Arpico Finance Company PLC | Annual Report 2019/20

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Arpico Finance Company is one of the Sri Lanka’s most renowned finance companies, securing leadership and expertise

in the industry. Strengthened by our progressive plans and strategies, our business model has continued to ensure success

and economic resilience throughout the years.

As we thrive on exploring the possibilities of tomorrow, we have shifted our focus towards sustainable innovation — aligning our

operations to deliver exceptional financial services for all our stakeholders.

Today, we are leveraging on our progressive plans, advanced technology and dynamic team as we venture

into a future of endless possibilities.

Arpico Finance Company. We are stepping into the future with progressive plans.

PROGRESSIVE PLANS

| Arpico Finance Company PLC | Annual Report 2019/202

CONTENTS

About Us ______________________________________________3

About the Report _______________________________________4

Highlights of the Year ___________________________________5

Chairman’s Message ____________________________________6

Managing Director/CEO’s Review _________________________8

Our Value Creating Business Model ______________________10

Materiality ____________________________________________11

Stakeholder Engagement _______________________________12

Operating Environment _________________________________14

Management Discussion and AnalysisFinancial Review _______________________________________16

Customer Capital ______________________________________18

Human Capital ________________________________________20

Social and Environmental Capital ________________________22

GovernanceBoard of Directors _____________________________________24

Management Team ____________________________________27

Corporate Governance _________________________________29

Annual Report of the Board of Directors on the Affairs of the Company ___________________________54

Board Audit Committee Report __________________________58

Integrated Risk Management Committee Report ___________60

Related Party Transaction Review Committee Report _______61

Report of the Remuneration Committee __________________62

Risk Management ______________________________________63

Financial ReportsDirectors’ Responsibility Statement on Internal Control Over Financial Reporting _________________69

Independent Assurance Report on the Directors’ Statement on Internal Control __________________70

Directors’ Responsibility for Financial Reporting____________71

Independent Auditors’ Report ___________________________72

Statement of Profit or Loss and Other Comprehensive Income ___________________________76

Statement of Financial Position __________________________77

Statement of Changes in Equity _________________________78

Cash Flow Statement ___________________________________79

Notes to the Financial Statements _______________________80

Supplementary InformationTen Year Summary ____________________________________127

Shareholder Information _______________________________128

GRI Content Index ____________________________________130

Glossary _____________________________________________134

Notice of Meeting ____________________________________139

Pre-Registration Form _________________________________141

Form of Proxy ________________________________________143

Annual Report 2019/20 | Arpico Finance Company PLC | 3

Our Vision Service Excellence

Our MissionTo be the Preferred Financial Services Company Through Service Excellence and Value Creation for all our Stakeholders.

Values In our day-to-day business we will respond promptly, act creatively, with trust, mutual respect and integrity We believe in a future that allows each individual to grow financially, which will lead to create a well-established economy. At Arpico Finance, we are dedicated to respond punctually while integrating the premium financial solution to assist each customer concern with utmost trust and respect.

ABOUT US

Arpico Finance Company PLC (AFCP) is a fully-fledged finance company, incorporated under the Finance Business Act No. 42 of 2011 and licensed and monitored by the Central Bank

of Sri Lanka. We are Sri Lanka’s second oldest finance company, being in existence for over six decades. Supporting small and medium

enterprises as well as retail business, currently we serve a large portfolio of customers who have

placed their confidence in us.

Established as a Private Limited Company by Richard Pieris Group in 1951, we were listed in the Colombo Stock Exchange as far back as

1955. Thereafter, the controlling interest of AFCP was acquired by Alliance Finance Group in 1967.

With the consolidation drive initiated by the Central Bank, Alliance Finance Group divested its controlling interest to Associated Motor Finance PLC in 2014, which is now the major shareholder

of the Company with a stake of 94%.

We offer a diversified product portfolio to our customers by way of leasing and hire purchase, deposits based on robust interest rates, small scale corporate loans and Islamic Financing to our loyal customer base. We are privileged to

serve generations of customers, who have relied on us for their financial needs.


Integrated reporting structure is followed in this Annual Report, as was done before, in order to maintain the quality of our corporate reporting. The Report provides a detailed account of how the company has delivered value to our stakeholders. External delivery of value accrues to the stakeholder whereas internal accrual of value yields to the company in forming financial and institutional capital. This two way process is encapsulated in the report, presenting material information in the context of economic, environmental and social performance of the company.

Report Boundary The Report covers the operations of our Organisation for the 12 month period, 1 April 2019 to 31 March 2020. This is consistent with our usual annual reporting cycle for both financial reporting and sustainability reporting. The boundary of this Report entails the affairs and activities of Arpico Finance Company PLC. There are no significant changes in the scope and aspect boundary compared to the previous reporting periods and there were no restatements of information provided in previous reports.

Precautionary PrincipleThe precautionary principle is applied by us in relation to our social and environmental sustainability. We have taken necessary measures to mitigate the risks caused to society and the environment through the impact of our operations. These are detailed under Social and Environmental capital on pages 22.

Compliance AFCP conducts operations in compliance with all applicable laws, regulations and standards as well as guidelines for voluntary disclosures. The Financial Statements have been prepared in accordance with the Sri Lanka Accounting Standards (SLFRS/ LKAS) issued by Institute of Chartered Accountants of Sri Lanka. These financial statements are also in compliance with the requirements of the Companies Act No. 07 of 2007 and the Finance Business Act No. 42 of 2011.

In addition, the company has complied with the Listing Rules of the Colombo Stock Exchange, Code of Best Practice on Corporate Governance issued jointly by the Securities Exchange Commission and the Institute of Chartered Accountants of Sri Lanka. In preparing this Report we have also drawn on the concepts, principles and guidance of the Global Reporting Initiatives (GRI) Sustainability Reporting Guidelines External assurance of the Financial Statements and Directors’ Statement of Internal Controls have been obtained from SJMS Associates. External assurance on our sustainability reporting was not sought during the Financial Year 2019/2020.

Feedback Please send your inquiries and feedback on this Report to:

Chandrin Fernando Chief Executive Officer146, Havelock RoadColombo 05. Email: [email protected]

ABOUT THE REPORT

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PROGRESSIVE PLANS


HIGHLIGHTS OF THE YEAR

Financial Highlights

Item 2019/20 2018/19 Change %

OPERATING RESULTS

Income Rs.Mn 2,905.32 4,195.41 -30.75%

Interest income Rs.Mn 2,699.13 4,042.78 -33.24%

Net interest income Rs.Mn 1,004.70 1,743.76 -42.38%

Profit before taxation (PBT) Rs.Mn (75.04) 162.28 -146.24%

Income tax (expense)/refund Rs.Mn (92.71) 210.32 144.08%

FINANCIAL POSITION

Total assets Rs.Mn 13,434.90 15,947.07 -15.75%

Lending portfolio Rs.Mn 9,633.66 13,281.36 -27.46%

Deposits Rs.Mn 8,702.00 8,695.44 0.08%

Borrowings Rs.Mn 2,523.29 5,379.68 -53.10%

Shareholders' funds Rs.Mn 1,603.70 1,527.10 5.02%

SHARE INFORMATION

Market price per share Rs. 125.10 154.00 -18.77%

Market capitalisation Rs.Mn 930.43 1,145.38 -18.77%

Net assets value per share Rs. 215.62 205.32 5.02%

Earning per share (EPS) Rs. (22.56) 50.10 -145.02%

Price earning ratio (PE) Times (5.55) 3.07 -280.42%

Dividend per share (DPS) Rs. 0.00 6.25 -100.00%

STATUTORY RATIOS

Core capital to risk-weighted assets ratio (Tier I) % 7.97 6.83 16.69%

Total risk-weighted capital ratio (Tier II) % 9.19 8.23 11.66%

Equity to deposits % 18.43 17.56 4.95%

Liquid assets to total assets % 18.14 7.78 133.16%

Liquid assets to deposits % 28.00 14.28 96.08%

OTHER RATIOS

Return on assets (ROA) % -1.14 2.20 -151.82%

Return on equity (ROE) % -10.72 27.26 -139.33%

Interest spread % 7.90 11.08 -28.70%

Interest cover Times 0.96 1.07 -10.28%

Net interest margin (NIM) % 7.93 11.50 -31.04%

Loan to deposits % 110.71 152.74 -27.52%

Equity to assets % 11.94 9.58 24.63%

Debt to equity ratio Times 7.00 9.22 -24.08%

Non-performing loans ratio (NPL) % 15.50 14.87 4.24%

*Liquid assets include cash and cash equivalents, treasury bills, Repo and FD

Dear Shareholders,

I feel privileged to welcome you to the 69th Annual General Meeting of Arpico Finance Company PLC (AFCP), a long standing entity with a proven track record and decades of goodwill and place before you the Annual Report and the Audited Financial Statements for the financial year 2019/20. Due to the turbulent nature of the industry and adverse macro-economic fluctuations which are beyond our control, the company was unable to match the previous year’s robust financial performance and achieve the expected outcome.

The State of the Economy Sri Lanka’s weak economic performance during the year under review provided little incentive in terms of real economic growth and fiscal performance worsened due to the notable decline in government revenue caused by the sizeable import compression, particularly of motor vehicles, subpar economic activity exacerbated by the Easter Sunday attacks, as well as the rise in recurrent expenditure mainly on account of subsidies and transfers, and salaries and wages. The Easter Sunday attacks had a severe impact on the tourism sector and their adverse spillover effects were felt across the economy, especially on SMEs in the sector, worsening the sluggish growth of the economy, reducing disposable incomes and dampening business confidence further.

Growth of credit to the private sector decelerated sharply, driven by subdued economic activity and weak business confidence, affecting the performance of the financial sector. Sri Lanka’s external debt increased further by end 2019, mainly due to the rise in external debt of the government. The exchange rate strengthened during the first four months of 2019 as a result of the significant contraction in the trade deficit and an increase in financial inflows. However, the exchange rate experienced some

pressure in the immediate aftermath of the Easter Sunday attacks, and towards the latter part of 2019, reflecting the impact of heightened uncertainties in global markets, which resulted in some unwinding of portfolio investment by foreigners.

The performance of Licensed Finance Companies (LFCs) and Specialized Leasing Companies (SLCs) deteriorated during the year, owing to unfavorable market conditions and sector weaknesses. Negative credit growth, declining profitability and an increase in Non Performing Loans (NPLs) contributed to the weak performance of the sector during 2019. The total asset base of the sector expanded marginally during the year while credit growth of the sector remained negative. The deterioration in asset quality of the sector was reflected by the increase in NPL ratio in 2019. Meanwhile, the sector recorded a substantial decline in profit after tax, compared to the profit recorded in 2018, mainly due to an increase in non-interest expenses and high loan loss provisions. Signs of stress on profitability were also reflected by the decline in ROA and ROE during the year.

Consolidating Key Pillars of our SuccessThe management continued to be resilient through the various challenges and crises situations through the year under consideration, focused on strengthening people and processes which remain consistent despite extenuating circumstances. Our employees have demonstrated remarkable teamwork, professionalism, enthusiasm, hard work and diligence through the period under consideration. The Company continues to support them with the technology tools, workplace satisfaction and motivation they need to enhance service capabilities and operational excellence levels. As a finance company that has remained in step with evolving needs of customers and market advances, we continued to leverage on technology to improve efficiency on

recovery and operations and to accelerate decision-making process with greater reliance on data analysis.

As a finance company in Sri Lanka with a corporate legacy of 69 years, AFCP has earned a loyal customer base and we believe that no sooner industry conditions improve, it will bounce back with ease. Meanwhile, the risk management function ensures we remain within our risk appetite and risk tolerance levels. AFCP complies with good corporate governance principles and high ethical standards at all times.

AppreciationOn behalf of the Board of Directors, I wish to acknowledge the selfless contributions made by all stakeholders towards the Company’s resolute performance. I am very grateful to our loyal customers and shareholders for their continued support. I also wish to thank my fellow Directors on the Board for their sustained leadership. I am grateful for the guidance provided by officials of the Central Bank of Sri Lanka through the year and to all stakeholders for believing in our potential.

Dr. L Rohan KarunaratneChairman

Colombo3 September 2020


CHAIRMAN’S MESSAGE


As a finance company in Sri Lanka with a corporate legacy of 69 years, AFCP has earned a loyal customer base and we believe that no sooner industry conditions improve, it will bounce back with ease. Meanwhile, the risk management function ensures we remain within our risk appetite and risk tolerance levels.


MANAGING DIRECTOR/CEO’S REVIEW


The headwinds in the macro-economic environment and blustery nature of the finance industry which were beyond the company’s direct control hindered the achievement of expected performance levels, while continuously striving to provide optimum service standards to all stakeholders.

Challenges FacedAll the industry parameters declined during the year under review and with the sector becoming almost stagnant, it was tough for finance companies to record many positive accomplishments. The regulatory environmental changes and the restrictions of vehicle importation constrained the possibility of earning higher profitability in the year under review – a scenario that was further exacerbated with the Easter Sunday attacks in the month of April which had a negative impact on the economy and made recovery a slow process as many customers saw a decline in their disposable income. Political upheaval and the prospects of a presidential election in November of the year under review further engendered a ‘wait and watch’ approach when it came to vehicle ownership and investments. Ad hoc policy and regulatory changes further compounded the situation.

Highlights of the YearDespite these formidable headwinds, the company sustained its competitive brand advantage and exercised prudent financial controls to stay the course. Despite many negative ingenuities, increase in the Company’s deposit base reflects the trust and confidence the company enjoys amongst its customer base.

Determined to uphold our spirit of innovation despite the hardships faced in 2019, AFCP introduced a Minor Savings product called ‘Diri Ithurum’ at the end of the year, to inculcate the savings habit amongst young children whilst securing a strong and sustainable low-cost fund base.

AFCP has also made strides in expanding its customer base for its alternative finance solutions along with competitive

rates, quick approval and services at the doorstep. The Company leverages on speedy service and an advanced IT platform to making the customer’s dream of owning their vehicle come true within 24 hours by providing leasing facilities for registered or unregistered vehicles and remains a preferred leasing partner.

Enhancing Brand ValueAFCP was recently awarded the ISO/IEC 27001:2013 certification by Bureau Veritas, a leading global certification body for provisioning of information security related to Information technology infrastructure implementation, maintenance, core system support, business application development, supporting and maintenance operations. This certification is yet another achievement of AFCP’s commitment towards a digital transformation to deliver better customer experiences, process optimization and product digitization.

In honor and recognition of its excellence in digital initiatives AFCP VLog was awarded 2nd Runner-Up in the Financial Sector under Best Use of Mobile at the SLT Zero One Awards, held at the Shangri-La Hotel Colombo, Sri Lanka.

Corporate StewardshipAs the second-oldest finance company in Sri Lanka with strong brand equity, the Company remains focused on fulfilling its responsibilities to local communities within which it operates, its employees and customers, and the environment. Keeping in line with its corporate CSR project to eradicate pollution from plastics in the ocean, the Company conducted beach cleanup projects at Wellawatte/Dehiwela and Mount Lavinia Beaches.

Future OutlookIn the face of such enormous economic challenges and lack of market opportunities for growth, we expect greater rationalization to take place in the industry and will explore expansion through organic and inorganic means. The network of 10 branches will see expansion in the future while we will

also pursue any attractive merger or acquisition opportunities which will enhance the balance sheet and brand equity of AFCP. The company is also in the process of strategizing its market offerings in relation to the competition through digital transformation to gain top of the mind recall in relevant target markets and achieve a higher Return on Assets, Return on Equity and optimizing operational efficiency levels above industry norms.

The year 2020/21 will obviously prove perhaps even more challenging as the outbreak of COVID-19 has added further economic uncertainty and health and safety concerns to an already bleak economic outlook. Nevertheless, taking courage from the decisive manner in which the outbreak was curbed in Sri Lanka, we are hoping a slew of measures by the government will put the economy on its feet once again.

AcknowledgementsI would like to place on record my gratitude to the Chairman and Board of Directors of AFCP for their wise counsel that helped us face challenges during the year under review. The management and staff of the Company have been pillars of support in our journey through yet another challenging year. I also wish to thank our valuable customers, business partners, regulators, shareholders, and all other stakeholders for their unstinted loyalty in our exciting journey towards growth and expansion.

J P I Shanil DayawansaManaging Director

Chandrin FernandoChief Executive Officer



How We Create Value Using the Five CapitalsAt Arpico Finance PLC, we are committed in our visionary aspirations of excelling in our sphere of providing access to financial capital, returns commensurate with risks, and inclusivity as a Company engaged in the provision of financial services, and aspire to contributing to a more sustainable economy, society and an environment that is well protected.

At the heart of our business model is the primary goal of sustainable wealth creation for our investors and key stakeholders

over the long term. Our business model is centred around a value generating process which subjects five capital inputs through a streamlined process of value creation, resulting in output capitals and sustainable outcomes of significance to our key stakeholders, as depicted in the diagram below. The past 69 years have given us the opportunity and the time to gain a wealth of experience, acquire and fine tune our skills and focus our attention towards integrated thinking.

OUR VALUE CREATING BUSINESS MODEL

CAPITAL INPUTS OUTCOME

VISI

ON

, MIS

SIO

N &

VA

LUE

STRA

TEG

IC G

OA

LS

Sustainable Growth

Financial Discipline & Stability

Training & Development

Performance Monitoring

Quality Service

Responsible Practices

Best HR Practices

Strength Brand

Fair Procurement

Marketing and Communication

Investment in Appropriate Technology

Brand Image

Financial Capital

Outcomes for our stakeholders

Financial Impact

Net Operating Income Rs. 668.46 Mn

Human Capital

New Recruitment- 104

Investment in Training Rs. 2.6 Mn

Training Hours 3,790

Social & Relationship Capital

Deposit Base Rs. 8.70 Bn

Total Interest Paid Rs. 1.18 Bn

Payments to suppliers Rs. 8.61Bn

Human Capital

Social & Relationship Capital

Natural Capital

Intellectual Capital

VALUE CREATIONPROCESS

Lease

Business Loan

DepositsIslamic Produ

cts

Savi

ngs


Impact to AFC

Stakeholder Concern

Economic1 Economic performance High High

2 Market presence Low Low

3 Indirect economic impacts Community Medium High

4 Procurement practices Suppliers High Medium

Environmental5 Materials Low Medium

6 Energy Medium Low

7 Water Low Low

8 Emissions Low Low

9 Effluents and Waste Environment Low Low

10 Products and services Low Low

11 Compliance-Environment Low Low

12 Transport Low Low

13 Overall Low Medium

Labour practices and decent work14 Employment High High

15 Labour/management relations Employees High Low

16 Occupational health and safety Employees Low Low

17 Training and education Employees High High

18 Diversity and equal opportunity High High

19 Equal remuneration for women and men High Medium

20 Labour practices grievance mechanisms Employees

High High

Human rights21 Investment Low Low

22 Non-discrimination High High

23 Child labour High High

24 Forced and compulsory labour High High

25 Security practices High High

Society26 Local communities Community High High

27 Anti-corruption High Medium

28 Public policy Low Low

Product responsibility29 Customer health and safety Low Low

30 Product and service labelling High High

31 Marketing communications High Medium

32 Customer privacy High High

MATERIALITYSt

akeh

old

er C

onc

ern

Impact to AFC

We have done Materiality analysis and arrived at the following interpretations. Each year we take a deep dive into our business both internal and external aspects that could be potentially material to business. Materiality events that would have an impact on the value creation process so that they could be addressed in a manner that would not adversely affect the creation of value to our stakeholders.

For each identified topic, we assigned a corresponding impact level, marking it either high, medium or low, based on our past experience and judgement of the concerned matter.

3

5/13

1/14/17/18

2/7/8/9/10

4/19/27

20/22/23/24

10/12/16 6 15

25/26/30/32

11/21/28/29

31


Stakeholder is a party that has an interest in a company and can affect or be affected by AFC’s actions, objectives, and policies. Meeting the needs and aspirations and addressing the concerns of stakeholders are cornerstone of the AFC’s strategy. Because stakeholder relationships lie at the heart of corporate profit making and sustainability in today’s global, knowledge economy. Companies with strong stakeholder relationships are more profitable and sustainable than companies whose focus is exclusively on the bottom line.

AFC can comprehend their needs, aspirations and concerns and are able to formulate strategies to address them.

AFC has identified key stakeholder groups with whom AFC needs to constantly be in dialogue and engage with:

• Investors

• Customers

• Employees

• Business partners

• Government and institutional regulators

• Society

STAKEHOLDER ENGAGEMENT

Objectives Driven

Incl usive & collaborativeOpen C

omm

unic

atio

n

DiscoverStrategic Stakeholder Analysis

PlanStakeholder Engagement plan

TransformStakeholder Engagement

TransformReview & Respond

Stakeholder Engagement

Regulatory and Government

Directives and circulars As necessary Compliance

On-site review by CBSL Annual Compliance

Submission of returns and status reports Periodic deadlines Compliance

Training and workshops organized by regulators

As necessary Awareness and knowledge

Passive Press releases As necessary Compliance and information


Stakeholder Engagement Mechanism

STAKEHOLDER ENGAGEMENT MODE FREQUENCY TOPICS AND CONCERNS

Investors/ Shareholders

Annual General Meetings Annual Company performance

Annual Report Annual Financial performance

Interim financial statements Quarterly Investor relations

Announcements to CSE Ad hoc as and when necessary

Employees Management meeting Monthly Review business performance

Company social events Annual/Ad hoc Work life balance

E-mail updates On a regular basis Operational changes

Employee notice board On a regular basis Company events

Business partners Supplier meetings As necessary Contractual performance

Supplier get-together Annual Networking

One-to-one meetings As necessary Future business opportunities

Letter/E mails/Telephone conversation On a regular basis

Society Passive Media advertisements and press releases

As necessary Communication

Community projects As necessary Serve community

Public events On a regular basis Public relations

Call centre conversations As necessary General inquiries

Customers Customer hotline As necessary Customer complaints/ suggestions

One-to-one meetings As necessary Customer relations

Direct customer feedbacks On a regular basis Dispute resolution

Passive Media campaigns/advertisements On a regular basis Awareness


OPERATING ENVIRONMENT

Sri Lankan Economy The year 2019 proved to be one of the toughest years in Sri Lanka’s recent history. The aftermath of the Easter Sunday attacks in April 2019 caused a slump in economic activity that was worsened with the looming presidential election later on in the year and the COVID-19 outbreak at financial year-end. As a result of these multiple shocks, the main industries were crippled as business confidence too went weak.

As a result of the impact of the Easter Sunday attacks on tourism related activities, the growth of the service sectors decelerated significantly in 2019. The agriculture sector continued to be plagued by unpredictable weather although the performance of the industry sector showed a slight improvement in 2019 compared to the previous year, backed largely by export-oriented industries which benefited from eternal factors such as the restoration of the GSP+ programme and shifting global trade patterns caused by US-China trade tensions.

Against this backdrop, the Sri Lankan economy growth slowed down to 2.3% in 2019, compared to 3.3% in 2018. Subdued economic growth, coupled with the sharp depreciation of the Sri Lankan Rupee towards end 2018 resulted in a substantially depreciated average exchange rate in 2019.

Inflation remained largely under control and tighter fiscal controls aimed at curtailing import expenditure resulted in a notable improvement in the country’s trade and current account balances which, along with significant inflows to the financial accounts, helped strengthen gross official reserves. The growth in the trade balance was mainly due to lower import expenditure as a result of ongoing fiscal policy measures to curtail imports. A modest growth in export earnings also contributed towards lowering of the trade deficit in 2019.

During the year under review, Sri Lanka managed to achieve an important milestone in its economic journey by graduating to the Upper Middle-Income Country status in terms of per capita Gross National Income (GNI) as per the World Bank’s country classification.

For the time being, just as domestic economic activities indicated to be showing an early response to the policy measures taken to revive the economy and improve business sentiments, the COVID-19 pandemic in March 2020 put an end to what little progress was made in the first two months of 2020. Steps taken by the government to curb the spread of the virus, including a nationwide lock-down starting mid-March 2020, pushed the country to the brink of a crisis as economic activity came to a complete standstill for several weeks thereafter.

During the year under review, Sri Lanka managed to achieve an important milestone in its economic journey by graduating to the Upper Middle-Income Country status in terms of per capita Gross National Income (GNI) as per the World Bank’s country classification.


Non-Bank Financial Institution (NBFI) Sector PerformanceThe NBFI sector faced a challenging year amidst a notable slowdown in lending activities due to the external factors mentioned earlier. The government’s efforts to curtail imports through strict macro prudential policy measures such as the LTV ratio to control credit facilities granted in respect of motor vehicles also continued to dampen the credit appetite from businesses and individuals.

A culmination of these factors saw the volume of credit provided by the NBFI sector in 2019 decreasing by 3% year-on-year compared to a growth of 7.6% reported in 2018. Within the lending portfolio, the demand for finance leases, secured loans and advances and hire purchases all contracted in 2019. Gold loan advances increased significantly compared to the previous year.

Asset BaseAs a result of the stagnation in lending activities, the NBFI sector asset base did not expand in 2019. The general composition of the asset base however remained unchanged from the previous year, with loans and advances accounting for the majority of the total.

Asset Quality A significant deterioration was seen in sector wide asset quality in 2019, mainly as a result of the economic downturn following the Easter Sunday attacks, as well as the deceleration of lending activities and the spillover effects of the debt relief programme announced by the government in 2018. Reflecting on the stress on asset quality, sector-wide gross Non-Performing Advances (NPA) ratio jumped to 10.6% by the end of December 2018. Stemming from this, the sector reported higher impairment charges in 2019.

ProfitabilityChallenged by higher impairment charges, the NBFI sector profitability fell sharply in 2019. The sector posted a Profit after Tax of Rs. 14.5 Bn, a decline of 31.9% year-on-year from the profit recorded in 2018. Consequently, a steep decline in both ROA and ROE was to be expected.

Funding and liquidity Despite being challenged on other fronts, the sector as a whole succeeded in maintaining its capital and liquidity buffers well above the regulatory minimum levels. All NBFIs were seen taking keen action to enhance their minimum core capital to comply with the Central Bank of Sri Lanka mandated Rs. 2 Bn requirement by 1st January 2020. Hence, the sector’s Core Capital and total Risk Weighted Capital Adequacy Ratio (RWCAR) stood at 11.1% and 12.5% respectively by end December 2019, compared to 9.8% and 11.1% respectively reported in 2018.

Furthermore, the sector continued to maintain adequate liquidity buffers well above the regulatory minimum levels with the overall regulatory liquid assets available as at end-December 2019, indicating a surplus against the stipulated minimum requirement. The sector-wide liquidity increased to 11.3% at end December 2019, from 9.6% recorded at end December 2018. Deposit mobilisation activities continued to remain the primary source of funding for the NBFI sector as deposit growth accelerated in 2019 as borrowings declined.


The Company’s Financial Capital consists of the pool of funds that are available for use in the provision of services obtained through financing, such as debt, equity or generated through operations or investments. These funds are used to drive our strategic ambitions while sustaining the engine of value creation for our shareholders. During the year 2019/20, the Company continued its downward trend despite operating in a volatile macroeconomic environment and amidst the challenging market conditions. The Company recorded a revenue decline of 30.75% YoY and its Profit after Tax was impacted by the drop in interest income by 33.24% YoY due to low credit growth, indicating declining profitability and increasing non-performing loans.

Description 2019/20 2018/19 YoY growth (%)Interest Income Rs. Mn 2,699.13 4,042.78 -33.2%

Net Interest Income Rs. Mn 1,004.69 1,743.76 -42.4%

Total Operating Income Rs. Mn 1,210.88 1,896.38 -36.1%

Operating Income Rs. Mn 8.24 295.41 -97.2%

Pre-tax Profit Rs. Mn (75.04) 162.28 -146.2%

Profit for the year Rs. Mn (167.76) 372.60 -146.24%

EPS Rs. (22.56) 50.10 -145%

DPS Rs. - 6.25 -

Return on Equity % -10.72 27.26 -139.33%

Net Interest IncomeThe Company’s Interest Income dropped down by 33.24% to Rs. 2.69 Bn., during the year under review while Interest Income on loans & advances decreased by Rs. 388.71 Mn. Interest income on leasing receivables decreased by Rs. 999.50 Mn, while Income interest on placements with banks & other financial institutions increased by Rs. 1.89 Mn, with income interest on other financial assets growing by Rs. 42.67 Mn. Interest expenses declined by 26.30% YoY due to the decrease in interest expenses on deposit from customers and debt instruments issued & other borrowed funds. Ultimately, the company’s net interest income recorded a notable drop of 42.38% compared to the previous year. The comparison of the net interest income is explained below:

2019/20(Rs.Mn)

2018/19(Rs.Mn)

Interest IncomeLoans and advances 199.95 588.66

Lease receivables 2,355.95 3,355.46

Placements with banks and other financial institutions 19.35 17.46

Other financial assets 123.88 81.21

Total Interest Income 2,699.13 4,042.78

Interest ExpensesDeposits from customers 1,181.59 1,250.82

Debt instruments issued and other borrowed funds 512.85 1,048.21

Total Interest Expenses 1,694.43 2,299.03

Net Interest Income 1,004.70 1,743.76

Operating IncomeFee and Commission income declined by 37.23% YoY to Rs. 77.17Mn, with the lower service charge on the Company’s loan products. A significant increase in the other operating income of Rs. 105.2 Mn was experienced during the year under review in contrast with Rs. 33.43

MANAGEMENT DISCUSSION AND ANALYSIS

FINANCIAL CAPITAL

Net Interest Income Trends (Rs. Mn.)

0

1000

2000

3000

4000

5000

2015/16 2016/17 2017/18 2018/19 2019/20

Interest incomeInterest expenseNet interest income

0

1000

2000

3000

4000

5000

Operating Expenses

Personnel CostsDepreciation of Property & Equipment and Amortisation of Intangible AssetsOther Operating Expenses

40%

51%

9%

Total Assets(Rs. Mn.)

0

5,000

10,000

15,000

20,000

2015/16 2016/17 2017/18 2018/19 2019/20

Total assets

Asset Composition

Other Financial AssetsLending AssetsPPE & Intangible assets

8%

20%

72%


Mn in the previous year. However overall, the Company’s total operating income decreased by 36.15% to Rs. 1.21 Bn because of the major decline in fee and commission income.

Operating ExpensesStrategic focus on expanding the Company’s business operations resulted in a declining status in operating expenses in FY 2019/20. The Company’s cost to income ratio grew to 54.52% from 35.47% in the previous financial year. Operating expenses comprise primarily of administration expenses and personnel costs which accounted for 51% and 40% respectively of total overhead expenses during the year.

ProfitabilityProfit before tax decreased to Rs. 75.04 Mn loss in FY 2019/20 compared to Rs. 162.28 Mn profit in the previous financial year. The income tax charge of Rs. 92.71 Mn negatively affected the profitability of the company. However, the Company recorded an income tax reversal of Rs. 210.32 Mn from the past year.

AssetsArpico Finance’s total assets decreased by 15.75% to Rs.13.43 Bn during the year under review, largely due to the drop in its leases, loans and advances portfolio which shrank by 27.46% YoY and accounted for 72% of total assets by end March 2020. Funds were also channelled towards financial investments during the year comprising primarily of dealing securities and government securities, which accounted for 9.19% (or Rs. 1,235 Mn) of the total asset base.

The Company’s credit assets consist primarily of leasing advances.

Asset QualityThe Company’s gross NPLs decreased to Rs. 1.6 Bn during the year, stemming primarily from the leasing segment. Asset quality, as measured by the gross NPL ratio, deteriorated to 15.5% from 14.9% which was fueled by the negative market factors and the decline in the company’s lending portfolio. During the year, we reinforced our recovery efforts by strengthening underwriting mechanisms and deploying increased resources towards monitoring and recovery.

Funding and CapitalizationThe Company’s deposit base increased by 0.08% to Rs. 8.7 Bn during the year and accounted for 68% of the total funding base. There was a significant increase in other borrowings as well, which accounted for 20% the of total funding during the year.

Capital levels strengthened during the year with shareholder funds increasing by 5.02% to Rs. 1.6 Bn, supported by the increase in the revaluation reserve. Capitalization measured by the Tier 1 capital and total risk weighted capital adequacy ratios were 7.97% and 9.19% respectively.

LiquidityLiquidity position was moderate during the year with liquid assets accounting for 18.14% of the Company’s total asset base. The statutory liquid asset ratio was 28% as at the end of the FY 2019/20, compared to 14% in FY 2018/19.

Shareholder ReturnsThe company spent its full potential to generate a sustainable value to their shareholders. Earnings per share amounted to Rs. (22.56) - reflecting a sharp decrease of 145.02% YoY.

2019/20 2018/19Earnings per Share (Rs.) (22.56) 50.10

Dividends per Share (Rs.) - 6.25

Share price (Rs.) 125.10 154.00

Market Capitalisation (Rs. Mn.) 930.43 1145.38

Impairment Charge for the year (Rs. Mn.)

0

200

400

600

800

1000

2015/16 2016/17 2017/18 2018/19 2019/20

Impairment Charge for the yearProvision Coverage

30%

60%

90%

120%

150%

Funding Composition

Customer DepositsBorrowingsShareholders' Funds

12%

68%

20%

Gross Lending Portfolio and Non-Performing Assets(Rs. Mn.)

0

5000

10000

15000

20000

2015/16 2016/17 2017/18 2018/19 2019/20

Gross PortfolioGross NPL Ratio

0%

5%

10%

15%

20%


The value of the relationships that a company has with its customers is defined as its Customer Capital. At Arpico Finance, our customers are our lifeblood which is why since inception our business model places customers at the heart of our business. Listening to customers and understanding their needs is the foundation on which we tailor our products and services to exceed their expectations. Through advanced customer relationship management skills we have set high standards of customer service and our longstanding customer base is a testimonial of our success in upholding customer relationships.

Our FootprintThe majority of our customer base hails from the Western Province, followed closely by the Southern and the North Western provinces. It is encouraging to see in recent years our reach is spreading island-wide as our base now counts customers from diverse parts of the country and from all walks of life.

In operation for over six decades, Arpico Finance has consolidated its customer base to over 90,000 and continues to understand their evolving personal and business needs.


CUSTOMER CAPITAL

Customer Touch PointsCurrently we have over 500 customer touch points and 10 full-fledged branches to serve our customers. Reputed for our personalized service warm and courteous staff, we capitalize on the opportunity to make lasting connections with customers by fulfilling their financial needs in the simplest manner backed by technology platforms.

Customer Satisfaction Customer satisfaction is a key metric against which we evaluate our offerings and we regularly engage with customers to ensure that they are receiving the attention and the response they need from us to complete their financial transactions and whether it is to their satisfaction.

Overall customer satisfaction is positive, as our customer surveys indicate. We have taken note of areas for improvement and rectification has ensured that the company gained a further share of a competitive market through improving

customer base. We make good use of customer satisfaction surveys to ensure that the company’s offering, by way of products and services, are in line with our customer’s need.

Customer Relationship ManagementOur customer relationship management philosophy facilitates insights into the behaviour of our customers so that we can modify our business operations to ensure our customers are better served in best possible way. Our longstanding presence in the market implies that our brand has stood the test of generations. We have customers who have been with us for over decades and we still continue to serve the next generation. Whether it is an existing or new customers, the level of attention we place on customer satisfaction has placed us at the forefront of customer service excellence in the industry and resulted in customer loyalty and retention.

Customer Service toolsThe Company employs several mechanisms by which customers can access our products and services and engage directly with our frontline well-trained customer service staff:

• Door-to-door after sales services are offered by staff

• Automated service whereby any customer can log in and check the status of financial facility, details and any other information, without standing in queue

• Other online facilities to save time and infuse greater convenience

• Call Centre is well equipped to interact with customers and provide a high standard of personalised service.

Geographical Spread of Customers

Western ProvinceSouthern ProvinceNorth Western ProvinceNorth Central ProvinceNorthern ProvinceCentral ProvinceUva ProvincSabaragamuwa ProvinceEastern Province

41%

15%14%

13%

6%6%

3%2% 0%


Grievance HandlingThe company has provided many ways to hear the voice of the customer, from lodging complaints with the Call Centre, writing to us, using the complaint boxes in the branches or visiting the branch. The aim is to ensure the complaint or dispute is resolved quickly. As the focus is on building a good relationship with the customer, due diligence is given to any customer complaint on a priority basis.

Customer privacyAs an ethical company that operates in line with regulatory requirements and customer confidentiality, we employ state of the art technology to ensure that we are complained with this aspect. Customer data is not divulged on the phone and is done, only in the instance of a requirement by a legal authority to do so.

Our Product PortfolioAs a full-fledged finance company, Arpico Finance offers a comprehensive range of products such as deposits, savings, loans, leasing facilities, hire purchases and Islamic financing to fulfill the aspirations of our customers.

Fixed DepositsOffering financial security and attractive rates, our Fixed Deposits facility offers competitive benefits that set us apart from competition.

LeasingArpico Finance is a preferred leasing partner for customers who seek a speedy and efficient service. The Company takes only 48 hours to turn around a lease or hire purchase facility while also extending a structured model of Lesi Leasing, Lesi Draft and Top up leasing to meet the varied needs of our customer. Our need-based product portfolio in leasing is the hallmark of our company’s strength and is made available for registered or unregistered vehicles in any category.

LoansPlacing value on the relationship with our customer, we strive to keep in step with upward mobility, by financing business or personal advancement with an array of Corporate, Vehicle or Personal loans.

Revolving loanAccess to finance is a key determinant of success for entrepreneurs and Revolving Loans prove to be a useful tool especially in an uncertain economy and volatile markets.

Islamic financeAlternate financing is becoming more popular across all communities in Sri Lanka as people begin to grasp the sustainable nature. We offer IJARA and MURABA Islamic financing to support the business ambitions of our valued customers supported by the right principles.

REPEAT BUSINESS/NEW BUSINESS

Customer Needs

Customer Rights & Norms

Cultivate Relationships

Customer Loyalty

Customer Retention

Customer AttractionInnovation &

SolutionsCustomer

Guardianship

CUSTOMER RELATIONSHIPSOUR APPROACH OUR EFFORT

Accessibility & Convenience

Service Experience


Human capital is the sum of habits, knowledge, social and personality attributes embodied in the ability to perform labour so as to produce economic value. Human capital is unique and differs from any other capital and is vital to achieve goals, develop and remain competitive. Led by this definition, Arpico Finance has developed a committed and competent workforce which drives its corporate goals and vision. The skills, experience, and the business acumen creates the competitive advantage which is supported by substantial investments in training and development of staff. Arpico Finance enjoys the reputation of being an equal opportunity employer who values diversity.

Employee AnalysisThe male to female ratio is not optimal because of the nature of the role of field staff, however, the Company remains committed to recruiting females in all other departments to improve the ratio further.

The Company has an optimal blend of longstanding experienced staff and young recruits who together lend a dynamic work culture. Our staff strength as at the end of the financial year is 333.

The Managerial and Executive constitute the majority of staff.

Recruitment and SelectionThe Company continues to strengthen its employer brand by offering a distinctive work culture, career growth opportunities, competitive remuneration and challenging job roles. Our recruitment process focuses on attracting the right talent for the right role. Being an equal employment opportunity provider, we value diversity and focus on hiring for attitude as a positive attitude engenders a positive culture. Our recruitment policy focuses on internal sourcing as well as external sourcing. We ensure that priority is given to internal candidates to be promoted

from within before recruiting from the industry.

Learning & DevelopmentThe financial industry relies on trust and a strong reputation and in order to sustain these qualities, the Company invests heavily in providing the right training to employees about products and services, customer relationship management and ethical conduct to ensure they are always acting in the interest of the customers and other stakeholders. The Company has an annual outbound training programme for staff at all levels in collaboration with the Che Adventure Park at Hanwella, coupled with other inhouse programmes which have helped build a cutting edge team at Arpico Finance.

A needs analysis serves to identify skill gaps which are discussed with the supervisors at the performance review and employees are subsequently provided with inhouse or external training. Moreover, employees are encouraged to pursue academic and technical qualifications by extending financial assistance to them through a professional development scheme where the Company contributes 64% of the total fee of the course.

Performance ManagementWith business environments becoming increasingly fluid and fast-moving, an agile performance-driven culture has been established to ensure personal career goals are aligned with the larger corporate goals. The Company’s well-organised performance management ensures consistency and continuous improvement through performance review meetings and performance improvement plans on an ongoing basis.

Employee Engagement and RetentionRetaining critical talent and rewarding them appropriately goes a long way towards nurturing the Company’s intellectual pool. At Arpico Finance, our


HUMAN CAPITAL

Gender

0

30

60

90

120

150

Male Female

Key & Senior M

anagerial

Managerial

Executives

Trainees

Non-Executive

Age Analysis

More than 50Age 41 to 50

Age 31 to 40Age 18 to 30

3%

10%

34%

53%

Our Strength

Key & Senior ManagementManagerialExecutivesTraineesNon - Executives

4%5%2%

22%

67%


success in this sphere can be evaluated by the high number of longstanding staff who are responsible for organisational growth. Transparency and open communication amongst management and staff has built a culture of mutual trust and respect and enhanced employee engagement.

Rewards and RemunerationWe believe in fair and just benefits and rewards structure without discrimination. We ensure that our employees are offered a competitive remuneration and benefits package. Our performance-driven culture ensures employees are evaluated against Key Performance Indicators (KPIs) and are granted rewards and benefits accordingly.

Occupational Health and SafetyThe health, safety and well-being of our employees is a crucial pillar and we comply with all workplace health and safety regulations in addition to providing a personal accident cover and a surgical and hospitalization policy that covers medical expenses of the staff members, funded by the Company.

Arpico Finance responded swiftly to the COVID-19 outbreak at the end of the financial year to ensure safety of staff and customers and to ensure business continuity. The Company adopted measures such as ’Work from Home’, provided Personal Protective Equipment for staff and organised transport to ferry staff who were deemed essential workers.

Opportunities for FellowshipIn order to promote an optimal work-life balance, the Company organizes some key events throughout the year which employees look forward to with great enthusiasm. During 2019/20, the following exciting events were held as a part of employee engagement measures:


As a responsible corporate citizen Arpico Finance is committed to preserving natural resources and ensure sustainability when carrying out our business operations. We utilize the natural resources mindfully while ensuring the better service to our Stakeholders. We understand our responsibility towards the entire community in which we operate, thus we continuously engage in activities that ensures the betterment of the society and sustainability.

The annual schoolbooks donation for the underprivileged students was carried out this year as well. As an annual event organized by the company the staff enthusiastically provide their corporation towards the success of the event. We provide monthly financial assistance to the children in need for their education as well as monthly financial support is provided to an elder’s home. The annual poson dansala which attracts a large crowd as well as the blood donation campaign were not organized due to the distress situation in the country at the beginning of the financial year.

The pollution to the environment is minimal due to the nature of our business operation as a financial service provider. However, we understand that continuous consumption of energy, water and paper in daily business activities has some impact. In order to further minimize the impact to the environment we have introduced environment friendly initiatives at our organization. There are programs to raise awareness of the staff about the significance of environment friendly practices and raise the environment conscious behaviours. The paper recycling project of the papers that are no longer usable in the department is continuing which is an initiative taken last year to reduce waste as well as preserve natural resources.

One of the great initiatives that took place during the year was beach cleaning. Sri Lanka has been ranked as the 5th largest global polluter of the ocean. Further according to the statistics Sri Lanka generates nearly 450 metric tons of plastic waste per day. The urban coastal areas are highly polluted with plastic and polythene, hence a beach cleaning programme is executed once a month in different beaches. The main objective of this project is to raise community awareness about the cleaner coastal line and with this anticipation a major social media campaign was also organized.

Strategies and processes to reduce environment deterioration and reduce the carbon footprint. As a responsible institution with an unblemished heritage, we ensure the sustainability and eco-friendliness in every action we take. We strive on reducing the wastage as well as minimize the impact to the environment through our business operation. Furthermore, we have already reduced the wastage through our astonishing initiatives towards sustainability.

Energy – Electricity is the main source of energy to our day to day business operation. The entire energy requirement is met through the national grid and during the financial year 2019/2020 the total energy consumption was 461,283 Kwh.

We have raised awareness among our staff members regarding the saving of electricity. Unless there is a requirement, we switch off AC and light bulbs in the building including head office as well as branches. Moreover, CFL bulbs are used to further contribute to preserving energy together with setting as example to the community.


SOCIAL AND ENVIRONMENTAL CAPITAL


Paper – Nevertheless the increase of electronic communication and technology, paper is the most versatile and widely used material. Given the nature of our business, the main raw material or the input to our operation is paper and requires paper in bulk. We have adapted the 3R method and we manage the paper keeping in mind the consequence of unnecessary usage of paper. Most of our communications are through electronic methods and email and we encourage our staff to use both side of the paper where necessary. The total paper consumption for the year was 15,000 Kg.

Waste – Since paper is the main raw material in our operation, paper is the main waste we generate. We managed the waste by sending them for recycling. During the year we have recycled paper amounting to 4,000 Kg.

Water – Utilization of water is not required given the nature of our business. However, our staff members use it for their daily consumption. Knowing that water is one of the scarce resources we encourage our staff to use it efficiently through awareness. The total consumption of water for the financial year was 7,350 m3.


GOVERNANCE

BOARD OF DIRECTORS


Dr. Rohan KarunartneChairman – Non Executive

Dr. Karunaratne, a Consultant Engineer, counts over 35 years of experience in Civil Engineering. He has a wide Business Experience gained from Leadership roles held in a range of industries.

He holds a PhD in Management and MBA from the Sussex University (UK).A civil Engineering Graduate and advanced Diploma holder in HIET (Chennai –India), he is a Fellow of the International Institute of Management (HK) and a Fellow of the Ceylon Institute of Builders.

He is the President of the Ceylon Institute of Builders and South Asian Lean Construction Association, Advisory Panel Member of Export Development Board, Federation Chamber of Construction Industry, Confederation of Micro, Small and Medium Industries (COSMI) and Central Environment Authority. Ex- Co Member SAARC Chamber of Commerce, Construction Preservation Forum and Philippine Business Council, Deputy Chairman of International Institute of Management, Vice President of Chamber of Construction Industry and Myanmar Business Council, Chairman of Human Resource Development (Pvt) Ltd and Senior Vice Chairman of The Commonwealth Entrepreneur Club.

He also served as the Chairman of the National Construction Association of Sri Lanka, Associate Motor Finance PLC and Advance Construction & Training Academy and as an Advisor to the Ministry of Mega Police and Western Development.

Mr. J P I Shanil DayawansaManaging Director

An Executive Director of Associated Motor Finance Company PLC since September 2009, Mr. Shanil Dayawansa’s expertise lies in the fields of Finance and Accounting. He holds a Bachelor’s Degree in Accounting and Management

from the University of Essex, UK and a Masters’ Degree in International Business from the Monash University in Melbourne, Australia. Since his entry to the Board, he has contributed fresh perspectives and dynamism to drive the Company forward.

Mr. J P I Nalatha DayawansaDirector – Executive

A prominent entrepreneur, Mr. Dayawansa counts over 35 years of experience in multiple industries including finance, hospitality and leisure, garments, exports and imports. He was appointed to the Board of Associated Motor Finance Company PLC in 1982 and has led the Board as Chairman/ Managing Director since 1995. He has obtained extensive local and international exposure in automobile engineering and pioneered the import of used high end cars in Sri Lanka. Mr. Dayawansa holds a Diploma in Economics and Management from the prestigious London School of Economics, UK. He is currently the Chairman/Managing Director of Poltech (Ceylon) Ltd. and Imperial Import and Export Company (Pvt) Ltd.

Mr. T M A SallayDirector – Executive

Mr. Sallay is a financial professional with over 35 years of extensive and diverse work experience in the fields of Finance, Auditing, Marketing, Credit and Recoveries, Project Management & Event Management. He has held many strategic and operational positions in a range of industry sectors including Finance, Hospitality, Healthcare, Trading and Communications. He holds a Masters in Business Administration from the Asia University of Malaysia Mr. Sallay is a Fellow of the Chartered Institute of Management Accountants (FCMA), UK and Chartered Global Management Accountant (CGMA), UK and a fully-qualified Member of the Institute of Certified Management Accountants of Australia. He is the Chief

Executive Officer of Associated Motor Finance Co. PLC since 2011.

Mr. Nilanka M PierisDirector – Independent Non-Executive

Nilanka Pieris is a Finance Professional with over 22 years of diverse experience in the areas of Financial Planning, Evaluation & Control, Financial Auditing, Credit Operations & Management, Business Development & Analysis, Mergers & Acquisitions, Information Technology, Project Management and Logistics Operations.

He is a Fellow Member of the Institute of Bankers (Sri Lanka) a Fellow Member of the Sri Lanka Institute of Credit Management, Associate Member of the Chartered Institute of Management Accountants and a Chartered Global Management Accountant, Member of the Sri Lanka Institute of Directors and Chartered Member of the Chartered Institute of Logistics and Transport.

Having commenced his banking career with Seylan Bank he was subsequently appointed to the Board of Arpico Finance Company PLC as an Independent Non Executive Director in January 2012 and served as the Chairman of the Audit Committee. He currently serves as the Chairman of the Integrated Risk and Related Party Transactions Committees and is a member of the Audit Committee. He also functioned as an Independent Non Executive Director of People’s Bank where he served as the Chairman of the Audit, Risk, IT Committee and was a member of the Credit Committee.

In addition to his appointments in the Banking and Non Banking Financial sector he is the Managing Director of Gensoft (Pvt) Ltd which is the largest software development company for the logistics industry in Sri Lanka and the Maldives and has also been involved in conceptualizing and implementing systems for the hospitality, legal, telecommunication and export industry. He also serves as a


Director of Black Hat Force (Pvt) Ltd an Information Security company focused on cyber security.

He is also an avid angel investor and partners a venture capital fund that invests in Fintech, AI and Logistics industry startups that focus on innovation and disruption. From an educational perspective he is a visiting lecturer at the University of Kelaniya. In an Honorary Capacity he serves on the Governing Council of the Sri Lanka Institute of Credit Management and as the Treasurer of the Sinhalese Sport Club.

Mr. Suren GoonewardeneDirector - Independent Non Executive

Mr. Suren Goonewardene has over two decades worth of rich domain experience spanning across multiple industries from Telecom to Information Communication Technology and has an exceptionally strong track record of transforming organizations and leading businesses into successes in each of his roles. He also serves on numerous Boards of Private and Public Companies; which include First Guardian Equities (Pvt) Ltd and Dawi lnvestment Trust (Pvt) Ltd.

Mr. Goonewardene was appointed to the Board of Arpico Finance Company PLC as an Independent Non Executive Director in August 2019 and currently functions as the Chairman of the Audit Committee.

He possesses over 30 years of extensive and diverse work experience holding strategic management positions in the areas of general management, strategic restructuring, investments / credit management, finance, marketing / sales, operations and business consultancy.

Some of his previous roles include Managing Director/Chief Executive Officer of Bharti Airtel Lanka (Pvt) Ltd, Chief Operating Officer of Dialog Television & Dialog Broadband – members of the

Dialog Axiata Group and Managing Director of Lanka Bell (Pvt) Ltd.

Mr Goonewardene holds a bachelor’s degree in Business Accounting from Monash University, Australia, a Fellow Member and a holder of the Graduate Diploma in Marketing from the Chartered lnstitute of Marketing, UK., a Member of the Certified Practicing Accountants of Australia and a member of the Sri Lanka lnstitute of Marketing. He was also a Council Member of the Employer’s Federation of Ceylon and a former Member of the Executive Committee of the lndian Chamber of Commerce in Sri Lanka.

GOVERNANCE

BOARD OF DIRECTORS


Chandrin Fernando Chief Executive Officer

Mr. Fernando is a Fellow of the Chartered Institute of Management Accountants, UK and Chartered Global Management Accountant, UK. He is a Fellow of the Chartered Certified Accountants, UK. He is a Chartered Marketer holding an Associate Membership from the Chartered Institute of Marketing, UK. He also holds a Bachelor’s Degree in Business Administration (Special) from the University of Sri Jayewardenapura with a Second Upper Division Class Honors and an MBA from the University of Cardiff Metropolitan, UK.

Mr. Fernando served on the CIMA Sri Lanka Board in 2014. He held many positions while serving as a Director of CIMA Sri Lanka Division and he was a member of the ‘Global Markets Committee’ which reports to the CIMA London Council. He is the former Chairman of MESANA Regional Board which covers Middle East, South Asia and North Africa comprising 28 countries.

Mr. Fernando possesses extensive experience in Non Banking Financial Service industry and counts over 20 years of professional experience. He is well versed in the fields of Finance, Marketing, Trading, Construction, Real Estate and Plantations.

Dinesh PereraChief Operating Officer

He is a Fully qualified Banker and is an Associate Member of the Institute of Bankers of Sri Lanka since 1998 and also holds an MBA from the University of Wolverhampton ¬ United Kingdom. He has a total of 29 years’ experience mainly in local commercial banks and the Finance Sector- including Sampath Bank, Seylan Bank, Pan Asia Bank PLC and SMB Leasing PLC. He joined Arpico Finance Company PLC as the Chief Operating Officer in October 2018. He specializes

in Banking and Branch Operations, Sales and Marketing , Credit and Recoveries, Corporate Finance, Micro Finance and leasing Operations.

Geethika Wickramasinghe Deputy General Manager – Deposits

Geethika Wickramasinghe counts over 25 years of experience in Banking & Finance sector. She has headed both Operations & Credit departments in branches at Seylan Bank PLC & as Branch Manager in Union Bank PLC. Geethika was at UB Finance Ltd as AGM Deposits & AGM Credits. She worked at Orient Finance PLC as AGM Fund Mobilization prior to joining Arpico Finance PLC as a Deputy General Manager. Geethika is a Double Master’s Degree holder from the University of Colombo & American City University, USA and a Diploma holder from the Institute of Bankers of Sri Lanka. Geethika also holds two international diplomas in Compliance & Anti Money Laundering (Merit) from University of Manchester UK, awarded by the International Compliance Association UK.

Dileepa Dharmarathna Senior Assistant General Manager - Credit & Operations

Mr. Dharmarathna holds a BSc Degree and an MBS from the University of Colombo. He has over 21 years experience in finance covering credit, marketing and recoveries. He was the Credit Manager at Nation Lanka Finance PLC prior to joining Arpico Finance Company PLC in June 2012.

Anusha PrasangikaSenior Assistant General Manager – Finance

Anusha is a fellow member of the Institute of Chartered Accountants of Sri Lanka (ICASL) and an associate member of the Chartered Institute of Management Accountants, UK and the Chartered Global Management Accountant, UK

and is currently reading for the Master of Business Administration degree at the University of Colombo.

She started her career at SJMS Associates (Deloitte Sri Lanka) as an Auditor and was subsequently promoted as Manager – Assurance and Advisory – Technical and worked in Assurance and Advisory services. She counts over 12 years’ experience in accounting, auditing and due diligence and taxation and IFRS consultancy in Banking and Finance, Insurance and Manufacturing and Trading sectors. She joined Arpico Finance Company PLC as the Asst. General Manager – Finance in October 2016.

Chamila Herath Senior Manager Legal

Mrs.Herath is an Attorney at Law, Notary Public, Commissioner for Oaths and a Company Secretary. She has obtained an Advance Diploma in Finance Banking and Insurance Law conducted by the Institute of Advance Legal Studies in Sri Lanka. She has more than twenty-four years of experience as an Attorney at Law on the finance sector. She started her career at Palitha Mathew & Company and then at Mercantile Credit Ltd. She joined Arpico Finance Company PLC in 1999 as a Legal Officer and was promoted to Senior Manager Legal in April 2014.

GOVERNANCE

MANAGEMENT TEAM


GOVERNANCE

MANAGEMENT TEAM

Suneth PiumalHead of IT

Mr. Piumal holds a B.Sc. Special Honors Degree in Information Technology from the Sri Lanka Institute of Information Technology (SLIIT). He is a member of the Computer Society of Sri Lanka (MCSL), Microsoft Certified professional (MCP) and ISO 27001:2013 ISMS Lead Auditor.

He has started his career at Laughfs Group of Companies and counts over 12 years of experience in the IT sector. He was the Manager – IT at Co-operative Leasing Company Limited prior to joining Arpico Finance Company PLC. Mr. Piumal has joined Arpico Finance Company PLC as Manager - ICT in May 2017.

Niluka MahanamaHead of Internal Audit

Ms. Niluka is an Associate Member of The Institute of Chartered Accountants of Sri Lanka (ICASL) and she holds a bachelor’s degree in Business Administration (Special) from the University of Sri Jayewardenepura with a Second Class. Niluka started her career at KAL Rupasinghe & Company as an Auditor and she was the Chief Internal Auditor at The Finance Company PLC prior to joining Arpico Finance Company PLC in January 2019.

Nilmini KarunathilakeSenior Manager – Compliance

Mrs. Nilmini Karunathilake with more than 7 years experience as a Compliance officer in UAE, started her career as an Accounting Software Instructor in UAE and joined the Financial industry as a Compliance Officer in a leading Money Exchange Company Abu Dhabi UAE in 2008. Nilmini holds Certified Anti Money Laundering Specialist (CAMS) from Association of Certify Anti Money Laundering Miami, USA, Currently reading for a Diploma in Compliance at IBSL and Diploma in Bank Integrated Risk

Management (IBSL). Mrs. Karunathilake joined Arpico Finance Company PLC in February 2019.

Ishari DalugodaManager – Human Resources

Ms. Ishari Dalugoda possesses over 15 years of experience, out of which over 12 years is in Human Resources management and Industrial Relations. She started her career at Mobitel Pvt Ltd and Emirates Bank, Dubai UAE. Ishari holds an MBA from Anglia Ruskin University, UK and is currently reading for a professional diploma in Psychology and Counselling. Ms. Dalugoda is heading the Human Resources Department of Arpico Finance Company PLC since 2018 and an Associate member of the Chartered Institute of Personnel Management of Sri Lanka.

Recaz RizvieHead of Islamic Finance

Recaz Rizvie has over 10 years of experience as an Islamic Finance professional. He was instrumental in heading the fund mobilization division and subsequently promoted to handle the Branch operations of a strategic unit in his previous assignment of a leading financial institution. In his previous stints, he headed the Operations of AG Capital (Pvt) Limited in Maldives, a subsidiary of Amana Holdings Ltd in Sri Lanka. He too was part of the Treasury team of Amana Takaful PLC, Sri Lanka and Maldives. He started his banking and finance career at HSBC Global Service Centre, Colombo.

Recaz is currently reading for his Master’s Degree at the University of Colombo and holds a Bachelor’s Degree awarded by Heriot-Watt University, United Kingdom. He holds a qualification in Treasury and Foreign Exchange Operations from the Central Bank of Sri Lanka and partial qualification in Capital Markets conducted by Securities & Exchange Commission of Sri Lanka. He is a Member

of the International Association of Book- Keepers, United Kingdom and Associate Member of the Sri Lanka Institute of Marketing, Sri Lanka.

Githal BandaranayakeAssistant Manager - Administration

Mr. Githal Bandaranayake holds a BSc (Bio-Science) Degree and a Post Graduate Diploma in Business Administration from the University of Peradeniya. He has over 17 years experience in administration related functions in multiple organizations. His previous employments include Ceylinco General Insurance Limited, Micro Cars Ltd and Informatics International Ltd. He joined Arpico Finance Company PLC in August 2013.


Statement of ComplianceOur company has from its inception committed to good governance and it has been interwoven into the fabric of our company. It is not a mere value statement but is fundamental to our belief system. Every employee is grounded and nurtured into the good governance culture giving credence in how our business are conducted taking into cognizance the wellbeing of all stakeholders. Needless to say, the shareholder is our primary focus and it evolves around the fundamental principles of a sustainable business framework in order to facilitate value creation and augmenting stakeholders’ wealth.

The Board of Directors of the Company wishes to confirm that the Company has complied consistently with the provisions of the Finance Companies (Corporate Governance) Direction No. 3 of 2008 as amended by No. 4 of 2008 and No.6 of 2013, Code of Best Practice on Corporate Governance issued jointly by the Securities and Exchange Commission of Sri Lanka (SEC) and the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka), Corporate Governance Rules embodied in the Listing Rules of the

Colombo Stock Exchange (CSE), to the extent hereinafter disclosed in this report.

The Board of Directors also wishes to confirm that, to the best of its knowledge and belief, the Companies complied with all requirements under the Companies Act No.7 of 2007 and is satisfied all its statutory payment obligations to the Government and other statutory/ regulatory bodies.

Governance FrameworkAs enumerated in the preceding paragraphs our model to create value is not detached from our governance framework. Our governance framework which is depicted below serves as the backbone to our business activities, social responsibility and our engagement with all the stakeholders, Board of Directors, Board Sub Committees and Management. Delegated authority flows from the Board of Directors to the Managing Director, Executive Directors and the various layers within the company and is designed to provide ideal business solutions. It is a customer centric structure and is well balanced to meet the needs of the market segments we cater to whilst consistently measured against our risk mitigating framework.

Our governance structure is formulated in a manner that facilitates transference of authority combined with responsibilities and accountabilities at all levels.

Board of DirectorsThe Board of Directors is the primary tier and is responsible for the strategic direction policy making and has an overarching purview on the entire business of the Company.

Board compositionThe Board consisted of six Directors as at 31 March 2020 with three Non-Executive and three Executive Directors, and the required balance between Executive and Non-Executive Directors has been consistently maintained. During the year an independent Non -Executive Director was appointed further enhancing the independence of the Board.

The Board consists of Directors whose combined knowledge, skills and experience from diverse disciplines such as banking, finance, administration and business enhances the effectiveness of the Board and its Committees, where no individual or a group dominates the decision-making process.

GOVERNANCE

CORPORATE GOVERNANCE

Shareholders at Annual General Meeting

Management Committee

Internal Audit

Compliance Officer

Corporate Management Team

Audit Committee

Integrated Risk Management Committee

Remuneration Committee

Related Party Transaction Review Committee

Board of Directors

Managing Director

Chief Executive Officer


The composition of the Board as at 31 March 2020, respective areas of expertise and the attendance of Directors at meetings is set out in the undernoted table:

Name of Director

Stat

us o

f Dire

ctor

ship

Board Audit Committee Integrated Risk Management Committee

Related Party Transaction Review Committee

Remuneration Committee

Posit

ion

Atte

ndan

ce

Posit

ion

Atte

ndan

ce

Posit

ion

Atte

ndan

ce

Posit

ion

Atte

ndan

ce

Posit

ion

Atte

ndan

ce

Dr. D. L. Karunaratne NED Chairman 14/14 - - - - Member 04/04 Member 03/03

Mr. J. P. I. N. Dayawansa ED Director 13/14 - - Member 08/09 - - - -

Mr. J. P. I. S. Dayawansa ED Managing Director

13/14 - - Member 08/09 - - - -

Mr. T. M. A. Sallay ED Director 14/14 - - Member 09/09 - - - -

Mr. P.S. Goonewardene (Appointed August 2019)

INED Director 08/14 Member Sep 2019

Chairman (Appointed Oct 2019)

6/9 Member 06/09 Member 02/04 Chairman 01/03

Mr.L.D. Peiris (Retired on September 2019)

INED Director 08/14 Member (Till Sep 2019)

4/9 Chairman (Retired on Sep 2019)

04/09 Member 02/04 Chairman

Retired Sep 2019

02/03

Mr. Nilanka M. Peiris INED Director 14/14 Chairman till Oct 2019

Member

9/9 Chairman

(Oct 2019)

09/09 Chairman 04/04 Member 03/03

INED – Independent Non-Executive DirectorNED – Non Executive DirectorED – Executive Director

GOVERNANCE



The Finance Companies (Corporate Governance) Direction No. 3 of 2008 and No 6 of 2013 amendments thereto applicable on finance companies licensed under the Finance Business Act No. 42 of 2011 issued by the Central Bank of Sri Lanka

Section Rule Compliance and implementation Compliance status

2 THE RESPONSIBILITIES OF THE BOARD OF DIRECTORS

2 (1) Strengthening the safety and soundness of the Company(a) Approve, oversee and

communicate the strategic objectives and corporate values

The Company’s strategic objectives and corporate values are determined by the Board and the views relating to the above are communicated to all levels of staff through structured meetings.

Complied

(b) Approve the overall business strategy, including the overall risk policy and risk management.

The Company’s strategic plan was approved in principle by the Board for three years covering the period from 2020-2022 and is being revised due to the impact of COVID 19 pandemic.

Risk Management Policy was reviewed and recommended by the Integrated Risk Management Committee (IRMC) and approved by the Board.

Complied

(c) Identifying and managing risk (a) The Board appointed Integrated Risk Management Committee is tasked with defining risk appetite, identifying and managing the overall risk of the Company.

The Risk Management Report on page 63 provides further insight in this regard.

Complied

(d) Communication policy with all stakeholders

The Board approved communication policy is formulated to ensure the effective internal and external communication of corporate information with all stakeholders including depositors, creditors, shareholders and borrowers of the Company in periodic intervals where applicable and in general required time frame.

Complied

(e) Adequacy and integrity of the internal control system and management information system

The adequacy and integrity of the Company’s internal control system is reviewed by the Board through the Board Audit Committee by way of internal audit reports and monitoring of follow-up actions. There is an independent verification by external auditors.

Complied

(f) Identifying and designating Key Management Personnel (KMP)

The identified Key Management Personnel include Board of Directors, Chief Executive Officer, Chief Operating Officer, Assistant General Managers (Finance, Lending & Operation), Head of Internal Audit, Head of IT, DGM Deposit ,Senior Managers.

Complied

(g) Authority and responsibilities of the Board and Key Management Personnel

The Company has a schedule of matters specifically reserved for the Board defining the areas of authority and key responsibilities of the Board of Directors and the areas of authority and key responsibilities of other Key Management Personnel are enumerated in their job roles.

Complied

(h) Oversight of affairs of the Company by Key Management Personnel

Oversight the affairs of the Company is carried out by its Key Management Personnel takes place at the regular Board Meetings of the Board, Committee meetings of the Board Sub-committee and at Management level. Key Management Personnel are required on a regular basis to support their representations to the Board with relevant data, infrastructure and personnel required for the Board to make informed decisions. KMP’S are also required to report to the Board on key aspects in relation to meeting budgetary and financial objectives.

Complied

(i) Assess effectiveness of own governance practice

The Board appraises its own performance by submission of performance evaluation form by each Director and the overall responses are then evaluated. Based on the ratings the Board will then set out appropriate action to fulfil its role by setting, improving or instructing new or advanced criterion of measurement.

Complied



(j) Succession plan for Key Management Personnel

A policy on succession planning for Key Management Personnel was approved by the Board in July 2019. In relation to this the Company encourages employees to train, improve and excel in their given areas of expertise, thus grooming them for the future identified positions. Those with potential and promise are earmarked for career progression and self-improvement. The Board has approved the succession Plan

Complied

(k) Regular meetings with the Key Management Personnel

The Key Managerial Personnel regularly make presentations and participate in discussions on their areas of responsibility at the Board, its Sub-committee meetings and management meetings where progress towards corporate objectives are also reviewed.

Complied

(l) Regulatory environment The Board of Directors of the Company monitors closely, the compliances function at monthly Integrated Risk Management meetings. The reporting structure provides for a regular feedback on matters related to compliance. This also encompasses the formulation and implementation of processes and procedures to adhere to new compliance requirements stipulated by the Regulator or statutory bodies.

Chief Executive Officer attends the Directors and CEO’s forums arranged by the Central Bank of Sri Lanka and the management personnel of the Company. The relevant officer will liaise with the CBSL when required.

Complied

(m) Hiring and oversight of External Auditors

The Board Audit Committee is responsible for the recommendation of the engagement of the External Auditors and oversight of the External Auditors functions. The External Auditors appointment is made by the shareholders of the Company, at the AGM.

Complied

2 (2) Appointment of the Chairman and the Chief Executive Officer and define and approve functions and responsibilities

The Chairman and the Managing Director of the Company have been appointed by the Board and there is a clear division of the functions and responsibilities of the Chairman and the Managing Director as required by the Rule 7(1) of this Direction.

Complied

2 (3) Directors ability to seek independent professional advice

The Directors are able to obtain independent professional advice as and when necessary at the Company’s expense and a Board approved procedure is in place.

Complied

2 (4) Dealing with conflict of interests As per the section of Articles of Association on ‘Restrictions on voting’, evidence the procedure for a Director to abstain from voting on any Board resolution when if there is a conflict of interest and he/she would not to be counted in the quorum at the meeting when the matter to deliberated on.

Complied

2 (5) Formal schedule of matters specifically reserved for the Board’s decision

The Board has adopted a policy for a formal schedule of matters specifically reserved for the Board. Present agenda for the meetings ensure that the direction and the control of the Company is under Board’s control and authority..

Complied

2 (6) Situation of insolvency issue The Board is aware of the requirement to inform the Director of Non-Bank Supervision Division at the Central Bank of the Sri Lanka and no such situation has arisen during the year.

Complied

2 (7) Publish Corporate Governance Report in Annual Report

Annual Corporate Governance Report has been published by the Company in the Annual Report 2019/20 on page 29.

Complied

2 (8) Annual self-assessment by the Directors

The Company has adopted a scheme of self-assessment to be undertaken by each Director annually, filed and maintained with Company Secretary.

Summary of this has been presented to the Board and action plan was drawn up and is being implemented.

Complied

GOVERNANCE




3 MEETINGS OF THE BOARD3 (1) Regular Board meetings The Board meets regularly at monthly intervals and special Board meetings are

convened whenever necessary. There were instances where the Board’s consent has been obtained through circular resolutions. The Board met on 14 occasions during the year 2019/20.

Complied

3 (2) Arrangements for Directors to include matters and proposals in the agenda

All the Board members are given equal opportunity to include matters and proposals in the agenda and the procedures are in place for this. The calendar of meetings is drawn up and informed to the Board at the beginning of each calendar year.

Complied

3 (3) Notice of meetings Annual calendar of Board meetings for 2020 was issued on 6th January 2020. The Notice convening the meeting along with Agenda is circulated minimum of seven days prior to the board for the holding at the meeting.

Complied

3 (5) Appointment of a Company Secretary to handle the secretariat services to the Board

Alliance Management Services (Private) Limited, a Company registered with the Registrar General of Companies as a qualified Secretaries and handles the secretarial function for the Board and shareholder meetings and carries out other functions specified in relation to laws and regulations.

Complied

3 (6) Preparation of agenda for a Board meeting by the Company Secretary.

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

3 (7) Directors access to advice and services of the Company Secretary

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

Complied

3 (8) Maintenance of Board minutes The Company Secretaries maintains Meeting Minutes and circulates them to all Board members and the Minute Book shall be open for inspection at any reasonable time to any Director.

Complied

3 (9) Minutes to have sufficient details and serve as a reference for regulators and supervisory authorities

The Company Secretary maintain detailed Minutes of Board Meetings to satisfy all requirements of this Direction. Minutes are approved by the Chairman and the other members of the Board after making required amendments, if necessary.

Complied

4 COMPOSITION OF THE BOARD4 (1) The number of Directors As at 31 March 2020, Board comprised of six Directors with three of them being

Non-Executive of which two of them are Independent.Complied

4 (2) Period of service of a Director The total period of service of all Non-Executive Directors has not exceeded nine years.

Complied

4 (3) Board balance There are three Executive Directors including the Managing Director, out of six Directors which is well balanced and within the requirement to limit the number of Executive Directors to 50 percent of total Directors.

Complied

4 (4) Independent Non-Executive Directors

The Board has two Independent Non-Executive Directors that exceeds the required 1/4th of the Board as per the Direction. The Board evaluates Independence of the Directors annually based on the Directors self-declaration.

Complied

4 (5) Appointment of Alternate Directors

There were no Alternate Directors appointed or functioning during the year 2019/20.

Complied

4 (6) Skills and experience of Non-Executive Directors

Appointments are made through the Nomination process.

The Directors including Non-Executive Directors are persons with knowledge, expertise and experience to bring an independent judgment and their detailed profiles are on page 24.

Complied



4 (7) More than half the quorum of Non-Executive Directors in Board meetings

Company Secretary strictly monitor that at all Board meetings held during the year were duly constituted with more than one half of the number of Non-Executive Directors being present at such meetings.

Complied

4 (8) Expressly identification of the Independent Non-Executive Directors in corporate communications and disclose in the details of Directors

The Independent Non-Executive Directors are expressly identified in all corporate communications that require disclosure of the names of all Directors of the Company.

Complied

4 (9) Procedure for the appointment of new Directors and for the orderly succession of appointments to the Board

The new appointments to the Board are made of based on the recommendations made through the Board Nomination process for the appointments to the Board. After complying with this procedure, the names are referred to the CBSL for approval, prior to appointment.

Complied

4 (10) Directors appointed to fill a casual vacancy to be re-elected at the first General Meeting after their appointment

All Directors appointed to the Board are subject to re-election by the shareholders at the first Annual General Meeting after their appointments. Mr. L.D. Peiris retired in September 2019 as he reached the age of 70 years.

Complied

4 (11) Communication of reasons for removal or resignation of Directors

There were no removal or resignation during the year under review. Complied

5 CRITERIA TO ASSESS THE FITNESS AND THE PROPRIETY OF DIRECTORS5 (1) The age of a Director shall not

exceed 70 yearsAll the Directors are below the age of 70 years as at 31 March 2020. Complied

5 (2) Directors shall not hold office as a Director of more than 20 companies/ entities /institutions including associate and subsidiary companies

The total number of positions held as a Director or any other position in companies/entities/institutions are less than 20.

Complied

6 THE MANAGEMENT FUNCTIONS DELEGATED BY THE BOARD6 (1) Delegation of work to the

ManagementAs per the Articles of Association the Board may delegate any of its functions to the Board appointed committees, Managing Director, Executive Directors, Key Management Personnel upon such terms and conditions.

All delegations are made in a manner that would not hinder the Board’s ability to discharge its functions.

Complied

6 (2) Periodical evaluation of the delegation process

Delegation arrangements are reviewed periodically to ensure that they remain relevant to the requirement of the Company.

Complied

7 THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER7 (1) Division of responsibilities of the

Chairman and Chief Executive Officer

There exists a clear separation of duties between the roles of the Chairman and the Managing Director.

Complied

7 (2) Chairman preferably an Independent Non-Executive Director and if not appoint a Senior Director

Chairman is a Non-Executive Director. To further enhance independence Mr.N.M Perris has been appointed as the Senior Director.

Complied

GOVERNANCE




7 (3) Disclosure of the identity of the Chairman and the Chief Executive Officer and any relationship with the Board members

The Board is aware that there are no material relationships whatsoever, including financial, business, family and any other material Dayawansa relationship between the Chairman and the Managing Director and the other members of the Board as per the annual declarations made by the Non-Executive Directors and regular updates provided at monthly Board meetings. However, Mr. J. P. I. S. Dayawansa and the Dr. L.R. Karunaratne are the son and the Brother-in-law respectively of Mr. J. P. I. N. Dayawansa.

Complied

7 (4) Chairman to-

(a) provide leadership to the Board;

Board approved list of functions and responsibilities of Chairman include, ‘Providing Leadership to the Board’ and also to ensure that the Board effectively and efficiently discharged its responsibilities

Complied

(b) ensure that the Board works effectively and discharges its responsibilities; and

(c) ensure that all key and appropriate issues are discussed by the Board in a timely manner

All key and appropriate issues are discussed by the Board on a timely basis.

7 (5) Responsibility of the agenda lies with the Chairman or may be delegated to the Company Secretary

The Company Secretary circulates a formal agenda prior to the Board meeting which is prior to approved by the Chairman of the Board.

Complied

7 (6) Ensure that all Directors are properly briefed on issues and receive adequate information in a timely manner

The Chairman ensures that all Directors are adequately briefed on matters arising at Board Meetings through the submission of Agenda and Board papers with sufficient time prior to meeting.

Complied

7 (7) Encourage all Directors to actively contribute and ensure that they act in the best interest of the Company

All Directors actively participate in the deliberation of matters which are under the purview of the Board.

Complied

7 (8) Facilitate effective contribution of Non-Executive Directors and relationships between Executive and Non-Executive Directors

Executive and Non-Executive Directors work together for the best interests of the Company. Non-Executive Directors participate in Board Sub-committees which provide further opportunities for active participation.

Complied

7 (9) Refrain from direct supervision of Key Management Personnel or executive duties

Chairman is not directly involved in the supervision of Key Management Personnel or any other executive duties.

Complied

7 (10) Maintain effective communication with shareholders.

The Annual General Meeting of the Company is the main forum where the Board maintains effective communication with shareholders and they are given the opportunity to take up matters for which clarification is needed and also their views are communicated to the Board.

Complied

7 (11) Chief Executive Officer functions as the apex executive-in-charge of the day-today operations and businesses

The Managing Director is responsible for the day-to-day operations and business of the Company with the support of the Executive Directors, Chief Executive Officer and members of the corporate management.

Complied



8 BOARD APPOINTED COMMITTEES8 (1) Establishing Board committees,

their functions and reportingThe following Board sub-committees have been appointed by the Board and each sub Committee is required to report to the Board:

1. Remuneration Committee

2. Integrated Risk Management Committee

3. Audit Committee

4. Related Party Transaction Review Committee

Recommendations of these Committees are addressed directly to the Board and Minutes of meetings are tabled and discussed at the main Board Meetings.

The Company has presented a report on the performance, duties and functions of each committee in the Annual Report.

Complied

8 (2) Audit Committee

(a) The Chairman to be a Non-Executive Director

with relevant qualifications and experience

The Chairman of the Audit Committee Mr.P.S Goonewardene is Independent Non-Executive Director and member of the Certified Practicing Accountants of Australia. Qualifications and experience are disclosed on page 24 of this Annual Report.

Complied

(b) All members of the Committee to be Non-Executive Directors

All members of the Audit Committee are Independent Non-Executive Directors. Complied

(c) Duties of the Committee: Prior to the appointment of External Auditors for audit services at the AGM, the Audit Committee ensures compliance with applicable legal and statutory requirements.

Complied

I. The appointment of the external auditor

II. The implementation of the Central Bank guidelines

III. The application of the relevant accounting standards; and

IV. The service period, Audit Fee and any resignation or dismissal of the Auditor

The evaluation on implementation is carried out by the Audit Committee in consultation with the Compliance Officer on matters related to implementation of the Central Bank guidelines and accounting standards.

The Committee ensures that the requirement of rotation of External Audit Engagement Partner, once in every five years, is met. The Audit Committee has the primary responsibility for making recommendations on the appointment, re-appointment or removal and the approval of audit fee of the External Auditor in line with professional standards and regulatory requirements.

(d) Review and monitor the External Auditors’ independence, objectivity and the effectiveness of the audit processes

The External Auditor has provided an independent confirmation in compliance with the guidelines for appointment of Auditors of Listed Companies. In order to safeguard the objectivity and independence of the External Auditor, the Audit Committee reviewed the nature and scope taking into account the applicable regulations and guidelines.

Complied

(e) Develop and implement a policy on the engagement of an External Auditor to provide non-audit services

The Board approved policy is in place. When such services are obtained from the External Auditor, prior approval is obtained from the Audit Committee as per the above policy. There were no non audited services obtained during the year under review.

Complied

(f) Determines the nature and the scope of the External Audit

The Auditors make a presentation at the Audit Committee meeting with details of the proposed audit plan and the scope. Members of the Audit Committee obtain clarifications in respect of the contents of the presentation, if deemed necessary and make recommendations to enhance the scope required.

Complied

GOVERNANCE




(g) Review the financial information of the Company.

Quarterly Financial Statements as well as year-end Financial Statements are circulated to the Audit Committee. A detailed discussion focused on major judgmental areas, changes in accounting policies, significant audit adjustments and compliance with statutory requirements take place and required clarifications in respect of all areas are obtained by the Committee before its recommendations for Board’s approval.

Complied

(h) Meeting of External Auditors to discuss issues and problems of interim and final audits in the absence of Key Managerial Persons

The Committee met the External Auditors without the presence of the Executive Directors and Corporate Management ones during the year 2019/20.

Complied

The Audit Committee met with the External Auditors and a meeting was scheduled for March 2020 which could not be held due to the office being closed on account of the COVID 19 Pandemic.

(i) Reviewing of the External Auditors’ Management Letter and the response thereto

Upon receipt of the Management Letter, Auditors are invited to make a presentation at the Audit Committee with the responses of the Corporate Management to discuss the significant findings which have arisen during the audit and instructions are given to Department Heads to take remedial actions, if necessary.

Complied

(j) Review of the internal audit function

• Review scope, functions and resources

• Review of internal audit programme

• Review Internal Audit Department

• Recommendations on internal audit functions

• Independence of internal audit functions

The Audit Committee reviewed the Internal Auditors Annual Audited Plan which covers the scope, functions and resources to carry out their work.

In addition, the Audit Committee requested the Internal Auditors to present the internal audit programme prepared according to the annual audit plan which is approved by the Audit Committee.

Complied

(k) Consideration about the internal investigations and management’s responses

Whenever a need arises, the Audit Committee assigns special internal investigations on certain matters and reviews major findings with the management responses and ensures that the recommendations are implemented.

Complied

(l) Attendees of the Audit Committee meeting with Corporate Management and External Auditors

The Audit Committee met with the External Auditors and a meeting was scheduled for March 2020 which could not be held due to the office being closed on account of the COVID 19 pandemic..

The Managing Director, Executive Directors, Chief Executive Officer and the Internal Auditor attend meetings by invitation. Where it is deemed necessary, members of the corporate management may also attend meetings by invitation.

Non – Complied

(m) Explicit authority, adequate resources, access to information; and obtain external professional advice wherever necessary

The Audit Committee is guided by a Board approved Terms of Reference which sets out authority and responsibility of the said Committee.

The Audit Committee is authorised to obtain external professional advice and to invite outsiders with relevant experience to attend if necessary. The Committee also has full access to information in order to investigate into matters relating to any matter within its terms of reference.

Complied



(n) Regular meetings The Committee meets regularly, and the audit reports were issued to its members in advance and the Minutes of the meetings are maintained by Company Secretary.

The Committee has met 09 times during the year and the attendance at those meetings is set out on page 58 of the Audit Committee Report.

Complied

(o) Disclosures in the Annual Report The Report of the Audit Committee is on pages 66 to 67 includes the detail activities, meetings held during the year and the Directors attendance at the Audit Committee.

Complied

(p) Maintain minutes of meetings The Company Secretaries acts as the Secretary of the Audit Committee and records and maintains all minutes of the Meetings.

Complied

(q) Whistle-blowing Policy The Company has a Board approved Whistle-blowing Policy whereby employees of the Company could raise concerns in confidence about any malpractices of the Company, if it exists.

Complied

8 (3) Integrated Risk Management Committee (IRMC)(a) The composition of IRMC IRMC comprises two Independent Non-Executive Directors.

Executive Directors including Managing Director, Chief Executive Officer and other Key Management Personnel and Heads of Departments are present at this meeting.

Complied

(b) Periodical risk assessment The Committee has a Board approved Risk Management Policy which provides a framework for management and assessment of risk. The Committee has a process to assess and evaluate the risk and the findings and reviews are submitted to the Board monthly.

The Company does not have any subsidiary or associate companies.

Complied

(c) Review and measurement of management level committee risk

The Committee reviews the adequacy and effectiveness in addressing specific risk and managing the same within the quantitative and qualitative risk limits sets by such respective Committees such as Asset and Liability Committee and Credit Committee.

Complied

(d) Corrective action to mitigate the risk

The risk indicators introduced have been reviewed against the benchmark and corrective actions are taken to mitigate the effects of such risks that are at a level beyond the prudent levels decided by the Committee.

Complied

(e) Frequency of meetings The Committee has met 09 times during the year to assess the risks of the Company.

Complied

(f) Actions against the officers responsible for failure to identify risks and take prompt corrective actions

A process is place for necessary action to be taken if there is breach. However, the specific risk and limits identified by the Integrated Risk Management Committee and such decisions are taken collectively.

Complied

(g) Risk assessment report to the Board

The Committee had apprised the Board of their risk assessment of the Company by forwarding a risk report.

Complied

(h) Establishment of a compliance function

The Company’s compliance with laws and regulations were monitored by the Compliance Officer.

The Company has a process to assess the compliance with internal controls and approved policies pertaining to all areas of business operations.

Complied

GOVERNANCE




9 RELATED PARTY TRANSATION9 (2) Avoid conflicts of interest that arise

from transactions of the Company with related parties.

The Related Party Transaction Policy is in place which describes the related parties, types of related party transactions and the favourable treatment granted to the said parties and stipulates that Board members should avoid any conflicts of interest that may arise from any transactions with the Company. The Board has appointed a Related Party Transactions Review Committee to ensure that the transactions with related parties are in accordance with best practices.

A system for monitoring and reporting of data pertaining to such transactions was established in the Company during the year.

Transactions carried out with Related Parties in the normal course of business are disclosed in the Financial Statements on ‘Related Party Disclosures’ under Note 43 to the Financial Statements.

Complied

9 (3) Related Party Transactions Board approved process is in place to identify the related party transactions. The Related Party Transaction Review Committee will ensure that all the transactions with related parties are carried out on arm’s length basis.

Complied

9 (4) Monitoring of related party transactions defined as more favourable transactions

Board approved Related Party Transactions Policy contains provisions to ensure compliance and Related Party Transactions are carried out on arm’s length basis with comparative quotes. Committee will ensure that all the transactions with related parties are carried out on arm’s length basis with comparative quotes.

Complied

10 DISCLOSURES10 (1) Published interim and annual

financial statement based on applicable accounting standards and published in Sinhala, Tamil and English

Relevant Financial Statements are prepared and published in accordance with the formats prescribed by the supervisory and regulatory authorities and applicable accounting standards, and such statements are published in the newspapers in all languages.

Complied

10 (2) The Board shall ensure that at least the following disclosures are made in the Annual Report:(a) A statement to the effect that

the annual audited financial statements have been prepared in line with applicable accounting standards and regulatory requirements, inclusive of specific disclosures

Compliance with applicable accounting standards and regulatory requirements has been reported under the “Directors’ Responsibility for Financial Reporting” on page 71.

Complied

(b) A Report by the Board on the finance company’s internal control mechanism

Directors’ Statement on Internal Control System over the Financial Reporting is given on page 69.

Complied

(c) The External Auditor’s Certification on the effectiveness of the internal control mechanism

The Company obtained a certification from the External Auditors on the effectiveness of the internal control mechanism. Their certification appears on page 70.

Complied

(d) Details of Directors Directors profiles are given on page 24 and other details have been disclosed under the ‘Annual Report of the Board of Directors on the Affairs of the Company’ on pages 54 to 59 of the Annual Report. The transactions with Directors were aggregate fees and remuneration paid during the year is disclosed in Note 43 to the financial statements.

Complied



(e) Fees/remuneration paid by the Finance Company to the Directors in aggregate

The aggregate fees and remuneration paid to the Directors was Rs. 28.48 million during the year.

Complied

(f) Total net accommodation and the net accommodation outstanding to the related parties as a percentage of the capital funds

No accommodation has been granted to related parties during the period. Complied

(g) The aggregate values of remuneration paid and the value of transactions with the Key Management Personnel

Aggregate remuneration paid to the KMPs as defined in LKAS 24 - ‘Related Party Disclosures’ for financial reporting purpose, disclosed under Note 43 to Financial Statement.

Complied

(h) A report confirming compliance with prudential requirements, regulations, laws and internal controls

This has been disclosed under the ‘Annual Report of the Board of Directors on the Affairs of the Company’ on page 54.

Complied

(i) Non-compliance reporting There was no non- compliance during the year than the minimum public holding where the disclosure was made.

Complied

(j) The External Auditor’s certification of the compliance with the Corporate Governance directions

The Company has obtained a Report from External Auditors confirming compliance with Corporate Governance directions and provisions.

Complied

Code of Best Practice on Corporate Governance issued jointly by the Securities and Exchange Commission of Sri Lanka (SEC) and The Institute of Chartered Accountants of Sri Lanka (ICASL) in 2013

Corporate governance principle Degree of compliance Compliance status

A. DIRECTORSA.1 THE EFFECTIVE BOARD

The Company should be headed by an effective Board, which should direct, lead and control the Company.

The Board comprises of six (6) Directors, three (3) of whom function in Non-Executive capacity, having required professional competence, skills and experience in the fields of Banking, Law, Accounting, Marketing and Economics to lead and control the Company. The Board gives leadership in setting the strategic direction and implement sound control environment for the successful functioning of the Company.

A.1.1 Regular Board meetings The Board consistently meets on monthly intervals and special Board meetings are convened when it is necessary. The Board met 14 times during the year. The attendance at Board meetings held in 2019/20 is given in the table in page 58.

Complied

A.1.2 Board’s responsibilities

Formulation and implementation of a sound business strategy

The Board engages in providing direction in formulating a sound business strategy and closely monitors the implementation of the strategy effectively. A Strategic Plan has been developed covering next three years from 2020 – 2022 and was approved by the Board and is being revised due to the impact of COVID 19 pandemic.

Complied

CEO and Key Management Personnel succession planning

A succession plan was approved on July 2019 by the Board and is in place for the corporate management team.

Complied

GOVERNANCE




Implementing security and integrity of information, internal controls, business continuity and risk management

Board has reviewed effectiveness of internal control and compliance with laws and regulations on a continuous basis through the Audit Committee and IRMC. The risk management policy and procedures were approved by the Board.

Complied

Ensuring compliance with laws, regulations and ethical standards

The Compliance Officer submits Compliance Report to the Integrated Risk Management meeting setting out the laws and regulations and confirming compliance in each month.

Complied

Ensuring all stakeholders interest is considered in corporate decisions

Stakeholders interest which are identified through different stakeholders’ engagement methodologies are considered in decision-making.

Complied

Recognising sustainable business development

Sustainable business development is one of the key areas considered by the Board when formulating the strategy for the Company.

Complied

Adopting appropriate accounting policies and financial regulations

The Audit Committee assists the Board in ensuring that effective systems and controls and adherence to ensure the integrity of information, internal controls are in place and adoption of appropriate accounting policies with financial regulation.

Complied

A.1.3 Board collectively and Directors individually must act in accordance with laws and accessibility for independent professional advices

The Board collectively and Directors individually, recognised their duty to comply with laws of the country. The Board of Directors perform their functions in line with the relevant laws and regulations.

Complied

A.1.4 All Directors should have access to the services and advice of the Company Secretary.

All Directors have access to the Company Secretaries a company registered as a qualified Secretary. Their services are available to all Directors and they advise the Board on corporate governance matters, Board procedures and applicable rules and regulations.

Complied

A.1.5 Independent judgment of Directors

All Directors are responsible for bringing independent judgment on issues of strategy, performance, resources and standard of business conduct. Non- Executive Directors are responsible for providing independent judgment for the proposals made by the Managing Director and Executive Directors.

Complied

A.1.6 Every Director should dedicate adequate time and effort to the matters of the Board and the Company

Every Director has dedicated adequate time and effort to attend the meetings of the Board and Sub-committees to ensure that the duties and responsibilities are satisfactorily discharged.

Complied

A.1.7 One of third directors can call for resolution

Provisions are available in the Board to call for resolution to be presented to the Board

Complied

A.1.8 Every Director should receive appropriate training

Every Director was given appropriate induction when first appointed to the Board with regard to the affairs of the Company and laws and regulations applicable to the Company. Further the Corporate Management and external experts make presentations with regard to the market environment, macro-economic and social environment to update the knowledge of the directors.

Complied


GOVERNANCE



A.2 CHAIRMAN AND CHIEF EXECUTIVE OFFICERThere should be a clear division of responsibilities at the head of the Company, which will ensure balance of power and authority, so that no one individual has unfettered powers of decision.

The Chairman as well as the Managing Director have a clear distinction of responsibilities and balance in power and authority. Chairman is responsible in effectively guiding the Board and Managing Director is responsible for running of business functions.

A.2.1 Division of responsibility between Chairman and CEO

The positions of Chairman and Managing Director have been separated in line with best practices with a view to maintain the balance of power and authority. Chairman is Non-Executive Director while MD is an Executive Director. To further enhance independence Mr. N.M. Pieris has been appointed Senior Director.

Complied

A.3 CHAIRMAN The Chairman’s role in preserving good corporate governance is crucial. As the person responsible for guiding and directing the Board, the Chairman should preserve order and facilitate the effective discharge of the functions of the Board.

A.3.1 Chairman’s role in preserving good corporate governance

The Chairman provides leadership to the Board, ensures that the Board works effectively discharges its responsibilities and ensures that all key and appropriate issues are discussed by the Board in a timely manner.

Complied

A.4 FINANCIAL ACUMEN The Board should ensure the availability within it of those with sufficient financial acumen and knowledge to offer guidance on matters of finance.

A.4.1 Financial Acumen The Chairmen of AC is a Non-Executive Director and member of the Certified Practicing Accountants of Australia and other Directors also have financial acumen, a key attribute of the successful careers.

Complied

A.5 BOARD BALANCEIt is preferable for the Board to have a balance of Executive and Non-Executive Directors such that no individual or small group can dominate the Board’s decision taking.

A.5.1 Board should include at least two Non-Executive Directors or one third of total Directors whichever is higher

The Board comprise of three Non-Executive Directors and three Executive Directors facilitating the required balance within the Board.

Complied

A.5.2 Two or one-third of Non-Executive Directors whichever is higher should be independent

Two (2) Non-Executive Directors are Independent as defined by this Code. Complied

A.5.3 Evaluation of independence of Non-Executive Directors

The Board evaluates the independence yearly using annual declarations submitted by the Directors according to the CSE code.

Complied

A.5.4 Signed declaration of independence by the Non-Executive Directors

All Non-Executive Directors provided the signed declaration of independence for 2019/2020

Complied

A.5.5 Determination of the independence and non-independence of each Non-Executive Director annually

The Board has reviewed the declarations submitted by the Non-Executive Directors and determined their independence.

Complied



A.5.6 If an Alternate Director is appointed by a Non-Executive Director such Alternate Director should not be an Executive Director and if an Alternate Director is appointed by an Independent Director, the person who appointed also should meet the criteria of independence

There were no Alternate Directors appointed during the year 2019/20. Complied

A.5.7

A.5.8

Senior Independent Director (SID)

Confidential discussion with other Directors by the SID

Chairman is Non-Executive Director while MD is an Executive Director. To further enhance impendence Mr.N.M Pieris has been appointed Senior Director

Complied

A.5.9 Meetings held by the Chairman with Non-Executive Directors

The Chairman held meetings with Non-Executive Directors. Complied

A.5.10 Recording of concerns of Directors in Board minutes where they cannot be unanimously resolved

There were no instances where the Directors could not unanimously resolve a matter and accordingly no such matters were recorded in the Minutes.

Complied

A.6 SUPPLY OF INFORMATIONThe Board should be provided with timely information in a form and of quality appropriate to enable it to discharge its duties.

A.6.1 Management should provide timely information to the Board

Timely and accurate information is provided by the Management to the Board and it is customarily seven days prior to the date of the Board meeting.

Complied

A.6.2 The minutes, agenda and papers required for a Board meeting should be provided before seven (7) days

Board Papers are circulated among the Directors seven days prior to the Board Meeting.

Complied

A.7 APPOINTMENTS TO THE BOARDThere should be a formal and transparent procedure for the appointment of new Directors to the Board.

A.7.1 Nomination Committee Nomination procedure is in place and this was duly followed in the appointment of Mr. P.S. Goonewardene.

Complied

A.7.2 Assessment of Board composition by the Nomination Committee

The Board based on its composition and its business model reviewed that structure of the Board and identified the areas of expertise that is required and decided that the appointments to the Board will be made considering these matters.

Complied

A.7.3 Disclosure requirements when appointing of new Directors to the Board

Details of new Directors are disclosed to the shareholders at the time of their appointment by way of announcements made through the Colombo Stock Exchange as well as in the Annual Report. Prior approval for appointment of a new Director was obtained from the Director of Non-Bank Supervision of CBSL and notification is sent to the Colombo Stock Exchange.

Complied


GOVERNANCE



A.8 RE-ELECTIONA.8.1 & A.8.2

Re-election of Directors At each Annual General Meeting one Director who is longest in office retires by rotation excluding the Managing Director.

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

Complied

A.8.3 Resignation As per the company procedure all Directors should provide written communication on their resignation to the Board.

Complied

A.9 APPRAISAL OF BOARD PERFORMANCEBoard should periodically appraise their own performance in order to ensure that Board responsibilities are satisfactorily discharged.

A.9.1 Appraisal of Board performance The Board annually evaluates its own performance to ensure that it is discharging its responsibilities satisfactorily. This process requires each Director to duly complete the Board Performance Evaluation Form in line with this section of the code. The responses are tabulated by the Company Secretaries who compiles a report which is submitted to the Board for information and necessary action.

Complied

A.9.2 Annual self-evaluation by the Board of its sub-committees

The appraisal of the performance of Board Sub-committees have been presented to the Board.

Complied

A.9.3 Disclosure in the Annual Report about the Board’s performance evaluation methodology

As indicated in the A.9.1 Complied

A.10 DISCLOSURE OF INFORMATION IN RESPECT OF DIRECTORSShareholders should be kept advised of relevant details in respect of Directors

A.10.1 Annual Report disclosure in respect of Directors

Profiles of the Board of Directors are given on page 24 including other Directorships held by the Directors and memberships of other Board Committees.

Complied

A.11 APPRAISAL OF CHIEF EXECUTIVE OFFICER (CEO)The Board should require at least annually to assess the performance of the CEO.

A.11.1 Targets for CEO at the commencement of each fiscal year

Managing Director’s performance targets are aligned with business strategies of the Company. Targets are set at the beginning of every financial year by the Board which is in line with the short, medium and long-term objectives of the Company. He is assisted by the CEO in the discharge of specified functions.

Complied

A.11.2 Evaluation of the performance at the end of fiscal year

In addition to the monthly review of the Profit and Loss A/c at the end of each financial year the Board evaluates the set targets and the actual performance

Complied

B. DIRECTORS’ REMUNERATIONB.1 REMUNERATION PROCEDURE

The Company has a formal and transparent procedure for developing policy on executive remuneration and for determining the remuneration packages of individual Directors. No Directors should be involved in deciding his own remuneration.



B.1.1 Setting up of Remuneration Committee

The functions of the Committee include determination of compensation and benefits of the Managing Director and Executive Directors while ensuring that no Director is involved in setting his own remuneration.

Complied

B.1.2 Composition of Remuneration Committee

Composition of Remuneration Committee is in line with Listing Rules. Complied

B.1.3 Disclosure in the Annual Report about the Remuneration Committee members

Details of the Remuneration Committee members are given on page 62 of the Annual Report.

Complied

B.1.4 Remuneration of Non-Executive Directors

The Non-Executive Directors receive a fee and additional fee whenever they serve on Board Sub-committees and this will be decided by the Board.

Complied

B.1.5 Consultation of the Chairman/ CEO/MD and other Executive Directors and access to the professional advice

Committee could seek independent professional advise where and when necessary in discharging its functions.

Complied

B.2 THE LEVEL AND MAKE UP OF REMUNERATIONLevel of remuneration of both Executive and Non-Executive Directors should be sufficient to attract and retain the Director’s needed to run the Company successfully.

B.2.1 Remuneration of Executive Directors

Remuneration of Executive Directors are formulated to attract, retain and motivate them in achieving the objective of the Company as set out by the Board.

Complied

B.2.2 Remuneration packages in line with industry practices

The Board reviews the information relating to the Company and due care is taken to ensure the remunerations are on par with industry standards.

Complied

B.2.3 Remuneration packages in line with other Companies.

Remuneration is set by referring to the remuneration levels within the industry.

Complied

B.2.4 Performance related payments to Executive Directors

Such payments are made in keeping with their job role and fulfilling of the objectives.

Complied

B.2.5 Executive Share Option There are no Share Option schemes offered by the Company. Not Applicable.

B.2.6 Designing schemes of performance-related remuneration

In deciding the remuneration of the CEO and Senior Management the Remuneration Committee takes note of the provisions set out in Schedule E.

Complied

B.2.7 – 2.8

Early termination of Directors Termination of service of the Executive Directors will be in accordance with their contract of employment.

Not Applicable.

B.2.9 Remuneration of the Non-Executive Directors

Non-Executive Directors remuneration is determined by the Remuneration Committee with the recommendation of the Executive Directors considering the time commitment, responsibilities of the role and the market practices. The Company currently does not provide any share option plans.

Complied

B.3 DISCLOSURE OF REMUNERATIONB.3.1 Disclosure in the Annual Report

about the Remuneration Committee members, Statement of Remuneration Policy and aggregate remuneration paid

The composition of the Remuneration Committee is given on page 62. The aggregate remuneration paid to the Board of Directors is disclosed in Note 43 to the Financial Statements.

Complied


GOVERNANCE



C. RELATIONS WITH SHAREHOLDERSC.1 CONSTRUCTIVE USE OF THE ANNUAL GENERAL MEETING (AGM) AND CONDUCT OF GENERAL MEETINGS

Board should use the AGM to communicate with shareholders and should encourage their participation

C.1.1 Use of proxy votes The Form of Proxy is modelled to facilitate the shareholder to vote on each item specifically. Thereby the Company has recorded all proxy votes for each resolution received within the appointed time frame prior to the Annual General Meeting.

Complied

C.1.2 Separate resolutions for separate issues

Separate resolutions are placed before shareholders for business transactions at the Annual General Meetings.

Complied

C.1.3 Arrangement made by the Chairman of the Board that all Chairmen of Sub-committees make themselves available at the AGM

The Board ensure that the Chairmen of the Audit, Remuneration and Board Integrated Risk Management Related Party Transactions Review Committees were present at the 2019 AGM to answer any questions.

Complied

C.1.4 Adequate notice for the AGM to the shareholders

The Annual Report including Financial Statements and the Notice of Meeting are sent to shareholders 15 working days prior to the date of the AGM.

Complied

C.1.5 Procedures of voting at general meetings

The Annual Report including Financial Statements and the Notice of Meeting are sent to shareholders 15 working days prior to the date of the AGM.

Complied

C.2 COMMUNICATION WITH SHAREHOLDERSC.2.1 Channel to reach all shareholders

to disseminate timely information Board-approved communication policy is available and the primary mode of communication with shareholders is at the AGM.

Complied

C.2.2 Policy and methodology of communicating

The Company provides fair disclosure with emphasis on the integrity, accuracy, timeliness and relevance of the information provided.

Complied

C.2.3 Implementation of the communication policy and methodology

Shareholders receive the Annual Report from the Company either by means of a CD or in hard copy form. Shareholders may at any time elect to receive the Annual Report from the Company in printed form without any charge.

Complied

C.2.4 Contact person Shareholders may, at any time, direct questions and request for publicly available information of the Directors or Management of the Company.

Complied

C.2.5 Awareness of Directors on major issues and concerns of shareholders

The Company Secretaries shall maintain a record of all correspondence received and will deliver as soon as practicable such correspondence to the Board or individual Director/s as applicable.

Complied

C.2.6 Contact person for shareholders Company Secretaries can be contacted for any queries by the shareholders. Complied

C.2.7 Process for responding to shareholders

Company has a Board approved communication policy to address this. Complied

C.3 MAJOR AND MATERIAL TRANSACTIONSDirectors should disclose all proposed corporate transactions which would materially alter the net asset base of the Company.

C.3.1 Major Transactions During the year 2019/20, the Company did not engage in or commit any ‘Major Transactions’ which materially affected the Company’s net asset base.

Complied

C.3.2 Public listed company should in addition comply with the disclosures

If it is required, we normally follow the best practices. Complied



D. ACCOUNTABILITY AND AUDITD.1 FINANCIAL REPORTING

The Board should present a balanced and an understandable assessment of the Company’s financial position and prospects.

D.1.1 Board should present interim and other price sensitive information to the public and reports to regulators

The Company has reported a true and fair view of its financial position and performance for the year ended on 31 March 2020 and at the end of each quarter of the financial year and all price sensitive information has been disclosed in a timely manner.

Complied

D.1.2 Directors’ Report in the Annual Report

Annual Report of the Board of Directors on the Affairs of the Company is given on page 54 covering all areas of this section.

Complied

D.1.3 Annual Report disclosure stating Boards’ and Auditors’ responsibility

Statement of Directors’ Responsibilities is given on page 69 and Auditors responsibility is given on the Auditors’ Report to the Financial Statement on page 72 and the Directors’ Statement on Internal Control is given on page 70 respectively.

Complied

D.1.4 Management discussion and analysis

Management discussion and analysis is given on pages 16 to 23. Complied

D.1.5 Directors’ assumption on the going concern of the business.

This is given in the ‘Annual Report of the Board of Directors on the Affairs of the Company’ on page 54.

Complied

D.1.6 Management Discussion and Analysis

A separate section in the Annual Report. Complied

D.1.7 Serious loss of capital No such circumstances occurred, and its likelihood of occurrence is also remote.

Not applicable

D.1.8 Disclosure of related party transactions

A detailed Board approved documented process is available in the Company and the system for monitoring and reporting of related party transaction is in place.

The Company Secretaries keep a record of related party transactions and makes necessary disclosures accordingly. All related party transactions as defined in Sri Lanka Accounting Standard – 24 (LKAS 24) on ‘Related

Party Transactions’ are disclosed in Note 43 to the Financial Statements.

Complied

D.2 INTERNAL CONTROLThe Board should maintain a sound system of internal control to safeguard shareholders investments and company assets.

D.2.1 Evaluation of internal controls by the Board

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

Complied

D.2.2 Internal audit function According to the CBSL direction an Internal Audit Division was setup within the company from January 2019.

Complied

D.2.3 Evaluation of the process and effectiveness of risk management and internal controls

The Audit Committee reviewed the internal controls and procedures of the Company and the Minutes of the Meetings are tabled at the Board Meetings. The IRMC reviews processes relating to the risk management framework of the Company and minutes of the meetings are tabled at the Board Meeting subsequently.

Complied

D.2.4 Responsibilities of Directors in maintaining a sound system of internal control and Statement of Internal Control

The Directors’ responsibility for maintaining a sound system of internal control is given in the Directors’ responsibility Statement on Internal Control over Financial Reporting on page 69.

Complied


GOVERNANCE



D.3 AUDIT COMMITTEEThe Board should establish formal and transparent arrangements for considering how they should select and apply accounting policies, financial reporting and internal control principles and maintaining an appropriate relationship with the Company’s Auditors.

D.3.1 Composition of the Audit Committee

The Audit Committee comprises the following committee members:

Mr.P. Suren Goonewardene

Mr. Nilanka M. Pieris.

Complied

D.3.2 Reviewing the scope and results of the audit and its effectiveness and independence and objectivity of the Auditors

The Audit Committee periodically reviews the scope and results of the audits and its effectiveness. Further, independence and the objectivity of the Auditors are also reviewed periodically. The Committee considers independence when providing non-audit engagements to the External Auditor.

Complied

D.3.3 Terms of Reference of the Audit Committee

The Audit Committee is guided by the Terms of Reference approved by the Board which outlines authority and responsibility. The Committee mainly deals with matters pertaining to the statutory and regulatory compliance in financial reporting and matters with regard to the External Auditors and internal audit.

Complied

D.3.4 Disclosures made in the Annual Report about Audit Committee

Audit Committee Report is given on page 58 to the Annual Report. Complied

D.5 CORPORATE GOVERNANCE DISCLOSURES The Board should include this in the Annual Report’ setting out the manner and extent for it to be complied.

D.5.1 Disclosure of Corporate Governance compliance

The requirement is met with the presentation of this Corporate Governance Report from pages 29 to 53 of the Annual Report.

Complied

D.4 RELATED PARTY TRANSACTIONS REVIEW COMMITTEEThe Board should establish a procedure to ensure that the Company does not engage in transactions with “ related parties” in a manner that would grant such parties “more favourable treatment” than that accorded to third parties in the normal course of business

D.4.2 The Board should established a Related Party Transaction Review Committee

Board appointed Related Party Transaction Review Committee is in place. Complied

D.4.3 RPT Review Committee should have written terms of reference

Written terms of reference for the Related Party Transaction Review Committee is in place.

Complied

2. SHAREHOLDERSE.1 SHAREHOLDER VOTING

Institutional shareholders are required to make considerable use of their votes and encouraged to ensure their voting intentions are translated into practice.

E.1.1 Regular dialogue to be maintained with shareholders and Chairman to communicate shareholders views to the Board

Annual General Meeting is the forum at which there is an effective dialogue with shareholders on matters which are relevant and of concern to the general membership.

Complied



F. OTHER INVESTORSF.1 Individual shareholder’s

investment decisionsIndividual shareholders investing directly in the Company are encouraged to seek independent advice on decisions pertaining to investing or divesting of the shares. The Annual Report contains sufficient information for a potential investor to carry out their own analysis and quarterly Financial Statements contains information on the progress of the Company to make decisions.

Complied

F.2 Individual shareholder voting Individual shareholders are encouraged to participate at the Annual General Meeting and to exercise their voting rights.

Complied

G. SUSTAINABILITY REPORTINGG1.1 Economic sustainability Adopted sustainability practices and reporting based on GRI standards

issued by Global Reporting Initiatives.Complied

G1.2 The Environment Refer page 22 for details. Complied

G1.3 Labour Practices Refer page 20 for details. Complied

G1.4 Society Refer page 22 for details. Complied

G1.5 Product responsibility Refer page 16 for details. Complied

G1.6 Stakeholder identification, engagement and effective communication

Refer page 12 for details. Complied

G1.7 Sustainable reporting and disclosures should be formalised.

Reported based on Guidelines for Global Reporting Initiatives. Complied

Report on Compliance with The Rules on The Content of The Annual Report in Section 7.6 And Rules on Corporate Governance in Section 7.10 of the Listing Rules of The Colombo Stock Exchange (Listing Rules).

Compliance with Rules on The Content of The Annual Report in Section 7.6 Of the Listing Rules


7.6 (i) Names of the Directors during the Financial year.

Please refer ‘Annual Report of the Board of Directors on the Affairs of the Company’ on page 54

Complied

7.6 (ii) Principal Activities of the Company Please refer ‘Annual Report of the Board of Directors on the Affairs of the Company’ on page 54.

Please refer Note 1.1 – Corporate Information to the Financial Reports on page 80

Complied

7.6 (iii) Top 20 shareholders with the number of Shares held and the percentage of such Shares

Please refer ‘Share Information’ for the Twenty (20) largest holders of voting shares on page 128. The Company has not issued any non-voting shares.

Complied

7.6 (iv) The Public Holding percentage Please refer page 129 Complied

7.6 (v) Statement of each Directors and Chief Executive Officers shareholding of the Company at the beginning and end of the year.

Please refer page 129 Complied

7.6 (vi) Information relating to foreseeable risk factors of the Company

Please refer the ‘Risk Management’ section on page 63 Complied


GOVERNANCE



7.6 (vii) Details of material issues relating to employees and industrial relations of the Company.


7.6 (viii) Extent, locations, valuations and number of buildings of the Company & the land holdings & investment properties.

Please refer Note 30 – Information on the freehold land and buildings of the Company in the Financial Reports on page 110

Complied

7.6 (ix) Number of shares representing the Company’s stated capital

Please refer Note 38 – Stated Capital in the Financial Reports on page 118.

Complied

7.6 (x) A distribution schedule of the number of holders in each class of equity securities, and the percentage of their total holdings.


7.6 (xi) Ratios and market price information on:

Equity1. Dividend per share

2. Dividend pay out

3. Net asset value per share

4. Market value per share (highest and lowest values recorded during the financial year and value as at the end of financial year)

DebtInterest rate of comparable government security.

Debt/equity ratio

Interest cover

Quick asset ratio

The market prices and yield during the year

Changes in Credit Rating


S7.6 (xii) Significant changes in the Company’s fixed assets and the market value of land, if the value differs substantially from the book value.

Please refer Note 30 – Property & Equipment in the

Financial Statements on page 110

Complied

7.6 (xiii) Details of funds raised through a public issue, rights issue and a private placement

There were no share issues, rights issues or private placements during the year.

Complied

7.6 (xiv) Information in respect of Employee Share Ownership or Stock Option Schemes.

The Company does not have any Employee Share Ownership or Stock Option Scheme at present.

Complied

7.6 (xv) Disclosures pertaining to Corporate Governance Practices in terms of Rules

7.10.3, 7.10.5 c. and 7.10.6 c. of Section 7 of the Listing Rules.

Please refer Report on compliance with the Rules on the Content of the Annual Report on page 51

Complied



7.6 (xvi) Related Party transactions exceeding 10 percent of the Equity or 5 percent of the total assets of the Entity as per Audited Financial Statements, whichever is lower.

Refer Note 43 in page 120 Complied

COMPLIANCE WITH RULES ON CORPORATE GOVERNANCE REQUIREMENTS IN SECTION 7.10 OF THE LISTING RULESNon-Executive Directors7.10.1 (a) Two or one third of the Directors, whichever

is higher, should be Non- executive Directors.

As at 31 March 2020, the Board comprised of three Non-Executive Directors out of total of 6 Directors which is 50 as a percentage.

Complied

7.10.1 (b) The total number of Directors is to be calculated based on the number as at the conclusion of the immediately preceding Annual General Meeting.

All of the Directors who were in office as at the conclusion of the immediately preceding Annual General Meeting continued as at 31 March 2020 except Mr. L.D. Peries who retired in September 2019.

Complied

7.10.1 (c) Changes to that ratio shall be rectified within ninety days from the changing date.

No change in the ratio took place during the year. Complied

Independent Directors7.10.2 (a) Two or one third of Non-Executive

Directors, whichever is higher, should be independent.

The Board has determined that two Directors out of three Non-Executive Directors are Independent.

Complied

7.10.2 (b) The Board shall require each Non-Executive Director to submit signed declaration of independence/non- independence annually.

All Directors have submitted annual declarations in respect of the year under review.

Complied

Disclosure Relating to Directors7.10.3 (a) Names of Independent Directors should be

disclosed in the Annual Report.Refer page 30 Complied

7.10.3 (b) In the event a Director does not qualify as independent as per the rules on corporate governance but if the Board is of the opinion that the Director is nevertheless independent, it shall specify the basis of the determination in the Annual Report.

No such event has occurred. Complied

7.10.3 (c) A brief resume of each Director should be published in the Annual Report including the areas of expertise.


7.10.3 (d) A brief résumé of any new Director appointed to the Board should be provided to the exchange for dissemination to the public.

Mr. P. Suren Goonewardene was appointed as an independent Non-Executive Director with effective from August 2019 and published through a market announcement.

Complied

Criteria for Defining Independence7.10.4 (a-h)

Requirements for meeting criteria to be independence of a non-executive director.

There are Independent Directors of the Company who met the criteria for independency specified in this Rule.

Complied

Remuneration Committee7.10.5 A listed Company shall have a

Remuneration Committee.Board appointed Remuneration Committee is in place. Complied


GOVERNANCE



7.10.5 (a) The Remuneration Committee shall comprise a minimum of two Independent Non-Executive Directors or a majority of Independent Non-Executive Directors, whichever is higher.

Two Independent Non-Executive Directors are in the Remuneration Committee.

Complied

One Non-Executive Director shall be appointed as Chairman of the Committee by the Board.

Mr. P. Suren Goonewardene is the Chairman of the Committee and he is an Independent Non-Executive Director.

Complied

7.10.5 (b) Functions of the Remuneration Committee shall be to recommend the remuneration of the Chief Executive Officer and the Executive Directors.

Please refer the Report of the Remuneration Committee Complied

7.10.5 (c) The Annual Report shall set out: The names of the Directors that comprise the Remuneration Committee

Please refer the Report of the Remuneration Committee Complied

A Statement of Remuneration Policy Complied

Aggregate remuneration paid to Executive and Non-Executive Directors.

Complied

Audit Committee7.10.6 A listed Company shall have an Audit

Committee.Please refer the ‘Audit Committee Report’ on pages 58 of the Annual Report

Complied

7.10.6 (a) The Audit Committee shall comprise a minimum of two Independent Non-Executive Directors, or a majority of Independent Non-Executive Directors, whichever is higher.

The Audit Committee comprises of two Independent Non-Executive Directors.

Complied

One Non-Executive Director shall be appointed as Chairman of the Audit Committee by the Board.

Mr.P. Suren Goonewardene is the Chairman of the Committee who is an Independent Non-Executive Director.

Complied

The Chief Executive Officer and Chief Financial Officer shall attend Audit Committee meetings.

Both the Managing Director and the Chief Executive Officer attend the meetings by invitation.

Complied

The Chairman or one member of the Committee should be a member of a recognized professional accounting body.

The Chairman of the Audit Committee Mr. P. Suren Goonewardene is an Independent Non-Executive Director and Certified Practicing Accountants of Australia relevant information are disclosed on page 58 of this Annual Report.

Complied



7.10.6 (b) Functions shall include:

1. Overseeing whether the Financial Statements of the Company is in accordance with the Sri Lanka Accounting Standards.

2. Overseeing the Company’s compliance with financial reporting is in accordance with the regulations.

3. Overseeing to ensure the adequacy of Company’s internal control and risk management process.

4. Assessment of the independence and the performance of External Auditors.

5. To make recommendation to the Board pertaining to the appointment, reappointment and removal of External Auditors and approve their remuneration and terms of engagement.

Please refer ‘Audit Committee Report’ on page 58 Complied

7.10.6 (c) The Annual Report shall set out; the names of the Directors who comprise the Audit Committee.

Please refer the ‘Audit Committee Report’ on Page 58 for the required disclosure.

Complied

The Audit Committee shall make a determination of the independence of the Auditors and disclose the basis for such determination.

Please refer the ‘Audit Committee Report’ on page 58. Complied

A report by the Audit Committee setting-out the manner of compliance of the functions set out in above, during the period to which the annual report relates.

Please refer the ‘Audit Committee Report’ on page 58. Complied


Annual Report of the Board of Directors on the affairs of the Company is presented as required by section 168 of the Companies Act No. 7 of 2007.

GeneralThe Board of Directors of Arpico Finance Company PLC has pleasure in presenting the Integrated Annual Report to the

shareholders, together with the Audited Financial Statements for the year ended 31 March 2020 of the Company and the Auditors’ Report on these Financial Statements.

This report provides the information as required by the Companies Act No.07 of 2007, Finance Business Act No.42 of 2011 and Directions issued there under

Finance Leasing Act No 56 of 2000 and amendments, the Code of Best Practice on Corporate Governance issued jointly by the Institute of Chartered Accountants of Sri Lanka and the Securities and Exchange Commission of Sri Lanka and Listing Rules of the Colombo Stock Exchange. This report was approved by the Board of Directors on 3 September 2020.

As required by the Section 168 of the Companies Act No. 07 of 2007, the following information is disclosed in this Report prepared for the year ended 31 March 2020:

Reference to the Companies Act’s Section

Information Required to be disclosed as per the Companies Act No. 07 of 2007

Annual Report Page Reference for Compliance and Necessary Disclosures

168 (1) (a) The nature of the business of the Company together with any changes thereof during the accounting period.

Refer Section 1.2 on ‘Principal Business Activities, Nature of Operations’ on page 80.

168 (1) (b) Signed Financial Statements of the Company for the accounting period completed in accordance with Section 152.

The Financial Statements of the Company for the year ended 31 March 2020 have been prepared in accordance with the requirements of the Sri Lanka Accounting Standards (SLFRS’ and LKAS’) and comply with the requirements of the Companies Act No. 07 of 2007 and the Finance Business Act No. 42 of 2011.

168 (1) (c) Auditors’ Report on the Financial Statements of the Company

Refer page 72 for the Independent Auditors’ Report.

168 (1) (d) Accounting Policies of the Company and any changes therein.

Significant Accounting Policies adopted in the preparation of the Financial Statements of the Company are given on pages 80 to 126.

168 (1) (e) Particulars of the entries made in the Interests Registers of the Company during the accounting period.

All Directors have made declarations as required by the Sections 192 (1) and (2) of the Companies Act aforesaid and all related entries were made in the Interests Registers during the year under review.

168 (1) (f) Remuneration and other benefits paid to Directors of the Company during the accounting period.

Refer Note 43 to the Financial Statements.

168 (1) (g) Total amount of donations made by the Company during the accounting period.


168 (1) (h) Information on Directorate of the Company during and at the end of the accounting period.

Refer page 30.

168 (1) (i) Separate disclosure on amounts payable to the Auditors as Audit Fees and Fees for other services rendered during the accounting period by the Company.


168 (1) (j) Auditors’ relationship or any interest with the Company. Auditors do not have any other relationship or interest in contracts with the Company other than being the Auditors for the Company.

168 (1) (k) Acknowledgement of the Contents of this Report/Signatures on behalf of the Board of Directors

Refer the item 28 in page 57.

ANNUAL REPORT OF THE BOARD OF DIRECTORS ON THE AFFAIRS OF THE COMPANY


2. Review of Business

2.1 Vision, Mission and Corporate Conduct

The Company’s vision, mission and values are given on page 3 of this Report. Arpico Finance Company PLC was incorporated on 1 May 1951 under the Company Ordinance No 51 of 1938 and was re-registered under Companies Act No 07 of 2007.

The registered office of the company is situated at 146, Havelock Road, Colombo 05. ICRA Lanka Ltd has assigned a B+ (Negative) rating to the company.

2.2 Review of OperationsA review of the business of the Company and its performance during the year with comments on financial results are contained in the Managing Director’s and Chief Executive Officer’s Reviews on page 8, which form an integral part of this Report.

3. Future DevelopmentsAn overview of the future developments of the Company is given in the Chairman’s message given on page 6, and Managing Director’s and Chief Executive Officer’s Reviews on page 8.

4. Directors’ responsibility for financial reporting

The Directors are responsible for the preparation of the Financial Statements of the Company, which reflect a true and fair view of its state of affairs.

The Statement of Directors’ Responsibilities for Financial Reporting is given on page 71 and forms an integral part of the Annual Report of the Board of Directors on the affairs of the Company.

5. Directors’ statement on internal control over financial reporting

The Board has issued a statement on the internal control mechanism of the Company as per Section 10 (2)

(b) of Finance Companies (Corporate Governance) Direction No. 03 of 2008.

The Board has obtained an Assurance Report from the External Auditors on the Directors’ Statement on Internal Control Over Financial Reporting which is given on page 70.

6. Auditors’ ReportThe Report of the Independent Auditors on the Financial Statements of the Company is given on page 72.

7. Gross IncomeThe gross income of the Company for the year of 2019/2020 was Rs. 2.90 Bn (Rs. 4.19 Bn in 2018/2019).

The sources of income are disclosed in Note 7 to the Financial Statements.

8. Accounting Period The financial accounting period reflect information from 1 April 2019 to 31 March 2020.

9. Results and Appropriations

9.1 Performance of the Company The net Loss before tax of the Company amounted to Rs. 75.04 Mn. (Net profit before tax Rs. 162.2 Mn in 2018/2019).

9.2 ReservesInformation on the movement of reserves is given in the Statement of Changes in Equity on page 78 and in Notes 39 to 40 to the Financial Statements.

9.3 TaxationThe income tax rates applicable on the profits earned are 28% from April to December 2019 and 24% from January to March 2020. The rate of VAT on financial services during the year is 15% Income tax charged for the year of assessment 2019/20 was Rs 92.71 Mn (Year of assessment 2018/19 was Rs 210.32 Mn tax

reversal) given in page 90 in Notes 16 to the Financial Statements.

10. Property & Equipment and Intangible Assets

Information on Property & Equipment and Intangible Assets of the Company are given in Notes 30 and 31 to the Financial Statements on pages 107 to 111.

Specific information on extent, location, valuations of the land and buildings held by the Company are given in Note 30 to the Financial Statements on pages 110.

11. Market Value of PropertiesThe revaluation of the land and buildings of the Company was carried out by professionally qualified independent valuers and the Board of Directors of the Company is of the opinion that the revalued amounts are not in excess of the current market values of such properties.

Details of market value (revalued amounts) of freehold properties of the Company are given in Note 30 to the Financial Statements.

12. Stated Capital The details of the Stated Capital are given in Note 38 to the Financial Statements. Details of the movement of reserves and stated capital is provided on page 118 of the financial statements.

13. Share Information• Distribution Schedule of

ShareholdingsInformation on the distribution of shareholding and the respective percentages are given in the Section on ‘Investor Relations’ on pages 127 to 128.

• Information on Earnings, Dividend, Net Assets and Market ValueInformation relating to earnings, dividend, net assets and market value per share is given in ‘Financial


ANNUAL REPORT OF THE BOARD OF DIRECTORS ON THE AFFAIRS OF THE COMPANY

Highlights’ on page 5. Information on the trading of the shares and movement in the number of shares represented by the Stated Capital of the Company is given in the Section on ‘Investor Relations’ on pages 127 to 128.

• Substantial ShareholdingsNames of the twenty major shareholders for ordinary shares, percentages of their respective holdings and percentage holding of the public, etc. are given in the Section on ‘Investor Relations’ on pages 127 to 128.

• Employee Share OptionThe company has not adopted and employee share option scheme.

14. Equitable Treatment to Shareholders

The Company has at all times ensured that all shareholders are treated equitably.

15. Information on the Directors of the Company

The Board of Directors of the Company as at 31 March 2020 consisted of six (6) Directors with vast knowledge

and experience in banking, finance, commercial and engineering as detailed in the ‘Board Profiles’ on pages 24 to 26.

Details of the attendance of meetings of the Board of Directors are presented on page 30.

The Board Subcommittees namely, Audit Committee, Integrated Risk Management Committee and Remuneration Committee and Related Party Transaction Review Committee carried out their activities and reports from such committees appear on pages 58 to 62.

We wish to place on record our heartfelt gratitude and thanks to Mr. L.D Peiris for his contribution to the company during in his tenure of office and for serving in the board committees. He retired in September 2019 and we wish him well.

In August 2019 Mr. P. S. Goonewardena a qualified professional was appointed as an Independent Non Executive Director. The Board welcomes him and looks forward to his contribution.

Mr. N. M. Pieris retired as per article No 130 & 131 and being eligible offers himself for re-election with the support of the Directors.

16. Disclosure of Directors’ Dealing in Shares and DebenturesIndividual ordinary voting shareholdings of persons who were Directors of the Company at any time during the financial year are as follows:

No of Ordinary shares31.03.2020 31.03.2019

Dr. D. L. Karunaratne 100 100

Mr. J. P. I. N. Dayawansa 100 100

Mr. J. P. I. S. Dayawansa 100 100

Mr. T. M. A. Sallay 100 100

Mr. Nilanka M. Pieris 166 166

Mr. P. S Goonewardene – Appointed on 07-08-2019 100 -

Mr. L.D Peiris – Resigned on 24-09-2019 166 166

There were no debenture issues during the year under review

17. Statutory PaymentsThe Directors, to the best of their knowledge and belief are satisfied that all statutory payments (including all taxes, duties and levies payable by the Company) due to the Government, other regulatory institutions and related to the employees have been made on time or where relevant provided for.

Compliance with laws and regulations the company has not engaged in any activity contravening any laws and regulations.

18. External AuditorsMessrs. SJMS Associates is the present Auditor of the Company and in keeping with the principles of good Corporate Governance, audit partner rotation takes place once in every five years.

The retiring auditors express their willingness to continue in office and a resolution to reappoint them as auditors will be proposed at the forthcoming Annual General Meeting.

The reappointment of SJMS as Auditors and fixing their remuneration rests with the Shareholders and will be proposed at the forthcoming Annual General Meeting to be held on 28 September 2020 for Shareholder approval.

19. Risk Management and System of Internal Controls

The Company has an ongoing process in place to identify, evaluate and manage the risks that are faced by the Company. The Directors continuously review this process through the Board Integrated Risk Management Committee. Specific steps taken by the Company in managing risks are detailed in the ‘Board Integrated Risk Management Committee Report’ on page 60 and in Note 44 to the Financial Statements on ‘Risk Management’ on pages 121 and 126.


An effective and comprehensive system of internal controls is in place in the Company comprising of internal checks, internal audit and financial and other controls required to carry out the business in an orderly manner and to safeguard the assets. The Directors’ Statement on Internal Control and the Auditors’ Report thereon are given on pages 70 and 71.

20. Corporate GovernanceThe measures taken and the extent to which the Company has complied with the Code of Best Practice on Corporate Governance issued by The Institute of Chartered Accounts Sri Lanka and the Securities and Exchange Commission of Sri Lanka, the Colombo Stock Exchange and the Central Bank of Sri Lanka are given on pages 29 and 53.

21. Related party transactionsThere were no non-recurrent related party transactions of which aggregate value exceeded 10% of the equity of the 5% of the total assets of the company, which require specific disclosures in the Annual Report as per the Listing rule 9.3.2 (a) of the Colombo Stock Exchange.

The recurrent related party transactions of which aggregate value exceeded 10% of the gross revenue/ income of the company, which require specific disclosures in the Annual Report as per the Listing rule 9.3.2 (b) of the Colombo Stock Exchange, are disclosed under the Note 43 in page 121.

22. Outstanding LitigationIn the opinion of the Directors and in consultation with the Company’s lawyers, litigation currently pending against the Company will not have a material impact on the reported financial results or future operations. Details of Litigation Pending against the Company are given in Note 41 to the Financial Statements..

23. Contingent LiabilitiesExcept as disclosed in Note 41 to the Financial Statements, there were no material contingent liabilities as at the reporting date

24. Events after the Reporting PeriodNo event of material significance that require adjustments to the Financial Statements, has occurred subsequent to the Reporting period, other than those disclosed in Note 42 to the Financial Statements on page 120.

25. Going ConcernThe Directors have made an assessment of the Company’s ability to continue as a going concern and is satisfied that it has the resources to continue in business for the foreseeable future. Furthermore, the Directors are not aware of any material uncertainties that may cast significant doubt upon the Company’s ability to continue as a going concern, such as restrictions or plans to curtail operations.

26. Human Resources The company has identified that human capital is of paramount importance to the company and has taken measures for career development and appropriate hiring is enhance skill and capabilities.

Material issues pertaining to employees and industrial relations.

No Material issues pertaining to employees or industrial relations of the company occurred during the year under review.

27. Annual General Meeting and the Notice of Meeting

The Annual General Meeting of the Company will be held at 9.30 a.m. on 28th September 2020 at Sinhalese Sports Club, Mair Air-Conditioned Pavilion, 35 Maitland Place, Colombo 07.

Notice relating to the Annual General Meeting of the Company is enclosed at the end of the Annual Report.

28. Acknowledgement of the Contents of the Report

As required by the Section 168 (1) (k) of the Companies Act No. 07 of 2007, the Board of Directors does hereby acknowledge the contents of this Annual Report.

Signed in accordance with a resolution adopted by the Directors.

By order of the Board of Directors

Alliance Management Services (Pvt) Ltd.Secretaries



Composition of the CommitteeThe Board Audit Committee is appointed by the Board of Directors of the Company. As at 31 March 2020, it comprised the following Directors,

Name of the Member Directorship Status Membership StatusMr. Suren Goonewardene Independent Non-Executive Chairman

Mr. N.M. Pieris Independent Non-Executive Member

The Profiles of the members are given on page 24.

The Company Secretaries function as the Secretaries for the Audit Committee.

The Terms of Reference document specifies the framework for the Committee. In addition, the Managing Director, Executive Directors and CEO attend the Audit Committee meetings by invitation as and when required. The audit partner of the External Auditors, M/s. SJMS Associates was invited to attend one such meetings during the year where the Executive Directors were not present. Proceedings of the Audit Committee meetings are reported regularly to the Board of Directors.

Role of the Audit CommitteeThe operation of the Audit Committee is guided by the mandate set out and approved by the Board of Directors of the Company. The Committee provides oversight over:

• Preparation, presentation, and adequacy of disclosures in Financial Statements in accordance with Sri Lanka Accounting Standards.

• Compliance with financial reporting requirements under the Companies Act and other relevant regulations.

• Adequacy of internal controls and risk management procedures.

• Assessment of the Company’s ability to continue as a going concern in the foreseeable future.

• Independence of External Auditors.

External AuditThe Audit Committee reviewed and evaluated the effectiveness of the audit and obtained an assurance from the Auditors on their independence.

The Committee approved the reappointment of Messrs SJMS Associates as External Auditors for the financial year ending 31 March 2020 while further approving the External Auditors’ terms of engagement, audit plan and budgeted audit fees payable.

Financial Statements The Committee examined and reviewed the interim and annual Financial Statements in addition to financial information disclosed to the public prior to submission and approval by the Board.

Additionally, the Committee reviewed the adequacy of the Company’s portfolio, specific impairments, and impairment of other assets, while also considering the appropriateness of accounting policies adopted and changes thereto during the year in review.

The Committee also took steps to ensure that the annual Financial Statements give a fair and accurate assessment of the present financial position of the Company as at the end of the financial year.

The Committee notes that there were no material reports or complaints made concerning accounting practices, internal audit, internal financial controls, or the content of annual Financial Statements.

Given the above, the Committee concluded and confirmed the going concern as the basis of the preparation of the interim and annual Financial Statements and made recommendations to the Board on the interim and final dividend payments to shareholders.

Internal Control and Internal AuditThe Committee further reviewed and approved the mandate of the annual internal audit and audit plan which was evaluated for independence, effectiveness, and performance in compliance with the said mandate. In doing so, the Committee considered reports of the Internal and External Auditors on the Company’s systems of internal controls including internal financial controls and maintenance of effective internal control systems in addition to the adequacy of available internal audit resources and found them to be satisfactory. Industry best practices which were recommended by the Internal Auditors were implemented to facilitate growing the businesses with quality lending. In order to achieve this systems and controls were strengthened to adopt a sustainable business model.

The Committee notes that no significant differences of opinion exist between the internal audit function and management and has received assurances that proper and adequate accounting records were maintained and that the systems safeguarding Company assets have been implemented.

Based on the above, the Committee formed the opinion that at the date of this report there were no material breakdowns in internal control, including internal financial controls, resulting in any material loss to the Company.

The infrastructure required in all disciplines within the Company was also assessed in terms of its adaptability to meet market demands and deliverables.

BOARD AUDIT COMMITTEE REPORT


Recommendations were made to the Board on resources required in relation to this and also on optimizing the resources. Critical parameters were consistently reviewed in order to ensure adequate checks in meeting the aspirations of the Company.

Legal and Regulatory RequirementsThe Committee evaluated the Company’s compliance with the Companies Act, Finance Business Act and other relevant enactments and concluded that the Company is in compliance with all requirements in a consistent and timely manner.

Risk Management and Information TechnologyThe Committee reviewed reports from the Management with regards to risk management including fraud and information technology risks as they pertain to financial reporting and the going concern assessment and found that controls in place are sufficient to address all significant financial risks facing the business.

The Committee further evaluated the expertise, resources and experience of the finance function and the senior members of Management responsible for this function and concluded that these were appropriate.

Attendance at MeetingsThe attendance at the Audit Committee meetings is given on page 30.

Conclusion based upon the functions of the Audit Committee, it is satisfied that the Company is in conformity with the legal & statutory requirements and the implemented systems and controls sufficient to ensure compliance with the best industry practices.

Suren GoonewardeneChairmanAudit Committee



The Board Integrated Risk Management Committee (BIRMC) has been established as a Sub-committee of the Board of Directors in compliance with the Finance Companies (Corporate Governance) Direction No. 3 of 2008.

Composition of the CommitteeThe Integrated Risk Management Committee is appointed by the Board of Directors of the Company. As at 31 March 2020 it comprised the following members,

Name of the Member Directorship Status Membership StatusMr. N.M. Pieris Independent Non-Executive Chairman

Mr. P.S. Goonewardene Independent Non-Executive Member

Mr. J.P.J.N. Dayawansa Executive Member

Mr. J.P.I.S. Dayawansa Executive Member

Mr. T.M.A. Sallay Executive Member

Committee MeetingsThe Committee held 12 meetings, during the financial year 2019/20 to discuss all risk related matters within its purview and risk mitigation based on potential risk, critical areas which required the attention of the Executive Directors were identified and a report was submitted to the Board. The implementation of the recommendations made to the Board or alternate measures proposed were reviewed at the succeeding meeting. The establishing of a healthy risk appetite for the Company was also considered and based on the recommendations made. Compliance of all statutory, regulatory and tax was periodically reviewed with special emphasis on the implementation of matters related to new directions and statutes. Further Compliance department is reporting the status of compliance in a special report for each meeting.

The critical risks which could affect the sustainability of the Company and the business model were considered by the Committee. Recommendations were made where appropriate to the Board on the recommended course of action. In the changing business environment, the Company had to be adept to take measures to mitigate risk whilst reaching the Company objectives in maintaining the risk & return.

Risk Management framework of the Company being effective policies,

procedures and guidelines which were tested to establish its robustness in the changing market conditions and exceed customer demands with without compromising on the quality and breach of systems and controls.

Attendance of Committee meetings is given on page 40. Key members of the staff participated at the meetings as appropriate.

Term of ReferenceThe responsibilities of the Board Integrated Risk Management Committee as mandated by the Board of Directors are as follows:

1. Assess all risks i.e., credit, market, liquidity, operational and strategic risk including business continuity plans of the Company on monthly basis through appropriate risk indicators and management information.

2. The Committee shall:

- Receive reports from the management concerning capital adequacy, asset quality, credit, market, liquidity, operational, new and emerging risks etc., in order to oversee these risks and assess their effect on capital levels.

- Receive reports from the management concerning resolution of significant risk exposures and risk events, to

monitor them and, if deemed fit, approve them.

3. Take prompt corrective action to mitigate the effects of specific risks in the case such risks are at levels beyond the prudent levels, decided by the Board on the basis of the Company’s policies and regulatory and supervisors requirements.

4. Take appropriate action against the officers for failure to identify specific risks and take prompt corrective action as recommended by the Committee.

5. Report and recommend to the Board of Directors on risk management and compliance related matters seeking the Board’s view, concurrence and/or specific directions.

ComplianceAssessed the Company’s compliance with laws, regulations and regulatory guidelines, internal policies in all areas of business operations.

GeneralReviewed the actual results computed against each risk indicator and took corrective action to mitigate the risk, in cases where risk events exceeded the risk appetite thresholds.

Reviewed risk management policy at the last meeting of the year and improved the effectiveness by proposing a Risk Appetite Statement with KRIs and thresholds for Board approval.

Nilanka. M. PierisChairmanBoard Integrated Risk Management Committee


INTEGRATED RISK MANAGEMENT COMMITTEE REPORT


CompositionThe Related Party Transactions Review Committee is appointed by the Board and their Terms of Reference specifies their role. The Committee comprised of 3 Board members and the Chairman of the Committee is an Independent Non-Executive Director, other Independent Non Executive Director and a Non Executive Director constitute the Related Party Transactions Review Committee. The Managing Director, Executive Directors and other officers have been invited to the meetings as and when required.

Mr. N.M. Pieris – Chairman

Mr. P. S. Goonewardene – Member

Dr. L.R. Karunaratne – Member

ConstitutionThe Related Party Transactions Committee was formed in compliance with the laws and regulations stipulated by the Securities and Exchange Commission, Companies Act, Section 9 of the Listing Rules of the Colombo Stock Exchange, Direction of the Central Bank of Sri Lanka and the Accounting Standards. The primary purpose of the Committee is to evaluate and consider all transactions with related parties of the Company in order to ensure that related parties are treated on par with other shareholders and constituents of the Company.

In carrying out the duties of the Committee is required to avoid ‘conflicts of interest’ which may arise from any transaction of the Company with any person particularly with related parties, ensure arm’s length dealings with related parties whilst also ensuring adherence to the Corporate Governance Directions which requires the Company to avoid engaging in transactions with related parties in a manner that would grant such parties ‘more favourable treatment’ than accorded to other constituents of the Company carrying on the same business.

Summary of Responsibilities of the CommitteeThe Committee’s key focus is to review all proposed Related Party Transactions prior to the completion of the transaction according to the procedures laid down in the Policy which was approved by the Board of Directors. Its key responsibilities are as follows:

• The Committee identified the Key Management Personnel

• Evaluate any proposed Related Party Transactions on a quarterly basis,

• Review any post quarter confirmations on related party transactions,

• Whilst reviewing the related party transactions, the Committee ensures that key management personnel who are a party to a transaction is not present at the meetings.

• Obtain approval from the Board wherever necessary,

• Review the threshold for Related Party Transactions which require either shareholders’ approval or immediate market disclosures

• Review the criteria of Key Management Personnel,

• Report to the Board on the Committee’s activities.

DisclosuresInformation relating to all related parties, as extracted as at the end of each quarter, was presented to the RPTRC.

All transactions both recurrent and non recurrent were presented to the Committee and they were below the threshold which would require disclosure in terms of the Listing Rules.

MeetingsThe Committee met on four separate occasions to approve and confirm transactions with the related parties.

Nilanka M. PierisChairmanRelated Party Transactions Committee


RELATED PARTY TRANSACTION REVIEW COMMITTEE REPORT


The Remuneration Committee, appointed by and responsible to the Board of Directors,comprises two Non-Executive Independent Directors and one Non-Executive Directors.

• Mr. P.S. Goonewardene - Chairman

• Mr. N.M. Pieris – Member

• Dr. D.R.L. Karunaratne – Member

The remuneration policy of the Company endeavours to attract, motivate, and retain quality management in a competitive environment with the skills, experience and quality demanded necessary to achieve the objectives of the Company. This is to ensure that the Company is able to attract, motivate and retain high quality management in a competitive environment and this is well-placed to meet the challenges of the Company. The Committee is responsible for ensuring that the total compensation package is competitive and can attract the best talent in the market.

The following decisions were taken by the committee;

• Equity based or performance based compensation will not be extended to non-executive directors as adopted previously.

• The remuneration policy of the Company encourages enhanced performance and in a fair and responsible manner rewards individuals for their contribution to the success of the Company.

• The Committee should lead the process for make recommendations to the Board, ensuring there is a

formal, rigorous and transparent procedure.

• Determine and agree with the Board the remuneration policy set and monitor the remuneration of the Chairman and Executive Directors of the Company and members of the Company’s senior management group as agreed from time to time, and recommend to the Board a remuneration framework for the Company.

• Request the structure of, and determine targets for performance related pay schemes provided by the Company.

• Review the ongoing appropriateness of the remuneration policy taking into consideration the provisions and recommendations.

• When setting the remuneration of the Executive Directors and the Company’s senior management review and have regard to the remuneration trends across the Company.

The Committee reviews the remuneration levels annually by evaluating the individual performances of senior management staff and its impacts to the company together with matching market levels.

All Executive remuneration decisions are made at Board level, upon recommendation by the Remuneration Committee.

MeetingsThe Remuneration Committee held 03 meetings during the financial year. Information on the attendance at these meetings by the members of the Committee are given on page 30.

Fees and RemunerationThe aggregate remuneration of the Board of Directors during the financial year was Rs. 28.48 Mn.

On behalf of the Remuneration Committee Meeting.

P. S. GoonewardeneChairman


REPORT OF THE REMUNERATION COMMITTEE


Standing strong and stable as one of the oldest Non-Bank financial institutions, we have been proactively addressing and managing numerous risks in our business operations since 1951. Our risk management framework is well established to support the organisation,

to effectively manage these risks while facilitating the management to make better and well-informed decisions. Many challenging volatilities in the political and socio-economic context during the year under review, posed a perplexing business environment, which particularly affected

the operations of financial institutions. In this context, we have continuously reviewed and initiated new measures to strengthen our risk management framework and thereby effectively addressed these challenges to mark another successful year.

Risk Governance Structure

The Board has delegated the authority to focus on the management of risk to the Integrated Risk Management Committee. The Committee has an integrated approach in risk management and updates the Board every month. All the risks related to various departments are taken in to consideration at ALCO and Credit Committee. The risks which are not mitigated at management appointed committees are referred to the Management Risk Committee. The Management Risk Committee reports all risks related information to the IRMC in a well-articulated risk register. The Internal Audit function independently carries out

audits based on audit plan and manually. This function ensures that the existing risk management structures are being followed in the day to day operations. Further, the Internal Audit reviews the adequacy of the existing risk policies and structures in the changing environment.

The Board decides the level of risk which is accepted, monitored and managed by the business units. Such information is reported to the CEO forming the first line of defence. The risk management function independently monitors risks on an aggregate basis and articulates policies and guidelines for effective management

of risk. Reporting directly to the IRMC, the risk management function constitutes the second line of defence. Assurance over the first and second lines of defence is provided by Internal Audit which reports directly to the Audit Committee forming the third line of defence, together with external audit.

In addition to the given risk management framework, the compliance function monitor the company activities are in line with the regulations, legislations and company policies. Any violation will be independently reported to the Risk Committee.

RISK MANAGEMENT

Audit Committee (AC) Integrated Risk Management Committee (IRMC)

Management Risk Committee

Assets and Liabilities Management Committee

(ALCO)Credit Committee

Compliance

Board of Directors


RISK MANAGEMENT

Arpico Finance Company PLC has an integrated approach to risk identification and mitigation. This approach integrates all the risk related activities of the Company. This approach aligns business strategy, processes, people, technology, and knowledge within all risk pillars and integrates it at all levels of decision-making.

Integrated risk management helps in identifying, selecting among alternative risk responses, risk avoidance, reduction, transfer and acceptance. In addition compliance department will ensure effective reporting and compliance with laws and regulations and avoids damage to the entity’s reputation and associated consequences.

A sound risk culture is a core element of AFCP’s Integrated Risk Management Framework and is deemed to be vital in building resilience and creating a scalable platform for future growth.

Risk Management is seen as the responsibility of every employee. In this regard, the Company seeks to promote

a culture where employees are aware of potential threats related to their actions and work towards minimising them by exercising the right controls, professionalism, and due care at all times.

The Company’s Risk Appetite provides measurable targets and tolerance thresholds across all material risk categories. This creates a framework where optimal growth options can be evaluated alongside the risks involved in order to drive sustainable performance.

The main aim of setting a Risk Appetite is to ensure that risks are proactively managed as per the Board approved tolerance limits. Risk Appetite tolerance levels are set at different trigger levels, with clearly defined escalation requirements. That enables appropriate actions to be defined and implemented as required. In cases where the tolerance levels are breached, it is the responsibility of the SAGM – Finance, MIS department & Compliance Officer to bring them to the attention of the Management and respective Board Sub Committees, and the Board for necessary action.

The Board is tasked with reviewing and approving the Risk Appetite annually, to ensure alignment with the strategy, business environment and stakeholder requirements. Any amendments to Risk Appetite are arrived at through discussions between Business Line Heads, the relevant Board Sub Committees and the SAGM – Finance and Compliance Officer and are thereafter recommended for approval by the Board.

Stress testing is carried out at individual risk level and at entity level to estimate the potential impact on income, capital and liquidity position as a result of changes in market conditions and other risk factors. Results of stress testing are used for decision making processes for credit Risk Appetite, market risk limits, capital and funding and are also integrated into the strategic and financial planning processes.

Details of CommitteesThis structure facilitates constructive challenge of the balance between risk and reward which is necessary for effective risk management.

Committee Key Objectives Representation Chaired by

Asset and Liability Management Committee (ALCO)

Review asset and liability functions of the Company.

• Chief Executive Officer

• Corporate management

• Finance

• MIS

Chief Executive

OfficerRisk Management CommitteeStrengthen the risk governance structure of the Company at the

senior management level.

• Key risk owners

• Key management personnel

Credit CommitteeStrengthen the credit evaluation

process• Key management

personnel


The Company is exposed to risks which have the potential to impact the Company’s ability to achieve agreed strategic goals including the financial performance. While some risks can be managed by the Company, there are other key risks that need to be monitored to assess their impact as described below,

Risks that are monitored but cannot be managed by the company

• Macroeconomic Risk

• Macro prudential, Regulatory and Legal Risk

Pre-disbursement

• Stringent credit appraisal and pre-credit sanctioning

• Well defined credit criteria

• Delegated approval authority at multiple levels

Post-disbursement

• Consistent monitoring of sector and product exposures

• Monitoring and reporting of NPLs at multiple levels

• Periodic revaluation of collaterals

• Periodic Risk Reporting

• Management Committee

Risks that are managed by the company

• Credit Risk

• Market Risk

• Operational Risk

• Liquidity Risk

• Strategical Risk

• Business Risk

• Reputational Risk

• Compliance Risk

Risk

Credit RiskCredit Risk is the risk of potential loss resulting from the failure of a customer/ borrower or counterparty to honour its financial or contractual obligations to the Company. It arises mainly from direct lending activities which are reflected On-Balance Sheet. Credit risk is composed of counterparty risk, concentration risk and settlement risk. Credit risk may result in the loss of the principal amount and interest with adverse implications on profits due to the impairment provisions or write-offs of non-performing facilities. At AFCP, the credit risk is applicable for leases, hire purchases and loan receivables, which in effect account for major percentage of the total assets.

Areas to be focused under AFC Credit Risk Management Processes• Credit Appraisal

• Credit Approval

• Credit Disbursement

• Credit Risk Measurement and Monitoring

• Credit Recovery

• Impairment Process

Market RiskMarket Risk is the risk of loss arising from movements in interest rates, foreign exchange rates, commodity prices, equity and debt prices and their correlations. Most of the Company's operations are subject to at least one or more elements of market risk.

Interest rate risk is the volatility in interest sensitive products and the susceptibility of the future income and expense levels to the changes in line with the market

interest rates. Finance department and MIS department continuously evaluate and review the interest rates, market information and report for necessary policy decisions to mitigate the related market risks.

Operational RiskAFC has a sound internal control mechanism on all its operations. Internal Audit department tests the adequacy of such internal controls and reports independently to the Audit Committee for necessary actions. Operational risk arises due to inadequate and inappropriate internal processes, systems and people or from external events. When operational risks materialise, it often causes other risks such as reputational, compliance, credit, market and liquidity risks etc.

Liquidity RiskLiquidity risk is the potential loss of earning and / or erosion of capital arising from the inability to meet the Company’s obligations in a timely manner as and when they fall due.

The ALCO holds overall responsibility for ensuring that the Company maintains adequate liquidity levels to fulfil its contractual obligations. Key aspects of the Company’s liquidity management framework are as follows;


RISK MANAGEMENT

The Company’s liquidity position is consistently monitored to ensure compliance to internal targets and regulatory requirements.

Diversified funding strategy where funds are sourced from multiple sources.

Committed lines of credit in place as contingency sources.

All the Company’s liquidity ratios have been maintained well above the regulatory requirement during the period under review. We also maintain a relatively diverse funding portfolio. Our customer deposit base is granular, with top 10 deposits accounting for only 9% of total deposits.

Strategic RiskMIS department independently carries out an assessment of the corporate strategy against the business environment and the findings are duly reported to the senior management for their deliberations. At the monthly Management Committee meetings, the corporate strategy is assessed through brainstorming and sharing experiences and knowledge on the market, industry and competitor behaviour.

In a competitive environment; pragmatic strategy and effective implementation are essential to ensure the sustainability of profits. The key drivers of strategic risk are competition, customer changes, industry trends, technological innovation and regulatory developments.

Strategic risk is assessed based on quantitative and qualitative information gathered on a quarterly basis by the IRMC and remedial measures are taken at the top management level. The achievement and adequacy of budgetary targets are reviewed daily, weekly and reported monthly at the Management Committee and at the Board level.

Business RiskBusiness risk is a part of strategic risk which arises from the competitiveness within the financial services industry. As is the case in the present context, intense competition in the industry together with the volatilities in the macroeconomic environment, particularly, the changes in policy interest rates and import duty levels, adversely impact business volumes and market share and in turn, the profitability of the Company.

Business volume risk is assessed based on the variance between budgeted disbursements and actual disbursements.

Reputational RiskReputational risk is an event or incident that could adversely impact on the corporate brand. Reputation is always linked to how the Company operations are carried out. AFCP is always proactively alert on such risks to respond immediately.

Risk of Unforeseen EventsThis refers to the risk of business operations being disrupted due to unexpected events. It is difficult for anybody to predict all the possible events which may materialise in the future. Therefore, every organisation is left with the risk of unforeseen events.

Risk Management Measures & Action PlansAt the operational level detailed risk management, an operational action plan is in place with the risk factors, impact, risk management assessment and risk mitigating factors. Through this detailed action plan all the risks of the organisation are clearly identified with the level of risk. Assessment of the identified risk factors are mitigated by actions proposed in the action plan.

Funding Composition 31.03.2020

Customer DepositsBorrowingsShareholders' Funds

12%

20%

68%

FINANCIAL REPORTS

Directors’ Responsibility Statement on Internal Control Over Financial Reporting _____69

Independent Assurance Report on the Directors’ Statement on Internal Control ______70

Directors’ Responsibility for Financial Reporting__________________________________71

Independent Auditors’ Report _________________________________________________72

Statement of Profit or Loss and Other Comprehensive Income _____________________76

Statement of Financial Position ________________________________________________77

Statement of Changes in Equity _______________________________________________78

Cash Flow Statement _________________________________________________________79

Notes to the Financial Statements _____________________________________________80


ResponsibilityIn line with the section 10 (2) (b) of the Finance Companies (Corporate Governance) Direction, No. 03 of 2008 (in IRMC Report) as amended by the Direction No. 06 of 2013, the Board of Directors presents this report on internal control over financial reporting.

The Board of Directors (‘Board’) has overall responsibility for Arpico Finance Company PLC’s (‘Company’) internal control over financial reporting and for reviewing its adequacy and effectiveness.

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

The Board is of the view that the system of internal control over financial reporting in place is adequate to provide reasonable assurance regarding the reliability of financial reporting that the preparation of the Financial Statements for external purposes is in accordance with relevant accounting principles and regulatory requirements.

The management assists the Board in the implementation of the policies and procedures on risk and control, by identifying and assessing the risks faced and in design, operation and monitoring of suitable internal controls over financial reporting to mitigate and control these risks.

Internal controls over financial reporting are checked by the Internal Auditors of the Company for suitability of design and effectiveness on an ongoing basis. The scope, quality and reports of internal audits are reviewed by the Board Audit Committee at its monthly meetings and improvements recommended wherever necessary.

ConfirmationBased on the above processes, the Board confirms that the financial reporting system of the Company has been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of Financial Statements for external purposes and has been done in accordance with Sri Lanka Accounting Standards and regulatory requirements of the Central Bank of Sri Lanka.

Review of the Statementn by External AuditorsThe External Auditors have submitted a certification on the process adopted by the Directors on the system of internal controls over financial reporting. The matters addressed by the External Auditors in this respect, are being looked into.

Suren GoonewardeneChairman – Board Audit Committee

Shanil DayawansaManaging Director

Colombo 3 September 2020

DIRECTORS’ RESPONSIBILITY STATEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING


To the Board of Directors of Arpico Finance Company PLC

IntroductionWe were engaged by the Board of Directors of Arpico Finance Company PLC (the “Company”) to provide assurance on the Directors’ Statement on Internal Control (the “Statement”) included in the annual report for the year ended 31st March 2020.

Management’s responsibility for the statement of internal controlManagement is responsible for the sufficiency and reliability of internal controls in place at the company as specified in the Finance Companies (Corporate Governance) Direction No. 03 of 2008 and subsequent amendments thereto (“direction), and to prepare and present the statement as required by section 10 (2) (b) in accordance with the direction.

Our Independence and Quality ControlWe have complied with the Independence and other ethical requirement of the Code of Ethics for Professional Accountants issued by the Institute of Chartered Accountants of Sri Lanka, which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour.

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

Our responsibilities and compliance with SLSAE 3050Our responsibility is to assess whether the Statement is both supported by the documentation prepared by or for

directors and appropriately reflects the process the directors have adopted in reviewing the design and effectiveness of the internal control of the company.

We conducted our engagement in accordance with Sri Lanka Standard on Assurance Engagements (SLSAE) 3050 (Revised) – Assurance Report for company on Directors’ Statement on Internal Control, issued by the Institute of Chartered Accountants of Sri Lanka.

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

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

Summary of work performedWe conducted our engagement to assess whether the Statement is supported by the documentation prepared by or for Directors; and appropriately reflected the process the Directors have adopted in reviewing the system of internal control over financial reporting of the Company.

The procedures performed were limited primarily to inquiries of Company personnel and the existence of documentation on a sample basis that supported the process adopted by the Board of Directors.

SLSAE 3050 (Revised) does not require us to consider whether the Statement covers all risks and controls, or to form an opinion on the effectiveness of the Company’s risk and control procedures. SLSAE 3050 (Revised) also does not require us to consider whether the processes described to deal with material internal control aspects of any significant problems

disclosed in the annual report will, in fact, remedy the problems.

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

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

Our conclusionBased on the procedures performed, Except for the deficiencies noted in General Information Technology Controls, there were no matters which came our attention that causes us to believe that the Statement included in the annual report is inconsistent with our understanding of the process that the Board of Directors have adopted in the review of the design and effectiveness of internal control of the Company.

SJMS ASSOCIATESChartered Accountants


INDEPENDENT ASSURANCE REPORT ON THE DIRECTORS’ STATEMENT ON INTERNAL CONTROL


The following statement sets out responsibility of the Directors in relation to the Financial Statements of the Company prepared in accordance with the provisions of the Companies Act No. 07 of 2007.

The responsibility of the External Auditor in relation to the Financial Statements is set out in the Report of the Auditors given on page 72 of the Annual Report.

As per the provisions of Sections 150 (1) and 151 of the Companies Act No. 07 of 2007, the Directors are required to prepare financial statements for each financial year, which should give a true and fair view of the state of affairs of the Company as at each financial year end and its profit or loss for the financial year then ended and place them before a General Meeting.

In preparing the Financial Statements, the Directors are responsible to ensure that appropriate accounting policies have been selected and applied consistently, reasonable and prudent judgements and estimates have been made and all applicable accounting standards have been complied with.

The Directors are also required to ensure that the Company has adequate resources to continue in operation to justify applying the going concern basis in preparing these Financial Statements.

Further, the Directors have a responsibility to ensure that the Company maintains sufficient accounting records to disclose with accuracy, the financial position of the Company.

Financial Statements prepared and presented in this Report have been prepared based on Sri Lanka Accounting Standards (SLFRS/LKAS) which came to effect from 1 January 2012 and are consistent with the underlying books of account and are in conformity with the requirements of Sri Lanka Accounting Standards, Companies Act No. 07 of 2007, Directions issued under the Finance Business Act No. 42 of 2011, Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995 and the Listing Rules of the Colombo Stock Exchange.

The Directors have also instituted effective and comprehensive systems of internal control for identifying, recording evaluating and managing the significant risks faced by the Company throughout the year.

The Financial Statements of the Company have been certified by the Chief Executive Officer of the Company, as the officer responsible for their preparation as required by the Section 150 (1) (b) and they have also been signed by two Directors of the Company as required by Section 150 (1) (c) of the Companies Act.

The Directors to the best of their knowledge and belief, are satisfied that all statutory payments in relation to all relevant regulatory and statutory authorities which were due and payable by the Company as at the reporting date have been paid or where relevant, provided for. The Directors are of the view that they have discharged their responsibilities as set out in this Statement.

By order of the Board

Secretary to the Board

Colombo 3 September 2020

DIRECTORS’ RESPONSIBILITY FOR FINANCIAL REPORTING


TO THE SHAREHOLDERS OF ARPICO FINANCE COMPANY PLC

REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS

Opinion We have audited the financial statements of Arpico Finance Company PLC (“the Company”), which comprise the statement of financial position as at 31 March 2020, and the statement of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.

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

Basis for opinion We conducted our audit in accordance with Sri Lanka Auditing Standards (SLAuSs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the Code of Ethics issued by CA Sri Lanka (Code

of Ethics), and we have fulfilled our other ethical responsibilities in accordance with the Code of Ethics. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

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

Allowance for impairment of leases , loans and receivables

Risk description:As at 31 March 2020, 72% of its total assets of the company consisted of Net investment in leases and hire purchase and Loans and receivables from customers amounting to LKR 9,633,656,584 (Note 25 and 26), net of impairment allowance of LKR 1,292,934,588 (Note 25 and 26).

Recognition of expected credit loss (ECL) under SLFRS 9, is a complex accounting policy which requires considerable judgement in its implementation. ECL is dependent on management judgements in assessing the level of credit risk and classification of credit facilities in to various stages, determine when a default has occurred, determining probability of default (PD) of customers, estimating cash flows from recovery procedures or realisation of collateral and the impact of outbreak of COVID- 19 pandemic on the economically impacted customers and key assumptions used in ECL model.

How the matter was addressed in our auditOur audit procedures to assess impairment of leases and hire purchase and Loans and receivables from customers included the following:

• Obtaining an understanding, testing the design, and operating effectiveness of key controls within the management process of determination of impairment of financial assets under ECL model.

• Challenging and evaluating the key assumptions and management judgements used in the ECL models, including staging, PD and Loss given in default (LGD) etc.

• Testing the arithmetical accuracy of the underlying calculation in the ECL model.

• Testing the accuracy and completeness of the data inputs including the testing of reconciliations between source systems and the ECL model

INDEPENDENT AUDITORS’ REPORT


Due to the significance of Financing facilities and the related estimation uncertainty and judgement in the impairment calculation, this was considered as a key audit matter

• Verifying the economic factor inputs, used in the models to compute the forward-looking scenarios and management overlays (including the impact of COVID- 19), against the market information and economic statistics to assess whether they were aligned with the current macro-economic scenario.

• In addition to above , the following focused procedures were performed ; For contracts individually assessed for impairment;

- We assessed the main criteria used by the management for determining whether an impairment event had occurred.

- Where impairment indicator’ s existed, we assessed the reasonableness of management’s estimated future cash flows, discount rates and the valuation of collateral held.

• Assessing the disclosures made in note 44 with reference to the requirements of SLFRS 7.

Revaluation of land and buildings

Risk description:As at 31 March 2020, Land and Buildings are carried at fair value, classified as Property, Plant & Equipment amounted to Rs .888,500,000 and the fair value gain recognized in Other Comprehensive Income and Profit or Loss amounted to Rs.237,790,469 respectively. The fair value of such property was determined by external valuers engaged by the Company. The valuation of land and buildings was significant to our audit due to the use of significant assumptions disclosed in note .30 to the financial statements.

How the matter was addressed in our auditOur audit procedures focused on the valuations performed by external valuers engaged by the company, and included the following;

• We assessed the competency, capability and objectivity of the external valuers appointed by the management.

• We checked the valuation report to obtain an understanding of the work done by the valuer and evaluated the appropriateness as audit evidence for the recorded valuation of freehold land and buildings in the financial statements..

• We engaged internal specialized resources to assess the appropriateness of the valuation techniques and reasonableness of assumptions/estimates of the valuation techniques, per perch price and value per square foot.

• In addition, we evaluated the overall appropriateness of the related financial statement disclosures in note 30.


Management’s use of significant judgements relating to the impacts of the evolving COVID 19 pandemic on the company

Management has assessed the impact of the evolving COVID 19 pandemic on its business and financial statements of the company

We considered the management’s assessment in the wake of the evolving COVID 19 pandemic as a key audit matter, since it involve the use of significant management judgments and estimates considering future events circumstances and impacts on cash flows based on available information

Our audit procedures included the following;

• We gained an understanding of the significant judgements used by the management related to the impact assessment of the COVID 19 pandemic on the business of the company

• We obtained an understanding of the procedures adopted by the management to manage and mitigate the prevailing business interruption and possible effects on going concern ability of the company.

• We obtained an understanding of the management’s practices in response to COVID-19, which are extended debt relief to borrowers and specific guidance issued by governments or regulators.

• We assessed the adequacy of qualitative disclosures made in financial statements in note number 44 focusing on credit risk and liquidity risk in the light of objective of SLFRS 7.

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

Our opinion on the financial statements does not cover the other information included in the annual report and we will not, express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other

information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of management and those charged with governance for the financial statementsManagement is responsible for the preparation of financial statements that give a true and fair view in accordance with Sri Lanka Accounting Standards, and for such an internal control, as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

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

either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

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

Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with SLAuSs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence

INDEPENDENT AUDITORS’ REPORT


the economic decisions of users taken on the basis of these financial statements.

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

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

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

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

• Conclude on the appropriateness of the management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty

exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.

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

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

We also provide those charged with governance with a statement that we have complied with ethical requirements in accordance with the Code of Ethics regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances,

we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

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

CA Sri Lanka membership number of the engagement partner responsible for signing this independent auditor’s report is 2347.

SJMS ASSOCIATESChartered Accountants

No 11, Castle lane,

Colombo 04

3 September 2020


For the year ended 31 March 2019/2020 2018/2019

Note Rs. Rs.

Gross income 7 2,905,318,138 4,195,406,967 Interest income 2,699,131,354 4,042,781,943 Interest expenses (1,694,434,523) (2,299,026,102)Net interest income 8 1,004,696,831 1,743,755,841 Fee and commission income 9 77,167,564 122,941,283 Net trading income/(expense) 10 23,827,636 (3,745,655)Other operating income (net) 11 105,191,584 33,429,397 Total operating income 1,210,883,614 1,896,380,866 Less: Impairment charges on financial assets and other losses 12 (542,427,067) (928,239,007)

Net operating income 668,456,547 968,141,859

Less: Operating expensesPersonnel costs 13 (337,798,589) (367,443,242)Depreciation of Property, Equipment and amortisation of Right of Use Assets (51,363,615) (29,402,291)Amortisation of intangible assets (5,378,327) (4,863,668)Other operating expenses 14 (265,677,961) (271,024,637)Profit before taxes on financial services 8,238,056 295,408,020

Less : Tax on financial services 15 (83,282,629) (133,130,244)Profit / (loss) before income tax (75,044,573) 162,277,776 Less: Income tax (expense) / reversals 16 (92,714,675) 210,317,907 Net Profit/(loss) for the year (167,759,249) 372,595,683

Other comprehensive income / (expense), net of taxItems that may be subsequently reclassified to profit or loss

Items that will not be reclassified to profit or lossFinancial assets measured at Fair Value through Other Comprehensive Income:Net change in fair value during the period (2,097,176) (1,140,617)Gain on revaluation of land & buildings 237,790,469 - Retirement benefit obligations - actuarial gain (loss) 9,033,700 (3,871,718)Total other comprehensive income / (expense) for the year, net of taxes 244,726,993 (5,012,335)Total comprehensive income for the year 76,967,745 367,583,348

Earnings per ShareBasic earnings per share (Rs.) 17 (22.56) 50.10

The accounting policies and notes from 01 to 44 form an integral part of these financial statements.

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME


STATEMENT OF FINANCIAL POSITION

As at 31 March 31.03.2020 31.03.2019

Note Rs. Rs.

AssetsCash and cash equivalents 22 1,059,515,359 221,717,261 Financial assets - amortised cost 23 1,394,597,315 1,036,998,760 Financial assets - measured at Fair Value through Profit or Loss 24 19,114,384 10,904,749 Loans and receivables 25 1,140,029,971 1,478,560,792 Lease rental receivables from customers 26 8,493,626,612 11,802,800,444 Financial assets - measured at Fair Value through Other Comprehensive Income 28 17,330,977 19,726,224 Other assets 29 69,470,462 294,618,370 Property, Equipment and Right of Use Assets 30 1,040,335,766 805,314,319 Intangible assets 31 13,785,291 18,103,066 Current tax assets 32 137,215,625 110,021,710 Deferred tax assets 33 49,875,323 148,307,535 Total assets 13,434,897,087 15,947,073,231

Liabilities Due to banks and financial institutions 34 2,573,869,772 5,452,964,238 Deposits from customers 35 8,702,003,780 8,695,436,982 Trade and other payables 36 485,499,863 194,652,267 Retirement benefit obligations 37 69,826,383 76,917,514 Total liabilities 11,831,199,798 14,419,971,001

EquityStated capital 38 245,062,500 245,062,500 Retained earnings 39 624,904,205 783,257,069 Other reserves 40 733,730,584 498,782,661 Total equity 1,603,697,289 1,527,102,230 Total liabilities and equity 13,434,897,087 15,947,073,231

Net asset value per share (Rs. ) 215.62 205.32


These financial statements have been prepared in compliance with the requirements of the Companies Act No. 07 of 2007.

Chandrin FernandoChief Executive Officer

The Board of Directors is responsible for the preparation and presentation of these financial statements.Approved and signed for and on behalf of the Board,

Shanil Dayawansa T.M.A. SallayManaging Director Director

03 September 2020Colombo


STATEMENT OF CHANGES IN EQUITY

For the year ended 31 March StatedCapital

Revaluation Reserve

GeneralReserve

Statutory Reserve

Fund

Fair ValueReserve

Retained Earnings

Total

Rs. Rs. Rs. Rs. Rs. Rs. Rs.

Balance as at 31 March 2018 245,062,500 120,307,712 22,035,535 273,754,578 9,306,317 535,576,616 1,206,043,257

Net Profit for the year - - - - - 372,595,683 372,595,683

Other comprehensive income net of tax - - - - (1,140,617) (3,871,718) (5,012,335)

Transfer during the year - - - 74,519,137 - (74,519,137) -

Interim dividend for 2018/19- Ordinary shares - - - - - (46,484,375) (46,484,375)

- Irredeemable cumulative preference shares

- - - - - (40,000) (40,000)


Net Profit for the year - - - - - (167,759,249) (167,759,249)

Other comprehensive income net of tax - 237,790,469 - - (2,469,861) 9,033,700 244,354,308

Transfer during the year - - - - (372,685) 372,685 -




CASH FLOW STATEMENT


Rs. Rs.

Cash flow from operating activitiesNet profit / (loss) before taxation (75,044,573) 162,277,776

Adjustments for;Depreciation of property and equipment and amortisation of right of use assets and intangible assets 56,741,942 34,265,959 (Profit) / loss on disposals of property and equipment (35,000) 3,305,342 Provision for bad and doubtful debts 542,427,067 928,239,007 Provision for gratuity 16,042,649 14,256,472 Interest on borrowings 508,798,230 983,258,769 Dividend receipt (874,115) (1,162,037)Written off - Loans and advances (862,867,477) (214,694,489)Operating profit before working capital changes 185,188,722 1,909,746,800

(Increase) / decrease in financial investments (365,363,515) (444,475,552)(Increase) / decrease in loans and advances 3,968,145,062 1,426,087,324 (Increase) / decrease in other assets 218,666,689 (152,698,392)Increase / (decrease) in public deposits 6,566,798 129,143,912 Increase / (decrease) in debentures - (359,804,292)Increase / (decrease) in trade and other payables 262,799,943 (348,613,615)

4,090,814,976 249,639,386

Cash generated from operations 4,276,003,698 2,159,386,187 Income Tax paid (31,624,545) (56,504,283)Retirement benefits paid (10,586,975) (1,237,625)Interest paid (500,933,049) (816,134,533)Net cash from /(used) in operating activities 3,732,859,130 1,285,509,746

Cash flow from investment activitiesDividends received 874,115 1,162,037 Purchase of property and equipment (9,010,500) (191,807,370)Proceeds from disposal of property and equipment 35,000 139,235Net cash flow used in investing activities (8,101,385) (190,506,098)

Cash flow from Financing activitiesProceeds on borrowings 3,498,111,393 10,017,378,154 Repayment of borrowings (6,362,359,317) (11,409,842,566)Dividends paid - (46,524,375)Net cash flow from financing activities (2,864,247,924) (1,438,988,787)

Net increase / (decrease) in cash and cash equivalents 860,509,820 (343,985,140)Cash & cash equivalents at the beginning of the year 148,429,647 492,414,787 Cash & Cash Equivalents at the end of the year 1,008,939,467 148,429,647

Cash and Cash Equivalents ComprisesCash and bank balances 1,059,515,359 221,717,261 Bank overdrafts (50,575,892) (73,287,615)Cash and Cash Equivalents at the end of the year 1,008,939,467 148,429,647



NOTES TO THE FINANCIAL STATEMENTS

1. Reporting Entity

1.1 Corporate InformationArpico Finance Company PLC (“The Company”) is a Public Limited Liability Company incorporated on 01 May 1951 and re-registered under the Companies Act No 07 of 2007 and domiciled in Sri Lanka. It is a licensed finance company under the Finance Business Act No 42 of 2011. The Company’s ordinary shares have a primary listing on the Colombo Stock Exchange. The registered office of the Company and principal place of business is located at 146, Havelock Road, Colombo 05.

Parent Entity and Ultimate Parent Entity

The Company’s parent entity is Associated Motor Finance Company PLC which is a listed company in Colombo Stock Exchange.

Number of Employees

The staff strength of the Company as at 31 March 2020 was 333. (As at 31 March 2019 - 403).

1.2 Principal Activities and Nature of OperationsThe principal business activities are providing finance leasing, hire-purchase asset financing, term loans, Islamic finance, share trading, and mobilisation of public deposits.

2. Basis of Preparation and Other Significant Accounting Policies

2.1 Statement of Compliance“The Financial Statements of the Company, as at 31 March 2020 and for the year then ended, have been prepared and presented in accordance with the Sri Lanka Accounting Standards (SLFRS and LKAS), laid down by the Institute of Chartered Accountants of Sri Lanka and in compliance with the requirements of the Companies Act No. 7 of 2007. The presentation of these finacial statements aslo in compliance with the requirements of Finance Business Act No 42 of 2011, Listing rule of the Colombo Stocl Exchange and CBSL Guidelines. “

These financial statements include the following components:

• statement of profit or loss and other comprehensive income

• statement of financial position

• statement of changes in equity

• statement of cash flows

Notes to the financial statements comprising accounting policies and other explanatory information.

2.2 Responsibility for Financial StatementsThe Board of Directors is responsible for the preparation and presentation of these financial statements of the company as per the provision of the Companies Act No. 07 of 2007 and SLFRS and LKAS.

The Board of Directors acknowledges their responsibility as set out in the “Annual Report of the Board of Directors on the Affairs of the Company”, “Directors’ Responsibility for Financial Reporting” and in the certification on the Statement of Financial Position.

2.3 Approval of Financial Statements by the Board of DirectorsThe financial statements of the Company for the year ended 31 March 2020 (including comparatives) were approved and authorised for issue on 3 September 2020 in accordance with the resolution of the Board of Directors on 3 September 2020.

2.4 Basis of MeasurementThe financial statements of the Company have been prepared on the historical cost basis except for the following material items stated in the statement of financial position:

• financial assets recognised through profit or loss - measured at fair value

• financial assets measured at fair value through other comprehensive income

• Liability of defined benefit obligation is recognized at the present value of the defined benefit obligation

• Freehold land and buildings are measured at cost at the time of acquisition and subsequently at revalued amounts, which are the fair values at the date of revaluation.

2.5 Presentation of Financial StatementsThe assets and liabilities of the Company presented in the statement of financial position are grouped by nature and listed in an order that reflects their relative liquidity and maturity pattern.

An analysis on recovery or settlement within 12 months and after more than 12 months from the Reporting date is presented in note 42.


2.6 Functional and Presentation CurrencyThe financial statements of the Company are presented in Sri Lankan rupees (LKR), which is the currency of the primary economic environment, in which the Company operates (Company’s functional currency).

2.7 Materiality and AggregationIn compliance with the Sri Lanka Accounting Standard - LKAS 01 on ‘Presentation of Financial Statements’, each material class of similar items is presented separately in the financial statements. Items of dissimilar nature or functions too are presented separately, unless they are immaterial.

2.8 RoundingThe amounts in the financial statements have been rounded-off to the nearest Rupee, except where otherwise indicated as permitted by the Sri Lanka Accounting Standard- LKAS 01 on ‘Presentation of financial statements’.

2.9 OffsettingFinancial assets and financial liabilities are offset and the net amount reported in the statement of financial position, only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or to realise the assets and settle the liabilities simultaneously. Income and expenses are not offset in the statement of comprehensive income, unless required or permitted by an Accounting Standard or Interpretation and as specifically disclosed in the Significant Accounting Policies of the Company.

2.10 Comparative InformationComparative information including quantitative, narrative and descriptive information is disclosed in respect of the previous period in the financial statements in order to enhance the understanding of the current period’s financial statements and to enhance the inter period comparability. The presentation and classification of the financial statements of the previous year are amended, where relevant for better presentation and to be comparable with those of the current year.

2.11 Changes in accounting policiesIn these financial statements, the company applied the Sri Lanka Accounting Standard SLFRS 16 - Leases and replaced the Sri Lanka Accounting Standard - LKAS17 as well as the related interpretations, with effect from 01 January 2019. Changes included transition disclosures are shown in Note 6 to these financial statements.

The accounting policies adopted by the company are consistent with those used in the previous financial year other than above.

2.12 Significant Accounting Judgements, Estimation Uncertainties and AssumptionsThe preparation of the financial statements of the Company in conformity with SLFRS and LKAS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Further, management is also required to consider key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date that have significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Actual results may differ from these estimates.

Accounting judgments, estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

The key significant accounting judgments, estimates and assumptions involving uncertainty are discussed below, whereas the respective carrying amounts of such assets and liabilities are as given in related notes.

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 a foreseeable future. Furthermore, having evaluated the facts and circumstances which impacts the future operations of the group and after giving due consideration to the possible outcomes of Covid-19, management is not aware of any material uncertainties that may cast significant doubts upon the Company’s ability to continue as a going concern. Therefore, the financial statements continue to be prepared on a going concern basis.

Determination of lease terms and estimating incremental borrowing rate

Details on the basis for determination of lease terms and estimating incremental borrowing rate are given in Note 6 of the financial statements.

Impairment Losses on Lease rental receivables from customers and Loans and Receivables

Details of the ‘Impairment Losses on Lease rental receivables from customers and Loans and Receivables’ are given in Note 25 to 27 of the financial statements.


Impairment of Investment in Fixed Deposits

Details of the ‘Investment in Fixed Deposits’ are given in Note 23 to the financial statements.

Useful Life Time of the Property and Equipment

The Company reviews the residual values, useful lives and methods of depreciation of property and equipment at each reporting date. Judgement of the management is exercised in the estimation of these values, rates, methods and hence they are subject to uncertainty.

Useful Life Time of the Intangible Assets

Details of the ‘useful life-time of the intangible assets’ are given in Note 29 to the financial statements.

Deferred Taxation

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

Defined Benefit Obligations

The cost of the defined benefit plans determined using an actuarial valuation. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates, etc. Due to the long-term nature of these plans, such estimates are subject to significant uncertainty.

Provisions for Liabilities, Commitments and Contingencies

The Company receives legal claims in the normal course of business. Management has made judgments as to the likelihood of any claim succeeding in making provisions. The time of concluding legal claims is uncertain, as is the amount of possible outflow of economic benefits. Timing and cost ultimately depends on the due processes in respective legal jurisdictions.

Information about significant areas of estimation uncertainty and critical judgments in applying Accounting Policies other than those stated above that have significant effects on the amounts recognised in the Financial Statements are described under the respective Note 41.

2.13 Events After the Reporting PeriodEvents 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 Note 42 where necessary.

3. Fair Value Measurement‘Fair value’ is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Company has access at that date. The fair value of a liability reflects its non-performance risk.

When one is available, the Company measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

If there is no quoted pricing in an active market, then the Company uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all of the factors that market participants would take into account in pricing a transaction.

The fair value of an asset or a liability is measured using the assumptions that market participants would use the fair value hierarchy when pricing the asset or liability, assuming that market participants act in their economic best interest.

The Company recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred.

A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. External professional valuers are involved for valuation of significant assets such as land and building.

An analysis of fair value measurement of financial and non-financial assets and liabilities is provided in Note 21.



4. General Accounting Policies

4.1 Impairment of Non Financial AssetsThe 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 of 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 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 price for publicly traded subsidiaries or other available fair value indicators.

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 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 statement of profit or loss.

4.2 ProvisionsProvisions are recognised in the statement of financial position when the Company has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation in accordance with the Sri Lanka Accounting Standard - LKAS 37 on ‘Provision, Contingent Liabilities and Contingent Assets’. The amount recognised is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and

uncertainties surrounding the obligation at that date. The expense relating to any provision is presented in the statement of profit or loss net of any reimbursement.

4.3 Borrowing CostsAs per Sri Lanka Accounting Standard- LKAS 23 on ‘Borrowing Costs’, the Company capitalises borrowing costs that are directly attributable to the acquisition, construction or production of qualifying asset as part of the cost of the asset. A qualifying asset is an asset which takes a substantial period of time to get ready for its intended use or sale. Other borrowing costs are recognised in the statement of profit or loss in the period in which they occur.

4.4 Leases Under LKAS 17 - (Applicable up to 31 March 2019) 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.

4.4.1 Finance Leases

Finance Leases – Company as a Lessee

Finance leases that transfer substantially all risks and rewards incidental to ownership of the leased item to the Company are classified as finance leases and capitalised at the commencement of the lease at the lower of the fair value of the leased property and the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability.

A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Company will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term.

Finance Leases – Company as a lessor

When the Company is the lessor under a lease agreement that transfers substantially all of the risks and rewards incidental to the ownership of the asset to the lessee, the net investment in lease (i.e. after deduction of unearned charges) is included in ‘loans and advances to banks’ or ‘loans and advances to other customers’, as appropriate. The finance income receivable is recognised in ‘interest income’ over the periods of the leases so as to achieve a constant rate of return on the net investment in the leases.



Operating Leases

Assets leased under leases other than finance leases are classified as operating leases.

Operating Leases - Company as a lessor

Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and recognise the rental income over the lease term.

Operating Leases - Company as a lessee

Operating lease rentals payable were recognized as an expense over the lease term, which commenced when the lessee controlled the physical use of the property. Lease incentives were treated as a reduction of rental expense and were also recognized over the lease term.

4.5 Statement of Cash FlowsThe statement of cash flows is prepared using the ‘Indirect Method’ of preparing cash flows in accordance with the Sri Lanka Accounting Standard – LKAS 7 on ‘Statement of Cash Flows’. Cash and cash equivalents comprise of short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value.

5. New Accounting Standards that are Issued But Not Yet Effective are Stated Below;The following new accounting standard/amendemnts 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 accounting standards will have an effect on the accounting policies currently adopted by the Company and may have an impact on the future Financial Statements. None of those have been early adopted by Company.

5.1 Amendments to LKAS 01 and LKAS 08: Definition of MaterialAmendments to Sri Lanka Accounting Standard - LKAS 01 (Presentation of Financial Statements) and Sri Lanka Accounting Standard - LKAS 08 ( Accounting policies, Changes in accounting Estimates and errors) are made to aling the definition of ‘material’ across the standards and to clarify certain aspects of the term ‘definition’. The new definition states that ,’ Information is material omitting, misstating or obscuring is it could reasonably be expected to influence decisions that the primary users of general purpose Financial Statements make on the basis of those Financial Statements, which provide financial information about a specific reporting entity.’ The Company shall apply those amendments prospectively for annual financial periods beginning on or after 1 January 2020

5.2 Amendments to Conceptual Framework for Financial ReportingRevisions to the Conceptual Framework were made because some important issues were not covered and some guidance was unclear or out of date. The revised Conceptual Framework includes:

• a new chapter on measurement ;

• Guidance on reporting financial performance;

• improved definitions of an asset and a liability, and guidance supporting these definitions; and

• Clarifications in important areas, such as the roles of stewardship prudence and measurement uncertainty in financial reporting.

The amendments are effective for annual periods beginning on or after 1 January 2020, with early application is permitted. Further, the amendments to the reference to the conceptual framework in SLFRS standards are not expected to have a significant impact on the Company’s Financial Statements.


6. SLFRS 16 (Leases) Transition DisclosureSriLanka Accounting Standard - SLFRS16 replaced SriLanka Accounting Standard - LKAS17 as well as the related interpretations,with effect from 1 January 2019. The core principle of this standard is that the lessee and lessor should recognise all rights and obligations arising from leasing arrangements on Statement of Financial Position. The most significant change pertaining to the accounting treatment for operating leases is from the perspective. Sri Lanka Accounting Standard - SLFRS 16 eliminates the classification of leases for lessees as either operating or finance leases, as was required by Sri Lanka Accounting Standard - LKAS 17, and introduces a single lessee accounting model, where a right- of-use (ROU) asset together with a lease liability for the future payments is recognised for all leases with a term of more than 12 months, unless the underlying asset is of low value. Sri Lanka Accounting Standard - SLFRS 16 did not introduce significant changes for lessors, as a result the accounting policies applicable to the company as a lessor are not different from those under Sri Lanka Accounting Standard - LKAS 17.

The Company adopted Sri Lanka Accounting Standard - SLFRS 16 using the modified retrospective method of adoption with the date of initial application being 1 April 2019. Under this method, the standard is applied retrospectively with the cumulative effect of initially applying the standard being recognised at the date of initial application. Accordingly, the company previously reported financial results up to 31 March 2019 are presented in accordance with the requirements of Sri Lanka Accounting Standard - LKAS 17 and for the year ended 31 March 2020, and future reporting periods, are presented in terms of Sri Lanka Accounting Standard - SLFRS 16. On adoption of SLFRS 16, the company recognised lease liabilities in relation to leases which had previously been classified as operating leases under the principles of Sri Lanka Accounting Standard - LKAS 17. These liabilities were measured at the present value of the remaining lease payments discounted using the lesee’s incremental borrowing rate as at 01 April 2019

Right of use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the statement of financial position as at 31 March 2019.

Determination of Lease Term and Estimating the Incremental Borrowing Rate

The company uses its judgement to determine whether an operating lease contract qualifies for recognition of right-of-use assets. The company applies judgements in evaluating whether it is reasonably certain whether or not to exercise the option to renew or terminate the lease. That considers all relevant factors that create an economic benefits for it to exercise either the renewal or termination.

Further, as the company cannot readily determine the interest rate implicit in the lease, it uses its incremental borrowing rate (IBR) to measure the lease liabilities. The IBR is the rate of interest that the company would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.

The present value of operating lease commitments as at 01st April 2019 has been calculated using incremental borrowing rate 16.06%.

6.1 Summarised statement of financial position as at 01 April 2020

For the year ended 31 March 31.03.2019 SLFRS 16 transition

adjustment at 01.04.2019

01.04.2019

Rs. Rs. Rs.

AssetsProperty, Equipment and Righ-of-Use Assets 805,314,319 34,528,872 839,843,191 Other financial and non-financial assets* 15,141,758,912 (6,481,219) 15,135,277,693 Total Assets 15,947,073,231 28,047,653 15,975,120,883

Liabilities and EquityLiabilities ** 14,419,971,001 28,047,653 14,448,018,653 Equity 1,527,102,230 - 1,527,102,230 Total Liabilities and Equity 15,947,073,231 28,047,653 15,975,120,884

* Due to derecognition of the LKAS 17 prepaid lease asset** Due to recognition of lease liabilities



7. Gross IncomeRevenue is recognised to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. specific recognition criteria, for each type of income, given under the respective income notes.


Rs. Rs.

Interest income 2,699,131,354 4,042,781,943 Fee and commission income 77,167,564 122,941,283 Net trading income 23,827,636 (3,745,655)Other operating income (net) 105,191,584 33,429,397

2,905,318,138 4,195,406,967

8. Interest Income and Interest Expenses The company used the effective interest rate (EIR) method for recognition of interest income and interest expense of the financial assets and financial liabilities that are measured at amortised cost.

Effective Interest Rate (EIR)

The ‘effective interest rate’ is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or financial liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or financial liability.

The calculation of EIR takes into account all the contractual terms of the financial instrument and includes any fees or incremental costs that are directly attributable to the instrument and are integral part of the EIR, but not the 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 an impairment charges or reversal to the income Statement.

Interest income on impaired financial instruments continue to be recognised at original EIR to the unadjusted carrying amount until the financial asset reached the age of 12. Until such the accrued interest added to the unadjusted carrying amount has been impaired to the estimated Loss Given Default (LGD). Overdue interest on arrears rentals have been accounted on cash received basis.


Rs. Rs.

Interest IncomeLoans and advances 199,949,203 588,658,798 Lease receivables 2,355,951,560 3,355,455,983 Placements with banks and other financial institutions 19,350,070 17,455,950 Other financial assets 123,880,521 81,211,212 Total Interest Income 2,699,131,354 4,042,781,943

Interest ExpensesDeposits from customers 1,181,588,750 1,250,818,108 Debt instruments issued and other borrowed funds 512,845,774 1,048,207,993 Total Interest Expenses 1,694,434,523 2,299,026,102 Net Interest Income 1,004,696,831 1,743,755,841


9. Fee and Commission IncomeFees and commission income and expenses that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate.

Fees arising from negotiating or participating in the negotiation of a transaction for a third party, such as the arrangement of the document and inspection of vehicle is recognised on completion of the underlying transaction. All fees and commissions are recognised to the income statement on accrual basis.


Rs. Rs.

Service charges and commission income 77,167,564 122,941,283 77,167,564 122,941,283

10. Net Trading IncomeResults arising from trading activities include all gains and losses from changes in fair value for financial assets measured at “fair value through Profit or loss”.


Rs. Rs.

Fair value gain / (loss) on dealing securities 23,827,636 (3,745,655) 23,827,636 (3,745,655)

11. Other Operating IncomeOther Operating income includes gains on disposal of property and equipment, dividend income and other income.

Dividend Income

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

Bad Debts Recovered

Recovery of amounts which were written off as bad and doubtful debts is recognised when such amounts are recovered.

Gain or Losses on Disposal of Property and Equipment

Gain or loss resulting from the disposal of property and equipment is accounted on cash basis in the statement of profit or loss, in the period in which the sale occured.



Other Income

Other income is recognised on an accrual basis.


Rs. Rs.

Dividend income 874,115 1,162,037 Profit / (loss) on disposal of property & equipment 35,000 (3,305,342)Bad debt recoveries 38,834,625 15,542,229 Sundry income 65,447,843 20,030,474

105,191,584 33,429,397

12. Impairment Charges on Financial Assets and Other LossesThe Company recognises the changes in the impairment provisions for loans and receivables which are assessed on expected credit loss method in accordance with Sri Lanka Accounting Standard- SLFRS 9 - Financial Instruments. The methodology adopted by the Company is explained in Note 27 to these financial statements.


Rs. Rs.

Impairment charges for loans and advances 69,319,528 97,210,728 Impairment charges for leases 473,059,701 831,028,280 Impairment charges for other financial assets 47,838 -

542,427,067 928,239,007

13. Personnel ExpensesPersonnel expenses include salaries and bonus’ terminal benefit charges and other related expenses. The provision for bonus is recognised when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made on the amount of the obligation.

Defined Contribution Plans – Employees’ Provident Fund (EPF) and Employees’ Trust Fund (ETF)

A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee services in the current and prior periods as defined in the Sri Lanka Accounting Standard – (LKAS 19) – ‘Employee Benefits’.

The contribution payable to a defined contribution plan is in proportion to the services rendered to the Company by the employees and is recorded as an expense when they become due. Unpaid contributions are recorded as a liabilities.

The Company and the employees contribute 20% and 10% respectively on the salary of each employee to the Private Provident Fund. The Company and the Employees who joined with the company on or after 01.01.2018, contribute 12% and 8% respectively on the salary of each employee to the Employees’ Provident Fund.

The Company contributes 3% from the salary of each employee to the Employees’ Trust Fund in respect of each employee.


Defined Benefit Plan

A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. Accordingly, staff gratuity was considered as defined benefit plan as per LKAS 19 - Employee Benefits.


Rs. Rs.

Salaries and bonus 176,057,017 193,491,882 Employer’s contribution to Employee Provident Fund & Private Provident Fund 32,472,347 35,458,936 Employer’s contribution to Employee Trust Fund 5,496,640 5,747,067 Employee allowances 95,239,936 106,808,885 Gratuity charge for the year 16,042,649 14,256,472 Director Fees 12,490,000 11,680,000

337,798,589 367,443,242

14. Other Operating ExpensesOther operating expenses are recognised in the statement of comprehensive income on the basis of a direct association between the cost incurred and the earnings of the specific items of the income. All the expenses incurred in the running of the business and in maintaining the property, plant & equipment have been charged to the statement of comprehensive income in arriving at the profit for the year.

Other operating expenses also include the following expenses.


Rs. Rs.

Auditors’ remuneration 1,125,000 826,581 Non-audit fees to auditors 190,000 179,966 Donations and subscriptions 6,804,015 5,727,758 Professional fees 29,857,961 29,148,870 Legal expenses 11,228,514 5,381,672 Deposit Insurance Premium 12,116,643 12,344,917 Crop Insurance Levy expense 744,383 3,170,409

Crop Insurance Levy

As per the provisions of the section14 of the Finance Act No 12 of 2013, the Crop Insurance Levy was introduced with effect from 1 April 2013 and was payable to the National Insurance Trust Fund. Currently, the Crop Insurance Levy is payable at 1% of profit after tax.



15. Tax on Financial ServicesTax on Financial Services include Value Added tax on Financial Services, Nations Building Tax on Financial Services and Debt Repayment Levy on Financial Services

Value Added Tax (VAT) on Financial Services

VAT on financial services is calculated in accordance with the Value Added Tax Act No 14 of 2002 and subsequent amendments thereto. The base for the computation of VAT on financial services is the accounting profit before VAT and NBT on Financial Services and income tax adjusted for the economic depreciation and emoluments payable to employees including cash benefits, non cash benefits and provision relating to the terminal benefits.

VAT rate applied for the current financial year is 15% (2018/2019- 15%).

Nations Building Tax (NBT) on Financial Services

As per the provisions of the Nation Building Tax (NBT) Act No 9 of 2009 and amendment thereto, NBT on Financial Services was payable at 2% on Company’s value addition attributable to financial services with effect from 01 January 2014. The value addition attributable to financial service is same as the value using to calculate the VAT of Financial Services. As per the notice issued by Department of Inland Revenue NBT on financial service was abolished with effect from 01 December 2019.

Debt Repayment Levy (DRL) on Financial Services

As per the Finance Act No 35 of 2018, with effect from 1 October 2018, DRL of 7% was introduced on the value addition attributable to the supply of financial services by each financial services by each financial institution. DRL is chargeable on the same base used for calculation of VAT on Financial Services. As per the notice issued by the Department of Inland Revenue (PN/DRL/2020-01 ) DRL was abolished with effect from 01 January 2020.


Rs. Rs.

Value Added Tax on Financial Services 49,335,715 87,052,951 Nations Building Tax on Financial Services 8,349,106 13,000,115 Debt Repayment Levy on Financial Services Debt Repayment Levy on Financial Services paid during the year 35,635,337 33,077,179 Debt Repayment Lever over provision for FY 2018/2019 (10,037,529) -

83,282,629 133,130,244

16. TaxationAs per Sri Lanka Accounting Standard – (LKAS 12) – ‘Income Taxes’, tax expense is the aggregate amount included in determination of profit or loss for the period in respect of current and deferred taxation. Income tax expense is recognised in the income statement except to the extent it relates to items recognised directly in ‘Equity’ or ‘Other Comprehensive Income (OCI)’, in which case it is recognised in equity or in OCI.

Current Tax

Current tax assets and liabilities consist of amounts expected to be recovered from or paid to the Commissioner General of Inland Revenue in respect of the current year and any adjustments to tax payable in respect of previous years. The tax rates and tax laws are used to compute the amount are those that are enacted or substantially enacted by the reporting date. Accordingly, provision for taxation is based on the profit for the year adjusted for taxation purposes in accordance with the provisions of the Inland Revenue Act No. 24 of 2017 and the amendments thereto.


Accounting Estimates

Significant judgment was required to determine the total provision for current and deferred taxes. Uncertainties exist, with respect to the interpretation of the applicability of tax laws, at the time of the preparation of these financial statements.

The Company recognised assets and liabilities for current, deferred and other taxes based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income, deferred and other tax amounts in the period in which the determination is made.

Deferred Tax

Detailed disclosure of accounting policies and estimate of deferred tax is available in Note 31 to the financial statements.


Rs. Rs.

Current Income TaxIncome tax for the year 5,423,163 - Provision for previous year income tax under provision (992,533) 16,216

Deferred TaxDeferred taxation charge / (reversal) 88,284,045 (210,334,123)

92,714,675 (210,317,907)

A reconciliation between the tax expense and the accounting profit multiplied by Government of Sri Lanka’s tax rate for the years ended 31 March is as follows:


Rs. Rs.

Accounting Profit as per draft Income Tax computation 128,726,242 171,033,369 Income tax expense at the statutory income at 28% & 24% (2018/2019 -28%) 35,852,290 47,889,343 Tax effect of disallowable expenses 2,450,449,897 2,913,498,254 Tax effect of allowable expenses and other deductions (2,479,799,421) (3,010,203,561)Effect of tax exempt income (1,079,603) (325,370)Income tax expense for the year 5,423,163 -

Effective tax rate 4.21% 0.00%

Income tax provision for the Company is calculated in accordance with the provisions of the Inland Revenue Act No. 24 of 2017 and the notice issued by the Department of Inland Revenue, the instructions of the Ministry of Finance on 12 February 2020 (No. PN/IT/2020-03) “Implementation of proposed changes to the Inland Revenue Act No. 24 of 2017” and further amended by the notice dated on 8 April 2020, No. PN/IT/2020-03 (Revised) issued by the Department.

17. Earnings Per ShareThe earnings per share have been calculated by dividing the profit for the year attributable to equity holders of the Company by the weighted average number of ordinary shares outstanding during the year, as per the Sri Lanka Accounting Standard - LKAS 33 - Earnings per Share.

The weighted average number of ordinary shares outstanding during the year and the previous years are adjusted for events that have changed the number of ordinary shares outstanding during the year.



Rs. Rs.

Profit attributable to ordinary shareholders (167,799,249) 372,555,683 Weighted average number of ordinary shares 7,437,500 7,437,500Earnings per ordinary share-basic and diluted (Rs.) (22.56) 50.10

The Company’s diluted earnings per ordinary share are equal to the basic earnings per ordinary share since it does not have any convertible securities as at the reporting date.

18. DividendsProvision for final dividends is recognised at the time the dividend recommended and declared by the Board of Directors, is approved by the shareholders. Interim dividend payable is recognised when the Board approves such dividend in accordance with the Companies Act No. 07 of 2007.

Declared and paid during the year

Dividends on ordinary shares:Interim dividend for 2019/2020 - Nil (First and final dividend for 2018/19 - Rs 6.25 per share) - 46,484,375 Dividends on preference shares:Final dividend payment (8%) - 40,000

19. Financial Instruments

Date of Recognition

Financial assets and financial liabilities, except the loans and advances to customers and balances due to depositors, are initially recognised on the trade date, i.e. the date the company becomes a party to the contractual provisions of the instrument. This includes the regular way trades, purchases or sales of financial assets that require delivery of assets to customers within the time frame generally established by regulation or convention in the market place. Loans and advances to customers are recognised when funds are transferred to the customers’ accounts and the balances due to customers are recognised when the funds are transferred to the Company.

Initial measurement of financial instruments

Financial instruments are initially measured at fair value, except in case of financial assets and financial liabilities recorded at Fair Value through Profit or Loss (FVTPL), transaction costs are added to or subtracted from, this amount.

When the fair value of financial instruments at initial recognition differs from the transaction price, the company accounts for the Day 1’ Profit or loss.

Day 1’Profit or Loss

When the transaction price of the instrument differes from the fair value at the origination and the fair value is based on a valuation technique using only inputs from observable in market transactions, the company recognises the difference between the transaction price and the fair value.



Classification and subsequent measurement of financial assets

The company classifies all its financial assets based on the business model for managing the assets and asset’s contractual terms measured at either;

• Amortised cost or

• Fair Value through Profit or Loss (FVTPL)

• Fair Value through Other Comprehensive Income (FVOCI)

The subsequent measurement of financial assets depends on their classification.

Business model assessment

The company determines its business model at the level that reflects how it manages the financial assets to achieve its objectives. The company’s business model is not assessed on an instrument by instrument basis, but at a higher level of aggregated portfolios and is based on observable factors such as;

• How the performance of business model and the financial assets held within business model are evaluated and reported to the entity’s key management personnel

• The risks that affect the performance of the business model (and the financial asset held within that business model) and , in particular, the way those risks are managed

• How managers of the business are compensated (for example; whether the compensation is based on the fair value of the assets managed or on the contractual cash flows collected)

• The expected frequency, value and the timing of sales

The business model assessment is based on reasonably expected scenarios without taking ‘worst case’ or ‘stress case’ scenarios in to account. If cash flows after initial recognition are realized in a way that is different from the Group’s original expectation, the Group does not change the classification of the remaining financial assets held in that business model, but incorporates such information when assessing newly originated or newly purchased financial assets.

Contractual Cash flow Characteristic Test (The SPPI Test)

As the second test of the classification process the company assesses the contractual terms of the financial asset to identify whether those meet ‘Solely the Payment of Principle and Interest’ (SPPI) criteria.

Principal for the purpose of this test is defined as the fair value of the financial asset at initial recognition which may change over the life of the financial asset (for example, if there are repayments of principal or amortization of the premium / discount).

The most significant elements of interest within a lending arrangement are typically the consideration for the time value of money and credit risk. To make SPPI assessment, the company applies judgement and considers relevant factors such as currency in which the financial asset is denominated and the period for which the interest rate is set.

Classification and subsequent measurement of financial liabilities

As per SLFRS 09, the Company classifies financial liabilities, other than financial guarantees and loan commitments into one of the following categories;

• Financial liabilities at fair value through profit or loss, and

• Financial liabilities measured at amortised cost.

The subsequent measurement of financial liabilities depends on their classification.


Reclassification of Financial Assets and Financial Liabilities

As per SLFRS 09, Financial assets are not reclassified subsequent to their initial recognition, except and only in those rare circumstances when the Company changes its objective of the business model for managing such financial assets which may include the acquisition, disposal or termination of a business line.

Financial liabilities are not reclassified as such reclassifications are not permitted by SLFRS 09.

Derecognition of Financial Assets and Financial Liabilities

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 financial asset have expired.

A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires.

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.

Income and expenses are presented on a net basis only when permitted under LKAS / SLFRS, or for gains and losses arising from a group of similar transactions such as in the Company’s trading activity.

During the year the Company has not offset any financial assets with financial liabilities in the Statement of Financial Position.

20. Analysis of Financial Instruments by Measurement BasisFinancial instruments are measured on an ongoing basis either at fair value or at amortised cost. The summary of significant accounting policies describes how each category of financial instruments is measured and how income and expenses, including fair value gains and losses, are recognised. The following table analyses the carrying amounts of the financial instruments by category as defined in Sri Lanka Accounting Standard - SLFS 09 ‘Financial Instruments : Recognition and Measurement’ under the headings of the Statement of Financial Position.

FVPL : Fair value through profit or loss

AC : Amortised Cost

FVOCI : Fair value through Other Comprehensive Income



As at 31 March 2020 FVPL AC FVOCI Total

Rs. Rs. Rs. Rs.

AssetsCash in hand and at bank - 1,059,515,359 - 1,059,515,359 Financial assets - amortised cost - 1,394,597,315 - 1,394,597,315 Financial assets - measured at FVPL 19,114,384 - - 19,114,384 Loans and advances - 1,140,029,971 - 1,140,029,971 Lease rentals receivable from customers - 8,493,626,612 - 8,493,626,612 Financial assets - measured at FVOCI - - 17,330,977 17,330,977 Total financial assets 19,114,384 12,087,769,257 17,330,977 12,124,214,619

FVPL AC Total

Rs. Rs. Rs.

LiabilitiesDue to banks and financial institutions - 2,573,869,772 2,573,869,772 Deposits from customers - 8,702,003,780 8,702,003,780 Trade payables - 433,609,159 433,609,159 Total financial liabilities - 11,709,482,711 11,709,482,711

As at 31 March 2019 FVPL AC FVOCI Total

Rs. Rs. Rs. Rs.

AssetsCash in hand and at bank - 221,717,261 - 221,717,261 Financial assets - amortised cost - 1,036,998,760 - 1,036,998,760 Financial assets - measured at FVPL 10,904,749 - - 10,904,749 Loans and advances - 1,478,560,792 - 1,478,560,792 Lease rentals receivable from customers - 11,802,800,443 - 11,802,800,443 Financial assets - measured at FVOCI - - 19,726,224 19,726,224 Total financial assets 10,904,749 14,540,077,257 19,726,224 14,570,708,229

FVPL AC Total

Rs. Rs. Rs.

LiabilitiesDue to banks and financial institutions - 5,452,964,238 5,452,964,238 Deposits from customers - 8,695,436,982 8,695,436,982 Trade payables - 108,236,222 108,236,222 Total financial liabilities - 14,256,637,442 14,256,637,442


21. Fair Value MeasurementThe fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Company uses various valuation methodologies that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. The use of observable and unobservable inputs and their significance in measuring fair value are reflected in our fair value hierarchy assessment.

Level 1 : Inputs include quoted prices for identical instruments and are the most observable.

Level 2 : Inputs include quoted prices for similar instruments and observable inputs such as interest rates, currency exchange rates and yield curves.

Level 3 : Inputs include data not observable in the market and reflect management judgment about the assumptions market participants would use in pricing the instruments.

We review the inputs to the fair value measurements to ensure they are appropriately categorised within the fair value hierarchy. Transfers into and transfers out of the hierarchy levels are recognised as if they had taken place at the end of the reporting period.

Assets and Liabilities Measured at Fair Value and Fair Value Hierarchy

As at 31 March 2020 Level 1 Level 2 Level 3 Total

Rs. Rs. Rs. Rs.

Non financial assetsProperty, plant & equipment Land and buildings - - 888,500,000 888,500,000

Financial assetsFinancial assets - measured at FVPL 8,816,949 10,297,435 - 19,114,384 Financial investments - FVOCI Investments in quoted shares 11,592,574 - - 11,592,574 Investments in unquoted shares - - 5,738,403 5,738,403

As at 31 March 2019 Level 1 Level 2 Level 3 Total

Rs. Rs. Rs. Rs.

Non financial assetsProperty, plant & equipment Land and buildings - - 656,945,142 656,945,142

Financial assetsFinancial assets - measured at FVPL 10,904,749 - - 10,904,749 Financial investments - FVOCI Investments in quoted shares 13,605,997 - - 13,605,997 Investments in unquoted shares - - 6,120,227 6,120,227

There were no transfers into and transfers out of the hierarchy levels during the year 2019/20 and 2018/19.

Details of valuation methodologies and assumptions are disclosed in the relevant notes to the financial statements.



Financial Instruments not Measured at Fair Value and Fair Value Hierarchy

The following table sets out the estimated fair values of financial assets and liabilities not measured at fair value and hence reflected at the carrying amounts in Financial Statements and the fair value hierarchy used:

As at 31 March 2020 Amortised cost Level 1 Level 2 Level 3 Total

Rs. Rs. Rs. Rs. Rs.

Financial assets - amortised costCash and cash equivalents 1,059,515,359 1,059,515,359 - - 1,059,515,359 Financial assets - amortised cost

Investments in fixed deposits 159,460,274 159,460,274 - - 159,460,274 Investments in treasury bonds 17,531,875 17,235,958 - - 17,235,958 Investments in repos 1,217,653,003 - 1,217,653,003 - 1,217,653,003

Loans and receivables 1,140,029,971 - - 1,140,029,971 1,140,029,971 Lease rental receivables from customers 8,493,626,612 - - 8,493,626,612 8,493,626,612

Financial liabilities - amortised costDues to banks and financial institutions 2,573,869,772 - 2,573,869,772 - 2,573,869,772 Deposits from customers 8,702,003,780 - - 8,702,003,780 8,702,003,780 Trade and other payables 485,499,863 - 485,499,863 - 485,499,863

As at 31 March 2019 Amortised cost Level 1 Level 2 Level 3 Total

Rs. Rs. Rs. Rs. Rs.

Financial assets - amortised costCash and cash equivalents 221,717,261 221,717,261 - - 221,717,261 Financial assets - amortised cost

Investments in fixed deposits 54,592,466 54,592,466 - - 54,592,466 Investments in treasury bonds 17,251,957 17,235,958 - - 17,235,958 Investments in repos 965,154,337 - 965,154,337 - 965,154,337

Loans and receivables 1,478,560,792 - - 1,478,560,792 1,478,560,792 Lease rental receivables from customers 11,802,800,443 - - 11,802,800,443 11,802,800,443

Financial liabilities - amortised costDues to banks and financial institutions 5,452,964,238 - 5,452,964,238 - 5,452,964,238 Deposits from customers 8,695,436,982 - - 8,695,436,982 8,695,436,982 Trade and other payables 194,652,267 - 194,652,267 - 194,652,267


22. Cash and Cash EquivalentsCash and cash equivalents includes 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.

31.03.2020 31.03.2019

Rs. Rs.

Cash in hand 35,777,314 80,806,027 Cash at bank 1,023,738,045 140,911,234

1,059,515,359 221,717,261

23. Financial assets - amortised costInvestments in fixed deposits, treasury bonds and repos are initially measured at fair value and subsequently measured at amortised cost. Interest income is accrued over the tenor of the investment using the effective interest rate (EIR) method.

31.03.2020 31.03.2019

Rs. Rs.

Investment in fixed deposit 159,412,436 54,592,466 Investment in treasury bonds 17,531,875 17,251,957 Investments in repos 1,217,653,003 965,154,337

1,394,597,315 1,036,998,760

23.1 The collateral value of the repurchase agreements was Rs.1,377,195,492.00 as at 31 March 2020. (Rs. 1,241,154,602 in 31 March 2019).

23.2 Investments in fixed deposits

31.03.2020 31.03.2019

Rs. Rs.

Investment in fixed deposit 159,460,274 54,592,466 Provision for Impairment (47,838) -

159,412,436 54,592,466

Counter party external credit rating (A - By Fitch Rating).

24. Financial assets - measured at Fair Value through Profit or LossThe Company classifies financial assets recognised through profit or loss when they have been purchased primarily for short term profit making through trading activities. They are recorded and measured in the statement of financial position at fair value. Changes in fair value are recognised in Net Trading Income.

Financial assets recognised through profit or loss include quoted equity securities that have been acquired principally for the purpose of selling in the near term, and are recorded at fair values. The quoted equity securities are valued using the market prices published by the Colombo Stock Exchange.

31.03.2020 31.03.2019

Rs. Rs.

Investments in Dealing with Securities - (Note 24.1) 8,816,949 10,904,749 Investments in unit trusts 10,297,435 -

19,114,384 10,904,749



24.1 Investments in Dealing with Securities

31.03.2020 31.03.2019

No of shares Cost Fair value No of shares Cost Fair value

Rs. Rs. Rs. Rs.

Bank, Financial & InsuranceAlliance Finance Co. PLC 52,000 305,474 1,768,000 52,000 305,474 2,802,800 DFCC PLC 24 1,551 1,440 24 1,551 1,673 Lanka Orix Leasing Company PLC 5,700 511,869 513,000 5,700 511,869 513,000 Citizens Development Bank PLC 4,109 283,139 296,259 4,000 283,139 318,800 Peoples Leasing & Finance Company PLC 107,149 1,872,000 1,285,788 104,000 1,872,000 1,393,600

Beverages, Food & TobaccoLanka Milk foods PLC 21,600 2,734,628 1,944,000 21,600 2,734,628 2,354,400

Chemical and PharmaceuticalsLankem Ceylon PLC 42 3,570 718 42 3,570 924 Chemenex PLC 4,300 588,773 172,000 4,300 588,773 253,700

Hotel & TourismSigiriya Village Hotel PLC 1,600 159,034 40,160 1,600 159,034 74,720 Hotel Corporation PLC 10,478 404,080 104,780 10,478 404,080 102,684 Serendib Hotels PLC (N/V) 10,000 192,128 110,000 10,000 192,128 110,000

Power & EnergyLaughs Gas PLC 8,000 184,000 72,000 8,000 184,000 136,000

ManufacturingBlue Diamond Jewellery PLC 19 48 4 19 48 6 ACL Cables PLC 23,800 780,646 737,800 23,800 780,646 768,740

Diversified HoldingsValible One PLC 104,000 2,600,000 1,248,000 104,000 2,600,000 1,487,200

MotorsDiesel & Motor Engineering PLC 1,122 788,918 280,500 1,122 788,918 326,502

Land & PropertySeylan Developments PLC 25,000 479,309 242,500 25,000 479,309 260,000 Total 8,816,949 10,904,749


25. Loans and ReceivablesLoans and receivables include financial assets measured at amortised cost if both of the following conditions are met:

• Assets that are held within a business model whose objective is to hold the assets in order to collect contractual cash flows.

• Contrcatual terms of the assets give rise on specific dates to cash flows that are solely payment of principal and interest on the principal outstanding.

After initial measurement loans and receivables 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. The losses arising from impairment are recognised in ‘impairment (charge)/reversal on loans and other losses’ in the statement of comprehensive income.

31.03.2020 31.03.2019

Rs. Rs.

Corporate loans 546,227,161 788,291,502 Personal loans 514,363,427 543,191,999 Micro loans 118,719,823 189,608,387 Other loans 288,172,392 190,650,440 Hire purchases and Murabh 101,787,886 195,296,815 Mediation/ consent motion loans 35,055,198 16,005,698 Pawning advances 8,687,485 8,687,485 Foreclosed properties- other assets - 3,616,098 Prepaid rentals (4,597,556) (27,995,334)

1,608,415,816 1,907,353,089 Less: allowance for impairment losses (Note 27.1) (468,385,845) (428,792,297)Net loans and advances 1,140,029,971 1,478,560,792



26. Lease Rentals Receivable from CustomersAgreements which transfer to counterparties substantially all the risks and rewards incidental to the ownership of assets, but not necessarily legal title, are classified as finance leases. When the Company is the lessor under finance leases the amounts due under the leases, after deduction of unearned charges, are recognised on the statement of financial position. The finance income receivable is recognised in ‘interest income’ over the periods of the leases so as to give a constant rate of return on the net investment in the leases.

After initial measurement, lease receivable 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. The losses arising from impairment are recognised in ‘impairment (charge) /reversal on loans and other losses’ in the statement of comprehensive income.

31.03.2020 31.03.2019

Rs. Rs.

Gross rentals receivables 10,800,438,592 16,009,384,043 Due rentals on lease finance 1,461,219,389 1,695,907,776

12,261,657,980 17,705,291,819 Less: unearned income (2,892,281,685) (4,603,915,685)Less: Lease rentals prepaid (51,200,939) (113,327,061)Net rentals receivables 9,318,175,356 12,988,049,073 Less : Allowances for impairment losses (Note 27.1) (824,548,744) (1,185,248,629)Total net rentals receivable 8,493,626,612 11,802,800,444

26.1 Rental Receivables on Finance Lease

31.03.2020 31.03.2019

Rs. Rs.

Within 1 yearGross receivable 5,410,933,650 8,745,226,690 Unearned income (1,340,548,180) (2,418,216,905)Net receivable 4,070,385,469 6,327,009,785

1-5 yearsGross receivable 6,820,878,007 8,887,823,335 Unearned income (1,549,524,942) (2,182,147,217)Net receivable 5,271,353,065 6,705,676,118

More than 5 yearsGross receivable 29,846,323 72,241,794 Unearned income (2,208,563) (3,551,564)Net receivable 27,637,760 68,690,230

Total net receivable 9,369,376,295 13,101,376,133

The Company had granted no facilities for a period above 5 years in 2019/2020.


27. Allowance for Impairment LossesThe adaption of SLFRS 09 has fundamentally changed the Company’s loan loss impairment method by replacing LKAS 39’s incurred loss approach with a forward-looking Expected Credit Loss (ECL) approach. The Company has all loans and other debt financial assets not held at FVPL, together with loan commitments and financial guarantee contracts, in this section all referred to as ‘financial instruments’ for allowance for expected credit losses with effect from 01 April 2017. Equity instruments are not subject to impairment under SLFRS 09.

The ECL allowance is based on the credit losses expected to arise over the life of the asset.

The 12 months ECL is the portion of Life time ECLs that represent the ECLs that result from default events on a financial instrument that are possible within the 12 months after the reporting date.

Both Lifetime ECLs and 12 months ECLs are calculated on either an individual basis or a collective basis, depending on the nature of the underlying portfolio of financial instruments.

The Company has established a policy to perform an assessment, at the of each reporting period, of whether a financial instrument’s credit risk has increased significantly since initial recognition, by considering the change in the risk of default occurring over the remaining life of the financial instrument. Based on such process Company allocates loans in Stage 1, Stage 2, Stage 3 as described below;

Stage 01

When loans are first recognised, the Company recognises an allowance based on 12 months ECLs. Stage 1 loans also includes facilities where the credit risk has improved and the loan has been reclassified from Stage 2.

Stage 02

When a loan has shown a significant increase in credit risk since origination, the Company records an allowance for the Lifetime ECLs. Stage 2 loans also include facilities, where the credit risk has improved and the loan has been reclassified from Stage 3.

Stage 03

When a loan is considered to be credit impaired/contain objective evidences of incurred loss, the Company records an allowance for the Lifetime ECLs.

Significant Increase in Credit Risk

The Company continuously monitors all assets subjects to ECL, in order to determine whether there has been a significant increase in credit risk since initial recognition and whether the instrument or a portfolio of instruments is subject to 12 months ECL or Lifetime ECL. The Company considers an exposure to have a significant increase in credit risk at 30 days past due.

Individually Significant Impairment Assessment and Loans which are Not Impaired Individually

Company will individually assess all significant customer exposures to identify whether there are any indicators of impairment. Loans with objective evidence of incurred losses are classified as Stage 3. Loans which are individually significant but not impaired will be assessed collectively for impairment under either Stage 1 or Stage 2, based on the above specified criteria to identify whether there have been a significant credit deterioration since origination.



While establishing significant credit deterioration, Company will consider the following criteria;

• Other changes in the rates or terms of an existing financial instrument that would be significantly different if the instrument was newly originated

• Significant changes in external market indicators of credit risk for a particular financial instrument or similar financial instrument

• Other Information related to the borrower, such as changes in the price of a borrower’s debt/equity instrument

• An actual/expected internal credit rating downgrade for the borrower or decrease in behavioural score used to assess credit risk internally

• Existing or forecast adverse changes in business, financial or economic conditions that are expected to cause a significant change in the borrower’s ability to meet its obligation

• An actual or expected significant change in the operating results of the borrower in relation to actual/expected decline in revenue, increase in operating risk, working capital deficiency, decrease in asset quality, increase in gearing and liquidity management problems

• Significant increase in credit risk on other financial instruments of the same borrower

• An actual or expected significant adverse change in the regulatory, economic or technological environment of the borrower that results in a significant change in the borrower’s ability to meet the debt obligation

Definition of default

The company considers the following as constituting an event of default for internal credit risk management purposes as historical experience indicates that financial assets that meet either of the following criteria are generally not recoverable:

• when there is a breach of financial covenants by the debtor; or

• information developed internally or obtained from external sources indicates that the debtor is unlikely to pay its creditors, including the company, in full (without taking into account any collateral held by the company).

Irrespective of the above analysis, the company considers that default has occurred when a financial asset is more than 90 days past due unless the Company has reasonable and supportable information to demonstrate that a more lagging default criterion is more appropriate.

Grouping Financial Assets Measured on a Collective Basis

As explained above, Company calculates ECL either on a collective or individual basis. Asset classes where Company calculates ECL on an individual basis includes all individually significant assets which belong to Stage 3. All assets which belong to Stage 1 and Stage 2 will be assessed collectively for impairment.

The Company allocates smaller homogeneous exposures based on a combination of internal and external characteristics such as product type, customer type, days past due etc.

Calculation of ECL

The expected cash shortfalls are calculated by multiplying respective loan level PDs, EADs and LGDs. The cash shortfall is discounted to the Effective Interest Rate (EIR). A cash shortfall is the difference between the cash flows that are due to an entity in accordance with the contract and the cash flows that the entity expects to receive.

PDs and LGDs are adjusted to the forward looking information using statistically quantified variance.


The mechanics of the ECL calculation are outlined below and the key elements are as follows;

• Probability of Default (PD): PD is an estimate of the likelihood of default over a given time horizon. Hence majority of our client base being retail; we use internal information to estimate the PDs. The client has two credit status which can be identified as default or not default. We used Cohort method (CM) to compute the PDs.

• Exposure at Default (EAD): EAD is the estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of the principal and interest, whether scheduled by contract or otherwise and expected draw downs on committed facilities.

• Loss Given Default (LGD): LGD is an estimate of the loss arising, where a default occurs at a given time calculated based on historical recovery data. It is usually expressed as percentage of the EAD.

For all products, Company considers the maximum period over which the credit losses are determined is the contractual life of a financial instrument.

Forward Looking Information

Company relies on broad range of qualitative / quantitative forward looking information as economic inputs in the Multiple economic factor model developed to forecast the expected Non-Performing Loans (NPL), such as;

• GDP growth

• Inflation

• Interest rate

• Unemployment rate

• Exchange rate

• Average LTV

Reversals of Impairment

If the amount of an impairment loss decreases in a subsequent period, and the decrease can be related objectively to an event occurring after the impairment was recognised, the excess is written back by reducing the financial asset impairment allowance account accordingly. The write-back is recognised in the Income Statement.

Write-off of Loans and Receivable

Financial assets are written off either partially or entirety only when the company has stopped pursuing the recovery. If the amount to be is greater than the accumulated impairment, the difference is first treated as an addition to the impairment that is then applied against the gross carrying amount. Any subsequent recoveries are credited to the statement of profit or loss.

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, vehicles, gold, securities, letters of guarantees, real estate, receivables, inventories, other non-financial assets. The fair value of collateral is generally assessed, at a minimum, at inception and based on the guidelines issued by the Central Bank of Sri Lanka.

To the extent possible, the Company uses active market data for valuing financial assets, held as collateral, such as real estate, is valued based on data provided by third parties such as independent valuers.

Collateral Repossessed

Repossessed collateral will not be taken into books of accounts unless the Company has taken those collaterals into its business operations. However such additions from the repossessed collaterals to the business operations are not significant.



27.1

Loans and Advances

Lease Rentals Receivable from Customers

31.03.2020 31.03.2019 31.03.2020 31.03.2019

Rs. Rs. Rs. Rs.

As at the beginning of the year 428,792,297 344,521,972 1,185,248,629 555,974,435 Charge for the period 69,319,528 97,210,728 473,059,701 831,028,280 Amounts written off (29,107,892) (12,940,402) (833,759,586) (201,754,086)As at the end of the period 468,385,845 428,792,297 824,548,744 1,185,248,629

Individual impairment 346,858,308 68,034,769 330,873,126 323,666,824 Collective impairment 121,527,537 360,757,528 493,675,618 861,581,805

468,385,845 428,792,297 824,548,744 1,185,248,629

Stage 1 impairment 14,590,451 30,560,934 37,270,236 48,614,471 Stage 2 impairment 12,192,107 53,511,843 120,715,118 259,805,254 Stage 3 impairment 94,744,979 276,684,751 335,690,264 553,162,079

121,527,537 360,757,528 493,675,618 861,581,805

27.2 Sensitivity analysis of allowance for impairment Changed criteria Changed Factor Effect on impairment Allowance (Rs.) Loss Given Default (LGD) Increased 10% 72,634,188

Probability of Default (PD) Increased 1% 1,768,246

28. Financial assets - measured at Fair Value through Other Comprehensive incomeUpon initial recognition, the Company occasionally elects to classify irrevocably some of its investments in equity instruments as Financial Assets at FVOCI when they meet the definition of financial assets and are not held for trading. Such classification is determined on an instrument by instrument basis.

Investments in quoted shares are recorded at fair value and the unquoted shares are recorded at the deemed cost of which the fair value cannot be measured due to the unavailability of sufficient more recent infomation. Gains and losses on these investments are never recycled to Profit. Dividends are recognised in the Statement of Profit or Loss as other operating income when the right of the payment has been established, except when the Company benefits from such proceeds as recovery of part of the cost of the instrument, in which case, such gains are recorded in Other Comprehensive Income. Equity instruments measured at FVOCI are not subject to an impairment assessment.

31.03.2020 31.03.2019

Rs. Rs.

Investments in quoted shares (Note 28.1) 11,592,574 13,605,997 Investments in unquoted shares (Note 28.2) 5,738,403 6,120,227

17,330,977 19,726,224


28.1 Investments in quoted shares and unit trusts

31.03.2020 31.03.2019


Rs. Rs. Rs. Rs.

Ceylinco Insurance PLC 1,250 12,500 2,218,750 1,250 12,500 2,656,250 Blue Diamond Jewellery Worldwide PLC 6,839 50,000 3,420 6,839 50,000 3,420

The Finance Company PLC 1,749 6,937 2,274 1,749 6,937 2,274 Central Industries PLC 24 2,400 780 24 2,400 696 Merchant Bank of Sri Lanka & Finance PLC 224 625,000 1,232 224 625,000 2,307

Chemanex PLC 600 38,395 24,000 600 38,395 35,400 Sinhaputhara Finance Company PLC 50,000 125,000 185,000 5,000 125,000 475,000 Citizen Development Bank PLC 102,820 1,562,450 6,801,702 95,485 1,562,450 7,722,329 Jetwing Symphony PLC 250,000 2,750,000 2,125,000 250,000 2,750,000 2,425,000 Comtrust Equity Fund 17,738 351,747 230,417 17,819 250,000 283,322

11,592,575 13,605,997

28.2 Investments in unquoted shares

31.03.2020 31.03.2019


Rs. Rs. Rs. Rs.

Alliance Agencies Limited - - - 1,303 18,215 392,517 Ranweli Holiday Resorts Limited 40,444 188,495 780,889 34,667 188,495 780,889 Credit Information Bureau of Sri Lanka 148 14,700 1,582,565 147 14,700 1,571,872 Finance House Consortium 20,000 200,000 200,000 20,000 200,000 200,000 Nation Lanka Equities 800,005 8,785,760 3,174,949 800,005 8,785,760 3,174,949

5,738,403 6,120,227

29. Other AssetsThe Company classifies all other assets as other financial assets and other non financial assets. Other assets mainly comprises of advance payments, VAT receivable, inventory and sundry receivables. Advance payments are carried at historical cost.

31.03.2020 31.03.2019

Rs. Rs.

Stationery stocks 960,228 1,767,344 Advances, deposit and prepayments 48,943,547 74,959,606 Other receivables 19,566,687 217,891,419

69,470,462 294,618,370



30. Property and Equipment

Basis of Recognition

Property and Equipment are tangible items that are held for servicing, or for administrative purposes, and are expected to be used during more than one year.

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

Basis of Measurement

An item of Property 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 or replace a part of 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 at the site on which they are located and capitalised borrowing costs. Purchased software that is integral to the functionality of the related equipment is capitalised as a part of computer equipment.

When parts of an item of Property and Equipment have different useful lives, they are accounted for as separate items (major components) of Property and Equipment.

Cost Model

The Company applies the Cost Model to all Property and Equipment except freehold land and buildings. These are recorded at cost of purchase together with any incidental expenses thereon, less accumulated depreciation and any accumulated impairment losses.

Revaluation Model

The Company applies the revaluation model to the entire class of freehold land and buildings. Such properties are carried at a revalued amount, being their fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses.

Freehold land and buildings of the Company are revalued at least once in every three years on a roll over basis to ensure that the carrying amounts do not differ materially from the fair values at the reporting date. On revaluation of an asset, any increase in the carrying amount is recognised in other comprehensive income and accumulated in equity, under capital reserve or used to reverse a previous revaluation decrease relating to the same asset, which was charged to the income statement. In this circumstance, the increase is recognised as income to the extent of the previous write down.

Any decrease in the carrying amount is recognised as an expense in the income statement or debited in the other comprehensive income to the extent of any credit balance existing in the capital reserve in respect of that asset. The decrease recognised in other comprehensive income reduces the amount accumulated in equity under capital reserves. Any balance remaining in the revaluation reserve in respect of an asset is transferred directly to retained earnings on retirement or disposal of the asset.

Subsequent Cost

Subsequent expenditure is capitalised only when it is probable that the future economic benefits of the expenditure will flow to the Company. Ongoing repairs and maintenance are expensed as incurred.


Derecognition

An item of Property and Equipment is derecognised upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset), is recognised in ‘Other Income (Net)’ 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 and Equipment, the remaining carrying amount of the replaced part is derecognised as required by Sri Lanka Accounting Standard – LKAS 16 on ‘Property, Plant & Equipment’.

Capital Work-in-Progress

These are expenses of a capital nature directly incurred in the construction of buildings and system development, awaiting capitalisation. These are stated in the Statement of Financial Position at cost less any accumulated impairment losses. Capital work-in-progress is transferred to the relevant asset when it is in the location and condition necessary for it to be capable of operating in the manner intended by management (i.e. available for use).

Depreciation

The Company provides depreciation from the date the assets are available for use up to the date of disposal, at the following rates on a straight line basis over the periods appropriate to the estimated useful lives, based on the pattern in which the asset’s future economic benefits are expected to be consumed by the Company of the different types of assets. 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 does not cease when the assets become idle or is retired from active use unless the asset is fully depreciated.

Category Depreciation rateBuildings 2.5%

Motor Vehicles 20%

Office Equipment 12.5%

Computer Equipment 20%

Furniture and Fittings 10%

Office Lifts 10%

Useful Life-Time of the Property and Equipment

The Company reviews the residual values, useful lives and methods of depreciation of property and equipment at each reporting date. Judgment of the management is exercised in the estimation of these values, rates, methods and hence they are subject to uncertainty.



30.1 Property and Equipment

Land Buildings Furniture & fittings

Equipment Motor vehicles

Computer hardware

Office lift Capital Work in

progress

Right of Use Assets

Total

Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.

CostBalance as at 31 March 2018

376,492,586 125,995,949 104,282,174 32,815,381 32,736,853 44,734,086 3,600,000 22,970,738 - 743,627,767

Additions 144,199,000 6,067,170 31,451,724 8,098,255 - 10,581,155 - 49,608,458 - 250,005,762

Write off - - - (782,146) - - - - - (782,146)

Transfers/ disposals - - (5,088,260) (336,397) - - - (69,114,477) - (74,539,134)

Balance as at 31 March 2019

520,691,586 132,063,119 130,645,637 39,795,094 32,736,853 55,315,240 3,600,000 3,464,719 - 918,312,249

Less: Accumulated depreciationBalance as at 31 March 2018

- 2,835,511 31,202,427 14,585,625 5,634,966 29,229,188 2,088,000 - - 85,575,718

Charge for the year - 3,181,509 10,097,168 4,077,324 6,547,371 5,482,166 360,000 - - 29,745,537

Write off - - - (343,245) - - - - - (343,245)

Transfers/ disposals - - (1,737,948) (242,132) - - - - - (1,980,080)


- 6,017,020 39,561,647 18,077,573 12,182,337 34,711,354 2,448,000 - - 112,997,930

Net book value as at 31 March 2019

520,691,586 126,046,100 91,083,991 21,717,521 20,554,516 20,603,886 1,152,000 3,464,719 - 805,314,319

CostBalance as at 31 March 2019

520,691,586 132,063,119 130,645,637 39,795,094 32,736,853 55,315,240 3,600,000 3,464,719 - 918,312,249

Impact from the implementation of SLFRS 16

- - - - - - - - 34,528,872 34,528,872

Revaluation 244,453,978 (547,737) - - - - - - - 243,906,241

Additions - - 1,402,088 3,296,696 - 3,278,121 - 3,522,854 - 11,499,760

Transfers/ disposals - (8,160,947) - (153,884) - (112,675) - (3,549,812) - (11,977,318)


765,145,565 123,354,435 132,047,726 42,937,906 32,736,853 58,480,687 3,600,000 3,437,761 34,528,872 1,196,269,803

Less: Accumulated depreciationBalance as at 31 March 2019

- 6,017,020 39,561,647 18,077,573 12,182,337 34,711,354 2,448,000 - - 112,997,930

Charge for the year - 3,371,117 13,616,115 4,899,419 6,547,371 6,971,712 360,000 - 15,597,881 51,363,615

Transfers/ disposals - (8,160,947) - (153,884) - (112,675) - - - (8,427,506)


- 1,227,190 53,177,762 22,823,106 18,729,707 41,570,391 2,808,000 - 15,597,881 155,934,037

Net book value as at 31 March 2020

765,145,565 122,127,246 78,869,964 20,114,800 14,007,145 16,910,296 792,000 3,437,761 18,930,991 1,040,335,766


Borrowing Costs

There were no capitalised borrowing costs relating to the acquisition of property, plant & equipment during the year.

Fully-Depreciated Property and Equipment

The initial cost of fully-depreciated property, plant & equipment, which are still in use as at reporting date is Rs. 61,727,665.11 (31.03.2019 - Rs 64,783,552.24)

Property and Equipment Pledged as Securities for Liabilities

The land and buildings situated in Colombo 5, has been pledged as security for the overdraft facility obtained from Seylan Bank PLC amounting to Rs. 150 Mn.

Fair Value of the Land and Buildings

The carrying amount of the freehold properties, if they were carried at cost less accumulated depreciation would have been as follows:

31.03.2020 31.03.2019

Rs. Rs.

Cost and accumulated depreciation of the revalued assetsLand 418,860,335 418,860,335 Buildings 120,614,851 78,721,030 Accumulated depreciation on buildings (15,217,341) (9,327,253)

524,257,845 488,254,112

Extent, locations, valuations of the land and the buildings of the entity’s land holdings as follows.

Location Extent Cost Valuation Valuation date Level of fair value No of Buildings

1. No 146, Colombo 05 13.80 Perches 88,774,927 339,000,000 02.11.2019 Level 3 12. No 146/34, Colombo 05 20.12 Perches 223,982,049 245,885,569 14.10.2019 Level 3 13. No 138, Colombo 05 10.60 Perches 144,199,000 164,114,431 14.10.2019 Level 3 04. Kandy 11.35 Perches 48,663,081 89,500,000 15.10.2019 Level 3 15. Matara 17.78 Perches 33,856,130 50,000,000 26.11.2019 Level 3 1

539,475,186 888,500,000

Above all properties valued by Incorporated Valuer - Mr. N. M. Jayatilake.

As a result of the Covid-19 outbreak in the country in mid March 2020, it has been concluded that there is no adjustment required for impairment of property, plant and equipment.



31. Intangible AssetsThe Company’s intangible assets include the value of acquired computer software.

Basis of Recognition

An intangible asset is recognised if it is probable that future economic benefits associated with the asset will flow to the entity and the cost of the asset can be measured reliably in accordance with the Sri Lanka Accounting Standard – LKAS 38 on ‘Intangible Assets’.

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value as at the date of acquisition. Following initial recognition, these assets are stated in the Statement of Financial Position at cost, less accumulated amortisation and accumulated impairment losses, if any.

Subsequent Expenditure

Subsequent expenditure on intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred.

Useful Economic Lives, Amortisation and Impairment

Computer Software

Software acquired by the Company is measured at cost less accumulated amortisation and any accumulated impairment losses.

Amortisation is calculated using the straight–line method to write-down the cost of intangible assets to their residual values over their estimated useful lives as follows:

Balance as at 31.03.2018

Additions during the year

Disposals Balance as at 31.03.2019

Rs. Rs. Rs. Rs.

Cost 32,977,829 11,698,231 - 44,676,060 Accumulated depreciation 21,709,326 4,863,668 - 26,572,994 Net carrying value 11,268,503 18,103,066

Balance as at 31.03.2019

Additions during the year

Disposals Balance as at 31.03.2020

Rs. Rs. Rs. Rs.

Cost 44,676,060 1,060,552 - 45,736,612 Accumulated depreciation 26,572,994 5,378,327 - 31,951,321 Net carrying value 18,103,066 13,785,291



32. Current Tax AssetThe Company is subject to income taxes and other taxes including VAT on financial services. Significant judgment is required to determine the total provision for current, deferred and other taxes. Uncertainties exist, with respect to the interpretation of the applicability of tax laws, at the time of the preparation of these financial statements.

The Company recognised assets and liabilities for current deferred and other taxes based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters are different from the amounts that were initially recorded, such differences will impact the income, deferred tax amounts in the period in which the determination is made.

31.03.2020 31.03.2019

Rs. Rs.

Current Tax AssetWith holding tax receivable 12,063,277 11,199,226 Economic Service Charge receivable 100,368,596 74,038,733 Notional Tax 24,783,752 24,783,752

137,215,625 110,021,710

33. Deferred Tax Asset / (Liability)Deferred tax is provided on 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 arise from the initial recognition of goodwill or 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, 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 asset is recognised for all deductible temporary differences, carry forward of unused tax credits 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 credits 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, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profits will be available against which the temporary differences can be utilised.

The carrying amount of deferred tax asset 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 tax asset to be utilised. Unrecognised deferred tax asset is reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

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

Current tax and deferred tax relating to items recognised directly in equity are also recognised in equity and not in the Statement of Profit or Loss.


Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

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

31.03.2020 31.03.2019

Rs. Rs.

Deferred tax asset / (liability) 49,875,323 148,307,535 49,875,323 148,307,535

Deferred tax assets, liabilities and income tax relates to the followingsBalance at the beginning of the year 148,307,535 (63,541,587)Originated/ (reversal) during the year - profit and loss (88,284,045) 211,849,121 Originated/ (reversal) during the year - other comprehensive income (10,148,167) 1,505,668 Balance at the end of the year 49,875,323 148,307,535

Deferred tax arising from Accelerated depreciation for tax purposeProperty and equipment (43,764,743) (38,928,676)Leased assets (35,459,922) (59,054,371)Provision for impairment 143,856,112 252,402,083 Revaluation reserve on lands (34,628,523) (28,512,750)Post employment retirement benefits 19,551,387 21,536,904 Financial assets - FVTPL & FVTOCI 321,012 864,344

49,875,323 148,307,535

The unrecognised deferred tax asset as at 31.03.2020 is Nil (31.03.2019 - Nil)

34. Due to banks and financial institutionsDue to banks and other financial institutions include bank overdrafts and long term and short term loans obtained from banks and other financial institutions. Subsequent to initial recognition, these are measured at their 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 Profit or Loss. Gains and losses are recognised in the Statement of Profit or Loss when the liabilities are derecognised as well as through the EIR amortisation process.

31.03.2020 31.03.2019

Rs. Rs.

Bank overdrafts 50,575,892 73,287,615 Securitised borrowings and other banking facilities 2,523,293,880 5,379,676,623 Total 2,573,869,772 5,452,964,238



34.1 Securitised borrowings and other banking facilities

Repayment

Descriptions Amortised cost as at 31.03.2019

Loans obtained*

Interest recognised

Capital Interest Amortised cost as at 31.03.2020

Period Security

Revolving loans

Seylan Bank PLC 1,566,115,687 1,095,000,000 84,521,211 2,405,000,000 90,208,704 250,428,195 180 days Mortgage over LF - Rs 2,250 Mn

PABC PLC 50,339,071 - 271,233 50,000,000 610,304 - 180 days Mortgage over LF - Rs 542 Mn

NDB loan - 800,000,000 8,786,027 800,000,000 8,786,027 - 180 days Mortgage over LF - Rs 480 Mn

NDB - wakala loan 51,296,404 - 493,322 50,000,000 1,789,726 - 90 days Mortgage over LF - Rs 365 Mn

Sampath Bank PLC 501,263,288 550,000,000 22,415,573 1,050,000,000 23,678,860 - 180 days Mortgage over LF - Rs 365 Mn

Securitisation loans

NDB Investment 68,054,904 - 2,637,323 48,300,000 22,392,227 - 48 months Mortgage over LF - Rs 825 Mn

Safe Holdings Loan 13,171,668 - 166,935 9,559,000 3,779,602 - 34 months Mortgage over LF - Rs 650 Mn

Abans Finance PLC 59,322,454 - 3,708,995 55,200,000 7,831,449 - 12 months Mortgage over LF - Rs 64.5 Mn

Sampath Bank PLC 147,523,343 - 10,972,863 150,000,000 8,496,206 - 34 months Mortgage over LF - Rs 650 Mn

Agora Securities (Pvt) Ltd - loan 2 223,961,669 - 24,489,265 181,818,182 21,724,939 44,907,813 37 months Mortgage over LF - Rs 650 Mn

First Capital Ltd - loan 1 36,838,999 - 729,276 27,230,376 10,337,899 - 24 months Mortgage over LF - Rs 520 Mn

First Capital Ltd - loan 2 39,330,701 - 1,042,724 30,348,579 10,024,846 - 24 months Mortgage over LF - Rs 390 Mn

HNB PLC 156,173,777 - 16,728,758 92,850,000 16,166,699 63,885,835 36 months Mortgage over LF - Rs 357 Mn

DFCC PLC 50,761,233 - 1,371,777 50,000,000 2,133,010 - 24 months Mortgage over LF - Rs 260 Mn

Agora Securities (Pvt) Ltd - loan 3 64,555,870 - 828,746 52,877,618 12,506,998 - 24 months Mortgage over LF - Rs 519 Mn

National Savings Bank 379,957,607 - 27,430,351 160,800,000 33,046,767 213,541,191 36 months Mortgage over LF - Rs 600 Mn

Indian Bank -Term Loan 103,023,529 - 3,746,236 86,000,000 20,769,765 - 24 months Mortgage over LF - Rs 260 Mn

NDB & Sampath Syndication 485,850,339 - 62,106,832 80,000,000 37,175,349 430,781,820 48 months Mortgage over LF - Rs 656 Mn

Wayamba Co-operative 1 442,984,090 - 40,333,748 297,463,649 51,597,889 134,256,298 24 months Mortgage over LF - Rs 483 Mn

MBSL Term loan 198,447,701 - 19,172,054 144,023,283 30,956,557 42,639,916 24 months Mortgage over LF - Rs 450 Mn

Wayamba Co-operative Loan 2 385,527,843 - 65,581,036 193,200,307 34,310,377 223,598,195 18 months Mortgage over LF - Rs 585 Mn

Safe Holdings/Wayambe Securitisation Loan 108,719,856 - 5,866,435 98,569,100 16,017,191 - 17 months Mortgage over LF - Rs 288 Mn

First Capital Ltd - loan 3 246,456,590 - 24,231,927 140,479,020 26,671,777 103,537,722 24 months Mortgage over LF - Rs 461 Mn

Areva Securitization Loan 02 - 337,853,545 46,171,968 78,140,204 7,868,754 298,016,555 24 months Mortgage over LF - Rs 600 Mn

M Power Capital - Sec: Loan - 294,238,335 24,753,001 30,350,000 2,051,123 286,590,213 20 months Mortgage over LF - Rs 450 Mn

Agora Securitization Loan 04 - 421,019,513 10,240,614 150,000 - 431,110,126 30 months Mortgage over LF - Rs 718 Mn

5,379,676,623 3,498,111,393 508,798,230 6,362,359,317 500,933,046 2,523,293,879

* Net of transaction cost.



35. Deposits from Customers - Financial liabilities measured at amortised costDeposits from customers include fixed deposits. Subsequent to initial recognition, these are measured at their amortised cost using the Effective Interest Rate (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 Profit or Loss. Gains and losses are recognised in the Statement of Profit or Loss when the liabilities are derecognise as well as through the EIR amortisation process.

31.03.2020 31.03.2019

Rs. Rs.

Fixed deposits 8,680,149,843 8,694,035,621 Savings deposits 21,853,936 1,401,362

8,702,003,780 8,695,436,982

36. Trade and Other PayablesOther financial liabilities are recognised initially at fair value and subsequently measured at amortised cost using the effective interest rate method. Trade payables are obligations to pay for vehicle suppliers in the ordinary course of business.

Company classifies all non-financial liabilities other than post employment benefit liability and current tax liabilities and trade payables under other non-financial liabilities. Other non-financial liabilities include accruals, advances and provisions. These liabilities are non-interest bearing and recorded at the amounts that are expected to be paid.

31.03.2020 31.03.2019

Rs. Rs.

Trade payables (Note 36.1) 433,609,159 108,236,222 Other payables 37,647,041 86,416,045Lease Liability 14,243,663 -

485,499,863 194,652,267

36.1 Trade Payables

31.03.2020 31.03.2019

Rs. Rs.

Purchase creditors 350,775,236 54,185,440 Accrued expenses 82,833,923 54,050,782

433,609,159 108,236,222

37. Retirement Benefit ObligationsThe Company measures the present value of the promised retirement benefits for gratuity, which is a retirement benefit plan with the advice of an independent professional actuary using the ‘Projected Unit Credit method’ (PUC) as required by the Sri Lanka Accounting Standard- LKAS 19 on ‘Employee Benefits’.

Recognition of Actuarial Gains and Losses

The Company recognises the total actuarial gains and losses that arise in calculating the Company’s obligation in respect of the plan in Statement of Comprehensive Income during the period in which it occurs.


Funding Arrangements

The gratuity liability is not externally funded.

Retirement Benefit Obligations

The cost of the retirement benefit obligation is determined using actuarial valuation. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates and future gratuity increases. Due to the long term nature of such obligation, these estimates are subjected to significant uncertainty. All assumptions are reviewed at each reporting date.

31.03.2020 31.03.2019

Rs. Rs.

Balance as at beginning of the year 76,917,514 58,521,280 Amount recognise in Statement of Profit or Loss 16,042,649 14,256,472 Actuarial (gain) / loss (12,546,805) 5,377,386 Benefits paid (10,586,975) (1,237,625)Balance as at the end of the year 69,826,383 76,917,514

Amount recognise in Statement of Profit or LossCurrent service cost 7,123,868 8,170,259 Net interest on the net retirement benefit liability 8,918,781 6,086,213

16,042,649 14,256,472

An actuarial valuation of the retirement benefit obligation was carried out as at 31 March 2020 by Messrs. Actuarial & Management Consultants (Pvt) Limited a firm of professional actuaries. The valuation method used by the actuaries to value the liability is the ‘Projected Unit Credit (PUC), the method recommended by the Sri Lanka Accounting Standard- LKAS 19 on ‘Employee Benefits’.

Actuarial assumptions

31.03.2020 31.03.2019

Discount rate 10.00% 11.60%Future salary increment rate 5.00% 10.00%Mortality - Mortality 1967/ 70 1967/ 70 Retirement age 55 years 55 years

Sensitivity of Assumptions Employed in Actuarial Valuation

The following table demonstrates the sensitivity to a reasonably possible change in the key assumptions employed with all other variables held constant in the employment benefit liability measures.



The sensitivity of the Statement of Comprehensive Income and the Statement of Financial Position is the effect of the assumed changes in discount rate and salary increment rate on the employment benefit obligation for the year.

Effect on RBO – increase/ (Reduction) in the liability

Rs.

1% Increase in discount rate (2,375,435)1% decrease in discount rate 2,479,899 1% Increase in salary increment 2,905,573 1% decrease in salary increment (2,812,706)

38. Stated Capital

31.03.2020 31.03.2019

No of shares Value of the shares

No of shares Value of the shares

Rs. Rs.

Ordinary SharesIssued and fully paid-ordinary shares 7,437,500 244,562,500 7,437,500 244,562,500 Preference Shares8% Irredeemable cumulative preference shares 50,000 500,000 50,000 500,000 Total Stated Capital 245,062,500 245,062,500

Rights of Shareholders

The holders of ordinary shares have the right to receive dividends as and when they are declared from time to time and they are entitled to one vote per share at meetings. All shares rank equally with regard to the Company’s residual assets.

39. Retained Earnings

31.03.2020 31.03.2019

Rs. Rs. Restated

Balance at the beginning of the year 783,257,069 535,576,616 Profit/(loss) for the period (167,759,249) 372,595,683 Other comprehensive income for the period 9,033,700 (3,871,718)Transfers from FV reserve 372,685 -(-) Dividend paid - (46,524,375)(-) Transfers to statutory reserve fund - (74,519,137)Balance at the end of the year 624,904,205 783,257,069

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 losses or dividends payable.


40. Other Reserves

Revaluation Reserve

General Reserve

Statutory Reserve Fund

Fair Value Reserve

Rs. Rs. Rs. Rs.

Balance as at 31 March 2019 120,307,712 22,035,535 348,273,714 8,165,700 Other comprehensive income 237,790,469 - - (2,469,861)Transfers to/(from) during the year - - - (372,685)Balance as at 31 March 2020 358,098,181 22,035,535 348,273,714 5,323,154

The revaluation reserve relates to revaluation of freehold land and buildings and represents the fair value changes of the land and buildings as at the date of revaluation.

‘General Reserve’ represents the amounts set aside by the Directors for general application. The purpose of setting up the General Reserve is to meet the potential future unknown liabilities.

‘Statutory Reserve Fund’ was created during the year 2007 in accordance with the Finance Companies (Capital Funds) Direction No.1 of 2003 issued by Central Bank of Sri Lanka. Accordingly 5% of the net profit for the period is transferred to the Statutory Reserve Fund during the financial year.

41. Contingent Liabilities and Commitments

Commitments and Contingencies

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.

The Company has no commitments for acquisition of property, plant and equipment, intangible assets incidental to the ordinary course of business as at 31 March 2020. (31 March 2019 - Nil)

Legal Claims

Litigation is a common occurrence in the finance industry due to the nature of the business undertaken. The Company has formal controls and policies for managing legal claims. Once professional advice has been obtained and the amount of loss reasonably estimated, the Company makes adjustments to account for any adverse effects which the claims may have on its financial standing. At the reporting date of the Company had several unresolved legal claims. The significant unresolved legal claims against the Company for which legal advisor of the Company advised as the loss is possible, but not probable, that the action will succeed. Accordingly, no provision for any claims has been made in these financial statements.

The Company filed a case against the Richard Pieris Arpico Finance Limited, for using the word ‘Arpico Finance’ in the High Court of Western Province (Civil) in Colombo under the provisions of the Intellectual Property Act. An Interim order was issued in our favour, prohibiting Richard Peiris Arpico Finance Limited from using the name “ARPICO FINANCE“ until the final judgment is delivered by the Commercial High Court. After several days of the trial, both parties closed their cases and the case was fixed for written submissions on 29 September 2020.

Tax assessment

As per the notice of assessment issued by the Department of Inland Revenue dated 30.05.2016, 30.05.2017 and 25.05.2018, the company has to make an additional tax payment for the years of assessment 2013/14 ,2014/15, 2015/16 and 2016/17 amounting to Rs 8,488,500/- , Rs 28,402,545/-, Rs 51,632,714/- and Rs 400,035,660/- respectively. The company has already appealed in this regard and the management of the company is in confidence that there will be no further tax payments.



42. Events After the Reporting PeriodOn 11 July 2018, the Board of Directors of the Company granted its approval in principle for the proposed amalgamation between the Arpico Finance Company PLC and its parent company Associated Motor Finance Company PLC, whereby Arpico Finance Company PLC will be the surviving entity subject to obtaining requisite approvals. Arpico Finance Company PLC is in the process of finalizing the terms upon which the proposed amalgamation would take effect, the ratio in which the shares of Arpico Finance Company PLC would be swapped for shares of Associated Motor Finance Company PLC and obtaining the necessary approvals from the Central Bank of Sri Lanka for the above.

Other than the above no circumstances have arisen since the reporting period which would require adjustments to, or disclosures in the Financial Statements.

43. Related Party Disclosures

43.1 Parent and Ultimate Controlling PartyThe immediate and ultimate parent of the Company is Associated Motor Finance Company PLC which is a listed at the Colombo Stock Exchange.

43.2 Transactions with Key Management Personnel (KMP) and their Family MembersAs per the Sri Lanka Accounting Standard (LKAS -24 ) - “Related Party Disclosures”, the KMPs include those who are having authority and responsibility for planning, directing and controlling the activities of the Company. Accordingly, the Board of Directors of the Company, immediate parent Company and members of the Corporate Management of the Company have been classified as KMPs of the Company.

The Company carries out its transactions with KMPs & their close family members in the ordinary course of its business on an arms length basis at commercial rates.

Transactions with Key Management personnel and their Close Family Members

Remuneration to Key Management Personnel

2019/2020 2018/2019

Rs. Rs.

Remuneration to Board of DirectorsShort term employees benefits 28,480,800 25,280,800

Remuneration to Corporate ManagementShort term employees benefits 27,522,511 22,037,212 Post employment benefits 2,093,000 -

Share Transactions with Key Management PersonnelNo. of ordinary shares held 666 732 Dividends paid (Rs) - 4,575


Transactions, Arrangements and Agreements Involving Key Management Personnel (KMPs), their Close Family Members (CFMs) and Other Related Entities

Board of Directors Corporate Management Total

2019/2020 2018/2019 2019/2020 2018/2019 2019/2020 2018/2019

Rs. Rs. Rs. Rs. Rs. Rs.

Items in Statement of Profit or LossInterest income - - 20,653 113,259 20,653 113,259 Interest expense 10,239,943 9,081,461 922,453 835,170 11,162,396 9,916,631 Rent expense 1,355,200 1,353,000 - - 1,355,200 1,353,000

Items in Statement of Financial PositionAssets - Loans and receivables - - - 421,935 - 421,935 Liabilities - Due to customers 84,597,580 86,931,231 5,048,306 8,599,170 89,645,886 95,530,401

43.3 Transactions with Related EntitiesThe company carried out the following transactions in the ordinary course of business on an arm’s length basis with the parent company:

Name of the related party Relationship Nature of the transaction Aggregate value of RPTs entered during the year

Aggregate value of RPTs as a % of

Net income

Terms and Conditions

Associated Motor Finance Company PLC

Parent Fixed deposit 30,000,000 1.0% 24 months maturity, Rate 13.11%

Interest expense 13,974,031 0.5%Reimbursement Expenses 9,941,807 0.3%

Hatton National Bank PLC Common directors

Repayments of capital 92,850,000 3.2% 36 month securitization loan, at AWPLR+3.5%

Interest payment 16,723,469 0.6%Poltech (Ceylon) Company Ltd Common

directorsRent payment 3,424,972 0.1%

44. Risk Management

44.1 IntroductionRisk is inherent in the Company’s activities, but is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Company’s continuing profitability and each individual within the Company is accountable for the risk exposures relating to his or her responsibilities. The Company is primarily exposed to credit risk, liquidity risk and market risk. It is also subject to various operating risks.



Risk management structure

The Board of Directors is responsible for the overall risk management approach and for approving the risk management strategies and principles.

The Board has appointed a subcommittee, Integrated Risk Management (IRM) Committee, which has the responsibility to monitor the overall risk process within the Company.

The IRM Committee has the overall responsibility for the development of the risk strategy and implementing principles, frameworks, policies and limits. The IRM Committee is responsible for managing risk decisions and monitoring risk levels and reports on a periodical basis to the Board.

44.2 Credit RiskCredit risk is the risk of financial loss to the Company if a borrower or counterparty to a financial instrument, fails to meet its contractual obligations, and arises principally from the Company’s loans and advances to customers/other companies and investments in debt securities. Credit risk constitutes the Company’s largest risk exposure category. This can be broadly categorised into three types; default, concentration and settlement risks.

Default risk as the risk of the potential financial loss resulting from the failure of customer or counterparty to meet its debt or contractual obligations and arises principally from the Company’s loans and advances to customers. Concentration risk is the credit exposure being concentrated as a result of excessive build-up of exposure to a single counterparty, industry, product, geographical location or insufficient diversification.

Settlement risk is the risk of loss arising from trading/investment activities when there is a mutual undertaking to deliver on a progressive basis.

44.2.1 Analysis of credit risk exposure

The Company seeks to use collateral, where possible, to mitigate its risks on financial assets. The collateral comes in various forms such as cash, vehicles, real estate and other non-financial assets. The fair value of collateral is generally assessed, at a minimum, at inception and based on the guidelines issued by the Central Bank of Sri Lanka.

44.2.2 Credit quality by class of financial assets

The tables below show the credit quality by the class of asset for all financial assets exposed to credit risk. The amounts presented are gross of impairment allowances.

Neither past due nor

impairment*

Past due and impairment

Total

Rs. Rs. Rs.

As at 31.03.2020Financial assetsCash and bank balances 1,059,515,359 - 1,059,515,359 Financial assets - amortised cost 1,394,597,315 - 1,394,597,315 Financial assets - measured at FVPL 19,114,384 - 19,114,384 Loans and receivables 1,140,029,971 468,385,845 1,608,415,816 Lease receivables from customers 8,493,626,612 824,548,744 9,318,175,356 Financial assets - measured at FVOCI 17,330,977 - 17,330,977

12,124,214,619 1,292,934,588 13,417,149,207

* These are considered for collective impairments.


Definition of Past Due

The Company considers that any amounts uncollected any day or more beyond their contractual due date as ‘past due’.

Age Analysis of past due (i.e. facilities in arrears even by one day and above) loans and receivables by class of Financial Assets are given below.

< 3 months > 3 & <= 6 > 6 & <=12 >12 Total

Rs. Rs. Rs. Rs. Rs.

As at 31.03.2020Loans and advances 947,907,695 132,837,570 26,720,253 500,950,298 1,608,415,816 Finance lease receivable 6,687,438,364 1,462,176,998 416,147,709 752,412,285 9,318,175,356

As at 31.03.2019Loans and advances 1,142,580,282 252,267,894 194,159,291 318,345,623 1,907,353,089 Finance lease receivable 8,845,410,136 2,435,262,901 1,044,339,714 663,036,322 12,988,049,073

44.3 Liquidity Risk and Funding ManagementLiquidity risk is defined as the risk that the Company will encounter in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. Liquidity risk arises because of the possibility that the Company might be unable to meet its payment obligations when they fall due under both normal and abnormal circumstances. To limit this risk, management has arranged diversified funding sources in addition to its deposit base, and adopted a policy of managing assets with liquidity in mind and monitoring future cash flows and liquidity on a daily basis.

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

Further the Company is maintaining assets in the form of Sri Lankan government treasury bills & government securities equivalent to 7.5% of the average of its month end total deposit liabilities and unsecured borrowings of the 12 months preceding financial year.



44.3.1 Analysis of Financial Assets And Liabilities By Remaining Contractual Maturities

The table below summarises the maturity profile of the undiscounted cash flows of the Company’s financial assets and liabilities as at 31 March 2019:

On demand Less than 03 months

03 - 12 months

01 - 05 years Over 05 years

Total


Financial assetsCash and bank balances 1,059,515,359 - - - - 1,059,515,359Financial assets - amortised cost - 827,832,250 109,460,274 452,260,215 5,092,414 1,394,597,315Financial assets - measured at FVPL - 19,114,384 - - - 19,114,384Loans and receivables 278,354,360 404,486,985 291,764,512 620,635,761 13,174,197 1,608,415,816Lease rentals receivables 708,239,313 1,136,550,465 2,174,394,753 5,271,353,065 27,637,760 9,318,175,356Financial assets - measured at FVOCI 17,330,977 - - - - 17,330,977Total financial assets 2,063,440,009 2,387,984,084 2,575,619,539 6,344,249,041 45,904,371 13,417,149,207

Financial liabilitiesDues to banks 50,575,892 771,641,182 793,982,511 957,670,187 - 2,573,869,772Dues to customers 21,853,936 2,603,527,298 3,229,632,788 2,846,989,757 - 8,702,003,780Other financial liabilities - 433,609,159 - - - 433,609,159Total financial liabilities 72,429,828 3,808,777,639 4,023,615,299 3,804,659,944 - 11,709,482,711Total net financial assets/(liabilities) 1,993,405,427 (1,420,793,554) (1,447,995,760) 2,539,589,097 45,904,371 1,707,666,496

44.3.2 Liquidity reserves

The following table sets out the components of the Company’s liquidity reserves.

31.03.2020 31.03.2019

Carrying amount Fair Value Carrying amount Fair Value

Rs. Rs. Rs. Rs.

Cash in hand 35,777,314 35,777,314 80,806,027 80,806,027 Balances with bank 1,023,738,045 1,023,738,045 140,911,234 140,911,234 Repo investments - less than 3 months 777,832,250 777,832,250 488,840,781 488,840,781 Repo investments - more than 3 months 439,820,753 439,820,753 476,313,556 476,313,556 Investment in fixed deposits 159,460,274 159,460,274 54,592,466 54,592,466

2,436,628,636 2,436,628,636 1,241,464,064 1,241,464,064

44.4 Market RiskMarket risk is the risk that the fair value or future cash flows of financial instruments will fluctuate due to changes in market variables such as interest rates, foreign exchange rates and equity prices. Company classifies exposures to market risk into either trading or non–trading portfolios and manages each of those portfolios separately.


44.4.1 Interest Rate Risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s long-term debt obligations with floating interest rates. The Company policy is to continuously monitor interest rates on regular basis. The Company manages its interest rate risk by having a balanced portfolio of fixed and variable rate financial assets and financial liabilities.

The following table demonstrates the sensitivity of the Company’s Statement of Profit or Loss for the year ended 31 March 2020 to a reasonable possible change in interest rates, with all other variable constant.

31.03.2020 31.03.2019

Rs. Rs.

Assets - - Liabilities 2,523,293,880 3,090,411,831

Impact on Statement of Profit or Loss due to interest rate variations+0.5% (239,475) (698,052)-0.5% 239,475 698,052

44.4.2 Currency Risk

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates.

Company has no investment and no borrowing in foreign currency and there is no currency risk for the company.

44.4.3 Equity Price Risk

The sensitivity analysis for equity risk reflects how changes in the fair value of equity securities at the reporting date will fluctuate in response to assumed changes in equity market prices. The movements in the fair value of equity securities monitored by assessing the projected changes in the fair value of equity securities held by the portfolios in response to assumed equity price movements of +/- 1%.

2019/2020 2018/2019

1% increase/decrease in equity market prices

Carrying Value Profit before tax

Other comprehensive

income

Carrying Value Profit before tax

Other comprehensive

income


Financial assets - measured at FVPL 191,144 191,144 - 109,047 - Financial assets - measured at FVOCI 115,926 - 115,926 136,060 136,060

44.5 Operational RiskOperational risk is the risk of loss arising from systems failure, human error, fraud or external events. When controls fail to operate effectively, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss.

Operational risk of the Company are managed through a Board approved operational risk management policy control framework which consists of monitoring and responding to potential risks.



44.6 Capital Adequacy RiskFor a financial institution, capital is a buffer against insolvency. It is available to absorb unforeseen losses so the Company can remain in business. The more capital the Company has relative to the risks it takes, the more confidence the stakeholders are that it will meet its obligations to them. Capital adequacy risk arises from Company’s inability to maintain the required amount of capital which is perceived to be adequate to absorb the risk.

The Company manages its capital considering regulatory capital requirements. The Central Bank of Sri Lanka (CBSL) sets and monitors capital requirements for licensed finance companies in Sri Lanka. Thus the Company’s operations are directly supervised by the CBSL and the Company is required to comply Directions on Risk Weighted Capital Adequacy Ratio issued by CBSL. Licensed Finance Companies in Sri Lanka need to maintain a minimum Capital Adequacy Ratio (CAR) of 10.50 percent and a Core Capital Ratio (Tier 1) of at least 6.50 percent.

As of 31 March 2020, the Company’s T1 and T2 ratios are 7.97% and 9.19% respectively.

44.7 Impact of COVID -19COVID-19 pandemic has directly impacted to the business and economic activities of the global and local economy. It has created the adverse economic stress among the public including our customers which may lead to increase the credit risk in short term.

Accordingly, the company is currently in the process of providing relief (Moratorium) for the affected businesses and individuals in line with the directions issued by CBSL. Further, the company is continuously assessing possible disruptions due to COVID-9 pandemic.

The company considered the COVID 19 impact in calculating the Probability of Default (PD), Loss Given Default (LGD), Economic Factor Adjustment (EFA) and the staging of facilities computed as at 31 March 2020 in order to estimate the Expected Credit Loss (ECL) of the company.

During the period of the global pandemic the Management of the Company conducted an in-depth analysis on the probable industries which would get affected and scale of the impact on the Company’s lending portfolio in terms of concentration risk.

The fair values of Equity Investments have been determined based on the market prices prevailed as at 20th March 2020, which is the last date of trading during the financial year 2019/20.


Key Ratios 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20

OperatingNet interest margin % 12.77 11.64 10.21 10.58 9.95 11.49 10.76 10.02 11.50 7.93 Cost to income % 73.96 74.58 82.05 69.49 52.68 42.71 49.26 44.23 35.47 54.52 Interest spread % 10.11 11.02 9.86 10.33 8.94 10.06 9.24 8.92 11.08 7.90

Financial PositionTotal assets to shareholders' funds No. of times 6.33 7.66 10.24 7.41 6.96 6.34 7.75 14.83 10.44 8.38Debt to equity No. of times 4.90 6.09 8.85 6.16 5.33 5.03 6.19 12.79 9.22 7.00Equity to deposits % 25.49 22.08 17.33 23.43 21.61 23.19 25.81 14.08 17.56 18.43

InvestorReturn on equity (ROE) % 6.90 9.23 10.38 15.64 34.21 33.00 17.19 1.17 27.26 (10.72)Return on average assets (ROA) % 1.20 1.31 1.15 1.83 4.78 4.99 2.42 0.11 2.20 (1.14)Equity to assets % 15.80 13.06 9.77 13.49 14.36 15.77 12.9 6.74 9.58 11.94Net assets per share Rs. 71.51 84.07 100.06 91.83 119.88 161.96 192.7 162.16 205.32 215.62Earnings per share (EPS) Rs. 4.85 7.18 9.56 11.88 36.21 46.50 30.5 2.08 50.10 (22.56)Dividend per share (DPS) Rs. 1.00 2.00 2.00 1.20 2.50 3.75 4.5 5.28 6.25 0.00Dividend cover No. of times 4.85 3.59 4.78 9.90 14.48 12.40 6.77 0.39 8.02 0.00Dividend yield % 0.87 2.15 2.23 1.68 1.54 2.08 2.72 3.69 4.06 0.00Dividend payout % 20.60 27.85 20.92 10.10 6.90 8.06 14.77 254.16 12.48 0.00Price earning ratio (PE) No. of times 23.63 12.95 9.36 6.01 4.47 3.87 5.42 68.83 3.07 (5.55)Price to book value (PBV) No. of times 1.60 1.11 0.89 0.78 1.35 1.11 0.86 0.88 0.75 0.58Market price per share Rs. 114.70 93.00 89.50 71.40 161.90 180.00 165.30 143.00 154.00 125.10Market capitalisation Rs. million 511.85 415.01 399.39 531.04 1204.13 1338.75 1229.42 1,063.56 1,145.38 930.43 Interest cover No. of times 1.16 1.22 1.10 1.15 1.51 1.49 1.36 1.05 1.07 0.96

GrowthGross income % 20.64 23.19 80.11 29.65 7.05 15.95 29.94 73.23 29.43 (30.75)Interest income % 22.27 23.90 78.37 37.00 (9.37) 30.07 34.79 71.25 32.76 (33.24)Interest expense % (2.26) 14.85 107.95 38.59 (22.72) 15.25 40.35 102.77 33.23 (26.30)Net interest income % 72.99 34.48 46.84 34.61 11.38 46.05 30.06 42.33 32.15 (42.38)Profit before tax % 289.27 58.12 70.04 101.74 168.03 11.36 2.76 (71.41) 84.28 (146.24)Profit after tax % 113.80 47.95 351.01 107.07 204.86 28.42 (34.47) (93.18) 2,311.45 (145.02)Total assets % 26.91 42.17 58.17 10.79 22.64 23.02 45.44 60.96 (10.84) (15.75)Lending portfolio % 29.16 52.09 75.47 (5.59) 35.20 24.81 65.00 57.71 (13.87) (27.46)Deposit base % 24.75 35.75 47.01 13.16 41.54 25.91 6.86 (43.44) 1.51 0.08 Shareholders'fund % 5.04 17.57 7.74 52.95 30.55 35.10 18.97 (15.84) 26.62 5.02

EmployeeProfit before tax per employee Rs.'000 202 230 170 380 1098 1286 938 210 403 (225)Profit after tax per employee Rs.'000 134 142 146 335 1099 1484 691 37 925 (504)Total assets per employee Rs.'000 12,470 12,764 15,709 19,181 25,348 32,790 33,877 42,584 39,571 40,345No.of branches 3 8 9 9 10 10 10 10 10 10No. of employees 162 225 293 264 245 233 328 420 403 333Employees per branch 54 28 33 29 25 23 33 42 40 33

* 2009 to 2011 ratios are calculated based on SLAS and from 2012 to 2020 SLFRS based

Net interest margin (NIM) - Net interest income/average interest earning assets

“Cost to income - Operating expenses excluding impairment charge/ total operating income (net of interest expenses)”

Interest spread -difference between the average interest rate earned on average interest earning assets and the average interest rate paid on average interest bearing liabilities.

ROE - Profit attributable to ordinary shareholders/average equity

TEN YEAR SUMMARY


Distribution of Shares

Holdings 31 March 2020 31 March 2019

No. of Holders Total % No. of Holders Total %

1 - 1,000 599 73,985 0.99 568 74,693 1.00

1,001 - 10,000 77 239,454 3.22 78 252,315 3.39

10,001 - 100,000 7 131,451 1.77 5 117,882 1.58

100,001 - 1,000,000 - - - - - -

Over 1,000,000 1 6,992,610 94.02 1 6,992,610 94.02

684 7,437,500 100.00 652 7,437,500 100.00

Twenty Major Shareholders

31 March 2020 31 March 2019

Name of Shareholder No. of Shares % Name of Shareholder No. of Shares

%

1 Associated Motor Finance Co. PLC 6,992,610 94.02 Associated Motor Finance Co. PLC 6,992,610 94.02

2 Mr.G.C.W. de Silva 47,800 0.64 Mr.G.C.W. de Silva 47,800 0.64

3 Miss N.R. Fonseka 22,317 0.30 Mrs.S.R.L. Marcelline 24,822 0.33

4 Mr.G.C. Goonetilleke 14,500 0.19 Miss N.R. Fonseka 19,925 0.27

5 Miss Z. Marcelline 12,411 0.17 Mr.G.C. Goonetilleke 14,500 0.19

6 Miss S. Marcelline 12,411 0.17 Assetline Leasing Co. Ltd/R.K.R. Pathiranage 10,835 0.15

7 Nanayakkara Management Services (Pvt) Ltd. 11,177 0.15 Miss M.L.R. de Fonseka 10,000 0.13

8 Assetline Leasing Co. Ltd/R.K.R. Pathiranage 10,835 0.15 Nanayakkara Management Services (Pvt) Ltd. 8,180 0.11

9 Miss M.L.R. de Fonseka 10,000 0.13 Mr.D.N.L. Wickremasinghe 8,000 0.11

10 Miss S.N. Dias 8,443 0.11 Bansei Securities Capital (Pvt) Ltd., /Dawi Investment Trust (Pvt) Ltd.

7,953 0.11

11 Mr.D.N.L. Wickremasinghe 8,000 0.11 Mr.E.B. Dassenaike 7,780 0.1

12 Mr.E.B. Dassenaike 7,780 0.10 Mrs.D.S. de Mel 7,732 0.1

13 Mrs.D.S. de Mel 7,732 0.10 Mrs.R.M. Wijeyekoon Rodrigo 7,288 0.1

14 Mrs.R.M. Wijeykoon Rodrigo 7,546 0.10 Mr.S. Ruwanpathirana & Mrs.V. Ruwanpathirana 7,000 0.09

15 Mr.S. Ruwanpathirana & Mrs.V. Ruwanpathirana 7,000 0.09 Dr.M. Coomaraswamy 7,000 0.09

16 Dr.M. Coomaraswamy 7,000 0.09 Mrs.Y. Sivagnanasundaram 6,700 0.09

17 Mrs.Y. Sivagnanasundaram 6,700 0.09 Miss S.N. Dias 6,406 0.09

18 Mrs.P.G.D. Priyadarshanie 5,196 0.07 Mr.K. Sabaratnam 6,000 0.08

19 Mr.C.P.G. Punchihewa 5,125 0.07 Mr.A.S.M. Rifki 5,230 0.07

20 Mrs.S. Thaha (deceased) 5,110 0.07 Mrs.P.G.D. Priyadarshanie 5,196 0.07

7,209,693 96.94 7,210,957 96.94

SHAREHOLDER INFORMATION


Directors’ Shareholding

No. Name of the shareholder 31 March 2020 31 March 2019

1 Dr. L. R. Karunarathne 100 1002 Mr. J. P. I. S. Dayawansa 100 1003 Mr. J. P. I. N. Dayawansa 100 1004 Mr. T. M. A Sallay 100 1005 Mr. N. M. Pieris 166 1666 Mr. Suren Goonewardene 100 -

Public Shareholding

31 March 2020 31 March 2019

No. of Shares 444.,124 444,058% 5.97 5.97

Number of Public Shareholders

31 March 2020 31 March 2019

No. of Shareholders 676 646

Float adjusted market Capitalization (Rs.) 55,546,745 68,378,888


GRI CONTENT INDEX

GRI Standard Disclosure Page No. Report commentary titleGRI 101: Foundation 2016 [GRI 101 does not include any disclosures]

General Disclosures GRI 102: General Disclosures 2016 Organisational Profile

102-1 Name of the organization 3 About us

102-2 Activities, brands, products, and services 18 Customer Capital

102-3 Location of headquarters 80 Notes to the Financial Statement - Note 01

102-4 Location of operations 18 Customer Capital

102-5 Ownership and legal form 3 About us

102-6 Markets served

102-7 Scale of the organization

102-8 Information on employees and other workers 20 Human Capital

102-9 Supply chain 10 Value Creation

"102-10 Significant changes to the organization and its supply chain"

102-11 Precautionary Principle or approach

102-12 External initiatives

102-13 Membership of associations Sri Lanka Leasing Association/ Finance House Assocaition.

Strategy102-14 Statement from senior decision-maker 6 Chairman Message

102-15 Key impacts, risks, and opportunities 14 Operating Environment

Ethics and integrity102-16 Values, principles, standards, and norms of behavior

102-17 Mechanisms for advice and concerns about ethics

Governance102-18 Governance structure 29-68 Governance

102-22 Composition of the highest governance body and its committees

102-23 Chair of the highest governance body 29-68 Governance

102-24 Nominating and selecting the highest governance body

102-25 Conflicts of interest

102-30 Effectiveness of risk management processes 63 Risk management

Stakeholder engagement102-40 List of stakeholder groups 12-13 Stake holder engagement

102-41 Collective bargaining agreements

102-42 Identifying and selecting stakeholders 12-13 Stake holder engagement

102-43 Approach to stakeholder engagement 12-13 Stake holder engagement

102-44 Key topics and concerns raised


GRI Standard Disclosure Page No. Report commentary titleReporting practice102-45 Entities included in the consolidated financial statements

80-126 Notes to the Financial Statement

102-46 Defining report content and topic Boundaries 11 Materiality

102-47 List of material topics

102-48 Restatements of information

102-49 Changes in reporting 80-126 Notes to the Financial Statement

102-50 Reporting period 80-126 Notes to the Financial Statement

102-51 Date of most recent report 80-126 Notes to the Financial Statement

102-52 Reporting cycle 80-126 Notes to the Financial Statement

102-53 Contact point for questions regarding the report 4 About the Report

102-54 Claims of reporting in accordance with the GRI Standards

4 About the Report

102-55 GRI content index 130 GRI content index

102-56 External assurance 4 About the Report

Material TopicsEconomic Performance Material

GRI 103: Management Approach 2016 103-1 Explanation of the material topic and its boundaries

11 Materiality

103-2 The management approach and its components

GRI 201: Economic Performance 2016 201-1 Direct economic value generated and distributed

201-3 Defined benefit plan obligations and other retirement plan

80-126 Notes to the Financial Statement

Indirect Economic Impacts Material


22 Social & Environment Capital

103-2 The management approach and its components 14 Operating environment

GRI 203: Indirect Economic Impacts 2016

203-1 Infrastructure investments and services supported 14 Operating environment

203-2 Significant indirect economic impacts 10 Value Creation

Procurement Practices Material


22 Social & environment capital

103-2 The management approach and its components 10 Our value creation business model

GRI 204: Procurement Practices 2016 204-1 Proportion of spending on local suppliers 10 Our value creation business model

Anti-Competitive Behavior Material




GRI Standard Disclosure Page No. Report commentary titleGRI 206: Anti-Competitive Behavior 2016

"206-1 Legal actions for anti-competitive behaviour, anti-trust, and monopoly practices"

Energy Material 22 Social and Environmental Capital



GRI 302: Energy 2016 302-1 Energy consumption within the organization

302-4 Reduction of energy consumption

Emissions Material



GRI 305: Emissions 2016 305-1 Direct (Scope 1) GHG emissions

305-2 Energy indirect (Scope 2) GHG emissions

305-3 Other indirect (Scope 3) GHG emissions

305-5 Reduction of GHG emissions

Effluents and Waste Material 22 Social and Environmental Capital



306-2 Waste by type and disposal method

Environmental Compliance Material 22 Social and Environmental Capital



GRI 307: Environmental Compliance 2016

307-1 Non-compliance with environmental laws and regulations

Employment Material 20 Human Capital



GRI 401: Employment 2016

401-1 New employee hires and employee turnover

401-2 Benefits provided to full-time employees that are not provided to temporary or part-time employees

401-3 Parental leave

Training and Education Material 20 Human Capital



GRI 404: Training and Education 2016 404-1 Average hours of training per year per employee

404-2 Programs for upgrading employee skills and transition assistance programs

GRI CONTENT INDEX


GRI Standard Disclosure Page No. Report commentary title404-3 Percentage of employees receiving regular performance and career development reviews

Diversity and Equal Opportunity Material 20 Human Capital



GRI 405: Diversity and Equal Opportunity 2016

405-1 Diversity of governance bodies and employees

Non-Discrimination Material 20 Human Capital



GRI 406: Non-Discrimination 2016 406-1 Incidents of discrimination and corrective actions taken

Local Communities Material 22 Social and Environmental Capital



GRI 413: Local Communities 2016 413-1 Operations with local community engagement, impact assessments, and development programs

Marketing and Labelling Material 18 Customer Capital



GRI 417: Marketing and Labelling 2016 417-1 Requirements for product and service information and labeling

417-2 Incidents of non-compliance concerning product and service information and labeling

417-3 Incidents of non-compliance concerning marketing communications

Customer Privacy Material 18 Customer Capital



GRI 418: Customer Privacy 2016 418-1 Substantiated complaints concerning breaches of customer privacy and losses of customer data"

Socioeconomic Compliance Material 18 Customer Capital



GRI 419: Socioeconomic Compliance 2016

419-1 Non-compliance with laws and regulations in the social and economic area


AAccounting policiesThe specific principles, bases, conventions, rules and practices adopted by an entity in preparing and presenting financial statements.

Accrual basisRecognising the effects of transactions and other events when they occur without waiting for receipt or payment of cash or its equivalent.

Allowance for impairmentA provision held on the statement of financial position as a result of the raising of a charge against profit for the incurred loss.

AmortisationThe systematic allocation of the depreciable amount of an intangible asset over its useful life.

Amortised costThe amount at which the financial asset or financial liability is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any loss allowance.

Asset and Liability Committee (ALCO)A Risk-Management Committee in a bank that generally comprises the senior management levels of the institution. The ALCO’s primary goal is to evaluate, monitor and approve practices relating to risk due to imbalances in the capital structure. Among the factors considered are liquidity risk, interest rate risk, operational risk and external events that may affect the Bank’s forecast and strategic balance sheet allocations.

Average weighted deposit rate (AWDR) AWDR is calculated by the Central Bank monthly based on the weighted average of all outstanding interest bearing deposits of commercial banks and the corresponding interest rates.

Average weighted prime lending rate (AWPLR)AWPLR is calculated by the Central Bank weekly based on commercial bank’s lending rates offered to their prime customers during the week.

CCapital adequacy ratio The relationship between capital and risk weighted assets as prescribed by the Central Bank of Sri Lanka.

Cash equivalentsShort-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

Cash FlowsCash equivalents are short-term, highly liquid investment that are readily convertible to know amount of cash and which are subject to an insignificant risk of changes in value.

Collective impairmentImpairment is measured on a collective basis for homogeneous groups of lending facilities that are not considered as individually significant and to cover losses that have been incurred but has not yet been identified at the reporting date.

Commercial paper (CP)An unsecured, debt instrument issued by a company, to finance short-term funding requirements. The debt is usually issued

at a discount, reflecting prevailing market interest rate.

Commitments Credit facilities approved but not yet utilised by the clients as at the reporting date.

ContingenciesA condition or situation existing at reporting date where the ultimate outcome of which, gain or loss, will be confirmed only on the occurrence or non-occurrence of one or more uncertain future events.

Cost method A method of accounting where by the investment is recorded at cost. The income statement reflects income from the investment only to the extent that the investor receives distributions from accumulated net profiles of the investee arising subsequent to the date of acquisition.

Corporate governanceThe process by which corporate entities are governed. It is concerned with the way in which power is exercised over the management and direction of entity, the supervision of executive actions and accountability to owners and others.

Corporate SustainabilityBusiness approach that creates long-term consumer and employee value by creating a ‘green’ strategy aimed toward the natural environment and taking into consideration every dimension of how a business operates in the social, cultural and economic environment.

Cost to income ratioOperating expenses excluding impairment charge/ gold loan auction losses as a percentage of total operating income (net of interest expenses).

GLOSSARY


Credit rating An evaluation of a corporate’s ability to repay its obligations or the likelihood of not defaulting, carried out by an independent rating agency.

Credit riskRisk of financial loss, if a customer or counterparty fails to meet an obligation under a contract.

Credit risk mitigationA technique to reduce the credit risk associated with an exposure by application of credit risk mitigants such as collateral, guarantee and credit protection.

Customer DepositsMoney deposited by account holders. Such funds are recorded as liabilities.

DDeferred taxationSum set aside for income tax in the financial statements that may become payable/receivable in a financial year other than the current financial year.

DepreciationThe systematic allocation of the depreciable amount of an asset over its useful life.

DerecognitionRemoval of a previously recognised financial asset or liability from an entity’s statement of financial position.

Discount rateA rate used to place a current value on future cash flows. It is needed to reflect the fact that money has a time value.

Dividend coverProfit attributable to ordinary shareholders as a percentage of gross dividends; indicates number of times dividend is covered by current year’s distributable profits.

Dividend pay-out ratio Dividend by profit after tax; indicates the percentage of earnings paid out to shareholders as dividends.

Dividend per share (DPS) Value of the total dividend paid out and proposed to ordinary shareholders divided by the number of ordinary shares in issue; indicates the proportion of current year’s dividend attributable to an ordinary share in issue.

Dividend yieldDividend expressed as a percentage of market value of a share. In absence of any capital gains, this shows the return on investing on a share relative to its market price.

EEarnings per share (EPS)Profit attributable to ordinary shareholders divided by the number of ordinary shares in issue; indicates the proportion of current year’s earnings attributable to an ordinary share in issue.

Economic value added (EVA)A measure of performance considering cost of total invested equity.

Effective interest rate (EIR)Rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or liability.

Effective tax rateProvision for taxation excluding deferred tax expressed as a percentage of the profit before taxation.

Employee retention ratio Represents the number of employees retained out of the employees attrition during the year as a percentage of average number of employees for the year end.

Equity method This is a method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition changes in the investor’s share of net assets of the investee. The profit or loss and other comprehensive income of the investor include the investor’s share of the profit or loss and other comprehensive income of the investee.

Events after the reporting periodTransactions that are not recognised as assets or liabilities in the statement of financial position, but which give rise to the contingencies and commitments.

ExposureA claim, contingent claim or position which carries a risk of financial loss.

FFair valueThe price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.


Fair value through other comprehensive income Financial assets are classified and measured at fair value through other comprehensive income if they are held in a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets.

Fair value through profit or lossAny financial assets that are not held in one of the two business models mentioned (Amortized cost or Fair value through other comprehensive income) are measured at fair value through profit or loss.

Finance lease A contract whereby a lessor conveys to the lessee the right to use an asset for rent over an agreed period of time which is sufficient to amortise the capital outlay of the lessor. The lessor retains ownership of the asset but transfers substantially all risks and rewards of ownership to the lessee.

Financial assetsAny asset that is cash, equity instrument of another entity, a contractual right to receive cash or contractual right to receive another financial asset from another entity.

Financial guarantee contractA financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument.

Financial instrument A financial instrument is any contract that gives rise to both a financial asset in one entity and a financial liability or equity instrument in another entity.

Financial liabilitiesA contractual obligation to deliver cash or other financial asset to another entity or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity.

GGlobal reporting initiative (GRI)GRI is a leading organisation in the sustainability filed. GRI promotes the use of sustainability reporting as a way for organisation to become more sustainable and contribute to sustainable development.

Going ConcernThe financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations.

Gross dividendThe proportion of profit distributed to shareholders including the tax withheld.

GuaranteesAn assurance made by a third party (Guarantor) who is not a party to contract between two others, that the guarantor will be liable if the Guarantee fails to fulfil the contractual obligation.

HHeld for tradingA financial asset or financial liability that acquired or incurred principally for the purpose of selling or repurchasing it in the near term.

Hire purchaseA contract between hirer and financier where the hirer takes on hire a particular article from the financier, with the option to purchase the article at the conclusion of the agreed rental payments.

IImpaired loansImpaired loans are loans where the company does not expect to collect all the contractual cash flows or expects to collect them later than they are contractually due.

Impairment This occurs when the recoverable amount of an asset is less than its carrying amount.

Impairment charge/(reversal) An increase/(decrease) of the difference between the carrying value of an asset and the sum of discounted future cash flows generating from the same asset compared to the previous reporting date.

Incremental Borrowing RateThe rate of interest that a lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.

Individual impairment Impairment is measured on an individual basis for non-homogeneous groups of lending facilities that are considered as individually significant.

Individual significant loans Exposures which are above a certain threshold decided by the management which should be assessed for objective evidence, measurement and recognition of impairment on an individual basis.

GLOSSARY


Intangible assetAn identifiable non-monetary asset without physical substance.

Integrated reportingA methodology of reporting an organisation’s strategy, governance, financial performance and prospects in relation to the creation of value over the short, medium and long-term in its economic, social and environmental context.

Interest coverEarnings before interest and taxes divided by interest cost. This indicates the number of times interest expenses is covered by earnings before interest and tax; ability to cover interest expenses.

Interest rate risk The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in the market interest rates.

Interest spread Represents the difference between the average interest rate earned on average interest earning assets and the average interest rate paid on average interest bearing liabilities.

KKey management personnel (KMP)People those who are having authority and responsibility for planning, directing and controlling the activities of the entity.

LLending portfolioTotal value of lending products net of unearned income, amounts received in advance and allowance for impairment.

Liquid assetsAssets that are held in cash or in a form that can be converted to cash readily.

Liquidity risk The risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities.

Loss given default (LGD)The percentage of an exposure that a lender expects to lose in the event of obligor default.

Loan to value ratio (LTV) The LTV ratio is a mathematical calculation which expresses the amount of a first mortgage lien as a percentage of the total appraised value of real property. The LTV ratio is used in determining the appropriate level of risk for the loan and therefore the correct price of the loan to the borrower.

M Market capitalisation Number of ordinary shares in issue multiplied by the market value of a share as at a date.

MaterialityThe relative significance of a transaction or an event, the omission or misstatement of which could influence the economic decisions of users of financial statement.

N Net assets value per share (NAV)Shareholders’ funds excluding preference shares, if any, divided by the number of ordinary shares in issue.

Net interest income The difference between interest income earned from interest earning assets and

interest expenses incurred on interest-bearing liabilities.

Net interest margin (NIM)Net interest income expressed as a percentage of average interest earning assets.

Non-performing loans/advances (NPL/NPA)The aggregate value of the advances portfolio that has been delinquent for a period of more than six months.

NPL ratio Total non-performing loans as a percentage of the total lending portfolio.

OOff-balance sheet transactionsTransactions that are not recognised as assets or liabilities in the statement of financial position, which give rise to the commitment and contingencies in future.

Operational RiskThis refers to the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.

PParent A parent is an entity which has one or more subsidiaries.

Price earnings ratio (P/E ratio)Market price of a share divided by earnings per share; reflects number of years that would be taken to recoup shareholders’ capital outlay in the form of earnings.


GLOSSARY

Probability of default (PD)An internal estimate for each borrower grade of the likelihood that an obligor will default on an obligation.

RRelated party Parties have the ability to control or exert a significant influence over the company’s financial and operating decisions.

Return on assets (ROA) Net profit for the year expressed as a percentage of average total assets; indicates overall effectiveness in generating profits with available assets.

Return on equity (ROE) Net profit for the year, less dividends on preference shares, if any, expressed as a percentage of average shareholders’ funds/equity.

Repurchase agreement (Repo)Contract to sell and subsequently repurchase government securities at a specified date and price.

Right-of-Use Asset An asset that represents a lessee’s right to use an underlying asset for the lease term.

Risk-weighted assetsOn balance sheet assets and the credit equivalent of off balance sheet assets multiplied by the relevant risk weighting factors.

S Shareholders’ fundsTotal of issued and fully paid share capital and revenue reserves.

Staff turnover ratio Represents the number of employees attrition during the year as a percentage of average number of employees for the year end.

Statutory reserve fundA capital reserve created as per the provisions of Finance Companies (Capital Funds) Direction No. 1 of 2003.

SubsidiaryAn enterprise that is controlled by another enterprise, which is known as the parent.

TTier I capital (Core capital)Representing permanent shareholders’ equity and reserves created or increased by appropriations of retained earnings or other surpluses.

Tier II capital (Supplementary capital)Representing revaluation reserves, general provisions and debt instruments such as subordinated term debts and other hybrid capital instruments which combine certain characteristics of equity and debt.

UUseful lifeThe period over which an asset is expected to be available for use by an entity or the number of production or similar units expected to be obtained from the asset by an entity.

V Value addedWealth created by providing banking and other services less the cost of providing such services. The value added is allocated among the employees, the providers of capital, to government by

way of taxes and retained for expansion and growth.

Y Yield to maturity Discount rate at which the present value of future cash flows would equals the security’s current price.


Notice is hereby given that the Sixty Ninth Annual General Meeting of Arpico Finance Company PLC, will be held on Monday, 28th September 2020 at 9.30 a.m., at the Sinhalese Sports Club, Main Air conditioned Pavilion, 35, Maitland Place, Colombo 07.

The business to be brought before the Meeting will be:-

1. To receive and consider the Annual Report and the Financial Statements for the Financial year ended 31 March 2020, with the Report of the Auditors thereon.

2. To re-elect a Director Mr.Nilanka Mevan Pieris retires under Articles numbered 130 and 131

3. To re-appoint Auditors to hold office until the next Annual General Meeting and to fix their remuneration.

4. To authorize the Directors to determine and make donations.

5. To consider any other business of which due notice has been given in terms of the relevant laws and regulations.

Notes :1. Health and Safety

The meeting will be held in compliance with the Health and Safety guidelines issued by the Ministry of Health and Indigenous Medical Services (Ministry of Health) and standards imposed by the venue to ensure the safety and well-being of all Meeting attendees. Please note that in compliance with such guidelines and standards:

a. All attendees will have to undergo a temperature check and sign a declaration form including contact details, historical and current health status, recent oversees travel history and exposure.

b. Persons who record temperatures in excess of norms prescribed by the Ministry of Health will not be permitted into the Meeting.

c. Persons with respiratory infections of any type including cough, cold, sore throat or exhibiting any other similar symptoms will not be permitted into the Meeting.

d. Physical contact such as shaking hands will not be permitted and attendees will not be permitted to linger or remain after the conclusion of the Meeting.

e. Any person not adhering to the health and safety guidelines and standards, including wearing a mask and maintaining the minimum social distance required, will be requested, to leave the Meeting.

f. Food and beverage offerings are not guaranteed and may be limited in keeping with health and safety standards and regulations.

g. As social distancing measures will be implemented, once the hall capacity is reached as per the relevant Government guidelines, Members may not be permitted to enter.

2. Voting by Proxy

Given that the health and well-being of our Members is paramount to us, Members are encouraged to vote by Proxy through the appointment of a member of the Board of Directors to represent them and vote on their behalf. Members are advised to complete the Form of Proxy and their voting preferences on the specified resolutions to be taken up at the Meeting and submit the same to the Company in accordance with the instructions given on the reverse of the Form of Proxy.

3. Attending the Meeting

Should a Member wish to attend the Meeting in person or through a proxy (who is not a Director of the Company), such Member or their Proxy is request to:

a. Complete and return the registration Form

b. Arrive early in order to register, carry out mandatory health checks, and fill in the required forms and avoid crowding;

c. Wear a suitable face mask when attending the Meeting; and

d. Co-operate with the health and Safety Measures, implemented by the Company, details of which are outlined in section 1 – Health and Safety Measures, to be implemented at the Meeting as they are done in the best interests of all Meeting attendees.

NOTICE OF MEETING


NOTICE OF MEETING

Members and/or their Proxies are requested not to attend the Meeting if they are feeling unwell, exhibiting any signs or symptoms of COVID -19 or have been placed on quarantine or stay-at-home notice.

In the event the Company is required to take any further action in relation to the Meeting, in the best interests of the Meeting attendees due to the COVID -19 pandemic; and/or any communications, guidelines, directives or orders issued by the Government of Sri Lanka, Notice of such action shall be communicated through News paper notice.

By Order of the Board of Directors

ARPICO FINANCE CO.PLC

Sgd.

Alliance Management Services (Private) LimitedSecretaries

3rd September 2020

Note: (i) A member is entitled to appoint a proxy to attend and vote in his/her place.

(ii) A proxy need not be a member of the Company.

(iii) A member wishing to vote by proxy at the meeting may use the Form of Proxy enclosed and interpolate the words “right to speak”.

(iv) To be valid, the completed Form of Proxy must be lodged at Alliance Management Services (Pvt) Ltd No.84, Ward Place, Colombo 7, not less than 48 hours before the meeting.

(v) Shareholders/Proxy holders are requested when attending the Annual General Meeting to bring with them their National Identity Cards or any other form of valid identification.

(vi) Shareholders appointing proxies (other than Directors) to attend the Meeting are requested to indicate the number of the National Identity Card of the Proxy holders on the Form of Proxy. Only registered proxy holders will be permitted to attend the Annual General Meeting.

Note: • A Member wishing to vote by Proxy at the Meeting may use the Form of Proxy enclosed herein.

• Due to the COVID-19 pandemic and prevailing health and safety guidelines issued by the Government of Sri Lanka, Members are encouraged to vote by Proxy through the appointment of a member of the Board of Directors to vote on their behalf and to include their voting preferences on the resolutions to be taken up at the Meeting in the Form of Proxy.

• If a poll is demanded, a vote can be taken on a show of hands or by poll. Each share is entitled to one vote. Votes can be cast in person, by Proxy or corporate representatives. In the event an individual Member and his/her Proxy holder are both present at the Meeting, only the Member’s vote is counted. If Proxy holder’s appointor has indicated the manner of voting, only the appointor’s indication of the manner of vote will be used.


PRE-REGISTRATION FORM

ANNUAL GENERAL MEETING TO BE HELD ON MONDAY, 28th SEPTEMBER 2020 AT 9.30 A.M

Details of Shareholder

Name : ............................................................................................................................................................

NIC / Passport No. : ............................................................................................................................................................ (in the case of individual shareholder)

Company Registration No. : ............................................................................................................................................................ (in the case of corporate shareholder)

Address : ............................................................................................................................................................

............................................................................................................................................................

............................................................................................................................................................

Contact Numbers : ............................................................................................................................................................

............................................................................................................................................................

Email Address : ............................................................................................................................................................ (Please provide email address of corporate representative in the case of corporate shareholder)

*I / We will be attending the Annual General Meeting (“AGM”)

Signature : ............................................................................................................................................................

Company stamp (in the case of corporate shareholder) : ............................................................................................................................................................

Registration Form should reach the Company Secretaries

Alliance Management Services (Pvt) Ltd.

84, Ward Place, Colombo 7

Fax 0112697205

Email: [email protected]

On or before 25th September 2020 4.30 p.m.

Personal Data Privacy By submitting this pre-registration form, the member accepts and agrees to the personal data privacy terms set out in the Notice of AGM and Notice dated 03rd September 2020.


I/We ................................................................................................................................................................................................. (in block letters)

of .................................................................................................................................................................................................................................

being a member/members of the above-named Company hereby appoint Dr. Lokuvithana Rohan Karunaratna or failing him, Mr.

John Paulu Irugalbandarage Shanil Dayawansa, or failing him, John Paulu Irugalbandarage Nalatha Dayawansa, or failing him, Tuan

Mohamed Anif Sallay, or failing him,. Nilanka Mevan Pieris, or failing him, Mr. Peter Suren Gunawardena, or falling him

................................................................................................................................................................................................................................ of

.............................................................................................................................. NIC No. .......................................................................................

as my/our proxy to represent me/us and to *vote for me/us on my/our behalf at the Sixty Ninth Annual General Meeting of the

Company to be held on 28th September 2020 and at any adjournment thereof and at every poll which may be taken in consequence

thereof.

For Against

1. Resolution No.1 The Ordinary Resolution No.1 set out in the Notice convening the aforesaid Meeting.




Signed this .......................................... day of ..........................................2020.

……………………..................................…………………… ……………………........……………………

Shareholder N.I.C. No./Co. Reg. No./P.P. No. Signature

Instructions as to completion of Form of Proxy given overleaf

FORM OF PROXY


FORM OF PROXY

INSTRUCTIONS AS TO COMPLETION OF THE FORM OF PROXY

1. A Proxy holder need not be a member of the Company.

2. The Full Name and the Address of the Proxy holder and of the Shareholder appointing the Proxy should be entered legibly in the Form of Proxy. Please perfect the Form of Proxy, by signing in the space provided and filling in the date.

3. To be valid, the completed Form of Proxy should be deposited at the Office of the Company Secretaries, No.84, Ward Place, Colombo 7, 48 hours before the time appointed for the holding of the meeting.

4. In the case of a Company or a Corporate Body, the Form of Proxy should be executed under its Common Seal which should be affixed and attested in the manner prescribed by its Articles of Association.

5. If the Form of Proxy has been signed by an Attorney, the relative Power of Attorney should also accompany the completed Form of Proxy for registration, if such Power of Attorney has not already been registered with the Company.

6. If there is any doubt as to how the vote is to be exercised by reason of the manner in which the Form of Proxy has been completed, the Proxy holder will vote as thought fit.

Note : If you wish your proxy to speak and vote at the Meeting you should interpolate the words “to speak and” in the space indicated with an asterisk and initial such interpolation.

Designed & produced by

Printed by Printage (Pvt) Ltd

Name of the CompanyArpico Finance Company PLC

Legal FormPublic limited liability company incorporated under the Companies Ordinance No. 51 of 1938. The Company was re-registered under the Companies Act No. 07 of 2007.

A licensed finance company under the Finance Business Act No 42 of 2011.

A registered Finance Leasing Establishment in terms of Finance Leasing Act No 56 of 2000.

Stock Exchange ListingThe ordinary shares of the Company were quoted on the Main Board of the Colombo Stock Exchange (CSE) in 1955.

Year of Incorporation1951

Company Re-Registration NumberPQ 92

Registered OfficeNo. 146, Havelock Road, Colombo 05.

Websitewww.arpicofinance.com

[email protected]

Telephone+94 115 553 663, +94 112 598 490

Fax+94 112 500 259

Financial Year End31st March

Board of DirectorsDr. L. Rohan Karunaratne – Chairman

J.P.I. Shanil Dayawansa – Managing Director

J.P.I. Nalatha Dayawansa – Executive Director

T.M.A. Sallay – Executive Director

Nilanka M. Pieris – Independent Non-Executive Director

Suren Goonewardene – Independent Non-Executive Director

SecretariesAlliance Management Services (Pvt) Ltd.,

No: 84, Ward Place,

Colombo 7.

External AuditorsM/s SJMS Associates,

Chartered Accountants,

No. 11, Castle Lane,

Colombo 04.

BankersBank of Ceylon

Commercial Bank PLC

Deutsche Bank Union Bank PLC

Hatton National Bank PLC

Nation Trust Bank

NDB Bank PLC

Pan Asia Bank

People’s Bank

Sampath Bank PLC

Seylan Bank PLC

CORPORATE INFORMATION

www.arpicofinance.com

Arp

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LC | A

nnual Rep

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Arpico Finance Company PLC | Annual Report 2019/20

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Transcript of Arpico Finance Company PLC | Annual Report 2019/20