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Seylan Bank PLC Annual Report 2019 99 Sustainable Stewardship Corporate Governance meetings held during the year is given remuneration and profit/performance Mr W D K Jayawardena, who were identified under Section 3 (6) (i) of this Report. based bonus in respect of the year 2018. to retire by rotation in terms of Article 82 at the AGM scheduled to be held 3 (6) (ii) (q) () 3 (6) (iii) (d) () on 30 March 2020. The proposals for Proceedings at Meetings of the their re-election have been included in Whistle-Blowing Policy – The Bank has a BHRRC – Eight meetings were held during the Notice of the AGM to seek Whistle-Blowing Policy in place. The BAC the year. The CEO attended the meetings shareholders’ approval. has ensured that all employees are duly of the Committees by invitation. He was informed and duly advised of the effective not present at meetings of the Committee, 3 (6) (iv) (c) () use of the whistle-blowing process. when matters relating to him were Criteria for eligibility – CEO and KMPs – Independent investigations were carried being discussed. The Committee reviews and agrees out by the Internal Audit Department on the criteria for eligibility such as on whistle-blower complaints and were 3 (6) (iv) Board Nomination qualifications, experience and key reported to the BAC including appropriate Committee (BNC) attributes for appointments or promotions follow-up action. 3 (6) (iv) (a) () to the positions of key management Procedure Selection/Appointment of personnel such as CEO and KMPs. These 3 (6) (iii) Board Human Resources and Directors, Chief Executive Officer (CEO) are documented in the respective job Remuneration Committee (BHRRC) and Key Management Personnel descriptions of the CEO and of the KMPs. 3 (6) (iii) (a) () (KMPs) – Appointment of the CEO and the KMPs is within the scope and 3 (6) (iv) (d) () Determination of the Remuneration responsibilities of the Committee as Fitness and Propriety of Directors, Policy – This is a key responsibility specified in its Terms of Reference. CEO and KMPs – Affidavits and of the Board Human Resources and The BNC has adopted a Board approved Declarations to assess the fitness and Remuneration Committee (BHRRC). Policy Governing Appointment of Directors propriety of Directors, CEO and KMPs in The BHRRC on behalf of the Board aims for this purpose. terms of the Banking Act and its Directions to establish a transparent procedure were obtained prior to the appointment for determining the remuneration, 3 (6) (iv) (b) () of Directors and at the time of appointing salaries, allowances and other financial Re-election of current Directors – The or promoting to the Key Management or non-financial benefits, perquisites, BNC considered and recommended Personnel (KMP) position. Prior to the special incentives, etc., to Directors, the the re-election of Directors who were date of the AGM of the Bank, the affidavits Chief Executive Officer (CEO), the Key due to retire in accordance with the and declarations which were submitted by Management Personnel (KMPs) as well Companies Act and the Bank’s Articles the continuing Directors, were forwarded to as other employees of the Bank. A Board of Association taking into account their the Director, Bank Supervision for review approved Remuneration Policy is in place contribution to the Board. Upon obtaining and approval. and it is reviewed regularly. the Board’s concurrence to the BNC’s recommendation, they were included 3 (6) (iv) (e) () Based on the recommendation of the in the Agenda of the Annual General Succession Plan – The BNC considered Committee, Directors collectively decide Meeting (AGM) proposing and seeking and discussed matters relating to new on the remuneration and benefits for shareholders’ approval for the re-election. expertise, succession arrangements the CEO as well as the professional Non-Executive Directors, Mr W M R S Dias, for Directors, the CEO and for the Key fees and benefits (if any) to the and Mr S V Corea were re-elected at the Management Personnel (KMPs) at its Non-Executive Directors. The Committee AGM held on 28 March 2019 by the Meetings held during the year. seeks independent advice to determine shareholders in terms of Article 82 revisions and compensation packages of the Articles of Association. 3 (6) (iv) (f) () when deemed necessary to discharge Composition and Chairman of BNC – these responsibilities. No Director or Non-Executive Directors who were subject The BNC comprised five Non-Executive KMP is involved in deciding his or her to retirement by rotation and re-elected by Directors during the course of the year remuneration. the shareholders at the AGMs held during 2019, majority of the members were the last three years were as follows: independent. The BNC was chaired by 3 (6) (iii) (b) () Independent Director, Ms M C Pietersz. 2017 – Mr W D K Jayawardena and The CEO attended the meetings of the Goals and Targets – The Key Performance Ms M C Pietersz BNC on invitation. Indicators (KPIs/goals and targets) of Director/CEO for the year 2019 were 2018 – Mr I C Nanayakkara, 3 (6) (v) Board Integrated Risk tabled and approved by the Board upon Mr S P S Ranatunga, and Management Committee (BIRMC) being recommended by the Committee. Mr P L S K Perera 3 (6) (v) (a) () The KPIs for the KMPs were thereafter Composition of the Committee – submitted to the meeting of the Committee 2019 – Mr W M R S Dias and During the year, the Board Integrated and agreed upon. Mr S V Corea Risk Management Committee comprised three Independent Non-Executive Directors, 3 (6) (iii) (c) () Re-election of Directors in 2020 one Non-Independent Non-Executive The BNC and the Board have Director, the CEO and the Head of Evaluations of the performance of the CEO recommended the proposals for the Risk (Acting Chief Risk Officer). The and the KMPs – The BHRRC considered re-election of Non-Executive Directors, Committee was chaired by Independent the evaluations of the performance of the Mr A S Wijesinha, Ms S K Salgado and Director/CEO (the CEO) and the KMPs against the approved KPIs for the year 2018 and determined the revision of

100 Seylan Bank PLC Annual Report 2019 Sustainable Stewardship Corporate Governance Director, Mr D R Abeysuriya. The Head 3 (6) (v) (e) () (RPTs) and Avoidance of Conflicts of of Risk (Acting Chief Risk Officer) is the Frequency of Meetings – The Committee’s Interest (hereinafter referred to as the KMP in charge of supervising broad Terms of Reference provides that the Policy or Policy on RPTs) was reviewed risk categories, i.e., market, liquidity, Committee shall meet at least quarterly. and adopted during the year. The Directors operations, credit and strategic risks, and The Committee met quarterly during the were aware of their responsibility towards reports directly to the Committee. The year 2018. complying with the requirements of this Head of Compliance and Chief Financial Policy and they ensured that conflicts of Officer were co-opted to the Committee 3 (6) (v) (f) () interest did not arise when transactions and they attended the regular meetings Action against those who fail to identify which were considered at Board and of the Committee. Other KMPs and specific risks – Officers responsible at Board Subcommittee meetings in which management attended the Meetings when branches and/or departments failing to they had an interest, particularly with invited by the Committee. identify specific risks and the consequent related parties of the Bank as defined in impact to the Bank were identified during Direction No. 3 (7) (i), which includes any 3 (6) (v) (b) () the internal audit reviews. If such actions of the following: required audit investigations, they were Assessment of Risks – The three Executive carried out accordingly and reported in the zz The Bank’s subsidiary companies; Subcommittees of the BIRMC, namely audit/investigation reports. Depending on the Assets and Liability Management the nature of the offence the reports were zz The Bank’s associate companies; Committee (ALCO), the Executive Credit submitted to the line management and/or Risk Management Committee (ECRMC) to the Head of Human Resources and/or zz Directors of the Bank; and the Executive Market and Operational to the Chief Executive Officer and/or to the Risk Management Committee (EMORMC) Disciplinary Unit for appropriate action. zz Key Management Personnel (KMP); assess and review the respective categories of risks, namely, credit, Reports on high risk offences including zz a close relation of any of the Bank’s market, liquidity, and operational risks line management’s action taken to prevent Directors or of the KMPs; coming under their respective purview such offences in the future were submitted at their regular meetings. Key issues to the BIRMC if deemed appropriate, for zz a shareholder owning a material interest which were reported to the BIRMC at its information and advice or instructions. in the Bank; quarterly meetings were reviewed by the Committee and the management advised 3 (6) (v) (g) () zz a concern in which any of the Bank’s appropriately. The risk management Risk Assessment Report to the Board – Directors or a close relation of any of policies reviewed by the BIRMC and Risk Assessment Reports were submitted the Bank’s Directors or any of approved by the Board provide a to the Board meetings that were held after its material shareholders had a framework for management and the quarterly BIRMC meetings. Copies of substantial interest. assessment of the overall risks to the confirmed Minutes of the Committee the Bank. and recommendations of the Committee 3 (7) (ii) () were also submitted to the Board meeting The BIRMC also reviewed the risk that followed the Committee meetings Types of Transactions with related assessments of the Bank’s only for the Board’s perusal and appropriate parties – Transactions defined under this Subsidiary, Seylan Developments PLC, the decisions/concurrence. direction are described in the Bank’s Policy principal activities of which are property on RPTs and were carried out with related development and management. 3 (6) (v) (h) () parties in the normal course of business. Compliance Function – The Bank has 3 (6) (v) (c) () in place an Independent Compliance 3 (7) (iii) () function headed by “Head of Compliance”, Effectiveness of Management Level who is a KMP. The Head of Compliance Favourable Treatment – The Bank did not Committees – The reports submitted by reports directly to the BIRMC. She engage in transactions with related parties, the Acting Chief Risk Officer pursuant to submitted quarterly updates of the status in a manner that would grant such parties the proceedings of the ALCO, the ECRMC of compliance to the BIRMC and also “more favourable treatment” than that and the EMORMC as well as the minutes to the Board on a monthly basis. The accorded to other constituents of the Bank of the said Committees were reviewed and Committee closely scrutinised the status carrying on the same business such as; the effectiveness of these Committees of compliance with mandatory banking charging of a lower rate of interest than the were assessed by the BIRMC at its regular and other statutory requirements and Bank’s lending rate charged to non-related quarterly meetings. also the systems and procedures that are party customers or paying more than the in place to ensure compliance with such Bank’s deposit rate for a comparable 3 (6) (v) (d) () requirements by providing appropriate transaction with an unrelated comparable guidance and advice. counterparty and; providing services to Actions to mitigate specific risks – The or receiving services from a related party BIRMC advises on corrective action by the 3 (7) Related Party Transactions without an evaluation procedure. management to mitigate the effects of specific risks where such risks are at levels 3 (7) (i) () The Board has set a prudent percentage beyond the prudent levels approved by the Avoidance of Conflicts of Interest – of the Bank’s regulatory capital to limit Committee or where they are not in The Bank’s Board approved Policy and total net accommodation to related line with the Bank’s policies and/or Process on Related Party Transactions parties which said limit is monitored by regulatory requirements. the subcommittee of the BIRMC, namely the Executive Credit Risk Management Committee. The Head of Risk Management reports the level of exposure to the related parties in its quarterly updates to the BIRMC.

Seylan Bank PLC Annual Report 2019 101 Sustainable Stewardship Corporate Governance The Board approved Policy on RPTs 3 (7) (vii) () 3 (8) (ii) (a) () emphasises that all employees are Prior approval of Monetary Board for aware of the policy and guidelines Remittance of Accommodation Statement of Directors’ Responsibility set out therein. Heads of Divisions/ for Financial Reporting and Statements relevant officers who deal in related party There was no requirement to comply with of the Chief Executive Officer’s and Chief transactions follow the Policy guidelines the requirement of this section based on Financial Officer’s Responsibility for in their evaluations of related party the comments made under Direction Financial Reporting – These two reports transactions and provide a confirmation 3 (7)(v) and 3 (7) (vi) above. have been published in this Annual Report. when submitting the return of the They confirm that the Financial Statements respective transactions to the Compliance 3 (8) Disclosures for the year ended 31 December 2019 Unit on a quarterly basis. The Compliance conforms to the rules and regulatory Unit has adopted a mechanism to 3 (8) (i) () requirements. (Reference: pages 150 monitor and ensure that the policy is Annual Audited Financial Statements and 151). duly complied with. and Quarterly Financial Statements – The Annual Audited Financial Statements 3 (8) (ii) (b) () 3 (7) (iv) () and Quarterly Financial Statements were prepared and published in accordance Directors’ Statement on Internal Accommodation to a Director or to with the formats prescribed by the Control – The Statement on Internal a close relation of a Director (if any) – supervisory and regulatory authorities and Control published in this Annual Report This was granted with the approval of the the Accounting Standards. Annual Audited confirms that the financial reporting Board with not less than two-thirds of the Financial Statements were published in system provides reasonable assurance number of Directors other than the Director the Annual Report while the Quarterly regarding the financial report and that the concerned being present at such meeting Financial Statements were published in preparation of the Financial Statements and voting in favour of the proposed the newspapers in all three languages. for external purposes has been done in accommodation. The Board ensured that accordance with all relevant accounting such accommodations were secured by The above Reports were released to the principles and regulatory requirements. such security as may from time to time Colombo Stock Exchange (CSE) and (Reference: pages 109 and 110). be determined by the Monetary Board uploaded on its website www.cse.lk for the of the Central Bank of Sri Lanka information of the shareholders and the 3 (8) (ii) (c) () (The Monetary Board). general public prior to publishing in the newspapers. The reports were also made External Auditors’ Certification – The 3 (7) (v) () available on the Bank’s corporate website Bank has obtained an Assurance Report www.seylan.lk. Please refer The “Financial on the internal controls over financial Obtaining of required security for Calendar” page in this Annual Report for reporting from the External Auditors in accommodation granted to a related party the relevant dates. accordance with the “Sri Lanka Standard of a Director being appointed or to a on Assurance Engagements SLSAE 3050 – Director individually prior to such Director Assurance Reports for Banks on Directors’ being appointed Statements on Internal Control” and the same is published in this Annual Report. No circumstances arose during the year (Reference: pages 111). to comply with this requirement. 3 (8) (ii) (d) () 3 (7) (vi) () Details of the Directors – Please refer the following pages of the Annual Report for the Accommodation to employees or related respective information: parties connected to the employees Details Section of the Annual Report Page/s No accommodation has been granted on 76 to 79 “more favourable” terms such as waiver of Names, qualifications, expertise Profile of the Directors 116 fees and/or commissions to any employee Report of the Board of Directors 120 to 122 or a close relation of such employee or Fitness and Propriety Annexure to the Report of the to any concern in which the employee or Board of Directors 237 close relation has a substantial interest Details on Directors’ interest Note 51 to the Financial Statements other in respect of accommodations in other entities 102 to employees based on the scheme/s Disclosure under Direction applicable to the employees of the Bank Transactions with the Bank/ 3 (8) (ii) (f) of this report or when secured by security as may Related Party Transactions be approved by the Monetary Board in respect of accommodation granted as per Fees/Remuneration paid to Direction 3 (7) (v) above. Directors

102 Seylan Bank PLC Annual Report 2019 Sustainable Stewardship Corporate Governance 3 (8) (ii) (e) () Confirmation Total net accommodations to related parties Accommodation granted to related parties is given in Note 51 to the In terms of Direction 3 (8) (ii) (g) of the Financial Statements. Banking Act Direction No. 11 of 2007, on behalf of the Board of Directors, we confirm The net accommodation as at 31 December 2019, granted to each category of related that the findings of the “Factual Findings parties as defined in Direction 3 (7) (i) and as per LKAS 24 is given below as a Report” dated 21 February 2020 issued percentage of the Bank’s regulatory capital: by the Auditors, Messrs KPMG, Chartered Accountants to the Board of Directors Category of related party transactions Amount Percentage of pursuant to the agreed-upon procedure carried out by them in accordance with LKR Mn. regulatory capital “Sri Lanka Related Services Practice Statement 4750” are consistent with the Directors, Key Management Personal and their close relations 317.52 0.56 matters disclosed in the above Annual (Transactions including credit card accommodations) 175.00 0.31 Corporate Governance Report on the mandatory compliance with the Banking Subsidiary, Seylan Developments PLC 12,399.86* 21.87 Act Direction No. 11 of 2007 4,370.95** 7.71 (as amended). Material shareholders of the Bank and concerns in which a director of the Bank or material shareholder W M R S Dias has a substantial interest Chairman Other entities including common directorship entities *Includes accommodations non-funded, undrawn facilities – LKR 4,199.12 Mn. Excluding LKR 50 Mn. debenture investment held by Seylan Developments PLC, which is accounted in consolidated financial statements. **Includes accommodations non-funded, undrawn facilities – LKR 2,322.33Mn. 3 (8) (ii) (f) () Mrs N N Najumudeen Remuneration to KMPs and transactions with KMPs and aggregate values of the Company Secretary transactions of the Bank with its KMPs The aggregate remuneration paid to KMPs and transactions of the Bank with KMPs during the year 2019 were as follows: Remuneration/Transaction Amount 21 February 2020 LKR Mn. Colombo Remuneration to KMPs (as per CBSL definition)* 292.11 Rules of the Colombo 29.73 Stock Exchange (CSE) Directors’ Fees for Non-Executive Directors relating to Disclosure on 317.52 Corporate Governance Loans and Advances (including Credit Card accommodations to 331.50 KMPs and Non-Executive Directors) The Bank being a listed entity is bound 129.04 by, and at all times has complied with the Deposits of KMPs and Non-Executive Directors applicable Rules and Circulars of the CSE and the Central Depository Systems (Pvt) Investments by KMPs and Non-Executive Directors – Limited as amended or replaced from time Other Investments (Liability) to time. * Includes cash/non-cash and post-employment benefits to Directors and KMPs. Section 7.10 (c) of the CSE Rules states that where a listed entity is required 3 (8) (ii) (g) () Statement on Internal Controls published by any law applicable to such listed External Auditors Certification of the in this Annual Report provide the extent entity to comply with rules on corporate Compliance with Direction No. 11 of 2007 of the Bank’s compliance in this regard. governance promulgated under such law, on Corporate Governance There were no material non-compliance of such listed entity shall make disclosures of prudential requirements, regulations, laws compliance with the corporate governance The External Auditors have performed an and internal controls which affected the rules applicable to that sector. Seylan agreed-upon procedure in accordance Bank during the year. Bank PLC being a Licensed Commercial with the principles set out in the Sri Lanka Bank (LCB) has disclosed its level of Related Services Practice Statement 3 (8) (ii) (i) () compliance under the Banking Act and 4,750 and have provided a Factual Banking Act Directions No. 11 of 2007 Findings Report to the Board on the Bank’s Supervisory Concerns (as amended) on Corporate Governance extent of compliance with the Directions There were no significant supervisory for Licensed Commercial Banks of as disclosed in this Corporate Governance concerns on lapses in the Bank’s risk Sri Lanka in this Report. The disclosures Report. Please refer confirmation stated at management system or non-compliance made include and affirm the Bank’s the end of this report. with these Directions that have been compliance with the relevant sections pointed out by the Director, Bank under the Corporate Governance Rules 3 (8) (ii) (h) () Supervision, Central Bank of Sri Lanka and of the CSE. Compliance with prudential requirements, directed to be disclosed to the public. regulations, laws and internal controls Statement of Directors’ Responsibility for Financial Reporting and Directors’

Seylan Bank PLC Annual Report 2019 103 Sustainable Stewardship Corporate Governance Code of Best Practice on Corporate Governance 2017, published by The Institute of Chartered Accountants of Sri Lanka (ICASL) The Bank’s comprehensive disclosures on its compliance with the Banking Act Directions on Corporate Governance, and other disclosures published in this Annual Report adequately addresses the level of compliance with the principles of the Code of Best Practice on Corporate Governance 2017 published by the ICASL. Relevant references to the disclosures required as per Schedule I of the Code are listed below: Subject Code of Best Practice Reference to Section of the Annual Report/Remarks Page Principle Reference Chairman and CEO A.2.1 and A.5.7 Corporate Governance (CG) Report – CBSL Direction No. 3 (5) 92 Board Balance A.5.5 CG Report – CBSL Direction No.3 (2) 89 Nomination Committee A.7.1 CG Report – CBSL Direction No. 3 (6) (iv) Report of the Board Nomination Committee 99 New Directors Appointed and their A.7.3 Profile of Directors 76 details including directorships and Annexure to the Report of the Board of Directors 120 status of independence A.9.4 CG Report – CBSL Direction No. 3 (2) (iv) 89 A.10.1 CG Report – CBSL Direction No.3 (1) (i) (i) 87 Appraisal of Board Performance Profile of Directors 76 B.3 and B.3.1 Annexure to the Report of the Board of Directors 120 Board Related Disclosures C.3 and C.3.1 CG Report – CBSL Direction Nos. 3 (1) (vi) and 3 (6) (i) 88 and 92 (Profile, status, directorships, attendance, subcommittee CG Report – CBSL Direction No. 3 (8) (ii) (f) 102 membership, etc.) There were neither material transactions which would have materially altered the Bank’s or Group’s net asset 237 Disclosure of Remuneration base nor any “major related party transactions” during the 97 year 2019 warranting disclosure in the Annual Report. 85 Major and Material Transactions Related party transactions are disclosed in Note 51 to the Financial Statements. 86 and 92 Audit Committee D.3.3 CG Report – CBSL Direction No. 3 (6) (ii) 105 CG Report 112 Code of Business Conduct and Ethics D.5.1 and D.5.4 CG Report – CBSL Direction Nos. 3 (1) (i) (d); 3 (5) (iv) – (x) f. Report of the Board Human Resources and 150 Communication with Shareholders C.2.2 to C.2.7 Remuneration Committee 100 Report of the Board of Directors on the State of Affairs Remuneration Committee Report B.1.3 of the Company 23 Statement of Directors’ Responsibility for Financial Reporting Directors’ Report D.1.4 CG Report – CBSL Direction No. 3 (7) Financial Statements – Statement of D.1.5 Value Creation Story Responsibility Please refer statement in the opening paragraph of this section. Related Party Transactions D.1.8 Report of the Board Audit Committee 104 D.1.6 Report of the Related Party Transactions Review Committee Management Report D.6.1 108 Directors’ Statement on Internal Control 109 and 110 Corporate Governance Report D.3.2 Risk Management D.4.3 (reviewing information risk, integrity and availability) 123 Compliance with Provisions of Value Creation Story 23 the above Code of Best Practice D.1.5 and D.2.4 G.5 Audit Committee Report H.1.1 to H.1.4 Related Party Transactions Review Committee Report Statement of Internal Control Report on Internet of Things and Cyber security Environment, Society and Governance (ESG) Reporting

104 Seylan Bank PLC Annual Report 2019 Sustainable Stewardship Report of the Board Audit Committee The Board Audit Committee (“BAC”, “Audit The Head of Internal Audit who services identified as restricted under the Committee” or “the Committee”) of the independently reports to the BAC and guidelines issued by the Central Bank of Bank presents its report for the year ended the Chief Financial Officer attended the Sri Lanka for External Auditors relating to 2019. This Report was approved by the regular meetings of the Committee. The their statutory duties in terms of Section Board of Directors. CEO and other members of the senior 39 of Banking Act No. 30 of 1988 and as management/staff of the Bank were amended by Banking Act No. 33 of 1995. Objective and Terms of Reference invited to the meetings as and when the The Bank’s Policy on Non-Audit Services Committee required their presence to by the Independent External Auditors was The objective of the BAC is to assist the respond to queries related to internal reviewed by the Committee and approved Board to fulfil its oversight responsibilities audit findings. by the Board during the year. including but not limited to providing insights for the financial reporting process, Attendance of the Members The Committee determined the systems of internal control, the audit at the Audit Committee Meetings independence of the External Auditors, process and the process for monitoring Messrs KPMG, as per the provisions of the compliance with laws, regulations, and The attendance of the members at Companies Act and the ICASL’s Code of codes of conduct. the meetings is presented in the table Professional Conduct and recommended appearing on page 97 of this Annual their reappointment as the Auditors of The scope and responsibilities of Seylan Report. the Bank for the financial year ended Bank’s Board Audit Committee emanates 2020, subject to the concurrence of from its Terms of Reference approved by Responsibilities of the Committee its recommendation by the Board and the Board. The Terms of Reference was approval of the Shareholders at the reviewed by the Committee during the year. Effective Internal Control over forthcoming Annual General Meeting. Financial Reporting The Audit Partner who was engaged from Composition of the the financial year 2014 completed his Committee during the year The management is primarily responsible tenure of five years as at the financial year for the Financial Statements and for ended 31 December 2018 and a new The Committee comprised: maintaining effective internal control over Audit Engagement Partner was assigned by financial reporting and assessing the M/s KPMG from the financial year 2019. zz Ms M C Pietersz, Independent Director/ effectiveness of such control systems. Senior Director – Chairperson of the The Committee maintained vigilance in Evaluation of the Committee Committee exercising its oversight role in respect of financial reporting, (estimates and The Board Audit Committee carried zz Mr W D K Jayawardena, Non-executive judgement made by the management, out a self evaluation/appraisal of its Director/Deputy Chairman adoption of new accounting standards), performance and effectiveness during the internal controls and the risk management year under review and was of the view zz Mr P L S K Perera, Independent Director process. that the Committee had carried out its responsibilities satisfactorily during the zz Mr D R Abeysuriya, Independent Director External audit year 2019. The Chairperson of the Committee is The meetings of the Committee with Compliance with the Banking Act an Associate Member of the Institute the External Auditors, Messrs KPMG Direction on Corporate Governance of Chartered Accountants in England focused on discussing the findings and and Wales and a Fellow Member of The recommendations arising from the conduct Further overview of the responsibilities Institute of Chartered Accountants of of the annual and half-year audits; the executed by the Committee and the extent Sri Lanka with over 30 years experience scope of external audit plan for the year of compliance with the Banking in auditing, finance, accounting and 2019 and compliance with the Standards Act Direction No. 11 of 2007 on Corporate banking, with over 25 years at senior on Financial Reporting. Governance are described in Section level. The profiles of the members are 3 (6) (ii) of the Corporate Governance given on page 76 of this Annual Report. Two meetings were held by the Committee Report published in this Annual Report. The Company Secretary functioned as with the External Auditors without the the Secretary to the Committee during presence of the executive management, Ms Coralie Pietersz the year. during the year and it was ensured that (Independent Director/Senior Director) there was no limitation of scope or Chairperson – Board Audit Committee Meetings incidents that could have a negative impact on the effectiveness of the external audit. 21 February, 2020 The Committee held 14 meetings during the year, which included two meetings with The Committee reviewed the non-audit the External Auditors without the presence services provided by the External of the Director/Chief Executive Officer Auditors and was of the view that such (“the CEO”) and the management. services were not within the category of

Seylan Bank PLC Annual Report 2019 105 Sustainable Stewardship Report of the Board Human Resources and Remuneration Committee The Board Human Resources and Committee on invitation and participated Aggregate remuneration to Remuneration Committee (“the BHRRC” in the deliberations except when matters Directors, CEO and the KMPs or “the Committee”) presents its report of their own interest, performance, and for the year ended 31 December 2019. compensation were discussed. Aggregate remuneration paid to the This Report was approved by the Board Directors, CEO, and the KMPs are of Directors. Meetings disclosed under Sections 3 (8) (ii) (f) in the table reporting compliance Scope and objectives The Committee held eight meetings with the Banking Act Directions on of the BHRRC during the year which included six regular Corporate Governance on page 102 of this meetings and two special meetings. Annual Report. The Committee assists and makes Copies of the confirmed minutes and recommendations to the Board of recommendations made by the Committee Responsibilities of the BHRRC Directors in exercising its oversight role were tabled to the meetings of the Board and responsibilities on matters related to of Directors for concurrence or approval/ The responsibilities of the Committee and human resource strategies and policies, decision as appropriate. The attendance the extent of compliance with Directions and determination of compensation, of the members at the meetings of the 3 (6) (iii) (a) to 3 (6) (iii) (d) of the benefits and remuneration for the Committee is presented in the table Banking Act Directions on Corporate Directors, the Chief Executive Officer (CEO) providing Directors’ attendance at Governance No. 11 of 2007 have been and Key Management Personnel (KMPs) Subcommittee meetings on page 97 disclosed in the relevant sections of the of the Bank. The Committee provides of this Annual Report. Corporate Governance Report published in necessary guidance and advice on matters the Annual Report on page 99. One of the of strategic importance related to human Remuneration policy key recommendations of the Committee, resources and remuneration of other which was approved by the Board during employees of the Bank as well. The Remuneration Policy of the Bank aims the year, was the review of the existing to establish a formal and transparent performance based bonus structure for the The terms of reference of the Committee procedure for determining remuneration, management and putting in place a new covering the structure, scope and salaries and allowances and other performance bonus model and scheme, responsibilities of the Committee was financial benefits and perquisites to with the objective of rewarding high reviewed and approved by the Board Directors, the CEO, the KMPs and all other performers for their contribution towards during the year. employees of the Bank. The policy and higher business growth targets. practices are linked to the achievement Composition of the Committee of the short-term and long-term strategic Self-evaluation of the Committee goals and operational objectives of the As at 31 December 2019, the Bank and aims to attract, motivate and The BHRRC carried out a self-evaluation Committee comprised: retain qualified and competent persons of its performance during the year and at all levels. The Policy was reviewed and was satisfied that it had carried out its zz Ms M C Pietersz, Independent Director/ adopted with revisions during the year. responsibilities in a satisfactory manner. Senior Director – Chairperson of the Committee Directors’ remuneration Ms Coralie Pietersz and Benefits (Independent Director/Senior Director) zz Mrs S K Salgado, Independent Director Chairperson – Board Human Resources The Board as a whole determines the and Remuneration Committee zz Mr D R Abeysuriya, Independent Director remuneration and/or allowances and fees for both Executive and Non-Executive 21 February 2020 zz Mr S V Corea, Non-Executive Director Directors based on the recommendations of the BHRRC. The Terms of Reference Non-Executive Director, Mr D M D K of the BHRRC provides that granting of Thilakaratne was appointed to any special payments and/or benefits the Committee with effect from to Directors upon their resignation or 1 January 2020 as approved by the retirement in addition to normal fees Board on 23 December 2019. and/or remuneration shall be subject to the recommendation of the Committee The Company Secretary functioned and approval of the shareholders. No such as the Secretary to the Committee during circumstances arose during the year that the year. required shareholder approval and/or disclosure in this Annual Report. The Director/Chief Executive Officer (CEO) and Deputy General Manager, Human Resources attended the meetings of the

106 Seylan Bank PLC Annual Report 2019 Sustainable Stewardship Report of the Board Nomination Committee The Board Nomination Committee Scope of work and responsibilities (“Committee”) presents its Report of the Committee for the year ended 31 December 2019. This report was approved by the Board The extent of the Committee’s compliance of Directors. with Direction Nos. 3 (6) (iv) (a) to (f) of the Banking Act Directions on Corporate Objective of the Committee Governance No. 11 of 2007 have been disclosed in the Corporate Governance The primary objective of the Board Report on page 99 of this Annual Report. Nomination Committee is to assist Some of the key responsibilities executed the Board in fulfilling its role and by the Committee during the year, in line responsibilities involving the appointment with its Terms of Reference are listed of Directors and Key Management below. Related policies and procedures for Personnel (KMPs) of the Bank. the implementation of such responsibilities are in place and reviewed periodically. Composition of the Board Nomination Committee 1. Advised and made recommendations on the appointment of KMPs, pursuant As at 31 December 2019, the to assessing whether such appointees Committee comprised: are fit and proper persons to hold office; zz Ms M C Pietersz, Independent Director/ Senior Director – Chairperson of the 2. Re-election of Directors in terms Committee of the Articles of Association of the Company, taking into account the zz Mr W M R S Dias, Non-Executive performance and contribution made Director/Chairman by the Directors concerned towards the overall discharge of the Board’s zz Mr W D K Jayawardena, Non-Executive responsibilities; Director/Deputy Chairman 3. Reviewed and made recommendations zz Mr P L S K Perera, Independent Director on structural changes and reporting lines in line with the Bank’s strategic zz Mr A S Wijesinha, Independent Director requirements; The Company Secretary functioned 4. Ensured succession arrangements as the Secretary to the Committee during are in place for the post of CEO and the year. KMPs and put in place of a training and development plan for the KMPs Meetings identified for succession. The Committee held six meetings during Evaluation of the Committee the year. Copies of the confirmed minutes of the meetings and recommendations The Board Nomination Committee of the Committee were tabled at Board carried out a self-evaluation of its Meetings for perusal and comments or performance during the year under review appropriate decisions. Attendance of the and was satisfied that the Committee members at the meetings of the Board had carried out its responsibilities in a Nomination Committee is presented in satisfactory manner. the table providing Directors’ attendance at subcommittee meetings on page 97. Ms Coralie Pietersz The Director/Chief Executive Officer (CEO) (Independent Director/Senior Director) and Deputy General Manager, Human Chairperson – Board Nomination Resources attended the Meetings of the Committee Committee on invitation. 21 February 2020

Seylan Bank PLC Annual Report 2019 107 Sustainable Stewardship Report of the Board Integrated Risk Management Committee The Board Integrated Risk Management Meetings of the BIRMC and implementing a bank-wide risk culture. Committee (“BIRMC” or “the Committee”) The BIRMC reviewed the adequacy of the presents its Report for the year ended The Committee met four times during the activities of the Risk Management Unit 31 December 2019. The Report was year on a quarterly basis. Copies of the and focused on improving communication approved by the Board of Directors. confirmed minutes of meetings were made and implementation of risk management available to the Board of Directors for responsibilities at all levels within the Scope and objective information whilst recommendations of the Bank. A comprehensive report on Risk of the Committee Committee were submitted to the Board Management disclosing the Bank’s level for review and appropriate decision. of risk management and assessment, To assess on a regular basis through including the levels of risk under different appropriate risk indicators and The Acting Chief Risk Officer was present risk categories, is presented on pages 123 management information, all risk at all meetings of the Committee. Directors of the Annual Report. categories including credit, market, who were members of the Committee were liquidity, operational and strategic risks also present at all four meetings during Compliance function facing the Bank and its reputation, and the year. The Head of Compliance and also to assess the risks faced by its the Chief Financial Officer attended the Ms Dilani Sooriyaarachchi functions as the associates and subsidiary companies. regular meetings of the Committee. Other Head of Compliance. She reports directly management members attended the to the BIRMC. The Head of Compliance is The mandate of the BIRMC as defined meetings from time to time when invited responsible for ensuring due compliance in its Terms of Reference is to ensure by the Committee. of the Bank with laws, regulations, internal that the Bank implements an approved controls and policies and industry best policy framework with defined procedures Compliance with the Corporate practices. Periodic updates to the BIRMC and systems for identifying, measuring, Governance Directions were provided by the Head of Compliance monitoring and controlling such risks. on the following regulatory developments The extent of the Committee’s compliance and their impact on the Bank; outcome of The Integrated Risk Management with the Banking Act Directions on compliance assessments and corrective/ Framework of the Bank was reviewed Corporate Governance No. 11 of 2007, precautionary measures taken where comprehensively and approved during in addition to those which have been required; findings of internal and external the year. disclosed in this Report, has been outlined auditors/regulatory audits, etc. Advice and under Sections 3 (6) (v) (a) to 3 (6) (v) (h) recommendations were provided by the Composition of the BIRMC of the Corporate Governance Report BIRMC on the compliance risks identified, published in the Annual Report on proposed policies and new developments As at 31 December 2019, the Committee page 99. to the compliance function. comprised the following members: Integrated Risk Management Evaluation of the Board Integrated zz Mr D R Abeysuriya, Independent Director Framework and Implementation Risk Management Committee – Chairman of the Committee Some of the key and supplementary The Members of the BIRMC carried out zz Mr W M R S Dias, Non-executive activities carried out and/or endorsed by a self-assessment of the Committees’ Director/Chairman the Committee during the year included performance. The Committee was satisfied (but is not limited to); review and that it had carried out its responsibilities in zz Ms M C Pietersz, Independent Director/ recommendation of policies related to an effective manner during the year. Senior Director risk management, review and in-depth deliberation on the effectiveness of the D R Abeysuriya zz Mr P L S K Perera, Independent Director Bank’s credit rating model, business (Independent Director) continuity planning, disaster recovery Chairman – Board Integrated Risk zz Mr K P Ariyaratne, Director/CEO testing, information security risk controls, Management Committee etc. The Committee also reviewed the risk zz Mr L A S Fernando, Acting Chief assessments and controls of the Bank’s 21 February 2020 Risk Officer subsidiary, Seylan Developments PLC. The members of the Committee possess Risk Management Unit experience in risk management, banking and finance and business management. The Risk Management Unit is an Profiles of the Directors holding independent unit headed by Mr Aruna membership in the Committee are Fernando, Acting Chief Risk Officer. The provided in pages 76 of the Annual Report. Unit is responsible for creating, managing The Company Secretary functioned as the Secretary to the Committee during the year.

108 Seylan Bank PLC Annual Report 2019 Sustainable Stewardship Report of the Related Party Transactions Review Committee The Related Party Transactions Review recommendation of the Committee were Committee (“the Committee” or “RPTRC”) tabled and decided upon by the Committee which is a subcommittee of the Board prior to submitting to the Board. of Seylan Bank PLC (“the Bank”) presents its report for the year ended The aggregate value of non-recurrent 31 December 2019. This Report was related party transactions did not exceed approved by the Board of Directors. 10% of the equity or 5% of the total assets of the Bank during the year requiring Scope and terms of reference disclosure in terms of Section 9.3.2 (a) of the Listing Rules of the CSE. The Terms of Reference of the Committee has set out the scope and objective of the The aggregate value of the recurrent Committee in accordance with the Listing related party transactions did not exceed Rules of Colombo Stock Exchange (CSE). 10% of the gross revenue/income of the The Terms of Reference was reviewed and Bank during the year requiring disclosure approved by the Board during the year. in terms of Section 9.3.2 (b) of the Listing Rules of the CSE. Composition The Bank has in place a Related Party The Committee comprised the following Transaction and Avoidance of Conflict of members as at 31 December 2019: Interest Policy and Process Document which was reviewed during the year. zz Mr P L S K Perera – Independent The Committee regularly reviewed the Director – Chairman of the Committee mechanism/process for recording, monitoring and reporting related party zz Ms M C Pietersz – Independent transactions and provided necessary Director/Senior Director guidance and advice to ensure the effectiveness of this process. zz Mr S V Corea – Non-executive Director Evaluation of the Committee zz Mr A S Wijesinha – Independent Director The Committee carried out a self- The Company Secretary functioned as the evaluation of the performance and Secretary to the Committee. effectiveness of the Committee and was satisfied that it had carried out its The Director/Chief Executive Officer and responsibilities in an effective manner the Head of Compliance attended the during the year. meetings of the Committee on invitation. Kumar Perera Meetings of the RPTRC (Independent Director) Chairman – Related Party Transactions The Committee held five meetings during Review Committee the year. Copies of the confirmed minutes of meetings and recommendations of the 21 February 2020 Committee were submitted to the Board of Directors for perusal and appropriate action. Details of attendance of the members at the meetings are presented in the subcommittee meetings table on page 97 of this Annual Report. Related party transactions The Committee ensured compliance with Section 9 of the Listing Rules of the CSE. A summary of recurrent related party transactions, approved by the Board, were reviewed by the Committee at its regular meetings. Non-recurrent related party transactions, which required prior

Seylan Bank PLC Annual Report 2019 109 Directors’ Statement Sustainable Stewardship on Internal Control Responsibility Key features of the process in zz Management/operational committees place for reviewing the design have also been established with This report on internal control mechanism and effectiveness of the appropriate empowerment to ensure of the Bank is presented by the internal control systems over effective management and supervision Board of Directors in compliance with financial reporting of the Bank’s core areas of business Section 3 (8) (ii) (b) of the Banking operations. These committees include Act Direction No. 11 of 2007. Key processes that are presently in the Asset and Liability Management place for reviewing the design, operating Committee (ALCO), Executive Credit The Board of Directors (“Board”) is effectiveness and the integrity of the Risk Management Committee, responsible for the Bank’s system of system of internal controls relevant to Executive Market and Operational Risk internal controls and for reviewing its financial reporting are set out below: Management Committee, Executive design and operating effectiveness. Crisis Management Committee, However, such a system will mitigate but zz The Board is assisted by the Board Corporate Management Committee, may not completely eliminate the risk of Committees established by the Board Performance Review Committee, failure in achieving the business objectives in ensuring the effectiveness of the Information Technology Steering of the Bank. Hence, the system of internal Bank’s daily operations in terms of Committee and the Business Process controls can only provide a reasonable but alignment with the corporate strategies, Re-engineering Steering Committee. not absolute assurance against material objectives and the annual budget and misstatement of financial information in approving the policies and business zz The Internal Audit Department of the and records. directions as required. Bank reviews the effectiveness of the internal control systems and the design The Board has established an on-going zz The Board Audit Committee of the of and compliance with the policies and process for identifying, evaluating and Bank evaluates the adequacy and procedures on an on-going basis. Audits managing the significant risks faced by effectiveness of the risk management are carried out on all business units, the Bank and this process provides for and internal control systems and functions and branches. Frequency and modifying the system of internal controls monitors the internal control issues the scope of audits are determined in response to changes in the business identified by the regulatory authorities, by the level of risk assessed. The and regulatory environment. The process Internal Audit Department, External key objective of such audits are to is reviewed regularly by the Board, taking Auditors and the Management. They also provide an independent and objective into account principles for the assessment review the internal audit function with assessment on operational and of the internal control system as given emphasis on the coverage, scope and management activities of the business in the Guidance for Directors of Banks the quality of internal audits. Minutes units, functions and branches. The on the Directors’ Statement on Internal of the Audit Committee meetings annual internal audit plan is reviewed Control issued by The Institute of Chartered are tabled at Board meetings of the and approved by the Audit Committee Accountants of Sri Lanka. The process Bank on a periodic basis. Activities and all the findings of the audits are is in compliance with the requirements undertaken by the Audit Committee escalated to the Audit Committee. set out in this document. of the Bank are set out in the Audit Committee Report on pages 104. zz Policies and procedures for ensuring The Management assists the Board in compliance with internal controls and implementing its policies and procedures zz Apart from the Audit Committee, the relevant laws and regulations are on risk and control by identifying and several Board committees have been set out in operation manuals, guidelines assessing the relevant risks faced by the established with a mandate to ensure and the directives issued by the Bank Bank and in designing, implementing, effective management and supervision which are reviewed and updated from operating, and monitoring of appropriate of the Bank’s core areas of business time to time. internal controls to mitigate and control operations. These Committees such risks. The Board is of the view that include the Board Integrated Risk zz All controls, including the IT general the system of internal controls over Management Committee, Governance controls and the branch level financial reporting is sound and adequate and Compliance Committee, Human application controls, were documented to provide a reasonable assurance on Resource and Remuneration Committee, by respective departments, on relevant reliability of financial reporting and that Nomination Committee, Credit formats prescribed in the “Guidance the preparation of Financial Statements Committee, Sustainability Committee, for Directors of Banks on the Directors’ for external purposes is in accordance Strategic Plan Committee, Marketing Statement on Internal Control” in the with relevant accounting principles and and Product Development Committee, Sri Lanka Standard on Assurance regulatory requirements. Related Party Transactions Review Engagements 3050, issued by The Committee, and Information Institute of Chartered Accountants Technology Committee. of Sri Lanka.

110 Seylan Bank PLC Annual Report 2019 Sustainable Stewardship Directors’ Statement on Internal Control zz In assessing the internal control and policies relating changes made to By order of the Board of Directors of system over financial reporting, the underlying assumptions during 2019 Seylan Bank PLC management of the Bank captured and obtained approval of the Board all procedures and controls that are Audit Committee and the Board. The W M R S Dias connected with significant accounts and Bank’s Internal Audit Department Chairman disclosures in the Financial Statements commenced reviews and testing these of the Bank. These are reviewed by the processes in 2019 and will continue K P Ariyaratne Internal Audit Department for adequacy to do so with more focus and robust Director/Chief Executive Officer of design and operating effectiveness approach in 2020. on an on-going basis. Ms Coralie Pietersz The computation of impairment losses Chairperson – Board Audit Committee zz Prior to 1 January 2019, the assets from loans and receivables has not 21 February 2020 held under operating leases were not been automated yet. Considering the recognised in the Bank’s statement complexity and level of estimation of financial position. Payments made involved in this process, the Board is in under operating leases were recognised the process of evaluating the options in profit or loss on a straight-line available for automation. basis over the term of the lease. From 1 January 2019, first time, the Bank Recommendations made by the External adopted SLFRS 16 which requires Auditors with regard to the internal recognition of a right-of-use asset control system in the financial year and a lease liability at the lease ended 31 December 2018 were taken commencement date. The Bank has into consideration and appropriate carried out the required reviews of all measures were taken to incorporate lease agreements and has assessed the recommendations in to the internal the impact on Financial Statements. controls. Recommendations by the On initial application the Bank opted External Auditors with regard to the internal for a modified retrospective approach control system made during the financial and has made all required adjustments year ended 31 December 2019 will be to the opening balance as at 1 January addressed in the ensuing year. 2019. Accordingly, comparatives have not been restated. Confirmation zz The Bank adopted SLFRS 9 from Based on the above processes, the Board 1 January 2018 and made an confirms that the financial reporting assessment of the objective of the system of the Bank has been designed business model classification of to provide a reasonable assurance on financial assets as it best reflects the the reliability of financial reporting and way the business is managed and the preparation of Financial Statements information is provided to management. for external purposes has been done in accordance with Sri Lanka Accounting With the introduction of “expected Standards (SLFRS/LKAS) and regulatory credit loss” under SLFRS 9, the Bank requirements of the Central Bank of developed models to calculate Expected Sri Lanka. This confirmation excludes the Credit Losses (ECLs). A number of subsidiary of the Bank. key assumptions were made by the Bank in applying the requirements of Review of the statement by the SLFRS 9 to the models including External Auditors selection and input of forward looking information. These models are inherently The External Auditors have reviewed the complex and judgement is applied in above Directors’ Statement on Internal determining the correct construction Control of the Bank for the year ended of the same. These models developed 31 December 2019 and reported to the over the last year were reviewed by the Board that nothing has come to their management and amendments were attention that causes them to believe made to the initial assumptions where that the above Statement is inconsistent necessary to reflect the recent and with their understanding of the process updated data and such amendments adopted by the Board in the review of made were independently reviewed by the design and effectiveness of the External Auditors. internal control system over financial reporting of the Bank. Their report to The Bank continues to focus on the Board is disclosed on page 111 strengthening the review and testing of this Annual Report. process of the models developed. The Bank has documented procedures

Seylan Bank PLC Annual Report 2019 111 Auditors’ Report on Sustainable Stewardship Auditors’ Report on Internal Control Internal Control KPMG Tel : +94 - 11 542 6426 (Chartered Accountants) Fax : +94 - 11 244 5872 32A, Sir Mohamed Macan Markar Mawatha, Internet : +94 - 11 244 6058 P. O. Box 186, : www.kpmg.com/lk Colombo 00300, Sri Lanka. To the Board of Directors To achieve this objective, appropriate SLSAE 3050 does not require us to of Seylan Bank PLC evidence has been obtained by performing consider whether the Statement covers all the following procedures: risks and controls, or to form an opinion We were engaged by the Board of Directors on the effectiveness of the Bank’s risk and of Seylan Bank PLC (“Bank”) to provide a. Inquired the directors to obtain an control procedures. SLSAE 3050 also does assurance on the Directors’ Statement understanding of the process defined not require us to consider whether the on Internal Control (“Statement”) included by the Board of Directors for their processes described to deal with material in the annual report for the year ended review of the design and effectiveness internal control aspects of any significant 31 December 2019 set out in pages 109 of internal control and compared their problems disclosed in the annual report to 110 in this annual report. understanding to the Statement made will, in fact, remedy the problems. by the directors in the annual report. Management’s Responsibility for Our conclusion the Statement on Internal Control b. Reviewed the documentation prepared by the directors to support their Based on the procedures performed, Our responsibility is to issue a report to Statement made. nothing has come to our attention that the Board on the Statement based on causes us to believe that the Statement the work performed. We conducted our c. Related the Statement made by the included in the annual report is engagement in accordance with Sri Lanka directors to our knowledge of the inconsistent with our understanding of Standard on Assurance Engagements Bank obtained during the audit of the the process the Board of Directors have SLSAE 3050 – Assurance Report for Financial Statements. adopted in the review of the design and Banks on Directors’ Statement on Internal effectiveness of the internal control system Control issued by the Institute of Chartered d. Reviewed the minutes of the meetings over the financial reporting of the Bank. Accountants of Sri Lanka. of the Board of Directors and of relevant Board Committees. Chartered Accountants Summary of work performed Colombo e. Attended meetings of the audit Our engagement has been conducted to committee at which the annual report, 21 February 2020 assess whether the Statement is both including the Statement on Internal supported by the documentation prepared Control is considered and approved for by or for directors and appropriately submission to the Board of Directors. reflects the process the directors have adopted in reviewing the system of internal f. Considered whether the Directors’ control for the Bank. Statement on Internal Control covers the year under review and that adequate processes are in place to identify any significant matters arising therefrom. g. Obtained written representations from directors on matters material to the Statement on Internal Control where other sufficient appropriate audit evidence cannot reasonably be expected to exist. M.R. Mihular FCA P.Y.S. Perera FCA C.P. Jayatilake FCA T.J.S. Rajakarier FCA W.W.J.C. Perera FCA Ms. S. Joseph FCA Ms. S.M.B. Jayasekara ACA W.K.D.C Abeyrathne FCA S.T.D.L. Perera FCA G.A.U. Karunaratne FCA R.M.D.B. Rajapakse FCA Ms. B.K.D.T.N. Rodrigo FCA R.H. Rajan FCA M.N.M. Shameel ACA Ms. C.T.K.N. Perera ACA A.M.R.P Alahakoon ACA Principals - S.R.I. Perera FCMA(UK), LLB, Attorney-at-Law, H.S. Goonewardene ACA

112 Seylan Bank PLC Annual Report 2019 Sustainable Stewardship Report of the Board of Directors on the State of Affairs of the Company The Directors of Seylan Bank PLC This Report hereinafter will also be referred No. 07 of 2007; the Banking Act No. 30 (hereinafter referred to as “the Board” or to as “this Report”, “Report of the Directors” of 1988 (as amended) and the Directions “the Directors”) present their Report on the or “Report of the Board of Directors”. issued by the Monetary Board under State of Affairs of Seylan Bank PLC (“the the Banking Act; the Listing Rules of the Bank” or “the Company”) together with the The Report and the aforementioned Colombo Stock Exchange (CSE) and the Audited Financial Statements of the Bank, Financial Statements were reviewed and recommended best practices. the Consolidated Financial Statements approved by the Board of Directors on of the Group and the Auditors’ Report 21 February 2020. Disclosures as required under Section on those Financial Statements for the 168 of the Companies Act No. 07 of 2007, financial year ended 31 December 2019. The disclosures in this Report conform to in respect of the year 2019 are published the requirements of the Companies Act in the following pages/sections of the Annual Report. Section Information required to be disclosed Compliance and/or required disclosure – Page/s of the Annual Report 168 (1) (a) 168 (1) (b) The nature of the business of the Company and the Subsidiaries. 113 (item Nos. 3 and 4 of this Report) 168 (1) (c) 168 (1) (d) Signed Financial Statements of the Company for the 155 to 244 (Financial Statements) 168 (1) (e) Accounting Period completed in accordance with Section 152. 168 (1) (f) 152 to 154 (Independent Auditors’ Report) 168 (1) (g) Auditor’s report on Financial Statements of the 168 (1) (h) Company and the Group. 165 to 166 (Notes to the Financial Statements) 168 (1) (i) Changes in Accounting Policies made during the 117 (item No. 23 of this Report) accounting period. 195 and 237 (Note 13 and 51.1.1 to the 168 (1) (j) Financial Statements) 168 (1) (k) Particulars of the entries in the interest register made 114 and 195 (item No. 13 of this Report and during the accounting period. Note 13 to the Financial Statements) Remuneration and other benefits of the Directors 116 (item No. 20 of this Report) during the accounting period. 195 (Note 13 to the Financial Statements) Total amount of donations made by the Company during the accounting period. 119 (item No. 41 of this Report) 119 (please refer signatures at the end Information on Directorate of the Company during and of this Report) at the end of the accounting period and persons who ceased to hold office as Directors during the accounting period. Amounts payable to the Auditors as audit fees and fees for other services rendered during the accounting period as a separate disclosure. Auditors’ relationship or any interest with the Company and its subsidiaries. Annual Report of the Board signed on behalf of the Board of Directors. 1. Seylan Bank PLC the Bank is situated at “Seylan Towers”, listed on the Main Board of the CSE. Fitch No. 90, Galle Road, Colombo 03. Ratings Lanka Ltd. has affirmed the Bank’s Seylan Bank PLC is a public limited National Long-Term Rating at A-(lka) with liability company incorporated in The Bank was listed on the Colombo a stable outlook and has affirmed the Sri Lanka on 28th August 1987 under Stock Exchange since 5 January 1989. Bank’s senior unsecured debentures at the Companies Act No. 17 of 1982. The Bank’s Ordinary Shares (both voting A-(lka) whilst assigning a BBB+(lka) for its The Bank was re-registered as required and non-voting) and its Unsecured, subordinated debt. under the provisions of the Companies Redeemable Debentures issued in the Act No. 07 of 2007, on 30 May 2007 years 2014, 2016, 2018, and 2019 are (Company Registration No. PQ9). The Registered Office and the Head Office of

Seylan Bank PLC Annual Report 2019 113 Sustainable Stewardship Report of the Board of Directors on the State of Affairs of the Company 2. Vision and mission during the year under review. Please refer by two Directors in terms of Section 151, and corporate conduct Section 29 of this Report for information 152 and 168 (I) (b) of the Companies on the Board of Directors of SDP. Act No. 07 of 2007 as published in this 2.1 Vision and mission Annual Report. It is an integral part of 5. Branch network this Report. Vision: “To be Sri Lanka’s leading financial services provider – as recognised by all As at 31 December 2019, the Bank’s 8. Directors’ responsibility its stakeholders.” branch network comprised of 173 banking for financial reporting centres and 98 student savings centres Mission: island-wide. Locations of the banking The Directors are responsible for the centres as at the date of this Report as preparation of the Financial Statements zz We provide our Customers with financial well as locations of off-site ATMs are given of the Bank to reflect a true and fair view services that meet their needs in terms in this Annual Report. of its state of affairs. The Directors are of of value, pricing, delivery, and service. the view that these Financial Statements 6. Review of performance and the Notes thereto have been prepared zz We will do so through a team of Seylan in 2019 and future in conformity with the requirements of Bankers who are recognised and development plans the Companies Act No. 07 of 2007, rewarded for being results-oriented. the Sri Lanka Accounting and Auditing Letter from the Chairman, Letter from Standards Act No. 15 of 1995, the zz We will ensure that our efforts translate the Director/Chief Executive Officer and Banking Act No. 30 of 1988 (as amended) to meeting the expectations of our Financial Value Creation, published in and its Directions, and the Listing Rules shareholders, whilst always acting as this Annual Report provide an overall of the Colombo Stock Exchange. The responsible corporate citizens. assessment and review of the operations Statement of Directors’ Responsibility for and financial performance of the Bank Financial Reporting which appears in this 2.2 Corporate conduct during the year 2019 and those Annual Report forms an integral part of reports also refer to the Bank’s future this Report of the Directors. The Bank conducts its business activities development plans. while maintaining a high level of ethical 9. Auditors’ report standards in achieving its vision and 7. Financial Statements mission. The Board of Directors of the and financial reporting The Auditors of the Company, Messrs Bank as well as its employees have KPMG, Chartered Accountants have carried pledged to abide by and comply with the The Bank has adopted the Sri Lanka out the audit of the Consolidated Financial Codes of Conduct and Ethics. Accounting Standards and Sri Lanka Statements for the financial year ended Financial Reporting Standards 31st December 2019 and their Report on 3. Principal activities (LKAS/SLFRS) in the preparation of the Financial Statements is published in the Financial Statements. Consequently, this Annual Report. The principal activities of the Bank are the necessary quantifications and commercial banking and provision of disclosures have also been made based 10. Financial results related financial services which include on LKAS/SLFRS. The significant accounting acceptance of deposits, personal banking, policies adopted in preparation of the The income and profit of the Bank and trade financing, off-shore banking, Financial Statements are given in this those of the Group for the year ended resident and non-resident foreign currency Annual Report. 31 December 2019 are given in the operations, travel-related services, table below. corporate and retail credit, margin trading, The Audited Financial Statements of the pawn broking, project financing, lease Bank and the Group for the financial year An analysis of the income is given in financing, rural credit, credit card facilities, ended 31 December 2019 was certified the Notes to the Financial Statements money remittance services, factoring, by the Chief Financial Officer and signed published in this Annual Report: dealing in Government Securities, and treasury related products, etc. There were no significant changes in the nature of the principle activities of the Bank and its subsidiary during the financial year under review. 4. Group structure Income 2019 Group 2018 Group LKR Bn. LKR Bn. The only subsidiary of the Bank, Seylan Gross income Bank Bank Developments PLC is a public limited Operating income LKR Bn. LKR Bn. liability company incorporated in 1992 Profit before income tax and listed on the Colombo Stock Less: income tax 61.370 61.356 54.873 54.845 Exchange. The principle activities of Profit after income tax 24.354 24.644 23.192 23.206 Seylan Developments PLC are property Profit before additional development and management. The gratuity expense and after tax 5.098 5.267 4.666 4.687 Bank held a 70.51% stake in Seylan 1.418 1.469 1.477 1.536 Developments PLC as at 31 December 3.680 3.798 3.189 3.151 2019. The Bank received a net dividend of LKR 89,725,616.32 from the subsidiary 3.738 3.856 4.006 3.968

114 Seylan Bank PLC Annual Report 2019 Sustainable Stewardship Report of the Board of Directors on the State of Affairs of the Company 11. Taxation Provision for taxation has been computed as indicated in Note 15 to the Financial Statements. 12. Capital expenditure The total capital expenditure incurred on the acquisition of property, plant and equipment of the Bank and the Group during the year is given in Notes 29, 30, and 33 to the Financial Statements. Capital Expenditure approved and contracted for, after the year ended 31 December 2019 is also given in Note 49 to the Financial Statements. Bank Group 2019 2018 2019 2018 LKR ’000 LKR ’000 LKR ’000 LKR ’000 Property, plant and equipment, leasehold rights, and intangible assets 1,507,629 1,203,633 1,559,895 1,220,469 Net book value of freehold properties 1,537,355 1,575,638 4,213,417 4,169,364 All freehold land and buildings of the Bank The Bank paid a first and final ordinary dividend of LKR 2.50 per share for the financial were valued by professionally qualified year ended 31 December 2018 on 28 March 2019. The dividend of LKR 2.50 per share independent valuers/Panel of Chartered consisted of LKR 0.50 per share in the form of cash dividend and LKR 2.00 per share in Valuers/Licensed Surveyors in 2016 and the form of a scrip dividend. brought into the Financial Statements. Details of freehold properties owned by 15. Reserves the Bank are given in Note 29 to the Financial Statements. Total reserves (including Statutory Reserve Fund) as at the end of the financial year, are as follows: 13. Donations Bank Group During the year, the Bank made donations amounting to LKR 97,000/- 2019 2018 2019 2018 (Donations made in 2018 amounted to LKR ’000 LKR ’000 LKR ’000 LKR ’000 LKR 1,125,000/-). Total reserves (including 27,582,550 22,584,004 29,334,742 24,221,111 14. Recommendation of Statutory Reserve Fund) Ordinary Dividend and Solvency Certification 16. Stated capital The Directors have recommended a First The Stated Capital of the Bank as at 31 December 2019 was LKR 17,044,722,726.90 and Final Ordinary Dividend of LKR 2.00 (Stated Capital as at 31 December 2018 was LKR 12,025,795,114.70). per share (both ordinary voting and ordinary non-voting) for the year ended 16.1 Shareholdings 31 December 2019. The dividend of LKR 2.00 per share will consist of LKR 1.00 The number of shares issued by the Bank (and consequently the Stated Capital), during per share in the form of cash dividend and the year increased due to the Scrip Dividends issued and the Rights Issued. LKR 1.00 per share in the form of a scrip dividend. This recommendation is subject As at 31 December 2019 2018 2019 2018 to the approval of the shareholders at Class of shares the Annual General Meeting of the Bank Number of shares Number of shareholders scheduled to be held on 30 March 2020 and upon such approval, the dividend will Ordinary voting shares 251,477,872 184,104,010 10,041 9,030 be issued to the shareholders registered 7,784 6,728 as at 30 March 2020 (entitlement date). Ordinary non-voting shares 252,145,914 181,995,082 Please refer the enclosed “Circular to Shareholders” for further details. 16.2 Rights issue of ordinary voting shares and ordinary non-voting shares The Board of Directors was satisfied that The Bank’s rights issue of ordinary voting shares and ordinary non-voting shares in the the Bank would meet the solvency test last quarter of the year was fully subscribed. 62,869,468 new ordinary voting shares at in terms of the provisions of Section LKR 45.25 per share {proportion of one (01) new ordinary voting share for every existing 57 of the Companies Act No.7 of 2007 three (03) ordinary voting shares} and 63,036,478 new ordinary non-voting shares at immediately after the proposed dividend. LKR 24.50 per share {in the proportion of one (01) new ordinary non-voting share for A Certificate of Solvency has also been every existing three (03) ordinary non-voting shares} were allotted to the subscribers obtained by the Bank from the External to the issue, on 10 December 2019. These shares were listed on the Colombo Stock Auditors in compliance with Section 56 Exchange on 20 December 2019. (2) of the Companies Act, confirming the Board’s declaration of solvency.

Seylan Bank PLC Annual Report 2019 115 Utilisation of funds raised through the Rights Issue Sustainable Stewardship Report of the Board of Directors on the State of Affairs of the Company Objective Objective as Proposed date of Amount allocated Amount allocated % of total Amount % Details, No. per Circular utilisation as per to shareholders the Circular as per the Issue from proceeds proceeds utilised utilised against if not fully Circular LKR LKR (A) in LKR (B) allocation (B/A) utilised 1. To increase the Tier 1 With effect from capital of the Company the Date of and thereby to strengthen Allotment* the capital adequacy of 2. the Company 4.389 Bn. 4.389 Bn. 100 4.389 Bn. 100 N/A To strengthen the balance Within 6 months sheet to support the from the date of business growth, expansion, the allotment and performance of the Company *Incorporated for the capital adequacy as at 31 December 2019. 16.3 Capital management 17.2 Analysis of the shareholding distribution and major shareholders The Bank has an ongoing process to An analysis of the distribution of shareholdings and lists of the twenty largest ordinary evaluate the adequacy of capital in line voting and ordinary non-voting shareholders of the Bank as required in the Rules of the with strategic aspirations and to comply Colombo Stock Exchange are published in this Annual Report. with the Basel III guidelines. A detailed review on capital management of the Bank 18. Debentures during the year under review is discussed in the Risk Management Report published 18.1 Debentures in Issue in this Annual Report. 17. Investor information Value of Debentures as at 1 January 2019 LKR 15,906,590,000 Information including earnings, dividend, Allotment of new debentures – Debenture Issue 2019 net assets, and market value per share 5,000,000,000 is given under Financial Highlights of this Redemption of Debentures 2014 (5 year category) on Annual Report. Information pertaining 23 December 2019 1,866,550,000 to share prices and debenture prices 19,040,040,000 is given in this Annual Report on pages Total value of Debentures as at 31 December 2019 252 and 253. 17.1 Minimum public Further information on the debenture issues are provided in the Investor Information holding requirement as at section in this Annual Report. 31 December 2019 18.2 Debenture Issue 2019 The Bank was compliant under Option 3 of the Section 7.13.1 of the Rules of the The Bank’s issue of 50,000,000 fully paid, BASEL III compliant, Tier 2, listed, rated, Colombo Stock Exchange. unsecured, subordinated, redeemable debentures with a non-viability conversion, of the par value of Rupees Hundred each (LKR 100.00) aggregating to a value of Rupees Five Float adjusted Billion (LKR 5,000,000,000.00) by way of a public issue was fully subscribed and such market capitalisation LKR 7.240 Bn. debentures were allotted to the successful investors on 18 April 2019. Please refer table below for details of the debentures issued: Public holding 54.84% Type A Type B percentage 5 year debentures – 5 year debentures – interest payable annually Interest payable semi-annually Number of public 10,021 shareholders @ 15% p.a. @ 14.50% p.a. Number of Debentures issued 37,734,000 12,266,000 The funds raised were used for the objectives mentioned in the Prospectus of the Issue as detailed in Section 18.3.

116 Seylan Bank PLC Annual Report 2019 Sustainable Stewardship Report of the Board of Directors on the State of Affairs of the Company 18.3 Utilisation of funds of the Debenture Issue 2019 Objective Objective as Proposed date of utilisation Amount allocated % of total Amount % Details, No. per Prospectus as per Prospectus from proceeds in proceeds utilised Utilised against if not fully in LKR (B) allocation (B/A) LKR (A) utilised 1. To strengthen the Tier 2 With effect from the Capital base of the Bank closure of the Issue as per BASEL III requirements 2. To meet the current credit Over the period of 5.0 Bn. 100 5.0 Bn. 100 N/A demand (loans and advances) twelve months from of the Bank the date of allotment or 31 December 2019 whichever is earlier 19. Equitable treatment of shareholders The Bank has at all times ensured the equitable treatment of its shareholders. 20. Directorate 20.1 Directors who held office from 1 January to 31 December 2019 Name of Director Status of Directorship Mr W M R S Dias Non-independent Non-Executive Director/Chairman Mr W D K Jayawardena Non-independent Non-Executive Director/Deputy Chairman Ms M C Pietersz Independent Non-Executive Director/Senior Director Mr K P Ariyaratne Director/Chief Executive Officer Mr P L S K Perera Independent Non-Executive Director Mr S V Corea Non-independent Non-Executive Director Mr A S Wijesinha Independent Non-Executive Director Ms S K Salgado Independent Non-Executive Director Mr D M D K Thilakaratne Non-independent Non-executive Director Mr D R Abeysuriya Independent Non-Executive Director Mr R D Tissera Alternate Director to Non-Executive Director, Mr W D K Jayawardena The Profiles of the Directors who were 20.3 Declarations by Directors – declaring their “fit and proper” status, prior on Board as at the date of this Report Independent/Non-independent to the Annual General Meeting held in including their membership/s in Board Status and Declaration of Relevant 2019 were submitted to the Director, Bank Subcommittees are given on pages 76 Relationships Supervision, Central Bank of Sri Lanka. The to 79 of this Annual Report. Central Bank approved the continuation of All Non-Executive Directors have submitted office of those Directors. 20.2 Change of directorate signed declarations confirming their independent/non-independent status in 20.5 Evaluation and self- Independent Non-Executive Director, compliance with Rule 7.10.2 and 7.10.4 assessment by the Board Mr S P S Ranatunga retired from the of the Colombo Stock Exchange Rules of Directors services of the Bank with effect from of Corporate Governance as well as with 12 January 2019 upon completion of Sections 3 (2) (iv) of the Banking Act The Board members carried out an nine years of service on the Board, in Direction No. 11 of 2007. evaluation of the Board’s performance compliance with the Section 3 (2) (ii) of and effectiveness and also that of its the Banking Act Direction No. 11 of 2007 20.4 Declarations by Directors Committees in line with good governance on Corporate Governance for Licensed – “Fit and Proper” Status of practices. Each member of the Board also Commercial Banks in Sri Lanka Continuing Directors carried out a self-assessment of his/her (as amended). effectiveness as an individual as well as Signed Affidavits and Declarations in the effectiveness of the Board as a team terms of Section 42 of the Banking Act during the year. (as amended) issued by the Directors

Seylan Bank PLC Annual Report 2019 117 Sustainable Stewardship Report of the Board of Directors on the State of Affairs of the Company 20.6 List of Directorships of the The Directors abstained from the meetings (both Board and Board Subcommittees) when Directors in other entities matters in which they were interested (related party interest or directorship interest) were considered for recommendation or approval due to conflict of interest, and those Directors Lists of Directorships as at 31 December did not vote on such matters. 2019 held by the Directors in other entities and their substantial/material 24. Directors’ interest in shares and debentures of the Bank shareholdings if any, are provided in the Annexure that follows this Directors’ Directors’ holdings in Shares and Debentures of the Bank as at 31 December 2019: Report. The list also identifies the status of directorships (Executive/Non-Executive/ Name of Director 31 December 2019 31 December 2018 Shares/Debentures Independent status) and the status where an entity is a listed entity. Mr W M R S Dias Nil Nil 50,000 21. Recommendations for 50,000 Nil Debentures 2018 re-election of Directors N/A Mr W D K Jayawardena Nil 38,206 Debenture issue 2019 In terms of Article 82 of the Articles of 145,395 Ordinary voting shares Association, Independent Directors, Ms M C Pietersz 50,000 Ordinary Mr A S Wijesinha, Ms S K Salgado, and 32,700 non-voting shares Non-Executive Director/Deputy Chairman, Mr K P Ariyaratne 63,186 200,000 Debentures 2016 Mr W D K Jayawardena retire by rotation at N/A Debentures 2018 the forthcoming Annual General Meeting 207,437 Nil Debenture issue 2019 (AGM) of the Bank and offer themselves 95 for re-election pursuant to the Board Mr P L S K Perera 32,700 Nil Ordinary voting shares Nomination Committee and the Board of Mr S V Corea 200,000 Nil Directors evaluating and recommending Mr A S Wijesinha 300,000 their re-election as Directors. Mrs S K Salgado Nil Nil Mr D M D K 97 Nil 22. Meetings of the Thilakaratne Nil Nil Board of Directors Mr D R Abeysuriya Nil Mr R D Tissera Twelve Regular monthly meetings and Nil three special meetings were held during Nil the year. The special meetings were held Nil to consider and decide on important and urgent issues. A schedule of Directors’ Percentage shareholding of Directors: 27. Board subcommittees attendance at Board meetings and a schedule of Directors’ attendance at Board 31 December 2019 2018 The Board is empowered by the Articles of Subcommittee meetings are presented 0.025 0.02 Association to delegate any of its powers in the Corporate Governance Report Ordinary 0.08 to the Board appointed Subcommittees published in this Annual Report. Voting shares (%) 0.08 within the scope of the respective Board approved Terms of Reference. 23. Directors’ interest in Ordinary The Subcommittees consist of members contracts and Directors’ Non-voting appointed as the Board thinks fit subject Interest Register shares (%) to meeting the criteria specified in the respective Terms of Reference. The The Bank maintains a Directors’ No change occurred in the Directors’ following Board Subcommittees were Interest Register as required under Section interest in shares and debentures after functional as at 31 December 2019. 168 (1) (e) of the Companies Act No. 07 31 December 2019 and before the date A table summarising the scope, of 2007. The Directors submit their of this Report of the Board of Directors. composition and responsibilities of signed declarations to the Board through these Subcommittees is provided in the the Company Secretary disclosing their 25. Directors’ remuneration Corporate Governance Report published interests in contracts from time to time in this Annual Report. in accordance with Section 192 (2) of Details of Directors’ emoluments paid the Companies Act No. 07 of 2007. Such in respect of the Bank and the Group zz Board Audit Committee disclosures are reported to the Board, for the year 2019 are given as a Note minuted by the Company Secretary and to the Financial Statements in this zz Board Integrated Risk Management thereafter recorded in the Directors’ Annual Report. Committee Interest Register. The Directors’ Interest Register is available for inspection by 26. Insurance and indemnity zz Board Human Resources and the shareholders or their authorised Remuneration Committee representatives as required under As authorised by the Articles of Association Section 119 (1) (d) of the Companies of the Bank and as approved by the Board zz Board Nomination Committee Act No. 07 of 2007. of Directors, the Bank obtained a Directors and Officers Liability Insurance Cover in zz Board Credit Committee respect of the year 2019/2020. zz Board Marketing and Product Development Committee zz Board Sustainability Committee zz Board Governance and Compliance Committee

118 Seylan Bank PLC Annual Report 2019 Sustainable Stewardship Report of the Board of Directors on the State of Affairs of the Company zz Related Party Transactions Review of the Bank. In the context of this desired Management Committee is vested with this Committee approach the Bank strengthened the responsibility. The Acting Chief Risk Officer performance based rewards mechanism reported and updated the status of the zz Board Strategic Plan Committee driving individual and strategic business Bank’s overall risks to the Committee at units. In ensuring that employees acquire its regular quarterly meetings. The Report zz Board Information Technology the expected competency level and of the Board Integrated Risk Management Committee functional knowledge, competency profiling Committee and a detailed report on Risk and development was carried out in a Management of the Bank are published in 28. Related party transactions structured manner through identification this Annual Report. of key competency gaps and bridging the The Board of Directors has vested the competency levels in line with the current 32.2 System of internal control responsibility for ensuring compliance with and future requirements of the Bank. Section 9 of the Rules of the Colombo The Board recognises that a robust internal Stock Exchange (CSE) and the SEC Furthermore, in building individual control mechanism is an indispensable Code on Related Party Transactions to capacities, structured development component of the governance framework the Related Party Transactions Review initiatives were rolled out to enhance adopted by the Bank. Internal controls is Committee of the Bank. During the year, the potential and ensure that competent a process, carried out at various levels in the Bank did not carry out any recurrent talent pipeline for key job positions the Bank aiming to provide a reasonable or non-recurrent related party transaction were in place for branch banking. The certainty of achievement of the objectives; which required shareholder approval and/ Board provided directions in facilitating safeguarding of assets; efficiency and or disclosure required in terms of Rule the business transformation through effectiveness of operating activities; 9.3.1 and 9.3.2 of the CSE Rules. centralisation and restructuring in order reliability of accounting information, and to bring in visible improvements in compliance with laws and regulations. The aggregate value of non-recurrent turnaround time, customer experience and The internal control framework of the Bank related party transactions did not exceed internal efficiencies. consists of organisational structures; 10% of the equity or 5% of the total assets effectively designed, documented and of the Bank during the year requiring 31. Corporate governance periodically reviewed business processes disclosure in terms of Section 9.3.2 (a) with inbuilt control mechanisms, of the Listing Rules of the CSE. The Board of Directors has pledged its instructions and guidelines, and duly commitment towards maintaining an approved delegated authority levels. An The aggregate value of the recurrent effective corporate governance framework effective internal controls system is a key related party transactions did not exceed and practices within the Bank to enhance decisive factor for the sustainability of the 10% of the gross revenue/income of the business prosperity and corporate Bank in the long run in terms of market Bank during the year requiring disclosure accountability. share, service quality, profitability, and in terms of Section 9.3.2 (b) of the Listing stakeholder confidence. Rules of the CSE. The Bank has established systems and procedures to ensure that they are The Board confirms the existence of an The Report of the Related Party adequately and practically adopted effective system of internal controls for Transactions Review Committee in respect and followed. managing the risks faced by the Bank by of the year 2019 is published in this taking timely risk mitigation actions and Annual Report. The extent of compliance with the ensuring operational effectiveness of such regulatory directions, rules and best internal controls, which had been in place 29. Directorate of the practice guidelines have been disclosed throughout the year under review up to the subsidiary, Seylan in the Corporate Governance Report date of approval of this Annual Report and Developments PLC published in this Annual Report. have been consistently reviewed. The Board of the Bank’s Subsidiary, The external certification by the External 33. Compliance with Seylan Developments PLC as at Auditors on the Bank’s compliance with the laws and regulations 31 December 2019 comprised six Banking Act Direction No. 11 of 2007 on Directors, all of whom were Non-Executive, Corporate Governance performed in line The Bank has not engaged in any activities namely, Messrs, K P Ariyaratne (Chairman), with agreed upon procedures set out in Sri contravening any laws and regulations S Palihawadana (Deputy Chairman), Lanka Related Services Practice Statement currently in force. Key management R J Jayasekara, P D Hennayake, (SLRSPS 4750) was issued to the Bank. personnel confirm compliance with P Saravanapavan and L T Kiringoda. various laws and regulations and their Mr P Saravanapavan, Mr L T Kiringoda are 32. Risk management and confirmations are reported to the Board on Independent Non-Executive Directors. The system of internal controls a monthly basis by the Compliance Officer. other four Directors were deemed not independent. 32.1 Risk management 34. Outstanding litigations 30. Human resources The Board has ensured the In the opinion of the Directors and implementation of a sound risk external legal counsels retained by the In 2019, the Board Human Resources management framework by means of Bank, litigations currently pending against and Remuneration Committee placed an ongoing process to identify, evaluate the Bank as disclosed in Note 48 to the great emphasis on initiatives which were and manage the risks that are faced Financial Statements will not have a primarily connected to the human capital by the Bank. The Board Integrated Risk material impact on the financial position effectiveness in pursuing the objectives of the Bank or its future operations.

Seylan Bank PLC Annual Report 2019 119 Sustainable Stewardship Report of the Board of Directors on the State of Affairs of the Company 35. Share trust companies 39. Going concern zz Messrs KPMG is a firm of high repute and the Seylan Bank and the firm had the necessary skills Employees’ Gratuity Trust Fund The Directors are satisfied that having to competently carry out the non-audit considered the financial position, related assignments entrusted to them. Six share trust companies (“companies”) operating conditions, regulatory and other were established by the Bank in 1995 factors and other such matters required to zz P artner and Audit-team rotation was and in 1999/2000 which have acquired be addressed in the Corporate Governance complied with, in 2019. shares of the Bank (“subject shares”) from Code, that the Bank has adequate time to time at the market prices prevailing resources to continue its operations in 42. Notice of Annual at that time. The Bank was the Settlor of the foreseeable future. The Financial General Meeting the trusts and the purchase of the subject Statements of the Bank have accordingly shares were fully funded by the Bank.  been prepared on a going concern basis. Notice of Meeting relating to the Thirty Third (33rd) Annual General Meeting Pursuant to a majority of the category of 40. Auditors of the Bank scheduled to be held on persons (i.e., certain current employees 30 March 2020 at 10.00am at the Grand and former employees satisfying certain The Bank’s Auditors during the period Ballroom, Galadari Hotel, No. 64, Lotus criteria) having reached agreement with under review were Messrs KPMG, Road, Colombo 1 is circulated to the the Bank for the receipt of an “enhanced Chartered Accountants. A new Audit shareholders with this Annual Report. gratuity” based on one month basic salary Engagement Partner was assigned by for each year of service, and such persons Messrs KPMG for the Bank’s external We, the undersigned acknowledge the having relinquished all rights, entitlements, audit with effect from the financial year, contents of this Report and its Annexure and claims which they may have made 2019 pursuant to the completion of the and have placed our signatures for and or may have in respect of the subject five year tenure of the previous Audit on behalf of the Board of Directors shares or on the proceeds arising from Engagement Partner. The audit fees and of Seylan Bank PLC, at Colombo, the realisation of such subject shares, by consolidated audit fees for the accounting this 21 February 2020. giving their consent for the disposal of the period are given in Note 13 to the subject shares and crediting the proceeds Financial Statements. W M R S Dias to the Seylan Bank Employees Gratuity Chairman Trust Fund enabling the Bank to utilise Based on the declaration made by same to part fund the payment of the Messrs KPMG and as far as the Directors K P Ariyaratne enhanced gratuity approved by the Board; are aware, the Auditors do not have any Director/Chief Executive Officer a total of 12,684,300 ordinary voting relationship with or interest in the Company shares from and out of the subject shares or its subsidiary other than the provision Mrs N N Najumudeen were transferred from the companies to of audit and non-audit and related Company Secretary the Seylan Bank PLC A/C No. 4 Employees services as given in the said Note 13. Gratuity Trust Fund established for that 21 February 2020 purpose, through the Trading Floor of The retiring Auditors, Messrs KPMG have the Colombo Stock Exchange, in the expressed their willingness to continue in last quarter of 2019. office and a resolution to reappoint them as Auditors and to authorise the Directors 36. Environmental protection to fix their remuneration will be proposed at the Annual General Meeting. The Bank has not engaged in any activity that is harmful or hazardous to 41. Independence the environment and has always taken of the Auditors measures to ensure environmental protection and its sustainability. Based on an assessment carried out by the Board Audit Committee upon adoption 37. Statutory payments of a policy for the engagement of Auditors, the Board is of the opinion that the The Directors are satisfied that all statutory External Auditors, Messrs KPMG can be payments including all taxes, duties deemed to be independent for all and levies payable by the Bank and its intents and purposes considering the Subsidiary, to the Government, regulatory following factors: institutions and related to the employees have been made or where relevant zz No partner from the Firm is on the provided for. Board of Seylan Bank or on the Board of its subsidiary. 38. Events after the reporting date zz The audit and non-audit fees paid/ payable to the Auditors are negotiated No events have occurred after the and are not above industry norms and reporting date which would require they do not receive fees from other adjustments to or disclosure in the assignments except as stated in Note Accounts, other than those given in 13 to the Financial Statements. Note 50 to the Financial Statements.

120 Seylan Bank PLC Annual Report 2019 Sustainable Stewardship Annexure to the Report of the Board of Directors on the State of Affairs of the Company Directors’ Interest Register and Directors’ Interest in transactions as at 31 December 2019 The Bank carries out transactions in the ordinary course of business at commercial rates with entities in which a Director of the Bank is the Chairman or a Director of such entities. Please refer Note 51 to the Financial Statements for information on related party transactions. The entities in which the Directors of the Bank held directorships and substantial shareholdings as at 31 December 2019 are disclosed below: Entity Directorships (Executive/Non-Executive status) Substantial Shareholding % (if any) Mr W M R S Dias (Non-Executive Director/Chairman) Independent Non-Executive Director – Listed entities Independent Non-Executive Chairman – Independent Non-Executive Director – 1. Carson Cumberbatch PLC 2. Senkadagala Finance PLC Independent Non-Executive Director – 3. Tokyo Cement Co. (Lanka) PLC Non-Executive Director – Independent Non-Executive Director – Unlisted entities Non-Executive Director – 4. Ceylon Tea Marketing (Pvt) Ltd. Non-Executive Director – 5. Jay-Cey-Tea (Pvt) Ltd. Non-Executive Director – 6. South Asia Textiles Ltd. Non-Executive Director – 7. Superfine Teas (Pvt) Ltd. Non-Executive Director – 8. Tokyo Super Cement Company Lanka (Pvt) Ltd. 9. Tokyo Cement Power Lanka (Pvt) Ltd. 10. Tokyo Eastern Cement Company (Pvt) Ltd. 11. Tokyo Supermix (Pvt) Ltd. Mr W D K Jayawardena (Non-Executive Director/Deputy Chairman) Listed entities 1. Brown & Co. PLC Non-Executive Director – – 2. Browns Investments PLC Non-Executive Director – – 3. Eden Hotel Lanka PLC Non-Executive Chairman – – 4. LOLC Development Finance PLC Non-Executive Director – 5. LOLC Holdings PLC Managing Director/CEO – 6. Palm Garden Hotels PLC Non-Executive Chairman – – Unlisted entities Non-Executive Director – 7. Ceylon Graphene Technologies (Pvt) Ltd. Non-Executive Director – 8. LOLC Advanced Technologies (Pvt) Ltd. Non-Executive Director – 9. LOLC Africa Holdings (Pvt) Ltd. Non-Executive Director – Non-Executive Chairman 10. LOLC Asia Private Limited Non-Executive Director 11. LOLC General Insurance Ltd. Non-Executive Director 12. LOLC International (Pvt) Ltd. Non-Executive Chairman 13. LOLC (Pvt) Ltd. Non-Executive Director 14. LOLC Securities Ltd. 15. Riverina Resort (Pvt) Ltd.

Seylan Bank PLC Annual Report 2019 121 Sustainable Stewardship Annexure to the Report of the Board of Directors on the State of Affairs of the Company Entity Directorships (Executive/Non-Executive status) Substantial Shareholding % (if any) Ms M C Pietersz (Independent Director/Senior Director) Independent Non-Executive Director – Listed entities Finance Director – Finance Director – 1. Bogala Graphite Lanka PLC 2. Hapugastenna Plantations PLC Executive Director – 3. Udapussellawa Plantations PLC Finance Director – Executive Director – Unlisted entities Executive Director – 4. Finlay Airline Agencies (Pvt) Ltd. Executive Director – 5. Finlays Colombo Ltd. Executive Director – 6. Finlay Plantation Management (Pvt) Ltd. Executive Director – 7. Finlay Properties (Pvt) Ltd. Executive Director – 8. Finlay Teas (Pvt) Ltd. 9. Finlay Tea Estates Lanka (Pvt) Ltd. Chairman/Non-Executive Director 10. Finlay Tea Solutions Colombo (Pvt) Ltd. Non-Executive Chairman 11. James Finlay Plantation Holdings (Lanka) Ltd. Non-Executive Director Non-Executive Chairman Mr K P Ariyaratne (Director/Chief Executive Officer) Non-Executive Chairman Listed entities Non-Executive Chairman Non-Executive Chairman 1. Seylan Developments PLC Non-Executive Chairman Unlisted entities Executive Director – 2. Esots (Pvt) Ltd. Independent Non-Executive Director – 3. Lanka Financial Services Bureau Ltd. Independent Non-Executive Director – 4. Sesot (Pvt) Ltd. 5. Seyshop (Pvt) Ltd. Executive Director – 6. Seybest (Pvt) Ltd. Non-Executive Director 18.33% 7. Seyfest (Pvt) Ltd. Executive Director 33.31% 8. Sotse (Pvt) Ltd. Non-Executive Director 16.66% (indirect) Partner 50% (partnership) Mr Anushka S Wijesinha (Independent Director) Unlisted entities Non-Executive Director – Director/Chief Executive Officer – 1. BizEx Consulting (Pvt) Ltd. 2. FairFirst Insurance Ltd. Non-Executive Director - 3. HNB Finance Ltd. Non-Executive Director – Non-Executive Director – Mrs Sandya K Salgado (Independent Director) Non-Executive Director – Unlisted entities 1. Carnival Movies Lanka Ltd. 2. Film Island (Pvt) Ltd. 3. Jigsaw International (Pvt) Ltd. 4. WAD International (Pvt) Ltd. 5. The Drug Shop Mr D M D Krishan Thilakaratne (Non-Executive Director) Listed entities 1. Commercial Factors PLC 2. Commercial Leasing & Finance PLC Unlisted entities 3. Commercial Insurance Brokers (Pvt) Ltd. 4. PRASAC Micro Finance Ltd. (Cambodia) 5. Credit Information Bureau of Sri Lanka 6. LOLC Myanmar Micro Finance Company Ltd. (Myanmar)

122 Seylan Bank PLC Annual Report 2019 Sustainable Stewardship Annexure to the Report of the Board of Directors on the State of Affairs of the Company Entity Directorships (Executive/Non-Executive status) Substantial Shareholding % (if any) Mr D R Abeysuriya (Independent Director) Non-Executive Director – Listed entities Non-Executive Director – 1. HNB Assurance PLC Executive Director – Executive Director – Unlisted entities Executive Director – 2. Bio-Foods (Pvt) Ltd. Executive Director – 3. Candor Asset Management (Pvt) Ltd. Non-Executive Director – 4. Candor Capital (Pvt) Ltd. 5. Candor Equities Ltd. – 6. Candor Shared Services (Pvt) Ltd. – 7. Straight Sale (Pvt) Ltd. – Mr R D Tissera (Alternate Director to Non-Executive Director, Mr W D K Jayawardena) – Listed entities 1. LOLC Finance PLC Executive Deputy Chairman 2. LOLC Development Finance PLC Non-Executive Director Unlisted entities Non-Executive Director 3. LOLC Mauritius Holdings Ltd. (Mauritius) Non-Executive Director 4. Sundaya Lanka (Pvt) Ltd. Independent Director, Mr P L S K Perera and Non-executive Director, Mr S V Corea did not hold any directorships or substantial shareholdings in other entities as at 31 December 2019.

Seylan Bank PLC Annual Report 2019 123 Risk Sustainable Stewardship Management Integrated Risk Management responsibility for managing all risks to and external audits provide the risk and Governance Structure business managers within stipulated assurance (3rd Line of Defence). risk limits (1st Line of Defence). Seylan Bank’s Board has established Risk management in Seylan Bank Risk management across the entire two Board Committees supported by three is structured on the Three Lines of Organisation has been assigned Executive Management Committees to Defence concept to ensure a cohesive to an independent Chief Risk oversee risk management as shown in the and coordinated approach. The Director/ Officer (2nd Line of Defence). The internal following chart: Chief Executive Officer has delegated Risk Ownership Board of Directors Risk Assurance Risk Control Board Audit Committee Board Integrated Risk Management Committee Director/Chief Executive Officer Assets and Executive Credit Executive Market Liabilities Risk Management and Operational Committee Risk Management (ALCO) Committee (ECRMC) Committee (EMORMC) Respective Chief Risk Officer Head of Business Unit Audit and Heads Inspection Business Credit Market Operational Information Auditors Management Risk Risk Risk Security Risk First Line of Defence Second Line of Defence Third Line of Defence At Seylan Bank, having understood that risk management is an essential component of growth, we have developed risk management policies and procedures that are applied across the Bank to assist the business units in their daily interaction with customers. The regulator recommended risk framework is in place to manage the risk in an integrated basis and monitor developments in real time to provide the right level of information to the attention and action of the Board Integrated Risk Management Committee (BIRMC).

124 Seylan Bank PLC Annual Report 2019 Sustainable Stewardship Risk Management As per Pillar II, we prepare and submit Risk appetite elements Market risk (Maturity Gaps – less than the findings of Internal Capital Adequacy one year net gap percentage of liabilities, Assessment Process (ICAAP) in order to go Risk Appetite Framework Government Securities to total assets, beyond management of key risks, namely market value of equity investments to total Credit, Market, and Operational. We also The definition of risk appetite is the first assets, net open position, interest rate risk use tools such as VaR, stress testing step in the Risk Appetite Framework (RAF) in the Banking Book). and other simulations within approved process. While the Risk Management Unit threshold limits to contain risks. The entire defines and proposes the appetite and Liquidity risk (Statutory liquidity ratio for risk management function is carried out tolerance limits, the Board of Directors domestic and foreign currency, advances with defined roles and responsibilities and is responsible for approving the risk to deposits ratio in domestic and foreign has the oversight of the Board of Directors. appetite and has the overall responsibility currency, advances to deposit ratio – Bank, IT systems are constantly upgraded to to ensure that the most significant risks Swaps, external borrowings in domestic facilitate the risk management process, are properly managed. currency). whilst regular training and communication takes place to create a risk management The Bank sets risk tolerance limits for Operational risk (Pawning operational culture across the Bank. We are geared its key risk indicators pertaining to losses as a percentage of pawning income, to adhere to the new guidelines on credit risk, market risk, liquidity, and non-rectified high risk audit findings over Operational Risk Capital Computation and operational risk. total high risk audit findings, cheque are planning to implement Standardised returns as a percentage of total cheques in Measurement Approach (SMA) in the Seylan Bank’s risk appetite incorporates, clearing and number of skimming cards). coming years. We also have developed at minimum, the following dimensions: a dashboard to monitor and report on Compliance to CBSL guidelines, the overall view of risk with given targets Credit risk (NPL ratio, overdrafts without all regulatory requirements and and thresholds to manage risk within the limits, large exposures to core capital, reputational risk. approved appetite and tolerance levels. specific provision cover to Gross NPL, watch list to performing advances, and related-party lending to core capital). Risk appetite statement (Comprising key credit, market, liquidity, and operational indicators) Risk type Tolerance limit December December Low Medium High 2019 2019 2018 % % % Credit risk 4.70 6.49 6.55 1. Gross NPA ratio (as per CBSL) 4.20 5.76 5.98 2. Gross NPA ratio (Net of IIS as per CBSL) 15.00 13.78 16.45 3. Overdue + NPA/Total advances 45.00 33.30 18.53 4. Specific provision/Gross NPL 12.00 8.15 10.83 5. Watch list/Total performing advances 500.00 162.00 324.00 6. Performing overdrafts without limits (LKR Mn.) 8.00 5.83 5.55 7. Large exposure/Core capital (Times) Max of 55.00 38.19 23.26 8. Exposure on related parties/Core capital Less than 17.50 33.17 36.24 9. Open credit exposure Market risk Less than 25% 6.72 3.36 10. Maturity gap less than one year to total liabilities Less than 30% 17.54 20.38 11. Government Securities to total assets (Interest bearing) 12. Equity investment value (Quoted-CSE) to Less than 1% 0.05 0.07 Long +10 Mn. total assets (Interest bearing) Short –16 Mn. 0.55 0.72 13. Net open position (USD) (Mn.)

Seylan Bank PLC Annual Report 2019 125 Sustainable Stewardship Risk Management Risk type Tolerance limit December December Low Medium High 2019 2019 2018 % % % Liquidity risk >21.00 21.40 21.44 14. Statutory liquidity ratio Domestic Banking Unit 21.81 22.08 15. Statutory liquidity ratio Foreign Currency Banking Unit >21.00 97.32 94.19 16. Advances to Deposits Ratio – Bank 92.72 90.07 17. Advances to Deposits + Debentures <97.50 96.84 94.38 18. Advances to Stable Funds 74.50 106.00 19. Swaps (USD) <95.00 25.77 23.81 20. External borrowing (LKR) <100.00 0.72 Not to exceed USD 175 Mn. 3.88 Not to exceed 0.54 LKR 50 Bn. 1.12 Operational risk 0.2% of pawning 0.21 21. Pawning operational losses as a percentage income 3.86 of Pawning Income Industry cheque 1.09 22. Cheque returns as a percentage of return percentage for 0.07 total cheques in clearing the month (-)0.5% Zero 23. Non-rectified high risk findings (> 90 days) over total high risk audit findings (%) 0.1% of credit card income for the month 24. Value of cards skimmed as a percentage of Card Interest Income Monitoring the risk profile obligation, in accordance with the These standards, policies, and guidelines agreed terms or its ability to perform lay down key roles and responsibilities The Board Integrated Risk Management such obligation is impaired resulting in a of those required to originate, identify, Committee and its appointed loss to the Bank. In essence, the proper analyse, rate, review, price, report, diversify, subcommittees use the Risk Appetite management of credit risk underpins a control/mitigate, and manage credit risks Statement to determine appropriate Bank’s financial stability, growth prospects, and are applicable to all lending activities earnings volatility, risk/return targets and profitability and as such Seylan Bank undertaken by our Bank. and risk tolerance, and concentration has developed a well-structured credit risk limits which it allocates to business management process in order to maintain In addition to setting up exposure limits activities or to specific risk types. The Risk the quality of the credit portfolio of the for clients individually, the Bank manages Management Unit and the Board Integrated Bank at the optimal level. counterparty credit exposures, using Risk Management Committee have the the “one obligor principle”, so that all responsibility to continuously monitor the Accordingly, credit risk is managed facilities to a group of borrowers wholly risk profile of Seylan Bank PLC, ensure through a comprehensive framework or substantially owned or controlled that the latter is within the approved risk which includes well-defined policies and by common or related parties are appetite tolerance limits and ascertain procedures that include clearly structured aggregated and evaluated together under whether certain business lines need further approval hierarchies and different the coordination of a designated lead monitoring or requires new guidance committees to oversee various aspects of relationship manager. regarding risk-taking. credit risk management processes in the Bank. In addition, the Bank manages its The monitoring of credit concentration Each business unit defines its strategy and credit exposures through diversification is an integral part of the credit risk business plans with a view to optimising strategies across products, geographies, monitoring process at Seylan Bank. its overall risk/return trade-offs within clients, and customer segments. Accordingly, the Bank constantly reviews the Bank’s risk appetite. Consistency is its credit concentration on a number maintained between the top-down targets The Credit Standards and Policy Manual of areas such as: geography, product and limits set by the Board Integrated outline the fundamental standards and type, industrial sectors, and maturity. Risk Management Committee and more disciplines that the Bank has implemented Close monitoring of key ratios/internal granular limits are set in case of products, to actively manage credit risk across our thresholds on a continuous basis and portfolios, individuals, and traders. lending book. The Lending Guidelines stress testing of the credit portfolios form on the other hand outlines the Bank’s another strategy to measure and monitor Credit risk management strategic risk/reward objectives in the light the credit concentration risk in the Bank’s of evolving market conditions by clearly loan portfolio. Credit risk is defined as the risk of setting out the preferred industries and a potential loss to the Bank, when a lending types to be targeted for lending counterparty fails to perform on an growth during each calendar year.

126 Seylan Bank PLC Annual Report 2019 Sustainable Stewardship Risk Management Additionally, the Bank’s credit risk evaluation of whether the borrower’s Non-performing advances by management strategy includes: identifying realistic projected cash flows will be collateral type (net of IIS) the emerging risks, which can impact the sufficient to repay their debts. The Bank business activities of the clients well in normally requires this to be supported Collateral type 2019 2018 advance, ensuring that the credit facility by at least one alternative way of settling (secured) LKR ’000 LKR ’000 or the relationship returns the expected the debt in the event of unforeseen profitability, close monitoring of the usage adverse circumstances but firmly believes Cash/shares 1,116,559 1,512,409 of working capital facilities to prevent that the availability of collateral does not diversion of funds into unintended in itself make an unacceptable lending Immovable 14,233,116 13,168,093 areas, and ensuring timely repayment proposition acceptable. property of the facilities. In instances where the Bank Movable assets 1,376,311 1,235,564 Assessment of credit risk accommodates highly reputable and financially strong corporate borrowers, Other securities 3,684,754 2,674,520 In order to grow the Bank’s loan book on whose performance is regularly and high quality loans and advances, there rigorously reassessed on the basis Pawned articles 96,945 117,520 is a clear segregation of duties between of reliable financial information, we transaction originators in business areas exceptionally grant facilities on an Clean 2,005,146 1,458,181 and approving authorities under the risk unsecured basis solely based on function. All credit exposure limits are their cash flows. Grand total 22,512,832 20,166,287 approved within a well-defined credit approval authority framework. Credit risk The Bank uses various techniques and Monitoring, reporting, and evaluation and approval is undertaken controls to limit and mitigate credit risk disclosure of credit risk by experienced credit risk professionals exposures and reduce potential credit operating within a clearly defined losses. These include documenting Respective Business Unit Heads are delegated authority framework, with only credit transactions with adequate primarily responsible for monitoring the the most senior credit officers entrusted terms, conditions, and covenants in a performance of their lending to ensure with the higher levels of delegated comprehensive and legally enforceable that the Bank’s credit portfolio profitability authority. All high value credit propositions basis and obtaining of guarantees, and lending quality objectives are above a certain threshold level are financial or other collaterals to provide achieved. Credit risk management uses approved by the Internal Credit Committee, a secondary recourse to minimise credit a comprehensive range of quantitative Board Credit Committee or the Board of losses. Such guarantees serve to mitigate tools and Bank-wide credit limits to Directors as relevant. the inherent risk due to credit default monitor lending, contingent commitments and minimise any related losses by either and other off-balance sheet exposures, The Bank has delegated credit approval substituting the borrower default risk or profitability, quality trends, concentrations authority to individual lending officers, improving recoveries. and identifies whether the Bank is based upon a consistent set of standards growing undue exposure concentrations such as experience, judgement, and ability. The Bank nets off collateralised cash and whether credit risks are adequately These authority levels are subjected to deposits against the on balance sheet remunerated. The Risk Management Unit review on an annual basis. If an individual non-performing advances in the instances makes recommendations for suitable lending officer’s authority is insufficient to where the relevant documentation amendments if required, after reviewing establish, materially change or restructure which is legally binding on all parties the existing credit policy framework. the required credit limits, the proposals and enforceable on all jurisdictions are are escalated to an officer or committee available. CRO reports these concentrations regularly having the required higher delegated together with his recommendations for authority. In addition, the individual In the standardised approach, collateral corrective actions to the Executive Credit credit exposure limits on the clients are recognition is limited to eligible financial Risk Management Committee (ECRMC) subjected to a critical review annually and collateral such as gold only but this and escalates the significantly important require the approval at the appropriate approach provides a preferred (lower) risk matters to the attention of the Board authority level. Managers recommending, weight for “SME exposures secured by Integrated Risk Management Committee reviewing or approving facilities are held immovable property” and “claims secured (BIRMC). This rigorous process enables the accountable for the outcome. by residential property”. Though the Bank Board of Directors to oversee the Bank’s has relied on the individual and corporate credit risk exposures, ensuring that the Credit risk mitigation guarantees in granting credit facilities, Bank quickly identifies emerging risks and the Bank has not relied upon any credit risks that are not aligned with the Board- In mitigating credit risk, the Bank primarily derivative instruments to transfer the credit approved credit risk appetite and initiates relies on a rigorous assessment of credit risk assumed on the clients. timely corrective measures. applicants, the strength of their business model, sustainable financial conditions, Collateral impairment haircuts are Loan review mechanism and our ability to meet their financial applied to security valuations, based on requirements. Further, the lending conservative and predetermined Loan/ In line with the Banking Act Direction proposals are normally required to show Collateral ratios in compliance with the No. 07 of 2011 under the Integrated more than one independent credible Banking Act Direction No. 03 of 2008, Risk Management Framework, the Bank source of repayment. The primary source “Classification of Loans and Receivables, has adopted a Loan Review Mechanism is established through a conservative Income Recognition and Provisioning”. (LRM) which stands as an effective tool for constantly evaluating the quality of the loan book and bringing about qualitative improvements in credit administration.

Seylan Bank PLC Annual Report 2019 127 Sustainable Stewardship Risk Management Under the purview of the Chief Risk will be raised against these loans, if the flows discounted at the financial asset’s Officer, Credit Risk Review Unit conduct expected cash flows discounted at the original effective interest rate. If the carrying Independent Risk Reviews of high value effective interest rate are less than the amount is less than the discounted loans (LKR 500.0 Mn. and above)/small carrying value. cash flows, then no further allowance is and mid tier facilities/product portfolio necessary. Impairment allowances are reviews. Independent Risk Reviews The “impaired and restructured loans” measured individually for assets that are are conducted within three months of category comprises loans not included individually significant, and collectively sanction/renewal of facilities covering at above where, for economic or legal where a portfolio comprises homogeneous least 30%-40% of the loan portfolio within reasons related to the debtor’s financial assets and where appropriate statistical a calendar year. difficulties, a concession has been granted techniques are available. to the debtor that would not otherwise be The main focus of the Independent Risk considered. Where the concession results As per SLFRS 9, calculation of the Reviews is on: the approval process, in the expected cash flows discounted at impairment has been assessed and accuracy and timelines of credit ratings the effective interest rate being less than disclosed based on Stages I, II, and III assigned by loan officers, adherence the loan’s carrying value, an impairment of the portfolio and such disclosures are to internal policies and procedures, allowance will be raised. explained in Note 24.3.1 of Financial applicable laws/regulations, compliance Statements. with covenants and conditions, post Approach on individually significant and sanction follow-up, sufficiency of collective loan loss provisioning Credit risk documentation, and portfolio quality. The Bank’s loan loss provisions are Concentrations with limits The findings of the reviews and the established to recognise impairment recommendations for improving the losses incurred either on specific loan Credit concentration risk may arise where portfolio quality are presented to the assets or within a portfolio of loans and a number of counterparties are engaged Executive Credit Risk Management receivables. in similar activities and have similar Committee (ECRMC) and to the attention characteristics, which could result in of the Board Integrated Risk Management Impairment allowances may be assessed inability to meet contractual obligations Committee (BIRMC). and created either for individually being similarly affected by changes in significant accounts or, on a collective economic or environmental conditions. Qualitative disclosures basis, for groups of individually significant accounts for which no evidence of Concentration risk is mitigated to a large Definition of past due and impaired impairment has been individually extent by stipulating prudent credit risk based on CBSL guidelines identified or for high volume groups limits on various parameters. CBSL also has A non-performing loan is any loan that is of homogeneous loans that are not specified certain guidelines on maximum 90 days or more past due or is otherwise considered individually significant. exposures in respect of single/related individually impaired (which represents Individually impaired loans are those party borrower limits and large exposures. those loans against which individual loans against which individual impairment impairment provisions have been raised) provisions have been raised. Related party lending and excludes: Estimating the amount and timing of future Related parties include the Major zz Loans renegotiated before 90 days past recoveries involves significant judgement Shareholders, Subsidiaries, Directors, and due and on which no default in interest and considers the level of arrears as well Key Management Personnel of the Bank payments or loss of principal is expected. as the assessment of matters such as and their close relations. The Bank has set future economic conditions and the value an internal limit on the overall exposure to zz Loans renegotiated at or after 90 of collateral, for which there may not be a the related parties and ensured that credit days past due, but on which there has readily accessible market. decisions are made on a rational basis, been no default in interest or principal as per the relevant legislation, approved payments for more than 180 days since Loan losses that have been incurred but policies and procedures and is based renegotiation and against which no loss have not been separately identified at the on market terms, with no preferential of principal is expected. Statement of Financial Position date are treatment. determined on a portfolio basis, which takes “Impaired Loans” comprise both into account Expected Credit Loss (ECL) Over exposure to geographical areas, individually and collectively identified experienced as a result of uncertainties economic sectors and lending products loans for the assessment of impairment arising from the economic environment allowances. These loans also include and defaults based on portfolio trends. Exposure to a single sector of the collateralised or where indebtedness has Under SLFRS/LKAS, impairment allowances economy or lending product or to a narrow already been written down to the expected are recognised where there is objective geographical region is another dimension realisable value. This category includes all evidence of impairment as a result of one of risk concentration. Borrowers may be loans that have been transferred to legal/ or more loss events that have occurred after vulnerable in the event of an economic or recovery departments. The impaired loan initial recognition and where these events market downturn affecting their economic category may include loans, which, while have had an impact on the estimated future sector, which in turn can affect their ability impaired, are still performing. cash flows of the financial asset or portfolio to service the loans and to mitigate this of financial assets. Impairment of loans and risk the Bank sets individual concentration The “accruing past due 90 days or more” receivables is measured as the difference limits for exposure to various sectors. The category comprises loans that are 90 days between the carrying amount and the Bank closely monitors the quantum and or more past due with respect to principal present value of estimated future cash quality of lending by geography (area) but or interest. An impairment allowance is of the opinion that weaknesses in any local economy, will not pose a significant risk in the foreseeable future.

128 Seylan Bank PLC Annual Report 2019 Sustainable Stewardship Risk Management Quantitative disclosures Credit exposure by product types as at 31 December 2019 The core banking products such as term loans and overdrafts account for more than 70% of total advances. The specialised products are closely monitored to mitigate inherent risks. Refer Note 24 in Financial Statements. Age analysis of non-performing loans by product distribution (Excluding interest receivables) – 31 December 2019 based on CBSL Directions Loan category 3-6 months 6-12 months 12-18 months 18 months NPA NPA NPA NPA and above grand total Credit cards Housing special mention substandard doubtful NPA loss LKR ’000 Leasing LKR ’000 LKR ’000 LKR ’000 LKR ’000 Overdrafts 554,395 Pawning 110,637 102,161 89,389 252,209 1,552,063 Staff term loans 424,676 330,335 208,178 588,873 1,375,615 Term loans 646,622 291,291 112,284 325,417 4,415,951 Trade finance 563,558 778,863 851,985 2,221,546 Grand total 69,970 34,815 – – 35,155 49,447 15,610 9,619 117 24,101 14,135,381 1,708,638 1,930,163 2,526,035 7,970,545 360,010 108,741 28,982 45,772 176,515 22,512,832 3,471,414 3,833,760 3,613,297 11,594,361 Additional quantitative disclosures made zz Analysis of gross rupee loans and zz Analysis of gross loans and advances in other sections of this Annual Report: advances by product (Note 24.1.1) industry-wise (Note 24.1.3) zz Credit quality of financial assets and zz Analysis of gross foreign currency loans zz An analysis of concentrations of allowances for impairment held by the and advances by product (Note 24.1.1) credit risk of loans and advances Bank against those assets (on page 205) by geographic locations (page 256) zz Analysis of gross loans and advances zz Details of the collateral types by currency (Note 24.1.2) zz Movement in expected credit loss/ (on page 181) impairment allowance on loans and advances (Note 24.3) Credit risk under standardised approach – Credit Risk Exposures and Credit Risk Mitigation (CRM) Effects Amount as at 31 December 2019 Exposures before Credit Exposures post-CCF and CRM RWA and RWA density (%) Conversion Factor (CCF) and CRM Description On-balance Off-balance On-balance Off-balance Total RWA RWA sheet amount sheet amount sheet amount sheet amount LKR ’000 LKR ’000 density (ii) LKR ’000 LKR ’000 LKR ’000 LKR ’000 % Claims on central government 98,801,156 98,801,156 – 98,801,156 1,922,775 1.95 and CBSL – 0.00 Claims on foreign sovereigns – – – ––– 0.00 and their central banks – ––– – 0.00 Claims on public sector entities – – 8,035,659 71.23 6,546,931 26,840,079 63.74 Claims on official entities and – 7,280,216 171,472,391 – – – 97.54 multilateral development banks 124,218,852 113,816,171 1,210,233 9,245,892 6,586,071 66.86 44,631,209 18,939,090 1,345,785 28,185,864 17,966,944 59.63 Claims on Bank’s exposures 8,035,659 22,962,482 194,434,873 189,646,319 – 2,488 8,250,304 122,066,475 81,611,952 100.00 Claims on financial institutions 27,417,818 16,719,983 18,939,090 11,293,411 117.68 – – Claims on corporates 175,695,338 – – – – 32,700,112 73.32 Retail claims 141,828,794 – 487,327,129 67.68 182,677,208 Claims secured by residential property 18,952,343 Claims secured by commercial 2,488 – 2,488 2,488 real estate – 16,719,983 19,676,700 – Non-performing assets (NPAs) (i) 16,827,767 – – – 33,768,804 32,700,112 23,975,322 Higher-risk categories – 521,095,933 352,681,981 Cash items and other assets 32,700,112 Total 520,261,475 (i) NPAs – As per Banking Act Directions on classification of loans and advances, income recognition, and provisioning. (ii) RWA Density – RWA/Exposures post-CCF and CRM.

Seylan Bank PLC Annual Report 2019 129 Sustainable Stewardship Risk Management Credit risk under standardised approach: exposures by asset classes and risk weights Risk-weight Amount as at 31 December 2019 (Post-CCF and CRM) (LKR ’000) >150% Total credit 0% 20% 50% 60% 75% 100% 150% exposures amount Asset classes 89,187,279 9,613,877 – – –– – – 98,801,156 Claims on central government and CBSL – – – – –– – –– Claims on foreign sovereigns and – – – – –– – –– their central banks – – – – –– – –– Claims on public sector entities – 816,300 4,013,562 – – 4,416,030 – – 9,245,892 – 20,437,839 – – 7,748,025 – – 28,185,864 Claims on official entities and – – 9,718,031 – – 184,575,920 140,923 – 194,434,873 multilateral development banks – – 33,712,980 62,387,077 13,756,245 – – 109,856,302 8,022,118 – – – –– – – 12,210,173 Claims on banks exposures – 4,188,055 – – – 3,647,732 – – 18,939,090 – 15,291,358 Claims on financial institutions – – – 2,488 – – 2,488 – – – – – 9,444,191 6,594,613 – 16,719,983 Claims on corporates – – 681,179 – –– –– 8,423,935 – – – 23,900,108 – – 32,700,112 Retail claims 105,633,332 376,069 – 33,712,980 62,387,077 247,490,739 – – 521,095,933 14,994,301 – 6,735,536 Claims secured by gold 50,141,969 Claims secured by residential property Claims secured by commercial real estate Non-performing assets (NPAs) (i) Higher-risk categories Cash items and other assets Total (i) NPAs – As per Banking Act Directions on classification of loans and advances, income recognition, and provisioning. Market Risk Management the Board, the Risk Committee (EMORMC) Stress testing and ALCO are responsible for allocating Market risk managing the market risk in the Bank’s Stress testing is an integral component major business areas especially Treasury. of our risk and capital management Managing market risk As such lines have mainly been granted framework. It allows us to assess potential The Bank defines market risk as the risks to Treasury. Treasury is responsible for vulnerabilities to the business, models or taken in relation to price fluctuations in the monitoring and handling the Bank’s market portfolios. It also helps to understand the financial markets. Several types of risk may risks and positions. Business Units are sensitivities of the core assumptions in our arise and the Bank manages and monitors closely monitored for their market risk strategic plans; and improve decision- these risks carefully. operations but is managed and monitored making through balancing risk and return. under the Treasury exposures. The Finance Market risk is generally defined as the Department and Risk Management In addition to internal stress test risk of the market value of portfolios, Unit reports market risks to ALCO, and scenarios reflecting the outcomes of the instruments or investments increase or EMORMC monthly and to BIRMC on a annual risk assessments, the Bank also decrease as a result of volatility and quarterly basis. performs regular stress test exercises unpredicted movement in market factors for management insight and timely such as exchange rates, interest rates, Control and management decision-making. and prices. The stringent market risk policies support The stress tests are generally carried Seylan Bank’s market risks are mainly; the Bank’s investment policy of mainly out by applying static balance sheet holding Sri Lanka Government Treasury Bills assumptions either at the close of a zz Interest rate risk: risk of loss caused and Bonds, and to a lesser extent investing month, quarter or the end of a financial by changes in interest rates in other instruments and currencies. year, or on an ad hoc basis. zz Exchange rate risk: risk of loss from Management of market risk positions in foreign currency when exchange rates change Level Board of ALCO Executive Market Market Risk Treasury Directors zz Equity market risk: risk of loss from and Operations Management falling equity values Risk Management Unit through Policy and responsibility The Bank’s market risk management Committee CRO relates to the Bank’s assets, liabilities, and off-balance sheet items. The Board Strategic Defines and of Directors defines the overall policies/ Tactical oversight of the limits for the Bank’s market risk exposures, Operational overall market risk including the overall risk limits. The limits on market risks are set with consideration Delegating risk Managing the Implementing of the risk they imply, and how they match authorities to Bank’s market the Bank’s strategic plans. On behalf of relevant divisions risk Controlling, Trading monitoring, and reporting

130 Seylan Bank PLC Annual Report 2019 Sustainable Stewardship Risk Management The result of the stress tests reaffirms the resilience of our business models and the strength of the Bank’s capital base. Our commitment to maintain a robust, Capital Adequacy Ratio (CAR) in excess of the prevailing requirements remains. The table below shows the likely effects on the Bank’s income and capital from likely market changes. Likely effects from changes in markets Impact on Income Statement and OCI Equity risk (-) Change Value Percentage impact Exchange rate risk (+/-) other currencies % Mn. on capital Portfolio interest rate risk on Government Securities FVTPL 10% 18.78 0.00 FVTOCI 10% 6.43 0.00 Upward shift of 100 bps 163.20 -0.01 100 bps 1,081.96 -0.34 zz All equity prices fall by 10% Market Risk under the Standardised Measurement Method zz All currencies change by 10% Computation of capital charge for market risk as at 31 December 2019 zz Upwards parallel shift of the yield curve Item RWA amount (LKR ’000) of 100 bp on the Government Security as at 31 December 2019 Portfolios (a) Capital charge interest rate risk General interest rate risk 232,330 Risk management principles (i) net long short position 232,330 The diversity of our business model (ii) horizontal disallowance 232,330 requires us to identify, assess, and manage (iii) vertical disallowance our risk, and to allocate capital for the (iv) Options 42,762 exposures the Bank carries. While business Specific interest rate risk 23,479 units actively take risk, the following (b) Capital charge for equity 19,283 principles underpin our risk management (i) General equity risk 16,083 framework: (ii) Specific equity risk (c) Capital charge for foreign exchange and gold 2,329,400 zz Risk taken is within the defined Total risk weighted assets on market risk risk appetite. [(a)+(b)+(c)]/CAR zz Every risk taken needs to be approved Portfolio interest rate risk Weighted duration of the Year within the risk management framework. Government sector portfolio The Bank’s policy is to invest mostly in zz Risk is continuously monitored Government Securities such as Treasury 4.0 and managed. Bills and Treasury Bonds to meet the liquidity requirements and for trading 3.2 At Seylan Bank to manage risk we purposes. As a consequence, the Bank primarily use our Risk Appetite Framework holds a large portfolio of treasury bonds, 2.4 of which the limit framework is a key and most of the Bank’s interest rate risk component. The Management and Board stems from this portfolio. 1.6 sets portfolio limits for market risk in the trading book. These limits are allocated to The following graph represents the 0.8 our Treasury Division based on established weighted average duration of the and agreed business plans. We have Government Security portfolios 0 also businesses aligned with market risk during 2019: Dec. Mar. Jun. Sep. Dec. management to establish business limits, 2018 2019 2019 2019 2019 by allocating the limits down to individual portfolios and cumulative exposures. Duration FVTPL Duration Amortised Duration FVOCI Cost Our main objective is to accurately measure all types of market risks by a comprehensive set of risk metrics embedding accounting, economic, and regulatory considerations. We measure market risks by several internally developed key risk metrics and regulator defined market risk approaches.

Seylan Bank PLC Annual Report 2019 131 Sustainable Stewardship Risk Management Interest rate risk in the revenue stream. In most instances the The analysis represents a change in annual banking book (IRRBB) contractual terms of products differ, due to net interest income with the rate change customer behaviours. For these products, by +/-100 and 200 bps and the balance Interest rate risk in the banking book arises assumptions are used on behavioural sheet assumed to be stable and is based principally from mismatches of assets and analysis to allow more accurate and on the assumption that the rate sensitive their funding cost (deposit liabilities) as feasible risk management techniques. assets and liabilities are bucketed on their a result of interest rate changes. The aim reprising maturities or failing which on through the management of IRRBB is to The interest rate risk is defined as the their contractual maturities or assumed mitigate the effect of prospective interest effects of a one percentage point parallel maturities. rate movements that could reduce future shift of the yield curve. net interest income, while balancing the cost of such hedging activities on the net Total Earnings at Risk (EaR) to a shift in interest rates is shown in the table below: Change in the net interest income per annum EaR as EaR as a on Date percentage 100 bps 31 December of last year’s 200 bps 2019 NII +/- 392.36 +/- 2.21% +/- 784.73 +/- 4.42% Earnings at risk – Parallel Amount LKR Mn. Sensitive total RI: 0 to 3 month RI: 3 to 12 months RI: 1 to 3 years RI: 3 to 5 years More than 5 years Description 468,490.90 136,138.10 83,405.60 99,361.70 85,446.80 64,138.70 435,325.60 Total interest earning assets 86,321.80 95,186.90 96,593.80 64,237.30 92,985.80 Total interest bearing liabilities 49,816.30 -11,781.3 21,209.50 -28,847.10 33,165.30 RSA-RSL GAP 2,767.90 Earnings at risk computation Mid point of bucket 45.0 227.5 720.0 1,440.0 2,700.0 – Remaining days till horizon 320.0 137.5 – – – – Horizon for EAR impact 365 365 365 – NII previous year 365 365 – 17,747 17,747 17,747 17,747 17,747 Bucket-wise earnings at risk RI: 0-3 month RI: 3 to 12 months RI: 1 to 3 years RI: 3 to 5 years More than 5 years Rate shock 436.75 -44.38 0.00 0.00 0.00 873.49 -88.76 0.00 0.00 0.00 1 2

132 Seylan Bank PLC Annual Report 2019 Sustainable Stewardship Risk Management Exchange rate risk Net Open Position Movement during the year is depicted in the following graph: The Bank considers that assets and NOP Movement during 2019 USD ’000 liabilities in other currencies imply an exchange rate risk as they may vary in 12,000 value over time relative to the Sri Lankan Rupee. Seylan Bank’s core business as 6,000 a commercial bank makes it necessary to have access to foreign currencies and 0 to hold positions in the most common currencies. Given the uncertainty of -6,000 currency fluctuations, the Bank’s policy is to maintain a low currency risk by holding -12,000 foreign currency exposures applying individual currency limits and the overall -18,000 Jan. Feb. Mar. Apr. May Jun. jul. Aug. Sep. Oct. Nov. Dec. exposure is managed within the Net 2019 2019 2019 2019 2019 2019 2019 2019 2019 2019 2019 2019 Open Position (NOP) limit defined by the regulator. Individual and cumulative NOP Short position limit Long position limit intraday limits, daylight limits, and overnight limits are defined for the treasury Equity market risk Treasury Investment Committee. The Market dealers to operate within these boundaries Risk Management Unit acts independently to mitigate the risk emanating through Seylan Bank’s risk policy restricts equity in monitoring and reporting the equity these exposures. positions to listed shares and shares investments risk, and is responsible for related to strategic investments. The Bank reporting the impact on earnings on a The foreign exchange risk is monitored occasionally holds unlisted shares made daily basis to the Treasury Investment daily and discussed at the Asset and for reasons such as investing in shares Committee and the impact on earnings Liability Committee on a monthly basis. of unlisted banking related companies. and regulatory capital on a monthly basis Limits are agreed and approved by the These are mainly investments in companies to ALCO and the Risk Committee and Board of Directors. providing financial infrastructure and subsequently to the Board. financial services to the Bank. For some of The Bank’s exchange rate risk mainly these investments holding is revalued yearly The graph represents the investments in stems from: according to the net worth of the companies. equity and the behaviour of market values of the equity investment FVOCI portfolio: zz Customer loans/deposits in foreign The management of the price risk of equity currency investments is the responsibility of the Treasury Department with oversight of the zz Treasury’s positions in foreign currency The following graph presents the NOP as a Equity Investments – FVOCI LKR Mn. percentage of the Tier 1 Capital during the LKR Mn. year 2019: 800 350 Aggregate unhedged open % 280 640 foreign currency position ratio 1.25 210 480 1.00 140 320 0.75 70 160 0.50 0 0 31 Dec. 0.25 2018 31 Mar. 30 Jun. 30 Sep. 31 Dec. 2019 2019 2018 2018 0 Cost FVOCI (CSE) Fair value (CSE) Cost FVOCI (NYSE) Fair value (NYSE) Dec. Mar. Jun. Sep. Dec. (LHS) (LHS) (LHS) (RHS) 2018 2019 2019 2019 2019

Seylan Bank PLC Annual Report 2019 133 Sustainable Stewardship Risk Management Liquidity risk on a daily basis in accordance with the Funding sources Liquidity risk is defined as the risk of loss limits set by the Board of Directors and The Bank monitors its funding mix to resulting from; reported to ALCO by Finance Department make sure that there is a satisfactory on a daily basis. Reporting to the Board diversification between deposits, equity, zz Increased funding costs Risk Management Committee is done debt capital, and loans from the financial by RMU on a quarterly basis. For better markets zz A lack of funding of new activities management and hindsight, liquidity reports with stress tests are submitted to Structural liquidity risk zz A lack of funding to meet the Bank’s ALCO by RMU on a monthly basis. Deposits are generally considered a secure commitments The Bank has implemented contingency source of funding. Deposits are generally plans to ensure that it is ready to respond short term but their historical stability The Board of Directors have defined to any unfavourable liquidity conditions. enables the Bank to grant customer loans the Bank’s liquidity limits for the daily with much longer terms. It is crucial for statutory liquidity requirements and the Operational liquidity risk the Bank to handle the risk associated to daily operational levels. With a Liquidity such maturity mismatches, and considers Coverage Ratio (LCR) of 116.01% as at The objective of the Bank’s operational it essential to have a reputation as a safe 31 December 2019, Seylan Bank’s liquidity liquidity risk management is to ensure Bank for deposits. position remains robust. that the Bank has sufficient liquidity at all times to handle customer transactions In order to minimise liquidity risk, the Control and management and changes in liquidity. The Bank Bank’s policy is to have strong liquidity Liquidity risk is a fundamental part of the complies with Liquidity Coverage Ratio from different funding sources. It is Bank’s business strategy. Treasury has the (LCR) requirements and therefore closely therefore the Bank’s policy to further operational responsibility for managing monitors the bond portfolio with regards to diversify the deposit base in terms of liquidity, while the Finance Department holding sufficient LCR compliable assets. of maturity. is responsible for reporting liquidity. The monitoring of liquidity lies with RMU. The Bank’s liquidity is managed by Treasury Liquidity management Board of Directors Assets & Liabilities Committee Finance Department through CFO Market Risk Unit through CRO Treasury Monitoring and reporting Objective Defines the objectives Planning oversight of liquidity Managing policies Tactical Defines the objectives for liquidity management and strategy Operational Controlling and reporting The following table represents the matrix used to measure and manage liquidity and funding risk as per internal and regulatory requirements/guidelines: Liquidity risk measures as per Regulatory Guidelines No. Ratio Limits December 2019 December 2018 % %% 1. Net loans to total assets 2. Loans to customer deposits (calculated as ADR) > 60.00 73.46 70.01 3. Liquid assets to short-term liabilities < 97.50 97.32 94.19 4. Purchased funds to total assets > 70.00 263.88 271.43 5. Commitments to total loans < 25.00 16.79 14.57 < 25.00 16.87 17.73

134 Seylan Bank PLC Annual Report 2019 Sustainable Stewardship Risk Management As envisaged in the ALM policy, liquidity risk is managed through the traditional floor approach better known as the “Gap Analysis” based on the residual maturity/behavioural pattern of assets and liabilities as prescribed by the CBSL and against prudential (tolerance) limits set for different residual maturity time buckets. The following table shows the assets and liabilities by a maturity structure. The maturity gap based on behavioural analysis is depicted in the following tables: Amount (LKR ’000) Up to 3 3 to 12 1 to 3 3 to 5 More than Total as at months months years years 5 years 31 December 2019 Assets 123,202,837 77,066,082 72,693,545 48,780,928 57,515,672 379,259,064 Interest earning assets 1,173,278 – – – – 1,173,278 Loans and advances 6,601,739 6,256,352 26,668,098 36,665,918 5,958,070 82,150,177 Placements with banks and – 665,000 743,258 finance companies 78,258 – – 5,165,159 Government of Sri Lanka Treasury 5,160,259 4,900 – – – 468,490,936 Bills/Bonds and Development Bonds Investments in debentures Securities purchased under resale agreements 136,138,113 83,405,592 99,361,643 85,446,846 64,138,742 Non–interest earning assets 8,422,292 – – – – 8,422,292 Cash in hand 2,529,654 3,384,251 3,045,433 1,926,779 3,572,853 14,458,970 Balances with Central Bank of Sri Lanka 3,336,437 Balances with banks – – – – 3,336,437 Investments in equities – 1,689,691 – – 1,153,602 2,843,293 Group balances receivable – – Property, plant and equipment/ 40,000 – 40,000 Leasehold rights/Intangible assets Derivative financial instruments – –– – 9,449,206 9,449,206 Other assets 118,366 – – 134,756 9,116,434 16,142 248 85 Total assets 23,523,183 1,926,864 1,736 9,118,297 40 2 14,177,397 47,803,251 159,661,296 5,130,124 3,045,683 87,373,710 516,294,187 78,316,139 88,535,716 102,407,326 Liabilities and equity 70,020,018 83,307,516 82,113,753 51,951,586 90,661,844 378,054,717 Interest bearing liabilities 8,046,703 379,181 – – – 8,425,884 7,495,282 8,442,000 12,855,754 – – 28,793,036 Financial liabilities at amortised cost 3,055,112 12,156,750 2,324,000 19,870,944 due to depositors 710,832 1,624,250 129,000 – 48,984 3,075 – 410,974 3,672,096 181,059 Financial liabilities at amortised cost 632 19,321 64,648,310 96,657,940 4,351,632 due to debt securities holders 95,206,205 248,609 439,677,272 86,322,451 96,842,366 Due to banks and other borrowings Debt securities issued Group balances payable Lease liabilities Non–interest bearing liabilities 22,676,641 – – – – 22,676,641 Demand deposits 7,776,649 – – – – 7,776,649 Other liabilities 177,946 45,032 – – – 222,978 Derivative financial instruments 525,389 – – – – 525,389 Current tax liabilities 725,326 – – – – 725,326 Deferred tax liabilities 42,748 – – – – 42,748 Dividend payable 19,910 – – – – 19,910 Group balances payable – – – – 44,627,274 Equity 45,032 – – 44,627,274 44,627,274 31,944,609 95,251,237 96,842,366 64,648,310 141,285,214 76,616,915 Total liabilities and equity 118,267,060 516,294,187

Seylan Bank PLC Annual Report 2019 135 Sustainable Stewardship Risk Management Currency-wise maturity gap reports of the main currency exposures (USD, GBP and EUR) Bucket type Bucket Currency Assets Liabilities Mismatch Cumulative As a % (-/+) Regulatory – Liquidity gap USD of total mismatch RL: < 1M ’000 ’000 liabilities RL: 1M-3M ’000 ’000 limits % RL: 3M-6M 80,808 0.75% RL: 6M-12M 83,959 74,270 3,151 3,151 13.89% 20% RL: 1Y-3Y 129,248 57,244 54,978 58,129 10.47% 20% RL: 3Y-5Y 110,300 -14,319 43,810 -4.46% 20% RL: 5Y-10Y 42,925 67,547 -62,477 -18,667 -5.34% 30% RL: > 10Y 47,823 -3,668 -22,335 20% Exposure USD 3,039 27,562 1.25% 20% 63,879 0 15,076 5,227 4.85% 10% 30,601 -19,750 20,303 0.13% 10% 15,076 25,205 418,413 553 553 5,455 418,966 Bucket type Bucket Currency Assets Liabilities Mismatch Cumulative As a % (-) Regulatory – Liquidity GBP gap of total Mismatch RL: < 1M ’000 ’000 liabilities RL: 1M-3M ’000 GBP ’000 limits % RL: 3M-6M 6,769 3,444 21.63% RL: 6M-12M 7,716 3,464 3,325 3,325 49.29% 20.00% RL: 1Y-3Y 2,148 4,252 7,577 35.61% 20.00% RL: 3Y-5Y 45 6,184 -2,103 5,474 -4.03% 20.00% RL: 5Y-10Y 90 -6,094 -620 -2.95% 30.00% RL: > 10Y 167 0 -453 -2.28% 20.00% Exposure 102 0 167 -351 20.00% 363 0 102 0.08% 10.00% 134 134 363 12 0.08% 10.00% 15,386 15,374 12 0 12 Bucket type Bucket Currency Assets Liabilities Mismatch Cumulative As a % (-) Regulatory – Liquidity EUR Gap of total Mismatch RL: < 1M ’000 ’000 liabilities RL: 1M-3M ’000 EUR ’000 limits % RL: 3M-6M 6,069 1,348 29.50% RL: 6M-12M 9,667 6,468 4,721 4,721 49.48% 20.00% RL: 1Y-3Y 1,879 3,199 7,920 37.74% 20.00% RL: > 10Y 0 6,013 -1,879 6,041 20.00% Exposure 0 -6,013 0.18% 30.00% 0 25 28 0.02% 20.00% 276 273 -25 3 0.04% 10.00% 16,012 16,006 3 6 6 Liquidity Coverage Ratio (LCR) LCR components Liquidity value (LKR Mn.) 31 December 2019 31 December 2018 While the LCR complements the internal High quality liquid assets stress testing framework, maintaining a Gross outflows 68,352 54,800 ratio in excess of minimum regulatory Gross inflows 103,244 86,307 requirements ensures that the Bank holds Net outflows 26,839 adequate liquidity resources to mitigate LCR Ratio (%) 44,327 59,468 short-term liquidity stress. 58,917 116.01 92.15 Our LCR of 116.01% as of 31 December 2019 has been calculated in accordance with the regulatory guidelines with regard to the LCR.

136 Seylan Bank PLC Annual Report 2019 Sustainable Stewardship Risk Management Basel III computation of liquidity coverage ratio Item Amount (LKR ’000) Reporting period – 31 December 2019 Reporting period – 31 December 2018 Total un-weighted Factor Total weighted Total un-weighted Factor Total weighted value % value % value value Toatal Stock of High-Quality – – 68,352,139 – – 54,800,053 Liquid Assets (HQLA) 68,421,922 68,421,923 55,294,220 – 55,294,220 68,258,877 100 68,258,877 54,673,046 100 54,673,046 Total Adjusted Level 1A Assets – – – – – – – – Level 1A Assets – – – – – – – 50 93,262 – 50 127,007 Total Adjusted Level 2A Assets 186,524 – 93,262 254,014 – 127,007 – 10 103,244,816 – 10 86,307,265 Level 2A Assets 296,507,444 29,650,744 272,105,628 25–100 27,210,563 94,242,828 25–100 52,666,981 77,731,112 – 42,931,261 Total Adjusted Level 2B Assets – – – – – Level 2B Assets 146,086,878 0–100 7,655,240 124,824,143 0–100 7,309,085 13,271,851 100 13,271,851 8,856,356 100 8,856,356 Total Cash Outflows – – 44,327,152 – – 26,838,579 Deposits –– – –– – –– – –– – Unsecured Wholesale Funding 24,122,613 50–100 41,683,180 49,351,190 50–100 24,675,595 Secured Funding Transactions 3,620,477 – – 5,087,053 – – 5,287,944 1,795,332 Undrawn Portion of Committed (Irrevocable) 50–100 2,643,972 50–100 2,162,984 Facilities and Other Contingent Funding Obligations – – 116.01 –– 92.15 Additional Requirements Total Cash Inflows Maturing Secured Lending Transactions Backed by Collateral Committed Facilities Other Inflows by Counterparty which are Maturing within 30 Days Operational Deposits Other Cash Inflows Liquidity Coverage Ratio (%) (Stock of High Quality Liquid Assets/Total Net Cash Outflows over the Next 30 Calendar Days)*100 Linkage between accounting and as “financial assets at amortised Counterparty credit risk which is managed regulatory exposure amounts cost – debt and other instruments” and and monitored by Treasury Middle “financial assets measured at fair value Office are mostly transactions entered Exposure to market risk is separated into through other comprehensive income by Treasury and a combination of trade two portfolios: (FVOCI)/available for sale” transactions entered with foreign and local financial counterparts. The Treasury-related zz Trading portfolios comprise positions Other risks managed under transactions include all foreign currency arising from market making. The market risk management contracts, money market transactions, instruments classified under this and outright treasury transactions entered portfolio are disclosed in Note. 23 to Counterparty credit risk with local and foreign counterparts. A limit the Financial Statements as “financial framework is put in place in managing the assets measured at fair value through Counterparty credit risk is the risk arising counterparty credit risk. Treasury Middle profit and loss (FVTPL)/held for trading” from the possibility that the counterparty Office monitors the utilisation of each may default on amounts owned on a counterparty on a real time basis; zz Non-trading portfolios comprise transaction. Financial transactions that against the stipulated limit and daily positions that are held for liquidity, derive their value from the performance of reporting is carried out to appraise the asset and liability management. The assets, interest or currency exchange rates Senior Management of any irregularities in financial assets under non–trading get included in structuring the obligation the limits. portfolios are disclosed in Notes 25 where debt obligations and deposits, and 26 to the Financial Statements swaps, futures, and forward contracts are considered for the combination.

Seylan Bank PLC Annual Report 2019 137 Sustainable Stewardship Risk Management Country risk concentration wide risk management system. Managing that operational risk exposure remains We manage our exposure to country operational risks is a key element of the within the Bank’s specified risk appetite. risk through a framework of limits. The Integrated Risk Management Framework Following policies and guidelines are Bank specifically limits and monitors its of the Bank. Therefore the Bank is established within the Bank to manage exposures to countries with trade barriers planning to implement an Operational operational risk effectively. and embargos. Limits are reviewed at least Risk Management System to enhance annually, in conjunction with the review of operational risk management capabilities zz Operational Risk Management Policy country risk ratings. Country risk limits are of the Bank by way of automating manual approved by the Board and are monitored processes while establishing a sound zz Corporate Information Security Policy daily by Treasury Middle Office. framework. zz Business Continuity Management Policy Operational Risk Management Operational risk management framework and responsibilities zz Incidents and Near-Miss Events Operational risk is the risk of loss arising Management Policy from inadequate or failed internal Under the Comprehensive Operational processes, people and systems or from Risk Management Policy, the roles and zz Fraud Risk Management Policy external events such as natural disasters, responsibilities for operational risk have social, or political events that may been defined from Board level to business zz Insurance Governance Policy impact the Bank. The Bank is exposed unit levels. Operational Risk is monitored to operational risk as it is inherent in all on a regular basis and the Operational zz Business Process Outsourcing Policy banking products and processes. Risk Management Policy is practised in the daily activities of all employees. The Operational Risk Management Thus it is no longer appropriate to permit function is enabled through day-to-day the management of operational risks only The objective of the Operational Risk management within a predefined to the individual departments as it is Management (ORM) Division is to framework. The Head of Operational Risk likely to occur in all activities of business implement and enforce an appropriate Management Unit reports to the Chief Risk and may lead to both financial and non- framework for identification, assessment, Officer (CRO) and an Executive Market and financial losses. monitoring, and reporting of operational Operational Risk Management Committee risks. ORM enables the Bank to identify (EMORMC). EMORMC is chaired by This risk is inherent to the Bank in all its and assess operational risk categories Director/CEO of the Bank and consists material products, activities, processes across the Bank’s different processes; of members from Operations, IT, Treasury, and systems, and is emerging as an to detect critical risk areas of work Finance, Compliance, Internal Audit, and important component of the enterprise- associated with an increased risk level Risk Management. The CRO represents the and to develop response actions to risk management function at the Board mitigate identified risks. The ORM ensures Integrated Risk Management Committee (BIRMC) for reporting and accountability. The BIRMC ensures appropriate implementation of its instructions through the defined governance structure. Operational risk management concepts and mitigants Governance Internal Loss Risks and Control Risk Structure Data Analysis Self-Assessment Monitoring People Processes Review/ Operational BCP and Risk Audits Risk Testing Management Policies Systems External Risk and Events Reporting Scenario Procedures Analysis Key Operational Risk Indicator Risk Diversification

138 Seylan Bank PLC Annual Report 2019 Sustainable Stewardship Risk Management Based on Basel II and regulatory requirements, industry best practices have been used to design the following risk management techniques to monitor and manage Operational Risk in the Bank: Technique Management/Mitigation Risk and Control Self-Assessment (RCSA) Centralised key business units of the Bank carry out RCSA annually to identify the inherent Appointment of Unit Operational Risk risks proactively. RCSA requires the documentation of risks, identifying the levels of risk Coordinators (UORC) (derived from an estimate of frequency and impact) and controls associated with each process conducted by the Organisation. Controls and mitigants that adequately counteract Collecting and analysing Internal Loss the risks are introduced thereby minimising the probability and impact. Findings from the Data (ILD), Incident and Near-Miss RCSA exercise are used to manage the residual risks through implementation of proper events data collection action plans and control improvements. ORMU has appointed UORC for all the departments/units in the Bank. An awareness session was conducted to brief the officers on Operational Risk and the responsibilities. UORC have to report incidents on a monthly basis, provide information for Key Risk Indicators, and complete RCSA on annual basis. ILD are classified into seven loss types as per Basel guidelines and into four broad business lines such as Trading and Sales, Payment and Settlements, Retail Banking, and Commercial Banking in which the Bank operates its activities. Loss events exceeding LKR 500,000 are reported as required by the Central Bank of Sri Lanka (CBSL) quarterly. All the incidents reported by respective departments are recorded in a database and a root-cause analysis is performed in order to provide recommendations to ensure non-recurrence of the same incidents in the future. Further the operational losses incurred in the year 2019 are reported mainly under execution delivery process management and the charts given below exhibit the operational losses incurred for the past two years. Operational losses % 23.23 0.23 0.05 0.28 2019 2018 11.05 65.72 99.44 Internal External Damages to Business disruption Execution delivery and fraud fraud Physical assets and system failures process management Establishing and reviewing Key Key Operational Risk Indicators (KORIs) are an important tool within risk management and Operational Risk Indicators (KORI) are used to enhance the monitoring and mitigation of risks and facilitate risk reporting. KORIs enable risk managers to identify potential losses before they happen. KORIs are reported to EMORMC and BIRMC by way of a dashboard and monitored against the corresponding threshold levels. The appropriate action plans are directed to mitigate the risks based on those indicators. Human Credit Audit Pawning Operations Service Level Resources Cards and systems and Reputation Overdue Audit Fake Staff Card Findings Articles System Legal Cases Frauds Frauds Down Time against the Bank Internal Skimmed Repeated High Over Teller/ATM Frauds Transactions Risk Audit Findings Assessments Cash Differences Cheque returns

Seylan Bank PLC Annual Report 2019 139 Technique Sustainable Stewardship Risk Management Reviewing information risk, integrity, and availability Management/Mitigation Effectiveness of business continuity The Bank is in a position to identify and respond to suspicious information flows and and disaster recovery plans (BCP) intruder attacks while observing the system readiness through the information risk management practices using the tools and techniques such as modern firewall technologies, Insurance arrangements intruder detection, and prevention systems. The Bank has introduced sound Data Leakage Prevention (DLP) solution, Data classification software, Security Information and Event Reviewing new products/processes Management (SIEM), Web Application Firewall system, and Internal Firewall system. Further, the Bank has upgraded the existing Firewall technology to latest next generation Firewall and revamped the existing Network Infrastructure. Business Continuity Planning (BCP) ensures the resilience to business disruption that may arise from internal or external events and should reduce any adverse impact on human safety, business operations as well as profitability and reputation of the Bank. The Bank has a well-established Disaster Recovery Site and has carried out several drills for critical systems including core banking systems in order to verify the readiness of business continuity related issues. The related Executive Committees and regulators are updated on outcomes of the BCP DR drills with the appropriate actions. The Bank has taken cover from the insurance providers as one of the risk mitigation strategies for high severity, low probability and the uncontrollable operational risk events such as natural disasters, fire as well as internal and external frauds, errors, omissions, hold ups, employee infidelity etc. However, insurance has not been used for taking upon risks that would otherwise not be undertaken thereby avoiding moral hazards. This policy will be reviewed and further enhanced on an ongoing basis. The Bank has engaged an insurance broker to source terms, evaluate, and add value using their expertise. The Bank was able to provide risk assurance for the newly-implemented products through the Product Management Policy. This procedure includes proactive risk identification, assessment, and introduced mitigation controls for risks inherent to new products, processes, systems, and their amended versions as well as to projects that have a material impact on the Bank’s operations. Gross income 2019 Gross income 2017 Capital charge for operational risk (15%) LKR ’000 2018 LKR ’000 Risk-weighted amount for operational risk 24,044,577 LKR ’000 20,567,269 3,384,130 23,070,781 27,073,039 Details of outsourcing activities Despite the potential benefits, information zz The CBSL directions for reporting Outsourcing involves transferring security incidents such as inappropriate purposes shall not apply to outsourced responsibility for carrying out Information access to or disclosure of sensitive arrangements that are not directly Technology and Business Processing information, loss of intellectual property related to the provision of financial functions (previously carried out internally) protection or the inability of the outsourcer services such as mail, courier services, to an outsourcer for an agreed charge. The to live up to agreed service levels, would catering for staff, housekeeping and outsourcer provides services to the Bank reduce the benefits and could jeopardise janitorial services, security of premises, based on a mutually agreed service level, the security posture of the Organisation. printing services (e.g. application normally defined in a formal contract. forms, brochures etc.), recruitments Definition and applicability on contract and temporary basis and Many commercial benefits have been communication services [as described attributed to outsourcing, the most zz An “Outsourcing Arrangement” is an under Section 2 (3) of CBSL Direction common amongst these being: agreement between Seylan Bank PLC No. 2 of 2012]. and a “Service Provider”, whereby the zz Reducing the costs service provider performs an activity, Details of due diligence test of third functions or process connected with the party service providers zz Greater focus on core banking business operations of Seylan Bank PLC. by outsourcing non-core functions The Bank has developed a comprehensive zz Outsourcing arrangements shall be policy in line with the Directions of the zz Access to world-class skills and entered into only with “External Service CBSL Direction No. 2 of 2012 which resources Providers” who have specialised is fully implemented. This covers all resources and skills to perform the aspects of due diligence controls such as zz Resource optimisation in limited related activities. (In compliance with comprehensive assessment, complaint duration projects CBSL Direction No. 2 of 2012). handling, service quality monitoring, and review of information security and business continuity plans of service providers.

140 Seylan Bank PLC Annual Report 2019 Sustainable Stewardship Risk Management Capital The Bank complied with the capital requirements under Basel III guidelines issued by the Central Bank of Sri Lanka. As part of its capital management process, the Bank seeks to maintain a prudent balance between the composition of its capital and its investment. Basel III computation of capital ratios Amount ( LKR ’000) Item Reporting Previous period reporting period Common Equity Tier 1 (CET 1) capital after adjustments 31 December 2018 Common Equity Tier 1 (CET 1) capital 31 December 2019 Equity capital (stated capital)/assigned capital Reserve fund 43,051,519 33,486,749 Published retained earnings/(Accumulated retained losses) 43,976,176 34,442,303 Published accumulated Other Comprehensive Income (OCI) 17,044,724 12,025,795 General and other disclosed reserves Unpublished current year’s profit/Loss and gains reflected in OCI 1,952,957 1,768,944 Ordinary shares issued by consolidated banking and 22,836,779 19,673,566 financial subsidiaries of the Bank and held by third parties (1,055,427) Total adjustments to CET 1 capital 179,455 Goodwill (net) 1,962,261 2,029,424 Intangible assets (net) – Others – Additional Tier 1 (AT 1) capital after adjustments Total additional Tier 1 (AT 1) capital – – Qualifying additional Tier 1 capital instruments 924,657 955,554 Instruments issued by consolidated banking and financial subsidiaries of the Bank and held by third parties – – Total adjustments to AT 1 capital 607,267 576,091 Investment in own shares 317,390 379,463 Others (specify) Tier 2 capital after adjustments – – Total Tier 2 capital – – Qualifying Tier 2 capital instruments – – Revaluation gains – Loan loss provisions – Instruments issued by consolidated banking and – – financial subsidiaries of the Bank and held by third parties – – Total adjustments to Tier 2 – – Investment in own shares 13,652,491 10,195,799 Others (specify) 13,652,491 10,195,799 Total Tier 1 capital 12,270,650 9,802,650 Total capital 393,149 393,149 988,692 – – – – – – – – – 43,051,519 33,486,749 56,704,009 43,682,548

Seylan Bank PLC Annual Report 2019 141 Sustainable Stewardship Risk Management Amount (LKR ’000) Item Reporting Previous period reporting period Total risk weighted assets (RWA) 31 December 2018 RWAs for credit risk 31 December 2019 RWAs for market risk RWAs for operational risk 382,084,421 328,331,166 CET 1 capital ratio (including capital conservation buffer, 352,681,982 300,834,151 counter cyclical capital buffer and surcharge on D-SIBs) (%) of which: capital conservation buffer (%) 2,329,400 1,661,514 of which: Counter cyclical Buffer (%) 27,073,039 25,835,501 of which: Capital Surcharge on D-SIBs (%) Total Tier 1 capital ratio (%) 11.27 10.20 Total capital ratio (including capital conservation buffer, 2.500 1.875 counter cyclical capital buffer and surcharge on D-SIBs) (%) of which: capital conservation buffer (%) 11.27 10.20 of which: Counter cyclical Buffer (%) of which: Capital Surcharge on D-SIBs (%) 14.84 13.30 2.500 1.875 CET 1 capital increased during the year primarily due to rights issue, OCI gains and 2019 profits. Risk-weighted assets (RWAs) The RWAs increased in 2019 primarily due to growth in loans and advances of the Bank. Key regulatory ratios – Capital and liquidity Minimum requirement Reporting Previous Item 2019 2018 period reporting period Regulatory capital 31 December 2019 31 December 2018 Common equity Tier 1 (LKR ’000) Tier 1 capital (LKR ’000) 43,051,519 33,486,749 Total capital (LKR ’000) 43,051,519 33,486,749 56,704,009 43,682,547 Regulatory capital ratios Common equity Tier 1 capital ratio (%) 7.000 6.375 11.27 10.20 Tier 1 capital ratio (%) 8.500 7.875 11.27 10.20 Total capital ratio (%) 12.500 11.875 14.84 13.30 Leverage ratio* (%) Net stable funding ratio* (%) 3.00 3.00 8.17 7.20 100.00 90.00 109.11 110.00 Regulatory liquidity Statutory liquid assets 90,379,939 80,722,525 Domestic Banking Unit (LKR ’000) 29,493 31,468 Off-shore Banking Unit (USD ’000) 20 20  21.40 21.44 Statutory liquid assets ratio Domestic Banking Unit (%) 20 20 21.81 22.08 Off-shore Banking Unit (%) Liquidity coverage ratio – LKR (%) 100 90   169.60 128.76 Liquidity coverage ratio – All currency (%) 100 90   116.01 92.15

142 Seylan Bank PLC Annual Report 2019 Sustainable Stewardship Risk Management Amount (LKR ’000) Reporting period Computation of leverage ratio 31 December 2019 Tier 1 capital 43,051,519 Total exposures On-balance sheet items (excluding derivatives and securities 527,061,840 financing transactions, but including collateral) Derivative exposures 487,327,129 Securities financing transaction exposures 800,747 Other off-balance sheet exposures Basel III leverage ratio (%) (Tier 1/total exposure) 5,165,159 33,768,806 8.17 Current and future capital Sources of capital Total capital base is the summation of the requirements Tier 1 and Tier 2 Capital after adjustments The Bank raises the eligible Tier 1 as well to CET1 Capital and AT1 Capital as Capital planning overview as Tier 2 capital as and when required in specified in the Direction. and assessment process order to expand the business and at the same time to meet the regulatory and Risk exposures in line with the The capital structure of banks is rigorously internal capital requirements. Budget 2020, and profit/balance regulated by the CBSL in view of the sheet forecasts thereafter systemic risk that a bank failure carries The following elements constitute the and loss it can cause to the depositors capital of the Bank, as deemed eligible The Bank’s Board Approved Capital and the consequent cost of bail-outs by by the CBSL: Augmentation Plan, based on the the Government. Basel III focuses on risk Budget and the Profit and Balance Sheet management in the Bank and intends Tier 1 capital Forecasts thereafter has included the to link the business profile of the Bank Total Tier 1 Capital items are: estimated /required Tier 1 and Tier 2 to the risk profile and subsequently to 1. Common Equity Tier 1 (CET1) Capital capital infusion during the period till the regulatory capital. There is thus an zz Equity capital or stated capital/ 2021. Furthermore, the Bank’s five year automatic calibration of business profile to Projection on the Performance includes the the regulatory capital. Internal capital can, assigned capital projections for the capital infusion required however, be different from the regulatory zz Reserve fund from 2020 to 2024. capital, which may require equity cushion zz Published retained earnings/ to the risk profile of the Bank. The Bank is planning to revise the Strategic (Accumulated retained losses) Plan 2020 considering the Bank’s future In practical terms, the role of capital in zz Accumulated other comprehensive growth outlook, average industry growth, the Bank is to provide creditor protection. peer growth, and necessary inputs from In other words, the role of capital is to income (OCI) the CBSL published documents etc. act as a buffer against future unexpected zz General and other disclosed reserves Furthermore, the relevant macroeconomic losses, thereby protecting depositors and zz Unpublished current year’s profit/ parameters will be factored in the its other creditors. The amount of capital calculations. Currently, the Bank employs a the Bank would hold therefore depends on (losses) and gains reflected in OCI mix of top-down and bottom-up approach the Bank’s risk appetite, loss distribution to arrive at the forecasts. (whether arising from credit, market or 2. Additional Tier 1 (AT1) Capital operational or any other kinds of risk), zz Qualifying Additional Tier 1 Capital Basel III minimum capital among other things. requirements and buffers Instruments that are issued by the As of 31 December 2019, the Bank Bank that meet criteria for inclusion As per the Banking Act Direction No. 01 was well capitalised, with a Total Capital in AT1 Capital of 2016 dated 29 December 2016 on Adequacy Ratio of 14.84% and a Tier 1 Capital Requirements under BASEL III capital ratio of 11.27% in excess of the Tier 2 capital which was effective from 1 July 2017 and mandatory regulatory requirements of the Total Tier 2 Capital items are: the amendments thereto under Directions Basel III Tier 1 ratio of 8.50%, and total zz Qualifying Tier 2 Capital Instruments No. 11 of 2019 dated 20 December 2019, capital ratio of 12.50%. the minimum required capital ratios to be such as BASEL III compliant debentures maintained by the Bank are as follows: Overall, the Statement of Financial Position approved by CBSL remains strong. zz Revaluation gains approved by CBSL zz Instruments issued by consolidated banking and financial subsidiaries of the Bank and held by third parties

Seylan Bank PLC Annual Report 2019 143 Sustainable Stewardship Risk Management Every licensed bank shall maintain, at all times, the minimum capital ratios prescribed The Bank has adopted the Standardised below in Table 01 and shall ensure compliance with Schedule I to the Banking Act Measurement Approach (SMA) for Directions No. 01 of 2016 on Capital Requirements under Basel III for licensed banks. calculation of the market risk capital charge. The capital charge for market risk Table 01 – Capital requirements for licensed banks continues to remain low, considering the limited market operations of the Bank Components of capital Capital and exists due to interest rate risk, adequacy ratio to equity risk, and foreign exchange risk Common Equity Tier 1 including Capital Conservation Buffer to a lesser extent. Total Tier 1 including Capital Conservation Buffer be maintained Total Capital Ratio including Capital Conservation Buffer % With regard to operational risk, the Basic Indicator Approach (BIA) has been 7.00% adopted under Pillar 1. The Bank is planning to move into the Standardised 8.50% Measurement Approach for operational risk calculation. 12.50% Liquidity risk is managed by Treasury, Risk Licensed banks which are determined as Domestic Systemically Important banks (D-SIBs) Management Unit, and ALCO using the from time to time shall maintain Higher Loss Absorbency (HLA) requirements as specified gap assessment and ratios. To ascertain by the Monetary Board in the form of Common Equity Tier 1 (CET1), as given below: the current liquidity position, the Bank has conducted strong stress tests to gauge Table 02 – Capital requirements for D-SIBs Capital the Bank’s position under liquidity crunch adequacy ratio to of different intensities. The capital charge Components of capital for interest rate risk in the banking book be maintained is calculated using the Economic Value Common equity Tier 1 including Capital Conservation Buffer % of Equity (EVE) approach. Overall, the Total Tier 1 including Capital Conservation Buffer ALM process in the Bank is well-managed Total capital ratio including Capital Conservation Buffer 7.00 + HLA and monitored using various indicators of liquidity and interest rate risks. 8.50 + HLA For reputational and strategic risk, detailed 12.50 + HLA scorecards have been developed and the scorecard results have been calibrated HLA requirements as the minimum capital surcharge on D-SIBs are given below: to capital charge. The result of strategic risk assessment indicates that the Bank Bucket HLA requirement has a dedicated strategy and planning (CET 1 as a % of risk- unit under finance and is well-capitalised 3 to achieve its strategic objectives 2 weighted assets going forward. The Board and Senior 1 Management critically review the strategic 2.0 direction of the Bank at the time the Strategic Plan is prepared and approved. 1.5 Risk management is an integral part of the strategic planning process. 1.0 Assessment of the adequacy of The Bank has adopted the Standardised Bank’s capital commensurate with Approach (SA) for credit risk capital all material risks and other capital calculation under Pillar 1. Credit needs in relation to its current and concentration in the corporate loan future activities: portfolio has been analysed using the Normalised Herfindahl–Hirschman Index The risk profile assessment of the (HHI) method and an adjustment to the Bank includes the assessment of all capital charge is administered in the material risks i.e. credit risk, market risk, light of concentration of the Bank’s operational risk, credit concentration business in large size borrowers. risk, residual risk, interest rate risk in the banking book, liquidity risk, strategic risk, compliance risk, and reputational risk.

144 Seylan Bank PLC Annual Report 2019 Sustainable Stewardship Risk Management The Bank uses ordinary voting, ordinary non-voting shares and debentures as main instruments to raise capital. Main features of instruments used as part of Regulatory Capital are given below: Description of the Ordinary Ordinary Debnture issue – 2016 Debnture issue – 2018 Debnture issue – 2019 capital instrument voting shares non-voting shares (5 years and 7 years) (5 years, 7 years and (5 years) 10 years) Issuer Seylan Bank PLC Seylan Bank PLC Seylan Bank PLC Seylan Bank PLC Seylan Bank PLC Unique Identifier LK0182N00002 LK0182X00001 LK0182023559 LK0182023955 LK0182D24219 (e., ISIN or Bloomberg Identifier LK0182023567 LK0182023963 LK0182D24227 for Private Placement) LK0182023542 LK0182023971 Governing Law (s) of the Instrument Provisions of the Provisions of the Rules of the Colombo Rules of the Colombo Rules of the Colombo Banking Act, Rules Banking Act, Rules Stock Exchange and Stock Exchange and Stock Exchange and of the Colombo of the Colombo the Securities and the Securities and the Securities and Stock Exchange and Stock Exchange and Exchange Commission Exchange Commission Exchange Commission of the Securities and the Securities and of Sri Lanka, Provisions of Sri Lanka, Provisions Sri Lanka, Provisions of Exchange Commission Exchange Commission of the Companies Act of the Companies Act the Companies Act No. of Sri Lanka, Provisions of Sri Lanka, Provisions No. 07 of 2007, the No. 07 of 2007, the 07 of 2007, the Articles of the Companies Act of the Companies Act Articles of Association Articles of Association of Association of the No. 07 of 2007 and the No. 07 of 2007 and the of the Bank, Prospectus of the Bank, Prospectus Bank, Prospectus of the Articles of Association Articles of Association of the Debenture Issue of the Debenture Issue Debenture Issue and the of the Bank of the Bank and the Trust Deed and the Trust Deed Trust Deed Original Date of Issuance April 1988 September 2003 15 July 2016 29 March 2018 18 April 2019 Par Value of Instrument N/A N/A LKR 100.00 each LKR 100.00 each LKR 100.00 each Prepetual or Dated N/A N/A dated dated dated Original Maturity Date, If Applicable N/A N/A 15 July 2021 28 March 2023 28 March 2025 18 April 2024 28 March 2028 Amount Recognised in Regulatory 10,884,710 6,160,014 3,155,150 4,865,500 4,250,000 Capital (in ’000 as at the Reporting Date) Accounting Classification Equity Equity Liability Liability Liability (Equity/Liability) Issuer call subject to prior Supervisory Approval Optional Call Date, Contingent N/A N/A N/A N/A N/A Call Dates and Redemption Amount (LKR ’000) Subsequent Call Dates, If Applicable N/A N/A N/A N/A N/A Coupons/Dividends Fixed or Floating Dividend/Coupon Dividend as decided Dividend as decided Fixed and floating Fixed interest rate Fixed interest rate by the Board annually by the Board annually interest rate Coupon Rate and any Related Index As decided by the Board As decided by the Board Semi-Annual Interest – Semi-Annual Interest – Semi-Annual Interest – 13.0% p.a. (for 5 years), 12.85% p.a. (for 5 14.5% p.a. Semi-Annual Semi-Annual Interest - 6 years), Semi-Annual Interest – 10.50% p.a month T-Bill (gross) + Interest – 13.20% (for 1.50% (for 5 years), 7 years), Semi-Annual Semi-Annual Interest – Interest – 13.50% p.a. 13.75% p.a. (for 10 years) (for 7 years) Non-Cumulative or Cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative Convertible or Non-Convertible Non-Convertible Non-Convertible Non-Convertible Convertible Convertible If Convertible, Conversion Trigger (s) when determined a when determined a “Trigger Event” at the “Trigger Event” at the sole discretion of the sole discretion of the Monetary Board of Monetary Board of the Central Bank of the Central Bank of Sri Lanka Sri Lanka If Convertible, Fully or Partially when determined at when determined at the sole discretion of the sole discretion of the Monetary Board the Monetary Board of the Central Bank of of the Central Bank of Sri Lanka Sri Lanka If Convertible, Mandatory or Optional Mandatory in the event Mandatory in the event of a “Trigger Event” of a “Trigger Event” If Convertible, Conversion Rate Simple average of the Simple average of the daily Volume Weighted daily Volume Weighted Average Price of an Average Price of an Ordinary Voting Share of Ordinary Voting Share of the Bank (as published the Bank (as published by the Colombo Stock by the Colombo Stock Exchange) during the Exchange) during the three (03) months three (03) months period immediately period immediately preceding the Trigger preceding the Trigger Event, as determined by Event, as determined by the Monetary Board. the Monetary Board.

Seylan Bank PLC Annual Report 2019 145 Sustainable Stewardship Risk Management Legal risk the Bank, while maintaining its vision and LKR 958.0 Mn. – outstanding as at mission in order to minimise the failures in 31 December 2019) was granted under Legal risk is the risk of financial or the business environment. the “Enterprise Sri Lanka” programme. The reputational loss that could arise Central Bank of Sri Lanka subsidises 75% from failure to comply with statutory In pursuing the Bank’s strategic goals of the interest for loans granted under and regulatory requirements, internal and business objectives, the Bank has this programme. policies, prescribed best practices, lack established clear communication channels of awareness, uncertainty of the outcome at all levels of the Organisation, allocate Achievements during 2019 of all litigation and probable adverse systems for operations and business and outlook for 2020 consequences resulting from deficient lines and enhance staff capabilities documentation. through astaff development and 1. Full roll-out of the Loan Origination recognition process. System (LOS) across the network, The Bank manages these legal risks thereby reducing the time taken to effectively having proper monitoring and Reputation risk management evaluate/approve facilities, thus controls in all business and supporting improving the quality of credit. areas. Further, through the Legal Reputation risk is a threat or danger to the Department all contracts and security goodwill or standing of a business or entity. 2. Assigning Regional Risk Officers to documentation are legally vetted taking As risk mitigating actions, the Bank has clustered SME Hubs and the setting into consideration the applicable laws and established sound policies and procedures up of SME Hubs on a regional basis regulations. Interpretation of provisions of such as customer complaint management, with the objective of improving quality statutes that may be applicable is referred whistle-blowing policy to maintain the of credit evaluation and improving to the Legal Department by the business goodwill in a positive manner. For the efficiency and reducing turnaround lines thus minimising the risk of non- purpose of extracting customer grievances, time (TAT) for SME credit approvals. compliance with laws and regulations. each business unit has a record of the same for the review of the inspections 3. Credit Standards and Policy Manual Compliance risk management and responses, while such complaints was revised during the year 2019. are allowed to be made using telephones The Compliance Department acts as under the whistle-blowing policy. The Bank 4. The lending guidelines were revised the control point in monitoring and had a very few incidents of this type and twice (1st half and 2nd half) during coordinating all regulatory requirements. successfully solved them without any the year. In line with the business It ensures that the Bank complies with reputational damage. requirements, number of industries all laws, regulations, and best practices covered in the Risk Appetite recommended by competent authorities. The Bank also recognises the importance statement has been increased. The It is also a key responsibility of of making a positive contribution to revision of lending guidelines for Compliance Department to ensure society by promoting Corporate Social 1H-2020 is underway and more prevalence of a compliance driven culture Responsibility (CSR) through ethical industry segments will be included as within the Bank. banking practices, environmental per the needs of the business lines. awareness, and contribution to the The Compliance Department, in addition community. Accordingly, the Bank’s Board 5. Credit risk reviews to the value of to its routine communication with the Sustainability Committee, quarterly LKR 132.3 Bn. (High value reviews Board Integrated Risk Management monitors the progress of CSR contribution of LKR 116.8 Bn. and small to mid Committee (BIRMC) which is its direct and its effectiveness. tier facilities of LKR 15.4 Bn.) were reporting line provides updates to the completed in 2019 covering 34.5% Board of Directors on the overall status of Relief offered to the of the performing advances as at compliance of the Bank at their monthly tourism sector 31 December 2018. meetings. Compliance related matters are also discussed at the quarterly meetings Under the relief package introduced by the 6. Rigorous monitoring of non-performing of the Board Governance and Compliance Government of Sri Lanka to the Tourism advances by the Executive Credit Risk Committee and the Related Party sector (post 21 April 2019), the Bank Management Committee has enabled Transactions Review Committee of has offered several concessions to clients to control the NPA ratio. which the Compliance Officer is a operating in the Hospitality industry. permanent attendee. 7. Awareness sessions on Lending Accordingly, credit facilities Guidelines were completed Strategic risk management (including facilities granted in foreign covering all the SME Credit HUBs currency denominations) totalling to of the Bank. The sessions were Strategic risk is the possibility of current LKR 4,611.6 Mn. has been granted designed to encourage credit staff to and prospective impact on earnings or capital moratorium and a further sum utilise the Lending Guidelines in their capital arising from adverse business of LKR 504.9 Mn. of interest/capital day-to-day credit related activities in decisions, improper implementation of recoverable has been differed as at order to improve credit quality and decisions or lack of responsiveness to 31 December 2019. increase turnaround time of credit industry changes. approval process. Additionally, new working capital loans to Corporate Management and the Board of the value of LKR 1,041.1 Mn. (of which 8. Used data analytics to identify Directors takes the responsibility to lead credit default behaviours in the product portfolio. 9. Approval was obtained for a risk-based pricing criteria and implementation to be carried out in 2020.

146 Seylan Bank PLC Annual Report 2019 Sustainable Stewardship Risk Management 10. The Bank plans to implement an 11. The Bank upgraded the ALM and 13. The Bank has awarded KPMG India operational risk management system Value at Risk Systems enabling the validation of market risk models across the branch network, thereby the Bank to manage and monitor and to conduct a gap study to assess being able to track and monitor all risk in a more robust and prudent the Bank’s readiness to move to incidents relating to operational manner, thus supporting the Bank in the IMA approach. The assignment risk. The system will also include the developing a steadfast risk appetite commenced in 2019 and is expected Standardised Measurement Approach and risk management strategy for the to be completed in the second under Basel II/III and future norms, areas of IRR, liquidity risk and market quarter of 2020. enabling the Bank to conserve and risk, with the impact of stress testing manage capital to an optimal level. scenarios. 14. The Bank has introduced sound Data Leakage Prevention (DLP) solution 12. Enhancing and upgrading the Market and Web Application Firewall system. Risk System will help the Bank to Further, the Bank has upgraded measure and monitor the regulatory the existing Firewall technology to capital calculation through the the latest next generation Firewall internal models-approach (IMA). and revamped the existing Network Infrastructure. Differences between Accounting and Regulatory Scopes and Mapping of Financial Statement Categories with Regulatory Risk Categories – Bank Only Amount (LKR ’000) as at 31 December 2019 a bcd e Item Carrying values Carrying values Subject to credit Subject to market Not subject to as reported under scope risk framework risk framework capital requirements Assets in published of regulatory Cash and cash equivalents Financial reporting or subject to Balances with Central Bank Statements deduction Placements with banks Derivative financial instruments from capital Other financial assets held for trading Securities purchased under resale agreements 516,294,187 519,219,255 518,611,989 5,273,119 607,267 Loans and receivables to banks 11,758,729 12,315,716 12,315,716 5,273,119 607,267 Loans and receivables to other customers 14,458,970 14,458,970 14,458,970 Financial investments – Available-for-sale 1,173,278 1,179,100 1,179,100 Financial investments – Held-to-maturity 134,756 Investments in subsidiaries 7,118,016 6,979,716 6,979,716 Investments in associates and joint ventures 5,165,159 5,163,569 5,163,569 Property, plant and equipment – Investment properties – 382,415,908 Goodwill and intangible assets 379,259,064 382,415,908 Deferred tax assets 55,591,526 72,198,901 Other assets 21,873,584 72,198,901 1,153,602 1,153,602 1,153,602 Liabilities – 4,384,468 Due to banks 4,384,467 4,384,467 Derivative financial instruments – – 18,362,039 Other financial assets held for trading 607,267 Financial liabilities designated at fair value 607,267 through profit or loss – 18,362,039 Due to other customers Other borrowings 13,615,769 Debt securities issued Current tax liabilities 471,666,913 – – – – Deferred tax liabilities Other provisions 28,769,629 Other liabilities 222,978 400,731,358 8,449,291 19,870,944 525,389 725,326 12,171,029

Seylan Bank PLC Annual Report 2019 147 Sustainable Stewardship Risk Management Amount (LKR ’000) as at 31 December 2019 a bcd e Item Carrying values Carrying values Subject to credit Subject to market Not subject to as reported under scope risk framework risk framework capital requirements Due to subsidiaries in published of regulatory Subordinated term debts Financial reporting or subject to Off-balance sheet liabilities Statements deduction Guarantees Performance bonds from capital Letters of credit Foreign exchange contracts 200,969 Other contingent items 146,169,925 193,374,468 182,677,209 – – Undrawn loan commitments 38,387,248 43,246,095 39,609,903 Other commitments Shareholders’ equity 12,213,693 12,167,370 12,084,217 Equity Capital (stated capital)/assigned capital (326,882) 43,720,593 43,720,593 of which amount eligible for CET1 10,394,142 of which amount eligible for AT1 12,042,064 6,983,220 Retained earnings 80,279,276 Accumulated other comprehensive income 83,126,458 3,566,992 80,279,276 Other reserves 727,344 Total shareholders’ equity 17,044,724 17,044,723 22,823,239 – 20,466,561 4,759,311 6,402,331 – – – 44,627,274 43,913,615 Column a. presents the assets, liabilities and equity on standalone SLFRS basis. Pillar III disclosures as at 31 December 2019 are presented in accordance with regulatory capital concepts and rules. A. Explanations of differences between accounting and regulatory exposure amounts Total assets as per carrying values reported in published Financial Statements (column a) LKR ’000 Total assets as per carrying values reported under scope of regulatory reporting (column b) Difference 516,294,187 519,219,255 2,925,068 Difference arises due to expected credit loss on loans and advances with adoption of SLFRS 9, fair value adjustments on investments and the classification changes of the line items. B. Methodologies used in valuation of financial assets Financial assets – Instrument type Valuation technique Inputs used for valuation Treasury Bills Price formula Based on market yield published by the CBSL Treasury Bonds Price formula Based on market yield published by the CBSL Sri Lanka Development Bonds Price formula Similar instrument’s rate (LIBOR) Quoted Equities Closing share price Closing share price (CSE) Unquoted Equities Net assets per share Net assets per share as per latest Audited Financial Statements Debentures Price formula Similar instrument’s yield (Treasury Bond yield) The details on the valuation framework, the valuation models used by the Bank, and the fair value hierarchy are disclosed in Note 6 to the Financial Statements.

148 Seylan Bank PLC Annual Report 2019 SustainableSustainableResults  Results Financial Calendar 149 Statement of Directors’ 150 Responsibility for Financial Reporting 151 Chief Executive Officer’s and 152 Chief Financial Officer’s Responsibility Statement 155 Independent Auditors’ Report 156 157 Income Statement 158 162 Statement of Profit or Loss and 164 Other Comprehensive Income Statement of Financial Position Statement of Changes in Equity Cash Flow Statement Notes to the Financial Statements