DFCC Vardhana Bank Limited Debenture Issue 2011/16 INTRODUCTORY DOCUMENT
Managers to the Introduction Acuity Partners (Private) Limited FOR OBTAINING A LISTING OF 10,000,000 UNSECURED SUBORDINATED REDEEMABLE FIVE YEAR RATED AND TRANSFERABLE DEBENTURES ON THE MAIN BOARD OF THE DEBT SECURITIES TRADING SYSTEM OF THE COLOMBO STOCK EXCHANGE
Managers to the Introduction Acuity Partners (Private) Limited No. 53, Dharmapala Mawatha Colombo 07, Sri Lanka Tel: 2 206206
2 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document INTRODUCTORY DOCUMENT
The Colombo Stock Exchange (“CSE’) has taken reasonable care to ensure full and fair disclosure of information in this Introductory Document. However, CSE assumes no responsibility for the accuracy of the statements made, opinions expressed or reports included in this Introductory Document.
This Introductory Document is dated 21st November 2011. This Introductory Document has been prepared by Acuity Partners (Pvt) Limited (hereinafter referred to as “Acuity”) on behalf of DFCC Vardhana Bank Limited. DFCC Vardhana Bank Limited (hereinafter referred to as “DVB” or “the Bank”) and its Directors confirm that to the best of their knowledge and belief, the information contained herein is true and correct in all material respects and that there are no other material facts, the omission of which would make any statement herein misleading. While DVB has taken reasonable care to ensure full and fair disclosure of pertinent information, it does not assume responsibility for any investment decisions made by the investors based on the information contained herein. In making such investment decisions, prospective investors must rely on their own knowledge, examination and assessments on DVB and the terms of the Debentures Issued (knowledge, perception together with their own examination and assessment on DVB and the terms and conditions of the Debentures issued) including the risks associated. Investors are further advised to obtain clarifications in this regard from their tax advisors.
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 3 Representation
No dealer, sales person, individual or any other outside party has been authorized to give out any information or to make any representation in regard to this Introduction other than the information and representations contained in this Introductory Document and if given or made such information or representations must not be relied upon as having been authorized by the Company.
The delivery of this Introductory Document shall not under any circumstance constitute a representation or create any implication or suggestion that there has been no material change in the affairs ofthe Company since the date of this Introductory Document. If you are in any doubt regarding the contents of this document or if you require any clarification or advice in this regard, you should consult your Stock Broker, Lawyer or any other Professional Advisor.
4 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document TABLE OF CONTENTS
1.0 CORPORATE INFORMATION 7 2.0 SALIENT FEATURES AT A GLANCE AND PARTIES TO THE INTRODUCTION 8 3.0 DEFINITIONS/ABBREVIATIONS AND INTERPRETATIONS 10 4.0 INFORMATION RELATING TO THE INTRODUCTION 13 4.1 Issue of Debentures under Prospectus 13 4.2 Subscription List and Allotment 13 4.3 Introduction 14 4.4 Debenture Types and Number of Debentures to be Listed 14 4.5 Interest 14 4.6 Interest Period 15 4.7 Interest Payment Date 15 4.8 Interest Repricing Date 16 4.9 Objectives of the Issue 16 4.10 Payment of the Principal Sum and Interest 16 4.11 Withholding Tax 17 4.12 Redemption 18 4.13 Trustee to the Issue 18 4.14 Rights of the Debenture Holders 18 4.15 Risk Factors Specifically Associated with the Debentures 18 4.16 Benefit of Investing in the Debentures 19 4.17 Transfer of the Debentures 19 4.18 Rating of the Instrument 20 5.0 OVERVIEW OF DFCC VARDHANA BANK LIMITED 21 5.1 Historical Overview 21 5.2 Significant Milestones 21 5.3 Performance Overview during 2010 22 5.4 Principal Activities 23 5.5 Outlook for 2011 and beyond and Assumptions and Risks Related to Future Plans 24 5.6 Degree of Dependence on key Customers and Suppliers 25 5.7 Employees and Labour Union Details 25 5.8 Major Shareholdings as at 30 September 2011 25 6.0 CAPITAL STRUCTURE 26 6.1 Stated Capital 26 6.2 Transferability of Shares 26 6.3 Details of Debt Securities 26 6.4 Details of Share and Debenture Allotments 26 6.5 Details of Share Redemption and Reduction in Share Capital 26 6.6 Details of Outstanding Convertible Debt Securities 26
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 5 7.0 THE BOARD OF DIRECTORS 27 7.1 Board of Directors of DVB 27 7.2 Directors’ Remuneration 31 8.0 CORPORATE MANAGEMENT AND SENIOR MANAGEMENT TEAM 32 9.0 CORPORATE GOVERNANCE PRACTICES 35 9.1 Overview 35 9.2 Audit Committee 36 9.3 Board Human Resource and Remuneration Committee 36 9.4 Nomination Committee 37 9.5 Integrated Risk Management Committee 37 10.0 STATUTORY AND OTHER GENERAL INFORMATION 39 10.1 Hosting of Documents 39 10.2 Copies of the Introductory Document 39 10.3 Details of Legal, Arbitration or Mediation Proceedings 39 10.4 Details of Penalties Imposed by Regulatory and State Authorities 39 10.5 Details of Contingent Liabilities 39 10.6 Financial Statements 40 10.7 Conflict of Interest Between DVB and Trustee 40 10.8 Key Ratios 40 10.9 Assets Pledged as Security 40 10.10 Non Resident Investors 40 11.0 DECLARATION BY THE DIRECTORS 41 ANNEX A: DFCC VARDHANA BANK LIMITED, AUDITORS REPORT TO THE BOARD OF DIRECTORS AND AUDITED FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDING 31 DECEMBER 2010 43 ANNEX B: DFCC VARDHANA BANK LIMITED, AUDITORS REPORT TO THE BOARD OF DIRECTORS AND AUDITED FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDING 31 DECEMBER 2009 79 ANNEX C: DFCC VARDHANA BANK LIMITED, AUDITORS REPORT TO THE BOARD OF DIRECTORS AND AUDITED FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDING 31 DECEMBER 2008 115 ANNEX D: DFCC VARDHANA BANK LIMITED, UNAUDITED INTERIM FINANCIAL STATEMENTS AS AT 30 JUNE 2011 149 ANNEX E: CREDIT RATINGS REPORT BY FITCH RATINGS LANKA LTD 157 ANNEX F: COLLECTION POINTS 161
6 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 1.0 CORPORATE INFORMATION
Name of Company DFCC Vardhana Bank Limited
Legal Form A limited liability company incorporated in Colombo on 25 August 1995 under the Companies Act No 17 of 1982. The Company was re- registered under the Companies Act No 07 of 2007 on 16 September 2008 bearing registration number PB 633. It is a Licensed Commercial Bank under the Banking Act No 30 of 1988.
Registered Office & Head Office DFCC Vardhana Bank Limited No. 73, W A D Ramanayake Mawatha Colombo 02, Sri Lanka. Tel: +94- 11 -2371371 Fax: +94-11-2371372
Board of Directors Mr. J M S Brito (Chairman) Mr. L H A Lakshman Silva (CEO) Mr. L N de S Wijeyeratne (Senior Director) Mr. T Dharmarajah Mr. A N Fonseka Mr. R S Jayawardena Mr. S Nagarajah Ms R A P Withana
Auditors KPMG Ford, Rhodes, Thornton & Co. Chartered Accountants No. 32 A, Mohamed Macan Markar Mawatha Colombo 03, Sri Lanka. Tel:+94-11- 2426426 Fax:+ 94-11-2445872
Company Secretary Mr. W A Mendis
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 7 2.0 SALIENT FEATURES AT A GLANCE AND PARTIES TO THE INTRODUCTION
Instrument and Rate of Interest (Yield) Unsecured Subordinated Redeemable Five (05) year Rated and Transferable Debentures, categorized as Debentures of Type A and Type B as described below.
Type A
Fixed Interest rate of eleven point five per centum (11.50%) p.a. payable semi-annually each year on 30th June and 31st December from Date of Allotment until the Date of Redemption on the principal sum of the Debentures. The tenor of the Debenture is Five (05) years.
Type B
Variable interest rate of weighted average six month (182 day) Treasury Bill after tax interest rate (grossed up for notional Withholding Tax) plus one point five per centum (1.50%) p.a. payable semi-annually each year on 30th June and 31st December from Date of Allotment until the Date of Redemption on the principal sum of the Debentures. The tenor of Debenture is Five (05) years.
Face Value of each Debenture Type A and Type B - LKR 100
Issue Price Both Type A and Type B Debentures were issued at LKR 100 each
Amount raised LKR 1,000 million
Date of Maturity On completion of Five (05) years from the Date of Allotment of the Debentures
Debenture Issue Rating Fitch Ratings Lanka has assigned a National Rating of ‘A+(lka)’
Date of Allotment 07th September 2011
Lawyers to the Introduction Nithya Partners Attorneys-at-Law No. 97A, Galle Road Colombo 03, Sri Lanka Tel: +94-11- 4712625 Fax:+94-11-2328817
Trustees Deutsche Bank AG, Colombo Branch No 86 Galle Road Colombo 03 Tel: +94-11-4791137 Fax: +94-11-2343336
8 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document Managers to the Introduction Acuity Partners (Private) Limited 7th Floor, Acuity House No. 53, Dharmapala Mawatha Colombo 03, Sri Lanka Tel: +94-11-2206206 (G), +94-11-2206212 (D) Fax: +94-11-2437149
Continuing Registrars DFCC Group Treasury No. 73/5, Galle Road Colombo 03, Sri Lanka. Tel: +94-11-2442442 Fax: +94-11-2344434
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 9 3.0 DEFINITIONS/ABBREVIATIONS AND INTERPRETATIONS
In this Introductory Document the following definitions/abbreviations and interpretations apply unless the subject or context otherwise requires.
Bank DFCC Vardhana Bank Limited
Bn Billion
Board/Board of Directors The Board of Directors of DVB
CDS Central Depository Systems (Pvt) Limited
Company DFCC Vardhana Bank Limited
CSE Colombo Stock Exchange
Date of Allotment 07th September 2011
Date of Maturity The date on which the period of Five (05) years from the date of allotment expires, which date will be stated in the Debenture Certificate and shall include where the context so requires the date on which the Debentures are redeemed in full (07th September 2016)
Date of Redemption The date of maturity of the Debentures, which will be stated in the Debenture Certificate or such earlier date on which the Debentures become payable in terms of these presents and the conditions endorsed on the Debenture Certificates (07th September 2016)
Debenture Type A and Type B Unsecured Subordinated Redeemable Five (05) Year Rated and Transferable Debentures of Rupees One Hundred (LKR 100) each of the aggregate value of Sri Lankan Rupees One Billion (LKR 1,000,000,000) issued at an Issue Price of LKR 100.00 each
Debenture Certificate A certificate issued to a Debenture Holder in respect of any Debenture or Debentures
Debenture Holders The holders of the Debentures for the time being whose names are entered in the Register of Debentures and in the case of Debentures listed on the CSE and lodged with the CDS the persons in whose account the Debentures are lodged as at the relevant date
DEX Debt Securities Trading System of the Colombo Stock Exchange
DFCC DFCC Bank
10 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document Due Date of Interest/Interest Payment Date 30th June and 31st December until the Date of Redemption on the principal sum of the Debentures with the first of such payments being due on 31st December 2011 and the final interest payments in respect of Debentures shall be made with the repayment of the principal sum on the Date of Maturity/Redemption of the Debentures
DVB DFCC Vardhana Bank Limited
Interest Period The period from the Date of Allotment to 30th December 2011 with respect to the first interest payment and thereafter interest period to be 31st December to 29th June and 30th June to 30th December in each of the years until the Date of Redemption
Interest Repricing Date The Due Date of Interest /Interest Payment Date
Introduction Listing of securities of an entity on the Colombo Stock Exchange without the requirement of an initial public offering
Issue Issue of Debentures by DVB under the Prospectus dated 29th August 2011 and allotted on 07th September 2011
Issue Price Debentures were Issued at LKR 100 per Debenture
Issuer DFCC Vardhana Bank Limited
Listing Listing on the Colombo Stock Exchange by way ofan Introduction
LKR/Rs. Sri Lankan Rupees, the lawful currency of the Republic of Sri Lanka
Market Day Any day on which trading takes place at the CSE
Mn Million
POA Power of Attorney
Prospectus Prospectus dated 29th August 2011 for the purpose of issuing 10,000,000 Unsecured Subordinated Redeemable Five Year Rated and Transferable Debentures
Redemption Repayment of the principal monies on these Debentures
Register The register of the Debenture Holders to be kept by DVB
Registered Address When used in relation to a Debenture Holder means the respective address of the Debenture Holder as registered in the Register. In the case of the Debentures lodged with CDS the registered address shall be deemed to be the address provided by the Debenture Holder to the CDS
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 11 RTGS Real Time Gross Settlement
SEC Securities & Exchange Commission of Sri Lanka
Subordinate The claims of the Debenture Holders shall in the event of winding up of DVB, rank after all the claims of secured and other unsecured creditors of DVB and any preferential claims under any statutes governing DVB but in priority to and over the claims and rights of the Shareholder/s of DVB
TIER II Capital 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 subordinated term debt.
Trust Deed Trust Deed executed between DVB and the Deutsche Bank AG, Colombo branch on 25th August 2011 and amended on 16th November 2011
Trustee Deutsche Bank AG, Colombo Branch and any other banking corporation appointed as Trustee as per the Trust Deed duly recognised by the Securities and Exchange Commission of Sri Lanka (SEC) to perform such role
Unsecured Repayment of the principal and interest on these Debentures not being secured by any specific asset of DVB
Working Day Any day (other than a Saturday or Sunday or any statutory holiday) on which Banks, Money and Foreign Exchange Markets are open for business in Sri Lanka
12 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 4.0 INFORMATION RELATING TO THE INTRODUCTION
4.1 Issue of Debentures under Prospectus The Board of Directors of DFCC Vardhana Bank Limited by a resolution passed on 31st May 2011 resolved to borrow a sum of up to LKR 1.0 Billion by the issue of Unsecured Subordinated Redeemable Five Year (5 year) Rated and Transferable Debentures. Under this Issue, 10,000,000 Unsecured Redeemable Five Year Debentures were issued under two types, Type A and Type B. Type A is a fixed interest rate Debenture with a yield of 11.50% and Type B is a floating interest rate Debenture with yield of six month Treasury Bill rate plus 1.50%, both payable semi-annually. The issue opened on 29th August 2011 and was closed on 02nd September 2011 after being fully subscribed. The Debentures were allotted on 07th September 2011.
4.2 Subscription List and Allotment Debentures under Type A and Type B were allotted to the following investors. Investor Number of Issue Total Date of Debentures Price/ Consideration Allotment Allotted Debenture LKR LKR Type A Employees Provident Fund 5,000,000 100.00 500,000,000 07 Sep 2011 Union Assurance PLC – Life Insurance Fund 1,481,481 100.00 148,148,100 07 Sep 2011 Union Assurance PLC – General Insurance Fund 740,741 100.00 74,074,100 07 Sep 2011 NDB Employees Provident Fund - FI 185,185 100.00 18,518,500 07 Sep 2011 International Water Management Institute 111,111 100.00 11,111,100 07 Sep 2011 Employees’ Federation of Ceylon 74,074 100.00 7,407,400 07 Sep 2011 Ceylinco Insurance PLC – Life Insurance Division 740,741 100.00 74,074,100 07 Sep 2011 Type A Total 8,333,333 833,333,300 Type B Sri Lanka Insurance Corporation Limited 740,741 100.00 74,074,100 07 Sep 2011 Sri Lanka Insurance Corporation Limited 740,741 100.00 74,074,100 07 Sep 2011 NDB Employees Provident Fund - FI 185,185 100.00 18,518,500 07 Sep 2011 Type B Total 1,666,667 166,666,700 Total 10,000,000 1,000,000,000
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 13 4.3 Introduction On 26th August 2011 the Directors of DVB passed a resolution to approve the Initial Listing Application for the listing of the 10,000,000 Debentures issued under the Prospectus dated 29th August 2011 and Trust Deed dated 25th August 2011 and amended on 16th November 2011. An application was made to the CSE and approval in-principle was obtained to deal in and for a listing of Ten Million (10,000,000) Unsecured Subordinated Redeemable Five Year Rated and Transferable Debentures under Type A and Type B as more fully described below. The Debentures shall rank equal and pari passu with each other, without any preference of priority one over the other except for the interest coupon offered. The Debentures to be listed consists of the entirety of Debentures issued under the Prospectus dated 29th August 2011 and Trust Deed dated 25th August 2011 and amended on 16th November 2011. The Debentures will be listed subject to compliance with all applicable CSE Listing Rules. Upon approval by the CSE, the Debentures will be listed on the Main Board of the Debt Securities Trading System of the CSE. In the event of listing on the CSE, DVB and Debenture Holders will be bound by the rules and regulations laid down by the CSE, SEC and CDS.
4.4 Debenture Types and Number of Debentures to be Listed Debenture Types/Categories Number of Debentures to be listed Type A Fixed Interest rate of eleven point five per centum (11.50%) p.a. payable 8,333,333 semi-annually each year on 30th June and 31st December from Date of Allotment until the Date of Redemption on the principal sum ofthe Debentures. The tenor of the Debenture is Five (05) years.
Type B Variable interest rate of weighted average six month (182 day) Treasury 1,666,667 Bill after tax interest rate (grossed up for notional Withholding Tax) plus one point five per centum (1.50%) p.a. payable semi-annually each year on 30th June and 31st December, from the Date of Allotment until the Date of Redemption on the principal sum of the Debentures. The tenor of Debenture is Five (05) years The repayment of the principal and interest on these Debentures are not being secured by any specific assets of DVB. The rights of the Debenture Holders for receipt of the principal sum and any accrued interest on these Debentures in the event of winding up of DVB would be subordinated to the rights of the secured and the other unsecured creditors of DVB and any preferential claims under any statutes governing DVB. Therefore the claims of these Debenture Holders shall in the event of winding up of DVB rank after all the claims of the Secured and other Unsecured Creditors of DVB and any preferential claims under any statutes governing DVB but in priority to and over the claims and rights of the shareholders of DVB.
4.5 Interest Interest payable in respect of Debentures will be as follows: Type A Interest on these Debentures shall be paid at a fixed rate of eleven point five percentum (11.50%) per annum (nominal interest) on the principal sum semi-annually each year on 30th June and 31st December from the Date of Allotment until the Date of Redemption on the principal sum of the Debentures.
14 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document The interest due on the Debentures for the interim period commencing from the Date of allotment up to the first semi-annual period being 31st December 2011 shall be paid pro rata on such date. The interest due on the Debentures for the interim period commencing from the last semi-annual period prior to the respective Date of Redemption shall be paid pro rata on such respective Date of Redemption. Interest calculation shall be based upon the actual number of days in each interest payment period (actual/365). Type B Interest on these Debentures shall be paid on the principle sum at a floating rate equivalent to one point five percentum (1.50%) above the Weighted Average Six month (182 day) Treasury Bill after tax Interest rate (grossed up for notional withholding tax) for scheduled auctions as published by the Public Debt Department of the Central Bank of Sri Lanka, per annum. The Weighted Average Six month (182 day) Treasury Bill after tax interest rate will be obtained from the auctions results of the auctions held immediately prior to the Interest Re-pricing Date (i.e the first date of an interest payment period). In the event that an auction is not held or the Six month (182 day) Treasury Bill interest rate is not announced in the week immediately preceding the re-pricing, the Six month (182 day) Treasury Bill rate announced nearest to the re-pricing date prior to such date by the Public Debt Department of the Central Bank of Sri Lanka at a scheduled auction will be used to compute the interest, per annum. The interest rates so established shall be notified by DVB to the Trustee prior to commencement of each semi annual period. The interest due on the Debentures for the interim period commencing from the Date of Allotment up to the first semi-annual period being 31st December 2011 shall be paid pro rata on such date. The interest due on the Debentures for the interim period commencing from the last semi-annual period prior to the respective date of redemption shall be paid pro rata on such respective date of redemption. Interest calculation shall be based upon the actual number of days in each interest payment period (actual/365).
4.6 Interest Period Interest Period with respect to both Type A and Type B Debentures will be as follows: The period from the Date of Allotment to 30th December 2011 with respect to the first interest payment and thereafter interest periods to be 31st December to 29th June and 30th June to 30th December in each of the calendar years until the Date of Redemption. If Interest Period ending date falls on a holiday, interest period shall extend to following working day and the interest period shall be adjusted accordingly. In any event, Interest shall be paid from and including the first date of the Interest Period up to and including the previous date of the last date of Interest Period.
4.7 Interest Payment Date Interest Payment Date or Due Date of Interest with respect to both Type A and Type B Debentures will be as follows:
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 15 Interest payment shall be made bi-annually for the six months ending on 31st December and 30th June of each calendar year until the redemption date of the Debentures. The first of such interest payment will be made for the period ending on 31st December 2011. In both instances, if either June 30th or December 31st of any year from 2011 to 2016 fall on a banking holiday, the next banking day shall be adopted as the Interest Payment Date and the Interest Period shall be adjusted accordingly. Dispatch of Interest payment cheques will be made as per the Trust Deed within 03 Working Days after the Interest Payment Date.
4.8 Interest Repricing Date Interest Repricing Date shall be the Interest Payment Date. I.e. interest repricing for the next interest period shall be on the Interest Payment Date of the previous interest period. If the interest repricing date falls on a Treasury Bill auction date, previous week’s Treasury Bill auction rates will be used.
4.9 Objectives of the Issue The objectives of the Issue were as follows; a) To strengthen the Tier II Capital of DVB. b) To mobilize long term funds to match expected long term lending opportunities and diversify the funding sources of DVB. c) To provide the public with an opportunity to invest in a long term debenture. d) To facilitate the listing of DVB on the Colombo Stock Exchange.
4.10 Payment of the Principal Sum and Interest (a) Debentures not deposited with the CDS DVB hereby covenants with the Trustee for the benefit of the Debenture Holders that prior to the listing of the Debentures on the CSE whilst the Debentures are not deposited with the CDS it will: (i) pay to the Debenture Holders registered as at the Due Date of Interest by RTGS transfer if so requested by the Debenture Holder at the cost and expense of the Debenture Holder or by crossed cheque marked “Account Payee only” interest on the principal sum of the Debentures for the time being outstanding at the said Rate of Interest in accordance with the provisions of these presents. Provided however that the final interest payments in respect of Debentures shall be made with the repayment of the principal sum on the Date of Maturity of the Debentures (ii) Interest calculation shall be based upon the actual number of days in each interest payment period and a year of 365 days. Provided however that in a leap year the first interest payment for such year shall be based upon the actual number of days in such interest payment period and a year of 365 days. Please refer Clause 4 of the Trust Deed for detailed covenants. (b) Debentures deposited with the CDS (a) The provisions of the Clause 4.1 in the Trust Deed shall mutatis mutandis apply to the Debentures upon the Debenture Certificates being deposited with the CDS. (b) as and when the Debentures ought to be redeemed in accordance with the provisions of these Presents, pay to the Debenture Holders registered as at the Date of Maturity by RTGS transfer if so requested by the Debenture Holder at the cost and expense of the Debenture Holder or by crossed cheque marked “Account Payee only” sent by ordinary mail to the registered addresses of the Debenture Holders the principal sum of the Debentures which ought to be redeemed and interest (if any) remaining unpaid up to the Date of Maturity of the Debentures.
16 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document (c) Payment of the Principal sum and interest shall be made in Sri Lankan Rupees. Interest payments shall be made on the due date of interest after deducting any taxes and charges thereon, if any applicable in terms of the law prevailing at the time of payment. (d) The Debentures shall be redeemed in accordance with the provisions contained in these Presents on the Date of Maturity or on such earlier date in the event of default together with interest (if any) remaining unpaid therefore. (e) If any Debenture Holder fails or refuses to claim and receive payment of the redemption monies payable to such Debenture Holder, or any part thereof within 90 days from the Date of Maturity of the Debentures, the amount due to him shall be transferred by DVB to a suspense account at the end of 90 days after the Date of Maturity of the Debentures and shall be paid by DVB to the holder of the Debentures and no interest will be payable by DVB on such Debentures for the period between the Date of Maturity and the date of the said payment. (f) If any cheques for redemption and interest payment sent by post to the Debenture Holders are returned to DVB undelivered, the amounts represented by each of such returned cheques shall also be transferred by DVB to the aforementioned suspense account and retained therein for a period of Six (06) years from the Date of Maturity of the Debentures. Such monies will be repaid to the Debenture Holders if the same is claimed in writing by such Debenture Holder within the said Six (06) years period. No person shall be entitled to claim any such redemption and interest payment after the completion of six years from the Date of Maturity and all unclaimed monies shall cease to be owed and payable by DVB or to any Debenture Holder after the said period of Six (06) years. (g) Upon the dematerialization of the Debentures, DVB shall always act on the information furnished by the CDS regarding the beneficial ownership of the debentures. It shall therefore be the responsibility of each Debenture Holder to keep all the information in respect of such Debenture Holder updated. DVB shall be absolved from any responsibility or liability in respect of any error or absence of necessary changes in the information recorded with the CDS. (h ) DVB shall be entitled to make all interest and redemption payments to the persons who are registered as the beneficial owners of the Debentures as of the date on which such payments are due without any request for claim from such Debenture Holders and DVB shall accordingly send the payment by RTGS transfer if so requested by the Debenture Holder at the cost and expense of the Debenture Holder or by crossed cheque marked “ Account Payee only” to the registered address of the Debenture Holder as may be furnished by the CDS and such payment shall be deemed to be a payment duly made by DVB to the respective Debenture Holders in redemption of the Debentures of such holders. (i) In order to accommodate the Debenture interest cycles in the Debt Securities Trading System (DEX), the payment of interest shall not include Debenture Holders holding Debentures in the DEX on the Due Date of Interest but one day prior to the due date of interest (i.e the entitlement date). If the entitlement date is a holiday interest shall be calculated including the entitlement date. Please refer Clause 4 of the Trust Deed for detailed covenants.
4.11 Withholding Tax In terms of Section 135 of the Inland Revenue Act No. 10 of 2006 as amended by Inland Revenue (Amendment) Act No. 22 of 2011 the issuer of any corporate debt security is required to remit withholding tax at the rate that may prevail at the relevant time on the entirety of the interest which may accrue on such corporate debt to the Inland Revenue Department at the time of the issue of such corporate debt security.
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 17 Pursuant to such a deduction and remittance being made there would be no further withholding of any tax by the Issuer on any interest being paid on such corporate debt security in terms of the prevailing law. In the Type A Debenture the withholding tax will be computed on the total interest payable during the life of the Type A Debenture, computed using the fixed interest rate of 11.5% p.a. payable to the investor. In the Type B Debenture the withholding tax will be computed on the total interest payable during the life of the Type B Debenture computed on the basis of the first coupon rate payable to the investor.
4.12 Redemption DVB shall redeem the Debentures at LKR 100 per Debenture at the expiry of five (05) years from the Date of Allotment of the Debentures (i.e. on the date of maturity) or on such other earlier date on which the Debentures become payable in accordance with the provision contained in the Trust Deed.
4.13 Trustee to the Issue DVB and the Trustee have executed a Trust Deed. The Trustee, subject to any overriding clauses in the Trust Deed will act as their agent of the Debenture Holders in entering into such deeds, writings and instruments with DVB and to act as the Trustee for the interest of the Debenture Holders on the terms and conditions contained in the said Trust Deed. The rights and obligations of the Trustee are set out in the Trust Deed.
4.14 Rights of the Debenture Holders a) Debenture Holders are entitled to the following: • Receiving the principal sum at maturity and interest on the Debentures as per Section 4.6 of this Introductory Document and Trust Deed. • Ranking above the shareholders (DVB shareholders) in the event of liquidation. • Receiving the Annual Report and interim financial statements of DVB. • Calling and attending meetings of the Debenture Holders as set out in the Trust Deed. b) Debenture Holders are not entitled to the following: • Attending and voting at the meetings of the holders of any other debentures which may be issued by DVB. • Sharing in the profits of DVB. • Participating in any surplus in the event of liquidation.
4.15 Risk Factors Specifically Associated with the Debentures Subscribers to the Debentures could be exposed to the following risks: (It is vital to note however that these risks are not unique to DVB Debentures and apply generally to any unsecured fixed income security, fixed deposit or any other term or money deposit) (i) Interest Rate Risk The price of a typical Debenture will change in the opposite direction to a change in the market interest rates assuming all other factors remain constant. “Market Interest Rate” refers to interest rate expected by the investors for investments with similar maturity and risk profile. As market interest rates rise, price of the Debenture may fall and as market interest rates fall, the price of the Debenture may rise. If an investor sells a Debenture prior to maturity when market interest rate is higher than DVB Debenture interest rates, the investor may incur a capital loss. Similarly,
18 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document if an investor sells a Debenture prior to maturity when market interest rate is lower than the DVB Debenture interest rate, then the investor may receive a capital gain. This uncertainty is known as interest rate risk. (ii) Reinvestment Risk DVB shall pay interest on the Debentures semi-annually. The investor may decide to reinvest this interest payment and earn interest on interest. Depending on the prevailing market interest rates, the Debenture Holder may be able to reinvest the paid interest at a higher or lower interest rate than that is offered by DVB Debenture. This uncertainty is known as “reinvestment risk”. (iii) Default Risk Default risk, also known as credit risk, refers to the risk that the issuer of a debenture may default i.e. the Issuer will be unable to pay interest and principal when due. It is advisable for prospective DVB Debenture investors to take into account past earnings and asset growth performance of DVB, present financial strengths as reflected in the financial statements of DVB, its risk management policies and the experience of Directors and Senior Management Team when forming an opinion on the default risk. Fitch Ratings Lanka has assigned a National Long Term Entity Rating of AA-(lka) with a stable outlook for DVB and a National Rating of ‘A+(lka)’ for the Debenture Issue by independently evaluating default risk. (iv) Liquidity Risk Liquidity risk depends on the ease with which Debentures can be sold after the initial placement. In order to mitigate the liquidity risk, DVB has applied for listing the Debentures on the CSE through an Introduction, which will mitigate liquidity risk.
4.16 Benefit of Investing in the Debentures • An ability to gain an attractive interest income for a period of five years. • Opportunity to realize capital gains according to interest rate fluctuations in the financial markets. • The capacity to exit from the investment at any time after the Debentures are listed on the CSE. • Can be used as collateral to obtain credit facilities from other banks and financial institutions.
4.17 Transfer of the Debentures The Debentures shall be transferable and transmittable in the manner as set out under the conditions in the Trust Deed, which is reproduced below: (a) These Debentures shall be freely transferable and the registration of such transfer shall not be subject to any restriction, save and except to the extent required for compliance with statutory requirements. (b) The Debentures shall be transferable and transmittable through the CDS as long as the Debentures are listed on the CSE. Subject to the provisions contained herein DVB may register without assuming any liability any transfer of Debentures, which are in accordance with the statutory requirements and rules and regulations in force for the time being as laid down by the CSE, SEC and the CDS. (c ) In the case of death of a Debenture Holder * The survivor where the deceased was a joint holder; and * The executors or administrators of the deceased or where the administration of the estate of the deceased is in law not compulsory the heirs of the deceased where such Debenture
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 19 Holder was the sole or only surviving holder; shall be the only persons recognized by DVB as having any title to his/her Debentures. (d) Any person becoming entitled to any Debenture in consequence of bankruptcy or winding up of any Debenture Holder, upon producing proper evidence that he/she sustains the character in respect of which he/she proposes to act or his/her title, as the Board of Directors of DVB thinks sufficient, may at the discretion of the Board be substituted and accordingly registered as a Debenture Holder in respect of such Debentures subject to the applicable laws rules and regulations of CDS, CSE and SEC. (e) No change of ownership in contravention to these conditions will be recognized by DVB.
4.18 Rating of the Instrument Fitch Ratings Lanka Ltd (“Fitch”) has assigned an ‘A+(lka)’ rating to the Debenture instrument. A credit rating of “A+” denotes expectations of low default risk and the capacity for payment of financial commitment is considered strong. The capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than in the case of higher ratings. The rating report issued by Fitch is set out in Annex E.
20 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 5.0 OVERVIEW OF DFCC VARDHANA BANK LIMITED
5.1 Historical Overview DVB is a public limited liability company incorporated in 1995 and domiciled in Sri Lanka. It is licensed by the Central Bank of Sri Lanka to conduct domestic and off-shore banking businesses under the provisions of the Banking Act No. 30 of 1988 and amendments thereto. DFCC, which is a licensed specialized bank is the parent company of DVB and owns 99.07% of voting share capital. (218,973,390 shares) DFCC was set up by an Act of Parliament in 1955 and is a pre-eminent provider of finance and specialist investment, advisory and financial services to Sri Lanka’s growing business sector. The bank’s success has been characterized by a strong commitment to its mission of providing superior financial solutions and nurturing business enterprises. Strong risk management, technical expertise and a pioneering approach to its core competency of development lending have enabled significant benefits to the bank’s large customer base. DVB has secured a National Long Term Entity Rating of AA-(lka) with a stable outlook from Fitch Rating Lanka Limited. This rating denotes expectations of very low default risk and indicates a very strong capacity for payments of financial commitments. This capacity is not significantly vulnerable to foreseeable events. DVB has an island wide reach with 124 branches and extension offices. Vision To provide exceptional commercial banking services to customers. Mission DVB’s mission is to meet the expectations as well as the general and selective needs of customers by offering a range of innovative banking and financial products and services, fine tuned to the achievement of speed and efficiency by using the most modern technology. Values • Integrity and transparency in all transactions • Objective assessment of risks in making financial commitments • Adherence to all relevant laws and regulations • Commitment to deliver enduring value to customers and depositors • Minimum bureaucracy and fast decision making • Teamwork for better performance • Merit-based recruitment of and performance-based rewards for the staff
5.2 Significant Milestones 2011 • Mobitel partners with DVB to extend convenience to customers • DVB opens branches in Pettah & Embilipitya • DFCC and DVB adds Trincomalee to branch network • DVB successfully completes a rights issue of 36,837,739 ordinary shares at LKR 30.00 per share • Issuance of DVB VISA Debit Card
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 21 2010 • Fitch affirms DVB at ‘AA-(lka)’; Outlook Stable • DVB opens 100th branch • DVB wins MACO award • DVB offers top loan schemes Vardhana Sandella and Vardhana Nenasa • DFCC & DVB expands branch network to the North and East • DVB launches “Vardhana MBanker” A practical mobile banking service • DVB celebrates Avurudu with ‘Vardhana Ganudenu Sathiya’ • DVB and Sampath Bank join forces to offer a more comprehensive ATM facility • DVB and Gateway Group in partnership to work towards the betterment of Education • Five more postal units for DVB 2009 • Five more postal units for DVB • DVB’s Ranwarama offers low interest rates • DVB sponsors NCE Awards • 135th World Post Day, DVB main sponsors of national event • DVB opens 50th branch • DVB now in Ambalangoda and Awissawella • DVB launches Vardhana Visa Credit Card • New DVB branches in Nuwara Eliya & Kalawana • DVB further expands its branch network • DVB records 80% growth in deposits • Fitch affirms DVB’s national long-term rating at AA-(lka) • Appointment of additional Directors to the DVB Board
5.3 Performance Overview during 2010 During the year, DVB reported a 30.5% growth in loans and advances to LKR 19,424 million while the fee-earning portfolio of commitments and contingencies expanded by 8.7% to LKR 10,380 million. This is well above the average growth of 15% in loans and advances in the banking sector during 2010. Total assets contracted by 5.8% from LKR 31,338 million to LKR 29,526 million during the year. This decline was due to withdrawal of several large wholesale deposits by a few institutional customers. This reduction is of little consequence as DVB depends less on wholesale fund mobilisation from secondary sources. DVB was able to increase its customer deposits to LKR 23,496 million in 2010 reflecting an expansion of the deposit liabilities by 6.6% during the year. More importantly, DVB was able to increase the savings and demand deposits to 23% and 6.1% respectively of the deposit portfolio. This is in line with DVB’s long-term goal of developing a balanced maturity mix in the customer deposit liability base which is increasingly becoming a main funding source. DVB did not have recourse to other standby funding lines due to high levels of liquidity retained throughout the year. The Profit After Tax (PAT) amounted to LKR 276 million with a modest gain from a PAT of LKR 268 million in 2009. The main operating income line also recorded a similar increase over the previous year. A key factor that held back the growth in PAT was the expenses incurred on specific initiatives designed to enhance the future income generating capacity of DVB. One such initiative was the expansion in DVB’s
22 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document distribution network by over 50 new units. Parallel to the physical expansion, DVB recruited a significant number of frontline non-executive staff and academically and professionally qualified executive staff to match the growth of business volumes. A priority in this exercise has been to materially expand the capacity to deliver superior banking services to the fast increasing customer base. Expansion in the delivery network, acquiring professional manpower and adoption of modern technology and sound control systems are essential prerequisites for effectively serving a group of discerning customers. DVB is essentially focussed on the medium and long-term while remaining adequately profitable in the short term. By most financial indicators, DVB showed an improved position though the balance sheet didnot grow in absolute terms during 2010. The ratio of customer advances to deposits was 82.7% while the liquid asset ratio stood at 25.8% and 41.1% respectively for the domestic banking and foreign currency banking units. The Non-Performing Loan (NPL) ratio declined to 7.2% while the NPL net of provisions was 3.3%. The provision cover for NPL was high at 59.5% by the end of 2010 and above the banking industry average. As a result, DVB remained liquid and risk relating to identified credit losses adequately covered by provisions already made. The liquid resources of DVB were invested in short- maturity money market and Treasury instruments. The capital adequacy ratio was steady at 15.4% while the stress testing carried out under the Central Bank of Sri Lanka (CBSL) guidelines yielded a risk adjusted capital ratio of 14.7% within the year. DVB met the minimum capital requirement of LKR 3 billion set by the CBSL for 2011 and is well on course in increasing the capital base on a staggered basis to reach LKR 5 billion by the end of 2014. The profit after tax of 2010 amounts to a return on equity (ROE) ratio of 9.2% which is around 150 basis points above the bank deposit rates.
5.4 Principal Activities DVB provides a comprehensive range of financial services structured to meet the requirements of a diversified customer portfolio. Key products and services are listed below; Personal Banking Current accounts Local currency saving accounts Foreign currency deposits Term deposits Remittances Retail Banking Savings accounts Current accounts Loans and Advances Trade Finance Leasing Corporate Banking Advances Trade finance Fund transfer Bonds and guarantees Deposits
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 23 Treasury Operations Correspondent relationships Foreign exchange Inward remittances Liquidity market risk management Foreign exchange and money market activities Fixed income and investments Wholesale fund mobilisation and debt structuring Credit Cards
5.5 Outlook for 2011 and beyond and Assumptions and Risks Related to Future Plans Presently, DVB has 124 branches and extension offices spread across most parts of the country and is closer to the goal of having 150 banking outlets. It also has the approval to establish another 25 Sri Lanka Post Office extension offices in 2011. It is likely to achieve this goal in 2011 with the setting up of these extension offices and a few branches in vital locations. The distribution network expansion diligently carried out over the past few years has vastly expanded the Bank’s access to a wide geographical area and a large segment of the population of the country. As such, the Bank is well placed to expand its services to most sectors of the market for commercial banking services. This extensive network of banking outlets will be a fundamental driving factor in the DVB’s business growth strategy for a number of years to come. The next phase of setting up of branches and extension offices in 2011 will be centred on the Northern, Uva, Eastern and Southern provinces. This will effectively remove any gaps that presently exist in the Bank’s presence in these areas. As an early entrant to this emerging and important sector of the economy, the Bank intends to allocate increasingly larger amounts of resources for investment activities in these provinces. With the development of these districts, DVB will have larger amounts of assets deployed within the region as a contributor to growth of this region and have higher levels of income generated from the business conducted in these areas. During the past two years, the Bank was able to establish over 80 branches and extension offices. Due to subdued economic conditions that prevailed during 2009 and early months of 2010, most of these banking units did not have enough opportunity to grow adequate volumes of banking business to match their capacity. As such, these business units could not reach adequate levels of efficiency with regard to business acquisition and income generation. It is intended to remedy this deficiency in 2011 by acquiring more lending and deposit customers to match the capacity of these business units. The accountability for this business generation has been assigned to the Branch Managers with the oversight responsibility for the Regional Managers to ensure that the Bank achieves this goal within 2011. The business growth and incremental income contributions from these efforts will help the Bank to increase its profitability and improve other vital indicators of financial performance. Moving forward the Bank will launch leasing products and internet banking shortly to enhance the service delivery to its rapidly growing customer base. Assumptions Relating to Future Plans • DVB expects the macroeconomic environment of the country to be conducive to the banking industry as a result of growth in all key sectors of the economy. • Expansion in the distribution network is primarily focused on capitalizing on the macro economic development and positive investment climate that is expected to continue in Sri Lanka. • DVB expects growth in customer base with better accessibility in the North and East of the island as a result of the end of the three decade long civil conflict.
24 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document • DVB expected no adverse change in the interest rate environment which may have a negative effect on the margin spread of the bank. • Expansion of product portfolio to include leasing facilities is with the expectation that demand for such products will growth due to enhanced economic activities in key sectors. Risks Associated With Future Plans • Growth expected through branch expansion might be negatively affected due to similar strategies being employed by other banks offering similar products. • Expansion of the branch network is subject to Central Bank of Sri Lanka approval. DVB’s branch expansion plans are based on present guidelines set out by the regulator, and may be adversely affected if the anticipated approvals are delayed or due to changes in regulations. • Success of new products such as leasing is subject to relative attractiveness of product offering and is based on multiple variables such as interest rate, ease of service and other conditions. Change in target market perception on new products can negatively impact future plans of DVB.
5.6 Degree of Dependence on key Customers and Suppliers DVB is not dependent on any customer or any one sector for income or supply at any given time.
5.7 Employees and Labour Union Details The permanent staff strength of DVB as at 30th September 2011 was 728 employees
Category of Staff No of employees Executives 137 Non-Executives 417 Minor Staff 3 Sri Lanka Post Extension Branch Staff 170 Total 728 The employees of DVB did not belong to any trade union as at 30 September 2011.
5.8 Major Shareholdings as at 30 September 2011 10 largest holders of ordinary voting shares of the Bank
Name of the Shareholder No. of Shares % DFCC Bank 218,973,390 99.07 Alliance Finance Company Limited 663,136 0.30 Merrill J Fernando & Sons (Pvt) Ltd 590,385 0.27 World Job and Food Bank 158,184 0.07 Sinhaputhra Finance Ltd 78,942 0.04 Mr Chitrupa de Silva 58,941 0.03 Mrs Shivanthi Mala de Silva 58,941 0.03 The Ceylon Guardian Investments Trust Ltd 42,975 0.02 The Ceylon Investment Company Ltd 42,975 0.02 The Rubber Investment Trust Ltd 42,975 0.02 Sub-total 220,710,844 99.86
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 25 6.0 CAPITAL STRUCTURE
6.1 Stated Capital Information relating to the Stated Capital of DVB as at 30 September 2011 is stated below.
Issued and fully paid share capital LKR ‘000 221,026,561 ordinary shares 3,182,519
6.2 Transferability of Shares There are no restrictions placed on the transfer of shares. The shares of the Company are freely transferable.
6.3 Details of Debt Securities No debt securities have been issued or outstanding within the last 02 years from the date of the listing application other than the Debentures issued under the Prospectus dated 29th August 2011, and more fully described under section 4.1 and 4.2 of this Introductory Document.
6.4 Details of Share and Debenture Allotments There has not been any issue or agreement to issue shares and debentures within the two preceding years, as fully or partly paid up for consideration other than cash and the consideration for which the shares or debentures, have been issued or are proposed or intended to be issued.
6.5 Details of Share Redemption and Reduction in Share Capital No shares were redeemed, re-purchased in terms of sections 63,64,66,67,68,69,93 and 100 of the Companies Act and of any reduction of stated capital in terms of section 59 of the Companies Act within the two preceding years.
6.6 Details of Outstanding Convertible Debt Securities DVB has not issued any convertible debt securities as at the date of the Introductory Document.
26 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 7.0 THE BOARD OF DIRECTORS
7.1 Board of Directors of DVB
Name & Qualification Business Experience Address Date of Birth
MR. J M S BRITO He holds the positions of Chairman of 7/5, Cinnamon 21.08.1946 CHAIRMAN/ DFCC and Deputy Chairman and Managing Garden Residencies, NON EXECUTIVE Director of Aitken Spence PLC and also 67, Ward Place, DIRECTOR serves on the Boards of a number of listed Colombo 07 LLB (London) FCA and unlisted companies. (Eng. & Wales) MBA (London) Formerly, he was the Chairman of Sri Lankan Airlines and a member of Strategic Enterprise Management Agency (SEMA) and served on the Post-Tsunami Presidential Task Force for Rebuilding the Nation (TAFREN) and Public Enterprises Reform Commission. Mr Brito has gained extensive management experience serving organisations such as PricewaterhouseCoopers, British Eveready PLC and the World Bank. Mr. Brito is a Director of the following companies: DFCC Bank Aitken Spence PLC Aitken Spence Hotel Holdings PLC Browns Beach Hotels PLC Elpitiya Plantations PLC Aitken Spence Travels (Pvt) Ltd Aitken Spence Aviation (Pvt) Ltd Royal Spence Aviation (Pvt) Ltd. Aitken Spence Moscow (Pvt) Ltd. Aitken Spence Hotels Ltd Aitken Spence Exports (Pvt) Ltd Aitken Spence Hotel Managements (Pvt) Ltd. Kandalama Hotels Ltd Ahungalla Resorts Ltd Hethersett Hotels Ltd Aitken Spence Hotels (International) Ltd. Aitken Spence Resources (Pvt) Ltd., MPS Hotels Ltd. Golden Sun Resorts (Pvt) Ltd Clark Spence & Company (Pvt) Ltd Aitken Spence Maritime Limited Port Management Container Services (Pvt) Ltd. Spence Shipping (Private) Limited
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 27 Name & Qualification Business Experience Address Date of Birth
Aitken Spence Shipping Ltd Ace Freight Management (Pvt) Ltd Ace Container Repair (Pvt) Ltd., Ace Containers (Pvt) Ltd Ace Container Terminals (Pvt) Ltd Ace Distriparks (Pvt) Ltd Ace Haulage (Pvt) Ltd Logilink (Pvt) Ltd Shipping & Cargo Logistics (Pvt) Ltd Aitken Spence Cargo (Pvt) Ltd Ace International Express (Pvt) Ltd Spence Maldives (Pvt) Ltd Ace Wind Power (Pvt) Ltd Branford Hydropower (Pvt) Ltd. Ace Power Generation Horana (Pvt) Ltd. Ace Power Generation Matara (Pvt) Ltd Ace Power Embilipitiya (Pvt) Ltd. Aitken Spence Insurance (Pvt) Ltd Aitken Spence Insurance Brokers (Pvt) Ltd. Aitken Spence Property Developments (Pvt) Ltd. Vauxhall Property Developments Ltd. MMBL Money Transfer (Pvt) Ltd Elevators (Pvt) Ltd Aitken Spence Printing (Pvt) Ltd Ace Printing and Packaging (Pvt) Ltd. Ace Exports (Pvt) Ltd Vauxhall Investments Ltd Aitken Spence Plantation Managements Ltd. A E N Palm Oil Processing (Pvt) Ltd. Clark Spence Garments Ltd Aitken Spence (Garments) Ltd Aitken Spence Group Ltd Aitken Spence Corporate Finance (Pvt) Ltd
MR. L.H.A Appointed to the Board in October 2008. 75/1A, Dutugamunu 16.07.1960 LAKSHMAN SILVA He is an Executive Vice President of DFCC Street, Kalubowila, EXECUTIVE and had a long career in banking before Dehiwela DIRECTOR / CEO assuming the post of Chief Operating Officer of DVB and promoted to the position of Chief Executive Officer from January 2010. BCom MBA He has a wide exposure in project finance, branch banking, financial leasing and operations management relating to banking. He has received extensive training and exposure in development and commercial banking locally and overseas. Mr Silva is also a past President of the Association of Professional Bankers of Sri Lanka. He started his professional career with the Department of Inland Revenue of Sri Lanka.
28 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document Name & Qualification Business Experience Address Date of Birth
MR T. Appointed to the Board in February 2011. 14/8 Shalawa Road, 07.08.1956 DHARMARAJAH Udahamulla NON EXECUTIVE He is a practicing Chartered Accountant INDEPENDENT and a Senior Partner of Amerasekera and DIRECTOR Company. He holds several public and academic positions and presently the President of the BSc (Management) Association of Accounting Technicians of Sri FCA APFDA Lanka and a Council Member of the Institute of Chartered Accountants of Sri Lanka. He is also a member of the Governing Council of the University of Sri Jayewardenapura and the Advisory Committee to the Faculty of Accounting and Business Management of the University of Kalaniya. He also serves on the Curriculum Development Committee of the National Institute of Education and a Senior Consultant to the Open University of Sri Lanka. Mr. Dharmarajah is a Director of the following companies: TKS Finance Limited Management Applications (Pvt) Ltd Raigam Wayamba Salterns Ltd
MR A. N. FONSEKA Appointed to the Board in February 2009. 55/2, Rosmead Place, 05.12.1952 NON EXECUTIVE Colombo 07 He holds the positions of the Director / DIRECTOR/CEO OF General Manager of DFCC, former Chairman DFCC of the Colombo Stock Exchange and Chairman of the Association of Development Financing Institutions of Asia and the Pacific BSc (Hons) FCIB (ADFIAP). He also serves on the Advisory (London) Committee on Finance and Banking of the Ceylon Chamber of Commerce, Board of Management of the National Institute of Business Management (NIBM), the Financial Sector, Capital Markets and Legal Reform Clusters of the National Council of Economic Development (NECD) and of the National Payments Council and Inter-Regulatory Institutions Council. Before assuming his current position with DFCC, Mr Fonseka had a long career with HSBC and held positions such as Deputy Chief Executive Officer of HSBC Sri Lanka. Mr. Fonseka is a Director of the following companies: DFCC Bank Acuity Partners (Pvt) Ltd Acuity Stockbrokes (Pvt) Ltd
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 29 Name & Qualification Business Experience Address Date of Birth
DFCC Consulting (Pvt) Ltd Lanka Industrial Estates Ltd Lanka Ventures PLC National Asset Management Ltd Synapsys Limited Colombo Stock Exchange Central Depositing System Ltd
MR R. S. Appointed to the Board in March 2011. 389/2 Hokandara 28.8.1948 JAYAWARDENA South, NON EXECUTIVE He is a member of the Institute of Marketing Hokandara INDEPENDENT of the UK and has held senior positions in DIRECTOR product marketing, business promotion and customer service areas attached to large organisations such as Air Lanka Ltd (now Sri Lankan Airlines), Ceylon Tobacco Company M Inst. M (UK) PLC and several other companies. The positions held by Mr Jayawardena overseas include the President - Inflight Duty Free Shop New York, USA and President – King Power Traveller Co Ltd –Hong Kong.
MR S. NAGARAJAH Appointed to the Board in August 2003. 22, Rajasinghe Road, 11.10.1950 NON EXECUTIVE Colombo 06 DIRECTOR He holds the position of Executive Vice President (Finance) of DFCC. Previously, he worked as the Head of the Project Finance and Internal Audit departments of DFCC. FCA FCCA FCMA Received initial training with a firm of Chartered Accountants and held managerial positions in the mercantile sector before being employed by DFCC. Mr Nagarajah has received extensive training in areas relating to banking and finance locally and overseas. Mr. Nagarajah is a Director of the following company: Synapsys Limited
MR L. N. de S. Appointed to the Board in October 2008. 25, 02nd Lane, 27.03.1950 WIJEYERATNE Ratmalana He has over 30 years of experience in the NON EXECUTIVE fields of accounting, finance and audit at INDEPENDENT senior managerial level with companies in DIRECTOR Sri Lanka and abroad. Mr Wijeyeratne held the position of Finance Director of Richard Pieris PLC for over ten FCA years until 2008. Presently, he serves on the Boards of a number of listed and unlisted companies as an Independent Director.
30 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document Name & Qualification Business Experience Address Date of Birth
He received initial training with an international firm of Chartered Accountants in Colombo. Mr. Wijeyeratne is a Director of the following companies: LB Finance PLC Rockland Distilleries Ltd Property Development PLC Nuwara Eliya Hotels PLC Elpitiya Plantation PLC Fortress Resorts PLC Talawakele Tea Estates PLC
MS. R.A.P. Appointed to the Board in August 2003. 73/8, Pamankade 06.08.1962 WITHANA Lane, Colombo 06 NON EXECUTIVE She is currently employed as the Executive DIRECTOR Vice President (Operations) of DFCC and previously held the positions of Head of Credit Administration, Accounting and Reporting with DFCC. FCA FCMA MBA She received her professional training with a firm of Chartered Accountants where she was appointed a Partner after acquiring the full professional qualification. Ms Withana has received extensive training and exposure in the areas of banking and finance both locally and overseas. Ms. Withana is a Director of the following company: Land & Marine Engineering Ltd
No Director of DVB or a person nominated to become a director is or was: a) Involved in a petition under any bankruptcy laws filed against such a person or any partnership in which he was a partner or any corporation of which he was an executive officer. b) Involved in a conviction for fraud, misappropriation or breach of trust or any other similar offence which the CSE considers as a disqualification; or c) The subject of any order, judgment or ruling of any court of competent jurisdiction temporarily enjoining him from acting as an investment advisor, dealer in securities, director or employee of a financial institution and engaging in any type of business practice or activity.
7.2 Directors’ Remuneration The aggregate emoluments paid to the Directors during the financial year ended 31 December 2010 was LKR 11.960 Mn. Estimate for the financial year ending 31 December 2011 is LKR 14.470 Mn.
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 31 8.0 CORPORATE MANAGEMENT AND SENIOR MANAGEMENT TEAM
DEPARTMENT NAME DESIGNATION QUALIFICATION EXPERIENCE
L.H.A Lakshman Silva Chief Executive Officer BCom, MBA Over 20 years experience in development and commercial banking
Lending H A Ariyaratne Executive Vice President BSc Over 20 years experience (Lending) in development and investment banking
Tyrone De Silva Senior Vice President MBA Over 15 years experience (Corporate Banking) in development and investment banking
Ananda Kumaradasa Senior Vice President BSc ACMA MBA Over 15 years experience (Branch Banking) in development and commercial banking
Dharmasiri Wickramathilaka Vice President BSc (Eng.) ACMA MBA Over 15 years experience (Branch Credit) in development and commercial banking
Roshan Jayasekara Vice President ACMA Over 20 years experience (Business Banking) in development and commercial banking
Rohan Thillekeratne Manager (Personal BSc Over 10 years experience Financial Services) in commercial banking
Priyadharshi Attanayake Manager Dip. in Finance and Over 15 years experience (Business Banking) Bank Management, in commercial banking Dip. in Credit Management, Executive Dip. in Accounting and Finance
Deposit Hemanath Samaranayaka Head of Customer Relations BSc (Hons) Graduate Over 20 years experience Mobilization Diploma in Finance AIB in commercial banking (Australia)
Treasury Manohari Gunawardena Senior Vice President BSc MBA Over 20 years experience (Group Treasury) MA(Fin Econ), in commercial banking ACI (Dealing) Treasury management
International Ravi Perera Head of Financial Institutions Relations FCIB (Lond.) Dip. in Over 20 years experience Financial Studies in commercial banking (Lond.) MBA
Prasanna Premaratne Manager (International) AIB CIMA (Pass Finalist) Over 20 years experience CDCS (IFS-UK) in development and commercial banking
Card Services Gamunu Gunasumana Senior Manager BSc MBA PGD in Over 15 years experience (Credit Cards) Business and Financial in commercial banking Administration and card related services
32 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document DEPARTMENT NAME DESIGNATION QUALIFICATION EXPERIENCE
Finance Darshini Wettasinghe Senior Manager BSc (Bus. Admin.) Over 15 years experience (Accounting & Reporting) ACMA ACA ASA in accounting, audit (Australia) and financial management.
Operations Achintha Hewanayake Head of Operations BSc MSc (Keele) Over 15 years experience ACMA CISA in commercial banking
Regional Bhathiya Alahakoon Regional Manager BSc (Eng.) Over 15 years experience Managers (Colombo South Region) in development and commercial banking
Anton Arumugam Regional Manager MBA Over 15 years experience (Colombo Metropolitan in commercial banking Region)
Priyadharsana Regional Manager BSc (Bus. Admin.) Over 15 years experience Sooriya Bandara (Central Region) MBA ACMA ACCA in development and commercial banking
Chanaka Kariyawasam Regional Manager BSc (Pub. Admin.) Over 15 years experience (Southern Region) MBA AIB in development and commercial banking
Prasanna Premaratne Regional Manager MSc PGD in Bank Over 15 years experience (North Western Region) Management in development and commercial banking
Kusumsiri Sathkumara Regional Manager BA (Econ.) Over 15 years experience (Northern & Eastern Region) in development and commercial banking
Credit Errol Fernando Vice President Administration (Credit Administration) Over 20 years experience and Credit Risk in commercial banking Appraisal
Jayangani Perera Head of Credit Risk Appraisal BCom Over 15 years experience in development and commercial banking
Settlement and Indaka Weerasekera Head of Transaction Dip. in Banking Over 15 years experience Transaction Processing & Risk Control and Finance in commercial banking Processing (University of Wales) Business Promotion and Corporate Communication
Marketing and Rosheeni Wijesekera Vice President BA PGD in Over 15 years experience Corporate (Corporate Communication) Business in advertising, marketing Communication Administration and corporate communication areas.
Planning Palitha Gamage Senior Vice President BSc (Eng.) ACMA MBA Over 15 years experience (Planning & Plan in development and Implementation) commercial banking
Ravi Dassanayake Manager (Budgeting BSc (Accy) MBA ACA Over 15 years experience and Planning) ACMA in development and commercial banking
Integrated Risk Suraj De Silva Senior Vice President BCom MBA FCMA Over 15 years experience Management (Integrated Risk in finance, IT and Management) development banking
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 33 DEPARTMENT NAME DESIGNATION QUALIFICATION EXPERIENCE
Information Dinesh Fernandopulle Group Chief BSc MSc Over 15 years experience Technology Information Officer in Information Technology management
Human Resource Jayani Amarasiri Vice President BA(Econ) MA Over 15 years experience Management (Group Human Resources) in development banking
Legal and Special Chaminda Gunawardana Vice President BSc AIB MBA Over 10 years experience Loan Administration (Special Loan in development banking Administration)
Samathri Kariyawasam Manager (Legal) BBA LLM (Lond.) Over 15 years experience Attorney at Law in development and commercial banking
Procurement Chanaka Kalansuriya Vice President MBA Over 15 years experience and Services (Procurement and in development banking Services)
Internal Audit Nandasiri Bandara Vice President BSc (Bus. Admin.) FCA Over 15 years experience (Group Internal Audit) in development and commercial banking
Compliance Prasanna Kannangara Head of Compliance ACIB (Lond.) FCCA (Lond.) Over 20 years experience in commercial banking
Company Asoka Mendis Company Secretary BA (Hons) FCA ACMA Over 15 years experience Secretary MBA in development and commercial banking The Chief Executive Officer is not and was not: a) Involved in a petition under any bankruptcy laws filed against him or any partnership in which he was a partner or any corporation of which he was an executive officer; b) Involved in a conviction for fraud, misappropriation or breach of trust or any other similar offence which the CSE consider as a disqualification; or c) The subject of any order, judgment or ruling of any court of competent jurisdiction temporarily enjoining him from acting as an investment advisor, dealer in securities, director or employee of a financial institution and engaging in any type of business practice or activity.
34 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 9.0 CORPORATE GOVERNANCE PRACTICES
9.1 Overview The primary responsibility for governance of DVB rests with the Board of Directors. The purpose of governance is to facilitate effective and prudent management to ensure the sustained growth and profitability of DVB. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the Board include setting DVB’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The performance of the Board is subject to overview of the shareholders at the annual general meeting. The Board is headed by the Chairman who is responsible for the leadership of the Board and ensuring its effectiveness on all aspects of its role while the Board is collectively responsible for the long-term success of DVB. The Board’s role is to provide leadership and direction to the business activities of DVB within a framework of effective controls which enable risks to be assessed and managed. The Board of Directors performs this role by engaging in the process of formulation of short and long term planning and helps in the development of business strategies. It also monitors the performance of the management in meeting the agreed objectives and goals through a system of regular management reporting on the operational and control activities. The Board has appointed four sub-committees to assist in the performance of its duties. They consist of the Audit Committee, Human Resource and Remuneration Committee, Integrated Risk Management Committee and the Nomination Committee. The structure and working of these committees are set out elsewhere in this Introductory Document. The Board takes steps to verify the integrity of the financial information and financial controls through reviews carried out by the Audit Committee and external and internal audits. The Integrated Risk Management Committee concentrates on providing assurance that systems of internal controls and risk management are robust and operate effectively. The appointment of new directors to the Board falls within the purview of the Nomination Committee which undertakes formal evaluation of all nominations for appointment of new directors. The wider role of the Human Resources and Remuneration Committee is to assist the Board in setting the levels and structure of remuneration of the executive directors and the senior management considering the position of DVB relative to other institutions in the banking industry as well as the overall remuneration and employment conditions of the DFCC Group. The Board consists of executive and non-executive directors who bring different perspectives to its decision-making process. There is a clear division of responsibilities at the head of the bank of the Board setting the strategic directions and ensuring that objectives are achieved with the executive responsibility of managing the business of DVB. The Board and these committees have appropriate balance of skills, expertise and independence to effectively discharge their responsibilities. A one third of all the directors retires by rotation annually and submits for re-election based on continued satisfactory performance. The Board undertakes structured evaluations of its own performance and that of the committees annually. The Board is provided with accurate, clear and sufficient information in a timely manner for it to perform its duties appropriately. The directors may call for further information or clarification to enable them to make decisions on any matter under consideration. This process enables the directors to allocate sufficient time to effectively perform their duties. The Board conducts formal scheduled meetings monthly and may have additional meetings on specific subjects as the necessity arises. The Board maintains a dialog with the shareholders and takes steps to ensure that all directors develop an understanding of the views of the shareholders. The Directors are provided with opportunities to have meetings with the Board of Directors of the major shareholder, DFCC, in order to help developing a balanced understanding of the views of the major shareholder.
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 35 9.2 Audit Committee The functions of the Audit Committee are to assist the Board of Directors in meeting its responsibilities over the proper conduct of the financial affairs of DVB. The members of the Audit Committee are:
Mr L N de S Wijeyeratne - Chairman Non-executive Independent Director Mr T Dharmarajah Non-executive Independent Director Ms R A P Withana Non-executive Director Mr T K Bandaranayake Consultant Three members of the Audit Committee, namely Mr L N de S Wijeyeratne, Mr T Dharmarajah and Ms R A P Withana, are chartered accountants with strong training backgrounds in audit and possess extensive experience in the industrial, commercial and financial sectors at senior managerial levels. The Consultant to the Audit Committee Mr T K Bandaranayake is a chartered accountant who has been a Partner of Ernst & Young, Colombo. The Group Head of Audit, Mr N Bandara, is a chartered accountant with a long career in the banking industry. The major responsibilities of the Audit Committee include the following. (a) Monitoring the integrity of the financial statements of DVB including the quarterly financial reports prepared for disclosure of the financial performance and significant accounting policies and financial reporting judgments contained therein. (b) Evaluation of the effectiveness of the financial and internal control systems relating to orderly conduct of the banking business and financial reporting of DVB. (c) Review of the adequacy of the scope, functions and resources of the Internal Audit department for meeting its obligations on assessing the internal controls and the integrity of the financial reporting processes of DVB. (d) Making recommendations to the Board in relation to the appointment of the external auditor and to approve the remuneration and terms of engagement of the external auditor. (e) Monitoring the external auditor’s independence and objectivity and the effectiveness of the audit process, taking into consideration relevant regulatory requirements. (f) Implementation of a policy on the engagement of the external auditor to supply non-audit services taking into account the related regulatory guidelines. (g) Review of the arrangements in place by which the staff of DVB may, in confidence, raise concerns about possible improprieties on matters relating to banking business or financial reporting and for independent investigation and follow-up action on such matters.
9.3 Board Human Resource and Remuneration Committee The Committee is responsible for advising the Board on the adoption of a formal and transparent procedure pertaining to the remuneration of the staff of DVB. The members of the Human Resource and Remuneration Committee are:
Mr J M S Brito - Chairman Non-executive Director Mr A N Fonseka Non-executive Director Mr L H A Lakshman Silva – Chief Executive Officer Executive Director Mr L N de S Wijeyeratne Non-executive Independent Director
36 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document Obligations of the Human Resource and Remuneration Committee include the following. (a) Determine the remuneration policy relating to the Directors, Chief Executive Officer (CEO) and key management personnel. Remuneration policy for Mr. L H A Lakshman Silva (CEO) is evaluated only in the presence of Non-Executive and Non-Executive Independent Directors. (b) Decide on goals and performance targets for the Directors, CEO and the key management personnel. (c) Evaluate the performance of the CEO and key management personnel against the set goals and targets and determine the basis for revising remuneration, benefits and other performance- based payments. (d) Develop succession plans in respect key management personnel of DVB.
9.4 Nomination Committee The role of the Nomination Committee is to lead the process for board appointments and make recommendations to the Board. The Committee also evaluates the balance of skills, experience, independence and knowledge on the Board and prepares description of the role and capabilities required in new appointments. The members of the Nomination Committee are:
Mr L N de S Wijeyeratne - Chairman Non-executive Independent Director Mr J M S Brito Non-executive Director Mr R S Jayawardena Non-executive Independent Director The Chief Executive Officer is invited to be present at the meetings. The areas of responsibility of Nominations Committee are as follows: (a) To implement a procedure to select / appoint new directors, the CEO and key management personnel. (b) Consider and recommend (or not recommend) the re-election of current directors taking into account the performance and contribution made towards the overall discharge of the Board’s responsibilities. (c) Determine the criteria such as qualifications, experience and key attributes required for appointment or promotion to the post of CEO and the key management positions. (d) Ensure that the directors, CEO and key management personnel are fit and proper persons to hold office based on their performance and as per relevant statutory requirements. (e) Recommend from time to time, the requirements of additional / new expertise and the succession arrangements for retiring directors and key management personnel.
9.5 Integrated Risk Management Committee The Board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives and maintain sound risk management systems. The role of the Integrated Risk Management Committee is to review the bank’s exposure to material risks and evaluate the effectiveness of the measures adopted for control and mitigation of such risks. The members of the Integrated Risk Management Committee are:
Mr J M S Brito - Chairman Non-executive Director Mr A N Fonseka Non-executive Director Mr T Dharmarajah Non-executive Independent Director Mr S Nagarajah Non-executive Director Mr L H A Lakshman Silva – Chief Executive Officer Executive Director Ms M Gunawardhena Head of Group Treasury
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 37 The Committee obtains the involvement of relevant key management personnel representing broad risk categories in making decisions within the framework of the authority and responsibility assigned to it. The areas of responsibility of this Committee are as follows: (a) Assess all risks pertaining to the business of DVB such as credit, market, liquidity, operational and strategic risks on a continuous basis using appropriate methodologies and indicators. (b) Review the adequacy and effectiveness of all management level committees such as the credit committee and the asset/liability committee to address and to manage risks within quantitative and qualitative risk limits as specified by the Committee. (c) Adopt corrective action to mitigate the effects of specific risks where such risks are at levels beyond the limits set out in DVB’s policies and regulatory and supervisory requirements. (d) Assess DVB’s compliance with the laws, regulations, internal controls and approved policies pertaining to risks in all areas of business operations.
38 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 10.0 STATUTORY AND OTHER GENERAL INFORMATION
10.1 Hosting of Documents This Introductory Document and the Articles of Association of DVB will be hosted on the CSE website (www.cse.lk) and on the DVB website (www.dfccvardhanabank.com) for a period of not less than 14 Market Days from the date of this Introductory Document.
10.2 Copies of the Introductory Document Copies of the Introductory Document may be obtained from the DVB Head Office, The Managers to the Introduction and member firms and trading member firms of the Colombo Stock Exchange. (Refer Annex F).
10.3 Details of Legal, Arbitration or Mediation Proceedings Apart from legal proceedings in the normal course of its banking business, the Bank is not a party to any litigation or arbitration proceedings and is not aware of any pending or threatened litigation or arbitration that, if decided adversely to the Bank, would have a significant effect upon the Bank’s financial position nor has it been a party to any such proceedings in the recent past.
10.4 Details of Penalties Imposed by Regulatory and State Authorities There were no penalties imposed by regulatory or state authorities on DVB as at the date ofthe Introductory Document.
10.5 Details of Contingent Liabilities Details of contingent liabilities and commitments as at 30 June 2011 are given below.
LKR ‘000 Acceptances 2,235,013 Guarantees 2,384,125 Bid bonds 129,640 Documentary letters of credit 3,236,754 Forward contracts 2,671,598 Spot contracts 44,227 Bills for collection 921,729 Total 11,623,085 Commitments in Ordinary Course of Business LKR ‘000 Commitments for unutilized credit facilities 2,591,076 Capital expenditure approved by the board of directors Contracted 40,470 Not contracted 124,099 Total 2,755,645
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 39 10.6 Financial Statements DVB being a licensed commercial bank is required to prepare financial statements for the year ended 31st December of a particular year. Accordingly, DVB has prepared its financial statements for the year ended 31st December 2010 which has been audited. There has been no audited financial statements prepared thereafter.
10.7 Conflict of Interest Between DVB and Trustee No conflict of interest has arisen between the Trustee and DVB as at the date of this Introductory Document.
10.8 Key Ratios
30th September 2011 30th June 2011 Core capital adequacy ratio, as a % of risk weighted assets 13.25% 16.07% Total capital adequacy ratio, as a % of risk weighted assets 17.07% 16.61% Statutory Liquidity Ratio – Domestic Banking Unit 25.14% 25.59% Statutory Liquidity Ratio – Off-Shore Banking Unit 50.00% 44.85%
10.9 Assets Pledged as Security There were no assets pledged as securities as at 31 December 2010.
10.10 Non Resident Investors As per current Central Bank of Sri Lanka and Exchange Control Regulations, Foreign Institutional Investors, corporate bodies incorporated outside Sri Lanka, Individuals resident outside Sri Lanka and Sri Lankans resident outside Sri Lanka will not be eligible to invest in the Debentures.
40 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 11.0 DECLARATION BY THE DIRECTORS
Declaration by the Directors We the undersigned, who are named in the Introductory Document as Directors of DFCC Vardhana Bank Limited hereby declare and confirm that this Introductory Document has been seen and approved by us and we collectively and individually accept full responsibility for the accuracy of the information given and confirm that after making all reasonable enquires and to the best of our knowledge and belief, there are no other facts the omission of which would make any statement herein misleading or inaccurate.
Name Designation Signature
Mr. J.M.S Brito Non-Executive Director Sgd.
Mr. L.H.A Lakshman Silva Executive Director Sgd.
Mr. T. Dharmarajah Non-Executive Independent Director Sgd.
Mr. A.N. Fonseka Non-Executive Director Sgd.
Mr. R.S Jayawardena Non-Executive Independent Director Sgd.
Mr. S. Nagarajah Non-Executive Director Sgd.
Mr. L.N. de S. Wijeyeratne Non-Executive Independent Director Sgd.
Ms. R.A.P Withana Non-Executive Director Sgd.
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 41 42 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document ANNEX A: DFCC VARDHANA BANK LIMITED, AUDITORS REPORT TO THE BOARD OF DIRECTORS AND AUDITED FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDING 31 DECEMBER 2010
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 43 Statement of Directors’ Responsibilities
The responsibility of the Directors of DFCC not absolute assurance that errors and irregularities are either Vardhana Bank Ltd (the Bank) in relation to the prevented or detected within a reasonable period of time. The Financial Statements is stated in the following Directors' Report on the Internal Control is given on pages 78 statement. The Financial Statements consist of to 79. the Balance Sheet as at 31 December 2010 and the Income Statement, Statement of Changes in The Auditors, Messrs KPMG Ford, Rhodes, Thornton & Co., Equity, Cash Flow Statement for the year ended were given access to all accounting records, other documents on that date and the Notes thereto. and all business locations of the Bank to undertake the inspections they considered appropriate to form their opinion In terms of Section 148 (1) of the Companies on the Financial Statements. They were also provided with all Act No 07 of 2007, the Directors of the the information and explanations required for the purpose of Bank are responsible to ensure that proper the audit. accounting records are kept to disclose, with reasonable accuracy, the financial position and By Order of the Board enable preparation of the financial statements. Accordingly, the Directors have caused the Bank to maintain proper accounting records which meet the statutory and financial reporting requirements. W A Mendis Company Secretary Under Sections 150 (1) and 151 (1) of the Companies Act, the Directors are also responsible, 25 March 2011 to prepare the Financial Statements for each year Colombo giving a true and fair view of the state of affairs of the Bank as at the end of the year and of the profit and loss for the financial year.
The Directors are also responsible for the preparation and fair presentation of the Financial Statements of the Bank in accordance with the Sri Lanka Accounting Standards and provide the information required by the Companies Act No 07 of 2007 and the Banking Act No 30 of 1988 and amendments thereto.
The Directors consider that they have adopted appropriate accounting policies based on reasonable and prudent judgements and applied them consistently.
The Directors acknowledge their responsibility for the Bank’s system of internal controls which is designed to provide assurance on maintenance of proper accounting records and the reliability of financial information generated and safeguarding of the assets of the Bank. However, any system of internal controls can provide reasonable and
DFCC Vardhana Bank Ltd. 82 Annual Report 2010
44 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document Financial Statements Independent Auditors’ Report
TO THE SHAREHOLDERS OF We have obtained all the information and DFCC VARDHANA BANK LIMITED explanations which to the best of our knowledge and belief were necessary for the purposes of our Report on the Financial Statements audit. We therefore believe that our audit provides We have audited the accompanying financial statements a reasonable basis for our opinion. of DFCC Vardhana Bank Limited (“Company”), as at 31st December 2010 which comprise the balance sheet as at Opinion that date, and the income statement, statement of changes In our opinion, so far as appears from our in equity and cash flow statement for the year then ended, examination, the Company maintained proper and a summary of significant accounting policies and other accounting records for the year ended 31st explanatory notes as set out on pages 89 to 116 of this annual December 2010 and the financial statements report. give a true and fair view of the Company’s state of affairs as at 31st December 2010 and its Management’s Responsibility for the Financial profit and cash flows for the year then ended in Statements accordance with Sri Lanka Accounting Standards. Management is responsible for the preparation and fair presentation of these financial statements in accordance with Report on Other Legal and Regulatory Sri Lanka Accounting Standards. This responsibility includes: Requirements designing, implementing and maintaining internal control These financial statements also comply with the relevant to the preparation and fair presentation of financial requirements of Section 151(2) of the Companies statements that are free from material misstatement, whether Act No. 07 of 2007and present the information due to fraud or error; selecting and applying appropriate required by the Banking Act No. 30 of 1988. accounting policies; and making accounting estimates that are reasonable in the circumstances.
Scope of Audit and Basis of Opinion Our responsibility is to express an opinion on these financial Chartered Accountants statements based on our audit. We conducted our audit in accordance with Sri Lanka Auditing Standards. Those Colombo standards require that we plan and perform the audit to obtain 25th March 2011 reasonable assurance whether the financial statements are free from material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting policies used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
DFCC Vardhana Bank Ltd. Annual Report 2010 83
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 45 Income Statement
For the year ended 31st December 2010 2009 Notes Rs ‘000 Rs ‘000
Income 9 3,787,123 4,447,480
Interest income 10 3,368,119 4,235,229 Interest expense 11 1,667,579 2,483,929 Net interest income 1,700,540 1,751,300
Net foreign exchange profit / (loss) 29,269 (89,905) Fee and commission income 302,835 197,782 Other income 12 86,900 104,374 Operating income 2,119,544 1,963,551
Personnel expenses 365,448 325,346 Provision for staff retirement benefits 13 39,205 32,313 Premises, equipment and establishment expenses 339,350 291,208 Fee expenses 71,326 48,924 Provision for loan losses and write-off 14 234,759 233,571 Other overhead expenses 340,836 252,478 Operating expenses 15 1,390,924 1,183,840
Operating profit before value added tax 728,620 779,711
Less: value added tax on financial services 189,834 181,742 Operating profit before income tax 538,786 597,969
Less: income tax expense 16 262,795 329,636 Profit for the year 275,991 268,333
Basic earnings per share, Rs 17 1.50 1.46
Notes from pages 89 to 116 form an integral part of these financial statements.
DFCC Vardhana Bank Ltd. 84 Annual Report 2010
46 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document Financial Statements Balance Sheet
As at 31 December Notes 2010 2009 Rs ‘000 Rs ‘000
Assets Cash and short term funds 18 1,452,215 835,704 Balances with Central Bank of Sri Lanka 19 894,235 802,076 Treasury bills and bonds eligible for rediscounting with Central Bank 20 7,055,896 14,377,234 Securities purchased under resale agreements 699,881 - Bills of exchange 21 288,932 325,886 Loans and advances 22 17,705,017 13,505,751 Interest receivable 23 134,861 156,101 Investment securities 24 2,030 2,030 Investment property 25 109,198 - Property and equipment 26 362,038 331,066 Intangible assets 27 125,300 107,039 Other assets 28 695,953 894,691 Total assets 29,525,556 31,337,578
Liabilities Deposits from customers 29 23,495,923 22,046,946 Borrowings 30 1,671,694 5,060,104 Group balances payable 31 20,024 35,565 Current tax liability 67,140 57,132 Retirement benefit obligation 32 18,302 14,973 Deferred tax liability 33 40,192 48,224 Other liabilities 34 1,113,696 1,196,783 Total liabilities 26,426,971 28,459,727
Equity Stated capital 35 2,077,387 2,077,387 Reserve fund 50,227 36,427 Retained earnings 970,971 764,037 Total equity - attributable to the equity holders of the Bank 3,098,585 2,877,851
Total liabilities and equity 29,525,556 31,337,578
Commitments and contingencies 36 10,380,055 9,548,224
Notes from pages 89 to 116 form an integral part of these financial statements. I confirm that to the best of my knowledge and belief these financial statements comply with the requirements in the Companies Act No. 07 of 2007.
Ms. D. Wettasinghe Senior Manager Accounting & Reporting
For and on behalf of the Board of Directors,
J.M.S. Brito Lakshman Silva Chairman CEO / Director
Colombo 25 March 2011 DFCC Vardhana Bank Ltd. Annual Report 2010 85
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 47 Statement of Changes in Equity
Attributable to equity holders of the Bank Stated Statutory Retained Total equity capital reserve fund ** earnings Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000
Balance as at 31.12.2008 2,077,387 23,010 527,540 2,627,937
Final dividends for 2008 - - (18,419) (18,419)
Profit for the year - - 268,333 268,333
Transfer from current earnings - 13,417 (13,417) -
Balance as at 31.12.2009 2,077,387 36,427 764,037 2,877,851
Final dividends for 2009 - - (55,257) (55,257)
Profit for the year - - 275,991 275,991
Transfer from current earnings - 13,800 (13,800) -
Balance as at 31.12.2010 2,077,387 50,227 970,971 3,098,585
Notes from pages 89 to 116 form an integral part of these financial statements.
** Statutory Reserve Fund Statutory Reserve Fund is a statutory reserve created as per direction issued by the Central Bank of Sri Lanka under Section 20 (1) of the Banking Act No 30 of 1988 as amended by Banking (Amendment) Act No 33 of 1995.
2010 2009 Computation of transfer to statutory reserve fund Rs’ 000 Rs’ 000
Profit after tax 275,991 268,333 Minimum amount to be transferred @ 5% 13,800 13,417
DFCC Vardhana Bank Ltd. 86 Annual Report 2010 48 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document Financial Statements Cash Flow Statement
For the year ended 31st December 2010 2009 Rs ‘000 Rs ‘000
Cash flow from operating activities Interest receipts 2,258,221 2,677,760 Fees and commission receipts 302,835 197,782 Interest payments (1,776,620) (2,404,193) Receipts from other operating activities 88,300 103,840 Cash payments to employees and suppliers (957,520) (708,694) Value added tax paid (192,594) (193,450) Operating loss before changes in operating assets and liabilities (277,378) (326,955)
(Increase)/decrease in operating assets Deposits held for regulatory or monetary control purposes (92,159) (33,693) Funds advanced to customers (4,397,071) 686,964 Others (51,490) (69,984)
Increase /(decrease) in operating liabilities Deposits from customers 1,412,085 3,097,379 Negotiable certificates of deposit 36,892 (22,532) Others (35,380) 92,259 Net cash (used) /generated from operating activities before Income tax (3,404,501) 3,423,438
Income tax paid (151,618) (113,917)
Net cash flow (used in)/generated from operating activities (a) (3,556,119) 3,309,521
Cash flow from investing activities Treasury bills eligible for rediscounting with Central Bank - more than 3 months 5,549,720 (6,164,650) Income from investment securities 207 322 Interest receipts from treasury bills and bonds 994,758 1,339,784 Disposal of property and equipment 4,256 847 Acquisition of investment property (109,198) - Purchase of property and equipment (196,474) (122,749) Net cash flow generated/(used in) investing activities 6,243,269 (4,946,446)
Cash Flow from financing activities Bank borrowings (2,128,500) 1,225,715 Borrowings under repurchase agreements (1,259,910) 1,644,507 Dividends paid (55,257) (18,419) Net Cash flow (used in)/generated from financing activities (3,443,667) 2,851,803
Net increase in cash and cash equivalents (756,516) 1,214,878 Cash and cash equivalents at beginning of period 5,513,895 4,299,017 Cash and cash equivalents at end of period 4,757,379 5,513,895
Composition of cash and cash equivalents at end of period Cash and short term funds ( Note - 18 ) 1,452,215 835,704 Treasury bills and other securities eligible for rediscounting with Central Bank of Sri Lanka - less than 3 months 2,605,283 4,678,191 Treasury bills purchased under resale agreements - less than 3 months 699,881 - 4,757,379 5,513,895
DFCC Vardhana Bank Ltd. Annual Report 2010 87 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 49 Cash Flow Statement (Continued...)
For the year ended 31st December 2010 2009 Rs ‘000 Rs ‘000
Note a Reconciliation of profit for the year to net cash (used in) / from operating activities
Profit for the year 275,991 268,333 Less: Dividend transferred to investing activities (207) (322) 275,784 268,011 Add /(deduct) items not using / (providing) cash Provision for loan losses 234,759 233,571 Loss / (gain) from marked to market on treasury bills and bonds 2,351 (285) Notional tax credit on treasury bills and bonds (109,201) (161,573) Depreciation - Property and equipment 86,434 78,430 Amortisation - Intangible assets 57,293 46,540 (Gain) / loss on disposal of property and equipment (742) 73 Net foreign exchange (profit) / loss (29,269) 89,905 (Decrease) / increase in deferred tax (8,032) 43,335 Increase / (decrease) in income tax 119,208 172,384 (Increase) / decrease in operating assets (4,540,720) 676,738 Increase / (decrease) in operating liabilities 1,413,597 3,074,847 Net change in other receivables and payables (1,057,581) (1,212,455) Net cash (used in)/generated from operating activities (3,556,119) 3,309,521
DFCC Vardhana Bank Ltd. 88 Annual Report 2010
50 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document Financial Statements Notes to the Financial Statements
1. Reporting Entity prepared under the historical cost convention. Exceptions to DFCC Vardhana Bank Limited (“Bank”) is a public the historical cost convention of accounting relate to dealing limited liability company incorporated in 1995 and securities, which are carried at market value. domiciled in Sri Lanka. It is licensed by Central Bank of Sri Lanka to conduct domestic and 2.4 Accrual Basis of Accounting off-shore banking business under the provisions All revenue and expenses are recognized using accrual basis of of Banking Act No. 30 of 1988. As per section accounting with the exception of interest income from non- 487(2) of Companies Act No 7 of 2007 the performing assets and discount on bills of exchange, which are company has been re-registered. The registered recognized only on the cash basis. office of the Bank is situated at 73, W A D Ramanayake Mawatha, Colombo 02. 2.5 Materiality and Aggregation Each material class of similar items is presented separately in DFCC Bank, which is licensed by the Central Bank the financial statements. Items of dissimilar nature or function of Sri Lanka as a specialized bank, is the parent are presented separately unless they are immaterial. company of the Bank, and owns 95.58% of the Bank. 2.6 Critical Accounting Estimates and Judgments Total employee population of the Bank as at 31 2.6.1 General December 2010 was 627. The preparation of financial statements requires management (31 December 2009 – 481) to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts 1.1 Principal Activities of assets, liabilities, income and expenses. Actual results may The Bank is currently engaged in activities differ from these estimates. related to commercial banking such as accepting deposits, providing corporate and retail credit, Estimates and underlying assumptions are reviewed on foreign currency operations, trade finance and an ongoing basis. Revisions to accounting estimates are treasury related services. recognized in the period in which the estimate is revised and in There were no significant changes in the nature any future periods affected. of the principal activities of the Bank during the financial year under review. Information about the significant areas of estimation and uncertainty that have the most significant effect on the amounts 2. Basis of Preparation recognized in the financial statements are described below. 2.1 Statement of Compliance The financial statements have been prepared in 2.6.2 Judgments Estimates and the Financial compliance with relevant Sri Lanka Accounting Impact Standards adopted by the Institute of Chartered 2.6.2.1 Classification of Dealing and Investment Accountants of Sri Lanka and comply with the Securities requirements of Companies Act No. 07 of 2007 The classification of investment securities is based on the and Banking Act No. 30 of 1988 and subsequent positive intention of the management and the financial capacity amendments thereto. to hold certain investments to maturity. In the event of a change of intention evidenced by management action of active trading, 2.2 Approval of Financial such investments are transferred to dealing securities, which Statements by Directors represent securities held for trading. The financial statements were authorized for issue by the Board of Directors on 25 March 2011. The classification of these securities determines the recognition of the carrying amount of these financial assets in the balance 2.3 Basis of Measurement sheet with a consequential adjustment to the reported results. The financial statements are presented in Sri Lankan Rupees, the functional and presentation 2.6.2.2 Loan Losses currency, rounded to the nearest thousand The assessment of loan loss involves considerable judgment and unless otherwise stated herein, have been and estimation. Judgment is required firstly to determine whether there are indications that a loss may already have
DFCC Vardhana Bank Ltd. Annual Report 2010 89 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 51 Notes to the Financial Statements (Continued...)
been incurred in individually significant loans and 3.1 Revenue and Expense Recognition secondly to determine the recoverable amount. 3.1.1 Interest Income Interest receivable is recognized on an accrual basis except 2.6.2.3 End of Service Statutory Gratuity for loans and advances classified as non-performing based Liability on criteria set out in Direction No. 3 of 2008 dated 8 May The estimation of this liability, which is not funded, 2008 as amended by Direction No. 10 of 2008 dated 30 determined by an independent, qualified actuary December 2008, Direction No 6 of 2009 dated 30 December necessarily involves long-term assumptions on 2009, Direction No 1 of 2010 dated 26 May 2010 issued by future changes to salaries, resignations prior to the Central Bank of Sri Lanka on “Classification of Loans and the normal retirement age and mortality of covered Advances, Income Recognition and Provisioning” as amended. employees. Key assumptions are disclosed in note 13.4. Interest income on non-performing loans and advances is accounted on receipt basis. Interest accrued and unpaid on 2.6.2.4 Income Tax non-performing loans at the date of classification is eliminated The estimate of income tax liability includes from the income and transferred to interest in suspense. interpretation of tax law and judgment on the allowance for losses on individually assessed The criteria for classification of loans and advances as non loans. The estimation process by the bank -performing are explained in Note 3.2.7.1. includes seeking expert advice where appropriate and the payment of the income tax liability is on 3.1.2 Notional Tax Credit on Interest Income self assessment basis. from Treasury Bills and Bonds Interest income from treasury bills and bonds is grossed by the In the event an additional assessment is issued addition of the tax credit imputed to 10% withholding tax on the additional income tax and deferred tax discount allowed at the time of issue. This notional tax credit is adjustment if any will be recognized in the period 1/9th of the net income. in which the assessment is issued. 3.1.3 Discount or Premium on Purchase of 2.6.2.5 Impairment of Tangible and Dated Debt Securities Intangible Assets The premium or discount is amortized through the income The assessment of impairment in tangible and statement over the period from the date of purchase to the date intangible assets includes the estimation of the of maturity. value in use of the asset computed at the present value of the best estimates of future cash flows 3.1.4 Dividend Income generated by the asset adjusted for associated Interim dividend on shares is recognized as income in the risks. The estimation has inherent uncertainties. period in which it is declared by the directors and final dividend on shares is recognized as income in the period in which it is Impairment losses if any are charged to the approved by the shareholders of the investee company. income statement immediately. 3.1.5 Discount on Bills of Exchange Discount charges on bills of exchange discounted are taken to 3. Principal Accounting Policies revenue on redemption. Accounting policies are the specific principles, bases, conventions, rules and practices applied 3.1.6 Default Interest consistently by the Bank in presenting and Default charges for delayed redemption of bills of exchange are preparing the financial statements. Changes in recognized as income on receipt basis. accounting policies are made only if the Sri Lanka Accounting Standards require such change or 3.1.7 Front-end fee Income when a change results in providing more relevant This arises on loan origination and the income is recognized on information. New policies are formulated as completion of loan documentation. appropriate to new products and services provided by the Bank or new obligations incurred by the Bank.
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3.1.8 Other Fee and Commission assets and liabilities at rates different from those which were Income initially recorded are dealt in the income statement. These are recognized as income in the period in which entitlement to the consideration arises. 3.1.16 Interest and Other Expenses Interest and other expenses have been recognized in the 3.1.9 Gains on Disposal of Dated period in which they are incurred, without any amount being Debt Securities capitalized. The difference between net proceeds and the carrying amount of the debt securities disposed of 3.1.17 Allowances for credit losses is recognized as income. Credit losses comprise losses against loans, bills of exchange and overdrafts. The estimated losses attributable to these debts 3.1.10 Gain or Loss on Sale of are based on a continuous review of all such debts identified as Equipment bad or doubtful. Recognized as income in the period in which the sale occurs and is classified as other income. The Bank makes both general and specific provisions.
3.1.11 Gains on Sale of Investment (a) Specific provision for loan losses Property Specific provisions are made for the estimated loss on doubtful The difference between the net disposal proceeds loans, bills of exchange and overdrafts not covered by realizable and the carrying value of the property disposed of value of the collateral. is recognized as income. Specific provisions on guarantees issued are made to 3.1.12 Sale and Repurchase recognize significant impairment of the debt service capacity Agreements of the customer giving rise to a constructive obligation prior to Where treasury bills/bonds and other corporate enforcement of guarantee. debt securities are sold subject to a commitment to repurchase them at a predetermined price The specific provision has two elements (Repos). The difference between sale and repurchase price is recognized as other income of i. A minimum statutory provision as per the direction issued the life of the agreement. by the Central Bank of Sri Lanka. This is on a graduated scale based on the amount of outstanding principal net 3.1.13 Mark to Market Gains on of realizable security value (net exposure at risk) as given Dealing Securities bellow Gains or losses on dated dealing debt securities that arise by adjusting the carrying value of these Categories of non- Minimum specific Provision securities to market value are recognized in the performing credit facilities Requirement income statement. Substandard Credit cards 25% of net exposure at risk 3.1.14 Marked to Market Gains / Other advances 20% of net exposure at risk Losses on Forward Exchange Doubtful 50% of net exposure at risk Contracts Loss 100% of net exposure at risk Gains or losses on trading open forward exchange contracts that arise by adjusting the carrying The provision made relates to all categories of loans and value of the off balance sheet forward exchange advances including pawning identified as substandard, doubtful contracts to market value on balance sheet date and loss. are recognized in the income statement. Where necessary, specific provisions have been made over and 3.1.15 Foreign Exchange Income above the minimum percentages stipulated above, on a case- Any exchange gain or loss arising from the by-case basis. settlement or translation of the Bank’s monetary
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ii. An additional provision to recognize 3.1.18.2 Deferred Tax difficulties in realization of collateral or i. Deferred tax is recognized on temporary differences significant impairment of debt service between the carrying amounts of the assets and liabilities capacity of the borrower. in the balance sheet and the amount attributed to such assets and liabilities for tax purposes. Deferred tax (b) General Provision liabilities are generally recognized for all taxable temporary A general provision of 1% of the outstanding differences and differed tax assets are recognized to balances of performing and special mention credit the extent it is probable that future taxable profit will be facilities (Note 3.2.7.2) was maintained as per available against which deductible temporary differences the direction dated 8 May 2008, up to the third can be utilized. Deferred tax is calculated using the tax quarter of 2010. rates that have been enacted or substantially enacted at the balance sheet date and are expected to apply This requirement was amended by the direction in the period in which the assets will be realized or No 3 of 2010 dated 27 September 2010 on liabilities settled. Deferred tax assets and liabilities are not “Amendments to Directions on Classification of discounted. Loans and Advances, Income Recognition and Provisions for Licensed Commercial Banks in Sri ii. The net increase in the carrying amount of the deferred Lanka”.The above direction requires all Licensed tax liability net of deferred tax asset is recognized as Commercial Banks to maintain general provision deferred tax expense and conversely any net decrease at 0.5% of the total outstanding balances of is recognized as reversal to deferred tax expense in the performing and special mention credit facilities income statement. commencing from 1 January 2012. For this iii. The financial statements of the Bank include the full purpose banks were required to reduce existing recognition of deferred tax asset attributable to the general provision requirement of 1% to 0.5% at gratuity provision of the Bank. a rate of 0.1% per quarter during the 5 quarters iv. The carrying amount of the deferred tax asset is reviewed commencing 1 October 2010. at each balance sheet date and tested against the absorption capacity of probable future taxable profit Accordingly, as at 31 December 2010, the general to utilize unused tax losses and adjustments made provision was maintained at 0.9% (after reducing accordingly. 0.1% during the quarter ended 31 December 2010) as at 31 December 2010. 3.1.18.3 Social Responsibility Levy The current rate of this levy with effect from 1 April 2008 is 3.1.18 Income Tax Expense 1.5% of the income tax and this is included in the current tax Income tax expense for the year comprises expense. Previously this was 1%. current and deferred tax. Income tax is recognized in the income statement except to the extent it 3.1.18.4 Value Added Tax on Financial Services relates to items recognized directly in reserves in The value base for value added tax on financial services for which case it is recognized in reserves. the Bank is the adjusted accounting profit before tax and emoluments of employees. The adjustment to the accounting 3.1.18.1 Current Tax profit before tax is for economic depreciation computed on Current tax is the expected tax payable on the prescribed rates instead of the rates adopted in the financial profit for the year adjusted for taxation purposes statements. This is 20% on the value base for value added tax in accordance with the provisions of the Inland and is a disallowed expense deduction for purpose of income Revenue Act No 10 of 2006, as amended by tax liability. subsequent legislation. 3.2 Assets and Bases of their Valuation Current tax expense includes any adjustment to 3.2.1 Cash and Cash Equivalents tax payable in respect of previous years. For the purpose of the cash flow statement cash and cash equivalents consist of cash held by the Bank and other short- term, highly liquid investments that are readily convertible to known amount of cash and which are subject to an insignificant risk of changes in value.
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54 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document Financial Statements
3.2.2 Balances with Central Bank of 3.2.4 Securities Purchased under Resale Sri Lanka Agreements (Reverse Repurchase The Monetary Law Act requires that all Transactions) commercial banks operating in Sri Lanka to These are loans collateralized by the purchase of treasury bills maintain reserves against all deposit liabilities from the counter party to whom the loans are granted. The sale denominated in Sri Lankan Rupees. The details by the counter party is subject to a commitment by the Bank of reserve requirements are given in Note No 19. to sell back the underlying debt securities to the borrower at There are no reserves requirement for deposit a pre-determined price. These loans are stated in the balance liabilities of the Foreign Currency Banking Unit sheet at cost. and foreign currency deposit liabilities in the Domestic Banking Unit. 3.2.5 Securities Sold Under Re Purchase Agreement (Repos) 3.2.3 Government of Sri Lanka This relates to treasury bills and bonds sold subject to a Treasury Bills and Bonds commitment to repurchase them at a predetermined price. Such 3.2.3.1 Investment in Treasury Bills and treasury bills and bonds remain on the balance sheet and the Bonds Held for Dealing liability is recorded in respect of the consideration received. The These are the marketable, dated debt securities liability is disclosed as borrowing under repurchase agreement. in respect of which the Bank has the expressed These treasury bills and bonds are not marked to market since intention of trading in the domestic debt market the corresponding liability is also not marked to market. and are included in the balance sheet at the market value as a sub category of treasury bills 3.2.6 Investment in Ordinary Shares and other securities eligible for rediscounting with These are acquired and held for yield or capital appreciation the Central Bank of Sri Lanka. in the medium/long term and are carried at cost reduced by, where appropriate, the diminution in value, which is other than The market value is determined using the middle temporary. Cost determined on a weighted average basis rate of buy and sell quotes for the treasury bills includes incidental cost of acquisition. and bonds eligible for rediscounting with the Central Bank of Sri Lanka provided by secondary 3.2.7 Loans and Advances to Customers market intermediaries. Loans and advances are stated net of provision for possible loan losses and interest in suspense relating to non-performing The securities are recognized at cost initially on overdrafts. The provision for possible loan losses include both acquisition and thereafter marked to market on specific and general provision. the balance sheet date recognizing both gains and losses. The choice of this option is mandated by 3.2.7.1 Non-performing Loans and Advances direction issued by Central Bank of Sri Lanka on The classification on 31 December 2010 is based on the ‘Prudential norms for classification, valuation and Direction No. 3 of 2008 dated 8 May 2008 as amended by operation of the Bank’s investment portfolio’ dated Direction No 9 of 2008 dated 30 December 2008, Direction 1 March 2006. No 6 of 2009 dated 30 December 2009, Direction No 1 of 2010 dated 26 May 2010, Direction No 3 of 2010 dated 27 3.2.3.2 Investment in Treasury Bills and September 2010. The loans are classified as non-performing Bonds held to Maturity based on the following criteria. These are dated debt securities in respect of which the Bank has expressed intention and ability Repayment Terms Default period or number to hold until maturity. These are included in the of unpaid due Repayable in monthly 3 unpaid dues balance sheet as a sub category of treasury bills installments and other securities eligible for re-discounting with Repayable in quarterly/half 90 days from due date the Central Bank of Sri Lanka. yearly installments Single lump sum repayment 90 days from due date Investments in treasury bills and treasury bonds Overdrafts Exceeds the sanctioned limit held to maturity are included in the balance sheet for a continuous period of 90 at cost adjusted for the amortization of premium or days or more Credit cards- minimum 90 days from the due date discount arising on acquisition. payment DFCC Vardhana Bank Ltd. Annual Report 2010 93 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 55 Notes to the Financial Statements (Continued...)
In addition loans with impaired debt service capacity are classified as non-performing on case-by-case basis.
Prior to the issue of Direction No 3 of 2008 dated 8 May 2008 issued by the Central Bank, as per the previous direction of this subject, the non-performing classification criteria applied to each credit facility extended to a borrower. As per the direction No 3 of 2008, where the multiple credit facilities have been granted to a single borrower, in the event the aggregate outstanding amount of non-performing credit facility exceeds 30% of the total credit facilities extended to the borrower, balance facilities also have to be classified as non-performing effective from 1 January 2009. Subsequent amendment to this direction however, inter alia is extended to the application of the aggregate rule for classification initially to 1 January 2010 and thereafter to 1 January 2011.
The Bank however, proactively has classified all credit facilities to a borrower as non-performing when 50% of the total facilities were non-performing.
3.2.7.2 Categorization of Non-Performing Loans The Direction No.3 of 2008 requires non-performing to be categorized in the following manner.
Category Facility Type Determinant Special Mention Credit facilities, repayable in monthly 3 installments or more but less than 6 installments, installments principal and/or interest are due and unpaid Overdrafts Exceeds the sanctioned limit for a continuous period of 90 days or more but less than 180 days from the due date. Credit cards The minimum payment is in arrears for 90 days or more but less than 120 days from the due date. Other credit facilities The payments are in arrears for 90 days or more but less than 180 days from the due date. Sub-standard Credit Credit facilities, repayable in monthly 6 installments or more but less than 12 installments, Facilities installments principal and/or interest are due and unpaid Overdrafts Exceeds the sanctioned limit for a continuous period of 180 days or more but less than 360 days from the due date. Credit cards The minimum payment is in arrears for 120 days or more but less than 180 days from the due date. Other credit facilities The payments are in arrears for 180 days or more but less than 360 days from the due date. Doubtful Credit Facilities Credit facilities, Repayable in monthly 12 installments or more but less than 18 installments, installments principal and/or interest are due and unpaid Overdrafts Exceeds the sanctioned limit for a continuous period of 360 days or more but less than 540 days from the due date. Credit cards The minimum payment is in arrears for 180 days or more but less than 240 days from the due date. Other credit facilities The payments are in arrears for 360 days or more but less than 540 days from the due date. Loss Credit Facilities Credit facilities, repayable in monthly 18 installments or more principal and/or interest are installments due and unpaid Overdrafts Exceeds the sanctioned limit for a continuous period of 540 days or more Credit cards The minimum payment is in arrears for 240 days or more Other credit facilities The payments are in arrears for 540 days or more.
DFCC Vardhana Bank Ltd. 94 Annual Report 2010 56 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document Financial Statements
3.2.7.3 Reclassification of Non-performing Depreciation commences in the month the asset is Loans as Performing commissioned for use in the business of the Bank and ceases Non- performing loans are reclassified as in the month of disposal. performing when the number of dues on a term loan repayable in monthly installments is less than Subsequent costs are included in the asset’s carrying amount 3, while other credit facilities are reclassified only or are recognized as a separate asset, as appropriate, only when arrears of interest and principal are settled when it is probable that future economic benefits associated in full by the borrower. with the item will flow to the Bank and cost of the item can be measured reliably. All other repairs and maintenance are Rescheduled non-performing loans however is charged to expense during the financial period in which they reclassified only after mandatory watch period are incurred. ranging from 90 days to 360 days based on the non-performing loan category at the time of 3.2.9.4 De-recognition reschedule. The carrying amount of property, plant and equipment is de-recognized on disposal or when no future economic benefits 3.2.8 Investment Property are expected from its use and the gain or loss arising from the The investment property of the Bank is a land de-recognition is included in the income statement. owned by the Bank held for capital appreciation. Land classified as investment property is carried at 3.2.10 Intangible Assets – Computer cost reduced by accumulated impairment losses. Application Software All software licensed for use by the Bank, not constituting an 3.2.9 Property Plant and Equipment integral part of related hardware are included in the balance 3.2.9.1 Basis of Recognition sheet under the category of intangible assets and carried at The cost of equipment comprising computers, cost less cumulative amortization and any impairment losses. office equipment, furniture fixtures and fittings and motor vehicles is recognized as an asset if it is The initial acquisition cost comprises license fee paid at the probable that future economic benefits associated inception, import duties, non-refundable taxes and levies, cost with the equipments will flow to the Bank and cost of customizing the software to meet the specific requirements of equipment can be measured reliably. of the Bank and other directly attributable expenditure in preparing the asset for its intended use. 3.2.9.2 Measurement at Recognition The cost of equipment comprises its purchase The cost is amortized using the straight–line method, at the rate price and any directly attributable cost of bringing of 20% per annum commencing from the date the application the equipment to working condition for its software is available for use. The amortized amount is based intended use. on the best estimate of the useful life, such that the cost is amortized fully at the end of the useful life during which the 3.2.9.3 Subsequent Measurement Bank has legal right of use. The amortized cost is recognized as The assets are stated at cost less accumulated an expense. depreciation, and any accumulated impairment losses. The depreciation is provided for on the The initial cost is enhanced by subsequent expenditure basis outlined below. Depreciation is provided on a incurred by further customization to meet ancillary transaction straight-line basis such that the cost of the asset processing and reporting requirements tailor-made for the use is depreciated over the period appropriate to the of the Bank constituting an improvement to the software. estimated life of the type of asset. The rates of depreciation are as follows: Computer application software is stated at cost less accumulated amortization and accumulated impairment losses, Computer equipment - 20% per annum if any. Office equipment and motor vehicles - 20% per annum 3.2.11 Impairment of Assets Furniture, fixtures and fittings - 10% per annum 3.2.11.1 Tangible Assets The Bank reviews on the balance sheet date whether the carrying amount of the property, plant and equipments are
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lower than their recoverable amount. In such event 3.3.2 Borrowing the carrying amount is reduced to the recoverable All borrowing are recognized when the Bank enters into amount and the reduction being an impairment contract with counter parties and initially measured at the loss is recognized immediately in the income consideration received. All directly attributable costs are statement. The recoverable amount is the higher amortized on straight-line basis up to the date of repayment. of the market value of the asset less estimated cost of disposal and its value in use. 3.3.3 Employee Benefits 3.3.3.1 Defined Contribution Plan 3.2.11.2 Intangible Assets This provides for a lump sum payment on termination of 3.2.11.2.1 Computer Applications Software employment by resignation, retirement at the age of 55 years The Bank reviews on the balance sheet date or death while in service. Payment is by an outside agency to whether the carrying amount of computer which contributions are made. application software is lower than the recoverable amount. In such event the carrying amount is All employees of the Bank are members of the Employees reduced to the recoverable amount and the Provident Fund and Employees Trust Fund to which the Bank reduction being an impairment loss is recognized contributes 15% and 3% respectively of such employee’s immediately in the income statement. The qualifying salary. recoverable amount is the value in use. Contributions to defined contribution plans are recognized as 3.2.12 Foreign Currency Translation an expense in the income statement as incurred. Transactions in foreign currencies are translated to Sri Lankan Rupees at the middle rate of exchange 3.3.3.2 Defined Benefit Plan- Provision for End of ruling at the date of the transaction. Service Gratuity Liability 3.3.3.2.1 Description of the Plan and the Employee Monetary assets and liabilities denominated in Groups Covered foreign currencies at the balance sheet date The defined benefit as per payment of Gratuity Act No. 12 are translated to Sri Lankan Rupees at the of 1983 as amended is half a months salary at the time exchange rate ruling on the balance sheet date of termination of employment for each completed year of and consequently any exchange loss or gain is service subject to a minimum of 5 years of service payable on recognized in the income statement of the Bank. termination of employment usually by resignation or retirement The exchange rates used are the middle spot at the age of 55 years. All employees of the Bank in tenured rates. employment are covered.
Forward Exchange Contracts are disclosed net, Employees on fixed term contract of employment are covered and trading (open) forward exchange contracts only if the contract provides for unbroken service of 5 years or are valued at the forward market rates ruling on more either singly or together with consecutive contracts. the date of the balance sheet for the residual maturity. Resulting net unrealized gains and losses Based on the Sri Lanka Accounting Standards 16 (Revised are dealt with through the income statement. 2006), “Employee Benefits” (“SLAS 16”) Bank has adopted the actuarial valuation method. Accordingly from 1 January 3.2.13 Comparative Information 2008 the Bank has made provisions for gratuities based on Where items are regrouped, comparative the actuarial valuation performed by a qualified actuary, Piyal S. information is also adjusted. Goonetilleke and Associates. The Bank recognizes the liability by way of a provision for all employees in tenured employment 3.3 Liabilities and Provisions from the date they joined the permanent cadre while fixed 3.3.1 Deposits from Customers term employees liability is recognized only if the fixed term Deposits include non-interest bearing demand contract of service provides for unbroken service of 5 years or deposits or current accounts, savings deposits, more either singly or together with consecutive contracts. The term deposits, deposits redeemable at call and gratuity liabilities are not externally funded. certificates of deposit. The contractual liabilities are recognized as outstanding balances. Interest paid is charged to the Income Statement.
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3.3.3.2.2 Funding Arrangement taxable entity operating in Sri Lanka and liable to Revenue The Bank adopts a pay-as-you-go method Authority in Sri Lanka. whereby the employer makes a lump sum payment only on termination of employment by resignation, 3.3.6 Commitments and Contingent Liabilities retirement at the age of 55 or death. Thus the All discernible risks are accounted for in determining the gratuity liabilities are not externally funded. amount of all known liabilities.
3.3.3.2.3 Recognition of Past Service Cost Contingent liabilities are possible obligations whose existence Since end of service gratuity defined benefit is a will be confirmed only by uncertain future events or present statutory benefit, the recognition of past service obligations where the transfer of economic benefit is not cost will arise only if the Payment of Gratuity probable or cannot be reliably measured. Contingent liabilities Act No.12 of 1983 is amended in future to are not recognized in the balance sheet but are disclosed increase the promised benefit on termination of unless they are remote. employment. 3.3.7 Events after Balance Sheet Date 3.3.3.2.4 Recognition of Gratuity Liability All material and important events which occur between The liability recognized in the balance sheet is the balance sheet date and the date on which the financial the present value of the gratuity obligation at the statements are authorized for issue, and the financial impact on balance sheet date together with adjustments the condition the assets and liabilities are disclosed in Note 39. for any unrecognized actuarial gains or losses. Independent actuary using the projected unit 4. Cash Flow credit method calculates the defined benefit The cash flow has been prepared by using the ‘Direct Method’. obligation annually. Cash and cash equivalents include cash balances and treasury bills of 3 months maturity at the time of issue. 3.3.3.2.5 Recognition of Actuarial Gains and Losses 5. Business Segment Reporting In respect of net actuarial gains and losses that A business segment is a distinguishable component of the arise in calculating the Bank’s obligation, to the Bank that is engaged in providing an individual product or extent that any cumulative unrecognized actuarial service or a group of related products or services that is subject gain or loss exceeds 10% of the present value to risks and returns that are different from those of other of the defined benefit obligation, that portion is business segments. recognized in income statement over the expected average remaining working lives of the employees 6. Directors’ Responsibility Statement participating in the plan. Otherwise, the actuarial The Directors' acknowledge the responsibility for true and fair gain or loss is not recognized. presentation of the financial statements in accordance with the books of account and Sri Lanka Accounting Standards. Further The recognition in the income statement will be elaboration of the directors’ responsibity is on page 82. over the remaining working life of the participants in the end of service gratuity scheme. 7. Earnings per Share The Bank presents basic earnings per share (EPS) data for its 3.3.4 Provision for Liabilities ordinary shares. Basic EPS is calculated by dividing the profit A provision is recognized in the balance sheet or loss attributable to ordinary shareholders of the Bank by the when the Bank has a legal or constructive number of ordinary shares outstanding during the period. obligation as a result of a past event, that can be estimated reliably and it is probable that an 8. New Accounting Standards issued but not outflow of economic benefits will be required to effective as at Balance Sheet Date settle the obligation. The Institute of Chartered Accountants of Sri Lanka has issued a new volume of Sri Lanka Accounting Standards which will 3.3.5 Off Setting become applicable for financial periods begining on or after Deferred and current tax asset is set off against 1 January 2012. Accordingly, these Standards have not been deferred and current tax liability of the same applied in preparing these financial statements as they were
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not effective for the year ended 31 December 2010.
These Sri Lanka Accounting Standards comprise Accounting Standards prefixed both SLFRS (corresponding to IFRS) and LKAS (corresponding to IAS). Application of Sri Lanka Accounting Standards prefixed SLFRS and LKAS for the first time shall be deemed to be an adoption of SLFRSs.
Bank is currently in the process of evaluating the potential effects of these Standards on its financial statements and the impact on the adoption of these Standards have not been quantified as at balance sheet date.
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For the year ended 31 December 2010 2009 Rs ‘000 Rs ‘000 9. Income Gross income 3,787,123 4,447,480
Interest income ( Note 10 ) 3,368,119 4,235,229 Fee and commission income 302,835 197,782 Net foreign exchange profit / (loss) 29,269 (89,905) Other income ( Note 12 ) 86,900 104,374 3,787,123 4,447,480
Net foreign exchange profit The Bank engages in funding swap between US dollar and Sri Lanka rupees to benefit from interest rate arbitrage. The foreign exchange income is net of swap cost.
For the year ended 31 December 2010 2009 Rs ‘000 Rs ‘000 10. Interest Income Loans and advances 2,236,982 2,654,292 Treasury bills, bonds and placements with other banks 1,131,137 1,580,937 3,368,119 4,235,229
Section 137 of the Inland Revenue Act No. 10 of 2006 provides that a company which derives interest income from the secondary market transactions in government securities be entitled to a notional tax credit, provided such interest income form part of the statutory income of the Bank for that year of assessment.
Treasury bill interest income includes Rs 100.9 million, which is the notional tax credit of 10% imputed for the withholding tax deducted / paid at source in respect of the year ended 31 December 2010. The amount relating to the previous financial year was Rs 151.5 million.
For the year ended 31 December 2010 2009 Rs ‘000 Rs ‘000
11. Interest Expense Deposits 1,591,036 2,285,684 Bank borrowings 76,543 198,245 1,667,579 2,483,929
12. Other Income Dividend income from investment securities - unquoted 207 322 Gain on treasury bills and bonds 2,214 1,133 Net gain on repurchase transactions 83,456 100,665 (Loss) / gain from marked to market on treasury bills and bonds (2,351) 285 Gain / (loss) on disposal of equipment 742 (73) Other operating income 2,632 2,042 86,900 104,374
Net gain on repurchase transactions includes Rs 8.3 million, which is the notional tax credit of 10% imputed for the withholding tax deducted / paid at source in respect of the year ended 31 December 2010. The amount relating to the previous financial year was Rs 10 million.
DFCC Vardhana Bank Ltd. Annual Report 2010 99 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 61 Notes to the Financial Statements (Continued...)
2010 2009 Rs ‘000 Rs ‘000
13. Provision for Staff Retirement Benefits 13.1 Amount Recognised as Expense 13.1.1 Unfunded End of Service Gratuity Liability Current service cost 4,517 3,888 Interest on obligation 2,106 1,708 Total defined benefit plan 6,623 5,596
13.1.2 Defined Contribution Plan Employer’s contribution to Employees’ Provident Fund 27,152 22,264 Employer’s contribution to Employees’ Trust Fund 5,430 4,453 Total defined contribution plan 32,582 26,717 Total expense recognised in the income statement 39,205 32,313
13.2 Actuarial Valuation Actuarial valuation was carried out by Mr. Piyal S Gunathilake, Fellow of the Society of Actuaries USA of Piyal S Gunathilake & Associates, on 31 December 2010
13.3 Actuarial Valuation Method Projected unit credit method was used to allocate the actuarial present value of the projected benefits earned by employees to date of valuation
2010
13.4 Principal Actuarial Assumptions Discount rate as at 31 December 2010, per annum 10.00% Future salary increases per annum 10.50%
Mortality GA 1983 Mortality table Retirement age 55 years Normal form of payment Lump sum
Turnover Rate
Age %
20 10 30 10 40 3 50/55 1
The discount rate is the yield rate on 31 December 2010 with a term equalling the estimated period for which the benefit payments will continue. This period is approximately 11 years for end of service gratuity.
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2010 2009 Rs ‘000 Rs ‘000 14. Provision for Loan Losses and Write-off 14.1 Specific Provision Provision for the year - Loans and advances 369,906 413,251 - Bills of exchange 15,462 9,632 Loans written off 2,028 2,974 387,396 425,857 Less :Recoveries during the year - Loans and advances 175,075 189,831 - Bills of exchange 3,362 9,111 208,959 226,915
14.2 General Provision Provision for the year - Loans and advances 26,344 6,367 - Bills of exchange (544) 289 234,759 233,571
15. Operating Expenses Operating expenses include the following: Employer’s contribution to Employees’ Provident Fund 27,152 22,264 Employer’s contribution to Employees’ Trust Fund 5,430 4,453 Gratuity provision 6,623 5,596 Directors’ remuneration 11,960 21,276 Auditors’ remuneration - Audit fees and expenses 1,088 899 Audit related fees and expenses 865 46 Fees for non-audit services 622 - Depreciation - Property and equipment 86,434 78,430 Amortisation - Intangible assets 57,293 46,540 Expenses on litigation 101 265
16. Income Tax Expense 16.1 Current tax of the Bank has been provided at 35% on the taxable income. Tax charge is based on taxable profits which differs from profit for financial reporting purposes. These differences are explained in the following reconciliation statement.
For the year ended 2010 2009 Rs ‘000 Rs ‘000
Profit before tax as per income statement 538,786 597,969 Disallowed expenses and provisions 451,995 477,445 (Gain) / loss on disposal of fixed assets (742) 73 Less: Capital allowances on property and equipment 151,021 158,980 Dividend income 207 322 Net income from investment in Sri Lanka Development Bonds and Sovereign Bonds 47,116 8,180 Gratuity paid during the year 3,294 1,687 Assessable income 788,401 906,318 Less: Offset of brought forward tax losses (limited to 35% of assessable income) 0 90,166 Taxable income 788,401 816,152
Income tax expense reported in the income statement at the effective tax rate 275,940 285,654
Effective tax rate 51% 48%
Income is taxed at 35%
DFCC Vardhana Bank Ltd. Annual Report 2010 101 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 63 Notes to the Financial Statements (Continued...)
For the year ended 2010 2009 Rs ‘000 Rs ‘000
16.2 Tax Losses Tax loss on 1 January - 91,161 Less: Adjustment in respect of final tax return - (995) Tax loss claimed against taxable profits - 90,166 Unutilised tax loss on 31 December - -
16.3 Income Tax Expense 16.3.1 Current Tax Tax for the year 275,940 285,654 (Over) / under provision in respect of previous year (5,113) 647 270,827 286,301
16.3.2 Deferred Tax Expense (Reversal) / charge from deferred taxation (8,032) 43,335 (8,032) 43,335 Income tax expense 262,795 329,636
17. Earnings Per Share Earnings per share has been calculated by dividing the profit after income tax for the year by 184,188,822, the number of ordinary shares outstanding during the year.
2010 2009
Profit for the year Rs. 275,991,054 268,333,476 Number of shares 184,188,822 184,188,822 Basic earnings per share Rs. 1.50 1.46
As at 31 December 2010 2009 Rs ‘000 Rs ‘000
18. Cash and Short Term Funds Cash in hand 942,800 694,480 Due from banks 5,822 12,301 Placements / balances with foreign banks 503,593 128,923 1,452,215 835,704
19. Balances with the Central Bank of Sri Lanka As required by the provisions of Section 93 of the Monetary Law Act, cash balance is maintained with the Central Bank of Sri Lanka as explained in Note No. 3.2.2. The minimum cash reserve requirement on rupee deposit liabilities was reduced to 7.75% on 28 November 2008 and further reduced to 7% from 27 February 2009 which was in effect as at 31 December 2010. There are no reserve requirement for deposit liabilities of the Foreign Currency Banking Unit and foreign currency deposits liabilities in the Domestic Banking Unit.
DFCC Vardhana Bank Ltd. 102 Annual Report 2010 64 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document Financial Statements
As at 31 December 2010 2,009 Rs ‘000 Rs ‘000 20. Treasury Bills and Other Securities Eligible for Rediscounting with Central Bank Treasury Bills and Bonds held for trading Repurchase transactions - - Others - 100,075 - 100,075
Treasury Bills and Bonds held to maturity Repurchase transactions 1,767,067 3,281,083 Others 5,288,829 10,996,076 7,055,896 14,277,159 7,055,896 14,377,234
21. Bills of Exchange 21.1 Balance on 31 December Export bills 301,057 278,270 Import bills 16,806 65,477 317,863 343,747 Less: Provision for bills of exchange - specific (Note -21.2 ) 26,462 14,805 Provision for bills of exchange - general (Note -21.3 ) 2,469 3,056 288,932 325,886
21.2 Movement in Bills of Exchange Provision - Specific Balance on 1 January 14,805 13,947 Add: Provision for the year (Note 14.1) 15,462 9,632 Exchange rate difference on foreign currency provision - 337 Less: Recoveries during the year (Note 14.1) 3,362 9,111 Exchange rate difference on foreign currency provision 443 - Balance on 31 December 26,462 14,805
21.3 Movement in Bills of Exchange Provision - General Balance on 1 January 3,056 2,767 Add: Provision for the year ( Note 14.2 ) (544) 289 Less: Exchange rate difference on foreign currency provision 43 - Balance on 31 December 2,469 3,056
22 Loans and Advances 22.1 Balance on 31 December Overdrafts 7,706,165 6,604,571 Term loans 4,983,923 3,183,049 Trade loans 5,425,162 4,434,761 Gold pledge loans 619,568 196,204 Staff loans 109,177 71,771 Credit card advances 12,836 1,162 Others 26,927 43,740 Margin trading 222,649 9,145 19,106,407 14,544,403 Less: Loan loss provision - specific (Note 22.2) 793,959 609,745 Loan loss provision - general (Note 22.3) 126,399 100,479 Interest in suspense related to overdrafts (Note 22.4) 481,032 328,428 17,705,017 13,505,751
DFCC Vardhana Bank Ltd. Annual Report 2010 103 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 65 Notes to the Financial Statements (Continued...)
As at 31 December 2010 2,009 Rs ‘000 Rs ‘000
22.2 Movement in Loan Loss Provision - Specific Balance on 1 January 609,745 390,517 Add: Provision for the year ( Note 14.1) 369,906 413,251 Transfer from interest in suspense - 1,403 Exchange rate difference on foreign currency provision - 665 Less: Recoveries during the year (Note 14.1) 175,075 189,831 Write off of loans 9,005 6,260 Exchange rate difference on foreign currency provision 1,612 - Balance on 31 December 793,959 609,745
22.3 Movement in Loan Loss Provision - General Balance on 1 January 100,479 94,123 Add: Provision for the year ( Note 14.2) 26,344 6,367 Less: Exchange rate difference on foreign currency provision 424 11 Balance on 31 December 126,399 100,479
22.4 Movement in Interest in Suspense for Overdrafts Balance on 1 January 328,428 166,397 Add: Interest suspended during the year 308,092 375,618 Exchange rate difference on foreign currency interest in suspense - 19 Less: Recoveries during the year 146,707 208,034 Write off of interests 8,744 5,572 Exchange rate difference on foreign currency interest in suspense 37 - Balance on 31 December 481,032 328,428
22.5 Non-Performing Loans and Advances This relates to the portfolio on which the interest income is recognised on cash basis.
As at 31 December 2010 Percentage 2009 Percentage of total loans of total loans Rs ‘000 and advances Rs ‘000 and advances
Non-performing loans and advances (including bills) 1,855,454 9.55 1,914,520 12.86 Less: Interest in suspense included in overdrafts 481,032 328,428 Net non-performing loans and advances (including bills) 1,374,422 7.26 1,586,092 10.89 Less: Loan loss provision (including bills) (Note 22.5.1) 817,923 619,114 Net exposure 556,499 3.07 966,978 6.94 Net of tangible securities 1,218,170 1,106,896
Percentage relates to the ratios of non performing credit exposure to the total credit exposure computed on gross and net basis.
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As at 31 December 2010 2,009 Rs ‘000 Rs ‘000
22.5.1 Allowances for Credit Losses Loans and advances ( Note 22.2) 793,959 609,745 Bills of exchange ( Note 21.2) 26,462 14,805 820,421 624,550
Less: Provision relating to facilities currently performing Loans and advances 2,498 5,436 2,498 5,436 Provision related to non-performing facilities 817,923 619,114
22.5.2 The realisable value of tangible securities is computed in accordance with the haircut rule prescribed by the Central Bank of Sri Lanka.This requires the application of prescribed discounts given below, to the forced sale value based on age of arrears of the loans, bills of exchange and other credit facilities for the purpose of determining the net exposure at risk.
The progressive discounts shall be as follows
Item % of FSV of immovable property that can be considered as the value of security Freehold property Leasehold property
At the first time of provisioning 75 60
Period in the Loss Section
Less than 12 months 75 60
More than 12 but less than 24 months 60 50
More than 24 but less than 36 months 50 40
More than 36 but less than 48 months 40 30
More than 48 months Property should be reviewed on a regular basis and discounted further at the Nil discretion of the bank’s management
DFCC Vardhana Bank Ltd. Annual Report 2010 105 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 67 Notes to the Financial Statements (Continued...)
As at 31 December 2010 2009 Rs ‘000 Rs ‘000
22.6 Concentration of Credit Risk Industry wise distribution of loans and advances including bills of exchange
Food, beverages and tobacco 225,043 192,986 Rubber and leather products 688,392 374,569 Metals,chemicals and engineering 537,609 329,251 Services 1,936,425 1,237,943 Exports 2,062,990 3,170,761 Imports 2,631,680 1,743,183 Trading 2,547,661 2,334,693 Financial 299,401 177,235 Consumption 2,399,031 924,960 Construction 520,677 530,794 Agricultural 2,191,785 513,771 Industrial 1,632,520 1,198,195 Tourism 650,081 882,154 Housing and property development 912,499 747,818 Others 188,476 529,837 19,424,270 14,888,150
23. Interest Receivables Loans ( Note 23.1 ) 134,632 155,521 Bills of exchange ( Note 23.2 ) 229 580 134,861 156,101
23.1 Loans Interest on loans 622,290 498,656 Less: Interest in suspense for loans ( Note 23.1.1 ) 487,658 343,135 Balance on 31 December 134,632 155,521
23.1.1 Movement in Interest in Suspense for Loans Balance on 1 January 343,135 176,890 Add: Interest suspended during the year 339,021 408,420 Exchange rate difference on foreign currency interest in suspense - 164 Less: Recoveries during the year 182,302 237,392 Transfer to loan provision - 1,403 Interests waivers 11,542 3,544 Exchange rate difference on foreign currency interest in suspense 654 - Balance on 31 December 487,658 343,135
23.2 Bills of Exchange Interest on bills of exchange 229 1,841 Less: Interest in suspense for bills of exchange ( Note 23.2.1 ) - 1,261 Balance on 31 December 229 580
23.2.1 Movement in Interest in Suspense for Bills of Exchange Balance on 1 January 1,261 3,903 Add: Interest suspended during the year - 1,261 Less: Recoveries during the year 1,261 3,903 Balance on 31 December - 1,261
DFCC Vardhana Bank Ltd. 106 Annual Report 2010 68 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document Financial Statements
As at 31 December 2010 2009 Rs ‘000 Rs ‘000
24. Investment Securities Unquoted (Note 24.1 ) 2,030 2,030
As at 31 December 2010 2009 Number of Cost Number of Cost ordinary ordinary shares Rs ‘000 shares Rs ‘000
24.1 Unquoted Credit Information Bureau of Sri Lanka 300 30 300 30 (Shares of Rs 100/- each)
Lankaclear (Pvt) Ltd 100,000 1,000 100,000 1,000 (Shares of Rs 10/- each)
Lanka Financial Services Bureau Limited 100,000 1,000 100,000 1,000 (Shares of Rs 10/- each) 2,030 2,030
Directors’ valuation 2,030 2,030
25. Investment Property During the year Bank acquired bare land situated at No. 44/7, School Lane, Nawala in extent of 105.5 p. The land is recognized at cost and the Bank has not earned any revenue during the year.
26. Property and Equipment
Furniture, Computer Office fixtures Motor 2010 2009 equipment equipment & fittings vehicles Total Total Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000
Cost on 1 January 224,860 102,036 260,138 17,267 604,301 513,642 Adjustments during the year * - - - - - 3,192 Additions for the year 40,964 10,572 49,927 19,458 120,921 88,919 Less: disposals during the year 162 - 2,357 9,762 12,281 1,452 Cost on 31 December 265,662 112,608 307,708 26,963 712,941 604,301
Accumulated depreciation on 1 January 135,163 49,198 77,730 11,144 273,235 192,665 Adjustments during the year * - - - - 2,672 Charge for the year 37,655 19,214 26,919 2,647 86,435 78,430 Less: accumulated depreciation on disposal 65 - 2,357 6,345 8,767 532 Accumulated depreciation on 31 December 172,753 68,412 102,292 7,446 350,903 273,235 Net book value on 31 December 2010 92,909 44,196 205,416 19,517 362,038 Net book value on 31 December 2009 89,697 52,838 182,408 6,123 331,066
* Classification change and adjustments to asset additions of previous years.
DFCC Vardhana Bank Ltd. Annual Report 2010 107 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 69 Notes to the Financial Statements (Continued...)
As at 31 December 2010 2009 Rs ‘000 Rs ‘000
27. Intangible Assets Cost on 1 January 420,424 389,582 Adjustments during the year * (808) (2,988) Additions for the year 76,362 33,830 Cost on 31 December 495,978 420,424
Accumulated amortisation on 1 January 313,385 269,516 Adjustments during the year * (108) (2,671) Amortisation for the year 57,401 46,540 Accumulated amortisation on 31 December 370,678 313,385 Net Book Value on 31 December 125,300 107,039
* Classification change and adjustments to asset additions of previous years.
28. Other Assets Refundable deposits and prepayments 107,974 94,073 Stocks of stationery 9,479 6,033 Clearing account balances 430,767 448,133 Other receivables 147,733 346,452 695,953 894,691
29. Deposits from Customers Demand deposits 1,434,833 1,011,529 Savings deposits 5,412,648 4,599,560 Time deposits 16,318,932 16,277,888 Certificates of deposits 99,153 62,261 Margin deposits 230,357 95,708 23,495,923 22,046,946
29.1 Analysis of Deposits Deposits from banks 2,510,850 3,098,394 Deposits from finance companies 159,788 177,546 Deposits from other customers 20,825,285 18,771,006 23,495,923 22,046,946
30. Borrowings Balances with foreign banks 35,579 73,184 Balances with local banks 18,305 1,987,200 Borrowings from DFCC Bank - 122,000 Borrowings under repurchase agreements 1,617,810 2,877,720 1,671,694 5,060,104
Amount falling due within one year 1,671,694 5,060,104 Amount falling due more than one year - - 1,671,694 5,060,104
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As at 31 December 2010 2009 Rs ‘000 Rs ‘000
31. Group Balances Payable DFCC Bank 20,024 35,565
32. Movement in Provision for Staff Retirement Benefits 32.1 Defined Benefits Unfunded End of Service Gratuity
2010 Rs’000
Net accrued liability on 1 January 14,973 Add : Gratuity benefit expense for the financial year 6,623 Less: Gratuity due and paid during the financial year 3,294 Net accrued liability on 31 December 18,302
32.2 Reconciliation of Actuarial Liability with Accounting Liability Recognized in the Balance Sheet Unfunded End of Service Gratuity Present value of defined benefit gratuity obligations on 31 December 19,773 Less: Unrecognized actuarial loss during the year (Note: 32.4 ) 1,471 Accounting net liability recognized on 31 December 18,302
32.3 Movement in Present Value of Defined Benefits Obligations Total present value of defined benefit obligation on 1 January 13,794 Add: Current service cost (Note: 13.1.1 ) 4,517 Interest on obligation (Note: 13.1.1 ) 2,106 Actuarial experience loss on 31 December 2,650 Less: Gratuity payments during the year 3,294 Total present value of defined benefit obligation on 31 December 19,773
32.4 Movement in Unrecognized Actuarial Gain / (Loss) Actuarial gain on 1 January 1,179 Less: Recognized during the year - Unrecognized due to 10% corridor 1,179 Less: Actuarial loss on 31 December 2,650 Total unrecognized loss on 31 December (1,471)
Bank will recognise only the portion of the cumulative actuarial gain that exceeds 10% corridor by amortising such excess over the remaining working life of the employees participating in the defined benefit plans. The 10% corridor is 10% of the present value of defined benefit obligation on 1 January 2010 which is Rs1,379,376. Since unrecognized actuarial gains on 1 January 2010 was only Rs 1,179,367 and within this corridor, it is not recognized during this financial year.
DFCC Vardhana Bank Ltd. Annual Report 2010 109
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As at 31 December 2010 2009 Rs ‘000 Rs ‘000
33. Deferred Tax Liability (net) Deferred tax asset (Note 33.1 ) 5,125 5,241 Less: Deferred tax liability (Note 33.2 ) 45,317 53,465 40,192 48,224
2010 2009 Temporary Temporary difference Tax effect difference Tax effect Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000
33.1 Deferred Tax Asset Balance at the beginning - on tax loss brought forward - - 91,161 31,906 - on differed tax asset on gratuity 14,973 5,241 11,064 3,872 Adjustment in respect of final tax return for previous year - - (995) (348) Add : Increase in gratuity provision 3,329 932 3,909 1,368 Less : Reversal during the year - - 90,166 31,558 Adjustment to opening balance due to future income tax rate reduction (rate reduction from 35% to 28%-14,973 @ 7%) - 1,048 - - 18,302 5,125 14,973 5,241
33.2 Deferred Tax Liability Balance at the beginning 152,751 53,465 116,192 40,668 Originating during the year 9,096 2,547 36,559 12,797 Less : Adjustment to opening balance due to future income tax rate reduction (rate reduction from 35% to 28%-152,751 @ 7%) - 10,695 - - 161,847 45,317 152,751 53,465
Impact due to corporate income tax change The corporate income tax rate has been reduced to 28% commencing from year of assessment 2011/12 as per budget proposals for 2011 announced by the Finance Minister, which is considered to be substantially enacted pending legislation in 2011. Accordingly, deferred tax asset and liability have been computed based on 28%.
As at 31 December 2010 2009 Rs ‘000 Rs ‘000
34. Other Liabilities Interest payable 388,869 497,910 Account payable 236,899 212,428 Gratuity payable - 495 Cheques pending realization 431,153 449,825 Others 56,775 36,125 1,113,696 1,196,783
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As at 31 December 2010 2009 Rs ‘000 Rs ‘000
35. Stated Capital Issued and fully paid share capital Balance on 1 January 2,077,387 2,077,387 184,188,822 ordinary shares (184,188,822 shares in 2009) Balance on 31 December 2,077,387 2,077,387
36. Contingent Liabilities and Commitments In the normal course of business, the Bank makes various commitments and incurs certain contingent liabilities with legal recourse to its customers.
No material losses are anticipated as a result of these transactions.
As at 31 December 2010 2009 Rs ‘000 Rs ‘000
36.1 Contingent Liabilities Acceptances 1,895,066 821,988 Guarantees 1,908,575 1,633,484 Bid bonds 94,068 57,706 Documentary letters of credit 3,028,703 861,222 Forward contracts 1,056,126 4,304,006 Bills for collection 675,443 631,482 8,657,981 8,309,888
36.2 Commitments in Ordinary Cause of Business Commitments for unutilized credit facilities 1,693,805 1,209,755 Capital expenditure approved by the Board of Directors Contracted 14,935 17,309 Not contracted 13,334 11,272 1,722,074 1,238,336 Commitments and contingent liabilities 10,380,055 9,548,224
36.3 Litigation Against the Bank An ex-employee of the bank has filed a petition at the Labour Tribunal claiming re-instatement or damages in lieu of re-instatement.
DFCC Vardhana Bank Ltd. Annual Report 2010 111 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 73 Notes to the Financial Statements (Continued...)
37. Maturity Profile of Assets and Liabilities 37.1 Definition of Maturity 37.1.1 Time interval between balance sheet date and contractual maturity date, as defined in Sri Lanka Accounting Standard 23, “Revenue Recognition and Disclosures in the Financial Statements of Banks”, in respect of assets and liabilities
37.1.2 Time interval between balance sheet date and expected date of realization of assets and repayment of liabilities as defined by Central Bank of Sri Lanka for assets and liabilities with no contractual maturity dates. 37.2
Total Up to 3 3 to 12 1 to 3 3 to 5 > 5 months months years years years Rs. 000 Rs. 000 % Rs. 000 % Rs. 000 % Rs. 000 % Rs. 000 %
Assets with Contractual Maturity (Interest bearing assets) Treasury bills and other securities eligible for rediscounting with Central Bank 7,055,896 2,605,283 37 3,455,382 49 995,231 14 - - - - Securities purchased under resale agreements 699,881 699,881 100 ------Bills of exchange 288,932 285,432 99 3,500 1 ------Loans and advances 17,705,017 8,164,479 46 6,715,295 38 1,102,590 6 1,155,382 7 567,271 3 25,749,726 11,755,075 45 10,174,177 40 2,097,821 8 1,155,382 4 567,271 3
Other Assets (Non-interest bearing assets) Cash and short term funds 1,452,215 1,452,215 100 ------Balances with Central Bank of Sri Lanka 894,235 894,235 100 ------Interest receivable 134,861 88,019 65 24,238 18 8,609 6 10,200 8 3,795 3 Investment properties 109,198 ------109,198 100 Investment securities 2,030 ------2,030 100 Other assets 695,953 567,862 82 31,620 5 35,038 5 6,463 - 54,970 8 Property and equipment 362,038 ------362,038 100 Intangible assets 125,300 ------125,300 100 3,775,830 3,002,331 80 55,858 1 43,647 1 16,663 - 657,331 18 Total Assets 29,525,556 14,757,406 50 10,230,035 35 2,141,468 7 1,172,045 4 1,224,602 4
Liabilities with Contractual Maturity (Interest bearing liabilities) Deposits from customers 22,061,090 11,695,570 53 9,916,616 45 228,745 1 122,622 1 97,537 - Borrowing under repurchase agreement 1,617,810 1,250,233 77 367,577 23 ------23,678,900 12,945,803 55 10,284,193 43 228,745 1 122,622 1 97,537 -
Other Liabilities (Non-interest bearing liabilities) Deposits from customers-demand 1,434,833 1,076,125 75 358,708 25 ------Balances with foreign banks 35,579 35,579 100 ------Balances with local banks 18,305 18,305 100 ------Group balances payable 20,024 20,024 100 ------Tax payable 67,140 33,570 50 33,570 50 ------Retirement benefit obligation 18,302 ------18,302 100 Other liabilities 1,113,696 835,093 75 252,986 23 11,694 1 2,341 - 11,582 1 Deferred tax liability 40,192 ------40,192 100 2,748,071 2,018,696 74 645,264 23 11,694 - 2,341 - 70,076 3 Total Liabilities 26,426,971 14,964,500 57 10,929,457 41 240,439 1 124,963 - 167,613 1
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38. Related Party Transactions The Bank’s related parties include Key Management Personnel, close family members of Key Management Personnel and entities which are controlled, jointly controlled or significantly influenced for which significant voting power is held by Key Management Personnel or their close family members.
As at 31 December 2010 2009 Rs’000 Rs’000
38.1 Transactions with Parent Company 38.1.1 Balance Sheet Liabilities Deposits 1,803,994 2,443,251 Borrowings - subordinated debt - 122,000 Borrowings under repurchase agreements collateralized by treasury bills 435,000 25,000 Interest payable 12,814 29,277 2,251,808 2,619,528
Unutilized credit facilities 878,000 878,000
The Parent company carries out certain functions of the Bank and vice versa, as set out in the collaborative agreement between the Bank and the Parent company. Following fees or recovery of costs were accounted for in the books of the Bank during the year.
For the year ended 31 December 2010 2009 Rs’000 Rs’000
38.1.2 Income Statement Interest income 3,926 113 Other income 6,410 280
Interest expenses 129,243 108,130 Reimbursed expenses 121,202 103,721
As at 31 December 2010 2009 Rs’000 Rs’000
38.2 Transactions with Subsidiary Companies / Joint venture Companies of the Parent Company 38.2.1 Balance Sheet Liabilities Deposits 248,822 209,837 Borrowings under repurchase agreements collateralized by treasury bills 80,155 182,546 Interest payable 5,003 8,091 333,980 400,474
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For the year ended 31 December 2010 2009 Rs’000 Rs’000
38.2.2 Income Statement Interest income 106 15 Interest expenses 29,167 64,934 Other expenses 65,019 37,760
As at 31 December 2010 2009 Rs’000 Rs’000
38.3 Transaction with Entities in which Directors of the Bank have Significant Influence Without Substantial Shareholding 38.3.1 Balance Sheet Liabilities Deposits 268,285 220,740 Interest payable 5,457 8,263 Included under subsidiary* (253,099) (217,881) 20,643 11,122
* A transaction that qualifies under two related party groupings
33.3.2 Income Statement
For the year ended 31 December 2010 2009 Rs’000 Rs’000
Interest income 117 11 Other income 38 - Included under subsidiary* (103) (11) 52 -
Interest expenses 29,136 24,711 Other expenses 65,095 37,852 Included under subsidiary* (89,601) (61,903) 4,630 660
* A transaction that qualifies under two related party groupings
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38.4 Transactions with the Key Management Personnel (KMP) of the Bank. 38.4.1 Key Management Personnel According to Sri Lanka Accounting Standard 30 (revised 2005) - “Related Party Disclosure’, KMP are those having authority and responsibility for planning, directing and controlling the activities of the entity. Accordingly the KMP of the Bank are; a. The Board of Directors of the Bank, Chief Executive Officer, Head of Customer Relations, Head of Corporate Credit, Head of Operations, Senior Manager Accounting & Reporting and Secretary to the Board and, b. Key Management Personnel of the Parent company.
38.4.2 Compensation of Directors and Other Key Management Personnel
For the year ended 31 December 2010 2009 Rs’000 Rs’000
Number of persons 29 28 Short term employment benefits 29,143 34,446 Post employment benefits 3,341 3,051
Post employment benefits are the expenses recognized in the income statement to provide for retirement benefits (end of service gratuity payable to employees ) defined contribution to Employees Provident Fund / Mercantile Service Provident Fund Society and Employees Trust Fund by the employer.
As at 31 December 2010 2009 Rs’000 Rs’000
38.4.3 Transactions with Key Management Personnel, and their Close Family Members. 38.4.3.1 Balance Sheet Assets Loans and advances 2,665 3,718 2,665 3,718
These loans are granted under a uniform scheme applicable to all employees of the Bank.
Liabilities Deposits 102,634 86,210 Borrowings under repurchase agreements - 1,325 Interest payable 2,485 1,710 102,634 87,535
For the year ended 31 December 2010 2009 Rs’000 Rs’000
38.4.3.2 Income Statement Interest income 171 251 Interest expenses 7,338 8,048
DFCC Vardhana Bank Ltd. Annual Report 2010 115 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 77 Notes to the Financial Statements (Continued...)
38.4.3.3 Accommodation Granted to Directors of the Bank (Disclosure under section 47 (11A) of the Banking (Amendment) Act No.33 of 1995)
Name of Director Limit Type of Outstanding Rs’000 Facility Rs’000 Security
J A R E M Machado 500 Credit Card 5 - Lakshman Silva 500 Credit Card 2 - J M S Brito 500 Credit Card 8 - 15 *
* The above total is included under loans and advances to Key Management Personnel and their close family members in Note 38.4.3
38.5 Pricing Policy and Terms for Transactions with Related Parties Bank enters into transactions with related parties in the ordinary course of business on terms similar to comparable transactions with an unrelated comparable counter party. The terms include pricing for loans, deposits and services, collateral obtained for loans where appropriate.
39. Events after the Balance Sheet Date 39.1 Proposed Dividend Directors have recommended the payment of a final dividend of 30 cents per share for the year ended 31 December 2010, which requires the approval of the shareholders at the Annual General Meeting to be held on the 31 May 2011.The Board of Directors confirm that the Bank has satisfied the solvency test in accordance with section 57 of the Companies Act No 7 of 2007 and have obtained certification from the auditors. The proposed final dividend exceeds the minimum distribution mandated by the Inland Revenue Act No 10 of 2006 and therefore the 15% deemed dividend tax, will not be imposed on the Bank.
No other circumstances have arisen which would require disclosure or adjustment to the accounts
40. Comparative Figures Where items are regrouped, comparative information is also adjusted.
41. Directors’ Responsibility Statement The Board of Directors of the Bank is responsible for the preparation and presentation of these financial statements. Please refer to page 82 for the statement of Directors’ Responsibility for financial reporting.
DFCC Vardhana Bank Ltd. 116 Annual Report 2010
78 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document ANNEX B: DFCC VARDHANA BANK LIMITED, AUDITORS REPORT TO THE BOARD OF DIRECTORS AND AUDITED FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDING 31 DECEMBER 2009
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 79 DFCC Vardhana Bank 2009 Annual Report
Statement of Directors’ Responsibilities
The Directors are responsible, under Section The Auditors, Messrs KPMG Ford, Rhodes, 148 (1) of the Companies Act No 07 of 2007, Thornton & Co., were given access to all to ensure that proper accounting records are accounting records, other documents and all kept to disclose, with reasonable accuracy, business locations of the Bank to undertake the financial position and enable preparation the inspections they considered appropriate of the Financial Statements. Accordingly, to form their opinion on the Financial the Directors have caused the Bank to Statements. They were also provided with all maintain proper accounting records which the information and explanations required for meet the statutory and financial reporting the purpose of the audit. requirements. By Order of the Board The Directors are also responsible, under Sections 150 (1) and 151 (1) of the Companies Act, to prepare the Financial Statements for each year giving a true W. A. Mendis and fair view of the state of affairs of the Company Secretary company as at the end of the year and of the profit and loss for the financial year. 30 March 2010 Colombo They are also responsible to prepare and present the Financial Statements in accordance with the Sri Lanka Accounting Standards and provide the information required by the Companies Act No 07 of 2007 and the Banking Act No 30 of 1988.
The Directors consider that they have adopted appropriate accounting policies based on reasonable and prudent judgements and applied them consistently.
The Directors acknowledge their responsibility for the Bank’s system of internal controls which is designed to provide assurance on maintenance of proper accounting records and the reliability of financial information generated and safeguarding of the assets of the Bank. However, any system of internal controls can provide reasonable and not absolute assurance that errors and irregularities are either prevented or detected within a reasonable period of time.
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80 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document Report of the Auditors
INDEPENDENT AUDITOR’S REPORT with Sri Lanka Auditing Standards. Those Report on Other Legal and Regulatory TO THE SHAREHOLDERS OF DFCC standards require that we plan and perform Requirements VARDHANA BANK LIMITED the audit to obtain reasonable assurance These financial statements also comply with whether the financial statements are free the requirements of Section 151(2) of the Report on the Financial Statements from material misstatement. Companies Act No. 07 of 2007 and present We have audited the accompanying financial the information required by the Banking Act statements of DFCC Vardhana Bank Limited, An audit includes examining, on a test No. 30 of 1988. which comprise the balance sheet as at 31st basis, evidence supporting the amounts and December 2009 and the income statement, disclosures in the financial statements. An statement of changes in equity and cash audit also includes assessing the accounting flow statement for the year then ended, and principles used and significant estimates a summary of significant accounting policies made by management, as well as evaluating CHARTERED ACCOUNTANTS and other explanatory notes. the overall financial statement presentation. March 30, 2010 Colombo Management’s Responsibility for the We have obtained all the information and Financial Statements explanations which to the best of our Management is responsible for the knowledge and belief were necessary for the preparation and fair presentation of purposes of our audit. We therefore believe these financial statements in accordance that our audit provides a reasonable basis for with Sri Lanka Accounting Standards. our opinion.
This responsibility includes: designing, F i n a implementing and maintaining internal Opinion n control relevant to the preparation and fair In our opinion, so far as appears from our cial R presentation of financial statements that are examination, the Company maintained proper e p free from material misstatement, whether accounting records for the year ended 31st ort due to fraud or error; selecting and applying December 2009 and the financial statements s appropriate accounting policies; and making give a true and fair view of the Company’s accounting estimates that are reasonable in state of affairs as at 31st December 2009 the circumstances. and its profit and cash flows for the year then ended in accordance with Sri Lanka Scope of Audit and Basis of Opinion Accounting Standards. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance
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DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 81 DFCC Vardhana Bank 2009 Annual Report
Income Statement
For the year ended 31st Decemb er 2009 2008 Notes Rs ‘000 Rs ‘000
Income 5 4,447,480 3,498,273
Interest income 6 4,235,229 3,212,690 Interest expense 7 2,483,929 2,031,116 Net interest income 1,751,300 1,181,574
Net foreign exchange (loss) /profit (89,905) 16,082 Fee and commission income 197,782 229,112 Other income 8 104,374 40,389 Operating income 1,963,551 1,467,157
Less: operating expenses Personnel expenses 325,346 247,587 Provision for staff retirement benefits 9 32,313 24,836 Premises, equipment and establishment expenses 291,208 230,541 Fee expenses 48,924 35,436 Provision for loan losses and write-off 10 233,571 287,213 Other overhead expenses 252,478 202,785 Operating expenses 11 1,183,840 1,028,398
Operating profit before value added tax 779,711 438,759
Value added tax on financial services 181,742 101,070
Operating profit before income tax 597,969 337,689
Less: Income tax expense 12 329,636 226,525 Profit for the year 268,333 111,164
Basic earnings per share, Rs 13 1.46 0.60
Notes from pages 53 to 79 form an integral part of these financial statements.
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82 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document Balance Sheet
As at 31 Decemb er Notes 2009 2008 Rs ‘000 Rs ‘000
Assets Cash and short term funds 14 835,704 2,177,373 Balances with Central Bank of Sri Lanka 15 802,076 768,383 Treasury bills and bonds eligible for rediscounting with Central Bank 16 14,377,234 5,764,172 Securities purchased under resale agreements - 171,564 Bills of exchange 17 325,886 326,171 Loans and advances 18 13,505,751 14,426,000 Interest receivable 19 156,101 179,569 Investment securities 20 2,030 2,030 Property, plant and equipment 21 331,066 320,977 Intangible assets 22 107,039 120,066 Other assets 23 892,697 548,428 Total assets 31,335,584 24,804,733
Liabilities Deposits from customers 24 22,046,946 18,972,099 Borrowings 25 5,060,104 2,189,882 Balances payable to parent company 26 35,565 19,050 Current tax liability 57,132 46,321 Retirement benefit obligation 27 14,973 11,064 Deferred tax liability 28 48,224 4,889 Other liabilities 29 1,194,789 933,491 Total liabilities 28,457,733 22,176,796
Equity Stated capital 30 2,077,387 2,077,387 Reserve fund 36,427 23,010 Retained earnings 764,037 527,540
Total equity - attributable to the equity holders of the Bank 2,877,851 2,627,937 F i n
Total liabilities and equity 31,335,584 24,804,733 a n cial cial
Commitments and contingencies 31 9,548,224 7,394,581 R e p ort
Notes from pages 53 to 79 form an integral part of these financial statements. s
These financial statements are in compliance with the requirements of Companies Act No. 07 of 2007.
Ms. D. Wettasinghe Senior Manager Accounting & Reporting
For and on behalf of the Board of Directors,
J. M. S. Brito Lakshman Silva Chairma n CEO / Director
Colombo March 30, 2010
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DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 83 DFCC Vardhana Bank 2009 Annual Report
Statement of Changes In Equity
Attributable to equity holders of the Bank Stated Statutory Retained Total Capital Reserve Fund ** Earnings Equity Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000
Balance as at 31.12.2007 2,077,387 17,452 432,985 2,527,824
Final dividend approved on 26.03.2008 - - (11,051) (11,051)
Profit for the year - - 111,164 111,164
Transfer from current earnings - 5,558 (5,558) -
Balance as at 31.12.2008 2,077,387 23,010 527,540 2,627,937
Final dividend approved on 25.03.2009 - - (18,419) (18,419)
Profit for the year - - 268,333 268,333
Transfer from current earnings - 13,417 (13,417) -
Balance as at 31.12.2009 2,077,387 36,427 764,037 2,877,851
Notes from pages 53 to 79 form an integral part of these financial statements.
**Statutory Reserve Fund Statutory Reserve Fund is a statutory reserve created as per direction issued by the Central Bank of Sri Lanka under Section 20 (1) of the Banking Act No 30 of 1988 as amended by Banking (Amendment) Act No 33 of 1995.
2009 2008 Computation of transfer to statutory reserve fund Rs’ 000 Rs’ 000
Profit after tax 268,333 111,164 Minimum amount to be transferred @ 5% 13,417 5,558
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84 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document Cash Flow Statement
For the year ended 31st Decemb er 2009 2008 Rs ‘000 Rs ‘000
Cash flow from operating activities Interest receipts 2,677,760 2,565,694 Fees and commission receipts 197,782 229,112 Interest payments (2,404,193) (1,879,368) Receipts from other operating activities 103,840 46,177 Cash payments to employees and suppliers (708,694) (721,890) Value added tax paid (193,450) (94,627) Operating profit before changes in operating assets (326,955) 145,098
(Increase)/decrease in operating assets Deposits held for regulatory or monetary control purposes (33,693) (157,082) Funds advanced to customers 686,964 (3,811,438) Others (69,984) 99,167
Increase /(decrease) in operating liabilities Deposits from customers 3,097,379 6,803,701 Negotiable certificates of deposit (22,532) 51,253 Others 92,259 (168,081) Net cash generated from operating activities before Income tax 3,423,438 2,962,618
Income tax paid (113,917) (93,986)
Net cash ow generated from operating activities (Not e a) 3,309,521 2,868,632
Cash flow from investing activities Treasury bills eligible for rediscounting with Central Bank -more than 3 months (6,164,650) (3,162,944) Income from investment securities 322 104
Interest receipts from Treasury Bills 1,339,784 455,411 F i n
Disposal of property, plant & equipment 847 44 a n Purchase on investment securities - 1,000 cial
Purchase of property, plant & and equipment (122,749) (176,383) R e p
Net cash flow used in investing activities (4,946,446) (2,882,768) ort s Cash flow from financing activities Bank borrowing 1,225,715 418,414 Borrowing under repurchase agreements 1,644,507 627,383 Dividends paid (18,419) (11,051) Net cash ow from nancing activiti es 2,851,803 1,034,746
Net increase in cash and cash equivalents 1,214,878 1,020,610 Cash and cash equivalents at beginning of period 4,299,017 3,278,407 Cash and cash equivalents at end of the period 5,513,895 4,299,017
Composition of cash and cash equivalent at end of the period Cash and short term funds (Note - 14) 835,704 2,177,373 Treasury bills and other securities eligible for rediscounting with CBSL - less than 3 months 4,678,191 1,950,080 Treasury bills purchased under resale agreements - less than 3 months - 171,564 5,513,895 4,299,017
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DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 85 DFCC Vardhana Bank 2009 Annual Report
Cash Flow Statement... Contd.
Note a Reconciliation of profit for the year to net cash from / (used in) operating activities
For the year ended 31st Decemb er 2009 2008 Rs ‘000 Rs ‘000
Profit for the year 268,333 111,164 Less: Dividend transferred to investing activities (322) (104) 268,011 111,060 Items not using / (providing) cash Provision for loan losses 233,571 287,213 Gain from marked to market on treasury bills and bonds (285) (2,066) Notional tax credit on treasury bills & bonds (161,573) (51,189) Depreciation - property, plant and equipment 78,430 62,318 Amortisation - Intangible assets 46,540 39,161 Loss on disposal of property, plant and equipment 73 196 Net foreign exchange loss/(profit) 89,905 (16,082) Increase/(decrease) in deferred tax 43,335 (87,712) Increase/(decrease) in income tax 172,384 125,624 (Increase)/decrease in operating assets 676,738 (3,885,435) Increase/(decrease) in operating liabilities 3,074,847 6,686,873 Net change in other receivables and payables (1,212,455) (401,329) Net cash from operating activities 3,309,521 2,868,632
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86 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document Notes to the Financial Statements
1. Reporting Entity DFCC Vardhana Bank Limited (“Bank”) is a public limited liability company incorporated in 1995 and domiciled in Sri Lanka. It is licensed by Central Bank of Sri Lanka to conduct domestic and off shore banking business under the provisions of Banking Act No. 30 of 1988. As per section 487(2) of Companies Act No. 7 of 2007 the company has been re registered. The registered office of the Bank is situated at 73, W A D Ramanayake Mawatha, Colombo 02.
DFCC Bank, which is licensed by the Central Bank of Sri Lanka as a specialised bank, is the parent company of the Bank, and owns 95.58% of the Bank.
Total employee population of the Bank on 31 December 2009 was 481 (31 December 2008 - 407)
1.1 Principal Activities Bank is currently engaged in activities related to commercial banking such as accepting deposits, providing corporate and retail credit, foreign currency operations, trade finance and treasury related services. There were no significant changes in the nature of the principal activities of the Bank during the financial year under review.
2. Basis of Preparation 2.1 Statement of Compliance The Financial Statements have been prepared in compliance with relevant Sri Lanka Accounting Standards adopted by the Institute of Chartered Accountants of Sri Lanka and comply with the requirements of Companies Act No. 07 of 2007 and Banking Act No. 30 of 1988 and subsequent amendments thereto.
2.2 Approval of Financial Statements by Directors The Financial statements were authorised for issue by the Board of Directors on 30 March 2010.
2.3 Basis of Measurement The financial statements are presented in Sri Lanka rupees, the functional and presentation currency, rounded to the nearest thousand and unless otherwise stated herein have been prepared under the historical cost convention. Exceptions to the historical cost convention of accounting relate to dealing securities, which are carried at market value.
2.4 Accrual Basis of Accounting F i
All revenue and expenses are recognised using accrual basis of accounting with the exception of interest income from non-performing assets and n a items given in notes 3.4.5 and 3.4.6 n cial cial R e
2. 5 Critical Accounting Estimates and Judgments p 2.5.1 General ort The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the application of s accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.
Information about the significant areas of estimation and uncertainty that have the most significant effect on the amounts recognised in the financial statements are described below.
2.5.2 Judgments and the Financial Impact 2.5.2.1 Classi cation of Dealing and Investment Securities The classification of investment securities is based on the positive intention of the management and the financial capacity to hold certain investments to maturity. In the event of a change of intention evidenced by management action of active trading, such investments are transferred to dealing securities, which represent securities held for trading.
The classification of these securities determines the recognition of the carrying amount of these financial assets in the balance sheet with a consequential adjustment to the reported results.
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DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 87 DFCC Vardhana Bank 2009 Annual Report
Notes to the Financial Statements... Contd.
2.5.3 Accounting Estimates 2.5.3.1 Loan Losses The assessment of loan loss involves considerable judgment and estimation. Judgment is required firstly to determine whether there are indications that a loss may already have been incurred in individually significant loans and secondly to determine the recoverable amount.
2.5.3.2 Impairment of Tangible and Intangible Assets The assessment of impairment in tangible and intangible assets includes the estimation of the value in use of the asset computed at the present value of the best estimates of future cash flows generated by the asset adjusted for associated risks. The estimation has inherent uncertainties.
Impairment losses if any are charged to the income statement immediately.
2.5.3.3 End of Service Statutory Gratuity Liability The estimation of this liability, which is not funded, determined by an independent, qualified actuary necessarily involves long-term assumptions on future changes to salaries, resignations prior to the normal retirement age and mortality of covered employees. Key assumptions are disclosed in note 9.4.
2.6 Materiality and Aggregation Each material class of similar items is presented separately in the financial statements. Items of dissimilar nature or function are presented separately unless they are immaterial.
3. Principal Accounting Policies Accounting Policies are the specific principles, bases, conventions, rules and practices applied consistently by the Bank in presenting and preparing the financial statements. Changes in accounting policies are made only if the Sri Lanka Accounting Standards require such change or when a change results in providing more relevant information. New policies are formulated as appropriate to new products and services provided by the Bank or new obligations incurred by the Bank.
3.1 Foreign Currency Translation Transactions in foreign currencies are translated to Sri Lankan Rupees at the middle rate of exchange ruling at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies at the Balance Sheet date are translated to Sri Lankan Rupees at the exchange rate ruling on the balance sheet date and consequently any exchange loss or gain is recognised in the income statement of the Bank. The exchange rates used are the middle spot rates.
Forward Exchange Contracts are disclosed net, and trading (open) forward exchange contracts are valued at the forward market rates ruling on the date of the Balance Sheet for the residual maturity. Resulting net unrealised gains and losses are dealt with through the Income Statement.
3.2 Assets and Bases of their Valuation 3.2.1 Cash and Cash Equivalent For the purpose of the cash flow statement cash and cash equivalent consist of cash held by the Bank and other short-term, highly liquid investments that are readily convertible to known amount of cash and which are subject to an insignificant risk of changes in value.
3.2.2 Balances with Central Bank of Sri Lanka The Monetary Law Act requires that all commercial banks operating in Sri Lanka to maintain reserves against all deposit liabilities denominated in Sri Lankan Rupees. The details of reserve requirements are given in note No 15.There are no reserves requirement for deposit liabilities of the Foreign Currency Banking Unit and foreign currency deposit liabilities in the Domestic Banking Unit.
3.2.3 Government of Sri Lanka Treasury Bills and Bonds 3.2.3.1 Investment in Treasury Bills and Bonds Held for Dealing These are the marketable, dated debt securities in respect of which the Bank has the expressed intention of trading in the domestic debt market and are included in the balance sheet at the market value as a sub category of treasury bills and other securities eligible for rediscounting with the Central Bank of Sri Lanka.
The market value is determined using the middle rate of buy and sell quotes for the treasury bills and bonds eligible for rediscounting with the Central Bank of Sri Lanka provided by secondary market intermediaries.
54
88 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document The securities are recognised at cost initially on acquisition and thereafter marked to market on the balance sheet date recognising both gains and losses. The choice of this option is mandated by direction issued by Central Bank of Sri Lanka on ‘Prudential norms for classification, valuation and operation of the Bank’s investment portfolio’ dated 1 March 2006.
3.2.3.2 Investment in Treasury Bills and Bonds Held to Maturity These are dated debt securities in respect of which the Bank has expressed intention and ability to hold until maturity. These are included in the balance sheet as a sub category of treasury bills and other securities eligible for re-discounting with the Central Bank of Sri Lanka.
Investments in treasury bills and treasury bonds held to maturity are included in the balance sheet at cost adjusted for the amortisation of premium or discount arising on acquisition.
3.2.4 Securities Purchased under Resale Agreements (Reverse Repurchase Transactions) These are loans collateralised by the purchase of treasury bills from the counter party to whom the loans are granted. The sale by the counter party is subject to a commitment by the Bank to sell back the underlying debt securities to the borrower at a pre-determined price. These loans are stated in the balance sheet at cost.
3.2.5 Securities Sold Under Re Purchase Agreement (Repos) This relates to treasury bills and bonds sold subject to a commitment to repurchase them at a predetermined price. Such treasury bills and bonds remain on the balance sheet and the liability is recorded in respect of the consideration received. The liability is disclosed as borrowing under repurchase agreement. These treasury bills and bonds are not marked to market since the corresponding liability is also not marked to market.
3.2.6 Investment in Ordinary Shares These are acquired and held for yield or capital appreciation in the medium/long term and are carried at cost reduced by, where appropriate, the diminution in value, which is other than temporary. Cost determined on a weighted average basis includes incidental cost of acquisition.
3.2.7 Loans and Advances to Customers Loans and advances are stated net of provision for possible loan losses and interest in suspense relating to non-performing overdrafts. The provision for possible loan losses include both specific and general provision.
3.2.7.1 Non-performing Loans and Advances The classification on 31 December 2009 is based on the direction No. 4 of 2008 dated 8 May 2008 as amended by Direction No. 10 of 2008 dated 30 December 2008 and Direction No. 6 of 2009 dated 30 December 2009. The loans are classified as non-performing based on the F i following criteria. n a n cial cial
Repayment Terms Default period or number of unpaid due R e p
Repayable in monthly installments 3 unpaid dues ort
Repayable in quarterly/half yearly installments 90 days from due date s Single lump sum repayment 90 days from due date Overdrafts Exceeds the sanctioned limit for a continuous period of 90 days or more Credit Cards- minimum payment 90 days from the due date
In addition loans with impaired debt service capacity are classified as non-performing on case-by-case basis.
The classification criterion as per the direction is applied individually to each credit facility extended to a borrower.
As per the direction No.4 of 2008 as amended, where multiple credit facilities have been granted to a single borrower, in the event the aggregate outstanding amount of non-performing credit facilities exceed 30% of the total credit facilities extended to the borrower, the balance facilities also have to be classified as non-performing. This requirement however is applicable only on 1 January 2011 as per direction No.6 of 2009 dated 30 December 2009.
However the Bank has proactively classified all credit facilities to a borrower as non-performing when 30% of the total facilities were non- performing as at 31 December 2009.
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DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 89 DFCC Vardhana Bank 2009 Annual Report
Notes to the Financial Statements... Contd.
3.2.7.2 Categorisation of Non Performing Loans The direction No.4 of 2008 requires non-performing to be categorised in the following manner. Category Facility Type Determinant Special Mention Credit facilities, repayable in monthly 3 installments or more but less than 6 installments installments, principal and/or interest are due and unpaid. Overdrafts Exceeds the sanctioned limit for a continuous period of 90 days or more but less than 180 days from the due date. Credit cards The minimum payment is in arrears for 90 days or more but less than 120 days from the due date. Other credit facilities The payments are in arrears for 90 days or more but less than 180 days from the due date. Sub-standard Credit facilities Credit facilities, repayable in monthly 6 installments or more but less than 12 installments installments, principal and/or interest are due and unpaid. Overdrafts Exceeds the sanctioned limit for a continuous period of 180 days or more but less than 360 days from the due date. Credit cards The minimum payment is in arrears for 120 days or more but less than 180 days from the due date. Other credit facilities The payments are in arrears for 180 days or more but less than 360 days from the due date. Doubtful Credit facilities Credit facilities, repayable in monthly 12 installments or more but less than 18 installments installments, principal and/or interest are due and unpaid. Overdrafts Exceeds the sanctioned limit for a continuous period of 360 days or more but less than 540 days from the due date. Credit cards The minimum payment is in arrears for 180 days or more but less than 240 days from the due date. Other credit facilities The payments are in arrears for 360 days or more but less than 540 days from the due date. Loss Credit Facilities Credit facilities, repayable in monthly 18 installments or more principal and/or installments interest are due and unpaid. Overdrafts Exceeds the sanctioned limit for a continuous period of 540 days or more. Credit cards The minimum payment is in arrears for 240 days or more. Other credit facilities The payments are in arrears for 540 days or more.
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90 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 3.2.7.3 Reclassi cation of Non-performing Loans as Performing Non- performing Loans are reclassified as performing when the number of dues on a term loan repayable in monthly installments is less than 3, while other credit facilities are reclassified only when arrears of interest and principal are settled in full by the borrower.
Rescheduled non-performing loans however is reclassified only after mandatory watch period ranging from 90 days to 360 days based on the non-performing loan category at the time of reschedule.
Upto 31 December 2008 reclassification of non-performing loans to performing was only on settlement of all dues by the borrower and rescheduled non-performing loans were reclassified as performing after a mandatory watch period of 6 months.
3.2.8 Property Plant and Equipment 3.2.8.1 Basis of Recognition The cost of equipment comprising computers, office equipment, furniture fixtures and fittings and motor vehicles is recognised as an asset if it is probable that future economic benefits associated with the equipment will flow to the Bank and cost of equipment can be measured reliably.
3.2.8.2 Measurement at recognition The cost of equipment comprises its purchase price and any directly attributable cost of bringing the equipment to working condition for its intended use.
3.2.8.3 Subsequent measurement The assets are stated at cost less accumulated depreciation, and any accumulated impairment losses. The depreciation is provided for on the basis outlined below. Depreciation is provided on a straight-line basis such that the cost of the asset is depreciated over the period appropriate to the estimated life of the type of asset. The rates of depreciation are as follows:
Computer equipment - 20% per annum Office equipment and motor vehicles - 20% per annum Furniture, fixtures and fittings - 10% per annum
Depreciation commences in the month the asset is commissioned for use in the business of the Bank and ceases in the month of disposal. Subsequent costs are included in the asset’s carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and cost of the item can be measured reliably. All other repairs and maintenance are charged to expense during the financial period in which they are incurred. F i n a n
3.2.8.4 De-recognition cial The carrying amount of property, plant & equipment is de-recognised on disposal or when no future economic benefits are expected from its use R e and the gain or loss arising from the de-recognition is included in income statement. p ort s 3.2.9 Intangible Assets – Computer Application Software All software licensed for use by the Bank, not constituting an integral part of related hardware are included in the balance sheet under the category intangible asset and carried at cost less cumulative amortisation and any impairment losses.
The initial acquisition cost comprises license fee paid at the inception, import duties, non-refundable taxes and levies, cost of customising the software to meet the specific requirements of the Bank and other directly attributable expenditure in preparing the asset for its intended use.
The cost is amortised using the straight –line method, at the rate of 20% per annum commencing from the date the application software is available for use. The amortised amount is based on the best estimate of the useful life, such that the cost is amortised fully at the end of the useful life during which the Bank has legal right of use. The amortised cost is recognised as an expense.
The initial cost is enhanced by subsequent expenditure incurred by further customisation to meet ancillary transaction processing and reporting requirements tailor-made for the use of the Bank constituting an improvement to the software. Computer application software is stated at cost less accumulated amortisation and accumulated impairment losses, if any.
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DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 91 DFCC Vardhana Bank 2009 Annual Report
Notes to the Financial Statements... Contd.
3.2.10 Impairment of Assets 3.2.10.1 Tangible Assets The Bank reviews on the balance sheet date whether the carrying amount of the property, plant and equipment are lower than their recoverable amount. In such event the carrying amount is reduced to the recoverable amount and the reduction being an impairment loss is recognised immediately in the income statement. The recoverable amount is the higher of the market value of the asset less estimated cost of disposal and its value in use.
3.2.10.2 Intangible Assets 3.2.10.2.1 Computer Application Software The Bank reviews on the balance sheet date whether the carrying amount of computer application software is lower than the recoverable amount. In such event the carrying amount is reduced to the recoverable amount and the reduction being an impairment loss is recognised immediately in the income statement. The recoverable amount is the value in use.
3.3 Liabilities and Provisions 3.3.1 Deposits from Customers Deposits include non-interest bearing demand deposits or current accounts, savings deposits, term deposits, deposits redeemable at call and certificates of deposit. The contractual liabilities are recognised as outstanding balances. Interest paid is charged to the Income Statement.
3.3.2 Borrowings All borrowings are recognised when the Bank enters into contract with counter parties and initially measured at the consideration received. All directly attributable costs are amortised on straight-line basis up to the date of repayment.
3.3.3 Employee Bene ts 3.3.3.1 De ned Contribution Plan This provides for a lump sum payment on termination of employment by resignation, retirement at the age of 55 years or death while in service. Payment is by an outside agency to which contributions are made.
All employees of the Bank are members of the Employees Provident Fund and Employees Trust Fund to which the Bank contributes 15% and 3% respectively of such employee’s qualifying salary.
Contributions to defined contribution plans are recognised as an expense in the income statement as incurred.
3.3.3.2 De ned Bene t Plan- Provision for End of Service Gratuity Liability 3.3.3.2.1 Description of the plan and the employee groups covered The defined benefit as per payment of Gratuity Act No. 12 of 1983 as amended is half a months salary at the time of termination of employment for each completed year of service subject to a minimum of 5 years of service payable on termination of employment usually by resignation or retirement at the age of 55 years. All employees of the Bank in tenured employment are covered.
Employees on fixed term contract of employment are covered only if the contract provides for unbroken service of 5 years or more either singly or together with consecutive contracts.
Based on the Sri Lanka Accounting Standards 16(Revised 2006), “Employee Benefits” (“SLAS 16”) Bank has adopted the actuarial valuation method. Accordingly from 1 January 2008 the bank has made provisions for gratuities based on the actuarial valuation performed by a qualified actuary, Piyal S. Goonetilleke and Associates. The Bank recognises the liability by way of a provision for all employees in tenured employment from the date they joined the permanent cadre while fixed term employees liability is recognised only if the fixed term contract of service provides for unbroken service of 5 years or more either singly or together with consecutive contracts. The gratuity liabilities are not externally funded.
3.3.3.2.2 Funding Arrangement The Bank adopts a pay-as-you-go method whereby the employer makes a lump sum payment only on termination of employment by resignation, retirement at the age of 55 or death. Thus the gratuity liabilities are not externally funded.
3.3.3.2.3 Recognition of Past Service Cost Since end of service gratuity defined benefit is a statutory benefit, the recognition of past service cost will arise only if the Payment of Gratuity Act No.12 of 1983 is amended in future to increase the promised benefit on termination of employment.
58
92 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 3.3.3.2.4 Recognition of Gratuity Liability The liability recognised in the balance sheet is the present value of the gratuity obligation at the balance sheet date together with adjustment for any unrecognised actuarial gains or losses. Independent actuary using the projected unit credit method calculates the defined benefit obligation annually.
Actuarial gains or losses arising from experience adjustments and changes in actuarial assumptions in excess of 10% of the defined benefit obligation are charged or credited to income over the employees’ expected average remaining work life.
3.3.4 Provision for Liabilities A provision is recognised in the balance sheet when the Bank has a legal or constructive obligation as a result of a past event, that can be estimated reliably and it is probable that an outflow of economic benefits will be required to settle the obligation.
3.3.5 Commitments and Contingent Liabilities All discernible risks are accounted for in determining the amount of all known liabilities.
Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events or present obligations where the transfer of economic benefit is not probable or cannot be reliably measured. Contingent liabilities are not recognised in the Balance Sheet but are disclosed unless they are remote.
3.4 Revenue and Expense Recognition 3.4.1 Interest Income Interest receivable is recognised on an accrual basis except for loans and advances classified as non-performing.
When an advance is classified as non performing, based on criteria set out in Direction No. 3 of 2008 dated 8 May 2008 issued by the Central Bank of Sri Lanka on “Classification of Loans and Advances, Income Recognition and Provisioning” as explained in note 3.2.7.1, interest ceases to be accrued and is taken to income thereafter on cash basis.
The criteria for classification of loans and advances as non performing is explained in Note 3.2.7.2
3.4.2 Notional Tax Credit on Interest Income from Treasury Bills and Bonds Interest income from treasury bills and bonds is grossed by the addition of the tax credit imputed to 10% withholding tax on discount allowed at the time of issue. This notional tax credit is 1/9th of the net income. F i n a n
3.4.3 Discount or Premium on Purchase of Dated Debt Securities cial The premium or discount is amortised through the income statement over the period from the date of purchase to the date of maturity. R e p 3.4.4 Dividend Income ort s Interim dividend on shares is recognised as income in the period in which it is declared by the directors and final dividend on shares is recognised as income in the period in which it is approved by the shareholders of the investee company.
3.4.5 Discounts on Bills of Exchange Discount charges on bills of exchange discounted are taken to revenue on redemption of bills of exchange.
3.4.6 Default Interest Default charges for delayed redemption of bills of exchange are recognised as income on receipt basis.
3.4.7 Front-end Fee Income. This arises on loan origination and the income is recognised on completion of loan documentation.
3.4.8 Other Fee and Commission Income These are recognised as income in the period in which entitlement to the consideration arises.
3.4.9 Gains on Disposal of Dated Debt Securities The difference between net proceeds and the carrying amount of the debt securities disposed of is recognised as income.
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DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 93 DFCC Vardhana Bank 2009 Annual Report
Notes to the Financial Statements... Contd.
3.4.10 Gain or Loss on Sale of Equipment Recognised as income in the period in which the sale occurs and is classified as other income.
3.4.11 Sale and Repurchase Agreements Where treasury bills/bonds and other corporate debt securities are sold subject to a commitment to repurchase them at a predetermined price (Repos). The difference between sale and repurchase price is recognised as other income of the life of the agreement.
3.4.12 Marked to Market Gains/ Losses on Dealing Securities Gains or losses on dated dealing debt securities that arise by adjusting the carrying value of these securities to market value are recognised in the income statement.
3.4.13 Marked to Market Gains/ Losses on Forward Exchange Contracts Gains or losses on trading (open) forward exchange contracts that arise by adjusting the carrying value of the off balance sheet forward exchange contracts to market value on balance sheet date are recognised in the income statement.
3.4.14 Foreign Exchange Income Any exchange gain or loss arising from the settlement or translation of the Bank’s monetary assets and liabilities at rates different from those which were initially recorded are dealt in the income statement.
3.4.15 Interest and Other Expenses Interest and other expenses have been recognised in the period in which they are incurred.
3.4.16 Allowances for Credit Losses Credit losses comprise losses against loans, bills of exchange and overdrafts. The estimated losses attributable to these debts are based on a continuous review of all such debts identified as bad or doubtful.
The Bank makes both general and specific provisions.
(a) Specific Provision for Loan Losses Specific provisions are made for the estimated loss on doubtful loans, bills of exchange and overdrafts not covered by realisable value of the collateral.
Specific provisions on guarantees issued are made to recognise significant impairment of the debt service capacity of the customer giving rise to a constructive obligation prior to enforcement of guarantee.
The specific provision has two elements.
i) A minimum statutory provision as per the direction issued by the Central Bank of Sri Lanka. This is on a graduated scale based on the amount of outstanding principal net of realisable security value (net exposure at risk) as given below.
Categories of non-performing credit facilities Minimum specific provision requirement Substandard Credit cards 25% of net exposure at risk Other advances 20% of net exposure at risk Doubtful 50% of net exposure at risk Loss 100% of net exposure at risk
The provision made relates to all categories of loans and advances including pawning identified as substandard, doubtful and loss. Where necessary, specific provisions have been made over and above the minimum percentages stipulated above, on a case-by-case basis.
ii) An additional provision to recognise difficulties in realisation of collateral or significant impairment of debt service capacity of the borrower.
60
94 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document (b) General Provision As at 31 December 2009, a general provision of 1% of the outstanding balances of performing and overdue loans has been made as per the direction issued by the Central Bank of Sri Lanka on all licensed banks operating in Sri Lanka. This general provision was imposed in December 2006 initially at 0.1% increasing at the rate of of 0.1% per quarter up to a maximum of 1% on 31 March 2009.
3.5 Income Tax Expense Income tax expense for the year comprises current and deferred tax. Income tax is recognised in the Income Statement.
3.5.1 Current Tax Current tax is the expected tax payable on the profit for the year adjusted for taxation purposes in accordance with the provisions of the Inland Revenue Act No. 10 of 2006, as amended by subsequent legislation.
Current tax expense includes any adjustment to tax payable in respect of previous years.
3.5.2 Deferred Tax i. Deferred tax is recognised on temporary differences between the carrying amounts of the assets and liabilities in the balance sheet and the amount attributed to such assets and liabilities for tax purposes. Deferred tax liabilities are generally recognised for all taxable temporary differences and differed tax assets are recognised to the extent it is probable that future taxable profit will be available against which deductible temporary differences can be utilised. Deferred tax is calculated using the tax rates that have been enacted or substantially enacted at the balance sheet date and are expected to apply in the period in which the assets will be realised or liabilities settled. Deferred tax assets and liabilities are not discounted. ii. The net increase in the carrying amount of the deferred tax liability net of differed tax asset is recognised as deferred tax expense and conversely any net decrease is recognised as reversal to deferred tax expense in the income statement. iii. The financial statements of the Bank include the full recognition of deferred tax asset attributable to the gratuity provision of the Bank. iv. The carrying amount of the deferred tax asset is reviewed at each balance sheet date and tested against the absorption capacity of probable future taxable profit to utilise unused tax losses and adjustments made accordingly.
3.5.3 Social Responsibility Levy F i The current rate of this levy with effect from 01 April 2008 is 1.5% of the income tax and this is included in the current tax expense. Previously n a n this was 1%. cial R e
3.5.4 Value Added Tax on Financial Services p ort The value base for value added tax on financial services for the Bank is the adjusted accounting profit before tax and emoluments of employees. s The adjustment to the accounting profit before tax is for economic depreciation computed on prescribed rates instead of the rates adopted in the financial statements.
3.6 Earnings per Share The Bank presents basic earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Bank by the number of ordinary shares outstanding during the period.
3.7 Cash Flow The cash flow has been prepared by using the ‘Direct Method’. Cash and cash equivalents include cash balances and treasury bills of 3 months maturity at the time of issue.
3.8 Business Segment Reporting A business segment is a distinguishable component of the Bank that is engaged in providing an individual product or service or a group of related products or services that is subject to risks and returns that are different from those of other business segments.
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DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 95 DFCC Vardhana Bank 2009 Annual Report
Notes to the Financial Statements... Contd.
4. New Accounting Standards issued but not effective as at Balance Sheet Date 4.1 Title of the Standards i. Sri Lanka Accounting Standard 44 – Financial Instruments: Presentation (SLAS 44)
ii. Sri Lanka Accounting Standard 45 – Financial Instruments: Recognition and Measurement (SLAS 45)
iii. Sri Lanka Accounting Standard 39 – Share Based Payment (SLAS 39) - Not relevant to the Bank since there are no such tr ansactions.
4.2 Effective Date for Mandatory Application
Financial year to 31 December 2011.
4.3 Nature of Significant Impending Changes
i. These Standards deal with the presentation, recognition and measurement of financial instruments defined as any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
ii. Loans and customer advances and held to maturity investments will be carried at amortised cost reduced by impairment losses.
iii. Recognition of impairment losses on loans and customer advances will be based on the present value of future recoveries individually or collectively assessed, compared to the amortised cost. Currently the impairment loss does not take into consideration time value of future cash flows discounted at the effective rates of the interest applicable to loans and customer advances.
iv. Most of the financial liabilities will be carried at amortised cost.
v. All other financial assets and financial liabilities other than those carried at amortised cost will be carried in the balance sheet at their fair value.
vi. All derivatives will be recognised as on-balance sheet asset or liability and carried at the fair value. Currently they are recognised off-balance sheet.
vii. Application of hedge accounting, which is optional, is permitted subject to stringent requirements on documentation and test for effectiveness of the hedges.
viii. Fair value is the market price where an active market exists or is computed using prescribed valuation techniques.
4.4 Financial Impact on the Application of these Standards in the Financial Year to 31 December 2010. The impact is not currently known or reasonably estimated.
62
96 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document For the year ended 31 Decembe r 2009 2008 Rs ‘000 Rs ‘000
5. Income Gross income 4,447,480 3,498,273
Interest income ( Note 6 ) 4,235,229 3,212,690 Fee and commission income 197,782 229,112 Net foreign exchange (loss) /profit (89,905) 16,082 Other income ( Note 8 ) 104,374 40,389 4,447,480 3,498,273
Net Foreign Exchange Profit The Bank engages in funding swap between US dollar and Sri Lanka rupees to benefit from interest rate arbitrage. The foreign exchange income is net of swap costs and the apparent decline in the foreign exchange income in the current period is compensated by the interest income derived in Sri Lanka rupees reported under interest income.
2009 2008 Rs ‘000 Rs ‘000
6. Interest Income Loans and advances 2,654,292 2,643,308 Treasury bills, bonds and placements with other banks 1,580,937 569,382 4,235,229 3,212,690
Section 137 of the Inland Revenue Act No. 10 of 2006 provides that a company which derives interest income from the secondary market transactions in government securities be entitled to a notional tax credit, provided such interest income form part of the statutory income of the Bank for that year of assessment.
Treasury bill interest income includes Rs 151.5 million, which is the notional tax credit of 10% imputed for the withholding tax deducted / paid at source in respect of the year ended 31 December 2009. The amount relating to the previous financial year was Rs 47.5 million. F i n a n
2009 2008 cial
Rs ‘000 Rs ‘000 R e p ort
7. Interest Expense s Deposits 2,285,684 1,880,059 Bank borrowing 198,245 151,057 2,483,929 2,031,116
8. Other Income Dividend income from investment securities - unquoted 322 104 Gain / (loss) on treasury bills and bonds 1,133 (1,591) Net gain on repurchase transactions 100,665 37,256 Gain from marked to market on treasury bills and bonds 285 2,066 Loss on disposal of equipment (73) (196) Other operating income 2,042 2,750 104,374 40,389
Net gain on repurchase transactions includes Rs 10 million, which is the notional tax credit of 10% imputed for the withholding tax deducted / paid at source in respect of the year ended 31 December 2009. The amount relating to the previous financial year was Rs 3.7 million.
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DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 97 DFCC Vardhana Bank 2009 Annual Report
Notes to the Financial Statements... Contd.
2009 2008 Rs ‘000 Rs ‘000
9 Provision for Staff Retirement Benefits 9.1 Amount Recognised as Expense 9.1.1 Unfunded end of Service Gratuity Liabili ty Current service cost 3,888 2,412 Interest on obligation 1,708 1,186 Less: Recognition of transition asset - 1,163 Total defined benefit plan 5,596 2,435
9.1.2 De ned Contribution Pl an Employer’s contribution to Employees’ Provident Fund 22,264 18,669 Employer’s contribution to Employees’ Trust Fund 4,453 3,732 Total defined contribution plan 26,717 22,401
Total expense recognised in the Income Statement 32,313 24,836
9.2 Actuarial Valuation Actuarial valuation was carried out by Mr. Piyal S Gunathilake, Fellow of the Society of Actuaries USA of Piyal S Gunathilake & Associates, on 31 December 2009.
9.3 Actuarial Valuation Method Projected unit credit method was used to allocate the actuarial present value of the projected benefits earned by employees to date of valuation.
9.4 Principal Actuarial Assumptions Discount rate as at 31 December 2009, per annum 11.50% Future salary increases per annum 11.00%
Mortality GA 1983 Mortality table Retirement age 55 years Normal form of payment lump sum
Turnover Rate Age % 20 10 30 10 40 3 50/55 1
The discount rate is the yield rate on 31 December 2009 with a term equalling the estimated period for which the benefit payments will continue. This period is approximately 11 years for end of service gratuity.
64
98 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 2,009 2,008 Rs ‘000 Rs ‘000
10. Provision for Loan Losses and Write-off 10.1 Specific Provision Provision for the year - Loans and advances 413,251 356,359 - Bills of exchange 9,632 11,021 Loans written off 2,974 3,070 425,857 370,450 Less : Recoveries during the year - Loans and advances 189,831 123,420 - Bills of exchange 9,111 1,785 226,915 245,245
10.2 General Provision Provision for the year - Loans and advances 6,367 41,595 - Bills of exchange 289 373 233,571 287,213
11. Operating Expenses Operating expenses include the following: Employer’s contribution to Employees’ Provident Fund 22,264 18,669 Employer’s contribution to Employees’ Trust Fund 4,453 3,732 Gratuity provision 5,596 2,435 Directors’ remuneration 21,276 13,233 Auditors’ remuneration Fees and expenses for audit related services 993 821 Depreciation - Property, plant and equipment 78,430 62,318 Amortisation - Intangible assets 46,540 39,161 Expenses on litigation 265 -
12. Income Tax Expense F i
12.1 Current tax of the Bank has been provided at 35% on the taxable income. Tax charge is based on taxable profits which differs from n a
profit for financial reporting purposes. These differences are explained in the following reconciliation statement. n cial cial R e
For the year ende d 2009 2008 p Rs ‘000 Rs ‘000 ort s
Profit before tax as per income statement 597,969 337,689 Disallowed expenses and provisions 477,445 422,618 Loss on disposal of fixed assets 73 196 Less: Capital allowances on property, plant and equipment 158,980 137,735 Dividend income 322 104 Net income from investment in Sri Lanka Development Bonds 8,180 10,754 Gratuity paid during the year 1,687 440 Total statutory income 906,318 611,470 Less: Offset of brought forward tax losses (limited to 35% of total statutory income) 90,166 214,015 Assessable income / Taxable income 816,152 397,455
Income tax expense reported in the income statement at the effective tax rate 285,654 139,109
Effective tax rate 48% 41%
Income is taxed at 35%
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DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 99 DFCC Vardhana Bank 2009 Annual Report
Notes to the Financial Statements... Contd.
2009 2008 Rs ‘000 Rs ‘000
12.2 Tax Losses Tax loss on 1 January 91,161 304,977 Adjustment in respect of final tax return (995) 199 Less: tax loss claimed against taxable profits 90,166 214,015 Unutilised tax loss on 31 December - 91,161
12.3 Income Tax Expense 12.3.1 Current Tax Tax for the year 285,654 139,109 Under / (Over) provision in respect of previous year 647 (296) 286,301 138,813
12.3.2 Deferred Tax Expense Charge from Deferred taxation 43,335 87,712 43,335 87,712
Income Tax Expense 329,636 226,525
13. Earnings Per Share Earnings per share has been calculated by dividing the profit after income tax for the year by 184,188,822 the number of ordinary shares outstanding during the year.
2009 2008
Profit for the year Rs 268,333,476 111,163,663 Number of shares 184,188,822 184,188,822 Basic earnings per share Rs 1.46 0.60
As at 31 Decemb er 2009 2,008 Rs ‘000 Rs ‘000
14. Cash and Short Term Funds Cash in hand 694,480 616,412 Due from banks 12,301 1,412,667 Placements / balances with foreign banks 128,923 148,294 835,704 2,177,373
15. Balance with the Central Bank of Sri Lanka As required by the provisions of Section 93 of the Monetary Law Act, cash balance is maintained with the Central Bank of Sri Lanka as explained in Note No. 3.2.2. The minimum cash reserve requirement on rupee deposit liabilities was reduced to 7.75% on 28th November 2008 and further reduced to 7% from 27th February 2009 which was in effect as at 31 December 2009. There are no reserve requirement for deposit liabilities of the Foreign Currency Banking Unit and foreign currency deposit liabilities in the Domestic Banking Unit.
66
100 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document As at 31 Decemb er 2009 2,008 Rs ‘000 Rs ‘000
16. Treasury Bills and Other Securities Eligible for Rediscounting with Central Bank Treasury Bills and Bonds held for trading Repurchase transactions - 1,122,442 Others 100,075 1,361,470 100,075 2,483,912 Treasury Bills and Bonds held to maturity Repurchase transactions 3,281,083 116,265 Others 10,996,076 3,163,995 14,277,159 3,280,260
14,377,234 5,764,172
17. Bills of Exchange 17.1 Balance on 31 December Export bills 278,270 256,330 Import bills 65,477 86,555 343,747 342,885 Less: Provision for bills of exchange - specific (Note -17.2) 14,805 13,947 Provision for bills of exchange - general (Note -17.3) 3,056 2,767 325,886 326,171
17.2 Movement in Bills of Exchange Provision - Specific Balance on 1 January 13,947 4,360 Add: Provision for the year (Note 10.1) 9,632 11,021 Exchange rate difference on foreign currency provision 337 351 Less: Recoveries during the year (Note 10.1) 9,111 1,785 Balance on 31 December 14,805 13,947
17.3 Movement in Bills of Exchange Provision - General F i Balance on 1 January 2,767 2,394 n a n
Add: Provision for the year (Note 10.2) 289 373 cial Balance on 31 December 3,056 2,767 R e p 18. Loans and Advances ort s 18.1 Balance on 31 December Overdrafts 6,613,716 8,377,716 Term loans 3,183,049 2,423,783 Trade loans 4,434,761 4,059,043 Gold pledge loans 196,204 112,580 Staff loans 71,771 56,965 Credit card advances 1,162 - Others 43,740 46,950 14,544,403 15,077,037 Less:- Loan loss provision - specific (Note 18.2) 609,745 390,517 Loan loss provision - general (Note 18.3) 100,479 94,123 Interest in suspense related to overdrafts (Note 18.4) 328,428 166,397 13,505,751 14,426,000
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DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 101 DFCC Vardhana Bank 2009 Annual Report
Notes to the Financial Statements... Contd.
As at 31 Decemb er 2009 2,008 Rs ‘000 Rs ‘000
18.2 Movement in Loan Loss Provision - Specific Balance on 1 January 390,517 158,391 Add: Provision for the year (Note 10.1) 413,251 356,359 Transfer from interest in suspense 1,403 563 Exchange rate difference on foreign currency provision 665 1,089 Less: Recoveries during the year (Note 10.1) 189,831 123,420 Write off of loans 6,260 2,465 Balance on 31 December 609,745 390,517
18.3 Movement in Loan Loss Provision - General Balance on 1 January 94,123 52,528 Add: Provision for the year (Note 10.2) 6,367 41,595 Less: Exchange rate difference on foreign currency provision 11 - Balance on 31 December 100,479 94,123
18.4 Movement in Interest in Suspense for Overdrafts Balance on 1 January 166,397 74,254 Add: Interest suspended during the year 375,618 355,067 Exchange rate difference on foreign currency interest in suspense 19 70 Less: Recoveries during the year 208,034 252,115 Write off of interests 5,572 10,879 Balance on 31 December 328,428 166,397
18.5 Non-Performing Loans and Advances This relates to the portfolio on which the interest income is recognised on cash basis.
As at 31 Decemb er 2009 Percentage 2008 Percentage of total loans of total loans Rs ‘000 and advances Rs ‘000 and advances
Non-performing loans and advances (including bills) 1,914,520 12.86 1,366,926 6.92 Less: Interest in suspense included in overdrafts 328,428 166,397 Net non-performing loans and advances (including bills) 1,586,092 10.89 1,200,529 6.31 Less: Loan loss provision (including bills) (Note 18.5.1) 619,114 400,816 Net exposure 966,978 6.94 799,713 5.21
Net of tangible securities 768,772 846,608
Percentage relates to the ratios of non performing credit exposure to the total credit exposure computed on gross and net basis.
68
102 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document As at 31 Decemb er 2009 2,008 Rs ‘000 Rs ‘000
18.5.1 Allowances for Credit Losse s Loans and advances (Note 18.2) 609,745 390,517 Bills of Exchange (Note 17.2) 14,805 13,947 624,550 404,464 Less: Provision relating to facilities currently performing Loans and advances 5,436 3,648 5,436 3,648 Provision related to non-performing facilities 619,114 400,816
18.5.2 The realisable value of tangible securities is computed in accordance with the haircut rule prescribed by the Central Bank of Sri Lanka. This requires the application of prescribed discounts given below, to the forced sale value based on age of arrears of the loans, bills of exchange and other credit facilities for the purpose of determining the net exposure at risk.
The progressive discounts shall be as follows Item % of FSV of immovable property that can be considered as the value of security Freehold property Leasehold property At the first time of provisioning 75 60 Period less than loss section Less than 12 months 75 60 More than 12 but less than 24 months 60 50 More than 24 but less than 36 months 50 40 More than 36 but less than 48 months 40 30 More than 48 months Property should be reviewed on a regular basis and discounted further Nil at the discretion of the Bank’s management F i n a
As at 31 Decemb er 2009 2008 n cial cial Rs ‘000 Rs ‘000 R e p 18.6 Concentration of Credit Risk ort Industry wise Distribution of Loans and Advances s Food, beverages and tobacco 192,986 189,008 Rubber and leather products 374,569 467,234 Metals, chemicals and engineering 329,251 302,458 Services 1,237,943 1,600,283 Exports 3,073,820 1,995,007 Imports 1,686,679 1,585,568 Trading 2,334,693 2,863,774 Financial 168,262 360,543 Consumption 924,960 839,688 Construction 530,794 190,041 Agricultural 332,442 742,808 Industrial 1,198,195 1,238,897 Tourism 882,154 1,030,656 Housing & property development 747,818 937,156 Others 529,837 733,916 14,544,403 15,077,037
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DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 103 DFCC Vardhana Bank 2009 Annual Report
Notes to the Financial Statements... Contd.
As at 31 Decemb er 2009 2008 Rs ‘000 Rs ‘000
19. Interest Receivables Loans (Note 19.1) 155,521 178,457 Bills of exchange (Note 19.2) 580 1,112 156,101 179,569
19.1 Loans Interest on loans 498,656 355,347 Less: Interest in suspense for loans (Note 19.1.1) 343,135 176,890 Balance on 31 December 155,521 178,457
19.1.1 Movement in Interest in Suspense for Loans Balance on 1 January 176,890 63,457 Add: Interest suspended during the year 408,420 309,670 Exchange rate difference on foreign currency interest in suspense 164 (29) Less: Recoveries during the year 237,392 194,418 Transfer to loan provision 1,403 563 Interest waivers 3,544 1,227 Balance on 31 December 343,135 176,890
19.2 Bills of Exchange Interest on bills of exchange 1,841 5,015 Less: Interest in suspense for bills of exchange (Note 19.2.1) 1,261 3,903 Balance on 31 December 580 1,112
19.2.1 Movement in Interest in Suspense for Bills of Exchange Balance on 1 January 3,903 5,953 Add: Interest suspended during the year 1,261 5,677 Exchange rate difference on foreign currency interest in suspense - 1 Less: Recoveries during the year 3,903 7,728 Balance on 31 December 1,261 3,903
20. Investment Securities Unquoted (Note 20.1) 2,030 2,030
As at 31 Decemb er 2009 2008 Number of Cost Number of Cost ordinary ordinary shares Rs ‘000 shares Rs ‘000
20.1 Unquoted Credit Information Bureau of Sri Lanka 300 30 300 30 (Shares of Rs 100/- each) Lankaclear (Pvt) Ltd 100,000 1,000 100,000 1,000 (Shares of Rs 10/- each) Lanka Financial Services Bureau Limited 100,000 1,000 100,000 1,000 (Shares of Rs 10/- each) 2,030 2,030
Directors’ valuation 2,030 2,030
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104 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document Furniture, Computer Office fixtures Motor 2009 2008 equipment equipment & fittings Vehicles Total Total Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000
21. Property, Plant and Equipment Cost on 1 January 195,637 87,403 213,335 17,267 513,642 380,856 Adjustments during the year* 2,984 63 145 - 3,192 (796) Additions for the year 27,491 14,770 46,658 - 88,919 133,942 Less: disposals during the year 1,252 200 - - 1,452 360 Cost on 31 December 224,860 102,036 260,138 17,267 604,301 513,642
Accumulated depreciation on 1 January 98,451 31,777 54,746 7,691 192,665 130,654 Adjustments during the year* 2,672 - - - 2,672 (187) Charge for the year 34,520 17,473 22,984 3,453 78,430 62,318 Less: accumulated depreciation on disposal 480 52 - - 532 120 Accumulated depreciation on 31 December 135,163 49,198 77,730 11,144 273,235 192,665 Net book value on 31 December 2009 89,697 52,838 182,408 6,123 331,066 Net book value on 31 December 2008 97,186 55,626 158,589 9,576 320,977
* Classification change and adjustments to asset additions of previous years.
As at 31 Decemb er 2009 2008 Rs ‘000 Rs ‘000
22. Intangible Assets Cost on 1 January 389,582 346,345 Adjustments during the year* (2,988) 796 Additions for the year 33,830 42,441 Cost on 31 December 420,424 389,582
Accumulated depreciation on 1 January 269,516 230,168 F i n
Adjustments during the year* (2,671) 187 a n
Amortisation for the year 46,540 39,161 cial
Accumulated amortisation on 31 December 313,385 269,516 R e p ort
Net Book Value on 31 December 107,039 120,066 s
* Classification change and adjustments to asset additions of previous years.
23. Other Assets Refundable deposits and prepayments 94,073 67,515 Stocks of stationery 6,033 3,556 Clearing account balances 448,133 375,538 Other receivables 344,458 101,819 892,697 548,428
24. Deposits from Customers Demand deposits 1,011,529 712,384 Savings deposits 4,599,560 2,361,526 Time deposits 16,277,888 15,733,457 Certificates of deposits 62,261 84,793 Margin deposits 95,708 79,939 22,046,946 18,972,099
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DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 105 DFCC Vardhana Bank 2009 Annual Report
Notes to the Financial Statements... Contd.
As at 31 Decemb er 2009 2008 Rs ‘000 Rs ‘000
24.1 Analysis of Deposits Deposits from banks 3,098,394 1,884,718 Deposits from finance companies 177,546 54,907 Deposits from other customers 18,771,006 17,032,474 22,046,946 18,972,099
25. Borrowings Balances with foreign banks 73,184 84,669 Balances with local banks 1,987,200 750,000 Borrowing from DFCC Bank 122,000 122,000 Borrowing under repurchase agreements 2,877,720 1,233,213 5,060,104 2,189,882
Amount falling due within one year 5,060,104 2,067,882 Amount falling due more than one year - 122,000 5,060,104 2,189,882
26. Balances Payable to Parent Company DFCC Bank 35,565 19,050
27. Movement in Provision for Staff Retirement Benefits 27.1 Defined Benefits Unfunded End of Service Gratuity Net accrued liability on 1 January 11,064 Add : Gratuity benefit expense for the financial year 5,596 Less: Gratuity due and paid during the financial year 1,192 Gratuity due and payable for the financial year 495 Net accrued liability on 31 December 14,973
27.2 Reconciliation of Actuarial Liability with Accounting Liability Recognised in the Balance Sheet Unfunded End of Service Gratuity Present value of defined benefit gratuity obligations on 31 December 13,794 Add: Unrecognised actuarial gain during the year (Note: 27.4) 1,179 Accounting net liability recognised in 31 December 14,973
27.3 Movement in Present Value of Defined Benefits Obligations Total present value of defined benefit obligation on 1 January 2009 10,960 Add: Gratuity benefit expense recognised in the year (Note: 9.1.1) 5,596 Less: Gratuity payments during the year 1,687 Less: Actuarial experience gain on 31 December 2009 1,075 Total present value of defined benefit obligation on 31 December 2008 13,794
27.4 Movement in Unrecognised Actuarial Gain Actuarial gain on 1 January 2009 104 Less: Recognised during the year - Unrecognised due to 10% corridor 104 Actuarial gain on 31 December 2009 1,075 Total unrecognised gain on 31 December 2009 1,179
Bank will recognise only the portion of the cumulative actuarial gain that exceeds 10% corridor by amortising such excess over the remaining working life of the employees participating in the defined benefit plans. The 10% corridor is 10% of the present value of defined benefit obligation on 1 January 2009 which is Rs1,095,993. Since unrecognised actuarial gains on 1 January 2009 was only Rs103,753 and well within this corridor, it is not recognised during this financial year.
72
106 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document As at 31 Decemb er 2009 2008 Rs ‘000 Rs ‘000
28. Deferred Tax Liability (net) Deferred tax asset (Note 28.1) 5,241 35,779 Less: Deferred tax liability (Note 28.2) 53,465 40,668 48,224 4,889
2009 2008 Temporary Temporary difference Tax effect difference Tax effect Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000
28.1 Deferred Tax Asset Balance at the beginning - on tax loss brought forward 91,161 31,906 304,977 106,742 - on differed tax asset on gratuity 11,064 3,872 9,069 3,174 Adjustment in respect of final tax return for previous year (995) (348) 199 70 Add : Increase in gratuity provision 3,909 1,368 1,995 698 Less : Reversal during the year 90,166 31,558 214,015 74,905 14,973 5,241 102,225 35,779
28.2 Deferred Tax Liability Balance at the beginning 116,192 40,668 77,409 27,094 Originating during the year 36,559 12,797 38,783 13,574 152,751 53,465 116,192 40,668
As at 31 Decemb er 2009 2008 Rs ‘000 Rs ‘000
29. Other Liabilities F i Interest payable 497,910 418,174 n a n
Account payable 212,428 90,745 cial Gratuity payable 495 - R e
Cheques pending realisation 449,825 380,791 p ort
Others 34,131 43,781 s 1,194,789 933,491
30. Stated Capital Issued and Fully Paid Share Capital Balance on 1 January 2,077,387 2,077,387 184,188,822 ordinary shares (184,188,822 shares in 2008) Balance on 31 December 2,077,387 2,077,387
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DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 107 DFCC Vardhana Bank 2009 Annual Report
Notes to the Financial Statements... Contd.
31. Contingent Liabilities and Commitments In the normal course of business, the Bank makes various commitments and incurs certain contingent liabilities with legal recourse to its customers.
No material losses are anticipated as a result of these transactions.
As at 31 Decemb er 2009 2008 Rs ‘000 Rs ‘000
31.1 Contingent Liabilities Acceptances 821,988 1,056,664 Guarantees 1,633,484 1,900,562 Bid bonds 57,706 35,644 Documentary letters of credit 861,222 815,049 Forward contracts 4,304,006 1,910,051 Bills for collection 631,482 661,923 8,309,888 6,379,893
31.2 Commitments in Ordinary Course of Business Commitments for unutilised credit facilities 1,209,755 903,791 Capital expenditure approved by the board of directors Contracted 17,309 45,922 Not contracted 11,272 64,975 1,238,336 1,014,688
Contingent Liabilities and Commitments 9,548,224 7,394,581
31.3 Litigation Against the Bank An ex-employee of the Bank has filed a petition at the Labour Tribunal claiming re-instatement or damages in lue of re-instatement.
32. Maturity Profile of Assets and Liabilities 32.1 Definition of Maturity 32.1.1 Time interval between balance sheet date and contractual maturity date, as defined in Sri Lanka Accounting Standard 23, “Revenue Recognition and Disclosures in the Financial Statements of Banks”, in respect of assets and liabilities.
32.1.2 Time interval between balance sheet date and expected date of realisation of assets and repayment of liabilities as defined by Central Bank of Sri Lanka for assets and liabilities with no contractual maturity dates.
74
108 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document Up to 3 3 to 12 1 to 3 3 to 5 Total months months years years > 5 years Rs 000 Rs 000 % Rs 000 % Rs 000 % Rs 000 % Rs 000 %
32.2 Assets with Contractual Maturity (Interest bearing assets) Treasury bills and other securities eligible for rediscounting with Central Bank 14,377,234 4,678,191 33 7,167,279 50 2,431,689 17 49,656 - 50,419 - Bills of exchange 325,886 310,454 95 6,459 2 8,973 3 - - - - Loans and advances 13,505,751 6,762,510 50 5,098,649 38 861,011 6 560,097 4 223,484 2 28,208,871 11,751,155 41 12,272,387 44 3,301,673 12 609,753 2 273,903 1
Other Assets (Non-interest bearing assets) Cash and short term funds 835,704 835,704 100 ------Balances with Central Bank of Sri Lanka 802,076 802,076 100 ------Interest receivable 156,101 123,251 79 17,550 11 10,554 7 3,130 2 1,616 1 Investment securities 2,030 ------2,030 100 Other assets 892,697 464,523 53 125,627 14 291,900 33 10,647 - - - Property plant and equipment 331,066 ------331,066 100 Intangible assets 107,039 ------107,039 100 3,126,713 2,225,554 71 143,177 5 302,454 10 13,777 - 441,751 14 Total Assets 31,335,584 13,976,709 45 12,415,564 40 3,604,127 12 623,530 2 715,654 1
Liabilities with Contractual Maturity (Interest bearing liabilities) Deposits from customers 21,035,417 12,109,204 58 8,626,456 41 235,190 1 63,567 - 1,000 - Bank borrowing 2,109,200 2,109,200 100 ------F i n
Borrowing under repurchase a n
agreements 2,877,720 2,728,088 95 149,632 5 ------cial
26,022,337 16,946,492 65 8,776,088 34 235,190 1 63,567 - 1,000 - R e p ort
Other Liabilities s (Non-interest bearing liabilities) Deposits from customers - demand 1,011,529 758,647 75 252,882 25 ------Balances with foreign banks 73,184 73,184 100 ------Group balances payable 35,565 35,565 100 ------Tax payable 57,132 28,566 50 28,566 50 ------Other liabilities 1,209,762 953,319 79 216,726 19 9,778 - 1,751 - 28,188 2 Deferred tax liability 48,224 24,112 50 24,112 50 ------2,435,396 1,873,393 78 522,286 21 9,778 - 1,751 - 28,188 1 Total Liabilities 28,457,733 18,819,885 66 9,298,374 33 244,968 1 65,318 - 29,188 -
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DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 109 DFCC Vardhana Bank 2009 Annual Report
Notes to the Financial Statements... Contd.
33. Related Party Transactions The Bank’s related parties include Key Management Personnel, close family members of Key Management Personnel (KMP) and entities which are controlled, jointly controlled or significantly influenced for which significant voting power is held by Key Management Personnel or their close family members.
Where appropriate additional information on Related Party transactions are disclosed in compliance with Rule No 3 (8) (ii) (e) of the Direction No 11 of 2007 issued by the Central Bank of Sri Lanka on Corporate Governance.
33.1 Transactions with Parent Company 33.1.1 Balance Sheet Average Balance As at 31 Decemb er 2009 2008 2009 2008 Rs’000 Rs’000 Rs’000 Rs’000
Liabilities Deposits 2,443,251 1,883,215 2,163,233 1,651,498 Borrowings - subordinated debt 122,000 122,000 122,000 122,000 Borrowing under repurchase agreements collateralised by treasury bills 25,000 230,000 127,500 233,500 Interest payable 29,277 5,004 17,141 6,710 2,619,528 2,240,219 2,429,874 2,013,708
Unutilised credit facilities 878,000 878,000 878,000 878,000
The Parent company carries out certain functions of the Bank and vice versa, as set out in the the collaborative agreement between the Bank and the Parent company. Following fees or recovery of costs were accounted for in the books of the Bank during the year.
33.1.2 Income statement For the year ended 31 Decembe r 2009 2008 Rs’000 Rs’000
Other income 1,404 7,108
Interest expenses 108,130 90,797 Other expenses 174,936 154,386
Other expenses include amounts reimbursed to parent company in respect of remuneration of seconded employees who are also KMP’s of the Bank.
76
110 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 33.2 Transactions with Subsidiary Companies / Joint venture companies of the Parent Company 33.2.1 Balance Sheet Average Balance As at 31 Decemb er 2009 2008 2009 2008 Rs’000 Rs’000 Rs’000 Rs’000
Liabilities Deposits 266,664 99,151 182,908 119,173 Borrowing under repurchase agreements collateralised by treasury bills 244,118 133,521 188,820 92,511 Interest payable 8,091 1,469 4780 735 518,873 234,141 376,508 212,419
33.2.2 Income Statement For the year ended 31 Decembe r 2009 2008 Rs’000 Rs’000
Interest expenses 141,462 26,649 Other expenses 37,760 26,393
33.3 Transaction with entities in which Directors of the Bank have significant influence without substantial share holding 33.3.1 Balance Sheet Average Balance As at 31 Decemb er 2009 2008 2009 2008 Rs’000 Rs’000 Rs’000 Rs’000
Liabilities Deposits 10,950 1,619 6,285 1,059 Interest payable 172 - 86 - 11,122 1,619 6,371 1,059 F i n a n
33.3.2 Income Statement cial For the year ended 31 Decembe r 2009 2008 R e
Rs’000 Rs’000 p ort s Interest expenses 568 1290 Other expenses 92 104
77
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 111 DFCC Vardhana Bank 2009 Annual Report
Notes to the Financial Statements... Contd.
33.4 Transactions with the Key Management Personnel (KMP) of the Bank 33.4.1 Key Management Personnel According to Sri Lanka Accounting Standard 30 (revised 2005) - “Related Party Disclosure’, KMP are those having authority and responsibility for planning, directing and controlling the activities of the entity. Accordingly the KMP of the Bank are;
(a) The Board of Directors of the Bank, Chief Executive Officer, Chief Operating Officer, Head of Credit, Head of Customer Relations, Head of Credit Risk and Quality Control and Head of Corporate Credit, of the Bank and,
(b) Key Management Personnel of the Parent company.
33.4.2 Compensation of Directors and Other Key Management Personnel
For the year ended 31 Decembe r 2009 2008 Rs’000 Rs’000
Number of persons 28 25 Short term employment benefits 34,446 25,637 Post employment benefits 3,051 2,759
Post employment benefits are the expenses recognised in the income statement to provide for retirement benefits (end of service gratuity payable to employees ) defined contribution to Employees Provident Fund / Mercantile Service Provident Fund Society and Employees Trust Fund by the employer.
33.4.3 Transactions with Key Management Personnel, and their Close Family Members 33.4.3.1 Balance Sheet
Average Balance As at 31 Decemb er 2009 2008 2009 2008 Rs’000 Rs’000 Rs’000 Rs’000
Assets Loans and advances 3,718 1,526 2,622 866 3,718 1,526 2,622 866
Liabilities Deposits 86,210 35,024 60,617 26,138 Borrowing under repurchase agreements 1,325 8,029 4,677 10,032 Interest payable 1,710 417 1,064 394 89,245 43,470 66,358 36,564
33.4.3.2 Income Statement For the year ended 31 Decembe r 2009 2008 Rs’000 Rs’000
Interest income 251 229
Interest expenses 8,048 3,968
78
112 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 33.4.3.3 Accommodation Granted to Directors of the Bank (Disclosure under section 47 (11A) of the Banking (Amendment) Act No.33 of 1995.)
Name of the Director Limit Type of Facility Outstanding Security Rs’000 Rs’000
Lakshamn Silva 1,500 Term Loan 695* Cash Deposits Elgee Perera 500 Credit Card 55* - 750** * Settled in full in February 2010 and January 2010 respectively. ** The above total is included under loans and advances to Key Management Personnel and their close family members in Note 33.4.3.
33.5 Pricing policy and Terms for Transactions with Related Parties Bank enters in to transactions with related parties in the ordinary course of business on terms similar to comparable transactions with an unrelated comparable counter party. The terms include pricing for loans, deposits and services, collateral obtained for loans where appropriate.
33.6 Net Accommodation Granted to Related Parties (Disclosure under Rule 3 (8) (ii) (e) of the Corporate Governance Direction of No. 11 of 2007 issued by the Central Bank of Sri Lanka.)
As at 31 Decemb er 2009 Rs’000
Net accommodation Directors 55 Key Management Personnel 82 137
Total net accommodation 137
Regulatory capital 2,898,747 F i n
Total net accommodation as a percentage of the Bank’s regulatory capital was insignificant. a n cial cial
The definition of Related Parties for the purpose of this disclosure is based in Rule 7 (1) of Corporate Governance Direction No. 11 of 2007 issued R e p
by the Central Bank of Sri Lanka. This definition is slightly different from the definition of Related Parties under the Sri Lanka Accounting Standard ort
30 (revised 2005) on Related Party Disclosures. s
34. Events after the Balance Sheet Date 34.1 Proposed Dividend Directors have recommended the payment of a final dividend of 30 cents per share for the year ended 31 December 2009, which requires the approval of the shareholders at the Annual General Meeting to be held on the 31st May 2010. The Board of Directors confirm that the Bank has satisfied the solvency test in accordance with section 57 of the Companies Act No 7 of 2007 and have obtained certification from the auditors. The proposed final dividend exceeds the minimum distribution mandated but the Inland Revenue Act No 10 of 2006 and therefore the 15% deemed dividend tax, will not be imposed on the Bank.
No other circumstances have arisen which would require disclosure or adjustment to the accounts.
35. Comparative Figures Where items are regrouped, comparative information is also adjusted.
36. Directors’ Responsibility Statement The Board of Directors of the Bank is responsible for the preparation and presentation of these Financial Statements. Please refer to page 46 for the statement of Directors’ Responsibility for financial reporting.
79
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 113 114 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document ANNEX C: DFCC VARDHANA BANK LIMITED, AUDITORS REPORT TO THE BOARD OF DIRECTORS AND AUDITED FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDING 31 DECEMBER 2008
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 115 Statement of Directors’ Responsibility
The Directors are responsible, under Section 148 (1) of the Companies Act No 07 of 2007, to ensure that proper accounting records are kept to disclose, with reasonable accuracy, the financial position and enable preparation of the financial statements. Accordingly, the Directors have caused the Bank to maintain proper accounting records which meet the statutory and financial reporting requirements.
The Directors are also responsible, under Sections 150 (1) and 151 (1) of the Companies Act, to prepare the Financial Statements for each year giving a true and fair view of the state of affairs of the company as at end of the year and of the profit and loss for the financial year.
They are also responsible to prepare and present the Financial Statements in accordance with the Sri Lanka Accounting Standards and provide the information required by the Companies Act No 07 of 2007 and the Banking Act No 30 of 1988.
The Directors consider that they have adopted appropriate accounting policies based on reasonable and prudent judgements and applied them consistently.
The Directors acknowledge their responsibility for the Bank’s system of internal controls which is designed to provide assurance on maintenance of proper accounting records and the reliability of financial information generated and safeguarding of the assets of the Bank. However, any system of internal controls can provide reasonable and not absolute assurance that errors and irregularities are either prevented or detected within a reasonable period of time.
The Auditors, Messrs KPMG Ford, Rhodes, Thornton & Co., were given access to all accounting records, other documents and all business locations of the Bank to undertake the inspections they considered appropriate to form their opinion on the Financial Statements. They were also provided with all the information and explanations required for the purpose of the audit.
By Order of the Board
W. A. Mendis Company Secretary
March 25, 2009 Colombo
DFCC Vardhana Bank 36 Annual Report 2008
116 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document Audit Committee Report
During the year under review Mr. J A R E M Machado who is an Independent Non-Executive Director of the Board functioned as the Chairman of the Audit Committee. In addition, there was another Independent Non-Executive Director and a Non-Executive Director making the total of three committee members for the current year. The Head of Compliance and Internal Audit functions as the Secretary to the Audit Committee. The Managing Director/Chief Executive Officer, Director/Chief Operating Officer and Head of Compliance and Internal Audit attend the Audit Committee Meetings by invitation.
The Board Audit Committee held six meetings during the year.
At the inception of 2009 Mr L N de S Wijeyeratne who is an Independent Non-Executive Director of the Board was appointed as the Chairman of the Audit Committee making the number of members to four.
The Board of Directors have now appointed all the Board Committees as required by the Banking Act Directions No.11 of 27 December 2007 on Corporate Governance and is compliant as regards to its compositions.
The voluntary services rendered by Mr. T K Bandaranayake as a Consultant to the Audit Committee has added considerable value to its functioning for which we are very thankful.
Audit Committee function • The Committee examined the quarterly and annual financial statements of the Bank and its compliance with all statutory requirements and Sri Lanka Accounting Standards. Where relevant, the External Auditors and the Head of Finance were present during the examination of the above financial statements.
• The External Auditors were present on three occasions during the year where the financial statements for 2007 were discussed in detail as well as the audit plan for 2008. The Audit Committee members also brought to the attention of the External Auditors their concerns which were to be addressed during the audit for the year 2008.
• The Audit Committee engaged the services of a firm of external consultants on the IT audit, whose members had considerable IT audit experience in Banks, to carry out an audit of a selected area of the core banking system. We intend to expand the IT audit to cover other areas of the core banking system in the coming year.
• During the year, with the expansion in the branch network, the committee obtained the services of two firms of Chartered Accountants to carry out the branch audits. In addition, Internal Audit Department of the Bank carries out a comprehensive audit of the branches and departments.
• Enhancements of internal controls took priority with its implementation across the branches and departments of the bank.Chairman would write directly to the Branch Managers /Heads of Depts calling for explanations where applicable, on the observations made at the Board Audit Committee meetings. Necessary action would be taken thereafter depending on the responses received.
It is the opinion of the Audit Committee that adequate internal controls are in place which are being updated and enhanced on an on-going basis as per above and hence providing reasonable assurance that the assets of the bank are safeguarded and that the financial position of the bank is well monitored.
The Audit Committee has recommended to the Board of Directors that, KPMG Ford, Rhodes, Thornton & Co. be re-appointed as Auditors for the year 31st December 2009, subject to the approval of shareholders at the Annual General Meeting.
L. N. de S. Wijeyeratne Chairman – Audit Committee
March 25, 2009
DFCC Vardhana Bank 37 Annual Report 2008
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 117 Report of the Auditors
INDEPENDENT AUDITOR’S REPORT We have obtained all the information and explanations which to the TO THE SHAREHOLDERS OF DFCC VARDHANA BANK best of our knowledge and belief were necessary for the purposes of LIMITED our audit. We therefore believe that our audit provides a reasonable Report on the Financial Statements basis for our opinion. We have audited the accompanying financial statements of DFCC Vardhana Bank Limited, which comprise the balance sheet as at Opinion December 31, 2008, and the income statement, statement of In our opinion, so far as appears from our examination, the Company changes in equity and cash flow statement for the year then maintained proper accounting records for the year ended December ended, and a summary of significant accounting policies and other 31, 2008 and the financial statements give a true and fair view of explanatory notes. the Company’s state of affairs as at December 31, 2008 and its profit and cash flows for the year then ended in accordance with Sri Lanka Management’s Responsibility for the Financial Statements Accounting Standards. Management is responsible for the preparation and fair presentation of these financial statements in accordance with Sri Lanka Accounting Report on Other Legal and Regulatory Requirements Standards. This responsibility includes: designing, implementing These financial statements also comply with the requirements of and maintaining internal control relevant to the preparation and fair Section 151(2) of the Companies Act No. 07 of 2007.and present the presentation of financial statements that are free from material information required by the Banking Act No. 30 of 1988. misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
Scope of Audit and Basis of Opinion Our responsibility is to express an opinion on these financial Chartered Accountants statements based on our audit. We conducted our audit in accordance with Sri Lanka Auditing Standards. Those standards require that we March 25, 2009 plan and perform the audit to obtain reasonable assurance whether Colombo, Sri Lanka the financial statements are free from material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
DFCC Vardhana Bank 38 Annual Report 2008
118 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document Income Statement
For the year ended 31st December 2008 2007 Notes Rs ‘000 Rs ‘000
Income 5 3,498,273 2,248,091
Interest income 6 3,212,690 1,937,732 Interest expense 7 2,031,116 1,273,506 Net interest income 1,181,574 664,226
Net foreign exchange profit 16,082 103,181 Fee and commission income 229,112 184,246 Other income 8 40,389 22,932 Operating income 1,467,157 974,585
Less: operating expenses 9 Personnel expenses 269,988 195,261 Provision for staff retirement benefits 2,435 4,529 Premises, equipment and establishment expenses 230,541 159,313 Fee expenses 35,436 27,024 Provision for loan losses and write-off 10 287,213 101,046 Other overhead expenses 202,785 147,586 Value added tax on financial services 101,070 49,516 Operating expenses 1,129,468 684,275
Profit before income tax 337,689 290,310
Less: Income tax expense 11 226,525 137,310 Profit for the year 111,164 153,000
Basic earnings per share, Rs 12 0.60 1.27
Notes to the Financial Statements from pages 44 to 67 form an integral part of these Financial Statements.
DFCC Vardhana Bank 39 Annual Report 2008
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 119 Balance Sheet
As at 31 December 2008 2007 Notes Rs ‘000 Rs ‘000
Assets Cash and short term funds 13 2,177,373 2,578,199 Balances with Central Bank of Sri Lanka 14 768,383 611,301 Treasury bills and bonds eligible for rediscounting with Central Bank 15 5,764,172 872,090 Securities purchased under resale agreements 171,564 475,000 Bills of exchange 16 326,171 492,668 Loans and advances 17 14,426,000 10,628,910 Interest receivable 18 179,569 140,472 Investment securities 19 2,030 3,030 Property and equipment 20 320,977 250,202 Intangible assets 21 120,066 116,177 Deferred tax asset 22 - 82,823 Other assets 23 548,428 642,903 Total assets 24,804,733 16,893,775
Liabilities Deposits from customers 24 18,972,099 12,117,145 Borrowing 25 2,189,882 1,144,085 Group balances payable 26 19,050 37,065 Current tax 46,321 52,683 Retirement benefit obligation 27 11,064 9,069 Deferred tax liability 22 4,889 - Other liabilities 28 933,491 1,005,904 Total Liabilities 22,176,796 14,365,951
Equity Stated capital 29 2,077,387 2,077,387 Reserve fund 23,010 17,452 Retained earnings 527,540 432,985 Total equity - attributable to the equity holders of the Bank 2,627,937 2,527,824 Total liabilities and equity 24,804,733 16,893,775
Commitments and contingencies 30 7,394,581 6,760,832
Notes to the Financial Statements from pages 44 to 67 form an integral part of these Financial Statements.
These financial statements are in compliance with the requirements of Companies Act No. 07 of 2007.
Ms. D. S. J. Wettasinghe Senior Manager Accounting & Reporting
For and on behalf of the Board of Directors,
J. M. S. Brito L. G. Perera Chairman Managing Director / CEO
Colombo March 25, 2009
DFCC Vardhana Bank 40 Annual Report 2008
120 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document Statement of Changes in Equity
Attributable to equity holders of the Bank Stated Statutory Retained Total Capital * Reserve Fund ** profit Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000
Balance as at 31/12/2006 1,184,071 9,802 287,635 1,481,508
Profit for the year - - 153,000 153,000
Right issue of new shares 893,316 - - 893,316
Transfer to statutory reserve fund - 7,650 (7,650) -
Balance as at 31/12/2007 2,077,387 17,452 432,985 2,527,824
Final dividend approved for 2007 - - (11,051) (11,051)
Profit for the year - - 111,164 111,164
Transfer to statutory reserve fund - 5,558 (5,558) -
Balance as at 31/12/2008 2,077,387 23,010 527,540 2,627,937
Notes to the Financial Statements from pages 44 to 67 form an integral part of these Financial Statements.
* Stated capital In accordance with Section 58 of Companies act No 7 of 2007, which became effective from 3rd May 2007, share capital and share premium have been reclassified as stated capital.
** Statutory Reserve Fund Statutory Reserve Fund is a statutory reserve created as per direction issued by the Central Bank of Sri Lanka under Section 20 (1) of the Banking Act No 30 of 1988 as amended by Banking (Amendment) Act No 33 of 1995.
2008 2007 Computation of transfer to statutory reserve fund Rs’ 000 Rs’ 000
Profit after tax 111,164 153,000 Minimum amount to be transferred @ 5% 5,558 7,650
DFCC Vardhana Bank 41 Annual Report 2008
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 121 Cash Flow Statement
For the year ended 31st December 2008 2007 Rs ‘000 Rs ‘000
Cash flow from operating activities Interest receipts 2,565,694 1,779,195 Fees and commission receipts 229,112 184,246 Interest payments (1,879,368) (1,171,714) Receipts from other operating activities 62,259 132,654 Cash payments to employees and suppliers (721,890) (411,990) Value added tax paid (94,627) (47,093) Operating profit before changes in operating assets 161,180 465,298
(Increase )/decrease in operating assets Deposits held for regulatory or monetary control purposes (157,082) (132,634) Funds advanced to customers (3,811,438) (3,396,766) Others 83,085 (307,716)
Increase /(decrease ) in operating liabilities Deposits from customers 6,803,701 4,343,988 Negotiable certificates of deposit 51,253 (39,173) Others (168,081) 263,715 Net cash generated from operating activities before Income tax 2,962,618 1,196,712
Income tax paid (93,986) (68,159)
Net cash flow generated from operating activities (a) 2,868,632 1,128,553
Cash flow from investing activities Treasury bills eligible for rediscounting with Central Bank -more than 3 months (3,162,944) (285,282) Income from investment securities 104 122 Interest receipts from Treasury bills 455,411 65,839 Disposal of property & equipment 44 1,500 Purchase of investment securities 1,000 (2,000) Purchase of property and equipment (176,383) (186,201) Net cash flow used in investing activities (2,882,768) (406,022)
Cash Flow from financing activities Proceeds from the sale of ordinary shares - 893,316 Bank borrowing 418,414 (680,021) Borrowing under repurchase agreements 627,383 472,404 Dividends paid (11,051) - Net Cash flow from financing activities 1,034,746 685,699
Net increase in cash and cash equivalents 1,020,610 1,408,230 Cash and cash equivalents at beginning of period 3,278,407 1,870,177 Cash and cash equivalents at end of the period 4,299,017 3,278,407
Composition of cash and cash equivalent at end of the period Cash and short term funds ( note 13 ) 2,177,373 2,578,199 Treasury bills and other securities eligible for rediscounting with CBSL-less than 3 months 1,950,080 225,208 Treasury bills purchased under resale agreements - less than 3 months 171,564 475,000 4,299,017 3,278,407
DFCC Vardhana Bank 42 Annual Report 2008
122 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document For the year ended 31st December 2008 2007 Rs ‘000 Rs ‘000
Note a Reconciliation of profit for the year to net cash flow generated from operating activities
Profit after taxation 111,164 153,000
Add/(Less) Dividend Income (104) (122) Provision for loan losses 287,213 101,046 Gain from mark to market on dealing securities 5,696 6,471 Notional tax credit on treasury bills & bonds (51,189) (2,361) Increase/(decrease) in deferred tax (87,712) (54,193) Increase/(decrease) in income tax 125,624 76,251 (Increase)/decrease in operating asssets (3,885,435) (3,837,115) Increase/(decrease) in operating liabilities 6,686,873 4,568,530 Net change in other receivables and payables (425,173) 40,020 Loss on disposal of property and equipment 196 192 Depreciation - property and equipment 62,318 40,803 Amortisation - intangible assets 39,161 36,031 Operating profit before changes in operating assets 2,868,632 1,128,553
DFCC Vardhana Bank 43 Annual Report 2008
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 123 Notes to the Financial Statements
1. Reporting Entity DFCC Vardhana Bank Limited (“Bank”) is a public limited liability company incorporated in 1995 and domiciled in Sri Lanka. It is licensed by Central Bank of Sri Lanka to conduct domestic and off shore banking business under the provisions of Banking Act No. 30 of 1988. As per section 487(2) of Companies Act No 7 of 2007 the company has been re registered. The registered office of the Bank is situated at 73, W A D Ramanayake Mawatha, Colombo 02.
DFCC Bank which is licensed by the Central Bank of Sri Lanka as a specialized bank, is the parent company of the Bank, and owns 95.58% of the Bank.
The number of staff of the Bank as at 31st December 2008 is 407. (2007 - 302)
1.1 Principal Activities Bank is currently engaged in activities related to commercial banking such as accepting deposits, providing corporate and retail credit, foreign currency operations, trade finance and treasury related services.
There were no significant changes in the nature of the principal activities of the Bank during the financial year under review.
2. Basis of Preparation 2.1 Statement of Compliance The Financial Statements have been prepared in compliance with Sri Lanka Accounting Standards laid down by the Institute of Chartered Accountants of Sri Lanka, and comply with the requrements of Companies Act No. 07 of 2007 and Banking Act No. 30 of 1988 and subsequent amendments thereto.
2.2 Approval of Financial Statements by Directors The Financial statements were authorized for issue by the Board of Directors on 25 March 2009.
2.3 Basis of Measurement The financial statements have been prepared on the historical cost basis and applied consistently with no adjustments being made for inflationary factors affecting the financial statements, except for the securities held for trading, which are measured at market value.
2.4 Functional and Presentation Currency The financial statements are presented in Sri Lanka rupees, the functional and presentation currency, rounded to the nearest thousand.
2.5 Use of Accounting Estimates and Judgments The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected.
Information about the significant areas of estimation and uncertainty that have the most significant effect on the amounts recognized in the financial statements are described below.
2.5.1 Provision for Loan Losses In addition to the specific provisions for possible loan losses made on the basis of continuous review of all loans and advances to customers in accordance with the Sri Lanka Accounting Standard 23, “Revenue Recognition and Disclosures in the Financial Statements of Banks” and the directions issued by the Central Bank of Sri Lanka, the Bank evaluates the need for additional provisions for loans and advances based upon management’s best estimate of recoverability. In estimating the recoverability the management makes judgments about the borrower’s financial situation, the workout strategy and the net realisable value of any underlying collateral or significant impairment of debt service capacity of the borrower.
DFCC Vardhana Bank 44 Annual Report 2008
124 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 2.5.2 Classification of Dealing (Trading) and Investment Securities The classification of investment securities is based on the positive intention of the management and the financial capacity to hold certain investments to maturity. In the event of a change of intention evidenced by management action of active trading, such investments are transferred to dealing securities, which represent securities held for trading.
The classification of these securities determines the recognition of the carrying amount of these securities in the balance sheet with a consequential adjustment to the reported results.
2.5.3 Assessment of Impairment The assessment of impairment in tangible and intangible assets includes the estimation of the value in use of the asset computed at the present value of the best estimates of future cash flows generated by the asset adjusted for associated risks. The estimation has inherent uncertainties.
Impairment losses if any are charged to the income statement immediately.
2.5.4 Employee Retirement Benefits The liability as at Balance Sheet date was actuarially valued based on the assumptions set out in note no. 27.
3. Materiality and Aggregation Each material class of similar items is presented separately in the financial statements. Items of dissimilar nature or function are presented separately unless they are immaterial.
4. Significant Accounting Policies The accounting policies set out below have been applied consistently to all periods presented in these financial statements. The accounting policies of the Bank have been consistently applied and deviations if any, have been disclosed accordingly.
4.1 Foreign Currency Translation Transactions in foreign currencies are translated to Sri Lankan Rupees at the middle rate of exchange ruling at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies at the Balance Sheet date are translated to Sri Lankan Rupees at the middle rate of exchange ruling at that date. Foreign exchange differences arising on the settlement or reporting of the Bank’s monetary items at rates different from those, which were initially recorded, are dealt with in the income statement.
Non-monetary assets and liabilities denominated in foreign currency that are stated at historical cost at the Balance Sheet date are translated to Sri Lankan Rupees at the foreign exchange rates ruling at the date of the initial transaction.
The Balance Sheet of the Foreign Currency Banking Unit is translated to Sri Lankan Rupees at the middle rate of exchange ruling at the balance sheet date. Income and expenses of the Foreign Currency Banking Unit is translated at the average rate.
Forward Exchange Contracts are valued at the forward market rates ruling on the date of the Balance Sheet. Resulting net unrealised gains and losses on the open (trading) forward transactions are dealt with through the Income Statement.
4.2 Assets and Bases of their Valuation 4.2.1 Cash and short-term funds Cash and short-term funds include cash in hand and balances with banks. They are brought to account at the face value or the gross value where appropriate.
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4.2.2 Statutory Deposit with Central Bank of Sri Lanka The Monetary Law Act requires that all commercial banks operating in Sri Lanka maintain reserves against all deposit liabilities denominated in Sri Lankan Rupees.The details of reserve requirements are given in note no 14. There are no reserve requirement for deposit liabilities of the Foriegn Currency Banking Unit and foriegn currency deposits liabilities in the Domestic Banking Unit.
4.2.3 Government of Sri Lanka Treasury Bills and Bonds i) Investment in Treasury Bills and Bonds Held for Dealing These are the marketable, dated debt securities in respect of which the Bank has the expressed intention of trading in the domestic debt market and are included in the balance sheet at the market value as a sub category of treasury bills and other securities eligible for rediscounting with the Central Bank of Sri Lanka.
The market value is determined using the middle rate of buy and sell quotes for the treasury bills and bonds eligible for rediscounting with the Central Bank of Sri Lanka provided by secondary market intermediaries.
The securities are recognized at cost initially on acquisition and thereafter marked to market on the balance sheet date in accordance with the direction issued by Central Bank of Sri Lanka on ‘Prudential norms for classification, valuation and operation of the Bank’s investment portfolio’ dated 1 March 2006. ii) Investment in Treasury Bills and Bonds Held to Maturity These are dated debt securities in respect of which the Bank has expressed intention and ability to hold until maturity. These are included in the balance sheet as a sub category of treasury bills and other securities eligible for re-discounting with the Central Bank of Sri Lanka.
Investments in treasury bills and treasury bonds held to maturity are included in the balance sheet at cost adjusted for the amortisation of premium or discount arising on acquisition.
4.2.4 Securities Purchased under Resale Agreements (Reverse Repurchase Transactions) These are loans collateralized by the purchase of treasury bills from the counter party to whom the loans are granted. The sale by the counter party is subject to a commitment by the Bank to sell back the underlying debt securities to the borrower at a pre-determined price. These loans are stated in the balance sheet at cost.
4.2.5 Investment in Ordinary Shares These are acquired and held for yield or capital appreciation in the medium/long term and are carried at cost reduced by, where appropriate, the diminution in value, which is other than temporary. Cost determined on a weighted average basis includes incidental cost of acquisition
4.2.6 Loans and Advances to Customers Loans and advances to customers are stated in the Balance Sheet at the recoverable amount represented by the gross value of the outstanding balance adjusted for provision of loan losses and interest in suspense (interest which is not accrued to revenue). The provision for possible loan losses include both specific and general provision.
4.2.6.1 Non performing Loans and Advances The loans and advances are classified as Non Performing Advances (NPA) based on the criteria set out in Direction No. 3 of 2008 dated 8th May 2008, issued by the Central Bank of Sri Lanka on “Classification of Loans and Advances, Income Recognition and Provisioning”.
Up to the date of issue of amended Direction referred to above, the loans and advances which were 90 days or more in arrears of due capital and / or interest were classified as non performing.
Provision for possible loan losses are made on the basis of a continuous review of all loans and advances to customers in accordance with the Sri Lanka Accounting Standard 23, “Revenue Recognition and Disclosures in the Financial Statements of the Banks” and the Directions issued by the Central Bank of Sri Lanka and disclosed in the Financial Statements of the Bank.
DFCC Vardhana Bank 46 Annual Report 2008
126 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 4.2.6.2 Provision for Loan Losses (a) Specific provision for loan losses In accordance with the Direction issued by the Central Bank of Sri Lanka on 8th May 2008, Direction No 3 of 2008 “Classification of Loans & Advances, Income Recognition & Provisioning” specific provisions on NPA are made as follows.
Category of NPA Minimum specific Credit Quality Provision Requirement Substandard Credit cards 25% Other advances 20% Doubtful 50% Loss 100%
The provision made relates to all categories of loans and advances including pawning identified as substandard, doubtful and loss. Where necessary, specific provisions have been made over and above the minimum percentages stipulated above, on a case by case basis.
(b) General Provision The Direction issued by the Monetary Board of the Central Bank of Sri Lanka on 5th December 2006, in terms of Section 46 of the Banking Act No 30 of 1988, as amended, in “Requirements to Maintain a General Provision for Advances” requires all licensed commercial banks to maintain a general provision of 1% of the total on balance sheet performing loans and advances and on balance sheet overdue loans and advances, net of interest in suspense and credit facilities secured by cash deposits, gold or Government securities with the same bank. The general provision commenced with a minimum of 0.1% provision as at 31st December 2006 and thereafter incremental provisions are being made on the same basis till 31st March 2009, with the view of meeting the total provision requirement of 1% not later than 31st March 2009.
The Direction referred to above was revoked and replaced by the Direction issued on 8th May 2008 on “Classification of Loans and Advances, Income Recognition and Provisioning” which reiterated the above basis for general provisioning.
4.2.6.3 Revenue Recognition on Non Performing Loans When an advance is classified as non-¬performing based on criteria set out in Direction No. 3 of 2008 dated 8th May 2008 issued by the Central Bank of Sri Lanka on “Classification of Loans and Advances, Income Recognition and Provisioning”. Interest ceases to be recognised and is taken to income thereafter on cash basis.
Upto the date of issue of the amended Direction referred to above, interest ceased to be recognised on Loans and Advances when due capital and / or interest were in arrears for more than 90 days. Interest was taken to Income on cash basis thereafter.
4.2.7 Property, Plant and Equipment Property ,Plant & Equipment are tangible items that are held for servicing, or for administrative purpose; and are expected to be used during more than one period.
4.2.7.1 Basis of Recognition Property, Plant & equipment are recognized if it is probable that future economic benefits associated with the asset will flow to the Bank and cost of the asset can be measured reliably.
4.2.7.2 Measurement The cost of an asset comprises its purchase price or cost of construction and any directly attributable cost of bringing the asset to working condition for its intended use.
The assets are stated at cost less accumulated depreciation, and any accumulated impairment losses. The depreciation is provided for on the basis outlined in 4.2.7.6.
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4.2.7.3 Cost Model The Bank applies cost model to Property, Plant & Equipment and records at cost of purchase or construction together with any incidental expenses thereon less accumulated depreciation and any accumulated impairment losses.
4.2.7.4 Subsequent Costs The cost of replacing part of an item of Property and Equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Bank and its cost can be measured reliably. The costs of day to day servicing of Property, Plant and Equipment are charged to the Income Statement as incurred.
4.2.7.5 De-recognition The carrying amount of an item of Property, Plant & Equipment is derecognized on disposal or when no future economic benefits are expected from its or disposal. The gain or loss arising from the derecognition of an item of Property, Plant & Equipment is included in Income Statement when the item is derecognized.
4.2.7.6 Depreciation Depreciation is provided at the following rates on a straight-line basis such that the cost of the asset is depreciated over the period appropriate to the estimated life of the type of asset. The rates of depreciation are as follows:
Computer equipment - 20% per annum Office equipment and motor vehicles - 20% per annum Furniture, fixtures & fittings - 10% per annum
Depreciation commences in the month the asset is commissioned for use in the business of the Bank and ceases in the month of disposal.
Depreciation method, useful life and residual values are re-assessed annually on Balance Sheet dates.
4.2.8 Intangible Assets – Computer Application Software All software licensed for use by the Bank, not constituting an integral part of related hardware are included in the balance sheet under the category intangible asset and carried at cost less cumulative amortization and any impairment losses.
The initial acquisition cost comprises license fee paid at the inception, import duties, non –refunded able taxes and levies, cost of customizing the software to meet the specific requirements of the Bank and other directly attributable expenditure in preparing the asset for its intended use.
The cost is amortized using the straight –line method, at the rate of 20% per annum commencing from the date the application software is available for use. The amortised amount is based on the best estimate of the useful life, such that the cost is amortised fully at the end of the useful life during which the Bank has legal right of use. The amortised cost is recognized as an expense.
The initial cost is enhanced by subsequent expenditure incurred by further customization to meet ancillary transaction processing and reporting requirements tailor-made for the use of the Bank constituting an improvement to the software.
Computer application software is stated at cost less accumulated amortization and accumulated impairment losses, if any.
4.2.9 Impairment The identifiable assets of the Company are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any, such indication exists the recoverable amount of the asset is estimated and shown in the balance sheet. The impairment loss is taken to the income statement.
4.3 Liabilities and Provisions 4.3.1 Deposits from Customers Deposits include non interest bearing deposits, savings deposits, term deposits, deposits redeemable at call and certificates of deposit. They are brought to account at the gross value of the outstanding balance. Interest paid is charged to the Income Statement.
DFCC Vardhana Bank 48 Annual Report 2008
128 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 4.3.2 Borrowings Borrowings include, borrowings from financial institutions and borrowing under repurchase agreements. They are brought to account at the gross value of the outstanding balance.
4.3.3 Securities Sold Under Re Purchase Agreement This relates to treasury bills and bonds sold subject to a commitment to repurchase them at a predetermined price. Such treasury bills and bonds remain on the balance sheet and the liability is recorded in respect of the consideration received. The liability is disclosed as borrowing under repurchase agreement. Treasury bills and bonds are not marked to market since the corresponding liability is also not marked to market.
4.3.4 Employee Benefits 4.3.4.1 Defined Contribution Plan All employees of the Bank are members of the Employees Provident Fund and Employees Trust Fund to which the Bank contributes 15% and 3% respectively of such employee’s qualifying salary.
Contributions to defined contribution plans are recognized as an expense in the income statement as incurred.
4.3.4.2 Defined Benefit Plan Up to 31 December 2007, provisions had been made for retirement gratuities in the financial statements of the Bank from the first year of service for all employees in conformity with Sri Lanka Accounting Standards 16, “Retirement Benefit Costs” which was effective till 1 July 2007. However, under the Payment of Gratuity Act No. 12 of 1983, the liability to an employee arises only on completion of five years of continual service. The gratuity liabilities were not externally funded.
Based on the Sri Lanka Accounting Standards 16 (Revised 2006), “Employee Benefits” (SLAS 16) which is applicable to Financial Statements covering annual period commencing on or after 1 July 2007, became effective for the Bank from the financial year commencing from 1 January 2008. The Bank has adopted the actuarial valuation method.
Accordingly, from 1st January 2008 the Bank has made provisions for gratuities based on the actuarial valuation, performed by a qualified actuary, Piyal S. Goonetilleke and Associates. The gratuity liabilities are not externally funded.
4.3.5 Provision for Liabilities A provision is recognized in the balance sheet when the Bank has a legal or constructive obligation as a result of a past event, that can be estimated reliably and it is probable that an outflow of economic benefits will be required to settle the obligation.
4.3.6 Commitments and Contingent Liabilities All discernible risks are accounted for in determining the amount of all known liabilities.
Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events or present obligations where the transfer of economic benefit is not probable or cannot be reliably measured. Contingent liabilities are not recognised in the Balance Sheet but are disclosed unless they are remote.
4.3.7 Events after the Balance Sheet date All material and important events which occur between the balance sheet date and the date on which the financial statements are authorized for issue, and the financial impact on the condition of assets and liabilities are disclosed in note no 33.
4.4 Revenue and Expense Recognition 4.4.1 Interest income Interest receivable is recognised on an accrual basis. Interest from loans and advances ceases to be accrued when they are classified as non performing as explained in Note No. 4.2.6. Interest on non performing loans and advances is accounted for on a cash basis. Interest on non performing loans and advances is credited to the ‘Interest in Suspense account’.
Interest income from investments is recognised on an accrual basis.
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4.4.2 Notional Tax Credit on Interest Income from Treasury Bills and Bonds Interest income from treasury bills and bonds is grossed by the addition of the tax credit imputed to 10% withholding tax on discount allowed at the time of issue. This notional tax credit is 1/9th of the net income.
4.4.3 Discount or Premium on Purchase of Dated Debt Securities The premium or discount is amortized through the income statement over the period from the date of purchase to the date of maturity.
4.4.4 Dividend Income Interim dividend on shares is recognized as income in the period in which it is declared by the Directors and final dividend on shares is recognized as income in the period in which it is approved by the shareholders of the investee company.
4.4.5 Discounts on Bills of Exchange Discount charges on bills of exchange discounted are taken to revenue on redemption of bills of exchange.
4.4.6 Fee and Commission Income These are recognized as income in the period in which entitlement to the consideration arises.
4.4.7 Gains on Disposal of Dated Debt Securities The difference between net proceeds and the carrying amount of the debt securities disposed of is recognized as income.
4.4.8 Gain or Loss on Sale of Property and Equipment Recognized as income in the period in which the sale occurs and is classified as other income.
4.4.9 Securities Purchased Under Re-sale Agreements The difference between the purchase price and sale price represents interest income and is recognized in the income statement over the period of the re-sale agreement.
4.4.10 Mark to Market Gains on Dealing Securities Gains or losses on dated dealing debt securities that arise by adjusting the carrying value of these securities to market value are recognized in the income statement.
4.4.11 Marked to Market Gains /Losses on Forward Exchange Contracts Gains or Losses on forward exchange contracts that arise by adjusting the carrying value of the off balance sheet forward exchange contracts to market value on balance sheet date are recognized in the income statement.
4.4.12 Foreign Exchange Income Any exchange gain or loss arising from the settlement or translation of the Bank’s monetary assets and liabilities at rates different from those which were initially recorded are dealt in the income statement.
4.4.13 Interest Expenses and Other Expenses Interest and other expenses have been recognized in the period in which they are incurred.
4.4.14 Sale and Repurchase Agreements Where treasury bills /bonds are sold subject to a commitment to repurchase them at a predetermined price (Repos) the difference between sales and repurchase price is recognized as an expense over the life of the agreement.
4.4.15 Fee and Commission Expenses Fee and commission expenses are recognized on an accrual basis.
DFCC Vardhana Bank 50 Annual Report 2008
130 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 4.5 Income Tax Expense Income tax expense for the year comprises current and deferred tax. Income tax is recognized in the Income Statement.
4.5. 1 Current Tax Current tax is the expected tax payable on the profit for the year adjusted for taxation purposes in accordance with the provisions of the Inland Revenue Act No 10 of 2006, as amended by subsequent legislation.
Current tax expense includes any adjustment to tax payable in respect of previous years.
4.5.2 Deferred Tax Deferred tax is provided using the liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the tax base of assets and liabilities, which is the amount attributed to those assets and liabilities for tax purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted by the reporting date.
Deferred tax assets, including those related to temporary tax effects of income tax losses and credits available to be carried forward, are recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
4.5.3 Value Added Tax on Financial Services The value base for value added tax on financial services for the Bank is the adjusted accounting profit before tax and emoluments of employees. The adjustment to the accounting profit before tax is for economic depreciation computed on prescribed rates instead of the rates adopted in the financial statements.
4.6 Earnings per Share The Bank presents basic earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Bank by the number of ordinary shares outstanding during the period.
4.7 Business Segment Reporting A segment is a distinguishable component of the company that is engaged either providing products or services or in providing products or services within a particular economic environment, which is subject to risks and rewards that are different from those of other segments.
Currently the banking business is the sole business segment.
4.8 Cash Flow The cash flow has been prepared by using the ‘Direct Method’ of preparing cash flows in accordance with the SLAS - 9. Cash and cash equivalents are short term (a maturity of 3 months or less from the date of acquisition) highly liquid investments that are readily convertible to known amounts of cash and which are subject to insignificant risks of changes in value.
4.9 Comparative Information Where items are recognized comparative information is also adjusted.
4.10 Directors Responsibility Statement Directors acknowledge the responsibility for true and fair presentation of the financial statements in accordance with the books of account and Sri Lanka Accounting Standards. Further elaboration of the Directors’ responsibility is in page 36.
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4.11 First Time Adoption of SLAS 16 (expand) Sri Lanka Accounting Standard 16 (Revised 2006) “Employee Benefits”, (SLAS 16 (Revised 2006)), which is applicable to financial statements covering annual periods beginning on or after 1st July 2007, became effective for the Bank from 1st January 2008 and has been applied in preparing these financial statements. The comparative information has not been restated as the Standard has been applied prospectively from 1st January 2008.
Any shortfall or excess between the actuarially valued liabilities and the balances out standing in these provision accounts is recognized immediately as a charge or income to the income statement in the period of the valuation.
4.12 Directions Issued but not Effective / Applied as at Balance Sheet Date The Central Bank of Sri Lanka issued Banking Act, Direction No. 9 of 2008 on 30th December 2008 on “Amendments to Directions on Classification of Loans Income Recognition and Provisioning”. This Direction addresses the following two areas.
4.12.1 Classification of NPA Based on Aggregated Exposure According to Section 1 of the above Direction, with effect from 1st January 2010 all credit facilities extended to a borrower should be classified as NPA when one or more of the credit facilities has/have been classified as NPA and if the aggregate amount of the outstanding of such NPA (excluding interest in suspense) exceeds 30% of the total credit facilities extended to such borrower (excluding interest in suspense).
4.12.2 Classification of NPA Based on Arrears According to Section 2 of the above Direction the Banks shall reclassify NPA as performing loans and advances in the manner as set out in the said Direction which will be effective till 31st December 2009.
As the above Direction was issued on 30th December 2008, Section 2 of the said Direction was not applied by the Bank during the year and as at balance sheet date.
DFCC Vardhana Bank 52 Annual Report 2008
132 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document For the year ended 31 December 2008 2007 Rs ‘000 Rs ‘000
5 Income Interest income ( Note 6 ) 3,212,690 1,937,732 Fee and commission income 229,112 184,246 Net foreign exchange profit 16,082 103,181 Other income ( Note 8 ) 40,389 22,932 3,498,273 2,248,091
Net foreign exchange profit The Bank engages in funding swap between US dollar and Sri Lanka rupees to benefit from interest rate arbitrage. The foreign exchange income is net of swap costs. The apparent decline in the foreign exchange income in the current period is compensated by the interest income derived in Sri Lanka rupees reported under interest income.
For the year ended 31 December 2008 2007 Rs ‘000 Rs ‘000
6 Interest income Loans and advances 2,643,308 1,812,192 Treasury bills and placements with other banks 569,382 125,540 3,212,690 1,937,732
Section 137 of the Inland Revenue Act No. 10 of 2006 provides that a company which derives interst income from the secondary market transactions in government securitites be entitled to a notional tax credit, provided such interest income form part of the statutary income of the Bank for that year of assesment.
Treasury bill interest income includes Rs 47.5 million, which is the notional tax credit of 10% imputed for the withholding tax deducted / paid at source in respect of the year ended 31 December 2008. The amount relating to the previous financial year was Rs 0.4 million.
For the year ended 31 December 2008 2007 Rs ‘000 Rs ‘000
7 Interest expense Deposits 1,880,059 983,277 Bank borrowing 151,057 290,229 2,031,116 1,273,506
8 Other income Dividend income from investment securities - unquoted 104 122 (Loss) / gain on treasury bills and bonds (1,591) 761 Net gain on Repo transactions 37,256 19,197 Unrealised gain on treasuty bills and bonds 2,066 - (Loss) / gain on disposal on property and equipment (196) (192) Other operating income 2,750 3,044 40,389 22,932
Net gain on Repo transactions includes Rs 3.7 million, which is the notional tax credit of 10% imputed for the withholding tax deducted / paid at source in respect of the year ended 31 December 2008. The amount relating to the previous financial year was Rs 1.9 million.
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For the year ended 31 December 2008 2007 Rs ‘000 Rs ‘000
9 Operating expenses Operating expenses include the following: Employer’s contribution to employees’ Provident Fund 18,669 13,110 Employer’s contribution to employees’ Trust Fund 3,732 2,609 Directors remuneration - fees 1,730 885 Auditors’ remuneration Audit fees and expenses 775 592 Audit related fees and expenses 46 -- Depreciation - Property and equipment 62,318 40,803 Amortisation - Intangible assets 39,161 36,031 Other professional fees 1,405 2,245 Donations 70 115
10 Provision for loan losses and write-off 10.1 Specific provision Provision for the year - Loans and advances 356,359 237,583 - Bills of exchange 11,021 5,282 Loans written off 3,070 - 370,450 242,865 Less :Recoveries during the year - Loans and advances 123,420 184,160 - Bills of exchange 1,785 1,005 245,245 57,700 10.2 General provision Provision for the year - Loans and advances 41,595 41,412 - Bills of exchange 373 1,934 287,213 101,046
11 Income tax expense 11.1 Current tax of the Bank has been provided at 35% on the taxable income. Tax charge is based on taxable profits which differs from profit for financial reporting purposes. These differences are explained in the following reconciliation statement.
For the year ended 2008 2007 Rs ‘000 Rs ‘000
Profit before tax as per income statement 337,689 290,310 Disallowed expenses and provisions 422,618 188,191 Loss on disposal of fixed assets 196 192 Less: Capital allowances on property and equipment 137,735 105,224 Dividend income 104 122 Net income from investment in Sri Lanka Development Bonds 10,754 5,930 Gratuity paid during the year 440 1,643 Assessable income 611,470 365,774 Less: Offset of brought forward tax losses (limited to 35% of assessable income) 214,015 128,021 Taxable income 397,455 237,753
Tax at normal company tax rate at 35% 139,109 83,214
Tax rate on accounting profit % 41% 29%
DFCC Vardhana Bank 54 Annual Report 2008
134 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document For the year ended 2008 2007 Rs ‘000 Rs ‘000
11.2 Tax losses Tax loss on 1 January 304,977 432,998 Add: Adjustment in respect of final tax return 199 - Less: tax loss claimed against taxable profits 214,015 128,021 Unutilised tax loss on 31 December 91,161 304,977
11.3 Income tax expense 11.3.1 Current tax Tax for the year 139,109 83,214 Less: Over provision in the prior year 296 97 138,813 83,117
11.3.2 Deferred tax expense Charge from Deferred taxation (Note 22) 87,712 54,193 87,712 54,193 Income tax expense 226,525 137,310
12 Earnings per share Earnings per share has been calculated by dividing the profit after income tax for the year by 184,188,822 the number of ordinary shares outstanding during the year. (2007 - the weighted average number of ordinary shares were 120,750,011).
2008 2007
Profit for the year Rs. 111,163,926 153,000,462 Number of shares (2007-Weighted average) 184,188,822 120,750,011 Basic earnings per share Rs. 0.60 1.27
As at 31 December 2008 2007 Rs ‘000 Rs ‘000
13 Cash and short term funds Cash in hand 616,412 489,701 Due from banks 1,412,667 1,602,674 Placements / balances with foreign banks 148,294 485,824 2,177,373 2,578,199
14 Balances with the Central Bank of Sri Lanka As required by the provisions of Section 93 of the Monetary Law Act, a cash balance is maintained with the Central Bank of Sri Lanka as explained in Note No. 4.2.2. The minimum cash reserve requirement on rupee deposit liabilities was reduced to 9.25% with effect from 17th October 2008 and further reduced to 7.75% on 28th November 2008 which was in effect as at 31st December 2008. (2007 - 10%). There are no reserve requirement for deposit liabilities of the Foriegn Currency Banking Unit and foriegn currency deposits liabilities in the Domestic Banking Unit.
DFCC Vardhana Bank 55 Annual Report 2008
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As at 31 December 2008 2007 Rs ‘000 Rs ‘000
15 Treasury bills and other securities eligible for rediscounting with Central Bank Treasury bills and bonds held for trading Held for repurchase transactions 1,122,442 - Others 1,361,470 - 2,483,912 - Treasury bills and bonds held to maturity Held for repurchase transactions 116,265 491,990 Others 3,163,995 380,100 3,280,260 872,090 5,764,172 872,090
16 Bills of exchange 16.1 Balance on 31 December Export bills 256,330 321,102 Import bills 86,555 178,320 342,885 499,422 Less: Provision for bills of exchange - Specific (Note 16.2) 13,947 4,360 Provision for bills of exchange - General (Note 16.3) 2,767 2,394 326,171 492,668
16.2 Movement in bills of exchange provision - specific Balance on 1 January 4,360 115 Add: Provision for the year (Note 10.1) 11,021 5,282 Exchange rate difference on foreign currency provision 351 - Less: Recoveries during the year (Note 10.1) 1,785 1,005 Write off - 32 Balance on 31 December 13,947 4,360
16.3 Movement in bills of exchange provision - general Balance on 1 January 2,394 461 Add: Provision for the year ( Note 10.2 ) 373 1,933 Balance on 31 December 2,767 2,394
17 Loans and advances 17.1 Balance on 31 December Overdrafts 8,377,716 5,371,315 Term loans 2,423,783 1,677,827 Trade loans 4,059,043 3,740,645 Gold pledge loans 112,580 19,855 Staff loans 56,965 55,191 Others 46,950 49,250 15,077,037 10,914,083 Less:- Loan loss provision - Specific (Note 17.2) 390,517 158,391 Loan loss provision - General (Note 17.3) 94,123 52,528 Interest in suspense related to overdrafts (Note 17.4) 166,397 74,254 14,426,000 10,628,910
DFCC Vardhana Bank 56 Annual Report 2008
136 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 2008 2007 Rs ‘000 Rs ‘000
17.2 Movement in loan loss provision - Specific Balance on 1 January 158,391 115,038 Add: Provision for the year ( Note 10.1 ) 356,359 237,583 Transfer from interest in suspense 563 12,526 Exchange rate difference on foreign currency provision 1,089 - Less: Recoveries during the year (Note 10.1) 123,420 184,160 Write off of loans 2,465 22,126 Exchange rate difference on foreign currency recoveries - 470 Balance on 31 December 390,517 158,391
17.3 Movement in loan loss provision - General Balance on 1 January 52,528 11,116 Add: Provision for the year ( Note 10.2 ) 41,595 41,412 Balance on 31 December 94,123 52,528
17.4 Movement in interest in suspense for overdrafts Balance on 1 January 74,254 110,561 Add: Interest suspended during the year 355,067 229,527 Exchange rate difference on foreign currency interest in suspense 70 - Less: Recoveries during the year 252,115 182,006 Write off of interests 10,879 77,743 Transfer to the provision - 6,085 Balance on 31 December 166,397 74,254
17.5 Non-performing loans and advances This relates to the portfolio on which the interest income is recognised on cash basis.
As at 31 December 2008 Percentage 2007 Percentage of total loans of of total loans Rs ‘000 andand advances Rs ‘000 and advances
Non-performing loans and advances (including bills) 1,366,926 8.86 790,170 6.92 Less: Interest in suspense included in overdrafts 166,397 74,254 Net non-performing loans and advances (including bills) 1,200,528 7.87 715,916 6.31 Less: Loan loss provision (including bills) 400,815 132,080 Net exposure 799,713 5.38 583,836 5.21 Net of tangible securities 846,608 348,593
Percentage relates to the ratios of non performing credit exposure to the total credit exposure computed on gross and net basis.
DFCC Vardhana Bank 57 Annual Report 2008
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 137 Notes to the Financial Statements... Contd
2008 2007 Rs ‘000 Rs ‘000
17.5.1 Allowances for Credit Losses Loans and advances ( Note 17.2 ) 390,517 158,391 Bills of exchange ( Note 16.2 ) 13,947 4,360 404,463 162,751
Less: Provision relating to facilites currently performing Loans and advances 3,648 30,671 3,648 30,671 Provision related to non-performing facilities 400,815 132,080
17.5.2 The realisable value of tangible securities is computed in accordance with the haircut rule prescribed by the Central Bank of Sri Lanka. This requires the application of prescribed discounts given below, to the forced sale value based on age of arrears of the loans, bills of exchange and other credit facilities for the purpose of determining the net exposure at risk.
The progressive discounts shall be as follows
Item % of FSV of immovable property that can be considered as the value of security Freehold property Leasehold property At the first time of provisioning 75 60 Period less than loss section Less than 12 months 75 60 More than 12 but less than 24 months 60 50 More than 24 but less than 36 months 50 40 More than 36 but less than 48 months 40 30 More than 48 months Property should be reviewed on a regular basis Nil and discounted further at the discretion of the bank’s management
DFCC Vardhana Bank 58 Annual Report 2008
138 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document As at 31 December 2008 2007 Rs ‘000 Rs ‘000
17.6 Concentration of credit risk Sectoral analysis of loans and advances Food, beverages and tobacco 189,008 39,049 Rubber and leather products 467,234 32,801 Metals,chemicals and engineering 302,458 514,360 Services 1,600,283 667,470 Exports 1,995,007 1,698,381 Imports 1,585,568 1,326,388 Trading 2,863,774 1,905,458 Financial 360,543 266,951 Consumption 839,688 1,688,002 Construction 190,041 350,316 Agricultural 742,808 377,875 Industrial 1,238,897 847,251 Tourism 1,030,656 218,678 Housing & property development 937,156 788,233 Others 733,916 192,870 15,077,037 10,914,083
18 Interest receivables Loans ( Note 18.1) 178,457 137,402 Bills of exchange ( Note 18.2) 1,112 3,070 179,569 140,472
18.1 Loans Interest on loans 355,347 200,859 Less: Interest in suspense for loans ( Note 18.1.1) 176,890 63,457 Balance on 31 December 178,457 137,402
18.1.1 Movement in interest in suspense for loans Balance on 1 January 63,457 22,147 Add: Interest suspended during the year 309,670 234,524 Less: Recoveries during the year 194,418 186,773 Transfer to loan provision 563 6,441 Interest waivers 1,227 - Exchange rate difference on foreign currency interest in suspense 29 - Balance on 31 December 176,890 63,457
18.2 Bills of exchange Interest on bills of exchange 5,015 9,023 Less: Interest in suspense for bills of exchange ( Note 18.2.1) 3,903 5,953 Balance on 31 December 1,112 3,070
DFCC Vardhana Bank 59 Annual Report 2008
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 139 Notes to the Financial Statements... Contd
As at 31 December 2008 2007 Rs ‘000 Rs ‘000
18.2.1 Movement in interest in suspense for bills of exchange Balance on 1 January 5,953 - Add: Interest suspended during the year 5,677 5,953 Exchange rate difference on foreign currency interest in suspense 1 - Less: Recoveries during the year 7,728 - Balance on 31 December 3,903 5,953
19 Investment securities Unquoted (Note 19.1) 2,030 3,030
As at 31 December 2008 2007 Number of Cost Number of Cost ordinary ordinary shares Rs ‘000 shares Rs ‘000
19.1 Unquoted Credit Information Bureau of Sri Lanka 300 30 300 30 (Shares of Rs 100/- each)
Lankaclear (Pvt) Ltd 100,000 1,000 100,000 1,000 (Shares of Rs 10/- each)
Lanka Financial Services Bureau Limited 100,000 1,000 200,000 2,000 (Shares of Rs 10/- each) 2,030 3,030 Directors’ valuation 2,030 3,030
20 Property and equipment Furniture, Computer Office fixtures Motor 2008 2007 equipment equipment & fittings vehicles Total Total Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000
Cost on 1 January 147,115 57,226 159,248 17,267 380,856 230,684 Less: transfer to intangible assets 796 - - - 796 - Additions for the year 49,318 30,182 54,442 - 133,942 153,157 Less: disposals during the year - 5 355 - 360 2,985 Cost on 31 December 195,637 87,403 213,335 17,267 513,642 380,856 Accumulated depreciation on 1 January 70,524 18,738 37,154 4,238 130,654 91,144 Less: transfer to intangible assets 187 - - - 187 - Charge for the year 28,076 13,042 17,747 3,453 62,318 40,803 Less: accumulated depreciation on disposal - 3 117 - 120 1,293 Accumulated depreciation on 31 December 98,413 31,777 54,784 7,691 192,665 130,654 Net book value on 31 December 2008 97,224 55,626 158,551 9,576 320,977 Net book value on 31 December 2007 76,591 38,488 122,094 13,029 250,202
DFCC Vardhana Bank 60 Annual Report 2008
140 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 21 Intangible Assets
As at 31 December 2008 2007 Rs ‘000 Rs ‘000
Cost on 1 January 346,345 313,303 Transfer from property and equipment 796 - Additions for the year 42,441 33,042 Cost on 31 December 389,582 346,345
Accumulated depreciation on 1 January 230,168 194,137 Transfer from property and equipment 187 - Amortisation for the year 39,161 36,031 Accumulated amortisation on 31 December 269,516 230,168
Net Book Value on 31 December 120,066 116,177
22 Deferred tax (liability) / assets (net) Deferred tax asset (Note 22.1) 31,907 106,743 Less: Deferred tax liability (Note 22.2) 36,796 23,920 (4,889) 82,823
2008 2007 Temporary Temporary difference Tax effect difference Tax effect Rs ‘000 Rs ‘000 Rs ‘000 Rs ‘000
22.1 Deferred tax asset Balance on 1 January 304,977 106,742 432,998 151,550 Add : Adjustment in respect of final tax return 199 70 - - Less : Reversal during the year 214,015 74,905 128,021 44,807 Balance on 31 Decemaber 91,161 31,907 304,977 106,743
22.2 Deferred tax liability Balance on 1 January 68,340 23,920 41,523 14,534 Originating during the year 36,788 12,876 26,817 9,386 Balance on 31 Decemaber 105,128 36,796 68,340 23,920
Deferred tax asset was not recognised on the general provision as at the balance sheet date, as it is not considered to be a temporary difference which will reverse in the foreseable future.
DFCC Vardhana Bank 61 Annual Report 2008
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 141 Notes to the Financial Statements... Contd
As at 31 December 2008 2007 Rs ‘000 Rs ‘000
23 Other assets Deposits and prepayments 67,515 45,023 Stocks of stationery 3,556 3,567 Clearing account balances 375,538 561,003 Other receivables 101,819 33,310 548,428 642,903
24 Deposits from customers Demand deposits 712,384 628,469 Savings deposits 2,361,526 1,359,713 Time deposits 15,733,457 9,834,129 Certificates of deposits 84,793 33,540 Others 79,939 261,294 18,972,099 12,117,145
24.1 Analysis of deposits Deposits from banks 1,884,718 1,513,884 Deposits from finance companies 54,907 74,420 Deposits from other customers 17,032,474 10,528,841 18,972,099 12,117,145
25 Borrowings Balances with foreign banks 84,669 216,255 Balances with local banks 750,000 200,000 Borrowing from DFCC Bank 122,000 122,000 Borrowing under repurchase agreements 1,233,213 605,830 2,189,882 1,144,085
Amount falling due within one year 2,067,882 1,022,085 Amount falling due more than one year 122,000 122,000 2,189,882 1,144,085
26 Group balances payable DFCC Bank 19,050 37,065
27 Retirement benefit obligation Balance on 1 January 9,069 6,183 Add: Provision for the year 2,435 4,529 Less: Payments 440 1,643 Balance on 31 December 11,064 9,069
Based on the Sri Lanka Accounting Standard 16 (revised 2006) Employee Benefits, which became effective from the financial year commencing after 1st July 2007, Bank has adopted to apply the acturial valuation method as explained in note 4.3.4.2 to these financial statements.
Prinicipal assumptions used (a) Discount rate 11.5% (b) Expected percentage increase in salary 11.0%
DFCC Vardhana Bank 62 Annual Report 2008
142 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document As at 31 December 2008 2007 Rs ‘000 Rs ‘000
28 Other liabilities Interest payable 418,174 266,426 Account payable 90,745 136,334 Cheques pending realisation 380,791 562,159 Others 43,781 40,985 933,491 1,005,904
29 Stated Capital In accordance with Section 58 of Companies act No 7 of 2007, which became effective from 3rd May 2007, share capital and share premium have been reclassified as stated capital.
As at 31 December 2008 2007 Rs ‘000 Rs ‘000
Issued and fully paid share capital Balance on 1 January 2,077,387 1,184,071 184,188,822 ordinary shares (118,407,100 shares in 2007)
Add: Rights issue - 893,316 (65,781,722 shares in 2007)
Balance on 31 December 2,077,387 2,077,387 184,188,822 shares
30 Contingent liabilities and commitments In the normal course of business, the Bank makes various commitments and incures certain contingent liabilities with legal recourse to its customers.
No material losses are anticipated as a result of these transactions.
As at 31 December 2008 2007 Rs ‘000 Rs ‘000
30.1 Contingent liabilities Acceptances 1,056,664 688,178 Guarantees 1,900,562 2,586,437 Bid bonds 35,644 50,008 Documentary letters of credit 815,049 1,529,287 Forward contracts 1,910,051 128,585 Bills for collection 661,923 872,454 6,379,893 5,854,949
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As at 31 December 2008 2007 Rs ‘000 Rs ‘000
30.2 Commitments in ordinary course of business Commitments for unutilized credit facilities 903,791 802,142 Capital expenditure approved by the board of directors Contracted 45,922 31,035 Not contracted 64,975 72,706 1,014,688 905,883
Commitments and contingent liabilities 7,394,581 6,760,832
30.3 Litigation against the Bank There was no outstanding litigation against the bank at the year end.
31 Maturity profile of assets and liabilities 31.1 Definition of maturity 31.1.1 Time interval between balance sheet date and contractual maturity date, as defined in Sri Lanka Accounting Standard 23, “Revenue Recognition and Disclosures in the Financial Statements of Banks”, in respect of assets and liabilities
31.1.2 Time interval between balance sheet date and expected date of realization of assets and repayment of liabilities as defined by Central Bank of Sri Lanka for assets and liabilities with no contractual maturity dates.
31.2 Total Up to 3 months 3 to 12 months 1 to 3 years 3 to 5 years > 5 years Rs. 000 Rs. 000 % Rs. 000 % Rs. 000 % Rs. 000 % Rs. 000 %
Assets with contractual maturity (Interest bearing assets) Treasury bills and other securities eligible for rediscounting with Central Bank 5,764,172 1,950,080 33 1,646,611 29 2,167,481 38 0 0 0 0 Treasury bills purchased under resale agreements 171,564 171,564 100 0 0 0 0 0 0 0 0 Bills of exchange 326,171 324,357 99 1,814 1 0 0 0 0 0 0 Loans and advances 14,426,000 7,014,092 49 6,147,609 43 778,146 5 312,443 2 173,710 1 20,687,907 9,460,093 45 7,796,034 38 2,945,627 14 312,443 2 173,710 1
Other assets (Non-interest bearing assets) Cash and short term funds 2,177,373 2,177,373 100 0 0 0 0 0 0 0 0 Balances with Central Bank of Sri Lanka 768,383 768,383 100 0 0 0 0 0 0 0 0 Interest receivable 179,569 142,353 80 18,429 10 12,019 7 4,095 2 2,673 1 Investment securities 2,030 0 0 0 0 0 0 0 0 2,030 100 Other assets 548,428 515,999 94 32,429 6 0 0 0 0 0 0 Property and equipment 320,977 0 0 0 0 0 0 0 0 320,977 100 Intangible Assets 120,066 0 0 0 0 0 0 0 0 120,066 100 4,116,826 3,604,108 88 50,858 1 12,019 0 4,095 0 445,746 11 Total assets 24,804,733 13,064,201 53 7,846,892 32 2,957,646 12 316,538 1 619,456 2
DFCC Vardhana Bank 64 Annual Report 2008
144 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 31.2 Contd. Total Up to 3 months 3 to 12 months 1 to 3 years 3 to 5 years > 5 years Rs. 000 Rs. 000 % Rs. 000 % Rs. 000 % Rs. 000 % Rs. 000 %
Liabilities with contractual maturity (Interest bearing liabilities) Deposits from customers 18,259,715 12,079,183 66 6,030,922 33 86,803 1 62,807 0 0 0 Bank borrowing 872,000 550,000 63 200,000 23 122,000 14 0 0 0 0
Borrowing under repurchase agreements 1,233,212 1,123,858 91 109,354 9 0 0 0 0 0 0 20,364,927 13,753,041 68 6,340,276 31 208,803 1 62,807 0 0 0
Other liabilities (Non-interest bearing liabilities) Deposits from customers-demand 712,384 712,384 100 0 0 0 0 0 0 0 0 Balances with foreign banks 84,670 84,670 100 0 0 0 0 0 0 0 0 Group balances payable 19,050 19,050 100 0 0 0 0 0 0 0 0 Current tax payable 46,321 11,580 25 34,741 75 0 0 0 0 0 0 Deffered tax liability 4,889 2,445 50 2,444 50 0 0 0 0 0 0 Other liabilities 944,555 795,295 84 134,688 15 2,043 0 1,465 0 11,064 1 1,811,869 1,625,424 90 171,873 9 2,043 0 1,465 0 11,064 1 Total liabilities 22,176,796 15,378,465 69 6,512,149 29 210,846 1 64,272 0 11,064 0
32 Related Party Disclosures The Company carries out transactions in the ordinary course of its business with parties who are defined as related parties in Sri Lanka Accounting Standard No.30 -Related Party Disclosures (revised 2005), the details of which are reported below.
32.1 Transactions with Parent Company 32.1.1 Accommodation granted by the Parent Company
2008 2007 Facility type Terms Facility limit Balance Facility limit Balance outstanding outstanding Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000
Short term loan Each tranch is repayable in 3 months after - - the date of utilization and interest rate based on Interbank Rate plus a premium determined at the date of utilization.
Medium term loan Each tranch is repayable in 5 years from 878,000 0* 878,000 0* the date of utilization and interest repriced quarterly based on Sri Lanka Interbank Offer Rate plus a premium.
Guarantee facility to secure Guarantee commission is 0.5% per annum. 0* 0* borrowings by the bank
Subordinated fixed term loan Repayable in one installments (capital) after a 122,000 122,000 122,000 122,000 grace period of 5 years from the date of disbursement at the rate of 11% per annum.
* Not utilized.
DFCC Vardhana Bank 65 Annual Report 2008
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2008 2007 Facility type Rs. ‘000 Rs. ‘000
32.1.2 Accommodation granted to parent company Overdraft Facility of Rs. 50 Mn 49,214 Cr 11,615 Cr
32.1.3 Deposits with and interest / commission to parent company 2008 2007 Nature of Transaction Rs. ‘000 Rs. ‘000
Foreign currency deposits 1,834,001 1,408,165 Interest payable 5,004 8,416 Borrowing under repurchase agreements collateralized by treasury bills 230,000 237,000 Interest expenses on borrowings and deposits 90,797 121,242 Commission paid 259 1,463
32.1.4 Non lending transactions with the parent compnay The parent company carries out certain functions of the Bank and vice versa, as set out in the the collaborative agreement between the Bank and the parent company. Following fees or recovery of costs were accounted for in the books of the Bank during the year.
2008 2007 Rs. ‘000 Rs. ‘000
a. Fees or recovery of costs charged by the Parent Company 154,127 78,580 b. Fees or recovery of cost charged to the Parent Company 7,108 9,135
2008 2007 Subsidiary/Joint Venture Companies Rs. ‘000 Rs. ‘000
32.2 Transactions with subsidiary/joint venture companies of the parent company Acuity Partners (Pvt) Limited DFCC Stock Brokers (Pvt) Ltd. ceased to be a subsidiary of DFCC Bank from 1st July 2008 and became a subsidiary of Acuity Partners (Pvt) Ltd. which is a Joint Venture of DFCC Bank.
Overdraft Facility of Rs. 50 Mn 846 Cr 231 Cr Borrowing under repurchase agreements collateralized by treasury bills 81,200 51,500
Synapsys Limited Aggregate deposits held with the Bank 2,982 33,482 Borrowing under repurchase agreements collateralized by treasury bills 766 - Payments made to IT related services 26,393 19,090
DFCC Consulting (Pvt) Limited Aggregate deposits held with the Bank 23,221 26,557
Lanka Industrial Estates Limited Aggregate deposits held with the Bank 72,097 44,152 Borrowing under repurchase agreements collateralized by treasury bills 29,915 -
Lanka Ventures Limited Aggregate deposits held with the Bank 5 35,003 Borrowing under repurchase agreements collateralized by treasury bills 21,640 -
DFCC Vardhana Bank 66 Annual Report 2008
146 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 32.3 Transactions with the Key Management Personnel (KMP) of the Bank. 32.3.1 Key Management Personnel According to Sri Lanka Accounting Standard 30 (revised 2005) - “Related Party Disclosure”, KMP are those having authority and responsibility for planning, directing and controlling the activities of the entity. Accordingly the KPM of the Bank are, a. The Board of Directors of the Bank, Chief Executive Officer, Chief Operating Officer, Head of Credit, Head of Customer Relations, Head of Credit Risk and Quality Control and Head of Corporate Credit, of the Bank and, b. Key Management Personnel of the Parent company. 2008 2007 Rs’000 Rs’000
32.3.2 Compensation of Key Management Personnel Short term employment benefits 29,388 22,627 Post employment benefits 4,663 3,897
In addition to their salaries, the Company also provides non-cash benefits to KMP.
32.3.3 Transactions with Key Management Personnel, and their close family members. (1) Deposits held by Key Management Personnel Aggregate deposits held by - Directors 14,614 5,853 - Other KMP’s 20,410 11,398
Borrowing Under Repurchase Agreements - Directors 1,668 11,708 - Other KMP’s 6,361 327
(2) Facilities held by Key Management Personnel Loans and Advances - Other KMP’s (security - cash deposits) 1,526 205
32.4 Transaction with Other Related entities Other related entities are those which are controlled or significantly influenced, directly or indirectly by KMP of the Bank. Significant influence is presumed to be established if a KMP of the Bank has more than 20% shareholding in an entity, unless otherwise reported by the KMP further significant influence is also established if in the view of the respective KMP, he has the ability to influence the operating and financial policies of an entity even in the absence of a 20% shareholding. 2008 2007 Rs’000 Rs’000
Aggregate Deposits held with the Bank 1,619 498 Payments made by the Bank for provision of secretarial services 104 113
33 Events after the Balance Sheet Date 33.1 Proposed Dividend Directors have recommended the payment of a final dividend of 10 cents per share for the year ended 31 December 2008,which requires the approval of the shareholders at the Annual General Meting to be held on the 28 May 2009 .The Board of Directors confirm that the Bank has satisfied the solvency test in accordance with section 57 of the Companies Act No 7 of 2007 and have obtained certification from the auditors. The proposed final dividend exceeds the minimum distribution mandated by the Inland Revenue Act No 10 of 2006 and therefore the 15% deemed dividend tax, will not be imposed on the Bank.
No other circumstances have arisen which would require disclosure or adjustment to the accounts
34 Comparative Figures Where items are regrouped, comparative information is also adjusted.
35 Directors’ Responsibility Statement The Board of Directors of the Bank is responsible for the preparation and presentation of these Financial Statements. Please refer to page 36 for the statement of Directors’ Responisbility for financial reporting.
DFCC Vardhana Bank 67 Annual Report 2008
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 147 148 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document ANNEX D: DFCC VARDHANA BANK LIMITED, UNAUDITED INTERIM FINANCIAL STATEMENTS AS AT 30 JUNE 2011
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 149 DFCC VARDHANA BANK LTD INCOME STATEMENT For the 3 months ended For the 06 months ended 30-06-2011 30-06-2010 30-06-2011 30-06-2010 Rs '000 Rs '000 Rs '000 Rs '000
Income 981,082 888,356 1,841,675 1,908,303
Interest income 851,054 805,186 1,595,894 1,723,098 Interest income on loans and advances 734,456 497,415 1,347,067 1,040,531 Interest income on other interest earning assets 116,598 307,771 248,827 682,567
Less: Interest expenses 436,583 412,084 823,240 843,911 Interest expenses on deposits 368,258 400,828 728,641 813,893 Interest expenses on other interest bearing liabilities 68,325 11,256 94,599 30,018
Net interest income 414,471 393,102 772,654 879,187
Non - interest income 130,028 83,170 245,781 185,205 Foreign exchange income 20,218 7,167 40,432 3,426 Other income 109,810 76,003 205,349 181,779
Less : Non - interest expenses 345,196 275,404 681,975 533,203 Personnel cost 123,162 92,300 242,018 177,055 Provisions for staff retirement benefits 1,650 1,500 3,300 3,000 Premises, equipment and establishment expenses 85,620 67,068 164,313 134,248 Loss on trading/investment securities 0 0 0 0 Amortization of intangible assets - Computer application software 10,652 12,753 20,832 25,323 Other operating expenses 124,112 101,783 251,512 193,577
Less: Provision for bad and doubtful debts and loans written off 44,840 67,011 83,137 138,703 Provision - General (4,751) 13,792 6,291 13,540 Provision - Specific 65,876 80,690 122,165 209,028 Recoveries (-) (16,894) (27,855) (47,759) (84,895) Loans written off 609 384 2,440 1,030
Less: Provision for decline in value of investments (Net) 0 0 0 0
Operating profit on ordinary activities before taxes 154,463 133,857 253,324 392,486
Less: Value added tax on financial services 22,441 42,781 37,160 103,420
Operating profit on ordinary activities before corporate tax 132,022 91,076 216,164 289,066
Less: Tax on profits on ordinary activities 38,630 48,254 65,085 139,478
Profit for the period 93,392 42,822 151,079 149,588
Earnings per share - Rs 0.50 0.23 0.81 0.81
150 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document DFCC VARDHANA BANK LTD BALANCE SHEET As at 30.06.2011 31.12.2010 Rs'000 Rs'000 (Audited)
On-Balance Sheet Assets
Cash in hand 1,100,313 942,800 Balances with Central Bank of Sri Lanka 1,143,980 894,235 Due from banks and other financial institutions 1,020,471 1,209,296 Investments - Trading Account 24,795 0 Government securities 24,795 0 Other securities 0 0 Investments - Held-to-Maturity (Net of provisions made for decline in value of investments) 6,884,183 7,057,926 Government securities 6,882,153 7,055,896 Other securities 2,030 2,030 Less: Provision for decline in value of investments 0 0 Investments in associates and subsidiaries 0 0 Total loans and advances Total performing loans and advances 23,459,523 17,703,677 Bills of exchange 337,218 282,761 Overdrafts 9,280,621 6,958,919 Lease rentals receivable 0 0 Other loans 13,656,167 10,327,136 Interest receivables 185,517 134,861 Total non-performing loans and advances 2,518,913 2,343,112 Bills of exchange 31,894 35,102 Overdrafts 1,023,004 969,895 Lease rentals receivable 0 0 Other loans 913,649 850,457 Interest receivables 550,366 487,658 Total gross loans and advances 25,978,436 20,046,789 Less: Interest in suspense 1,132,872 968,690 Specific loan loss provision 889,830 820,421 General loan loss provision 134,958 128,868 Net loans and advances 23,820,776 18,128,810 Other assets 879,202 695,953 Intangible assets - Computer application software 120,044 125,300 Investment properties 80,557 109,198 Property plant and equipment (Net of accumulated depreciation) 359,755 362,038
Total on balance sheet assets 35,434,076 29,525,556 On-balance sheet liabilities Total deposits 25,473,731 23,495,923 Demand deposits 1,605,827 1,434,833 Savings deposits 5,793,480 5,412,648 Time deposits 17,747,830 16,318,932 Margin deposits 161,198 230,357 Other deposits 165,396 99,153 Total borrowings 4,241,404 1,671,694 Borrowings from Central Bank of Sri Lanka 0 0 Borrowings from banks and financial institutions in Sri Lanka 1,795,332 18,305 Borrowings from banks and financial institutions abroad 102,906 35,579 Securities sold under repurchase agreements 2,343,166 1,617,810 Subordinated term debt 0 0 Other borrowings 0 0 Deferred taxation 40,156 40,192 Current taxation 40,425 67,140 Other liabilities 1,338,817 1,152,022 Total on balance sheet liabilities 31,134,533 26,426,971
Equity capital and reserves Stated Capital ( note 4) 3,182,519 2,077,387 Statutory reserve fund 50,227 50,227 Total other reserves 1,066,797 970,971
Total equity capital and reserves 4,299,543 3,098,585
Total on-balance sheet liabilities and shareholders' funds 35,434,076 29,525,556
Off-balance sheet items and contra accounts Contingencies 11,623,085 8,657,981 Commitments and contra accounts 2,755,645 1,722,074 Memorandum information Number of employees 680 627 Number of branches and extension offices 124 123
1 ======CERTIFICATION: - (1) We, the undersigned, being the Chairman , the Chief Executive Officer and Senior Manager Accounting & Reporting of DFCC Vardhana Bank Ltd. Certify jointly that:
(a) the above statements have been prepared in compliance with the format and definitions prescribed by the Central Bank of Sri Lanka
(b) the information contained in these statements have been extracted from the unaudited financial statements of the Bank unless indicated as audited
(Sgd) (Sgd) (Sgd) J M S Brito Lakshman Silva D S J Wettasinghe Chairman Director & Chief Executive Officer Senior Manager-Accounting & Reporting Date : 29.07.2011 Date: 29.07.2011 Date: 29.07.2011 ======
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 151 DFCC VARDANA BANK LTD
CASH FLOW STATEMENT
For the 6 Months ended 30th June 2011 2010 Rs '000 Rs '000 Cash flow from operating activities Interest receipts 1,298,279 1,081,058 Fees and commission receipts 109,756 76,253 Interest payments (822,022) (927,324) Receipts from other operating activities 77,144 51,203 Cash payments to employees and suppliers (733,938) (528,166) Value added tax paid (29,124) (93,672) Operating loss before changes in operating assets and liabilities (99,905) (340,648)
(Increase ) /decrease in operating assets Deposits held for regulatory or monetary control purposes (249,745) (34,022) Funds advanced to customers (5,726,315) (1,115,577) Others (215,613) (30,426)
Increase /(decrease ) in operating liabilities Deposits from customers 1,911,565 938,923 Negotiable certificates of deposit 66,243 (4,474) Others 285,247 (54,777) Net cash (used ) / generated from operating activities before Income tax (4,028,523) (641,001) Income tax paid (72,119) (69,156) Net cash (used in ) / generated from operating activities (4,100,642) (710,157)
Cash flow from investing activities
Treasury bills eligible for rediscounting with Central Bank -more than 3 months 3,310,952 3,698,544 Income from investment securities 41 - Interest receipts from treasury bills and bonds 328,951 497,022 Acquisition of Investment Properties - (109,198) Disposal of Investment Properties 31,950 - Disposal of property & equipment 1,652 3,920 Purchase of property and equipment (61,800) (55,122) Net cash (used in ) / generated from investing activities 3,611,746 4,035,166
Cash Flow from financing activities Proceeds from rights issue 1,105,132 - Bank borrowing 1,844,354 (2,022,372) Borrowing under repurchase agreements 725,356 (2,012,174) Dividends paid (55,253) (55,257) Net cash (used in ) / generated from financing activities 3,619,589 (4,089,803)
Net increase/(decrease) in cash and cash equivalents 3,130,692 (764,794) Cash and cash equivalents at beginning of period 4,757,379 5,513,895 Cash and cash equivalents at end of period 7,888,071 4,749,101
Composition of Cash and Cash Equivalent at end of period Cash and short term funds 1,830,784 1,660,062 Treasury bills and other securities eligible for rediscounting with CBSL-less than 3 months 5,767,287 3,089,039 Treasury bills purchased under resale agreements - less than 3 months 290,000 - 7,888,071 4,749,101
152 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document STATEMENT OF CHANGES IN EQUITY For the 06 months ended Other Reserves Stated Capital Reserve Investment Fund Retained Total Fund Reserve Earnings
Rs '000 Rs '000 Rs '000 Rs '000 Rs '000 Balance as at 31/12/2009 2,077,387 36,427 - 764,037 2,877,851 Net profit for the 06 months ended 30th June 2010 - - - 149,588 149,588 Dividend paid - - - (55,257) (55,257) IssueBalance of Shares/Increase as at 30/06/2010 of assigned capital 2,077,387 0 36,427 - - 858,368 - 2,972,182 0 Balance as at 31/12/2010 2,077,387 50,227 - 970,971 3,098,585 Net profit for the 06 months ended 30th June 2011 - - - 151,079 151,079 Rights issue of new shares 1,105,132 - - - 1,105,132 Dividend paid - - - (55,253) (55,253) Transfers to investment fund - - 41,420 (41,420) 0 Balance as at 30/06/2011 3,182,519 50,227 41,420 1,025,377 4,299,543
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 153 SELECTED PERFORMANCE INDICATORS As at As at 30.06.2011 31.12.2010
Regulatory capital adequacy Core capital (Tier 1 capital) , Rs. Mn 4,028 2,973 Total capital base, Rs. Mn 4,163 3,102 Core capital adequacy ratio, as % of risk weighted assets 16.07% 14.74% (Minimum requirement, 5%) Total capital adequacy ratio, as % of risk weighted assets 16.61% 15.38% (Minimum requirement, 10%)
Assets quality (Quality of loan portfolio) Gross non - performing advances ratio, % (net of interest in suspense) 5.58% 7.20% Net non - performing advances ratio, % (net of interest in suspense and Provisions) 1.45% 2.23%
Profitability Interest margin, % 4.62% 5.65% Return on assets (after tax) % 0.90% 0.92% Return on equity, % 9.11% 9.17%
Regulatory liquidity Statutory liquid assets, Rs.Mn. Domestic banking unit 6,941 7,396 Off-shore banking unit 1,417 1,345
Statutory liquid assets ratio, % (Minimum requirement, 20%) Domestic banking unit 26% 31% Off-shore banking unit 45% 40%
154 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document Explanatory Notes
01. Accounting policies The accounting policies and methods of computations are consistent with those policies and methods followed during the previous financial year except for the mandatory general provision on loans and overdraft portfolio excluding those to which specific provision apply, imposed by Central Bank of Sri Lanka, is reduced form 1% to .8% and .7% in the quarter ended 31 March 2011 and 30 June 2011 respectively.
02. Comparative figures Where items are regrouped, comparative information is also adjusted to conform to the 06 months ended 30 June 2011 presentation.
03. Foreign exchange income/ (loss) The Bank engages in funding swap between US dollar and Sri Lanka rupees to benefit from interest rate arbitrage. The foreign exchange income is net of swap cost.
04. Stated capital Number of shares Shares as at 31 December 2010 184,188,822 Rights issue of 1 new share for each 5 shares held as at 24 June 2011 36,837,739 Shares as at 30 June 2011 221,026,561
05. Investment fund reserve Investment Fund Reserve represents cumulative savings of financial services VAT and Income tax arising from the reduction of tax rates. The amount is appropriated from profits. The Investment Fund Reserve will be utilised for the purposes prescribed by the Central Bank of Sri Lanka and this reserve is included under other reserves in the Statement of changes in equity.
06. Disclosures required by Central Bank for Investment Fund Account (IFA)
Utilization of funds in Investment Fund Account (IFA) Rs 000 Balance on 1 January 2011 Nil SME and other loans 12,000 Temporary investment in Government securities 10,935 Balance on 30 June 2011 22,935
Details of loans to small and medium enterprises
No of loans granted 1 Interest rate fixed 11.70% Tenor 5 years
Details of Investment securities
Amount -Rs Maturity Interest rate 10,935 August 2011 7.06%
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 155 156 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document ANNEX E: CREDIT RATINGS REPORT BY FITCH RATINGS LANKA LTD
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 157 Rating Action & Commentary
Fitch Rates DFCC Vardhana Bank's Sub Debt 'A+(lka)'
Fitch Ratings-Colombo/Singapore-29 June 2011: Fitch Ratings Lanka has assigned DFCC Vardhana Bank Limited's (DVB) proposed subordinated debentures of up to LKR1.0bn a National rating of 'A+(lka)'. The agency has simultaneously affirmed DVB's National Long- Term rating at 'AA-(lka)' with a Stable Outlook.
The proposed debt issue has tenures ranging from five to seven years, and will have both fixed and floating coupon rates. Capital will be re-paid on maturity. The proposed debenture will be utilised to finance loan growth and will also help strengthen the bank's tier 2 capital. It is expected to be listed on the Colombo Stock Exchange, and is DVB's initial step in fulfilling the regulatory listing requirements for licensed commercial banks (LCB).
The ratings reflect Fitch's expectation that support would be forthcoming from its parent, DFCC Bank (DFCC; 'AA(lka)'/Stable), should it be required. DVB is almost fully owned by DFCC, with the latter increasing its stake to 99.01% in June 2011 (end-2010: 95.58%) via a rights issue; this will increase DVB's capital base by LKR1.1bn. It accounted for 33% of the DFCC group's assets at end-March 2011, and plays an important role in expanding the group's product offering. In addition to the common franchise shared by both banks, the operations of the two are closely linked with the integration of key back-office and treasury functions, as well as shared personnel and inputs on key decision-making committees.
DVB's rating is linked to that of DFCC and contingent on the support assumed to be available from the parent. Therefore, any changes to the implied support from DFCC or the strategic importance of DVB to its parent could trigger a rating action.
DVB is an LCB. DFCC is a licensed specialised bank and Sri Lanka's only development finance institution.
The latest research on DVB is available on www.fitchratings.com and www.fitchratings.lk.
Contacts: Primary Analyst Ramali Perera Financial Analyst + 94 11 254 1900 Fitch Ratings Lanka Limited Level 15-04 East Tower, World Trade Center Colombo 01, Sri Lanka
Secondary Analyst Rukshana Thalgodapitiya Assistant Vice President + 94 11 254 1900
158 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document Committee Chairperson Jonathon Lee Senior Director +886 2 8175 7600
Media Relations: Bindu Menon, Mumbai, Tel: + 91 22 4000 1727, Email: [email protected]; Shivani Sundralingam, Singapore, Tel: + 65 6796 7215, Email: [email protected].
Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(lka)' for National ratings in Sri Lanka. Specific letter grades are not therefore internationally comparable.
Additional information is available at www.fitchratings.com.
Applicable criteria, 'Global Financial Institutions Criteria', dated 16 August 2010, are available at www.fitchratings.com.
DFCC has a 1.78% shareholding in Fitch Ratings Lanka Ltd's equity. No shareholder, other than Fitch Ratings Limited of the UK, is involved in the operations of, or credit rating reviews conducted by, Fitch Ratings Lanka Ltd.
Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 159 160 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document ANNEX F: COLLECTION POINTS
Copies of the Introductory Document can be obtained free of charge from the following collection points. Managers to the Introduction Acuity Partners (Private) Limited No. 53, Dharmapala Mawatha, Colombo 03 T: 011 2 206206 Members and Trading Members of the CSE Acuity Stockbrokers (Private) Limited Asha Phillips Securities Limited No. 53, Dharmapala Mawatha, Level 4, “Millennium House”, Colombo 03 No. 46/58, Navam Mawatha, T: 011 2 206206 Colombo 02 T: 011 2 429100
Asia Securities (Private) Limited Assetline Securities (Pvt) Ltd. Level 21, West Tower, No. 282, Kaduwela Road World Trade Centre, Echelon Square, Battaramulla Colombo 01, T: 011 4 700111,011 2 307366 Tel. 011 2 423905, 011 5 320000
Arrenga Capital (Pvt) Ltd Bartleet Mallory Stockbrokers (Private) Limited Level 23, East Tower, World Trade Centre Level G, “Bartleet House” Colombo 01 No. 65, Braybrooke Place, T: 011 7 277000 Colombo 02 T: 011 5 220200
Capital Trust Securities (Private) Limited Nation Lanka Equities (Pvt) Ltd No. 42, Mohamed Macan Markar Mawatha, Level 9, “Ceylinco House”, Colombo 03 No. 69, Janadipathi Mawatha, T: 5335225 Colombo 01 T: 4714300, 4714388-9, 077-891871
CT Smith Stockbrokers (Private) Limited Capital Alliance Securities (private) Limited 4-14, Majestic City, Level 5, “Millenium House”, No. 10, Station Road, No. 46/58, Navam Mawatha, Colombo 04 Colombo 02 T: 011 2 552290-4 T: 011 2 317777
Claridge Stockbrokers (Pvt) Ltd D N H Financial (Pvt) Ltd. No. 10, Gnanaratha Pradeepa Mawatha Level 16, West Tower, World Trade Center Colombo 08 Colombo 01 T: 011 2 697974 T: 011 5 732222
First Guardian Equities (Private) Limited Heraymila Securities Ltd. 32nd Floor, East Tower, World Trade Centre, Level 8, South Wing, Millennium House Echelon Square, No. 46/58, Nawam Mawatha, Colombo 01 Colombo 02 T: 011 5 884400 T: 011 2 359100
DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document 161 IIFL Securities Ceylon (Pvt) Ltd. J B Securities (Pvt) Ltd. 27th Floor, East Tower, World Trade Center No. 150, St. Joseph Street Colombo 01 Colombo 14 T: 011 2 333000 T: 011 2 490900, 077-2490900
John Keells Stockbrokers (Private) Limited Lanka Securities (Private) Limited No. 130, Glennie Street, No. 228/2, Galle Road, Colombo 02 Colombo 04 T: 011 2 326003, 011 2 338066 T: 011 4 706757, 011 2 554942
NDB Stockbrokers (Pvt) Ltd. New World Securities (Pvt) Ltd 5th Floor, NDB Building 2nd Floor, No. 40, Navam Mawatha No. 45/2, Braybrooke Street Colombo 02 Colombo 02 T: 011 2 314170-8 T: 011 2 358700/20
Richard Pieris Securities (Pvt) Ltd SC Securities (Private) Limited No. 69, 2nd Floor, Hyde Park Corner, No. 55, D. R. Wijewardena Mawatha, Colombo 02 Colombo 10 T: 0777281281 T: 011 4 711000
SKM Lanka Holdings (Private) Limited SMB Securities (Private) Limited No. 377/3, Galle Road, No. 47, Dharmapala Mawatha, Colombo 03 Colombo 03 T: 011 2 372413-4 T: 011 5 539593
Somerville Stockbrokers (Private) Limited Tabrobane Securities (Private) Limited No. 137, Vauxhall Street, No. 10, Gothami Road, Colombo 02 Colombo 10 T: 011 2 329201-5, 011 2 332827 T: 011 5 328100
TKS Securities (Private) Limited LOLC Securities Ltd 19-01, East Tower, World Trade Centre Level 18, West Tower, World Trade Center Colombo 01 Colombo 01 T: 011 7 857799 T: 5880880
162 DFCC Vardhana Bank Limited – Debenture Issue 2011/16 – Introductory Document