Swarnamahal Financial Services PLC - Annual Report 2016/17 i
Creating Value, Steering Progress Annual Report 2016/17 Content
Financial Highlights 3 Chairman’s Message 4 CEO’s Message 6 Board of Directors 8 Senior Management Team 9 Risk Management 11 Corporate Governance Report 18 Annual Report of the Board of Directors on the Affairs of the Company 25 Directors’ Statement on Internal Control 28 Statement of Directors’ Responsibilities in Relation to Financial Statements 29 Statement of Responsibility of the Chief Executive Officer and General Manager - Finance 30 Board Audit Committee Report 31 Board Integrated Risk Management Committee Report 33 Board Remuneration Committee Report 34 Board Related Party Transactions Review Committee Report 35
Financial Reports Independent Auditors’ Report 37 Statement of Profit or Loss and Other Comprehensive Income 38 Statement of Financial Position 39 Statement of Changes in Equity 40 Statement of Cash Flows 41 Notes to the Financial Statements 42 Ten Years at a Glance 83 Share Information 85 Glossary of Financial Terms 87 Our Network 90 Notice of Meeting 91 Form of Proxy 95 Corporate Information Inner Back Cover Swarnamahal Financial Services PLC - Annual Report 2016/17 1
Creating Value, Steering Progress
We take pride in understanding and prioritizing our people’s pulse and financial requirements. In focusing on this aspect of our business, we have retained our standing as one of the nation’s foremost innovative and trusted financial service providers. The year under review has witnessed the company’s stay on course in its bid to reach even greater heights in the provision of financial services. Your company remains dedicated towards creating long-term value for all discerning stakeholders and is motivated towards steering the Company’s progress further than it has ever ventured toward before. Firmly grounded in our customer-centric, service-oriented stance, a clearly-defined course, ethical framework and the desire to constantly and consistently anticipate and improve will ascertain a bright future for the company in the years to come. 2 Swarnamahal Financial Services PLC - Annual Report 2016/17 About Us
Swarnamahal Financial Services PLC is a Public Limited Liability Company incorporated in Sri Lanka on14th January 2004, under the Companies Act No.17 of 1982, and re-registered on 16th September 2008 under the Companies Act No.7 of 2007. The Company is licensed by the Monetary Board of the Central Bank of Sri Lanka under the Finance Business Act No.42 of 2011 and listed on the Colombo Stock Exchange. Vision
To be one of the most trusted, innovative financial services provider in the country, understanding the pulse and financial needs of the people. Mission
To create opportunities for everyone to uplift their living standards while ensuring superior long term value to our stakeholders. Values
Customer Focus Ethics We provide personalized financial solutions for our Our success is with ethics and not with our rights. customers and always work towards to exceed their expectations. Integrity We believe in fair dealings, honest and complete Service Excellence communication with our clients and aspire towards We are committed to achieve the service perfection continuous improvement in our organization. with the highest standard of service quality. Flexibility Continuous improvements and anticipation We are really persistent of our goals and flexible in our We are always doing the best today to create a better methods and approach. tomorrow for all our stakeholders. Teamwork Direction We nurture individual talents to strengthen our All our efforts and courage are clearly in line with our teamwork to thrive on competition and challenges. direction. Swarnamahal Financial Services PLC - Annual Report 2016/17 3
Financial Highlights
2016/17 2015/16 Rs. Rs.
Financial Performance for the year (Rs. Mn) Gross Income 773 631 Net Profit before Tax (PBT) 55 29 Income Tax Expense (4) 13 Net Profit after Tax (PAT) 59 16
Financial Position at the year end (Rs. Mn) Total Assets 2,874 3,023 Pawning Advances 1,284 1,519 Other Loans and Advances 776 718 Deposits 3,772 4,015 Shareholders’ Funds (995) (1,052)
Information for Ordinary Share (Rs.) Earnings 0.12 0.03 Net Asset Value (1.99) (2.10)
Key Indicators Return on Average Shareholders’ Funds (%) 5.7 1.2 Return on Average Assets (%) 2.0 0.5 Cost to Income Ratio (%) 72.3 101
Capital Adequacy Ratios Core Capital Ratio - Tier I (%) (77.3) (85.6) Total Risk weighted Capital Ratio - Tier I & Tier II (%) (77.3) (85.6)
Statutory Ratios Shareholders’ Funds to Deposits (%) (26.4) (26.2) Liquid Assets Ratio (%) 13.7 13.9 4 Swarnamahal Financial Services PLC - Annual Report 2016/17
Chairman’s Message
A series of tactical moves targeting predominant income sources ensured that all key income generators, made positive contributions to the bottom line
Dear Shareholders, Sri Lankan Economic Context It gives me a great pleasure to welcome all of you, our Sri Lanka too began to feel the effects of the global economic valued shareholders to the 12th Annual General Meeting of downturn, albeit to a much lesser extent than most developing Swarnamahal Financial Services PLC and to present you the nations. Sri Lanka’s Economic Downturn continued to widen, Audited Financial Statements and the Annual Report for the fueled largely by the heightened demand for imports. As per Financial Year 2016/17. this dictum, the Goverment of Sri Lanka together with the Central Bank of Sri Lanka (CBSL) implemented comprehensive Global Economic Outlook macro-economic policy reforms, with a view to mitigating the The year 2016 was a challenging on both globally and locally. effects of unrestrained growth. The global economy has been impacted due to the many uncertainties during the year under review. Global growth is Most significant among these changes was the aggressive three projected to remain modest at 2.7% in 2017, picking up from tier strategy that would encompass fiscal policy, monetary 2.3% in 2016. policy and exchange rate policies. These plans were put into action immediately, intending to decelerate credit growth, The British government published a white paper on 2nd of regulate import demand and manage the widening trade gap. February 2017, which formally lays out the strategy for UK’s exit from the European Union. The Federal Reserve ruled Sri Lankan economy recorded a growth at a slower rate of 4.4% unanimously to keep its benchmark interest rate in a range of in 2016 when compared with 4.8% in the previous year, the 0.5% to 0.75%.The Federal Reserve had raised its benchmark unfavourable weather conditions which prevailed in the country interest rate by 0.25% in December 2016, only the second affected the Agriculture sector and the slow paced global increase in a decade. economic growth affected the growth in exports. The Services sector constituted 57% of Sri Lankan GDP recording a growth of 4% compared to last Year. Whilst the financial services sector grew by 12% largely contributed to the expansion in Services Sector to the Sri Lankan GDP. Swarnamahal Financial Services PLC - Annual Report 2016/17 5
23% Revenue Growth
The most significant is the growth in credit to private sector The Road Ahead which remained high at 21.9% by end 2016 and has fairly Having performed commendably well, amidst testing eased from the peak of 28.5% observed in July 2016 whilst circumstances in 2016/17, I am confident that SFS is now ready CCPI inflation increased to a six-month high of 5.5% on year- to capture the promise of the future. Financially we have set on-year basis amid the base year revision and NCPI inflation is ambitious goals, including the recapitalisation of the Company. accelerated to a two year high of 6.5% on year-on-year basis in This will result in enhanced brand equity of the Company. January 2017. Appreciations Rising to the Challenge I wish to express my sincerest appreciation to the Board of In the face of rising interest rates, as NIM’s continued to decline, Directors for the support and wise counsel extended to me we made sure it did not impinge on our profitability. A series of at all times. I take this opportunity to congratulate our CEO, tactical moves targeting predominant income sources ensured the Senior Management and the entire staff of SFS for their that all key income generators, made positive contributions exceptional fortitude in delivering success to our shareholders, to the bottom line. While Gold Loans being our core income notwithstanding tenuous market circumstances. I am inspired generator, leasing, hire purchase and term loan income also by your determination to work towards a common goal and continued to be noteworthy contributors to the equation. We thank you for your unquestionable loyalty. I rely on your were thus able to generate a profit after tax of Rs.58.7 Mn for the continued commitment in fulfilling the future aspirations of all Financial Year 2016/17 compared to the profit after tax of our stakeholders. Rs.16.1 Mn reported during the previous Financial Year 2015/16.
We prudently focused on recoveries at this juncture, which not only ensured a consistently healthy liquidity position J.H. Edirisinghe throughout the year but helped to maintain the NPL ratio within Chairman accepted industry limits. 23rd June 2017 6 Swarnamahal Financial Services PLC - Annual Report 2016/17
CEO’s Message
A combination of prudent financial management and tactical growth strategies which were implemented ensured the significant growth of the profitability during the financial year compared with the previous year.
I am happy to announce that your company has recorded a Performance Review significant performance during the financial year 2016/17. During the year under review, your company continued to The year under review reported significant number of policy surge ahead with growth trajectory in revenue and profits. changes that undoubtedly resulted in the slow down in growth Your Company recorded a net operating income of Rs.335.6 Mn of the entire financial services industry. compared to Rs.200.5 Mn, and a net profit after tax was Rs.58.7 Mn compared to Rs.16.1mn reported in the previous Regardless of these challenges, your Company resolutely year, witnessed the stakeholders’ continuous trust and continued to focus on strengthening its core business platform confidence placed on us. during Financial Year 2016/17. I believe it is our readiness to adapt to changes that have steered us towards success, We were acutely aware that SFS’s primary loan products would despite the uncertain market environment. A combination of be severely affected by the escalating interest rate environment. prudent financial management and tactical growth strategies As the Company’s lending portfolio took the initial blow, we which were implemented ensured the significant growth of realized that swift changes were imperative to offset the initial the profitability during the financial year compared with the setback and regain a measure of consistency. Our foresight led previous year. us to realign our lending strategies.
We worked with a renewed purpose, and initiated a It gives me a deep sense of accomplishment to witness that our comprehensive GAP analysis, earlier in the year. Thus we were timely initiatives were able to stem the negative influences and able to establish a keen sense of understanding our strengths deliver consistent performance, as intended, throughout the and weaknesses and tactically reposition ourselves during the year. Furthermore, it is indeed heartening to note, that despite year 2016/17. Under these circumstances, I am indeed, proud the tactical shift in the lending business, we have continued that we were able to overcome each hurdle with practical to maintain a healthy NPL ratio, well within the industry solutions driven by foresight and caution. benchmark. Our concentrated efforts were geared to establish great customer relationships in preparation of the future plans. Swarnamahal Financial Services PLC - Annual Report 2016/17 7
265% Profit Growth
Appreciations I take the opportunity to extend my heartfelt gratitude to the management and staff of SFS for their commitment and dedication towards achieving a common goal. I wish to express my sincere thanks to the Chairman and the Board of Directors of SFS for their unfailing support and guidance at all times. My heartfelt gratitude also goes to the shareholders of SFS. I am immensely grateful for your continued support and confidence.
My sincere appreciation goes out to the Governor and officials of the Central Bank of Sri Lanka for their guidance and support throughout the year and to our external auditors for their valuable input. Finally, I wish to thank the customers and all other stakeholders of SFS for their continued patronage. I rely on your continued support to explore the promising possibilities in the year ahead.
George Samantha Chief Executive Officer 23rd June 2017 8 Swarnamahal Financial Services PLC - Annual Report 2016/17
Board of Directors
1. Mr. J. H. Edirisinghe 2. Mrs. A. D. Edirisinghe Chairman Executive Director
The Deputy Chairman of EAP Group of Director of EAP Group of Companies. She Companies. He counts over 32 years of counts over 27 years of experience in the fields extensive experience in the fields of Finance, of Management and Finance. Gold, Jewellery, Electronic Media and Management.
3. Mr. N. P. Edirisinghe 4. Mr. A. S. Edirisinghe Executive Director Executive Director
Director of EAP Group of Companies, he Director of EAP Group of Companies. He has an expert knowledge in Gold and other is a Finalist of the Chartered Institute of precious metals and stones and counts over Management Accountants (UK) and a Member 27 years of extensive experience in the fields of the Film Association. He counts over 27 of Gold, Information Technology, Finance and years of experience in the fields of Film Management. Industry, Gold, Information Technology and Finance.
5. Mr. S. M. Ganegoda Non-Executive Director
He is the Chief Executive Officer of ETI Finance Limited and was the Director/Chief Executive Officer of the Company from January 2009 to September 2013. He counts over 17 years of experience in the fields of Finance and Audit and holds the Business Management Degree from the University of Kelaniya. He is an Associate Member of the Institute of Chartered Accountants of Sri Lanka and Institute of Certified Management Accountants of Sri Lanka. Swarnamahal Financial Services PLC - Annual Report 2016/17 9
Senior Management Team
1. Mr. George Samantha 2. Mr. Wishva Chief Executive Officer Wickramaarachchi General Manager- Finance He counts over 13 years of experience in the fields of Banking and Finance and holds He counts over 15 years of experience in the B.Sc Marketing Management (Special) finance and management in diversified Hons. Degree, from the University of Sri fields ranging from mass communication, Jayewardenepura. He is a Member of the manufacturing, BPO to banking and Chartered Institute of Marketing (MCIM) and finance and holds Fellow membership of Sri Lanka Institute of Marketing (MSLIM). The Chartered Institute of Management Accountants (UK) with over 10 years of post-qualifying experience. He holds a BSc (Economics and Management) degree from University of London (London school of Economics). Post Graduate Diploma in Business and Finance Management from The Institute of Chartered Accountants (Sri Lanka) with a merit award and a MBA from Harriot Watt University (Edinburgh Business School) in Scotland. He has also completed a Certificate in Taxation conducted by Association of Accounting Technicians of Sri Lanka.
3. Mr. R. M. G. Ratnayake 4. Mrs. Subhani Edirisinghe Senior Manager - Finance Senior Manager - Deposit Mobilization/City Office Branch He counts over 13 years of experience in the non-banking financial sector and holds She counts over 16 years of experience in the Degree of B.Sc. Accountancy & Financial the field of deposit mobilization. She holds Management (Special), from the University of the B.Sc Business Administration (Marketing Sri Jayewardenepura. He holds a Diploma in Special) Degree from the University of Sri Treasury Management from the Institute of Jayewardenepura. Bankers of Sri Lanka. 10 Swarnamahal Financial Services PLC - Annual Report 2016/17
Senior Management Team Contd.
5. Mr. Thanuja Gunawardena 6. Mr. Sisira Munasinghe Senior Manager - IT Head Of Credit
He counts over 11 years of experience in the He counts over 22 years of experience in field of Information Technology and holds the field of Banking and Finance including the B.Sc. (Bachelor of Science) Degree from three years of service in the Gulf Region. the University of Colombo and M.Sc. (Master He is an experienced retail banker with of Science) Degree from the University of expertise in Credit, Branch Operations, Credit Peradeniya. Administration and Recoveries. He started his banking career at Seylan Bank in 1991. In 2015, he joined ETI Finance Limited, as an Assistant Manager – Credit and subsequently promoted as Manager – Credit Administration. He holds a Diploma in Management, from the Open University of Sri Lanka.
7. Mr. Chamikara Perera 8. Mrs. Nirmala Maduwanthi Manager - Legal Manager - Finance
He counts over 12 years of experience in the field She counts over 12 years of experience in of Law and is a Notary Public. He holds the LLB the fields of Auditing and Finance and holds degree from the University of Colombo in 2003 the Higher National Diploma in Accountancy with a Second Class honours (Lower Division) and (HNDA), from the Sri Lanka Institute of Advanced passed out as an Attorney at Law from Sri Lanka Technological Education and she is reading Law College in 2003. for corporate level of Institute of Chartered Accountants of Sri Lanka.
9. Mr. Suneth Kumara 10. Mr. Ruwantha Sampath Manager - Gold Loan Manager - Branch Operations
He counts over 10 years of experience in the He counts over 15 years of experience in the field of Non-Banking Financial Sector. fields of Auditing, Finance and Branch operations. He is a member of the AAT Sri Lanka (MAAT) and successfully completed the Intermediate level of Institute of Chartered Accountants of Sri Lanka. Swarnamahal Financial Services PLC - Annual Report 2016/17 11
Risk Management
The overall strategic objective of managing risk at Swarnamahal Financial Services PLC (SFS) is to ensure quality of the credit portfolios, profitability, financial stability and sustainability of the business which will add value to the organization and its stakeholders. Our risk management process has evolved into Identifying, Analyzing, Assessing, Measuring, Mitigating, Controlling, Monitoring and reporting of risks affecting the business.
The Board of Directors assumes overall responsibility in managing risk through; Integrated Risk Management Committee (IRMC) which drives the Risk Management process presided by a nominated Director and key Corporate Management Executives. The Board Audit Committee (BAC). Assets and Liability Management Committee (ALCO), Executive Credit Committee and Operational Committees which comprises of Corporate Management team implement an effective, comprehensive and strong internal control system providing reasonable assurance that assets are safeguarded, transactions are authorized and properly recorded and irregularities are either prevented or detected within a reasonable period of time. These committees regularly review specific risk areas and analyze regular reports on internal controls, risk management, portfolio trends, policies, delegated authority limits along with the process of internal and external auditors and internal control unit.
In principle, the Board of Directors is responsible for the maintenance of prudent risk management mechanism and orderly implementation of the risk framework within the Company. The Board approves the policies, strategies and systems and operational approach for risk management. The effective implementation of the risk management function is carried out through the Integrated Risk Management Committee with the support from the Corporate Management team of the Company.
RISK MANAGEMENT FRAMEWORK SFS takes every step to capture and measure risks, monitor their impact real time, manage the outcome to get the competitive advantage or remain in the business of financial institutions. At our business units every manager is responsible for establishing and implementing risk management policies and practices under their purview. We have categorized the key risks faced by the Company into three main risk silos, Credit Risk, Market Risk and Operational Risk. Apart from these three risk categories, Liquidity Risk, Legal Risk, Reputational Risk, Regulatory /Compliance Risk, Strategy Risk inter-alia are the key risks faced by Our Company.
During the current financial year we took several steps to strengthen the existing risk management structure which facilitates a risk-based decision making process in an objective manner. The Company’s Risk Management function is independent from the risk assuming business functions. The Risk and Compliance division is responsible for carrying out the overall risk management function of the Company at operational levels.
The risk- based decision making is well-supported by the following risk related committees functioning within the Company;
Board of Directors
Board Integrated Board Audit Board Related Party Transaction Risk Committee Committee Review Committee
CEO and Corporate Internal Management Auditor
Investment/ ALCO Committee Executive Credit Committee 12 Swarnamahal Financial Services PLC - Annual Report 2016/17
Risk Management Contd.
Committee Key Objectives Board Integrated Risk • To oversee the risk management function in line with the Board approved policies and Management Committee strategies. (IRMC) • To ensure that all risks including credit, market, liquidity, operational and strategic risks are managed on a regular basis using appropriate risk indicators and MIS reports. • To ensure the risks of the Company are within the prudent levels decided by the Committee, based on the Company’s risk appetite and the regulatory and supervisory requirements. • To monitor and review all the risk exposures and risk related policies/procedures affecting credit, market and operational areas • More details are given in the Integrated Risk Management Committee Report in page 33. Board Audit Committee (BAC) The Board Audit Committee • Reviews the Audited Financial Statements, Accounting Policies, emerging accounting issues and disclosures. • Reviews the External Auditor’s Management Letter together with the Management Response • Discusses with the External Auditor regarding the issues, problems and reservations arising from the Interim and Final Audits. • Ensures that a sound reporting system is in place to provide timely information to the Board of Directors, Regulatory Authorities, Management and Stakeholders. • Reviews the performance of the Internal Audit Function, adequacy of the scope, resources and the authority of the Internal Auditors. • More details are given in the Board Audit Committee Report in pages 31 and 32. Board Related Party • Reviewing in advance all proposed related party transactions of the Company except those Transaction Review committee explicitly exempted by the TOR; • Adopting policies and procedures to review related party transactions and establishing guidelines to be followed by the senior management in respect of ongoing related party transactions; • Discussion of a proposed related party transaction for which he or she is a related party, unless such director is requested to do so by the Committee for the purpose of providing information thereon to the Committee • Ensuring that immediate market disclosures and disclosures in the Annual Report are made as required by the applicable rules /regulations are made in a timely and detailed manner. Asset-Liability Management • To analyze, review and mitigate the assets- liability mismatch risk. Committee (ALCO) • To manage the lending and borrowing rates, statement of financial positions, items including Assets and Liabilities, Capital structure and Liquidity. Executive Credit Committee • To review and approve the credit policies/ procedures recommended by the CEO to ensure that all credit portfolios are properly managed within the lending strategies of the Company. • To review and monitor the Company’s Non-Performing Advances (NPAs) and initiate proper credit risk mitigating strategies. • To identify key credit risks, evaluate the credit worthiness and prepare credit risk limits and parameters for the approvals of the Board of Directors. Swarnamahal Financial Services PLC - Annual Report 2016/17 13
Risk Management Control Matrix
� Counter Party Risk �Human Error � Credit Appraisal � Exposure Risk � Negligence � Monitoring Gaps � Audit Compliance Risk � Recovery Risk � Booking Error � Sector Downturns � Business Process Design � Security Realization Liquidity � Customer Relationship Management Risk Risk � Counter Party Failure � Founding Risk � Confidentiality Risk � Market Conditions � Distribution Channel � Time Risk � Documentation Risk � Execution Risk Forex Risk � Information � FX Rate
Credit Ri
s
k
�
Common Risk Gap Risk
� Settlement Risk
� Information
k Security Risk
s M
i
Interest Rate Risk
� R a Methodology Error
l
r
� k Basis Risk
a � Model Error
e
n
t � Prepayment Risk
o
� Money Laundering i
R t
i � Re-pricing Risk
a
s
� Product Complexity r
k
e
� Yield Curve Risk
p
� Settlement Error
O
� Security Risk
Other Market Risk
�
Training Gaps
�
Commodity Risk O � Volume Risk ther Risk � Country Risk � Common Interface Risk � Equity Position Risk � Connectivity Failure � Limits Risk � System Customisation Risk � Price Volatility � Telecom Failure � Third party/Wonder Failure for Non-IT Outstanding � Capital Inadequacy Risk � Service Failure � Disaster Risk / Force Majeure � Project Management Risk � External Credit Rating � Compliance Risk � Human Resources Management Risk � Accounting/Taxation � Strategy and Business Environment Risk Risk � Event Risk, Group Risk,Legal Risk � Regulatory Risk, Competition Risk � Management Risk, Organisation Risk 14 Swarnamahal Financial Services PLC - Annual Report 2016/17
Risk Management Contd.
RISK MANAGEMENT CONTROL MATRIX
Identified Risk Impact Assessment Mitigation Measures Control 1. Credit Risk It is the possibility of • Rise in Non Performing • Pre-credit appraisals. • Insurance cover over • Review of Executive assets financed and Credit Committee financial loss resulting Advances.(NPA) • Post-credit portfolio collateral offered from the failure or • Increase in loan loss reviews. • Credit Policies / unwillingness of • Mortgage protection Delegation Authority provision. • Review of product/ a counterparty to cover for borrowers for and Credit Circulars • Escalation of Cost of sect oral concentration meet the contractual loan value. obligations to the Funds and Break even and analysis. • Post – Credit • Cap on Credit Monitoring of Company and the risk Rates. • Review of Delegation Concentrations based Conditions / that collateral will not • Decline in profitability. of Authority. compensate such claims. on Product /Sector. covenants of • Erosion of Share Holder advances and renewal • Collateral Funds/ Equity. of Insurance cover Apart from risk of Management, over assets / collateral default, credit risk stems independent pre credit financed. from concentration risk inspection, valuation that arises from either of vehicles financed uneven distribution (VIR) and of immovable of exposures to its properties (PIR) offered borrowers or from as security. uneven distribution of exposures to particular sectors, regions, industries or products. 2. Liquidity Risk Liquidity risk is the • Possible Non payment Monitoring of daily Cash A key element Asset and Liability potential vulnerability of capital and interest Flow Statements and of Liquidity Risk committee (ALCO) of a financial institution on maturity / Non daily Bank balances Management is is overseeing the for not being able to payment of borrowers through Treasury monitoring and mismatch of potential fund increases in assets / Non payments of Operations. assessing the firm’s maturities and allocates and meet contractual other creditors before current and future fund of the assets to mitigate and contingent financial due dates requirements including the risk of default and debt obligations non- payments of the obligations as and when • Since liquidity and planning for any overdue payments. Also they fall due without risk arises from unexpected funding it manages the lending incurring unacceptable mismatches in the needs, regardless of and borrowing interest losses. timing of cash flows, whether they arise rates optimizing effective management from firm-specific liquidity position. Liquidity risk is of liquidity is factors, or from systemic highly dependent on considered of utmost (economy-wided) company’s specific importance to ensure factors. characteristics such as confidence and the the maturity profile smooth functioning of and composition of the Company’s operations. company’s assets and liabilities, the quality and marketable value of its liquidity buffer and broader market factors Swarnamahal Financial Services PLC - Annual Report 2016/17 15
Identified Risk Impact Assessment Mitigation Measures Control 3. Interest Rate Risk Interest rate risk is the Possible repricing of The Company monitors The objective of interest Asset and Liability potential negative the deposit liabilities the sensitivity of net rate risk management committee (ALCO) will impact on the Net and borrowings higher interest income due is to maintain earnings monitor the pricing Interest Income and it than potential repricing to changes in interest while improving of the core business refers to the vulnerability of core business rates and ensures that the ability to absorb assets and pricing of of an institution’s assets which results in variations are managed potential loss and to the deposit rates while financial condition due reduction in Net Interest within the appropriate ensure the adequacy focusing on the Net to the movement in Margins. levels. of the compensation Interest margins to be interest rates. Changes received for the risk maintained at minimum in interest rates affect taken. Industry levels. earnings, value of assets/ liability, off-balance sheet items and cash flows. 4. Operational Risk Operational risk can Losses due to frauds, Extensive on-going Some of the key Internal “Internal Control Matrix” be defined as risk of misconduct and training is provided Controls which are in developed with the losses resulting from negligence to ensure that the place for mitigating assistance of KPMG inadequate or inefficient Losses due to poor staff is fully aware of Operational Risk are: is used for risk based internal processes, quality of credit their responsibility for • Appropriate testing for future people and systems or documentation and complying with the segregation of duties compliance and avoids from external events. legal documentation. correct operational to carry out a process risk of operational Number of customer procedures in order to without independent defects. complaints and law suits. optimize operational review and to prevent Frequency of systems efficiency and individual conflicts of interest. Following committees in force for control breakdowns and costs. accountability at all • Setting of appropriate purposes : levels of the Company. risk limits and controls • Assets and Liability along with the Committee documented policies and procedures, • Executive Credit internal circulars and Committee monitoring the risks • BIRMC, BAC,RPTRC and adherence to limits on a regular basis. • Regular MIS reports to capture exceptional transactions and other risk events for management investigation. 16 Swarnamahal Financial Services PLC - Annual Report 2016/17
Risk Management Contd.
Identified Risk Impact Assessment Mitigation Measures Control 5. Regulatory and Compliance Risk Regulatory and Reprimand /Restrictions Regular reviews by Taking prompt action Controls are being compliance risk is on expansion of the Risk/ Compliance through internal monitored and observed as the business and imposing division and Internal circulars. reviewed through potential threat to the fines and penalties. Audit division regarding following high profile earnings or business compliance issues/ Enhancement of IT committees/key resulting from violations returns to CBSL and system to formalize management personals or infringement of other regulatory compliance monitoring with regular checks; laws, regulations or authorities. process. stipulated practices and 1. Board Meetings standards within the 2. Board Audit company, industry and Committee government. It could 3. Board IRMC even lead to loss of 4. Compliance Officer earnings and business opportunities, tarnished Company image and imminent lawsuits. 6. Legal Risk Losses due to legal risk Financial loss Assessment of Strengthening the staff Controls are being arise from litigation due to litigation, recoverability of money of Legal Division and monitored through against the Company, documentation errors from litigation from their capacities building following high profile faulty documentation etc. borrowers. to mitigate potential committees/key or business not being Monitoring progress of Legal risks and issues, management personals conducted as per the Legal /Arbitration cases. if any. with regular checks; applicable laws or regulations. Monitoring of legal • Legal Officer recovery process/ timely • ECC, BIRMC & BAC collection committees
7. Reputational Risk Reputational risk is the • Decline in Deposit Regularly monitor the • Public relations / • Impacts are being potential damage to base/ business volume responses from the Advertising/ Brand regularly monitored customers and general Building campaigns and appreciate the company, resulting • Negative perception public on the perception actions are being in loss of earnings or from rating agencies, • Business Impact of the company. taken timely. adverse impact on fund providers and Analysis -Business market capitalization as regulators Continuity Plan (BCP). • Training of staff at all a result of stakeholders levels are provided. taking a negative view • Intensifying Corporate of the Company or its Governance actions. Framework. Adverse publicity to company, its products, staff etc, thereby creating negative image among General Public, Customers, Regulators, Credit Rating Agencies etc Swarnamahal Financial Services PLC - Annual Report 2016/17 17
Identified Risk Impact Assessment Mitigation Measures Control 8. Human Resources Risk Being a service Loss of business due to Employee satisfaction • Company conducts Company has oriented entity one of untimely exit of valuable survey manpower planning in formulated a the Company’s main staff Empowerment of the line with expansions comprehensive Human strengths is human Cost of ineffective staff with a job rotation and detailed pre- Resource Policy resources. Thus, the contribution to the policy framework employment which encompasses Company pays special business and operations screening. Measure the the procedure for attention in mitigating of the company. employee feedback at manpower planning, risks associated with it. exit interviews. recruitments, grievances handling • Continuous focus etc. Failure to determine the and effort has been appropriate mix of skills extended in order to required implementing ensure that effective our strategy and the recruitment is carried consequent failure out while providing to recruit or develop an effective induction the right mix of to the Company’s appropriately qualified corporate culture people, or high levels of staff turnover, could adversely affect our ability to operate effectively in the market. 9. Information Technology Risk The technological Loss of business due to IT system error checklists A comprehensive In order to be prepared risk arises from non- the unavailability of the have been implemented review of IT controls in terms of mitigating availability of IT system, IT systems to sustain the and monitored with was already undertaken possible losses, System breakdowns, operations. the help of the service by the company with reducing the likelihood disruptions and not providers in core external consultants of occurrence and to keeping abreast with the banking system for and remedial measures recover from disruptive latest technology and improvements and are being taken incidents of system delivery channels. modifications timely. where appropriate on failures, a Business immediate basis. Continuity Plan (BCP) has been established encompassing of planning, establishing, implementing, monitoring and continually improving the management system in relation to business continuity. 18 Swarnamahal Financial Services PLC - Annual Report 2016/17
Corporate Governance Report
The Board of Directors of the Company places the highest emphasis on good governance in every aspect of the Company’s operations. The necessary policies and procedures have been formulated by the Board in order to implement an adequate internal control mechanism in a manner that would enhance stakeholders’ confidence.
Accordingly, the Board is assisted by 04 Board Sub Committees to ensure that the business is carried out in compliance with the Corporate Governance Direction No. 3 of 2008 issued by the Central Bank of Sri Lanka including amendments thereto and the Listing Rules of the Colombo Stock Exchange relating to the Corporate Governance.
Board of Directors
Board Integrated Board Board Related Party Board Audit Risk Management Remuneration Transactions Review Committee Committee Committee Committee
Minimum disclosures in terms of the Finance Companies (Corporate Governance) Direction No. 3 of 2008 issued by the Central Bank of Sri Lanka (CBSL).
CBSL Description Compliance Status Section 10. DISCLOSURES 10 (1) The Board shall ensure that a) Annual Audited Financial Statements and periodical Complied with Financial Statements are prepared and published in a) The Annual and Interim Financial Statements have accordance with the formats prescribed by the supervisory been prepared and published in accordance with and regulatory authorities and applicable accounting the formats prescribed by the supervisory and standards and that regulatory authorities and applicable Accounting Standards. b) Such statements are published in the newspapers in an abridged form, in Sinhala, Tamil and English. Not Complied b) We ensure to comply with this requirement in ensuing year. 10 (2) (a) A statement to the effect that the Annual Audited Financial Complied with Statements have been prepared in line with applicable A statement to this effect has been included in the accounting standards and regulatory requirements, inclusive Statement of Directors’ Responsibility in page 29. of specific disclosures. (b) A report by the Board on the finance company’s internal Complied with control mechanism that confirms that the financial reporting This report is contained in the Directors’ statement system has been designed to provide a reasonable assurance on Internal Control over Financial Reporting in page regarding the reliability of financial reporting and that the 28. preparation of financial statements for external purposes has been done in accordance with relevant accounting principles and regulatory requirements. Swarnamahal Financial Services PLC - Annual Report 2016/17 19
CBSL Description Compliance Status Section (c) The External Auditor’s certification on the effectiveness of Not Complied the internal control mechanism in respect of any statements The Board will ensure to comply with these prepared or published. requirements in the ensuing financial year. (d) Details of Directors, including Names, Transactions with the Complied with Finance Company. This has been included in the “Annual Report of the Board of Directors on the affairs of the Company” in pages 25 to 27. (e) Fees and remuneration paid by the finance company to the Complied with Directors in aggregate published in the Annual Report. The fees and remuneration paid to the Directors has been disclosed in Note No. 09 to the Financial Statements as given in page 62. (f) Total net accommodation as defined in 9(4) outstanding Complied with in respect of each category of related parties and the net The total net accommodations granted to related accommodation outstanding in respect of each category parties are disclosed in Note No. 32.4 to the Financial of related parties as a percentage of the finance Company’s Statements in page 77 and in page 25. capital funds. (g) The aggregate values of remuneration paid by the finance Complied with company to its key management personnel and the aggregate Disclosed in Note No. 32.2 to the Financial values of the transactions of the finance company with its key Statements in page 76. management personnel during the financial year, set out by broad categories such as remuneration paid, accommodation granted, deposits or investment made in the Finance Company. (h) A report setting out details of compliance with prudential Complied with requirements, regulations, laws and internal controls and Status of compliance with prudential requirements, measures taken to rectify any material non-compliance. regulations and laws are set out in the “Annual Report of the Board of Directors on the Affairs of the Company” in page 27. (i) A statement of the regulatory and supervisory concerns on Not Complied lapses in the finance company’s risk management, or non- There were a few supervisory concerns reported. compliance with the Act, and the rules and directions that The Company is now in a process of rectifying such have been communicated by the Director of Supervision concerns in line with the regulatory requirements. of Non Bank Financial Institutions, if so directed by the The details of such concerns are given in the Monetary Board to be disclosed to the public, together with “Independent Auditors’ Report” in page 37. the measures taken by the finance company to address such concerns. (j) The External Auditor’s certification of the compliance with Not Complied the Act and rules and direction issued by the monetary board An arrangement is in place to comply with this published in the annual Corporate Governance Report . requirement in the ensuing Financial Year. 20 Swarnamahal Financial Services PLC - Annual Report 2016/17
Corporate Governance Report Contd.
Compliance with the section 7.6 of continuing listing requirements of the Colombo Stock Exchange.
CSE Description Compliance Status Section 7.6 (i) Names of the Directors during the financial year Complied with Names of the Directors are given in the Annual Report of the Board of Directors on the Affairs of the Company in page 26. 7.6 (ii) Principal activities of the Company Complied with Principal activities of the Company are given in the Annual Report of the Board of Directors on the Affairs of the Company in page 25. 7.6 (iii) Top 20 shareholders with the number of share held and the Complied with percentage of such shares held Details are given in the Share Information in page 85. 7.6 (iv) The public holding percentage Complied with The public holding percentage is given in the Share Information in page 86. 7.6 (v) Statement of each Director’s and Chief Executive Officer’s Complied with shareholding of the Company at the beginning and end of the Details of the Director’s and Chief Executive Officer’s year Shareholding of the Company are given in the Annual Report of the Board of Directors on the Affairs of the Company in page 25. 7.6 (vi) Information relating to foreseeable risk factors of the Company Complied with Information relating to foreseeable risk factors of the Company is given in the Risk Management in pages 11 to 17. 7.6 (vii) Details of material issues relating to employees and industrial There were no material issues occurred during the relations of the Company year relating to employees and industrial relations except as disclosed in Note No. 34 in page 79. 7.6 (viii) Extent, locations,valuations and number of buildings of the Complied with Company and the land holdings and investment properties Details of property, plant and equipment and investment properties are given in Note No. 21 & 20 respectively in page 68 & 70 to the Financial Statements 7.6 (ix) Number of shares representing the Company’s stated capital Complied with Number of shares representing the Company’s stated capital is given in the Note No. 28 in page 75.
7.6 (x) A distribution schedule of the number of holders in each class Complied with of equity securities, and the percentage of their total holdings Details are given in the Share Information in page 85. Swarnamahal Financial Services PLC - Annual Report 2016/17 21
CSE Description Compliance Status Section 7.6 (xi) Ratios and market price information on: Equity 1. Dividend per share No dividend has been declared during the financial 2. Dividend payout year 2016/17 3. Net asset value per share Complied with Net asset value per share is given in the financial highlights in page 3. 4. Market value per share (highest and lowest values recorded Complied with during the financial year and value as at the end of financial Details are given in the Share Information in page 86. year) 7.6 (xii) Significant changes in the Company’s fixed assets and the Complied with market value of land, if the value differs substantially from the Details are given in Note No. 21 of Property, Plant & book value Equipment in page 70. 7.6 (xiii) Details of funds raised through a public issue, rights issue and There were no any share issues, right issue or private a private placement placement taken place during the year. 7.6 (xiv) Information in respect of Employee Share Ownership or Stock The Company has not implemented Employee Share Option Schemes Ownership or Stock Option Schemes during the Financial Year 2016/17. 7.6 (xv) Disclosures pertaining to Corporate Governance practices in Complied with terms of Rules 7.10.3, 7.10.5 c. and 7.10.6 c. of Section 7 of Details are given in Corporate Governance Report in the Listing Rules pages 22 to 23. 7.6 (xvi) Related party transactions exceeding10 percent of the equity Complied with or 5 percent of the total assets of the entity as per audited Related party transactions exceeding10 percent of financial statements, whichever is lower the equity or 5 percent of the total assets of the entity as per audited financial statements, whichever is lower are given in note No.32.6 on page 78.
Compliance with the section 7.10 of continuing listing requirements of the Colombo Stock Exchange.
CSE Description Compliance Status Section 7.10.1 Non Executive Directors 7.10.1 (a) The Board of Directors of a Listed Entity shall include at least, Not Complied two Non-Executive Directors, or such number of total number The Board will ensure to comply with these of Directors whichever is higher. requirements in the ensuing year 7.10.2 Independent Directors 7.10.2 (a) Where the constitution of the Board of Directors includes only Not Complied two Non-Executive Directors in terms of Rule 7.10.1. a above, The Board will ensure to comply with these both such Non-Executive Directors shall be independent. requirements in the ensuing Financial Year. In all other instances two or 1/3 of Non- Executive Directors appointed to the Board, whichever is higher shall be Independent. 22 Swarnamahal Financial Services PLC - Annual Report 2016/17
Corporate Governance Report Contd.
CSE Description Compliance Status Section 7.10.2 (b) The Board shall require each Non-Executive Director to Not Complied submit a signed and dated declaration annually of his/ her The Board will ensure to comply with these independence or non independence against the specified requirements in the ensuing financial year criteria. 7.10.3 Disclosures relating to Directors 7.10.3 (a) The Board shall make a determination annually as to the Not Complied independence or non-independence of each Non- Executive The Board will ensure to comply with these Director based on such declaration and other information requirements in the ensuing Financial Year. available to the Board and shall set out in the Annual Report the names of Directors determined to be independent. 7.10.3 (c) The Board shall publish in its Annual Report a brief resume of Complied with each Director on its Board which includes information on the The brief profile of each Director is given in page 8. nature of his/her expertise in relevant functional areas. 7.10.3 (d) Upon appointment of a new Director to its Board, the Entity Complied with shall forthwith provide to the Exchange a brief resume of such No new Director has been appointed during the Director for dissemination to the public. year. 7.10.5 Remuneration Committee 7.10.5 (a) The Remuneration Committee shall comprise of a minimum of Not Complied two Independent Non-Executive Directors (in instances where The Board will ensure to comply with these an Entity has only two Directors on its Board) or Non-Executive requirements in the ensuing Financial Year. Directors, a majority of whom shall be independent, whichever shall be higher 7.10.5 (b) The Remuneration Committee shall recommend the No meetings held during the year remuneration payable to the Executive Directors and Chief The Board will ensure to hold committee meetings Executive Officer of the Listed Entity and/or equivalent during the ensuing Financial Year. position thereof, to the Board of the Listed Entity which will make the final determination upon consideration of such recommendations. 7.10.5 (c) The Annual Report should set out the names of Directors Complied with comprising the remuneration committee, contain a statement The names of Directors of Remuneration Committee, of the remuneration policy and set out the aggregate Statement of remuneration policy and the aggregate remuneration paid to Executive and Non- Executive Directors. of remuneration paid to the Executive and Non- Executive Directors are given in page 34 and in the Note No. 09 in page 62. 7.10.6 Audit Committee 7.10.6 (a) The Audit Committee shall comprise of a minimum of two Not Complied Independent Non-Executive Directors (in Instances where an The Board will ensure to comply with these Entity has only two Directors on its Board) or Non-Executive requirements in the ensuing Financial Year. Directors a majority of whom shall be independent, whichever shall be higher. Swarnamahal Financial Services PLC - Annual Report 2016/17 23
CSE Description Compliance Status Section 7.10.6 (b) Functions of the Committee shall include, Complied with (i) Overseeing of the preparation, presentation and adequacy Functions of the Board Audit Committee are given in of disclosures in the financial statements of a Listed Entity, in the Board Audit Committee Report in pages 31 & 32. accordance with Sri Lanka Accounting Standards.
(ii) Overseeing of the Entity’s compliance with financial reporting requirements, information requirements of the Companies Act and other relevant financial reporting related regulations and requirements.
(iii) Overseeing the processes to ensure that the Entity’s internal controls and risk management are adequate, to meet the requirements of the Sri Lanka Auditing Standards.
(iv) Assessment of the independence and performance of the Entity’s external auditors.
(v)To make recommendations to the Board pertaining to appointment, re-appointment and removal of external auditors and to approve the remuneration and terms of engagement of the External Auditors. 7.10.6 (c) The names of the Directors comprising the Audit Committee Complied with should be disclosed in the Annual Report. Names of the Directors of the Board Audit Committee are given in the Board Audit Committee Report in page 31. 9. Related party transactions 9 (2) The Board shall take the necessary steps to avoid any conflicts Complied with. of interest that may arise from any transaction of the finance The Board takes necessary steps to avoid any company with any person, and particularly with the following conflicts of interest that may arise from any categories of persons who shall be considered as “related transaction of the Company with its related parties. parties” for the purposes of this Direction: The Board Related Party Transaction Review a) A subsidiary of the finance company; Committee was established on 30th August 2016 to b) Any associate company of the finance company; comply with the Code of Best Practices on Related c) A director of the finance company; Party Transactions, issued by the Securities and d) A key management personnel of the finance company; Exchange Commission of Sri Lanka (SEC). e) A relative of a director or a key management personnel of The Report of the Related Party Transactions Review the finance company ; Committee is given in Page 35. f) A shareholder who owns shares exceeding 10% of the paid up capital of the finance company; g) A concern in which a director of the finance company or a relative of a director or a shareholder who owns shares exceeding 10% of the paid up capital of the finance company, has substantial interest. 24 Swarnamahal Financial Services PLC - Annual Report 2016/17
Corporate Governance Report Contd.
CSE Description Compliance Status Section 9 (3) The transactions with a related party that are covered in this Complied with. Direction shall be the following: Information in this regard, is disclosed in note a) Granting accommodation, No.32 on “Related Party Disclosures” in the Financial b) Creating liabilities to the finance company in the form of Statements in pages 77 and 78. deposits, borrowings and investments, c) Providing financial or non-financial services to the finance company or obtaining those services from the finance company, d) Creating or maintaining reporting lines and information flows between the finance company and any related party which may lead to share proprietary, confidential or otherwise sensitive information that may give benefits to such related party. 9 (4) The Board shall ensure that the finance company does not Complied with except as disclosed in note No.32.5 to engage in transactions with a related party in a manner that the Financial Statements in page 78. would grant such party “more favourable treatment” than that is accorded to other similar constituents of the finance company.
Directors’ Attendance at Meetings During the Financial Year 2016/17
Names Classification of Board Audit Integrated Risk Related Party Directorship Committee Management Transactions Committee Review Committee No. of Meetings held - 13 5 4 1 Mr. J. H. Edirisinghe* Non- Executive 12/13 - - - Mr. N. P. Edirisinghe Executive 12/13 5/5 - 1/1 Mrs. A. D. Edirisinghe Executive 11/13 3/5 - 1/1 Mr. A. S. Edirisinghe Executive 12/13 4/5 3/4 1/1 Mr. S. M. Ganegoda Non-Executive 13/13 - - -
*Chairman of the Board Swarnamahal Financial Services PLC - Annual Report 2016/17 25
Annual Report of the Board of Directors on the Affairs of the Company
General Stated Capital The Directors have pleasure in presenting the Annual Report The Stated Capital of the Company consists of 500,000,140 together with the Audited Financial Statements of the Company Ordinary Voting Shares, amounting to Rs. 250,000,070/- as at for the financial year ended 31st March 2017. Swarnamahal 31st March 2017. Financial Services PLC (“SFS”) is a Public Limited Liability Company, incorporated on 14th January 2004 in Colombo, Information relating to earnings, net assets and market value under the Companies Act No. 17 of 1982 and re-registered per share is given in pages 83 to 86. under the Companies Act No.7 of 2007, on 16th September 2008. The Company is licensed by the monetary board of the Shareholders Central Bank of Sri Lanka under the Finance Business Act No. 42 There were 2,053 shareholders registered as at 31st March 2017, of 2011, the Finance Leasing Act No. 56 of 2000 and has quoted the details are given in pages 85 to 86. its shares on the Colombo Stock Exchange since May 2011. Related Party Transactions The Annual Report together with the audited Financial In terms of the Sri Lanka Accounting Standards comprising the Statements was approved by the Board of Directors on 23rd Sri Lanka Financial Reporting Standard (LKAS 24), Related Party June 2017. Transactions, including written off balances and provisioning for doubtful receivables, have been disclosed in notes to the Registered Office and Business Office financial statements as given in pages 76 to 78 forming the part The Registered and Business Office of the Company is situated of the Annual Report of the Board of Directors. at No.05, R.A.De Mel Mawatha, Colombo 04.
Principal Activities Directors’ Remuneration During the Financial year 2016/17, the Company continued The aggregate sum of Directors’ fees and emoluments paid with Gold Loan services, Leasing, Hire Purchase, Personal Loans, during the year was Rs. 3,000,000/- and is disclosed in Note No. 9 Mortgage Loans and mobilization of Fixed and Savings Deposits to the Financial Statements in page 62. as its main lines of business. There were no material changes in the nature of the principle business activities of the Company. Financial Statements Financial Statements of the Company are given in pages 37 to Directors’ Meetings 82. The meetings of the Board of Directors were held once a month or more frequently whenever necessary. The Directors’ Accounting Policies attendance at the Board Meetings is given in page 24. The Notes to the Financial Statements in preparation of the Financial Statements are given in pages 42 to 61. Directors’ Shareholdings The Directors’ interests in Ordinary Shares were as follows Auditor’s Report The Auditor’s Report on the Financial Statements is given in Name of the No of Shares held as at page 37. Director 31st March 2017 31st March 2016 Statement of Compliance on the Contents of the Mr. S. M. Ganegoda 20,020 20,020 Annual Report The Audited Financial Statements included in this Annual Report CEO’s Shareholdings have been prepared and presented with the relevant disclosures CEO has not held any share of the Company during the financial in accordance with the Sri Lanka Accounting Standards and year 2016/17. other applicable regulatory requirements. 26 Swarnamahal Financial Services PLC - Annual Report 2016/17
Annual Report of the Board of Directors on the Affairs of the Company Contd.
Corporate Governance The report of the Board Integrated Risk Management The report on Corporate Governance is given in pages 17 to 24. Committee is given in page 33.
Internal Controls Related Party Transaction Review Committee The Board has formed an effective and comprehensive system Mr. N. P. Edirisinghe - Chairman of Internal Controls covering financial reporting, compliance Mrs. A. D. Edirisinghe - Director with rules and regulations of relevant authorities and risk Mr. A. S. Edirisinghe - Director management to carry on the business in an orderly manner to safeguard its assets and to ensure as far as possible the accuracy The Report of the Related Party Transaction Review Committee and reliability of the financial records. is given in page 35.
Internal Control mechanism of the Company is reviewed Directorate and improved on a continuous basis, based on the The Board of Swarnamahal Financial Services PLC consists of recommendations of the Internal Auditor, findings of the onsite 5 Directors with a wide array of experience in financial and observations of the Central Bank of Sri Lanka and the External commercial sectors as at 31st March 2017. The brief profiles of Auditor during their inspections and audit. the Directors are given in page 08.
Directors’ Statement of Internal Control The names of the Directors who are on the Board are given The Directors’ report on Internal Control is given in page 28. below.
Board Sub Committees Executive Directors The Board of Directors of the Company has formed the following 1. Mr. N. P. Edirisinghe Board Sub Committees. 2. Mrs. A. D. Edirisinghe 3. Mr. A. S. Edirisinghe Audit Committee Mr. N. P. Edirisinghe - Chairman Non- Executive Directors Mrs. A. D. Edirisinghe - Director 1. Mr. J. H. Edirisinghe Mr. A. S. Edirisinghe - Director 2. Mr. S. M. Ganegoda The report of the Board Audit Committee is given in pages 31 to 32. Secretary M/s SSP Corporate Services (Pvt) Ltd engaged as the Secretary Remuneration Committee and Registrar to the Company. Mr. N. P. Edirisinghe - Chairman Mr. J. H. Edirisinghe - Director Directors’ Responsibility of Financial Reporting The Statement of Directors’ Responsibility for financial The report of the Board Remuneration Committee is given in statements is given in page 29 and forms an integral part of the page 34. Annual Report of the Board of Directors.
Integrated Risk Management Committee Human Resources Mr. A. S. Edirisinghe - Chairman The Company recruits the best talented people and provides equal employment opportunities with no discrimination. Management Representatives of the committee are, The Human Resource Policies of the Company includes Mr. George Samantha - Chief Executive Officer comprehensive training and developments programs to Mr. Wishva Wickramaarachchi - General Manager - Finance enhance skills of new recruits and the existing staff for greater Mr. R. M. G. Ratnayake - Senior Manager - Finance efficiency. Total employees of the Company was 144 as at 31st March 2017. Swarnamahal Financial Services PLC - Annual Report 2016/17 27
Report on Compliance with Prudential Requirements, The Board has accepted the recommendation of the Board Regulations and Laws Audit Committee and has recommended the reappointment of Messrs KPMG, Chartered Accountants as Auditors to the The Company has complied with the regulatory and prudential Company for the Financial Year 2017/18 as they have expressed and internal control requirements arising from the provisions their willingness to continue in office. A resolution to re-appoint in the statutes applicable to the Company, such as the Finance the Auditors and to authorize the Directors to determine their Business Act No. 42 of 2011, Directions issued by the Central remuneration will be proposed at the Annual General Meeting Bank of Sri Lanka, Companies Act No. 7 of 2007, Inland Revenue to be held on 29th September 2017. Act No. 10 of 2006, Value Added Tax Act No. 14 of 2002, Financial Transaction Reporting Act No. 06 of 2006, Prevention of Money Annual General Meeting Laundering Act No. 5 of 2006, Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995, Listing Rules of Colombo The 12th Annual General Meeting of the Company will be held Stock Exchange etc. except as disclosed in the Independent at Hotel Sapphire, No. 371, Galle Road, Colombo 06, on 29th Auditors’ Report in page 37, Note 35 to the Financial Statement September 2017 at 10.30 a.m. in page 79 and in the Corporate Governance Report in pages 18 to 24.
Statutory Payments J. H. Edirisinghe Chairman The Board of Directors of the Company is satisfied, to the best of their knowledge and belief that all statutory dues to the Government and to the employees of the Company have been made in full, on time. SSP Corporate Services (Pvt) Ltd Company Secretaries Going Concern The Company’s retained losses amount to Rs.1,388,177,371/- 23rd June 2017 and total liabilities exceed total assets by Rs.944,828,182/- as at 31st March 2017. Due to the above it doesn’t meet the regulatory requirements for capital. These conditions cast significant doubt on the Company’s ability to continue as a going concern and therefore its ability to realize assets and discharge liabilities in the normal course of business. However, as referred to in note 36 to the financial statements the Directors are addressing the said concern.
Events after the reporting date There have not been any material events that occurred subsequent to the date of statement of financial position that require adjustments to the Financial Statements.
Auditor Messrs KPMG, Chartered Accountants served as the Auditor during the Financial Year under review. During the Financial Year 2016/17, a sum of Rs. 925,000/-(2015/16 - Rs. 975,000) was provided as audit and audit related fees to the Auditor, Messrs KPMG, Chartered Accountants. 28 Swarnamahal Financial Services PLC - Annual Report 2016/17
Directors’ Statement on Internal Control
In line with the Finance Companies (Corporate Governance) • The Internal Audit checks for compliance with policies and Direction No.3 of 2008, the Board of Directors presents this procedures and the effectiveness of the internal control report on Internal Control. The Board of Directors (“Board”) is systems on an ongoing basis and highlights significant responsible for the adequacy and effectiveness of Swarnamahal findings in respect of any non-compliance. Audits are carried Financial Services PLC’s (“the Company”) system of internal out on all units, the frequency of which is determined by controls. Such a system is designed to manage the Company’s the level of risk assessed, to provide an independent and key areas of risk within an acceptable risk profile by highlighting objective report. The Annual Audit plan is reviewed and any deviation from the limits, rather than eliminate the risk of approved by the Audit Committee. Findings of the Internal failure to achieve the policies and business objectives of the Audit are submitted to the Board Audit Committee for review Company. at their meetings. • The Audit Committee reviews internal control issues Accordingly, the system of internal controls can only provide identified by the Internal Audit, Regulatory Authorities and reasonable but not absolute assurance against material Management, and evaluates the adequacy and effectiveness misstatements of management, financial information and of the Risk Management and internal control systems. It also records or against financial losses or fraud. The Board has reviews the Internal Audit functions with particular emphasis established an ongoing process for identifying, evaluating and on the scope of audits and quality of Internal Audits. The managing the significant risks faced by the Company and this minutes of the Audit Committee meetings are tabled to the process includes enhancing the system of internal controls Board of the Company. as and when there are changes in business environment or regulatory guidelines. The Board is in the view that the system Confirmation of internal controls in place is sound and adequate to provide a reasonable assurance regarding the reliability of financial Based on the above processes, the Board confirms that the reporting and preparation of financial statements for external financial reporting system of the Company has been designed purposes, and is in accordance with relevant accounting to provide reasonable assurance regarding the reliability principles and regulatory requirements. of financial reporting and that the preparation of Financial Statements for external purposes has been done in accordance The Management assists the Board in the implementation with Sri Lanka Financial Reporting Standards (SLFRS) and of the Board’s policies and procedures on risk and control by regulatory requirements of the Central Bank of Sri Lanka. identifying and assessing the risks faced and in the design, operation and monitoring of suitable internal controls to For and on behalf of the Board mitigate and control these risks.
The key processes that have been established in reviewing the adequacy and integrity of the system of internal controls with J. H. Edirisinghe respect to financial reporting include the following: Chairman
• Sub Board Committees were established by the Board to 23rd June 2017 assist the Board in ensuring the effectiveness of Company’s daily operations and that the Company’s operations are in accordance with the corporate objectives, strategies and the annual budget as well as the policies and business directions that have been approved. Swarnamahal Financial Services PLC - Annual Report 2016/17 29
Statement of Directors’ Responsibilities in Relation to Financial Statements
The responsibility of the Directors of the Company, in relation to The Directors are responsible for ensuring that the Company the preparation and presentation of the Financial Statements of keeps sufficient accounting records, which disclose the financial the Company in accordance with the relevant provisions of the position of the Company with reasonable accuracy and enable Companies Act No. 07 of 2007, Finance Business Act No. 42 of them to ensure that the financial statements have been 2011 and other Statutes which are applicable in the preparation prepared and presented as aforementioned. of Financial Statements are set out in the following statement. The Directors of the Company have instituted an effective The responsibilities of the External Auditors, in relation to the and comprehensive system of Internal Control for identifying, Financial Statements are set out in the Report of the Auditors recording, evaluating and managing the significant risks faced given in page 37. by the Company throughout the year and it is under regular review of the Board of Directors. This comprises internal reviews, In accordance with the Companies Act No. 07 of 2007, the internal audit and the whole system of financial and other Directors of the Company are responsible for ensuring, the controls required to carry out the business of the Company in an Company keeps proper books of accounts of all the transactions orderly manner, safeguard its assets, prevent and detect frauds and prepare Financial Statements for each financial year. The and secure as far as practicable, the accuracy and the reliability Financial Statements of the Company are comprised of the of the records. Statement of Financial Position as at 31st March 2017, the Statement of Profit or Loss and Other Comprehensive Income, The Directors of the Company are responsible for preparing Statement of Changes in Equity, Statement of Cash Flows for the and presenting the Financial Statements and have provided the year ended 31st March 2017 and notes there to. Company’s External Auditor, KPMG, Chartered Accountants with every opportunity to undertake the inspections they considered Accordingly, the Directors confirm that the Financial Statements appropriate and necessary. of the Company give a true and fair view of the state of affairs of the Company as at 31st March 2017. The Directors are Compliance Report responsible to ensure that: The Directors of the Company confirm that to the best of their knowledge and belief, all statutory payments in relation to all I. The appropriate accounting policies have been selected and relevant regulatory and statutory dues, as were due and payable applied in a consistent manner and material deviations, if any, by the Company as at the reporting date, have been paid or have been disclosed, where relevant, provided for. The Directors are of the view that II. Judgements and estimates made are reasonable and prudent they have discharged their responsibilities as set out in this and all applicable Accounting Standards have been complied above statement. with. By order of the Board The Directors accept responsibility to ensure that the Company has adequate resources to continue in operation to justify applying the going concern basis in preparing these Financial Statements. J. H. Edirisinghe Chairman The Financial Statements of the Company for the year ended 31st March 2017 are prepared and presented, consistent with 23rd June 2017 the underlying books of accounts, in accordance with the requirements of the Sri Lanka Accounting Standards issued by the Institute of Chartered Accountants of Sri Lanka, the Companies Act No. 07 of 2007, Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995, Finance Business Act No. 42 of 2011 and the Listing Rules of the Colombo Stock Exchange inclusive of specific disclosures. 30 Swarnamahal Financial Services PLC - Annual Report 2016/17
Statement of Responsibility of the Chief Executive Officer and General Manager - Finance
The Financial Statements of Swarnamahal Financial Services The Company’s External Auditor, Messrs KPMG, Chartered PLC for the financial year ended 31st March 2017 have been Accountants, has audited the Financial Statements of the prepared and presented, consistent with the underlying books Company and their report is given in page 37. of accounts, in accordance with the requirements of the Sri Lanka Accounting Standards issued by the Institute of Chartered The Board Audit Committee reviewed all the Internal Audit Accountants of Sri Lanka, the Companies Act No. 07 of 2007, Sri inspections, audit plans, the efficiency of Internal Control Lanka Accounting and Auditing Standards Act No. 15 of 1995, Systems and procedures and also reviewed the quality of Finance Business Act No. 42 of 2011 and the Listing Rules of the the significant Accounting Policies and their adhering to the Colombo Stock Exchange. The formats used in the presentation Statutory and Regulatory requirements. To ensure complete of the Financial Statements and the disclosures are complied independence, the Internal and External Auditors had full and with the formats prescribed by the Institute of Chartered free access to the members of the Board Audit Committee to Accountants of Sri Lanka. discuss any matter of substance.
The significant accounting policies and estimates that involved We further confirm that the Company has complied with all the a high degree of judgement and complexity were discussed guidelines for the audit services. with the Company’s External Auditor and the Board Audit Committee. Comparative information has been reclassified The Company has also complied with applicable laws, whenever necessary to comply with the current presentation regulations and prudential requirements except as disclosed and material deviations, if any, have been disclosed and in the Independent Auditors’ Report in page 37 and in the explained in the notes to the Financial Statements. Corporate Governance report in pages 18 to 24. There are/ were no litigations or proceedings against the Company in the recent We confirm, to the best of our knowledge and belief, that past except as disclosed in Note No. 34 in page 79. the Financial Statements of the Company give a true and fair view of the assets, liabilities, financial position and profit of the Company, its cash flows and liquidity position. We also confirm that the Company has adequate resources to continue George Samantha in operation and have applied the going concern basis in Chief Executive Officer preparing Financial Statements.
The Board of Directors and the Management of the Company accept responsibility for the integrity and objectivity of Wishva Wickramaarachchi these Financial Statements. The estimates and judgements General Manager-Finance relating to the Financial Statements were made on a prudent and reasonable basis, in order that the Financial Statements 23rd June 2017 reflect in a true and fair manner, the form and substance of transactions and that the Company’s state of affairs is well presented. To ensure this, the Company has taken proper and sufficient care in installing a system of Internal Controls and accounting records, for safeguarding assets and for preventing and detecting frauds as well as other irregularities, which is reviewed, evaluated and updated on an ongoing basis. Our Internal Auditors have conducted periodic audits to ensure that the policies and procedures of the Company were consistently followed. However, there are inherent limitations that should be recognized in weighing the assurances provided by any system of Internal Controls and Accounting. Swarnamahal Financial Services PLC - Annual Report 2016/17 31
Board Audit Committee Report
The Composition • Discuss with the External Auditor regarding the issues, The Board Audit Committee consisted of three Directors as problems and reservations arising from the Interim and Final detailed below. Audits of the Company. • Ensure that a sound reporting system is in place to provide Mr. N.P. Edirisinghe Chairman timely information to the Board of Directors, Regulatory Authorities, Management and Stakeholders. Review the Mrs. A.D. Edirisinghe Director performance of the Internal Audit Function, adequacy of the Mr. A. S. Edirisinghe Director scope, resources and the authority of the Internal Auditors. • Review internal audit programs and its results and ensure that The Chairman of the Committee, Mr. N. P. Edirisinghe counts appropriate actions are taken on the recommendations of the over 27 years of extensive experience in the fields of Gold, Board Audit Committee. Information Technology, Finance and Management. • Ensure that the internal audit function is independent of the Company’s other activities and that it is performed with The CEO and the Senior Manager - Finance/ General Manager - impartially, proficiency and due professional care. Finance were present at all the meetings on invitation. • Evaluate and discuss the major findings and observations of Secretary to the Board Audit Committee Internal Auditor and the management responses thereon, periodically. SSP Corporate Services (Pvt) Ltd
Meetings of the Committee Financial Reporting No. of meetings held and the members’ attendance at meetings The Committee assists the Board of Directors in discharging are given in page 24. their responsibilities for the preparation of financial statements that indicates a true and fair view of the affairs of the Company Role of the Audit Committee in accordance with the Company’s Accounting Records and in conformity with the Sri Lanka Accounting Standards, the The Audit Committee assists the Board of Directors in fulfilling Company’s Act No. 07 of 2007 and the Directions issued by the effectively its oversight responsibilities in the financial Central Bank of Sri Lanka. reporting process and other related affairs of the Company. The Committee has been empowered to: The Committee liaised with the other Board members, reviewed the Company’s annual and interim financial statements and • Analyze and review risks and examine the adequacy, recommended the issue of such financial statements to the efficiency, effectiveness of the system of internal controls and shareholders. The Committee analyzed and examined the procedures that are in force to mitigate risks. adequacy, efficiency, effectiveness of the system of internal • Monitor and evaluate the External Auditor’s independence, controls and procedures in place to ensure the reliability of objectivity and effectiveness of the Audit Process. information provided to the Board and other stakeholders. • Meet External Auditor during the year to discuss and finalize the Audit approach, procedures, nature and the scope, Internal Audit including the matters relating to the Company’s compliance During the financial year 2016/17, Ernst & Young (E&Y), with directions, internal control over financial reporting and Chartered Accountants engaged as the Internal Auditor of the auditor’s independence. Company who is responsible for reviewing and reporting on • Review the Audited Financial Statements with the External the efficiency of the system of internal controls mechanism, Auditors in order to monitor the integrity of the Financial procedures and compliance with other regulatory requirements. Statements and its conformity with the Sri Lanka Accounting The weaknesses highlighted by the Internal Auditors in Standards, prior to submission to the Board. relation to such control procedures were critically analyzed • Review Accounting Policies, emerging accounting issues and and recommendations suggested for implementation; such disclosures according to LKAS/SLFRS. implementations were followed up and reviewed. The internal audit personnel were invited to the committee discussion as • Review the External Auditor’s Management Letter together and when required, for further clarification. with the management responses thereto. 32 Swarnamahal Financial Services PLC - Annual Report 2016/17
Board Audit Committee Report Contd.
External Audit The Committee actively monitored the implementation of the recommendations of the External Auditor. Prior to commencement of the audit of the financial year 2016/17, the Auditor’s approach, procedures, nature and the scope of the Audit, including the matters relating to the Company’s compliance with directions were discussed and finalized.
The Committee evaluated the Independence and Objectivity of the Messrs KPMG, Chartered Accountants and reviewed that Non Audit Services provided by them to ensure that the provision of these services does not impair their Independence.
The audit scope, audit approach and audit plan were presented by Messrs KPMG, Chartered Accountants and discussed at the Audit Committee meetings.
The Committee is also empowered to recommend the re- appointment and fees of the External Auditor. Accordingly, the Committee has recommended the re-appointment of Messrs KPMG, Chartered Accountants as auditors to the Company for the ensuing financial year 2017/18, subject to the approval of the shareholders at the Annual General Meeting, scheduled to be held on 29th September 2017.
Committee Evaluation The evaluation of the Committee was carried out by the other members of the Board in order to assess the effectiveness of the Committee and its performance, which were found to be satisfactory.
N. P. Edirisinghe Chairman-Board Audit Committee
23rd June 2017 Swarnamahal Financial Services PLC - Annual Report 2016/17 33
Board Integrated Risk Management Committee Report
The Composition of the Committee is given below Meetings During the Financial Year 2016/17, four meetings were held and Mr. A. S. Edirisinghe Chairman the proceedings of the Committee meetings were recorded and circulated to the Board of Directors for information and advice. Management Representatives who attended the meetings were,
Mr. George Samantha Chief Executive Officer The members’ attendance at the Committee meeting is given in page 24. Mr. Wishva Wickramaarachchi General Manager - Finance Mr. R. M. G. Ratnayake Senior Manager - Finance
Brief profiles of the Directors and management representatives A. S. Edirisinghe of the Company are given in pages 8 to 10. Chairman - Board Integrated Risk Management Committee
Terms of Reference 23rd June 2017 The Committee gives directions to ensure that the Company fulfills its statutory, fiduciary and regulatory responsibilities on risk management.
The main functions of the committee include • Assessing all risks, including credit, market, liquidity, operational and strategic risks on a regular basis using appropriate risk indicators and MIS reports. • Ensuring the risks of the Company are within the prudent levels decided by the Committee, based on the Company’s risk appetite and the regulatory and supervisory requirements. • Taking appropriate actions reported against officers responsible for any failure in risk management to improve the overall effectiveness of risk management at SFS. • Taking prompt corrective measures to mitigate the effect of specific risks in the event such risks are beyond the prudent levels on the basis of the Company’s policies, procedures and regulatory criteria. Compliance with laws, regulations, regulatory guidelines, internal controls and approved policies in all areas of business operations. • Reviewing and updating the business continuity plan, for approval of the Board. • Review specific quantitative and qualitative risk limits for all management level committees viz Credit, Asset Liability etc. and report any risk indicators periodically to the Board.
The Committee shall meet at least quarterly and submit a risk management report to the first Board Meeting which will be held soon after each BIRMC meeting, seeking the Board’s view, concurrence and /or specific directions. 34 Swarnamahal Financial Services PLC - Annual Report 2016/17
Board Remuneration Committee Report
The Composition The primary objective of the remuneration policy aims to The Composition of the Board Remuneration Committee is ensure that the remuneration levels are sufficient to attract, given below, motivate, and retain talent with the appropriate professional, managerial and operational expertise necessary to achieve the objectives of the Company to enhance the long term value for Mr. N. P. Edirisinghe Chairman all stakeholders of the Company. Mr. J. H. Edirisinghe Director Committee Meetings The Functions of the Committee The Committee meets when necessary and makes • Determining and formulating a set of remuneration policies recommendation on bonuses, annual increments and and criteria pertaining to the compensation and benefits performance incentives to ensure that all level of employees are of the Executive Directors including the Chief Executive sufficiently rewarded on their performance and commitments. Officer while ensuring that no Director is involved in setting his/her own remuneration and salaries and the Committee The Chief Executive Officer who is responsible for the overall also determines the salaries and benefits of the Corporate management of the Company attends meetings by invitation. Management and Senior Management. • Recommending the objectives and targets to be set for The total remuneration paid to the Directors during the period Chief Executive Officer and key managerial personnel and under review is set out in the Note No. 09 of page 62. evaluating the performance of the Chief Executive Officer and key managerial personnel against the established goals and objectives in order to suggest suitable recommendations to the Board. N. P. Edirisinghe Chairman - Board Remuneration Committee • Implementing a framework for regular performance appraisal of the Staff under various performance parameters in order to 23rd June 2017 obtain feedback of their work performance. • Making independent judgements on the level of payments to the individuals according to their performance.
Policy The set of remuneration policies of the Company is formulated to ensure that the Executive Directors including the Chief Executive Officer and Senior Management are adequately rewarded for their individual contribution to the success of the Company. Swarnamahal Financial Services PLC - Annual Report 2016/17 35
Board Related Party Transactions Review Committee Report
Composition of the Committee The Committee will meet quarterly or more frequently as it The Board Related Party Transactions Review Committee, deems necessary to carry out its duties and responsibilities. appointed by the Board of Directors of Swarnamahal Financial Services PLC. The composition of the committee is as follows. Related Party Transactions during the year During the financial year under review, there were no non- Mr. Asanka Edirisinghe - Chairman recurrent or Recurrent related party transactions as stipulated by Listing Rules of the Colombo Stock Exchange other than Mr. Nalaka Edirisinghe - Director disclosed in note No. 32.6 to the Financial Statements in pages Mrs. Deepa Edirisinghe - Director 76 to 78.
Brief profile of each member of the Committee is given on pages 08. A. S. Edirisinghe Role of the Committee Chairman - Related Party Transactions Review Committee The Board Related Party Transactions Review Committee was established In 30th August 2016 to comply with the Code of 23rd June 2017 Best Practices on Related Party Transactions, issued by The Securities and Exchange Commission of Sri Lanka (SEC).
The purpose of the Committee is to provide independent review, approval and oversight of Related Party Transactions of the Company.
The main responsibilities of the Committee include the following.
• Develop and recommend policies and procedures to review Related Party Transactions of the Company • Review proposed Related Party Transactions of the Company except those explicitly exempted by the Committee Charter • Update the Board of Directors on the Related Party Transactions of the Company • Make disclosures on applicable Related Party Transactions, as required by the applicable rules and regulations
Policies and Procedures The Company has adopted a Related Party Transactions (RPTs) Policy in view of structuring the Company’s policies and procedures to uphold good governance and in the best interests of the Company. The Policy has been prepared in accordance with the rules pertaining to RPTs under the Listing Rules of Colombo Stock Exchange
Meetings The Committee held one meeting during the year to recommend the Related Party Policy to the Board and to review the Related Party Transactions of the Company. 36 Swarnamahal Financial Services PLC - Annual Report 2016/17
Financial Reports
Independent Auditors’ Report 37 Statement of Profit or Loss and Other Comprehensive Income 38 Statement of Financial Position 39 Statement of Changes in Equity 40 Statement of Cash Flows 41 Notes to the Financial Statements 42 Swarnamahal Financial Services PLC - Annual Report 2016/17 37
Independent Auditors’ Report
TO THE SHAREHOLDERS OF SWARNAMAHAL material uncertainity that may cast significant doubt on the Company’s FINANCIAL SERVICES PLC ability to continue as a going concern and therefore its ability to realize assets and discharge liabilities in the normal course of business. Report on the Financial Statements We have audited the accompanying financial statements of Swarnamahal 2. As disclosed in note 32.5, the Company has granted a loan in excess of Financial Services PLC, (“the Company”), which comprise the statement its single borrower limit to a related party. All scheduled instalments of financial position as at March 31, 2017, and the statements of profit or of interest and capital had regularly been paid by the borrower loss and other comprehensive income, changes in equity and, cash flows during the year, however, there was no evidence to indicate that for the year then ended, and a summary of significant accounting policies the financial condition of that entity had significantly improved to and other explanatory information set out on pages 38 to 82 of the annual exclude impairment based on historical loss experience with credit risk report. characteristics of similar group of assets. Based on a loss experience of 10 percent on the loan portfolio excluding gold loans and loans against Board’s Responsibility for the Financial Statements fixed deposits, a provision of Rs. 27 million which may impact the The Board of Directors (“Board”) is responsible for the preparation of these reported profit, was not made. financial statements that give a true and fair view in accordance with Sri Lanka Accounting Standards, and for such internal control as Board Qualified Opinion determines is necessary to enable the preparation of financial statements In our opinion, except for the possible effects of the matters described in that are free from material misstatement, whether due to fraud or error. the Basis for Qualified Opinion paragraph, the financial statements give a true and fair view of the financial position of the Company as at March Auditors’ Responsibility 31, 2017, and of its financial performance and cash flows for the year then Our responsibility is to express an opinion on these financial statements ended in accordance with Sri Lanka Accounting Standards. based on our audit. We conducted our audit in accordance with Sri Lanka Auditing Standards. Those standards require that we comply with ethical Report on Other Legal and Regulatory Requirements requirements and plan and perform the audit to obtain reasonable As required by section 163 (2) of the Companies Act No. 07 of 2007, we assurance about whether the financial statements are free from material state the following: misstatement. a) The basis of opinion and scope and limitations of the audit are as stated above. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures b) In our opinion, except for the possible effects of the matters described selected depend on the auditors’ judgement, including the assessment in the Basis for Qualified Opinion paragraph, we have obtained all the of the risks of material misstatement of the financial statements, whether information and explanations that were required for the audit and, due to fraud or error. In making those risk assessments, the auditor as far as appears from our examination, proper accounting records considers internal control relevant to the entity’s preparation of the have been kept by the Company and the financial statements of financial statements that give a true and fair view in order to design the Company, comply with the requirements of section 151 of the audit procedures that are appropriate in the circumstances, but not for Companies Act. However, the Company’s net assets are less than the purpose of expressing an opinion on the effectiveness of the entity’s half of its stated capital and face a serious loss of capital situation in internal control. An audit also includes evaluating the appropriateness of terms of Section 220 of the same Act. The Board of Directors held an accounting policies used and the reasonableness of accounting estimates Extraordinary General Meeting on 30 September 2015 in accordance made by Board, as well as evaluating the overall presentation of the with the said Act. financial statements. c) The Company does not fulfill the requirements of the Directions issued by the Central Bank of Sri Lanka to finance companies for minimum We believe that the audit evidence we have obtained is sufficient and core capital, risk weighted capital adequacy ratio (note 5.7) and Single appropriate to provide a basis for our qualified audit opinion. borrower limit (note 32.5).
Basis for Qualified Opinion 1. As disclosed in note 36, the Company’s retained losses amount to Rs. 1,388,177,371/- and total liabilities exceed total assets by Rs. CHARTERED ACCOUNTANTS 994,828,182/- as at 31 March 2017. Due to the above, it does not meet Colombo the regulatory requirements for capital. These conditions indicate a 23rd June 2017 38 Swarnamahal Financial Services PLC - Annual Report 2016/17
Statement of Profit or Loss and Other Comprehensive Income
For the Year Ended 31 March 2017 2016 Note Rs. Rs.
Interest income 716,326,014 621,949,578 Interest expense (437,414,836) (430,229,365) Net interest income 6 278,911,178 191,720,213 Net gain/(loss) from financial instruments at fair value through profit or loss 7 44,813 (403,598) Other income 8 56,618,516 9,272,968 Total operating income 335,574,507 200,589,583
Operating expenses Personnel expenses 9 (93,429,044) (76,814,865) Other expenses 10 (149,591,852) (126,193,913) Impairment (charges) / reversal and fair value adjustment for loans and other advances 11 (20,417,789) 54,299,282 Operating profit before value added tax and income tax expenses 72,135,822 51,880,087 Value added tax on financial services 12 (17,207,515) (22,530,863) Profit before income tax 54,928,307 29,349,224 Income tax 13 3,755,331 (13,278,736) Profit for the year 58,683,638 16,070,488
Other comprehensive income, net of income tax Actuarial loss on employee benefits 26 (1,606,961) (1,291,307) Deferred tax on actuarial loss on employee benefits 449,949 361,566 Net change in fair value on available-for-sale financial assets reclassified to profit or loss - (2,357,203) Other comprehensive loss for the year, net of tax (1,157,012) (3,286,944) Total comprehensive income for the year 57,526,626 12,783,544
Profit per share 14 0.12 0.03
The notes on pages 42 to 82, form an integral part of these financial statements. Swarnamahal Financial Services PLC - Annual Report 2016/17 39
Statement of Financial Position
As at 31st March 2017 2016 Note Rs. Rs.
Assets Cash and cash equivalents 15 238,437,500 304,659,520 Other investments 16 304,678,148 277,883,705 Financial assets held at fair value through profit or loss 17 1,964,730 1,919,917 Financial assets available-for-sale 18 2,500 2,500 Loans and advances to customers 19 2,059,618,929 2,237,282,970 Investment property 20 115,050,000 64,300,000 Property, plant and equipment 21 42,727,212 42,665,480 Current tax receivable 22 22,841,749 10,574,972 Other assets 23 88,187,395 84,051,918 Total assets 2,873,508,163 3,023,340,982
Liabilities Deposits from customers 24 3,771,827,767 4,015,255,430 Bank overdrafts 15 9,867,016 3,518,974 Deferred tax liabilities 25 - 3,842,092 Employee benefits 26 14,211,429 10,619,711 Other liabilities 27 72,430,133 42,459,583 Total liabilities 3,868,336,345 4,075,695,790
Equity Stated capital 28 250,000,070 250,000,070 Statutory reserve fund 29 143,349,119 114,007,300 Other reserves 30 - - Retained losses (1,388,177,371) (1,416,362,178) Total equity (994,828,182) (1,052,354,808) Total liabilities and equity 2,873,508,163 3,023,340,982
The notes on pages 42 to 82, form an integral part of these financial statements.
It is certified that the financial statements comply with the requirements of the Companies Act No. 07 of 2007.
Wishva Wickramaarachchi General Manager - Finance
The Board of Directors is responsible for the preparation and presentation of these financial statements. These financial statements were approved by the Board of Directors and signed on their behalf.
J. H. Edirisinghe N. P. Edirisinghe Chairman Executive Director
Colombo, Sri Lanka. 23rd June 2017 40 Swarnamahal Financial Services PLC - Annual Report 2016/17
Statement of Changes in Equity
For the Year Ended 31 March Stated Statutory Retained Available for Total capital reserve earnings/ sale reserve / (loss) / (loss) Rs. Rs. Rs. Rs. Rs.
Balance as at 1 April 2015 250,000,070 105,972,056 (1,423,467,681) 2,357,203 (1,065,138,352)
Statement of profit or loss Profit for the year - - 16,070,488 - 16,070,488
Other comprehensive income, net of tax - Net change in fair value ------Net amount reclassified to profit and loss - - - (2,357,203) (2,357,203) - Actuarial loss - - (929,741) - (929,741) Total comprehensive income for the year - - 15,140,747 (2,357,203) 12,783,544
Transfers (from) / to retained earnings - 8,035,244 (8,035,244) - -
Balance as at 31 March 2016 250,000,070 114,007,300 (1,416,362,178) - (1,052,354,808)
Balance as at 1 April 2016 250,000,070 114,007,300 (1,416,362,178) - (1,052,354,808)
Statement of profit or loss Profit for the year - - 58,683,638 - 58,683,638
Other comprehensive income, net of tax - Net change in fair value ------Net amount reclassified to profit and loss ------Actuarial loss - - (1,157,012) - (1,157,012) Total comprehensive income for the year - - 57,526,626 - 57,526,626
Transfers (from) / to retained earnings - 29,341,819 (29,341,819) - - Balance as at 31 March 2017 250,000,070 143,349,119 (1,388,177,371) - (994,828,182)
The notes on pages 42 to 82, form an integral part of these financial statements. Swarnamahal Financial Services PLC - Annual Report 2016/17 41
Statement of Cash Flows
For the Year Ended 31 March 2017 2016 Rs. Rs.
Profit before taxation 54,928,307 29,349,224
Adjustment for; Depreciation 14,272,872 15,495,031 Impairment for loan losses 47,231,950 (12,606,693) Profit from disposal of property, plant and equipment - (375,378) Fair value gain on investment property (50,750,000) (7,600,000) Provision for gratuity 2,742,507 2,295,750 Unwinding of interest (27,220,078) (34,284,014) Fair value change in financial assets available for sale - (2,357,203) Fair value loss / (gain) on investments (44,813) 403,598 41,160,745 (9,679,685) Changes in; - loans and advances to customers 157,652,169 16,941,720 - other assets (13,458,558) 27,403,926 - deposit from customers (243,427,665) (153,158,291) - other liabilities 29,970,551 3,491,812 Cash used in operating activities (28,102,757) (115,000,518)
Tax paid (2,580,509) (4,317,660) Employee benefit paid (757,750) (1,834,488) Net cash used in operating activities (31,441,016) (121,152,666)
Cash flows from investment activities Investment in government securities (26,794,442) (277,883,704) Withdrawal of investments in government securities - 630,581,251 Proceeds from disposal of property, plant and equipment - 845,000 Additions to property plant and equipment (14,334,604) (19,137,197) Net proceeds from disposal of equity share investments - 2,811,015 Net cash generated from / (used in) investment activities (41,129,046) 337,216,365
Cash flow from financing activities Net proceeds / (repayments) of borrowings - - Net cash used in financing activities - -
Net (decrease) / increase in cash and cash equivalents (72,570,062) 216,063,699 Cash and cash equivalents at the beginning of the year 301,140,546 85,076,847 Cash and cash equivalent at the end of the year 228,570,484 301,140,546
Reconciliation of cash and cash equivalents Cash and cash equivalents (Note 15) 238,437,500 304,659,520 Bank overdrafts (Note 15) (9,867,016) (3,518,974) 228,570,484 301,140,546
The notes on pages 42 to 82, form an integral part of these financial statements. 42 Swarnamahal Financial Services PLC - Annual Report 2016/17
Notes to the Financial Statements
1. Reporting entity 2.3 Functional and presentation currency Swarnamahal Financial Services PLC (the “Company”) is a public The financial statements are presented in Sri Lankan Rupees, limited company incorporated and domiciled in Sri Lanka and which is the functional currency of the Company. All financial listed on the Colombo Stock Exchange. The registered office of information presented in Sri Lankan Rupees has been rounded the Company is located at No.5, R.A. De Mel Mawatha, Colombo to the nearest rupee. 04 and the principal place of business is situated at the same place. 2.4 Use of estimates and judgement The preparation of financial statements in conformity with The Company is a subsidiary of E.T.I. Finance Limited and the Sri Lanka Accounting Standards requires management to ultimate parent undertaking and controlling party of the make judgments, estimates and assumptions that affect the Company is E.A.P Holdings Limited. application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ The principal activities of the Company are granting gold loans, from these estimates. leases, hire purchases, loan facilities and accepting fixed and savings deposits. The Company is a registered finance company Estimates and underlying assumptions are reviewed on an under the Finance Business Act No. 42 of 2011. ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any The staff strength of the Company as at 31 March 2017 is 144 future periods affected. (2016-138). Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment 2. Basis of preparation within the next financial year are included in the following 2.1 Statement of compliance notes: The financial statements of the Company which comprise • Note 16, 17 and 18 – Recognition and measurement of the statements of financial position, profit or loss and other financial instruments comprehensive income, changes in equity, cash flows and notes thereto have been prepared in accordance with Sri • Note 19 – Impairment allowance on loans and receivables Lanka Accounting Standards (SLAS) laid down by the Institute • Note 20 – Investment property of Chartered Accountants of Sri Lanka, and comply with the • Note 25 – Deferred tax liabilities requirements of Companies Act No. 07 of 2007 and Finance • Note 26 – Measurement of retirement benefit obligation Business Act No. 42 of 2011. An analysis of financial instruments measured at fair value as at The financial statements for the year ended 31 March 2017 were the end of the reporting period, by the level of the or fair value authorized for issue by the Directors on 23 June 2017. hierarchy is given in note 5.8
2.2 Basis of measurement 2.5 Materiality and aggregation The financial statements have been prepared on the historical Each material class of similar item is presented separately in the cost basis except for the following material items in the financial statements. Items of dissimilar nature or function are statement of financial position and no adjustments have been presented separately, unless they are immaterial. made for inflationary effects.
• Non derivative financial instruments at fair value through 3. Significant accounting policies profit or loss are measured at fair value The accounting policies set out below have been applied • Available for sale financial assets are measured at fair value consistently to all periods presented in these financial statements. • Investment property is measured at fair value • The liability for defined benefit obligations is recognised at the present value of the defined benefit obligation Swarnamahal Financial Services PLC - Annual Report 2016/17 43
3.1 Financial assets and financial liabilities 3.1.2.2 Loans and receivables 3.1.1 Recognition Loans and receivables are non-derivative financial assets with The Company initially recognises loans and receivables and fixed or determinable payments that are not quoted in an active deposits on the date that they are originated. All other financial market. Such assets are recognised initially at fair value plus any instruments (including regular purchases and sales of financial directly attributable transaction costs. assets) are recognised on the trade date, at which is the date on which the Company becomes a party to the contractual Subsequent to initial recognition loans and receivables are provisions of the instrument. measured at amortised cost using the effective interest method, less any impairment losses. For financial assets and liabilities held at fair value through profit and loss any changes in fair value from the trade date to Loans and receivables comprise total loans and advances, settlement date is accounted in the statement of profit or loss reverse repurchase agreements and cash and cash equivalents. while for available for sale financial assets any changes in fair value from the trade date to settlement date is accounted in the 3.1.2.3 Available-for-sale financial assets statement of other comprehensive income. Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale or are not A financial asset or financial liability is measured initially at fair classified in any of the categories of financial assets. Available- value plus, for an item not at fair value through profit or loss, for-sale financial assets are recognised initially at fair value plus transaction costs that are directly attributable to its acquisition any directly attributable transaction costs. or issue. Subsequent to initial recognition, they are measured at fair 3.1.2 Classification value and changes therein, other than impairment losses are Financial assets recognised in other comprehensive income and presented The Company classifies its financial assets in one of the in the fair value reserve in equity. When an investment is following categories derecognised, the gain or loss accumulated in equity is reclassified to profit or loss. • Loans and receivables • Available for sale or Unquoted equity securities whose fair value cannot reliably be measured or deemed immaterial are carried at cost. All other • At fair value through profit or loss and within the category as available for sale investments are carried at fair value. - Held for trading - Designated at fair value through profit or loss 3.1.2.4 Cash and cash equivalents Cash and cash equivalents comprise cash balances and short 3.1.2.1 Financial assets at fair value through profit or loss term investments with maturities of three months or less from A financial asset is classified as at fair value through profit or the acquisition date that are subject to an insignificant risk of loss if it is classified as held-for-trading or is designated as such changes in their fair value, and are used by the Company in the on initial recognition. Financial assets are designated as at fair management of its short-term commitments. value through profit or loss if the Company manages such investments and makes purchase and sale decisions based on Financial liabilities their fair value in accordance with the Company’s documented The Company classifies its financial liabilities, other than risk management and investment strategy. Attributable guarantees and loan commitments as measured at amortised transaction costs are recognised in profit or loss as incurred. cost or fair value through profit or loss Financial assets at fair value through profit or loss are measured at fair value and changes therein, which takes into account any 3.1.2.5 Reclassifications dividend income, are recognised in profit or loss. Reclassifications of financial assets, other than as set out below, or of financial liabilities between measurements categories are Financial assets at fair value through profit or loss comprise of not permitted following initial recognition. investments in quoted equity shares. 44 Swarnamahal Financial Services PLC - Annual Report 2016/17
Notes to the Financial Statements Contd.
A non-derivative financial asset Held for Trading that would Financial liabilities have met the definition of Loans and Receivables (if the financial The Company derecognises a financial liability when its asset had not been required to be classified as held for trading contractual obligations are discharged, cancelled or expire. at initial recognition) may be reclassified out of the Fair Value through Profit or Loss category, if the entity has the intention 3.1.4 Offsetting and ability to hold the financial asset for the foreseeable future Financial assets and financial liabilities are offset and the net or until maturity. amount presented in the statement of financial position when, and only when, the Company has a legal right to offset the Financial assets are transferred out of the Available-for sale amounts and intends either to settle on a net basis or to realise category to the Loan and Receivables category where they the asset and settle the liability simultaneously. would have met the definition of a Loan and Receivable at the date of reclassification and the Bank has the intent and ability to Income and expenses are presented on a net basis only when hold the assets for the foreseeable future or until maturity. permitted under Sri Lanka Accounting Standards, or for gains and losses arising from a group of similar transactions such as in Held-to-maturity assets are reclassified to the Available-for-sale the Company trading activity. category if the portfolio becomes tainted following the sale of other than an insignificant amount of Held-to-maturity assets 3.1.5 Amortised cost measurement prior to their maturity. The amortised cost of a financial asset or financial liability is the amount at which the financial asset or liability is measured at Financial assets are reclassified at their fair value on the date initial recognition, minus principal repayments, plus or minus of reclassification. For financial assets reclassified out of the the cumulative amortisation using the effective interest method Available-for-sale category into Loans and Receivables, any of any difference between the initial amount recognised and the gain or loss on those assets recognised in Shareholders’ Equity maturity amount, minus any reduction for impairment. prior to the date of reclassification is amortised to profit or loss over the remaining life of the financial asset, using the effective 3.1.6 Fair value measurement interest method. SLFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly 3.1.3 Derecognition transaction between market participants at the measurement Financial assets date. A Fair value measurement requires an entity to determine The Company derecognises a financial asset when the all the following; contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the • The particular asset or liability that is the subject of the financial asset in a transaction in which substantially all the risks measurement and rewards of ownership of the financial asset are transferred • For a non-financial asset, the valuation premise that is or which the Company neither transfers nor retains substantially appropriate for the measurement (consistently with its all of the risks and rewards of ownership and it does not retain highest and best use). control of the financial asset. • The principal (or most advantageous) market for the asset or liability. On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount • The valuation technique(s) appropriate for the measurement, allocated to the portion of the asset transferred), and the sum of considering the availability of data with which to develop (i) the consideration received (including any new asset obtained inputs that represent the assumptions that market less any new liability assumed) and (ii) any cumulative gain or participants would use when pricing the asset or liability and loss that had been recognised in other comprehensive income is the level of the fair value hierarchy within which the inputs recognised in profit or loss. Any interest in transferred financial are categorized. assets that is created or retained by the Company is recognised as a separate asset or liability. The principal or the most advantageous market must be accessible to the Company. The fair value of a liability reflects its Swarnamahal Financial Services PLC - Annual Report 2016/17 45
non-performance risk. The fair value of an asset and liability is • The disappearance of an active market for a security or measured using the assumption that market participants would • Observable data indicating that there is measurable decrease use when pricing the asset or liability, assuming that the market in expected cash flows from a group of financial assets participants act in their economic best interest. In addition, for an investment in an equity security, a significant When available, the Company measure the fair value of an or prolonged decline in its fair value below its cost is objective instrument using the quoted price in an active market for the evidence of impairment. instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume The Company considers evidence of impairment for loans to provide pricing information on an ongoing basis. and advances at both a specific asset and collective level. All individually significant loans and advances are assessed If there is no quoted price in an active market, then the for specific impairment. All individually significant loans Company uses valuation techniques that maximise the and advances found not to be specifically impaired are then use of relevant observable inputs and minimise the use collectively assessed for any impairment that has been incurred of unobservable inputs. The chosen valuation technique but not yet identified. Loans and advances that are not incorporates all of the factors that market participants would individually significant are collectively assessed for impairment take into account in pricing the transaction. by grouping together loans and advances with similar risk characteristics. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price. i.e. the fair In assessing collective impairment the Company uses statistical value of the consideration given or received. If the Company modelling of historical trends of the probability of default, determines that the fair value at initial recognition differs from timing of recoveries and the amount of loss incurred, adjusted the transaction price and the fair value is evidence neither by a for management’s judgement as to whether current economic quoted price in an active market for an identical asset or liability and credit conditions are such that the actual losses are likely nor based on a valuation technique that uses only data from to be greater or less than suggested by historical modelling. observable markets, then the financial instrument is initially Default rates, loss rates and the expected timing of future measured at fair value, adjusted to defer the difference between recoveries are regularly benchmarked against actual outcomes the fair value at initial recognition and the transaction price. to ensure that they remain appropriate. Subsequently that difference is recognised in profit or loss on an appropriate basis over the life of the instruments but no later Impairment losses on assets carried at amortised cost are than when the valuation is wholly supported by observable measured as the difference between the carrying amount of the market data or the transaction is closed out. financial asset and the present value of estimated future cash flows discounted at the asset’s original effective interest rate. 3.1.7 Identification and measurement of impairment Impairment losses are recognised in profit or loss and reflected At each reporting date the Company assesses whether there in an allowance account against loans and advances. is objective evidence that financial assets not carried at fair value through profit or loss are impaired. A financial asset or a Impairment losses on available-for-sale investment securities group of financial assets are impaired when objective evidence are recognised by transferring the cumulative loss that has been demonstrates that a loss event has occurred after the initial recognised in other comprehensive income to profit or loss as a recognition of the asset(s), and that the loss event has an impact reclassification adjustment. on the future cash flows of the asset(s) that can be estimated reliably. If, in a subsequent period, the fair value of an impaired available- for-sale debt security increases and the increase can be related Objective evidence that financial assets are impaired includes: objectively to an event occurring after the impairment loss • Default or delinquency by a debtor was recognised in profit or loss, then the impairment loss is • Significant financial difficulty of the borrower or issuer reversed, with the amount of the reversal recognised in profit or • Indications that a debtor or issuer will enter bankruptcy loss. However, any subsequent recovery in the fair value of an • Adverse changes in the payment status of borrowers or impaired available-for-sale equity security is recognised in other issuers comprehensive income. 46 Swarnamahal Financial Services PLC - Annual Report 2016/17
Notes to the Financial Statements Contd.
Impairment losses are recognised in profit or loss and reflected measured reliably. The carrying amount of the replaced part is in an allowance account against loans and receivables or held- derecognised. The costs of the day-to-day servicing of property, to-maturity investment securities. Interest on the impaired plant and equipment are recognised in profit or loss as incurred. assets continues to be recognised through the unwinding of the discount. If an event occurring after the impairment was 3.3.3 Depreciation recognised causes the amount of impairment loss to decrease, Depreciation is calculated over the depreciable amount, which then the decrease in impairment loss is reversed through profit is the cost of an asset, or other amount substituted for cost, less or loss. its residual value.
3.2 Stated capital Depreciation is recognised in profit or loss on a straight-line Ordinary shares basis over the estimated useful lives of each part of an item of Ordinary shares are classified as equity. Incremental costs property, plant and equipment, since this most closely reflects directly attributable to the issue of ordinary shares are the expected pattern of consumption of the future economic recognised as a deduction from equity, net of any tax effects. benefits embodied in the asset.
3.3 Property plant and equipment Items of property, plant and equipment are depreciated from 3.3.1 Recognition and measurement the date that they are installed and are ready for use, or in Items of property, plant and equipment are measured at cost respect of internally constructed assets, from the date that the less accumulated depreciation and accumulated impairment asset is completed and ready for use. losses. The estimated useful lives for the current and comparative years Cost includes expenditure that is directly attributable to the of significant items of property, plant and equipment are as acquisition of the asset. The cost of self-constructed assets follows: includes the following: Category Years of depreciation • the cost of materials and direct labour; Buildings improvements 10 years • any other costs directly attributable to bringing the assets to a (Includes partitions and other 04 years working condition for their intended use; permanent fixtures) Computer and software Purchased software that is integral to the functionality of the Office equipment 03 years related equipment is capitalised as part of the equipment. Motor vehicles 04 years When parts of an item of property, plant and equipment have Furniture and fittings 03 years different useful lives, they are accounted for as separate items Leased assets 04 years (major components) of property, plant and equipment. Depreciation methods, useful lives and residual values are Gains and losses on disposal of an item of property, plant and reassessed at each reporting date and adjusted if appropriate. equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and 3.3.4 Derecognition equipment, and are recognised net within other income in profit The carrying amount of an item of property, plant & equipment or loss. is derecognised on disposal or when no future economic benefits are expected from its use or disposal. The gain or 3.3.2 Subsequent costs loss arising from derecognition of an item of property, plant The cost of replacing a part of an item of property, plant and and equipment included in profit or loss when the item is equipment is recognised in the carrying amount of the item derecognised. When replacement costs are recognised in the if it is probable that the future economic benefits embodied carrying amount of an item of property, plant and equipment, within the part will flow to the Company, and its cost can be the remaining carrying amount of the replaced part is derecognised. Swarnamahal Financial Services PLC - Annual Report 2016/17 47
3.4 Investment property 3.6 Impairment of non-financial assets Investment property is property held either to earn rental The carrying amounts of the Company’s non-financial income or for capital appreciation or both but not for sale in the assets, other than deferred tax assets are reviewed at each ordinary course of business, used in the production or supply of reporting date to determine whether there is any indication goods or services or for administrative purposes. of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. 3.4.1 Basis of recognition Investment property is recognised if it is probable that future The recoverable amount of an asset or cash-generating unit economic benefits that are associated with the investment is the greater of its value in use and its fair value less costs to property will flow to the Company and cost of the investment sell. In assessing value in use, the estimated future cash flows property can be reliably measured. are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value 3.4.2 Measurement of money and the risks specific to the asset. For the purpose of An investment property is measured initially at its cost. The cost impairment testing, assets that cannot be tested individually of a purchased investment property comprises of its purchase are grouped together into the smallest group of assets that price and any directly attributable expenditure. The cost of a generates cash inflows from continuing use that are largely self-constructed investment property is its cost at the date when independent of the cash inflows of other assets or group of the construction or development is complete. assets (the “cash-generating unit, or CGU”).
The Company applies the fair value model for subsequent An impairment loss is recognised if the carrying amount of an measurement of investment properties in accordance with Sri asset or its CGU exceeds its estimated recoverable amount. Lanka Accounting Standard (LKAS 40) “Investment Property”. Impairment losses are recognised in profit or loss. Accordingly, investment properties are stated at fair value and an external independent valuer having an appropriate An impairment loss is reversed if there has been a change in recognized professional qualification values the properties the estimates used to determine the recoverable amount. every year. Any gain or loss arising from a change in fair value is An impairment loss is reversed only to the extent that the recognized in statement of profit or loss. asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or 3.4.3 Derecognition amortisation, if no impairment loss had been recognised. Investment properties are derecognized when disposed of or permanently withdrawn from use because no future 3.7 Employee benefits economic benefits are expected. Transfers are made to and from 3.7.1 Defined contribution plans investment properties only when there is change in use. A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate 3.5 Inventory entity and will have no legal or constructive obligation to pay Inventory mainly consists of real estate stock. The Company’s further amounts. Obligations for contributions to defined policy for the accounting of inventory is as follows. contribution plans are recognised as an employee benefit expense in profit or loss in the periods during which services are 3.5.1 Real estate rendered by employees. Investments in real estate are carried at cost or net realisable value whichever is lower. Cost of purchase, costs of conversion The Company contributes 12% and 3% of gross emoluments and other costs including selling and distribution expenses of employees as provident fund (EPF), and trust fund (ETF) that are necessary to bring the asset to the saleable condition contribution respectively. are included in the carrying value of the property. Net realisable value is the price at which inventories can be sold 3.7.2 Defined benefit plan in the ordinary course of business, less the estimated cost of A defined benefit plan is a post-employment benefit plan completion and the estimated cost necessary to make the sale. other than a defined contribution plan. The defined benefit Net Realisable Value is determined based on independent, is calculated by an independent actuary using Projected external valuations made by a qualified valuer. Unit Credit method as recommended by LKAS 19 “Employee 48 Swarnamahal Financial Services PLC - Annual Report 2016/17
Notes to the Financial Statements Contd.
Benefits ” The present value of the defined benefit obligation is Interest income and expense presented in the statement of determined by discounting the estimated future cash outflows profit or loss include interest on financial assets and liabilities using the yield on government bonds at the reporting date and measured at amortised cost calculated on an effective interest have maturity dates approximating to the terms of the related basis and interest income on available for sale investment liability. securities calculated on an effective interest basis.
The Company recognises actuarial gains and losses that arise 3.9.2 Finance lease and hire purchase income in calculating the Company’s obligation in respect of a plan in Assets leased to customers who transfer substantially all the statement of other comprehensive income. risk and rewards associated with ownership other than the legal title are classified as finance leases. Amounts receivable under The present value of the defined benefit obligation depends finance leases and hire purchases are included under “Lease on a number of factors that are determined on an actuarial rental receivable”. Leasing and hire purchases balances are basis using a number of assumptions. Key assumptions used stated in the statement of financial position after deduction of in determining the defined retirement benefit obligations are initial rental received. given in Note 26. Any changes in these assumptions will impact the carrying amount of defined benefit obligations. The excess of aggregate rentals receivable over the cost of the leased assets and hire purchases constitutes the total unearned Provision has been made for retirement gratuities from the first income. The unearned income is taken into revenue over the year of service for all employees, in conformity with LKAS 19 term of the facility, commencing from the month in which “Employee Benefits”. However, under the Payment of Gratuity the lease or hire purchase is executed in proportion to the Act No.12 of 1983, the liability to an employee arises only on remaining receivable balance of the facility. completion of 5 years of continued service. 3.9.3 Dividend income The gratuity liability is not externally funded. Dividend income is recognised in the statement of profit or loss on an accrual basis when the Company’s right to receive the 3.8 Provisions dividend is established. A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that 3.9.4 Overdue interest can be estimated reliably, and it is probable that an outflow of Overdue interest income from leasing, hire purchase, gold loans economic benefits will be required to settle the obligation. and other loans have been accounted for on a cash basis.
3.9 Revenue 3.9.5 Real estate income 3.9.1 Interest Revenue is recognized when properties are sold and the buyer Interest income and expense are recognized in profit or loss has taken possession of such properties (when the risk and using the effective interest method. The effective interest rate rewards are transferred to the buyer). However, when there is is the rate that exactly discounts the estimated future cash insufficient assurance as to the receipt of the total consideration, payments and receipts through the expected life of the financial income is accounted for on a cash basis. asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability. When 3.9.6 Gains or losses on disposal of property, plant & calculating the effective interest rate, the Company estimates equipment future cash flows considering all contractual terms of the Gains / losses from sale of property plant and equipment is financial instrument, but not future credit losses. recognized in the period in which the sale occurs.
The calculation of the effective interest rate includes all 3.10 Expenses transaction costs and fees that are an integral part of the Expenses are recognized in profit or loss as they are incurred, in effective interest rate. Transaction costs include incremental the period to which they relate. costs that are directly attributable to the acquisition or issue of a financial asset or liability. Swarnamahal Financial Services PLC - Annual Report 2016/17 49
3.10.1 Operating leases Deferred tax assets and liabilities are offset if there is a legally Leases where the lessor effectively retains substantially all the enforceable right to offset current tax liabilities and assets, and risks and rewards of ownership over the lease term are classified they relate to taxes levied by the same tax authority on the same as operating leases. Payments made under operating leases are taxable entity, or on different tax entities, but they intend to recognised in profit and loss on a straight-line basis over the settle current tax liabilities and assets on a net basis or their tax term of the lease. assets and liabilities will be realised simultaneously.
3.10.2 Operating expenses A deferred tax asset is recognised to the extent that it is All expenses incurred in day to day operations of the business probable that future taxable profits will be available against and in maintaining the property, plant and equipment in a which they can be utilised. Deferred tax assets are reviewed at state of efficiency has been charged to the statement of profit each reporting date and are reduced to the extent that it is no or loss in arriving at the profit for the year. Provision has also longer probable that the related tax benefit will be realised. been made for bad and doubtful debts, all known liabilities and depreciation on property, plant and equipment. 3.10.5 Value Added Tax on financial services The value base for Value Added Tax for the Company is the 3.10.3 Finance expense adjusted accounting profit before tax and emoluments of Finance costs comprise interest expense on short term employees. The adjustment to the accounting profit before tax borrowings and bank charges. is for economic depreciation computed on prescribed rates instead of the rates adopted in the financial statements. 3.10.4 Income tax expenses Income tax expenses comprise current and deferred tax. Current 3.10.6 Nation Building Tax on financial services tax and deferred tax is recognized in profit or loss except to the With effect from January 01, 2014, NBT of 2% was introduced extent that it relates to items recognized directly in equity or in on supply of financial services via an amendment to the NBT other comprehensive income. Act No. 09 of 2009. NBT is chargeable on the same base used for calculation of VAT on Financial services as explained in notes to 3.10.4.1 Current tax the Financial Statements. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or 3.10.7 Economic Service Charges (ESC) substantively enacted at the reporting date, and any adjustment ESC is payable on the liable turnover at specified rates. As per to tax payable in respect of previous years. Current tax payable the provision of the Economic Service Charge Act No. 13 of 2006 also includes any tax liability arising from the declaration of and subsequent amendments thereto, ESC is deductible from dividends. the income tax liability. Any unclaimed payment can be carried forward and set off against the income tax payable as per the The provision for income tax is based on the elements of income relevant provision in the Act. and expenditure as reported in the financial statements and computed in accordance with the provisions of the Inland 3.10.8 Crop Insurance Levy (CIL) Revenue Act No. 10 of 2006 and subsequent amendments As per the provisions of the Section 14 of the Finance Act No. 12 thereon specified in note 13. of 2013, the CIL was introduced with effect from April 01, 2013 and is payable to the National Insurance Trust Fund. Currently, 3.10.4.2 Deferred tax the CIL is payable at 1% of the profit after tax. Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for 3.11 Earnings per share financial reporting purposes and the amounts used for taxation The Company presents basic earnings per share (EPS) data purposes. for its ordinary shares. Basic EPS is calculated by dividing the profit attributable to ordinary shareholders of the Company by Deferred tax is measured at the tax rates that are expected to be the weighted average number of ordinary shares outstanding applied to temporary differences when they reverse, using tax during the year. rates enacted or substantively enacted at the reporting date. 50 Swarnamahal Financial Services PLC - Annual Report 2016/17
Notes to the Financial Statements Contd.
3.12 Commitments and contingencies 3.18.1 SLFRS 9 – Financial Instruments Contingencies are possible assets or obligations that arise from SLFRS 9 replaces the existing guideline in LKAS 39, Financial a past event and would be confirmed only on the occurrence or Instruments: Recognition and Measurement. SLFRS contain non-occurrence of uncertain future events, which are beyond three principal classification categories for financial assets the Company’s control. – i.e. measured at amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit 3.13 Events occurring after the reporting date or loss (FVTPL). The existing LKAS 39 categories of Held-to- All material events occurring after the reporting date have been maturity, Loans and receivables and Available for sale are considered and where necessary, adjustments to or disclosure removed. have been made in the financial statements. 3.18.2 SLFRS 15 – Revenue from contract with customers 3.14 Comparative information SLFRS 15 establishes a comprehensive framework for The comparative information is re-classified wherever necessary determining whether, how much and when revenue is to conform with the current year’s presentation in order to recognised. It replaces existing revenue recognition guideline, provide a better presentation. including LKAS 18 Revenue, LKAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes. 3.15 Directors’ responsibility statement SLFRS 15, will be effective for the financial periods beginning on The Board of Directors of the Company is responsible for the or after 1 January 2018, with early adoption permitted. preparation and presentation of these financial statements.
3.18.3 SLFRS 16 - Leases 3.16 Segmental reporting SLFRS 16 introduces a single, on-balance lease sheet accounting An operating segment is a component of the Company model for lessees. A lessee recognizes a right-of use asset that engages in business activities from which it may earn representing its right to use the underlying asset and a lease revenues and incur expenses, including revenues and expenses liability representing its obligation to make lease payments. that relate to transactions with any of the Company’s other There are optional exemptions for short-term leases and leases components, whose operating results are reviewed regularly by of low value items. Lessor accounting remains similar to the the Company’s Management to make decisions about resources current standard – i.e. lessors continue to classify leases as allocated to each segment and assess its performance, and for finance or operating leases which discrete financial information is available. For each of the strategic divisions, the Company’s management monitors the SLFRS replaces existing leasing guidelines including LKAS 17 operating results separately for the purpose of making decisions Leases, IFRIC 4 Determining whether an arrangement contains about resource allocation and performance assessment. The a lease, SIC 15 Operating Leases Incentives and SIC – 27 Company has two reportable segments, as described in the Evaluating the Substance of Transactions involving the legal Note 38. form of a lease.
3.17 Statement of cash flows SLFRS 16, will be applicable for the financial periods beginning The statement of cash flows has been prepared using the on or after 1 January 2019. indirect method in accordance with Sri Lanka Accounting Standard 7 - Statement of Cash Flows. 4. Regulatory provisions 3.18 New Accounting Standards issued but not effective as 4.1 Deposit insurance scheme at reporting date In terms of the Finance Companies (Insurance of deposit The Institute of Chartered Accountants of Sri Lanka has issued liabilities) Direction No. 2 of 2010, “Sri Lanka Deposit Insurance the following new Sri Lanka Accounting Standards which Scheme Regulations”, issued on 27 September 2010 and will become applicable for the financial periods beginning subsequent amendments thereto all Registered Finance on or after 1 April 2017. The Company has not assessed the Companies are required to insure their deposit liabilities in the potential impact on its financial statements resulting from their Deposit Insurance Scheme operated by the Monetary Board in application. terms of Sri Lanka Deposit Insurance Scheme Regulations No. 1 Swarnamahal Financial Services PLC - Annual Report 2016/17 51
of 2010 issued under Sections 32A to 32E of the Monetary Law impact significantly on earnings performance, reputation and Act with effect from 1 October 2010. Deposits to be insured capital. The approach entails active monitoring of the level of include time and savings deposit liabilities and exclude the risk exposure against the parameters set in the risk appetite. following: The BIRMC also assists the Board by assessing and approving significant credit and other transactions beyond the discretion • Deposit liabilities to member institutions. of executive management. • Deposit liabilities to the Government of Sri Lanka inclusive of Ministries, Departments and Local Governments. The following Executive Management Sub - Committees, each with specialized focus, support the BIRMC and are responsible • Deposit liabilities to shareholders, directors, key management for the co-ordination of risk matters for each of the areas of risk personnel and other related parties management: • Deposit liabilities held as collateral against any • Asset and Liability Committee (ALCO) accommodation granted. • Credit Committee • Deposits falling within the meaning of dormant deposits in • Remuneration Committee terms of the Finance Companies Act, funds of which have been transferred to the Central Bank of Sri Lanka in terms of • Related party transaction review committee the relevant Directions issued by the Monetary Board. Internal audit undertakes both regular and ad-hoc reviews of A premium of 0.15 per centum per annum is payable monthly, risk management controls and procedures, the results of which calculated on total amount of all eligible deposits as at end of are reported to the Audit Committee. The Audit Committee the month. provides its assessment on the effectiveness of internal audit and external disclosure of accounting policies and financial reporting to the Board. Risk management policies and systems 5. Financial Risk management are reviewed regularly to reflect changes in market conditions, products and services offered. 5.1 Introduction and overview The Company has exposure to the following risks from financial 5.3 Credit Risk instruments: Credit risk is the risk of financial loss to the Company if a a) Credit Risk customer or counter party to a financial instrument fails to b) Liquidity Risk meet its contractual obligations, and arises principally from the c) Market Risk Company’s loans and advances to customers, and investment in d) Operational Risk debt/equity securities. For risk management reporting purposes the Company considers and consolidates all elements of credit This note presents information about the Company’s exposure risk exposure (such as individual obligor default risk, industry to each of the above risks (except market risk), the Company’s risk etc.) objectives, policies and processes for measuring and managing risk, and the Company’s management of capital. 5.3.1 Management of Credit Risk The Company has developed a policy which defines the 5.2 Risk management framework principles encompassing client selection, due diligence, early The Board of Directors has overall responsibility for the alert reporting, tolerable levels of concentration risk and establishment and oversight of the Company’s risk management portfolio monitoring in line with Company’s risk appetite. The framework. In discharging its governance responsibility it policy is reviewed at least annually ensuring consistency with operates through two key committees the Board Integrated Risk the Company’s business strategy. A monthly Credit Policy Management Committee and the Audit Committee. Meeting chaired by the Chief Executive Officer, drives policy decisions and implementation plans. The BIRMC provides the Board the assurance that risk management strategies, policies and processes are in place to manage events / outcomes that have the potential to 52 Swarnamahal Financial Services PLC - Annual Report 2016/17
Notes to the Financial Statements Contd.
5.3.2 Exposure to credit Risk The table below sets out information about credit quality of loans and advances granted to customers.
5.3.3 Age analysis of loans and receivables
31 March 2017 0 to 3 3 to 6 6 to 9 9 to 12 12 & Above Total Months Months Months Months Months (Rs. ‘000) (Rs. ‘000) (Rs. ‘000) (Rs. ‘000) (Rs. ‘000) (Rs. ‘000) Gold loans 1,232,386 56,204 2,839 111 9,960 1,301,500 Finance lease receivable 33,478 887 - - 2,778 37,143 Hire purchase receivables 11,937 790 176 - 2,201 15,104 Other term loans 414,587 32,717 3,012 10,563 58,057 518,936 Loan to Swarnamahal Jewellers Limited 306,635 - - - - 306,635 Total 1,999,023 90,598 6,027 10,674 72,996 2,179,318
31 March 2016 0 to 3 3 to 6 6 to 9 9 to 12 12 & Above Total Months Months Months Months Months (Rs. ‘000) (Rs. ‘000) (Rs. ‘000) (Rs. ‘000) (Rs. ‘000) (Rs. ‘000) Gold loans 1,536,800 - - - - 1,536,800 Finance lease receivable 28,343 5,810 - - 2,338 36,491 Hire purchase receivables 33,332 12,310 1,457 527 2,538 50,164 Other term loans 256,411 3,678 153 406 10,524 271,172 Loan to Swarnamahal Jewellers Limited 442,557 - - - - 442,557 Total 2,297,443 21,798 1,610 933 15,400 2,337,184
The following table shows the maximum exposure to credit risk and net exposure to credit risk by class of financial assets (except loans and receivables)
As at 31st March 2017 2016 Maximum exposure Net exposure Maximum exposure Net exposure (Rs. ‘000) (Rs. ‘000) (Rs. ‘000) (Rs. ‘000) Financial assets held at FVTPL 1,965 1,965 1,919 1,919 Financial assets available-for-sale 2 2 2 2 Other investments 304,678 304,678 277,884 277,884 Cash and cash equivalents 238,438 238,438 304,660 304,660 Related party receivables 141 141 450 450 Deposits and prepayments 45,404 45,404 47,579 47,579 Total 590,628 590,628 632,494 632,494 Swarnamahal Financial Services PLC - Annual Report 2016/17 53
5.3.4 Allowances for impairment The Company established an allowance for impairment losses on assets carried at amortised cost/available for sale that represents its estimate of incurred losses in its loan and investment debt/equity security portfolio.
The main components of this allowance are a specific loss component that relates to individually significant exposures, and, for assets measured at amortised cost, a collective loan loss allowance established for groups of homogeneous assets as well as for individually significant exposures that were subject to individual assessment for impairment but not found to be individually impaired.
Assets carried at fair value through profit or losses are not subject to impairment testing as the measure of fair value reflects the credit quality of each asset.
5.3.5 Collateral held and other credit enhancement and the financial effect The Company holds collateral and other credit enhancements against certain of its credit exposure. The table below sets out principal types of collateral and their approximate collateral percentages that are held against different types of financial assets.
Type of credit exposure Principal type of collateral Percentage of exposure that is subject to an arrangement that held for secured lending requires collateralization 31-Mar-17 31-Mar-16 Loans and advances to retail customers Finance leases Property and equipment 100% 100% Hire purchase Property and equipment 100% 100% Loans against fixed deposit Fixed deposit 100% 100% Personal loans None - - Mortgage loans Any property with a value 100% 100% Loans and advances to corporate customers Finance leases Property and equipment 100% 100% Hire Purchase Property and equipment 100% 100% Loans against fixed deposit Fixed deposit 100% 100%
5.3.6 Fair value of collateral held An estimate made at the time of borrowing of the fair value of collateral and other security enhancements held against loans and receivables did not change significantly from the fair values at the reporting date.
5.3.7 Credit quality analysis Below table summarises the credit quality analysis of loans and advances based on number of months on arrears.
Loan category Balance as at Performing Non performing 31 March 2017 (Rs.) (Rs.) Gold loans 1,301,500,406 1,288,685,791 12,814,615 Finance lease receivables 37,142,633 34,364,861 2,777,772 Hire purchase receivables 15,103,772 12,726,855 2,376,917 Other term loans 518,936,186 456,214,341 62,721,845 Loan to Swarnamahal Jewellers Limited 306,635,129 306,635,129 - Total gross amount 2,179,318,126 2,098,626,977 80,691,149 54 Swarnamahal Financial Services PLC - Annual Report 2016/17
Notes to the Financial Statements Contd.
Loan category Balance as at Performing Non performing (Rs) 31 March 2016 (Rs) Gold loans 1,536,799,829 1,520,467,284 16,332,545 Finance lease receivables 36,491,847 34,153,609 2,338,238 Hire purchase receivables 50,163,943 45,641,834 4,522,109 Other term loans 271,171,378 260,088,298 11,083,080 Loan to Swarnamahal Jewellers Limited 442,557,080 442,557,080 - Total gross amount 2,337,184,077 2,302,908,105 34,275,972
5.4 Liquidity Risk Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivering cash or another financial asset.
5.4.1 Management of Liquidity Risk The Company’s approach to managing liquidity is to ensure, that funds available are adequate to meet credit demands of its customers and to enable deposits to be repaid on demand or upon maturity as appropriate.
The main sources of the Company’s funding are capital, core deposits from customers and access to borrowed funds from the market. The Company also maintains a portfolio of readily marketable securities to further strengthen its liquidity position. The treasury and liquidity policies and compliance there under are reviewed and approved by the ALCO. A summary report, including any exceptions and remedial action taken, is submitted quarterly to ALCO.
5.4.2 Exposure to Liquidity Risk Liquid assets include cash and short term funds, bills purchased and short term investments. Short term liabilities include savings deposits, repo borrowings and current taxation.
The Company also monitors the maturity profile of its assets and liabilities. Maturity analysis of assets and liabilities which is based on the remaining period as at the date of the statement of financial position to the respective contractual maturity date is given in Note 37 to the financial statements.
The below table depicts the remaining contractual maturities of financial liabilities as at 31st March 2017.
2016/17 Carrying Contractual Less than 3 Months to 1 1-5 Years More than 5 Total amount cash flow 3 Months Year Years (Rs.000) (Rs.000) (Rs.000) (Rs.000) (Rs.000) Non Derivative Liabilities Deposits 3,771,828 3,771,828 1,377,879 1,652,028 741,921 - 3,771,828 Bank overdraft 9,867 9,867 9,867 - - - 9,867 Other liabilities 86,642 86,642 23,577 48,854 - 14,211 86,642 Swarnamahal Financial Services PLC - Annual Report 2016/17 55
2015/16 Carrying Contractual Less than 3 Months to 1-5 Years More than 5 Total amount cash flow 3 Months 1 Year Years (Rs.000) (Rs.000) (Rs.000) (Rs.000) (Rs.000) Non Derivative Liabilities Deposits 4,015,255 4,015,255 1,559,761 1,299,377 1,149,828 6,289 4,015,255 Bank overdraft 3,519 3,519 3,519 - - - 3,519 Other liabilities 56,921 56,921 22,303 - 14,462 20,156 56,921
5.5 Market Risk Market risk is the risk that changes in market prices such as interest rates, equity prices, foreign exchange rates that will affect the Company’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposure within acceptable parameters, while optimising the return on risk.
5.5.1 The following assets of the Company are subject to market risk
Assets subject to market risk Carrying Amount as at 31 Trading portfolio Non trading portfolio March 2017 (Rs.) (Rs.) (Rs.) Equity shares 1,967,230 1,964,730 2,500 Loans and advances to customers 2,059,618,929 - 2,059,618,929 Reverse repurchase agreements 424,939,323 - 424,939,323
Assets subject to market risk Carrying Amount as at 31 Trading portfolio Non trading portfolio March 2016 (Rs.) (Rs.) (Rs.) Equity shares 1,922,417 1,919,917 2,500 Loans and advances to customers 2,237,282,970 - 2,237,282,970 Reverse repurchase agreements 412,918,756 - 412,918,756
Liabilities subject to market risk Carrying Amount as at 31 Trading portfolio Non trading portfolio March 2017 (Rs.) (Rs.) (Rs.) Deposits from customers 3,771,827,767 - 3,771,827,767 Bank overdrafts 9,867,016 - 9,867,016
Liabilities subject to market risk Carrying Amount as at 31 Trading portfolio Non trading portfolio March 2016 (Rs.) (Rs.) (Rs.) Deposits from customers 4,015,255,430 - 4,015,255,430 Bank overdrafts 3,518,974 - 3,518,974
5.5.2 Management of Market Risk The Company separates its exposure to market risk between trading and non-trading portfolios. Overall authority of market risk is vested with the ALCO. The head of the risk management committee is responsible for the development of detailed risk management policy overseen by the ALCO and for the day to day review of their implementation 56 Swarnamahal Financial Services PLC - Annual Report 2016/17
Notes to the Financial Statements Contd.
Equity Price Risk A sensitivity analysis of the share trading portfolio is shown below at shock level of 10%, 15% and 20%
2016/17 2015/16 At shock levels of Impact on Balance on At shock levels of Impact on Balance on statement of profit portfolio (Rs) statement of profit portfolio (Rs) or loss (Rs) or loss (Rs) 10% 196,473 1,768,258 10% 191,992 1,727,925 15% 294,709 1,670,022 15% 287,988 1,631,929 20% 392,946 1,571,785 20% 383,983 1,535,934
5.5.3 Exposure to Interest Rate Risk-Non trading portfolio The principal risk to which non-trading portfolios are exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instruments because of a change in market interest rates. Interest rate risk is managed principally through monitoring interest rate gaps and by having pre-approved limits for re pricing bands. ALCO is the monitoring body for compliance with these limits.
5.6 Operational Risk Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Company’s involvement with financial instruments, including processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behavior.
The Company’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Company’s reputation with overall cost effectiveness and to avoid control procedures that restrict initiative and creativity.
Compliance with Company’s standards is supported by a program of periodic reviews undertaken by Internal Audit. The results of Internal Audit reviews are discussed with the management of the business unit to which they relate, with summaries submitted to the Audit Committee and senior management of the Company.
5.7 Capital Management Risk Capital Adequacy is a measure of a finance company’s ability to withstand the associated risks of its business. Regulators find it necessary that every finance company to hold adequate capital to absorb unexpected losses as a going concern, while they price their products and services to take care of expected risks.
For the purpose of computing the capital adequacy ratio of finance companies, the constituent of capital shall be:-
I. Tier 1 Core capital: representing permanent shareholder’s equity (paid-up shares/common stock) and reserves created or increased by appropriation of retained earnings or other surpluses, i.e. share premia, retained profits and other reserves (core capital minimum of Rs.400Mn); and
II. Tier 2 Supplementary capital: representing revaluation reserves, general provisions and other capital instruments which combine certain characteristics of equity and debt, such as, hybrid capital instruments and unsecured subordinated term debts. Swarnamahal Financial Services PLC - Annual Report 2016/17 57
Every finance company shall, subject to the provisions of the In estimating these cash flows, management makes judgements Finance Companies (Minimum Core Capital) Direction No. 1 of about a counterparty’s financial situation and the net realisable 2006, at all times, maintain its capital (adjusted for the items that value of any underlying collateral. Each impaired asset is may be specified by the Director) at a level not less than assessed on its merits, and the workout strategy and estimate of 10 percent of its risk weighted assets with the core capital cash flows considered recoverable are independently approved constituting not less than 5 percent of its risk weighted assets, by ALCO computed as per instructions issued by the CBSL. Collectively assessed impairment allowances cover credit losses Description 2017 2016 inherent in portfolios of loans and advances and investment (Rs. ‘000) (Rs. ‘000) securities measured at amortised cost with similar credit risk characteristics when there is objective evidence to suggest Total tier 1 capital (995) (1,052) that they contain impaired financial assets, but the individual Total tier 2 capital - - impaired items cannot yet be identified. Total risk weighted 1,287 1,229 assets In assessing the need for collective loss allowances, management considers factors such as credit quality, portfolio Off balance sheet - - size, concentrations and economic factors. In order to estimate exposure the required allowance, assumptions are made to define the Capital adequacy ratio way inherent losses are modelled and to determine the required -Tier 1 (%) - (77.3%) (85.60%) input parameters, based on historical experience and current Stipulated limit 5% economic conditions. The accuracy of the allowances depends -Tier 1 &2 (%) - (77.3%) (85.60%) on the estimates of future cash flows for specific counterparty Stipulated limit allowances and the model assumptions and parameters used in 10% determining collective allowances.
The Company is not compliant with these directions, as at 31 Determining fair values March 2017 (and at 31 March 2016). The determination of fair value for financial assets and liabilities for which there is no observable market price requires the 5.8 Use of estimates and judgement use of valuation techniques as described in accounting policy Note 3.1.2.3 for financial instruments that trade infrequently Management discusses with the Company’s Audit Committee and have little price transparency, fair value is less objective, the development, selection and disclosure of the Company’s and requires varying degrees of judgement depending on critical accounting policies and their application, and liquidity, concentration, uncertainty of market factors, pricing assumptions made relating to major estimation uncertainties. assumptions and other risks affecting the specific instrument. Key sources of estimation uncertainty
Level 1 – fair value measurements using quoted prices Allowance for credit losses (unadjusted) in active markets for identical assets or liabilities; Assets accounted for at amortised cost are evaluated for impairment on a basis described in Note 3.1.7 Level 2 – fair value measurements using inputs other than quoted prices included within Level 1 that are observable for The specific counter party component of the total allowances the asset or liability, either directly (i.e. as prices) or indirectly (i.e. for impairment applies to financial assets evaluated individually derived from prices); and for impairment and is based upon management’s best estimate of the present value of the cash flows that are expected to be Level 3 – fair value measurements using inputs for the asset received. or liability that are not based on observable market data (i.e. unobservable inputs). 58 Swarnamahal Financial Services PLC - Annual Report 2016/17
Notes to the Financial Statements Contd. Total Total 2,024,070 1,967,230 1,967,230 9,867,016 1,922,417 3,518,974 1,922,417 5,999,853 72,430,133 42,459,583 118,176,325 424,939,323 169,624,469 412,918,756 4,061,233,987 2,604,758,647 2,059,618,929 3,771,827,767 3,854,124,916 2,825,826,048 2,237,282,970 4,015,255,430 2,500 2,500 2,500 2,500 Level 3 Level Level 3 Level 9,867,016 3,518,974 2,024,070 5,999,853 72,430,133 42,459,583 118,176,325 424,939,323 169,624,469 412,918,756 2,604,758,647 2,059,618,929 3,771,827,767 3,854,124,916 2,825,826,048 2,237,282,970 4,015,255,430 4,061,233,987 ------Fair value (Rs.) value Fair Fair value (Rs.) value Fair Level 2 Level Level 2 Level ------Level 1 Level Level 1 Level 1,964,730 1,964,730 1,919,917 1,919,917 Total Total 1,922,417 3,518,974 1,922,417 5,999,853 2,024,070 1,967,230 1,967,230 9,867,016 42,459,583 72,430,133 169,624,469 412,918,756 118,176,325 424,939,323 2,825,826,048 2,237,282,970 4,015,255,430 4,061,233,987 2,604,758,647 2,059,618,929 3,771,827,767 3,854,124,916 ------Other Other financial liabilities financial 3,518,974 liabilities 9,867,016 42,459,583 72,430,133 4,015,255,430 4,061,233,987 3,771,827,767 3,854,124,916 ------2,500 2,500 2,500 2,500 for sale for for sale for Available Available Available Available ------Carrying (Rs.) amount Carrying (Rs.) amount Loans & Loans Loans & Loans 5,999,852 2,024,070 receivables 169,624,469 412,918,756 receivables 118,176,325 424,939,323 2,825,826,047 2,237,282,970 2,604,758,647 2,059,618,929 ------trading trading Held for Held for Held for Held for 1,919,917 1,919,917 1,964,730 1,964,730 Financial assets not measured at fair value* at assets not measured Financial and Loans to advances customers and other Trade receivables and cash Cash equivalents fair value* at liabilities not measured Financial Deposits from customers Reverse Reverse repurchase agreements Bank overdrafts Trade & other Trade payables Equity shares 31 March 2016 31 March Financial liabilities not measured at fair value* at liabilities not measured Financial Deposits from customers Trade and other Trade receivables and cash Cash equivalents Financial assets measured at fair value fair value at assets measured Financial Equity shares fair value* at assets not measured Financial and Loans to advances customers Reverse repurchase agreements 31 March 2017 31 March Bank overdrafts & other Trade payables *These financial instruments are carried at amortised cost in the financial statements. The company doesn’t anticipate the fair values of these to be significantly be significantly of these to the fair values anticipate doesn’t company The carried amortised at are financial instruments *These in the financial statements. cost their carrying to the impact and consider value as non material. different The table below analyses financial instruments measured at fair value at the end of the reporting period, by the level in the fair value hierarchy into which the fair into hierarchy in the fair value the end of reporting the level at by fair value at period, measured financial instruments analyses table below The is categorised: measurement value Swarnamahal Financial Services PLC - Annual Report 2016/17 59 Total Total 2,024,070 1,967,230 1,967,230 9,867,016 1,922,417 3,518,974 1,922,417 5,999,853 72,430,133 42,459,583 118,176,325 424,939,323 169,624,469 412,918,756 4,061,233,987 2,604,758,647 2,059,618,929 3,771,827,767 3,854,124,916 2,825,826,048 2,237,282,970 4,015,255,430 2,500 2,500 2,500 2,500 Level 3 Level Level 3 Level 9,867,016 3,518,974 2,024,070 5,999,853 72,430,133 42,459,583 118,176,325 424,939,323 169,624,469 412,918,756 2,604,758,647 2,059,618,929 3,771,827,767 3,854,124,916 2,825,826,048 2,237,282,970 4,015,255,430 4,061,233,987 ------Fair value (Rs.) value Fair Fair value (Rs.) value Fair Level 2 Level Level 2 Level ------Level 1 Level Level 1 Level 1,964,730 1,964,730 1,919,917 1,919,917 Total Total 1,922,417 3,518,974 1,922,417 5,999,853 2,024,070 1,967,230 1,967,230 9,867,016 42,459,583 72,430,133 169,624,469 412,918,756 118,176,325 424,939,323 2,825,826,048 2,237,282,970 4,015,255,430 4,061,233,987 2,604,758,647 2,059,618,929 3,771,827,767 3,854,124,916 ------Other Other financial liabilities financial 3,518,974 liabilities 9,867,016 42,459,583 72,430,133 4,015,255,430 4,061,233,987 3,771,827,767 3,854,124,916 ------2,500 2,500 2,500 2,500 for sale for for sale for Available Available Available Available ------Carrying (Rs.) amount Carrying (Rs.) amount Loans & Loans Loans & Loans 5,999,852 2,024,070 receivables 169,624,469 412,918,756 receivables 118,176,325 424,939,323 2,825,826,047 2,237,282,970 2,604,758,647 2,059,618,929 ------trading trading Held for Held for Held for Held for 1,919,917 1,919,917 1,964,730 1,964,730 Financial assets not measured at fair value* at assets not measured Financial and Loans to advances customers and other Trade receivables and cash Cash equivalents fair value* at liabilities not measured Financial Deposits from customers Reverse Reverse repurchase agreements Bank overdrafts Trade & other Trade payables Equity shares Financial liabilities not measured at fair value* at liabilities not measured Financial Deposits from customers Trade and other Trade receivables and cash Cash equivalents Financial assets measured at fair value fair value at assets measured Financial Equity shares fair value* at assets not measured Financial and Loans to advances customers Reverse repurchase agreements 31 March 2017 31 March 31 March 2016 31 March Bank overdrafts & other Trade payables *These financial instruments are carried at amortised cost in the financial statements. The company doesn’t anticipate the fair values of these to be significantly be significantly of these to the fair values anticipate doesn’t company The carried amortised at are financial instruments *These in the financial statements. cost their carrying to the impact and consider value as non material. different The table below analyses financial instruments measured at fair value at the end of the reporting period, by the level in the fair value hierarchy into which the fair into hierarchy in the fair value the end of reporting the level at by fair value at period, measured financial instruments analyses table below The is categorised: measurement value 60 Swarnamahal Financial Services PLC - Annual Report 2016/17
Notes to the Financial Statements Contd.
Following non-financial instruments are also measured at fair value at the end of the reporting period.
31 March 2017 Carrying Value Fair Value (Rs) (Rs) Level 1 Level 2 Level 3 Total Investment properties valued at fair value No 10, De Alwis Avenue, Mount Lavinia 105,750,000 - - 105,750,000 105,750,000 03 commercial parcels in Reality Plaza 9,300,000 - - 9,300,000 9,300,000 115,050,000 - - 115,050,000 115,050,000
31 March 2016 Carrying Value Fair Value (Rs) (Rs) Level 1 Level 2 Level 3 Total Investment properties valued at fair value No 10, De Alwis Avenue, Mount Lavinia 55,000,000 - - 55,000,000 55,000,000 03 commercial parcels in Reality Plaza 9,300,000 - - 9,300,000 9,300,000 64,300,000 - - 64,300,000 64,300,000
There are various limitations inherent in this fair value disclosure particularly where prices may not represent the underlying value due to dislocation in the market. Not all of the Company’s financial instruments can be exchanged in an active market.
5.8.1 Movement of financial investments
Financial assets at Available for sale Loans and Total fair value through financial assets receivables profit and loss As at 31st March 2015 5,134,530 630,583,751 2,363,154,500 2,998,872,781 Purchases/New Granting - - 10,177,532,543 10,177,532,543 Disposals/Write offs (2,811,015) - (9,028,702) (11,839,717) Maturities/Settlements - (630,581,251) (10,781,002,826) (11,411,584,077) Fair value adjustment of financial assets (403,598) 369,127 - (403,598) Amortisation adjustments/Interest Accrual - - 586,528,562 586,528,562 As at 31st March 2016 1,919,917 2,500 2,337,184,077 2,339,106,494 Purchases/New Granting - - 9,164,483,753 9,164,483,753 Disposals/Write offs - - (213,781) (213,781) Maturities/Settlements - - (9,992,800,723) (9,992,800,723) Fair value adjustment of financial assets 44,813 - - 44,813 Amortisation adjustments/Interest Accrual - - 670,664,800 670,664,800 As at 31st March 2017 1,964,730 2,500 2,179,318,126 2,181,285,356 Swarnamahal Financial Services PLC - Annual Report 2016/17 61
Given below are the methodologies and assumptions used in fair value estimation
Loans and receivable Approximately 80% of the total portfolio of loans and receivables to customers have a remaining contractual maturity of less than one year. Therefore it’s assumed that fair value equals the carrying value.
Deposits More than 71% of the customer deposits are either repayable on demand or have a remaining contractual maturity of less than one year. Customer deposits with a contractual maturity of more than one year are subject to pre-mature upliftment. Amounts paid to the customer in the event of premature upliftment would not be materially different to its carrying value as at the date. Therefore fair value of customer deposits approximate to their carrying value as at the reporting date.
For the Year Ended 31 March 2017 2016 Rs. Rs.
6. Net interest income 6.1 Interest income- Loans and receivables Interest income on Gold Loan 477,184,271 435,309,507 Interest Income on Loan against FD 10,603,889 12,387,653 Interest Income on Term Loan 142,679,312 95,909,217 Interest Income on Staff Loans 243,816 383,279 Interest Income on Non Performing Loans 1,390,524 1,396,495
6.2 Interest income- Hire Purchase 5,387,705 16,842,367
6.3 Interest Income-Leases Interest income on Finance Leases 8,592,116 5,549,875
6.4 Interest Income from Srilanka government securities/ Reverse Purchase Agreements 43,755,141 29,493,085
6.5 Interest Income on Money Market Investment 1,906,072 2,225,844
6.6 Interest Income - Gold Auction and Default charges 24,583,168 18,750,168
6.7 Financial investments - available for sale Interest Income on Treasury Bonds - 3,702,088 Total interest income 716,326,014 621,949,578
Interest expense Interest on deposits from customers 437,414,836 430,225,341 Other interest expenses - 4,024 Total interest expense 437,414,836 430,229,365
Net interest income 278,911,178 191,720,213
7. Net (loss) / gain from financial instruments at fair value through profit or loss Equity shares 44,813 (403,598) 44,813 (403,598) 62 Swarnamahal Financial Services PLC - Annual Report 2016/17
Notes to the Financial Statements Contd.
For the Year Ended 31 March 2017 2016 Rs. Rs.
8. Other income / (loss) Service income 2,555,787 1,098,696 Sundry income 2,352,444 2,574,334 Loss on gold stock sales - (9,020,405) Gain on sale of property, plant & equipment - 375,378 Change in fair value of investment property 50,750,000 7,600,000 Rent income from Investment Properties 1,396,955 1,585,912 Dividend income 129,322 128,210 Fair value adjustment on rent in advance & refundable deposits. (565,992) (624,899) Income on real estate sale - 1,799,342 Capital gain on shares dealing - 669,982 Capital gain on disposal of treasury bonds - 3,086,418 56,618,516 9,272,968
9. Personnel expenses Salaries and wages 59,474,048 49,544,527 Directors’ emoluments 3,000,000 3,000,000 Contributions to defined contribution plans 8,038,376 6,720,564 Contributions to defined benefit plans 2,742,507 2,295,750 Over time payment 2,709,903 3,083,256 Fuel expense 5,869,632 3,928,921 Staff welfare 2,619,145 3,156,073 Others 8,975,433 5,085,774 93,429,044 76,814,865
10. Other expenses Audit fees 925,000 975,000 Non audit fees 480,000 - Penalty charged by CBSL 7,000,000 - Professional and legal expenses 6,711,889 2,842,571 Depreciation of property, plant & equipment 14,272,872 15,495,031 Office administration and establishment expenses 120,202,091 106,881,311 149,591,852 126,193,913
11. Impairment charges / (reversals) and fair value adjustment for loans and other advances Impairment charge / (reversal) on collective impairment (Note 11.1) 47,231,950 (12,606,693) Net impact reversals on fair value adjustments (Note 19.6.1) (27,220,078) (34,284,014) Impairment charge / (reversal) on stolen articles and other receivables 405,917 (7,408,575) 20,417,789 (54,299,282) Swarnamahal Financial Services PLC - Annual Report 2016/17 63
For the Year Ended 31 March 2017 2016 Rs. Rs.
11.1 Impairment charge / (reversal) on collective impairment Impairment charge / (reversal) on gold loans - (14,659,215) Impairment charge on lease rentals receivables 394,870 (7,498,347) Impairment charge / (reversal) on hire purchase receivables (1,241,194) (5,485,172) Impairment charge / (reversal) on other term loans 47,864,493 6,007,339 Loans written off 213,781 3,541,060 Lease and hire purchase written off - 5,487,642 47,231,950 (12,606,693)
* The Company has not written off any loan, lease and hire purchase facilities during the period against the impairment provisioning account since no specific impairment provision has been made in respect of such loans and no specific portion of the collective impairment in respect of those loans could be identified. Impairment provisioning as at 31.03.2017 has been assessed excluding these loans which are written off.
For the Year Ended 31 March 2017 2016 Rs. Rs.
12. Value added tax on financial services Current VAT on financial services 17,551,992 11,730,643 Under / (over) provision adjustment for previous year (344,477) - VAT on financial services for the previous financial years* - 10,800,220 17,207,515 22,530,863
* Company has recognised VAT on financial services Rs 10,800,220/- for the year of assessment 2012/2013 due to under payment of VAT on financial services for the year of assessment 2012/2013.
For the Year Ended 31 March 2017 2016 Rs. Rs.
13. Income tax Current income tax 5,343,927 5,707,115 Under / (over) provision in respect of prior year* (5,707,115) - Tax paid for previous years - 6,311,969 Deferred tax expense (Note 25) (3,392,143) 1,259,652 Total income tax (3,755,331) 13,278,736
*Due to the revision of a disallowed income and allowed expense during the tax computation for final tax payments, taxable profit of Rs.31,357,772/- has changed to a tax loss of Rs. 6,473,317/- for 2015/16. Therefore the current tax in respect of 2015/16 which was provided as at 31.03.2016 has been reversed. 64 Swarnamahal Financial Services PLC - Annual Report 2016/17
Notes to the Financial Statements Contd.
For the Year Ended 31 March 2017 2016 Leasing Other Business Leasing Other Business Rs. Rs. Rs. Rs.
13.1 Reconciliation of the total tax charge Net profit before tax 610,552 54,317,755 261,893 29,087,331 Adjustments: Disallowable expenses 12,074,884 66,637,641 16,758,984 45,669,403 Allowable expenses (11,869,794) (92,408,802) (14,063,994) (46,355,845) Total statutory income 815,642 28,546,594 2,956,883 28,400,889 Less : Deductions under Section 32 (285,475) (9,991,308) - (10,975,220) Taxable income / (loss) 530,167 18,555,286 2,956,883 17,425,669 Taxable income transfer against taxable loss - - - Net taxable income / (loss) 530,167 18,555,286 2,956,883 17,425,669 Income tax rate 28% 28% 28% 28% Income tax 148,447 5,195,480 827,927 4,879,188 Over provision (827,927) (4,879,188) - - Deferred tax expense (Note 25) - (3,392,143) - 1,259,652 Income tax on profit for the year (679,480) (3,075,851) 827,927 6,138,840
14. Profit / (loss) per share Basic profit / (loss) per share has been calculated by dividing the Profit for the year attributable to equity holders of the Company by the weighted average number of ordinary shares on issue during the year, as per the requirements of the Sri Lanka Accounting Standard (LKAS 33) - “Earnings per share”.
For the Year Ended 31 March 2017 2016 Rs. Rs.
Profit for the year attributable to equity holders of the Company 58,683,638 16,070,488 Weighted average number of ordinary shares 500,000,140 500,000,140 Profit per share 0.12 0.03
15. Cash and cash equivalents Cash in hand 61,116,441 48,308,659 Cash at bank 56,990,369 121,292,010 Reverse repurchase agreements 120,261,175 135,035,051 Stamps on hand 69,515 23,800 238,437,500 304,659,520 Bank overdrafts (9,867,016) (3,518,974) 228,570,484 301,140,546
16. Other Investments - Loans & receivables Reverse repurchase agreements 304,678,148 277,883,705 304,678,148 277,883,705 Swarnamahal Financial Services PLC - Annual Report 2016/17 65
As at 31st March 2017 2016 Rs. Rs.
17. Financial assets held at fair value through profit and loss Equity shares (Note 17.1) 1,964,730 1,919,917 1,964,730 1,919,917
As at 31st March 2017 2016 Quoted shares: No. of Cost of the Market No. of Cost of the Market shares at Investment value shares at Investment value the end of the end of the period the period Rs. Rs. Rs. Rs. Rs. Rs.
17.1 Equity shares Commercial Bank of Ceylon PLC - Voting 12 - 1,565 12 - 1,506 Commercial Bank of Ceylon PLC - Non Voting 4728 278,100 487,457 4,653 278,100 525,789 John Keells Holdings PLC 1740 297,100 239,946 1,523 297,100 225,404 Sampath Bank PLC 1193 292,000 308,987 1,105 292,000 249,730 Lanka Century Investment PLC 500 41,650 5,250 500 41,650 5,000 Hatton National Bank PLC - Non Voting 1045 145,953 193,325 1,028 145,953 175,788 Aitken Spence PLC 1,000 187,000 56,200 1,000 187,000 73,500 Renuka Foods PLC 4,000 143,000 72,000 4,000 143,000 83,200 Sierra Cables PLC 200,000 1,140,000 600,000 200,000 1,140,000 580,000 2,524,803 1,964,730 2,524,803 1,919,917
Mark to market gain /(loss) 44,813 (403,598)
As at 31st March 2017 2016 Rs. Rs.
18. Financial assets available-for-sale Share investment - unquoted company (Note 18.1) 2,500 2,500 2,500 2,500
As at 31st March 2017 2016 No of shares Cost of Market Cost of Market investment value investment value Rs. Rs. Rs. Rs.
18.1 Share investment - unquoted company “Credit Information Bureau of Sri Lanka Ltd” 25 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 66 Swarnamahal Financial Services PLC - Annual Report 2016/17
Notes to the Financial Statements Contd.
19. Loans and advances to customers at amortised cost As at 31st March 2017 2016 Gross Impairment Carrying Gross Impairment Carrying Amount allowance amount amount allowance amount / fair value / fair value adjustment adjustment Rs. Rs. Rs. Rs. Rs. Rs.
Gold loans (Note 19.2) 1,301,500,406 (17,430,300) 1,284,070,106 1,536,799,829 (17,430,300) 1,519,369,530 Finance lease receivable (Note 19.3) 37,142,633 (2,790,686) 34,351,947 36,491,847 (2,395,817) 34,096,030 Hire purchase receivables (Note 19.4) 15,103,772 (2,289,004) 12,814,768 50,163,943 (3,530,198) 46,633,745 Other term loans (Note 19.5) 518,936,186 (67,870,721) 451,065,465 271,171,378 (20,006,228) 251,165,149 Loan to Swarnamahal Jewellers Limited (Note 19.6) 306,635,129 (29,318,486) 277,316,643 442,557,080 (56,538,564) 386,018,516 2,179,318,126 (119,699,197) 2,059,618,929 2,337,184,077 (99,901,107) 2,237,282,970
As at 31st March 2017 2016 Rs. Rs.
19.1 Allowance for impairment and fair value adjustments Collective Allowance for impairment Balance as at 1 April 99,901,107 155,820,518 Impairment loss for the year - Charge / (Reversal) for the year 4,351,450 (21,635,397) - Change in net impact on fair value adjustment (Note 19.6.1) (27,220,078) (34,284,014) Balance as at reporting date 77,032,479 99,901,107
Individual impairment Balance as at 1 April - - - Charge / (Reversal) for the year 42,666,718 - Balance as at Reporting date 42,666,718 -
Total Impairment Provision 119,699,197 99,901,107
For the Year Ended 31 March 2017 2016 Rs. Rs.
19.2 Gold loans Gold loans - 1 months 875,483,611 856,618,415 Gold loans - 3 months 289,062,910 499,245,767 Gold loans - 6 months 80,561,154 74,043,543 Gold loans - 12 months 46,433,063 96,932,436 Gold stock for auction 9,959,668 9,959,668 Gross gold loans 1,301,500,406 1,536,799,829 Swarnamahal Financial Services PLC - Annual Report 2016/17 67
For the Year Ended 31 March 2017 2016 Rs. Rs.
19.3 Finance lease receivable Gross investment in finance leases, receivable - Less than one year 23,916,214 24,509,830 - Between one and five years 27,783,457 24,777,489 51,699,671 49,287,319
Unearned finance income (14,557,038) (12,795,472) Net investment in finance lease 37,142,633 36,491,847
Net investment in finance leases, receivable - Less than one year 22,840,947 18,146,837 - Between one and five years 14,301,686 18,345,010 37,142,633 36,491,847
There were no lease receivables beyond five years.
19.4 Hire purchase receivables Gross investment in hire purchase, receivable - Less than one year 13,172,246 37,559,104 - Between one and five years 5,573,798 23,380,078 18,746,044 60,939,182
Unearned finance income (3,642,272) (10,775,239) Net investment in hire purchase 15,103,772 50,163,943
Net investment in hire purchase, receivable - Less than one year 11,905,617 30,917,920 - Between one and five years 3,198,155 19,246,023 15,103,772 50,163,943
There were no hire purchase receivables beyond five years.
19.5 Other term loans Medium term loans 433,854,843 182,660,287 Wedaduru loans 1,719,673 3,482,328 Revolving loans 2,035,990 10,384,466 Staff loans 1,022,400 1,985,925 On-time loans 80,303,280 72,658,372 518,936,186 271,171,378 68 Swarnamahal Financial Services PLC - Annual Report 2016/17
Notes to the Financial Statements Contd.
For the Year Ended 31 March 2017 2016 Rs. Rs.
19.6 Loan to Swarnamahal Jewellers Limited Gold loan to Swarnamahal Jewellers Limited 306,635,129 442,557,080 Net impact on fair value adjustments (Note 19.6.1) (29,318,486) (56,538,564) 277,316,643 386,018,516
19.6.1 Net impact on fair value adjustments Balance as at 1 April (56,538,564) (90,822,578) Unwinding of interest 27,220,078 34,284,014 Balance as at reporting date (29,318,486) (56,538,564)
The gold loan granted to Swarnamahal Jewellers Limited is unsecured and the loan amounting to Rs.676,800,000 was rescheduled on 31st July 2014, payable in 60 equated monthly installment of Rs. 16,101,025/- (together with interest). The interest rate of this loan originally was 24% and which has been reduced to 15% at the date of rescheduling. However it’s stated at amortised cost based on the original EIR in accordance with LKAS 39.
As at 31st March 2017 2016 Rs. Rs.
20. Investment property Balance as at 1 April 64,300,000 56,700,000 Additions during the year - - Change in fair value 50,750,000 7,600,000 Balance as at reporting date 115,050,000 64,300,000
2017 2016 Location Extent Cost Date of Market Date of Market valuation value valuation value
20.1 Valuation of investment properties Land held for undertermined future use No 10, De Alwis Avenue, Mount Lavinia - Land & Building 0A-1R-05.42P 46,550,000 25.03.2017 105,750,000 28.03.2016 55,000,000
03 commercial parcels in Reality Plaza Vacant units held to be rented - Unit A/F1/U17 301 Sq. Ft 10,405,722 27.03.2017 4,850,000 28.03.2016 4,850,000 - Unit A/F1/U18 150 Sq. Ft 2,500,000 2,500,000 Unit already rented out - Unit A/F3/U13 269 Sq. Ft 1,950,000 1,950,000
Rental income from the Mount Lavinia Property and Unit A/F3/U13 recognised during the period is depicted in Note 8, the Company is yet to rent out units A/F1/U/17 and A/F1/U/18 in Reality Plaza to date. No direct operating expenses were incurred by the Company for the above investment properties. Swarnamahal Financial Services PLC - Annual Report 2016/17 69
Fair value of the Company’s investment property as at 31 March 2017 has been arrived on the basis of a valuation carried out by Mr. G.J. Sumanasena incorporated valuer having recent experience in the location and the category of the investment property being valued. He has used the contractor’s test method for Mount Lavinia property and investment method in arriving at the valuations for Reality Plaza property. Further, as at 31.03.2016, he has used the investment method in arriving at the valuations of both porperties. Valuation mothod of Mount Lavinia property has changed as at 31.03.2017 due to cancellation of rent agreement from 1st March 2017.
20.2 Methods and assumptions used in the fair valuation of investment properties
As at 31st March 2017 Location Valuation Significant Valued at Inter-relationship between key technique unobservable unobservable inputs and fair value inputs measurement Mount Contractor’s Price per perch Land value taken at Rs. 2,500,000 per The estimated fair value would Lavinia - Test Method perch, land value was determined by increase (decrease) if: expected Land taking into consideration, land values market value per perch were higher and recent selling price of the lands in (lower). the same area. Reality Investment Rent per Valuer has used market rentals (A The estimated fair value would Plaza-Ja-ela method square feet range of Rs. 83.50 to Rs. 86.50 per sq. ft) increase (decrease) if: expected based on the current market rental of market rentals were higher (lower), comparable commercial property and the risk adjusted discount rate were has been adjusted to take cognisance lower (higher). of location. Further, valuer has used Rs. 10,000/- rent income per month for Unit A/F3/U13 (which is currently rented out).
As at 31st March 2016 Location Valuation Significant Valued at Inter-relationship between key technique unobservable unobservable inputs and fair value inputs measurement Mount Investment Rent per Valuer has used market rentals (Rs. The estimated fair value would lavinia method square feet 125,000/- to Rs. 150,000/-per month) increase (decrease) if: expected based on the current rent agreement and market rentals were higher (lower), it has been adjusted to take cognisance the risk adjusted discount rate were of location of a central business district lower (higher). and peripherals. Price per perch Land value taken at Rs. 2,100,000 per perch, land value was determined by taking into consideration land values and recent selling price of the lands in the same area. Reality Investment Rent per Valuer has used market rentals (A The estimated fair value would Plaza-Ja-ela method square feet range of Rs. 83.50 to Rs. 86.50 per sq. ft) increase (decrease) if: expected based on the current market rental of market rentals were higher (lower), comparable commercial property and the risk adjusted discount rate were has been adjusted to take cognisance lower (higher). of location. Further, valuer has used Rs. 10,000/- rent income per month for Unit A/F3/U13.(which is currently rented out). 70 Swarnamahal Financial Services PLC - Annual Report 2016/17
Notes to the Financial Statements Contd.
20.3 Measurement of fair value - fair value heirachy The carrying amount of investment property is the fair value of property as determined by an external, independent property valuer, having an appropriate recognized professional qualification and recent experience in the location and the category of the property being valued. Fair values were determined having regard to recent market transactions for similar properties in the same location as the company’s investment property. The fair value measurement for the investment property has been categorised as a Level 3 for 2017 & 2016 based on the inputs to the valuation technique used.
21. Property, plant & equipment As at 31st March Building Office Furniture Motor Leased Computers Total improvements equipment & fittings vehicles assets & software Rs. Rs. Rs. Rs. Rs. Rs. Rs.
Cost Balance as at 1 April 2015 69,468,910 44,630,041 18,077,285 1,164,325 2,950,982 30,616,921 166,908,464 Additions 3,786,969 6,417,628 5,884,680 - - 3,047,920 19,137,197 Disposals / write-offs (11,989,198) (6,455,977) (3,764,850) (141,731) - (1,615,690) (23,967,446) Transfers during the year - - - 2,950,982 (2,950,982) - - Balance as at 31 March 2016 61,266,681 44,591,692 20,197,115 3,973,576 - 32,049,151 162,078,215
Balance as at 1 April 2016 61,266,681 44,591,692 20,197,115 3,973,576 - 32,049,151 162,078,215 Additions 5,702,096 2,126,005 407,222 - - 6,099,281 14,334,604 Disposals ------Balance as at 31 March 2017 66,968,777 46,717,697 20,604,337 3,973,576 - 38,148,432 176,412,819
Accumulated depreciation Balance as at 1 April 2015 39,864,862 39,496,875 17,050,982 320,650 2,087,921 28,594,238 127,415,528 Charge for the year 7,001,903 4,485,627 1,123,796 843,675 737,831 1,302,199 15,495,031 Disposal / write-offs during the year (11,617,481) (6,407,964) (3,757,284) (141,731) - (1,573,364) (23,497,824) Transfers during the year - - - 2,825,752 (2,825,752) - - Balance as at 31 March 2016 35,249,284 37,574,538 14,417,494 3,848,346 - 28,323,073 119,412,735
Balance as at 1 April 2015 35,249,284 37,574,538 14,417,494 3,848,346 - 28,323,073 119,412,735 Charge for the year 6,587,919 3,165,986 2,192,648 125,230 - 2,201,088 14,272,872 Disposal / write-offs during the year ------Balance as at 31 March 2017 41,837,203 40,740,524 16,610,142 3,973,576 - 30,524,161 133,685,607
Written down value As at 31 March 2016 26,017,397 7,017,154 5,779,621 125,230 - 3,726,078 42,665,480 As at 31 March 2017 25,131,574 5,977,173 3,994,195 - - 7,624,271 42,727,212
Lease commitments on building improvements are disclosed in Note 31.
21.1 Fully depreciated property, plant & equipment The cost of fully-depreciated property, plant & equipment of the Company which are still in use as at the statement of financial position date is as follows: 2017 2016 Rs. Rs.
Office equipment 36,300,377 36,245,378 Furniture and fittings 13,841,050 13,827,550 Computer equipment 26,757,786 23,533,178 Motor vehicles 3,973,576 1,164,325 80,872,789 74,770,431 Swarnamahal Financial Services PLC - Annual Report 2016/17 71
21.2 Leased assets Leased assets for the year 2014/15 consists solely of 15 Motor bikes leased under a 3 year agreement. During the 2015/16 above all leased assets are catagorised under the Motor Vehicle due to the end of lease period.
As at 31 March 2017 2017 2016 Rs. Rs.
22. Current tax assets Income tax payable (Note 22.1) (4,757,727) (7,701,424) Economic Service Charge receivable 11,452,657 7,865,616 Notional tax receivable on treasury bill and treasury bonds interest 15,005,084 9,474,040 WHT receivable 1,141,735 936,740 Balance at the end of the year 22,841,749 10,574,972
22.1 Income tax payable Balance as at 1 April (7,701,424) - Income tax paid 2,580,509 - Income tax charge for the year (5,343,927) (5,707,115) Under / (over) provision adjustement for previous year 5,707,115 - Income tax charge for past years (Note 13) - (1,994,309) (4,757,727) (7,701,424)
23. Other assets Deposits & prepayments 43,539,845 42,029,166 Other Receivable 1,883,258 5,549,992 Receivable from Related Parties (23.1) 140,812 449,860 Real estate stock (Note 23.3) 42,623,480 36,022,900 88,187,395 84,051,918
23.1 Receivable from Related Parties Lavinia Breeze Sea Food Restaurant (Pvt) Limited (Note 23.2) - 275,000 E.A.P. Films & Theaters (Note 32.4) 140,812 174,860 140,812 449,860
23.2 Rent receivable from Lavinia Breeze Sea Food Restaurant (Pvt) Limited Rent receivable from Lavinia Breeze Sea Food Restaurant (Pvt) Limited 6,720,417 7,075,000 Provision for rent receivable from Lavinia Breeze Sea Food Restaurant (Pvt) Limited (6,720,417) (6,800,000) - 275,000 72 Swarnamahal Financial Services PLC - Annual Report 2016/17
Notes to the Financial Statements Contd.
23.3 Real estate stock Thalawathugoda Kandy Total As at 31 March 2017 Balance at the beginning of the year - 36,022,900 36,022,900 Additions / Transfers during the year - 6,600,580 6,600,580 Disposals during the year - - - Balance at the end of the period - 42,623,480 42,623,480
As at 31 March 2016 Balance at the beginning of the year 11,806,028 36,022,900 47,828,928 Additions / Transfers during the year 52,130 - 52,130 Disposals during the year (11,858,158) - (11,858,158) Balance at the end of the year - 36,022,900 36,022,900
In order to ascertain the Net Realizable Value of the real estate stock, a valuation was carried out as at 31 March 2017 by professionally qualified independent valuer, Mr. G.J. Sumanasena and it was valued at Rs.47,750,000. The valuation was carried out by taking into account the observable prices in active market and recent market transactions on arm’s length term. The Net Realizable Value was compared with the Net Book Value and have been accounted for in accordance with LKAS 2.
2017 2016 Rs. Rs.
24. Deposits from customers Fixed deposits (Note 24.1) 3,715,830,669 3,951,584,872 Other deposits (Saving Deposits) (Note 24.2) 55,997,098 63,670,558 3,771,827,767 4,015,255,430
24.1 Fixed deposits Fixed deposits - General 815,349,484 1,721,052,203 SFS - Abhimana 2,888,311,055 2,218,176,967 Staff fixed deposits 191,510 178,130 Ranwasi deposits 11,978,620 12,177,572 3,715,830,669 3,951,584,872
24.2 Other deposits Savings - General 34,191,728 42,674,827 Minor Savings 16,634,282 16,190,178 Staff savings 233,058 280,110 Dhanajaya savings 488,742 460,351 SFS saver 2,785,456 2,773,676 Dhana Pragathi 4,570 4,306 Miscellaneous savings 1,659,262 1,287,110 55,997,098 63,670,558 Swarnamahal Financial Services PLC - Annual Report 2016/17 73
As at 31 March 2017 Deferred tax asset Deferred tax liability Net deferred tax asset/ liability 2017 2016 2017 2016 2017 2016 Rs. Rs. Rs. Rs. Rs. Rs.
25. Deferred tax liabilities Recognised deferred tax (asset) and liabilities Leased property plant and equipment - (412,807) - - - (412,807) Provision for gratuity (3,979,199) (2,973,519) - - (3,979,199) (2,973,519) Property plant and equipment - - 5,703,596 5,779,116 5,703,596 5,779,116 Lease rentals - - 1,426,521 1,449,302 1,426,521 1,449,302 Tax losses carried forward (3,150,918) - - - (3,150,918) - Total (7,130,117) (3,386,326) 7,130,117 7,228,418 - 3,842,092
Movement in deferred tax Balance as at Recognised Recognised Balance as at Recognised Recognised Balance as at during the year 31 March in profit in OCI 31 March in profit in OCI 31 March 2015 or loss 2016 or loss 2017 Rs. Rs. Rs. Rs. Rs. Rs. Rs.
Leased property plant and equipment (377,552) (35,255) - (412,807) 412,807 - - Provision for gratuity (2,482,800) (129,153) (361,566) (2,973,519) (555,731) (449,949) (3,979,199) Property plant and equipment 5,405,160 373,956 - 5,779,116 (75,520) - 5,703,596 Lease rentals 255,648 1,193,654 - 1,449,302 (22,781) - 1,426,521 Financial assets available-for-sale 143,550 (143,550) - - - - - Tax losses carried forward - - - - (3,150,918) - (3,150,918) 2,944,006 1,259,652 (361,566) 3,842,092 (3,392,143) (449,949) -
The company has recognised deferred tax assets to the extent of the deferred tax liability accruing to the company. Accordingly a deferred tax asset of Rs. 3,150,918/- has been recognised as at 31st March 2017. The company has not recognised deferred tax asset amounting to Rs. 499,603,989/- as it not probable that the future taxable profits will be adequate to utilise the available tax losses in the foreseeable future.
As at 31 March 2017 2017 2016 Rs. Rs.
26. Employee benefits 26.1 Amount recognized in balance sheet - Present value of defined benefit obligation 14,211,429 10,619,711
26.2 Movement in the present value of defined benefit obligation Defined benefit obligation as at 1 April 10,619,711 8,867,142 Actuarial loss (Note 26.4) 1,606,961 1,291,307 Benefits paid during the year (757,750) (1,834,488) Current service costs and interest (Note 26.3) 2,742,507 2,295,750 Defined benefit obligation as at reporting date 14,211,429 10,619,711 74 Swarnamahal Financial Services PLC - Annual Report 2016/17
Notes to the Financial Statements Contd.
For the Year Ended 31 March 2017 2016 Rs. Rs.
26.3 Expense recognized in profit or loss Current service cost 1,680,536 1,409,035 Interest cost 1,061,971 886,715 2,742,507 2,295,750
26.4 Amounts recognized in other comprehensive income Actuarial loss 1,606,961 1,291,307 1,606,961 1,291,307
26.5 Actuarial assumptions An actuarial valuation of the gratuity liability was carried out as at 31st March 2017 by Mr. M. Poopalanathan, AIA, of Messrs Actuarial and Management Consultants (Pvt) Ltd, a firm of professional actuaries.
The valuation method used by the actuaries to value the Fund is the “Projected Unit Credit Method”, the method recommended by the Sri Lanka Accounting Standard (LKAS 19) “Employee Benefits”.
Retirement age 55 Years 55 Years Discount rate 11.5% 10% Salary increment 10% 10% Staff Turnover 33% 32%
26.6 Sensitivity of assumptions employed in acturial 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 measurement.
2017 Effect in rupees Increase Decrease
Discount rate change by 1% 13,889,679 14,551,072 Future salary growth change by 1% 14,612,197 13,825,439
2016 Effect in rupees Increase Decrease
Discount rate change by 1% 10,366,076 10,888,312 Future salary growth change by 1% 10,934,891 10,316,930
As at 31 March 2017 2017 2016 Rs. Rs.
27. Other liabilities Accounts payable 48,853,587 26,905,891 Payable to Related Parties (Note 27.1) 2,124,396 120,913 Other tax payables (Note 27.2) 21,452,150 15,432,779 72,430,133 42,459,583 Swarnamahal Financial Services PLC - Annual Report 2016/17 75
For the Year Ended 31 March 2017 2016 Rs. Rs.
27.1 Payable to Related Parties E. A. P. Security Services (Pvt) Limited (Note 32.4) 729,383 - E. A. P. Holdings Limited (Note 32.4) 1,200,000 - Swarna Solutions Limited (Note 32.4) 195,013 120,913 2,124,396 120,913
27.2 Other tax payables WHT Payables 373,567 366,916 VAT on FS Payables 17,551,992 11,730,643 PAYE Payable - 1,639 Stamp Duty Payable 57,766 82,757 NBT Payable 2,578,258 2,360,257 Provision for ESC Payable 890,567 890,567 21,452,150 15,432,779
28. Stated capital Stated capital 250,000,070 250,000,070 250,000,070 250,000,070
No of shares 500,000,140 500,000,140
As per the Special Resolution passed at the Extraordinary General Meeting (EGM) held on 27 March 2012, it was resolved that each of the issued and subscribed 25,000,007 Voting Ordinary shares be sub - divided in to 20 (Twenty) Ordinary shares (Voting) fully paid up. Therefore, the number of ordinary shares outstanding was increased without an increase in resources.
As at 31 March 2017 2017 2016 Rs. Rs.
29. Statutory reserve fund Statutory reserve fund (Note 29.1) 143,349,119 114,637,126 143,349,119 114,637,126
29.1 Statutory reserve fund Balance as at 1 April 114,007,300 105,972,056 Transfers during the year 29,341,819 8,035,244 Balance as at Reporting date 143,349,119 114,007,300
Statutory reserve is a capital reserve which contains profit transferred as required by Section 3(b)(ii) of Central Bank Capital Fund Direction No. 1 of 2003, issued to Finance Companies.
As per the said Direction, every Licensed Finance Company shall maintain a Reserve Fund and transfer to such reserve fund out of the net profits of each year after due provisions have been made for taxation and bad and doubtful debts on the following basis:
Capital funds to Deposit Liabilities % of transfer to Reserve Fund
Not less than 25% 5% Less than 25% and not less than 10% 20% Less than 10% 50% 76 Swarnamahal Financial Services PLC - Annual Report 2016/17
Notes to the Financial Statements Contd.
As at 31 March 2017 2017 2016 Rs. Rs.
30. Available for sale reserve Balance as at 1 April - 2,357,203 Net gain / (Loss) during the year - - Matured T-bills and T-bonds - (2,357,203) Balance as at 31 March - -
As at 31 March 2017 2017 2016 Rs. Rs.
31. Commitments and contingencies Operating lease commitments
The future minimum lease payments under operating leases are as follows;
Not later than one year 41,793,240 37,467,170 Later than one year & less than five years 160,256,050 156,773,550 Later than five years 110,000,392 144,398,132 312,049,682 338,638,852
Company has recognised the operating lease expense amounting to Rs 42,540,947 during the year (2016 - Rs 45,719,085). Minimum lease payment for the year was 38,547,170 (2016 - 36,131,920)
Contingencies In the opinion of the Company’s lawyers, there are no pending litigations against the Company other than the following cases that will have an impact on the reported financial results or the future operations of the Company.
Labour tribunal case (LT Colombo Case No. 13/11/2015) - Case filed by an ex-employee seeking reinstatement with back wages or compensation in lieu thereof.
32. Related party disclosures The Company carries out transactions in the ordinary course of its business on an arm’s length basis at commercial rates with parties who are defined as related parties other than the transaction with Loan granted to Swarnamahal Jewellers Limited as per the Sri Lanka Accounting Standard - LKAS 24 “Related Party Disclosures”, the details of which are reported below.
32.1 Parent and ultimate controlling party The Company’s parent company is ETI Finance Ltd with 90% shareholding and ultimate parent undertaking and controlling party of the Company is E.A.P Holdings Limited.
32.2 Transactions with Key Management Personnel (KMP) According to Sri Lanka Accounting Standard - LKAS 24 “Related Party Disclosures”, Key Management Personnel are those having authority and responsibility for planning, directing and controlling the activities of the entity directly or indirectly including any director(whether executive or otherwise of that entity). The Company considers the members of its Board of Directors and the Chief Executive Officer (CEO) as Key Management Personnel (KMP) of the Company. Swarnamahal Financial Services PLC - Annual Report 2016/17 77
Year Ended Compensation to KMP 31.03.2017 31.03.2016
Short term employment benefits 9,000,000 7,800,000
There were no post employment benefits or long term benefits provided to key management personnel and the director’s emoluments are subject to maximum limit of CBSL direction.
32.3 Mr. Jeewaka Edirisinghe, Ms. Deepa Edirisinghe, Mr. Nalaka Edirisinghe, Mr. Asanka Edirisinghe and Mr. Sameera Ganegoda are the Directors of the Company and Key Management Personnel of the following companies and have had transactions as disclosed below.
Company names Mr. J. H. Mrs. A. D. Mr. N. P. Mr. A. S. Mr. S. Edirisinghe Edirisinghe Edirisinghe Edirisinghe Ganegoda EAP Holdings Limited ETI Finance Limited Swarnamahal Jewellers Limited EAP Broadcasting Company Limited Lavinia Breeze Sea Food Restaurant (Pvt) Limited EAP Security Services (Pvt) Limited EAP Films & Theatres Limited Hotel Sapphire (Pvt) Limited EAP RMS Insurance Brokers (Pvt) Limited Hotel Concord (Pvt) Limited
Mr. Sameera Ganegoda is a Non Executive Director of the Company and the CEO of ETI Finance Limited.
32.4 Transactions with entities that are controlled, jointly controlled or significantly influenced by Key Management Personnel or their close member of family, or shareholders who have either control, significant influences or joint control over entity are as follows;
Transactions with related parties
Name of the Company Description of Transaction Amounts Balance Balance paid/ as at as at (received) 31-Mar-17 31-Mar-16 Swarnamahal Jewellers Limited Settlement of loan / Outstanding balance (193,212,300) 306,635,129 442,557,080 Gold sales 73,397,000 Amount recovered on gold sale during the year (73,397,000)
E. A. P. Security Services (Pvt) Security expenses charged for the period (8,267,182) Limited Payment made during the year 7,537,799 (729,383) -
E. A. P. Holdings Limited Reimbursement of expense (9,000,000) Payment made during the year 7,800,000 (1,200,000) - 78 Swarnamahal Financial Services PLC - Annual Report 2016/17
Notes to the Financial Statements Contd.
Name of the Company Description of Transaction Amounts Balance Balance paid/ as at as at (received) 31-Mar-17 31-Mar-16 Lavinia Breeze Sea Food Rent income 1,482,500 Restaurant (Pvt) Limited Cash Received during the year (1,668,333) Rent Receivable 6,720,417 6,925,000 Provision for rent not received (6,720,417) (6,800,000)
Swarna Solutions Limited Reimbursement of expense (2,642,669) Payment made during the year 2,568,569 (195,013) (120,913)
E.A.P. Films & Theaters Limited Reimbursement of electricity & water expenses 2,089,082 Cash Received during the year (2,123,130) 140,812 174,860
Hotel Sapphire (Pvt) Limited Company AGM expenses 2015 & 2016 200,502 Payment made during the period (200,502) - -
32.5 Related party lending to Swarnamahal Jewellers Limited This accommodation was unsecured and exceeded the Single Borrower Limit set by the CBSL Directions. It was rescheduled in March 2014 effective from 1 April 2014, by reducing the rate of interest from 24% to 16% and waiver of penal interest. Further on 31 July 2014 the same loan was again rescheduled by reducing the rate of interest from 16% to 15% and extended the period from 3 years to 5 years.
32.6 Related Party transactions exceeding 10% of the Equity or 5% of the total assets of the Entity as per Audited Financial Statements, whichever is lower. Name of the Relationship Value of Related Party Value of Related Party Terms of the Rationale for Related Party Transaction Transaction as a % of Total transaction entering in to Assets the transaction 2017 2016 2017 2016 Swarnamahal Fellow 193,212,300 193,212,300 6.72% 6.39% Settlement of Note 01 Jewellers Subsidiary loan Limited 306,635,129 442,557,080 10.67% 14.64% Oustanding Loan Balance 73,397,000 174,651,000 2.55% 5.78% Gold sales Auction of Unredeemed Gold Articles
Note 01- Due to a sharp drop in gold prices, unredeemed gold articles which were not received satisfactory bids at auctions were transferred to SMJ on a consignment basis and subsequently the amount receivable was converted to a term loan. Swarnamahal Financial Services PLC - Annual Report 2016/17 79
32.7 Directive of Securities and Exchange Commission of Sri Lanka (SEC) In light of the non-compliance with Corporate Governance requirements of the Listing Rules of the Colombo Stock Exchange, SEC has issued a directive to the company prohibiting it from entering into any Related Party Transactions including any write off of outstanding or making of adjustments which will reduce the outstanding balances (except by way of recovering outstanding debts from related party transactions) until such time the Corporate Governance requirements of the Listing Rules of the Colombo Stock Exchange are complied with.
33. Events after the reporting date There have been no other material events occurred between the reporting date and the date on which the financial statements are authorised for issue which require adjustments to or disclosure in the financial statements.
34. Litigation and claims There were no litigation claims against the Company as at the reporting date other than mentioned in Note 31.
35. Non Compliance with Central Bank regulations The Company has not complied with the Finance Business Act No. 42 of 2011 section 24 (4), Corporate Governance Direction No. 03 of 2008, Capital Funds Direction No.1 of 2003, Risk weighted Capital Adequacy Ratio Direction No. 02 of 2006, Minimum Core Capital Direction No.1 of 2011, Single Borrower Limit Direction No. 4 of 2006, Structural Changes Direction No.01 of 2013, Provision for Bad and Doubtful Debts Direction No. 03 of 2006, Deviation from the Opening of Branches/Offices Guidelines No. 1 of 2006 and the also with the special Direction letter dated 26.03.2015 to implement a deposit reduction plan up to Rs.2.5bn, recover all loans granted to related companies, reduce the concentration on pawning advances below 50% of total accommodations, immediately appoint adequate number of Independent non-executive directors and to infuse capital amounting to Rs.2bn. The Central Bank of Sri Lanka imposed a penalty of Rs.7,000,000/- in respect of the continuous violations of the above regulatory requirements.
36. Going concern The Company earned a profit of Rs.58,683,638/- during the year ended 31 March 2017. However, as of that date the Company’s total liabilities exceeded it total assets by Rs.994,828,182/- and the retained losses amount to Rs.1,388,177,371/-. The financial statements of the Company have been prepared on a going concern basis without making adjustment that may be required to the recorded assets and the classification of liabilities if the Company is unable to continue as a going concern.
The Significant and sudden drop in Gold prices in the previous years has significantly affected the Company’s performance and the provisions made in this regard is the main reason for the loss during the previous years and the resulting negative net liability.
As disclosed in Colombo Stock Exchange on 12th May 2017, the parent Company of Swarnamahal Financial Services PLC (SFS), ETI Finance Ltd (ETIF) is undergoing a major restructuring in consultation with the central bank of Sri Lanka (CBSL) with the purpose of infusing equity capital into it. Once equity is infused to ETIF, a part of it will be infused as equity capital to SFS as well. 80 Swarnamahal Financial Services PLC - Annual Report 2016/17
Notes to the Financial Statements Contd.
37. Maturity of assets and liabilities An analysis of the total assets employed and total liabilities as at the year end ,based on the remaining period at the reporting date to the respective contractual maturity dates is given below. Maturity period 31-Mar-17 Up to 1-3 3-12 1-5 Over 5 Total 1 Month Months Months Years Years Rs. Rs. Rs. Rs. Rs. Rs.
Interest earning assets Cash at bank 56,990,369 56,990,369 Reverse repurchase agreements - 120,261,175 304,678,148 - - 424,939,323 Loans & receivables * - Pawning 1,011,257,688 180,670,126 92,142,294 - - 1,284,070,108 - Leasing 10,115,355 1,980,631 8,583,422 13,672,539 - 34,351,947 - HP 4,104,557 1,396,028 4,238,514 3,075,669 - 12,814,768 - Term Loans 51,386,254 37,077,811 186,575,117 453,342,926 - 728,382,108 1,133,854,223 341,385,771 596,217,495 470,091,134 - 2,541,548,623
Non interest earning assets Cash in hand 61,185,956 - - - - 61,185,956 Financial assets held at fair value through profit and loss 1,964,730 - - - - 1,964,730 Financial assets available for sale - - - - 2,500 2,500 Real estate stock - - 42,623,480 - - 42,623,480 Property, plant & equipment - - - - 42,727,212 42,727,212 Investment property - - - - 115,050,000 115,050,000 Other assets 140,812 2,709,824 1,883,259 39,409,103 24,262,664 68,405,662 63,291,498 2,709,824 44,506,739 39,409,103 182,042,376 331,959,540 Total assets 1,197,145,721 344,095,595 640,724,234 509,500,237 182,042,376 2,873,508,163
Percentage - 31st March 2017 41.66 11.97 22.28 17.75 6.34 100.00
Interest bearing liabilities Bank overdrafts - 9,867,016 - - - 9,867,016 Deposits from customers 595,246,745 782,632,692 1,652,027,523 741,920,807 - 3,771,827,767 595,246,745 792,499,708 1,652,027,523 741,920,807 - 3,781,694,783
Non interest bearing liabilities Other liabilities 2,124,396 22,465,212 47,840,525 - 14,211,429 86,641,562 Equity - - - - (994,828,182) (994,828,182) 2,124,396 22,465,212 47,840,525 - (980,616,753) (908,186,620) Total liabilities 597,371,141 814,964,920 1,699,868,048 741,920,807 (980,616,753) 2,873,508,163
Percentage - 31st March 2017 20.79 28.36 59.16 25.82 -34.12 100.00
* Loans and receivables are reported net of impairment Swarnamahal Financial Services PLC - Annual Report 2016/17 81
Maturity period 31-Mar-16 Up to 1-3 3-12 1-5 Over 5 Total 1 Month Months Months Years Years Rs. Rs. Rs. Rs. Rs. Rs.
Interest earning assets Cash at bank 121,292,010 - - - - 121,292,010 Reverse repurchase agreements 83,323,148 51,711,902 277,883,705 - - 412,918,755 Loans & receivables * - Pawning 1,069,763,693 353,974,492 95,631,344 - - 1,519,369,529 - Leasing 1,036,883 2,133,575 9,097,645 21,827,928 - 34,096,031 - HP 1,845,782 3,689,019 15,366,847 25,732,096 - 46,633,744 - Term Loans 22,035,186 31,087,872 181,375,115 402,685,494 - 637,183,667 1,299,296,702 442,596,860 579,354,656 450,245,518 - 2,771,493,736
Non interest earning assets Cash in hand 48,332,459 - - - - 48,332,459 Financial assets held at fair value through profit and loss 1,919,917 - - - - 1,919,917 Financial assets available for sale - - - - 2,500 2,500 Real estate stock - - 36,022,900 - - 36,022,900 Property, plant & equipment - - - - 42,665,480 42,665,480 Investment property - - - - 64,300,000 64,300,000 Other assets 239,166 378,332 1,366,630 18,190,940 38,428,922 58,603,990 50,491,542 378,332 37,389,530 18,190,940 145,396,902 251,847,246 Total assets 1,349,788,244 442,975,192 616,744,185 468,436,458 145,396,902 3,023,340,982
Percentage - 31st March 2016 44.65 14.65 20.40 15.49 4.81 100.00
Interest bearing liabilities Bank overdrafts - 3,518,974 - - - 3,518,974 Deposits from customers 741,414,786 818,346,702 1,299,376,948 1,149,827,817 6,289,178 4,015,255,429 741,414,786 821,865,676 1,299,376,948 1,149,827,817 6,289,178 4,018,774,403 Non interest bearing liabilities Other liabilities 19,682,971 2,620,258 - 14,461,803 20,156,355 56,921,387 Equity - - - - (1,052,354,808) (1,052,354,808) 19,682,971 2,620,258 - 14,461,803 (1,032,198,453) (995,433,421) Total liabilities 761,097,757 824,485,934 1,299,376,948 1,164,289,619 (1,025,909,276) 3,023,340,982
Percentage - 31st March 2016 25.17 27.27 42.98 38.51 -33.93 100.00
* Loans and receivables are reported net of impairment 82 Swarnamahal Financial Services PLC - Annual Report 2016/17
Notes to the Financial Statements Contd.
38. Segmental information For the year ended 31 March 2017 Gold loans Term Loans Other Total Rs. Rs. Rs. Rs.
Income Interest income 501,767,440 154,917,539 59,641,035 716,326,014 Other income - 2,476,443 54,186,886 56,663,329 Total income 501,767,440 157,393,982 113,827,921 772,989,343 Percentage 64.91% 20.36% 14.73% 100.00%
Less : Interest 283,937,320 89,065,216 64,412,300 437,414,836 Other expenses 182,174,730 57,144,414 41,327,056 280,646,199 Total expenses 466,112,050 146,209,630 105,739,356 718,061,035 Profit before taxation 35,655,390 11,184,352 8,088,565 54,928,308 Less : income tax 2,437,683 764,650 552,998 3,755,331 Profit after taxation 38,093,073 11,949,002 8,641,563 58,683,639
Segment assets 1,736,427,806 870,277,285 266,803,071 2,873,508,163 Percentage 60.43% 30.29% 9.28% 70% Segment liabilities 2,337,590,990 1,171,573,234 359,172,120 3,868,336,345
For the year ended 31 March 2016 Income Interest income 454,059,675 110,076,644 57,813,259 621,949,578 Other income (9,020,405) 945,634 16,944,141 8,869,370 Total income 445,039,270 111,022,278 74,757,400 630,818,948 Percentage 70.55% 17.60% 11.85% 100.00%
Less : Interest 303,524,432 75,719,102 50,985,832 430,229,366 Other expenses 120,809,125 30,137,799 20,293,436 171,240,360 Total expenses 424,333,557 105,856,901 71,279,268 601,469,726 Profit before taxation 20,705,713 5,165,377 3,478,132 29,349,222 Less : income tax (9,368,075) (2,337,018) (1,573,643) (13,278,736) Profit after taxation 11,337,638 2,828,359 1,904,489 16,070,486
Segment assets 2,027,209,550 763,872,611 232,258,821 3,023,340,982 Percentage 67.05% 25.27% 7.68% 100% Segment liabilities 2,732,834,132 1,029,758,934 313,102,725 4,075,695,790
The management has chosen to organise entity around differences in product & services. According to the Sri Lanka Accounting Standard - SLFRS 8, product types of gold loans and term loans are identified as reportable segments based on revenue derived from each segment. Swarnamahal Financial Services PLC - Annual Report 2016/17 83
Ten Years at a Glance
Year Ended 31st March (Audited) 2008* 2009* 2010* 2011 2012 2013 2014 2015 2016 2017 Rs. Mn. Rs. Mn. Rs. Mn. Rs. Mn. Rs. Mn. Rs. Mn. Rs. Mn. Rs. Mn. Rs. Mn. Rs. Mn.
Profit Performance Gross Income 190 309 425 714 1,079 1,340 317 120 631 773 Interest Income 164 256 417 706 1,061 1,331 1,058 658 622 716 Interest Expenses 151 228 274 383 529 794 814 571 430 437 Interest on customers deposits 151 228 274 363 502 762 784 553 430 437 Interest on other borrowings - - - 20 27 32 30 18 - - Net Interest Income 13 28 143 323 532 537 244 87 192 279 Other Income 26 53 8 8 18 9 (842) (538) 9 57 Operating Expenses * 78 93 121 230 315 325 277 195 203 243 Impairment charges/(reversals) for loans and other losses - - 4 126 (27) 1 353 (394) (54) 20 Profit before tax (PBT) (39) (12) 26 (25) 262 220 (1,228) (252) 52 72 Income Tax & Other Tax expenses ** - - 9 49 102 98 17 6 36 13 Profit after tax (PAT) (39) (12) 17 (74) 160 122 (1,245) (258) 16 59 Other comprehensive income for the year, net of tax - - - (1) (6) 1 8 (2) (3) (1) Total comprehensive income for the year (39) (12) 17 (75) 153 123 (1,237) (260) 13 58
Assets Cash and cash equivalents 88 55 122 130 205 104 308 170 170 118 Investments In Government Securities/REPOs/R-REPOs 124 148 126 183 339 449 441 631 413 425 Other Investments 153 156 130 68 75 80 40 62 66 117 Pawning Gold Jewellery 6 84 864 2,714 3,694 4,610 2,261 1,447 1,519 1,284 Hire Purchase Receivable 53 87 211 192 219 227 140 102 47 13 Lease rentals receivable 20 21 23 31 42 54 31 16 34 34 Other Loans & Advances 569 505 304 233 189 217 950 642 637 728 Value of non performing Advances (gross) - - 9 11 13 530 1,280 604 477 65 Other Trading Stock 172 263 272 243 274 220 203 48 36 43 Other Receivables 104 256 245 80 71 70 67 82 58 68 Fixed assets 82 89 122 74 86 72 53 39 43 43 TOTAL ASSETS 1,371 1,664 2,419 3,948 5,194 6,103 4,494 3,239 3,023 2,873
Liabilities Fixed Deposits 1,120 1,285 1,896 3,502 4,456 5,345 5,068 4,097 3,951 3,716 Savings 18 65 48 50 50 55 65 71 64 56 Borrowings (Refinance) - - 100 102 215 162 102 - - - Other Liabilities 64 157 144 138 164 109 64 136 60 96 TOTAL LIABILITIES 1,202 1,507 2,188 3,792 4,885 5,671 5,299 4,304 4,075 3,868
Shareholders' Funds Stated Capital 200 200 250 250 250 250 250 250 250 250 Reserves (31) (43) (19) (94) 59 182 (1,055) (1,315) (1,302) (1,245) TOTAL SHAREHOLDERS' FUND 169 157 231 156 309 432 (805) (1,065) (1,052) (995)
TOTAL EQUITY & LIABILITIES 1371 1664 2419 3,948 5,194 6,103 4,494 3,239 3,023 2,873 84 Swarnamahal Financial Services PLC - Annual Report 2016/17
Ten Years at a Glance Contd.
Year Ended 31st March (Audited) 2008* 2009* 2010* 2011 2012 2013 2014 2015 2016 2017 Rs. Mn. Rs. Mn. Rs. Mn. Rs. Mn. Rs. Mn. Rs. Mn. Rs. Mn. Rs. Mn. Rs. Mn. Rs. Mn.
Other Information Number of Staff as at 31st March 69 83 131 196 198 137 112 119 138 144 Number of Branches & Pawning Centers 4 9 11 15 17 17 17 17 17 17
Ratios Growth of Net Interest Income -67.5% 115.4% 410.7% 125.9% 0.4% 0.9% -54.6% -64.3% 120.7% 45.3% Cost to Income Ratio 200.0% 114.8% 80.1% 69.5% 57.3% 60.6% 113.1% 195.0% 101.0% 72.3% Growth of Deposits 64.2% 18.6% 44.0% 82.7% 26.9% 19.8% -4.9% -18.8% -3.7% -6.1% Growth of Advances 18.0% 7.6% 101.1% 126.1% 30.7% 23.3% -33.8% -34.7% 1.4% -8.0% ROA (before Tax) -3.4% -0.8% 1.3% -0.8% 5.7% 3.9% -23.2% -6.5% 1.7% 2.4% ROA (After Tax) -3.8% -0.8% 0.8% -2.3% 3.5% 2.2% -23.5% -6.7% 0.5% 2.0% ROE (after Tax) -20.7% -7.4% 8.8% -38.8% 65.8% 33.2% -200.0% -27.8% 1.2% 5.7% Advances to Deposits & Borrowings 57.9% 54.2% 70.2% 88.0% 88.7% 92.8% 65.4% 53.9% 56.6% 55.4% Total Assets to Shareholders funds (times) 8.1 10.6 10.5 25.3 16.8 14.1 -5.6 -3.0 -2.9 -2.9 EPS (after Tax) (Rs.) {considered Subdivision} -0.10 -0.03 0.03 -0.15 0.32 0.24 -2.49 -0.52 0.03 0.12 Net Asset Value P.S. (Rs.) {considered Subdivision} 0.42 0.39 0.46 0.31 0.62 0.86 -1.61 -2.13 -2.10 -1.99 Interest Cover (times) 1.1 1.1 1.5 1.8 2.0 1.7 1.3 1.2 1.4 1.6 Net Interest Margin 1.8% 3.5% 12.1% 13.2% 13.6% 10.7% 5.2% 2.6% 7.0% 10.9% Net Interest Spread *** 2.9% 8.3% 15.2% 14.4% 14.0% 10.7% 7.2% 7.3% 11.6% 15.7% Liquid Assets Ratio 18.6% 13.6% 11.9% 8.4% 11.2% 9.0% 13.1% 17.3% 13.9% 13.7% Government Security / TB Ratio 12.6% 12.4% 8.6% 10.0% 11.1% 10.2% 7.1% 10.5% 8.2% 9.9% NPL Ratio 0.0% 0.0% 0.6% 0.3% 0.31% 10.17% 30.9% 25.6% 20.4% 3.0% Core Capital Ratio 16.8% 12.9% 16.0% 10.3% 17.4% 22.3% -43.5% -85.6% -85.6% -77.3% Total Risk Weighted Capital Ratio 16.8% 12.9% 23.7% 16.9% 21.8% 25.3% -43.5% -85.6% -85.6% -77.3% Shareholder's Funds to Deposites 4.39% 6.86% 8.00% -15.68% -25.55% -26.20% -26.38%
*Ratios for the FY's before 2011 have been calculated based on the Financial Statement prepared in accordance with the SLAS. Swarnamahal Financial Services PLC - Annual Report 2016/17 85
Share Information
Colombo Stock Exchange The Company’s Ordinary Voting shares were listed on the “DiriSavi” Board of the Colombo Stock Exchange with effect from 26th May 2011. The interim financial statements of the Company were submitted to the Colombo Stock Exchange within two months from the reporting date
Twenty Largest Ordinary Shareholders as at 31st March 2017
Name of the Shareholder No. of Shares Percentage (%) 1 ETI Finance Ltd 450,000,100 90.00 2 Mr.W.A.S.P. De Seram 11,936,104 2.39 3 Mrs. N.Muljie 2,148,580 0.43 4 Mrs. T.H.Fernando 2,144,615 0.43 5 Seylan bank PLC/ K.L.Udayananda 1,167,361 0.23 6 Mr. R.E. Rambukwelle 1,140,100 0.23 7 Bansei Securities Finance/P.A.Anil 1,019,999 0.20 8 Mr. U.G.R.H.V Dharmasiri 1,000,000 0.20 9 Mr. M.A.Bary 1,000,000 0.20 10 Mr. L.A.P.K Liyanwala 901,570 0.18 11 Mr. R.M.I.Rajapaksa 451,964 0.09 12 Mr. A.Y.Gunawardena 450,000 0.09 13 Mrs. D.S.A.K Piyaseele 440,000 0.09 14 Mrs. F.F.Hamid 417,780 0.08 15 Mr. H.W.M.Woodward 390,400 0.08 16 Mr. T.Rajasekaran 375,000 0.07 17 Mr. S.N.C.W.M.B.C.Kandegedara 350,000 0.07 18 Mrs. R.N.R Aziz 334,601 0.07 19 Mr. H. L. D Hewagamage 326,385 0.07 20 Mr. W.G.S Wickramasinghe 320,080 0.06 Others 23,685,501 4.74 Total 500,000,140 100.00
The stated capital of the company consisting solely issued and fully paid up Ordinary Voting Shares of 500,000,140 as at 31st March 2017. 86 Swarnamahal Financial Services PLC - Annual Report 2016/17
Share Information Contd.
Market Price of an Ordinary Share
31st March 2017 31st March 2016 Highest (Rs.) 2.00 2.40 Lowest (Rs.) 0.60 0.90 Closing (Rs.) 0.70 1.10 No. of Ordinary Voting Shares 500,000,140 500,000,140
Number of Ordinary Shareholders as at 31st March 2017
Share Holdings Resident Non Resident Total Number of No of % Number No of % Number No of % Shareholders Shares of Shares of Shares Shareholders Shareholders 1 to 1,000 870 291,441 0.06 1 100 0 871 291,541 0.06 1,001 to 10,000 735 3,234,284 0.65 3 24,800 0 738 3,259,084 0.65 10,001 to 376 11,665,283 2.33 0 - 0 376 11,665,283 2.33 100,000 100,001 to 59 14,637,473 2.93 2 589,900 1.12 61 15,227,373 3.05 1,000,000 Over 1,000,000 6 467,412,244 93.48 1 2,144,615 0.43 7 469,556,859 93.91 2,046 497,240,725 99.45 7 2,759,415 0.55 2,053 500,000,140 100.00
Categories of shareholder No. of Shareholders No. of Shares Percentage (%) Individuals 1,991 45,545,297 9.11 Institutional 62 454,454,843 90.89 Total 2,053 500,000,140 100.00
Public holdings as a percentage of Issued Share Capital as at 31st March 2017 was 10 % comprising of 2051 shareholders. Swarnamahal Financial Services PLC - Annual Report 2016/17 87
Glossary of Financial Terms
Accounting Policies Corporate Governance The specific principles, bases, conventions, rules and practices The process by which corporate entities are governed. It is adopted by an entity in preparing and presenting Financial concerned with the way in which power is exercised over Statements. the management and direction of entity, the supervision of executive actions and accountability to owners and others. Accrual Basis Recognition of the effects of transactions and other events Cost Income Ratio when they occur without waiting for receipt or payment of cash Operating expenses as a percentage of net income. or its equivalents. Credit Risk Amortization Credit risk is the risk of financial loss to the Bank if a customer The systematic allocation of the depreciable amount of an or counter party to a financial instrument fails to meet its intangible asset over its useful life. contractual obligations, and arises principally from the loans and advances to customers and other banks and investment Capital Adequacy debt securities. The percentage of risk-adjusted assets supported by capital as defined under the framework of risk based capital standards Credit Ratings developed by the Bank for International Settlement (BIS) and An evaluation of a corporate entity to assess its ability to repay as modified to suit local requirements by the Central Bank of Sri its obligations or likelihood of not defaulting, carried out by an Lanka. independent rating agency.
Capital Reserves Dealing Securities Capital Reserves consist of revaluation reserves arising from These are marketable securities acquired and held with the revaluation of properties owned by the Company and Reserve intention to resale over a short period of time. Fund set aside for specific purposes defined under the Finance Business Act No. 42 of 2011 and shall not be reduced or Deferred Tax impaired without the approval of the Monetary Board. Sum set aside in the financial statements for taxation that may become payable in a financial year other than the current Cash Equivalents financial year. Short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to an Depreciation insignificant risk of changes in value. The systematic allocation of the depreciable amount of an asset over its useful life. Commitments Credit facilities approved but not yet utilized by the clients as at Earnings Per Share (EPS) the reporting date. Profit attributable to ordinary shareholders, divided by the number of ordinary shares in issue. Contingent Liabilities Conditions or situations at the reporting date, the financial Effective Tax Rate effect of which are to be determined by the future events which Provision for taxation, excluding deferred taxation, divided by may or may not occur. the profit before tax.
Core Capital (Tier I) Equity Core Capital includes selected items of capital funds. Major core Total of shareholders’ fund; share capital + statutory reserves + capital items are share capital, share premium, statutory reserve other reserves. funds, retained profits, general reserves, surpluses/losses after tax arising from the sale of fixed and long-term investments. 88 Swarnamahal Financial Services PLC - Annual Report 2016/17
Glossary of Financial Terms Contd.
Equity Method Investment Securities The equity method is a method of accounting whereby the Securities acquired and held for yield or capital growth purposes investment is initially recognized at cost and adjusted thereafter. and are usually held to maturity.
Fair Value Key Management Personnel Fair value is the amount for which an asset could be exchanged Key Management Personnel are those persons having authority between a knowledgeable, willing buyer and a Knowledgeable, and responsibility for planning, directing and controlling the willing seller in an arm’s length transaction. activities of the entity, directly or indirectly, including any Director (whether Executive or otherwise) of that entity. Finance Lease A lease in which the lessee acquires all the financial benefits and Liquid Assets risks attaching to ownership of whatever is being leased. Assets that are held in cash or in a form that can be converted to cash readily, such as deposits with other banks, bills of exchange General Provisions and treasury bills. General provisions are established for loans and advances for anticipated losses on aggregate exposures where credit losses Loan Losses and Provisions cannot yet be determined on individual facility basis. Amounts set aside against possible losses on loans, advances and other credit facilities as a result of such facilities becoming Impairment partly or wholly uncollectible. This occurs when recoverable amount of an asset is less that it’s carrying amount. Market Risk This refers to the possibility of loss arising from changes in the Interest Margin value of a financial instrument as a result of changes in market Net interest income as a percentage of average interest earning variables such as interest rates, exchange rates, credit spreads assets. and other asset prices.
Interest Spread Net Asset Value per Share This represents the difference between the average interest rate Shareholders’ funds divided by the number of ordinary shares in earned and the average interest rate paid on funds. issue.
Interest Cover Net-Interest Income (NII) A ratio showing the number of times interest charges is covered The difference between what a Company earns on assets such by earnings before interest and tax. as loans and securities and what it pays on liabilities such as deposits refinance funds and other borrowings. Interest Earning Assets Net interest margin (NIM) Assets which earn interest; Loans and Advances, Bills, Leases, Call money, etc. The measure of the difference between the interest income generated and the amount of interest paid out to their lenders. Interest in Suspense Non-Performing Loans (NPL) Interest suspended on non-performing loans and advances. All loans are classified as non-performing when a payment is Investment Properties 180 days’ in arrears. Investment property is property (land or a building – or part of a building - or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for use or sale. Swarnamahal Financial Services PLC - Annual Report 2016/17 89
NPL Ratio Return on shareholders’ fund Total non-performing advances (net of Interest in Suspense) An accounting ratio, expressing the profit for the financial year divided by total advances portfolio (net of Interest in Suspense). as a percentage of average shareholders’ funds.
Off Financial Position Transactions Segmental Analysis Transactions that are not recognized as assets or liabilities Analysis of financial information by segments of an enterprise in the statement of financial position, but which give rise to specifically, the different industries and the different contingencies and commitments in the statement of financial geographical areas in which it operates. position as at reporting date. Shareholders’ Funds Operational Risk Total of issued and fully paid share capital and revenue reserves. This refers to the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Statutory Reserve Fund A capital reserve created as per the provisions of the Finance Price Earnings Ratio (P/E Ratio) Business Act No. 42 of 2011. Market price of an ordinary share divided by earnings per share (EPS). Supplementary Capital (Tier II) Supplementary Capital includes, approved revaluation reserves, Provision for Bad and Doubtful Debts general provisions, hybrid (debt/equity) capital items and A charge to income which is added to the allowance for loan approved subordinated term debts. losses. Specific provisions are established to reduce the book value of specific assets (primarily loans) to estimated realizable values.
Return on Average Assets (ROA) Net income expressed as a percentage of average total assets, used along with ROE, as a measure of profitability and as a basis of intra-industry performance comparison.
Revenue Reserve Reserves set aside for future distribution and investment.
Return on Equity (ROE) Net income, less preferred share dividends if any, expressed as a percentage of average ordinary shareholders’ equity.
Related Parties Parties where one party has ability to control the other party or exercise significant influence over the other party in making financial and operating decisions, directly or indirectly.
Revenue Reserves Reserves set aside for future distribution and investment. 90 Swarnamahal Financial Services PLC - Annual Report 2016/17
Our Network
Fully Fledged Branches
No. Branch Address Tel No. 01 Batticaloa No. 190, Trincomalee Road, Batticaloa 065-2222880
02 Chilaw No.24A, Bazaar Street, Chilaw 032-2224888 03 Hatton No.15, Main Street, Hatton 051-2224466 04 Jaffna No.338, Hospital Road, Jaffna 021-2220245 05 Kandy No.156, Kotugodella Street, Kandy 081-2226126 06 Bambalapitiya No.5, R. A. De Mel Mawatha, Colombo 04 011-7534814 07 Negombo No.93, Rajapaksha, Broadway, Negombo 031-2222619 08 Nugegoda No.31, St. Thilakaratna Mw, Nugegoda 011-2810666 09 Ratnapura No.15, Main Street, Ratnapura 045-2226270 10 Trincomalee No.31, Central Road Trincomalee 026-2226677 11 Vavuniya No.141, Kandy Road, Vavuniya 0242226233
Gold Loan Centres
No. Branch Address Tel No. 12 Aluthgama No.164, Galle Road, Aluthgama 034-2271775
13 Gampaha No.16, Market Street, Gampaha 033-2248444 14 Ja-Ela No.120, Negombo Road, Ja- Ela 011-2249085 15 Ragama No.62A,Tewatte Road, Ragama 011-2957053 16 Jampettah No. 05, Jampettah Street, Colombo 13 011-2452245 17 Wattala No.416,Negombo Road, Wattala. 011-3193340 Swarnamahal Financial Services PLC - Annual Report 2016/17 91
Notice of Meeting
NOTICE IS HEREBY GIVEN THAT THE ELEVENTH (12TH) ANNUAL GENERAL MEETING OF SWARNAMAHAL FINANCIAL SERVICES PLC WILL BE HELD AT HOTEL SAPPHIRE NO. 371, GALLE ROAD, COLOMBO 06, ON FRIDAY, 29TH SEPTEMBER 2017 AT 10.30 AM, AND THE BUSINESS TO BE BROUGHT BEFORE THE MEETING WILL BE :
AGENDA 1. To consider and adopt the Annual Report of the Board of Directors on the Affairs of the Company and the Financial Statements for the year ended 31st March 2017 with the Report of the Auditors thereon. 2. To re-elect Mr. S.M. Ganegoda who in terms of Article 20(5) of the Articles of Association of the Company retires by rotation at the Annual General Meeting as a Director. 3. To re-appoint Messrs KPMG, Chartered Accountants as Auditors of the Company for the ensuing year and to authorize the Directors to fix their remuneration 4. To authorize the Directors to determine contributions to charities for the financial year ending 31st March 2018.
BY ORDER OF THE BOARD S S P CORPORATE SERVICES (PRIVATE) LIMITED
SECRETARIES
No.101, Inner Flower Road, Colombo 03.
30th August 2017
Note A member is entitled to appoint a proxy to attend and vote instead of himself/herself and a Proxy need not be a member of the Company. A Form of Proxy is enclosed for this purpose. The instrument appointing a proxy must be deposited at the Registered Office of the Secretaries, S S P Corporate Services (Private) Limited, 101, Inner Flower Road, Colombo 03.
Security Check We shall be obliged if the shareholders/proxies attending the Annual General Meeting produce their National Identity Card to the security personnel stationed at the entrance. 92 Swarnamahal Financial Services PLC - Annual Report 2016/17
Notes Swarnamahal Financial Services PLC - Annual Report 2016/17 93
Notes 94 Swarnamahal Financial Services PLC - Annual Report 2016/17
Notes Swarnamahal Financial Services PLC - Annual Report 2016/17 95
Form of Proxy
SWARNAMAHAL FINANCIAL SERVICES PLC
I/We ...... holder of National Identity Card No ...... of ...... being a member/members of Swarnamahal Financial Services PLC hereby appoint ...... holder of National Identity Card Number No ...... of ...... or failing him/her.
Mr. J. H. Edirisinghe or failing him Mr. N. P. Edirisinghe or failing him Mrs. A. D. Edirisinghe or failing her Mr. A. S. Edirisinghe or failing him Mr. S. M .Ganegoda or failing him as * my/our proxy, to represent *me/us and to vote as indicated hereunder for *me/us on *my/our behalf at the Annual General Meeting of the Company to be held at Hotel Sapphire No.371 Galle Road, Colombo 6 on Friday, Twenty Ninth (29th) day of September 2017 at 10.30 A.M and at any adjournment thereof and at every poll which may be taken in consequence thereof:
FOR AGAINST 1. To consider and adopt the Annual Report of the Board of Directors on the Affairs of the Company together with the Financial Statements of the Company for the year ended 31st March 2017. 2. To re-elect Mr. S. M. Ganegoda who in terms of Article 20(5) of the Articles of Association of the Company retires by rotation at the Annual General Meeting as a Director 3. To re-appoint Messrs KPMG, Chartered Accountants as Auditors of the Company for the ensuing Year and to authorize the Directors to fix their remuneration. 4. To Authorize the Directors to determine contributions to charities for the financial year ending 31st March 2018.
Signed this ...... day of ...... Two Thousand and Seventeen.
Signature: ......
Note: (a) *Please delete the inappropriate words. (b) Instructions are noted on the reverse hereof. 96 Swarnamahal Financial Services PLC - Annual Report 2016/17
INSTRUCTIONS TO COMPLETE PROXY 1. Kindly perfect the form of proxy by filling in legibly your full name and address, your instructions as to voting, by signing in the space provided and filling in the date of signature. 2. Please indicate with a ‘X’ in the cages provided how your proxy is to vote on the Resolutions. If no indication is given, the proxy in his/her discretion may vote as he/she thinks fit. 3. A Proxy for a Shareholder is entitled to attend and be heard at a meeting of shareholders as if the proxy was the shareholder. 4. In case of a Company or corporate body, the form of Proxy must be completed and signed under its Common Seal, which should be affixed and attested in accordance with the Articles of Association or the Constitution of that Company or corporate body. 5. In case of a proxy signed by an Attorney, the original or a certified copy of the Power of Attorney should also accompany the computed Form of Proxy, in the manner prescribed in the Articles of Association. 6. Every alteration or addition to the Proxy must be duly authenticated by the shareholders with the full signature. Such signature should as for as possible be placed in proximity to the alteration. 7. The completed Proxy should be deposited at the Registered office of the Secretaries ,at No. 101 ,Inner Flower Road ,Colombo 03,not less than 24 hours before the time appointed for holding of the Meeting.
Note: If the shareholder is a Company or body corporate, Section 138 of Companies Act No.7 of 2007 applies to Corporate Shareholders of Swarnamahal Financial Services PLC. Section 138 provides for representation of Companies at meetings of Companies. A Corporation, whether a Company within the meaning of this Act or not, may-where it is a member of another Corporation, being a Company within the meaning of this Act, by resolution of its Directors or other governing body authorized as aforesaid shall be entitled to exercise the same power on behalf of the Corporation which it represents, as that Corporation could exercise if it were an individual shareholder. Corporate Information
Name of the Company Company Secretary Swarnamahal Financial Services PLC SSP Corporate Services (Pvt) Ltd No. 101, Inner Flower Road, Colombo 03 Legal Form A Public Limited liability Company incorporated 14th January Auditors 2004, under the Companies Act No.17 of 1982 and re-registered Messrs KPMG 16th September 2008 under the Companies Act No.7 of 2007, Chartered Accountants licensed by the monetary board of the Central Bank of Sri Lanka, 32A, Sir Mohamed Macan Markar Mawatha, Colombo 3. under the Finance Business Act No. 42 of 2011. Bankers Registered Office / Business Office Commercial Bank of Ceylon PLC No. 05, R. A. De Mel Mawatha, Colombo 04 Sampath Bank PLC Tel : 011 2556160-4, 011 2595061, 011 7534800 Seylan Bank PLC Fax: 011 2595062 / 2589823 Hatton National Bank PLC E-mail : [email protected] web: www.sfs.lk
Board of Directors Principal Activities Mr. J. H. Edirisinghe Fixed Deposits Mrs. A. D. Edirisinghe Savings and Minors’ Savings Accounts Mr. N. P. Edirisinghe Gold Loan Services Mr. A. S. Edirisinghe Finance Leases Mr. S. M. Ganegoda Hire Purchase and Term Loan facilities Company Registration No. PB 594 PQ
VAT Registration No. 114363510 - 7000
Credit Ratings B-/NP RAM Ratings (Lanka) Limited
Number of employees 144
Produced by Copyline (Pvt) Ltd Printed by Printel (Pvt) Ltd b Swarnamahal Financial Services PLC - Annual Report 2016/17
No. 05, R. A. De Mel Mawatha, Colombo 04 Tel : 011 2556160-4, 011 2595061, 011 7534800 Fax: 011 2595062/ 2589823 E-mail : [email protected] web: www.sfs.lk