Sampath Bank Annual Report 2013

The Committee is accountable to make Annual Report 2013 Sampath Bank PLC recommendations after review, to reappoint Non Executive Directors when they are due for reappointment. The Committee must report to the Board of Directors on the activities of the Committee meetings, and must make available to the members of the Board the minutes of the Committee meetings. The Committee must determine the independence of the Directors of the Board. The independence must be based on standards and norms set out in the Central Bank Regulations, Colombo Stock Exchange regulations and other relevant Statues. To make recommendation on any other matter delegated by the Board of Directors.Reporting to the BoardThe Minutes of the Board Nomination Committeemeetings are tabled at Board meetings enabling allBoard members to have access to them.PerformanceThe members of the Board Nomination Committeework closely with the Board of Directors, in reviewingthe structure and skills needed for a steadfast, strongand successful organisation. Further, the Committeealso reviews its own performance, constitution andterms of reference to ensure that it is operatingeffectively, and if required recommends necessarychanges.On behalf of the Board Nomination CommitteeAnnika SenanayakeChairperson - Board Nomination CommitteeColombo, Sri Lanka18th February 2014 149

BOARD RISK MANAGEMENTCOMMITTEE REPORTThe Board of Directors has delegated overall risk Review and update of Risk Management policiesmanagement and compliance responsibilities to of the Bank pertaining to credit, market, liquidity,an independent Risk Management Committee, i.e. operational, outsourcing and reputational risks,The Board Risk Management Committee (BRMC) compliance risks, business continuity plan andestablished as a sub-committee of the Board in disaster recovery plan.compliance with the Banking Act Direction No11 of 2007, Corporate Governance for Licensed Ensuring effective design and implementation ofCommercial Banks in Sri Lanka. risk management framework with respect to integrated risk management and risk appetite,The Bank’s risk management strategy is based on Internal Capital Adequacy Assessment Processa clear understanding of various risks, disciplined (ICAAP) and stress testing.risk assessment and measurement procedures andcontinuous monitoring. The policies and procedures Review migration to the advanced approachesestablished for this purpose are continuously bench under Basel II, risk return profile of the Bank,marked with international best practices. outsourcing activities, compliance with CBSL guidelines pertaining to credit, market andThe Board of Directors has oversight on all the risks operational risk management systems.assumed by the Bank. The BRMC has been constitutedto facilitate focused oversight of various risks. Review the level and direction of ma jor risks pertaining to credit, market, liquidity, Terms of Reference operational, compliance and capital at risk asThe scope of activities of the Board Risk Management part of risk profile templates.Committee as mandated by the Board of Directors is: Reporting and recommendation to Board of Directors on risk management and compliance related matters. Ensuring compliance with laws / regulations including anti-money laundering.GovernanceThe governance structure of the management of risk at the Bank is set out bellow: Authority Membership Responsibilities All members of the BoardBoard of Directors Determine risk appetite(BOD) Ensure that significant risks are competentlyBoard Risk Mrs Dhara Wijayatilake managedManagement (Chairperson) Formulates risk policies and recommends toCommittee (BRMC) Independent, Non Executive Director Board for adoption Advises the Board and makes Mr Channa Palansuriya Non Executive Director recommendations on: risk appetite and alignment with Mr Sanjiva Senanayake Independent, Snr. Non Executive strategy Director appointment of senior risk officers Reviews the effectiveness of the Group’s Mr Aravinda Perera (MD) Executive Director systems of risk management and internal controls (Other than internal control over Mr Ranjith Samaranayake financial reporting) Executive Director Monitors compliance Monitors the progress on implementing Basel II Reviews Disaster Recovery and Business Continuity plans Oversees the maintenance and development of a supportive culture in relation to the management of risk150

Authority Membership ResponsibilitiesIntegrated Risk Group Chief Risk Officer / Formulating the policy framework addressingManagement Unit Group Compliance Officer multiple and inter-dependent risks andand Compliance recommending to Board Risk ManagementUnit Committee Measuring and monitoring risk Compliance with regulatory and supervisory requirements and Bench marking with international best practiceRisk Reporting and Monitoring Risk Appetite: Annual Report 2013 Sampath Bank PLCThe Committee received bi-monthly reports on key Risk Appetite limits and Key Risk Indicatorsrisk indicators from the Group Chief Risk Officerand compliance reports from the Group Compliance are periodically monitored for compliance andOfficer and reviewed actions taken to maintain any deviations are escalated to the Board ofrisks within the Bank’s risk appetite and to facilitate Directors for their review.compliance with regulatory requirements. Progress ofplanned activities and projects for the current year Risk Management Policies:and the next were reviewed by the Committee. The The following risk management and complianceCommittee also receives updates from ALCO andCredit Policy Risk and Portfolio Review Committee, policies were reviewed during the year.the two executive committees involved in the riskmanagement process, on key matters discussed Integrated Risk Managementat these meetings. The BRMC is supported by the Credit Risk Managementintegrated Risk Management and Compliance Units Market Risk Managementof the Bank, headed by the Group Chief Risk Officer Operational Risk Managementand the Group Compliance Officer in discharging its Stress Testingresponsibilities. Legal Risk Strategic RiskRisk Appetite Compliance and Anti-Money LaunderingRisk appetite is a key component of themanagement of risk at Sampath Bank. The Board, Stress Testing:advised by the BRMC, approves the Bank’s risk Reviewed stress testing limits for identified risksappetite, which describes the types and levels ofrisk that the Bank is prepared to accept in executing which include credit and market risk indicatorsits strategy and which is set out in the Group’s and recommended appropriate action toRisk Appetite Statement. Regular reports have improve the Bank’s tolerance levels.been provided to the Board on the performance ofidentified risk indicators and the prudential limits Progress on Basel II Compliance:defined and approved by the Board. The Committee has drawn up a road map andCommittee Activities monitors progress on implementation of keyMaintaining a culture of risk awareness among its components to ensure that the Bank is able tomembers in line with local and global developments meet the timelines set by Central Bank.in risk management and determining its applicabilityto the operations of the Bank and its operating IT Systems Support:environment is a priority for the BRMC. Key risk The BRMC has monitored the implementationindicators and changes to the risk profile of the Bankare discussed at each meeting to ensure that all of IT Systems to support credit and operationalmembers are aware of any developments. risk management in the Bank and has approved allocation of resources for this purpose.The BRMC undertook the following activities indischarging its responsibilities during the year. Compliance: The Committee received compliance reports from the Group Compliance Officer and reviewed these to assess the extent of compliance and regulatory requirements. 151

BOARD RISK MANAGEMENTCOMMITTEE REPORT Internal Controls: Key Management Personnel supervising the Credit, The Committee reviewed internal loss event Market, Liquidity, Operational and Strategic risks also attend the meetings of the BRMC by invitation. reports and the adequacy of internal control and procedures (except internal controls A review of the integrated risk management process over financial reporting) regularly and have has been detailed in pages 160 to 187 of the Annual made recommendations for improvements Report. to the Executive Management. Progress on implementation of recommendations is also On behalf of the Board Risk Management Committee followed up by the Committee at its regular meetings. Dhara Wijayatilake Chairperson - Board Risk Management Committee Customer Complaints: The Committee reviewed customer complaints Colombo, Sri Lanka 18th February 2014 to assess their implications on the risk management of the Bank and recommended actions where appropriate. Outsourced Activities: Monitoring of outsourcing activities of the Bank through the outsourcing committee to ensure that such activities are within the CBSL directives and guidelines and due diligence tests are in place to monitor the activities of 3rd party service providers.Meetings of the BRMCThere were eight meetings during 2013. Theattendance of the Committee members at each ofthese meetings is given in the table on page 110 ofthe Annual Report. The minutes of the BRMC wererecorded by the Group Company Secretary andcirculated among the members of the Committee.Minutes were submitted to the Board on confirmation.152

BOARD CREDITCOMMITTEE REPORTComposition of the Board Credit Committee 1. Operate a sound credit granting processThe Board Credit Committee comprises of five Non Review proposals with respect to creditExecutive Directors and two Executive Directors. TheCommittee is chaired by a Non Executive Director. policies and standards and approve them.A minimum of two Non Executive Directors and Where required, submit credit requeststwo Executive Directors is the quorum for a Credit beyond the Committee’s scope to theCommittee meeting. The following Directors serve in Board.the Credit Committee. Review credit policy changes initiatedProf Malik Ranasinghe - Chairman (IND/NED) by the management of the Bank and recommend them with or withoutMr Channa Palansuriya (NED) modifications to the Board of Directors for approval.Mr Sanjiva Senanayake (IND/NED) Ensure compliance of the Bank’s creditMiss Annika Senanayake (IND/NED) policies with the statutory requirements prescribed by the regulatory/supervisoryMr Deshal De Mel (NED) authorities.Mr Aravinda Perera (ED) Request rapid portfolio reviews or sector/industry reviews, where deemedMr Ranjith Samaranayake (ED) appropriate.(IND - Independent Director, NED - Non Executive 2. Maintain appropriate credit administration, measuring and monitoring processDirector and ED - Executive Director) Define credit approval framework andBrief profiles of the members are given on pages 22 assign credit delegated limits in line withto 28 of the Annual Report. the Bank’s policy.The Group Company Secretary acts as the Secretary Review and recommend to the Board,to the Board Credit Committee. facilities that they believe should have Board approval.MeetingsDuring the year the Committee met on thirteen 3. Maintain adequate controls over credit risk.occasions. The attendance of the committee Ensure credit risk exposure is kept withinmembers is stated in the Corporate GovernanceReport on page 110 of the Annual Report. Members acceptable limits to maximise the Bank’sof the senior management of the Bank are invited to risk adjusted rate of return.participate at the meetings as and when required. Monitor capital allocation and define limitsRole and Responsibilities in line with the risk appetite. Annual Report 2013 Sampath Bank PLCThe Board Credit Committee derives its scope andauthority from the Board of Directors decision to Ensure stress tests are conducted, whereset up the Committee and to increase its authority deemed appropriate.in keeping with the expansion of the Bank. Whilefinancial institutions have faced difficulties over 4. Identification and administration of problemthe years for various reasons, the ma jor causes creditsof serious banking problems have been directlylinked to lax credit standards for borrowers and Monitor on an ongoing basis the Bank’scounterparties, poor portfolio management or lack of credit quality, review periodic creditattention to changes in the economic environment. portfolio reports and assess portfolioHence, it is the responsibility of this Committee to: performance. 153

BOARD CREDIT COMMITTEEREPORT Ensure post-credit monitoring and postmortem reviews are performed, where deemed appropriate5. Proper evaluation of new business opportunities Ensure all new credit risk related products are reviewed from a credit risk management perspective6. Aware of the cyclical aspects of the economy (both internal and external) Monitor the resulting shifts in the composition and quality of the loan portfolioReporting to the BoardMinutes of the meetings of the Board CreditCommittee are circulated to the Committee membersby the Secretary and the confirmed minutes arereported to the Board of Directors for concurrence.Review of the CommitteeMembers of the Board Credit Committee work closelywith the Board of Directors to maintain proper creditstandards for the Bank. The Board undertakes areview of the Committee’s performance, objectivesand responsibilities according to its terms ofreference to ensure that it is operating effectively.On behalf of the Board Credit CommitteeMalik RanasingheChairman – Board Credit CommitteeColombo, Sri Lanka18th February 2014154

BOARD STRATEGICPRLEAPNONRTING COMMITTEEThe Board understands that effective strategic 3. Review the internal strengths and weaknessesplanning is the core foundation for the future of the of the Bank and give guidelines to theBank. The Strategic Plan of the Bank is a powerful Management.tool for monitoring the Bank’s progress and forhelping the Bank to attain the goals expected by 4. Oversee and monitor the planning process thatits stakeholders. We have developed a Strategic leads to the formulation of the Strategic Plan.Planning initiative that has evolved with thechanges in the regulatory landscape, experience 5. Examine the effectiveness of key strategies forand execution. Our Strategic Planning initiative achieving the goals and objectives.provides a professionally authored Strategic Planfor the Bank that includes action plans and tools for 6. Review the Bank’s resources and capabilities inimplementation of the plan. the context of achieving its strategic objectives.Composition of the Board Strategic Planning 7. Review the adequacy and composition of theCommittee Bank’s capital structure in the context of theThe Committee comprises of six Non Executive growth targets.Directors and two Executive Directors. TheCommittee is chaired by a Non Executive Director. 8. Make recommendations to the Board on keyThe following Directors serve in the Board Strategic strategic decisions and investments.Planning Committee. Reporting to the BoardMr Dhammika Perera - Chairman (NED) Minutes of the Committee meetings are circulated to the Committee members by the Secretary andMr Channa Palansuriya (NED) the confirmed minutes are reported to the Board of Directors for concurrence.Mr Sanjiva Senanayake (IND / NED) PerformanceProf Malik Ranasinghe (IND / NED) The Committee reviewed performance of the Bank during the year against the three year rollingMr Deshal De Mel (NED) plan and annual budget for 2013 to identify areas of concern which needed changes in strategicMr Ranil Pathirana (NED) direction. The Committee engaged in discussions with the Corporate Management and StrategicMr Aravinda Perera (ED) Planning Team to determine the strategic direction of the Bank for the period 2014 to 2016 which formedMr Ranjith Samaranayake (ED) the basis for the development of the Strategic Plan for this period. The three year rolling plan(IND - Independent Director, NED - Non Executive was submitted to the Board of Directors for their information and approval was obtained for theDirector and ED - Executive Director) Annual Budget for 2014 which was developed in line with the strategy document.Brief profiles of the members are given on pages 22to 28 of the Annual Report. The Committee reviews its own performance, constitution and scope of work to ensure that it isThe Group Company Secretary acts as the Secretary operating smoothly and efficiently. Its scope alsoto the Committee. extends to making recommendations to the Board when the need arises.Meetings Annual Report 2013 Sampath Bank PLCDuring the year the Committee met on two On behalf of the Board Strategic Planning Committeeoccasions and the Committee members worked withdedication to fulfill its obligations. The attendance of Dhammika Pererathe Committee members is stated in the Corporate Chairman – Board Strategic Planning CommitteeGovernance Report on page 110 of the Annual Report. Colombo, Sri LankaRole and Responsibilities 18th February 20141. Strategic Vision & Mission of the Bank: Examine 155 the Bank’s current mission, strategic positioning and the strategic vision and provide guidelines to the Bank’s Strategic Planning process.2. Review of the impact of external trends and issues: Examine the external challenges and opportunities relevant to the strategic vision and key goals of the Bank.

BOARD SHAREHOLDERRREELPAOTRIOTNS COMMITTEESampath Bank, became the first listed Company in The Shareholder Relations Forum was convenedSri Lanka to setup a Board Shareholder Relations after the Annual General Meeting providing a muchCommittee to identify and address shareholders’ awaited opportunity for shareholders to voice theirconcerns as deemed appropriate through dialogue opinions and suggestions to improve relationswith shareholders/investors. between stakeholders and the Bank.Composition of the Shareholder Relations Role played by the Board Shareholder RelationsCommittee CommitteeThe Committee includes of two Non ExecutiveDirectors. The Executive Directors join the meetings Providing suggestions to the Board to improvewhen necessary. The following Directors serve on the shareholder/investor relations of the Bank.Board Shareholder Relations Committee: Organising forums that encourage dialogueMr Channa Palansuriya - Chairman (NED) between the Board of Directors andMr Deshal De Mel (NED) Shareholders/Investors.(NED - Non Executive Director) Providing guidance to the Board on matters ofBrief profiles of the members are given on pages investor relations.22 to 28 of the Annual Report. The Group CompanySecretary acts as the Secretary to the Committee. Activities of the Committee The Board Shareholder Relations Committee is aMr Channa Palansuriya was appointed as the vital Board Committee established to facilitate aChairman of the Committee with effect from 1st smooth and continuous dialogue between the BoardJanuary 2012, Mr Deshal De Mel serves as a member and shareholders to address their concerns, if any.of the Committee. Mr Ernst Gunasekera, a former The Committee concentrates on developing andDirector and an advisor of the Committee decided to preserving a good rapport with the shareholders. Thestep down from the Committee this year. The Board Committee ensures that the Bank’s latest informationShareholder Relations Committee wishes to place on and financial results are swiftly communicated to therecord its appreciation for the service rendered by shareholders through Interim and Annual Reports,Mr Ernst Gunasekera. Mr W M P L de Alwis, also a notifications to the Colombo Stock Exchange andformer Director and advisor of the Committee too timely press releases. In addition to these avenuesdecided to step down. However due to the requests of information, our shareholders have easy accessmade by the Committee members Mr W M P L through our corporate website, www.sampath.de Alwis decided to stay on the Committee. The lk to all relevant information, which also gives ourCommittee places on record its appreciation of the shareholders access to the Bank for any query.services rendered by Mr de Alwis and also thanks him Shareholders can freely raise any questions to thefor agreeing to stay on the Committee. Board of Directors at the Shareholder Relations General Forums. These forums also encourage ourFrequency of Meetings shareholders to openly voice concerns and makeMeetings are held when deemed appropriate. The suggestions and requests.Committee met once during the year attended byall the members. By invitation of the Shareholder This year has seen regular two-way dialogueRelations Committee, the Managing Director and between the shareholders and the Board of Directors.Executive Director/Group Chief Financial Officer, The Group Company Secretary has played a vitalalso attended the Shareholder Relations Committee role in the accomplishment of many goals of theMeeting. Board Shareholder Relations Committee. The Board of Directors are kept informed of shareholder outlook through regular reports.156

Shareholders can also write to the Chairman and Annual Report 2013 Sampath Bank PLCany Director of Sampath Bank, they can express anyconcern or view regarding the Bank which givesanother avenue to the shareholders to express theiropinion in person.PerformanceThe main objective is to facilitate better shareholderrelations. The Committee meets as and whennecessary and reports on the activities to theBoard. The following activities were initiated by theCommittee during the year: Shareholders’ Forum was held soon after the Annual General Meeting on 4th April 2013. As discussed during the meeting the Shareholder Relations Committee is planning to hold provincial get-togethers island wide. As first step the Bank has identified the Central Province for its inaugural provincial meeting since the largest number of shareholders outside the Western Province are from the Central Province. The following concessions are given to shareholders on banking transactions. All commissions to be on actual cost basis, entailing all internal commission charges will be waived off. However, in the case of foreign bank charges and other local bank charges, the actual cost will be collected. This excludes cheque return commissions and postal charges. On opening of current accounts, the initial deposit will be 50% of the normal initial deposit requirement. 50% on the annual fee charged for VISA credit cards will be waived off. SET cards are issued free of charge. However, this does not include per transaction fee.On behalf of the Shareholder Relations CommitteeChanna PalansuriyaChairmanColombo, Sri Lanka18th February 2014 157

BOARD TREASURYCOMMITTEE REPORTComposition of the Board Treasury Committee Monitor the management of foreign exchangeThe Board Treasury Committee comprises three Non and interest rate risks by the BankExecutive Directors and two Executive Directors. Thefollowing Directors serve in the Treasury Committee. Monitor compliance with Central Bank regulations managed by the Treasury includingMr Sanjiva Senanayake - Chairman (IND/NED) capital adequacy, statutory reserve ratios, andProf Malik Ranasinghe (IND/NED) statutory liquid assets.Mr Deshal De Mel (NED)Mr Aravinda Perera (ED) Provide guidance to the Asset and LiabilityMr Ranjith Samaranayake (ED) Management Committee (ALCO), consisting(IND - Independent Director, NED - Non Executive of corporate management, to optimiseDirector and ED - Executive Director) performanceBrief profiles of the members are given on pages 22 Establish internal pricing of funds to provideto 28 of the Annual Report. desired incentives internally and better evaluate performance of business units. Development ofMr Manjula Ekanayake of the Bank’s Treasury new productsDepartment serves as the Secretary. Other officialsof the Bank were invited to attend as deemed During 2014 efforts will focus on instituting morenecessary. Minutes of the Board Treasury Committee sophisticated revenue analysis of the Bank’swere regularly reported to the Board of Directors and products/customers, managing risks in volatileapproval sought for policies recommended and other market conditions, further stabilising the Bank’smatters. liquidity management and assisting in joint initiatives with other departments of the Bank to help theMeetings Treasury achieve stable profitability.During the year the Committee met on six occasions.The attendance of the Committee members is stated On behalf of the Board Treasury Committeein the Corporate Governance Report on page 110 ofthe Annual Report. Sanjiva Senanayake Chairman - Board Treasury CommitteeRole and ResponsibilitiesThe Board Treasury Committee is instituted to Colombo, Sri Lankaprovide guidance to the Treasury in carrying out 18th February 2014its functions and to monitor its performance with aview to optimising earnings, stability and growthof the Bank.The main responsibilities of the committee are: Establish Treasury Management policies on behalf of the Board of Directors Ensure Treasury Dealing Room operations are carried out in accordance with those policies. Monitor the liquidity position of the Bank and advise Treasury accordingly158

BOARD MARKETINGCOMMITTEE REPORTComposition of the Board Marketing Committee focuses during the year had been ensuring greaterThe Board Marketing Committee comprises of four accountability of the marketing spend and toNon Executive Directors. The members of the Board strengthening the Bank’s brand.Marketing Committee are: On behalf of the Board Marketing CommitteeMr Deepal Sooriyaarachchi - Chairman (IND/NED) Deepal Sooriyaarachchi Chairman - Board Marketing CommitteeMiss Annika Senanayake (IND/NED) Colombo, Sri Lanka 18th February 2014Mr Deshal De Mel (NED)Mrs Saumya Amarasekera (NED)(IND - Independent Director and NED - Non ExecutiveDirector)Brief profiles of the members are given on pages 22to 28 of the Annual Report.The Group Company Secretary functions as theSecretary of the Board Marketing Committee.MeetingsThe Committee met five times during the year.Attendance by the Committee members at each ofthese meetings is given in the table on page 110 ofthe Annual Report.Terms of ReferenceThis Committee was set up to have a closer focuson the Marketing Strategies of the Bank and theireffectiveness. The Key Terms of Reference of theCommittee are to:1. Review the customer strategy and performance against set objectives2. Review Brand strategy and its performance3. Monitor customer service and customer service strategies in line with the customer charter4. Monitor the CSR policy of the Bank and Annual Report 2013 Sampath Bank PLC progresses of same.The Committee functions more as a facilitating anda guiding body to the management in an effort tostrongly align the activities of the marketing functiontowards the strategic focus of the Bank, followingbest practices. The Board Marketing Committeeacts also as a conduit to the main Board to receiveupdates on various consumer behaviour trendsand their implications to the Bank. One of the main 159

RISK MANAGEMENTREPORTEffective and disciplined Risk Management Strong Capital & We are well capitalised and have a sufficient Strong Capital &Liquidity buffer over specified regulatory requirements Liquidity for the Statutory Liquid Assets ratio, Capital Adequacy – Tier I and Total capital adequacy % ratios. 22.4 A strong deposit to advances ratio and a deposit 27.62 base that is diversified by type and maturity facilitates effective management of liquidity. 20 11.8 10.08 5 13.61 14.22 10 Tier I Ratio Tier I & II Ratio St/ Liq Ass .Rat. 2012 Regulatory 2013 RequirementDiversified A diversified portfolio of loans and advances and income streams have enabled thePortfolio growth and stability of the bank. This year it provided a sufficient buffer for the adverse impacts of the decline in gold prices and the challenging economic conditions. Action hasRobust Risk been instituted to further diversify the portfolio of advances during the year.GovernanceStructure We have in place an effective risk governance structure which facilitates identification, measurement and monitoring of risk in accordance with the defined risk appetite of theReadiness for Bank.Basel II A culture of risk awareness is nurtured throughout the organisation in a planned and structured manner through regular training and knowledge sharing. This facilitates optimal resource allocation to ensure that activities in strategic business units are aligned to the overall strategic objectives, while operating within the defined risk appetite of the bank. The Bank is currently compliant in; Standardise Approach – Credit & Market Risk Basic Indicator Approach – Operational Risk The following has been carried out in order to move towards Basel II advanced approaches; Calculation of Operational Risk Capital under Basel II Standardised Approach Value at Risk (VAR) calculations on our Foreign Exchange portfolio, which forms a ma jor part of moving on to Market Risk Capital calculation under Internal Models Approach. Computed Probability of Default in order to move towards Internal Risk Based (Foundation) Approach in Credit Risk Internal Capital Adequacy Assessment Process (ICAAP)160

Risk Management The Bank’s risk management objectives areRisk Management continues to remain centre stage To identify, measure, evaluate, monitor andas the financial services industry globally dealswith consequences of deficiencies and violations manage significant risks to the Bank on ain this vital area. The business of banking is about forward looking basisassuming appropriately priced risk and prudent To define the Bank’s risk appetite and align themanagement of risk portfolios within a defined risk Bank’s risk portfolios and business strategy inappetite, an effective governance structure and a line with the defined risk appetiteframework of policies that facilitate identification, To maintain the Bank’s capital strength andmeasurement, monitoring and management of risk. strong liquidity positionSampath Bank has a well defined risk appetite which To optimise risk – return decisionsis approved by the Board and plays a central role in To ensure that business growth plans arethe development of our strategy and policies. We properly supported by an effective riskuse various tools and techniques for identification, infrastructureassessment, measurement and management of risk To achieve competitive advantage throughin both proactive and reactive manner. efficient and affective risk management and controlA proactive and forward looking risk management To strengthen governance, controls andphilosophy that is clearly understood throughout accountability across the organisationthe organisation, effective governance structures,policies and risk management tools and techniques Accordingly, we have identified the ma jor risksare pre-requisites to nurturing an appropriate risk which are considered to be significant to the Bankculture that balances growth and risk. The returns as credit risk, market risk, liquidity risk, operationalmust be sufficient for the risks assumed which must risk, strategic risk, legal risk, regulatory risk andbe measured, monitored and managed continuously reputation risk which are clearly explained andand maintained within the defined risk appetite. supported with relevant metrics elsewhere in thisWe believe that awareness of risk and a strong risk report.management culture is key to managing risk andmaintaining stability. Strategic priorities aligned Risk management is effected through a riskwith the organisational vision, policies, goals governance structure based on the three lines ofand, robustness together with discipline among defence model which is set out on page 162 andoperations, service levels, and risk management a policy framework that is clearly communicatedcombine to form the risk culture at Sampath Bank and understood throughout the organisation. Thewhich defines how we do business. governance structure comprises Board, Board Sub Committees and Executive Committees supported by a dedicated Risk Management function operating Risk IdentificationRisk Monitoring & ReportingRisk Governance Structure Risk Policy FrameworkAssessment Annual Report 2013 Sampath Bank PLCRisk Minimising /Risk Mitigation PricingRisk Culture 161

RISK MANAGEMENT out independently of one another. The Three LinesREPORT of Defence has earned high level of acceptance as a standard model in a modern approach to managingunder the supervision of the Group Chief Risk uncertainty and minimising risk. This model couldOfficer. Risk is originated in the branches and the be used as the primary means to demonstrate theother strategic business units of the Bank including structure, roles, responsibilities and accountabilitiesdepartments such as Credit, Treasury, IT and Trade in decision making, risk and controlling functions toServices which are responsible for the initial risk achieve effective risk management, governance andassessments which are then reviewed by Risk assurance objectives.Management Department and where necessary bythe relevant Committees. An experienced senior The Board of Directors has overall responsibility forteam of banking professionals nurture a culture of defining the risk appetite of the Bank and for ensuringrisk awareness throughout the organisation which that the most significant risks to the Bank areis supplemented through comprehensive training competently managed. Accordingly, they determineprogrammes. the risk appetite, set the risk objectives and approve the Integrated Risk Management Framework, policiesRisk Governance and ensure that relevant procedures are in place forThe Bank`s overall risk governance model is effective risk management.based on the concept of Three Lines of Defencemodel whereby business management, riskmanagement and assurance functions are carried 1st Line of Defence 2nd Line of Defence 3rd Line of Defence Decentralised Primary Centralised Oversight Assurance: Independent of AllResponsibilities - Business Units - Risk Management others - Complianceé / Audit Primary responsibility for Setting the Integrated Compliance identifying, managing Risk Management (IRM ) Regulatory Compliance and reporting risk Framework Regulatory Reporting Anti Money Laundering Self assessment of risk Providing support to the Internal Audit and controls business units, review Independent assurance and report key risks to Compliance with all Board Risk Management of the robustness policies and procedures Committee (BRMC) of the different risk management processes Promoting strong risk Challenge the self and methodologies culture and awareness of assessments and inherent Independent oversight risk elements in business risks identified by business function with oversight activities units and review controls ability to communicate with external auditors and Training as a way of Independently identify and the Board Audit Committee mitigating risks in assess all types of risks Ensure that the Bank is business operations applicable to the Bank compliant with the risk management framework Ensuring that appropriate mitigative plans are in place Monitor and ensure setting of Policies , Procedures Overseeing of the Insurance framework Overseeing the development of Risk Culture and Anti Fraud Framework162

THE BUSINESS OF BANKING IS ABOUTASSUMING APPROPRIATELY PRICED RISK ANDPRUDENT MANAGEMENT OF RISK PORTFOLIOSWITHIN A DEFINED RISK APPETITE, ANEFFECTIVE GOVERNANCE STRUCTURE AND AFRAMEWORK OF POLICIES THAT FACILITATEIDENTIFICATION, MEASUREMENT, MONITORINGAND MANAGEMENT OF RISK. The Risk Management Governance structure is depicted in the chart below. Board of DirectorsBoard Risk Management Board Audit Board Treasury Managing Committee Committee Committee DirectorGroup Chief Group Head of Internal DGM Treasury ExecutiveRisk Officer Compliance Audit Committees OfficerIntegrated Risk Management of the Bank has been third line of defence. The Managing Director, Group Annual Report 2013 Sampath Bank PLCassigned to the Risk Management Committee of the Chief Risk Officer and the Group Compliance OfficerBOD in compliance with the Central Bank of Sri Lanka are invited to attend the meetings of the AuditDirective 11 of 2007. This committee is empowered to Committee to ensure that corrective action is takenreview the Bank`s risk management policies as well where necessary.as regulatory and compliance issues and forms partof the Bank’s second line of defence. It monitors the As activities of the Treasury can give rise to largeBank`s risk profile against the agreed risk appetite exposures that could create an adverse impact onthrough regular reviews and related controls. It also the Bank’s capital as a result of Market variables suchreviews Basel II implementation, Business Continuity as Interest Rates, Exchange Rates, Liquidity, etc.,and Disaster Recovery plans, key risk indicators there is a separate Sub-Committee of the Board thatand the implementation of the Integrated Risk has non-executive oversight on Treasury activities.Management framework. This vital committee of the A number of key executive committees comprisingBoard is supported by the Group Chief Risk Officer key management personnel of the Bank are chairedand the Group Compliance Officer who head Risk by the Managing Director and these form part of theManagement & Compliance functions, respectively. risk management processes at the Bank. As these committee members sit on other committees, thereThe Board Audit Committee reviews reports from the is a formal and informal dissemination of knowledgeHead of Internal Audit, and the external auditor in across all business areas.accordance with the terms of reference forming the 163

RISK MANAGEMENTREPORT Executive Committees Credit Policy, Risk & Portfolio Review Committee Assets & Liability Management Committee Investment Committee IT Steering Committee ICAAP Committee Outsourcing Committee Procurement Committee SLFRS Committee Management CommitteeCredit Policy, Risk & Portfolio Review Committee IT Steering CommitteeCredit Policy, Risk and Portfolio Review Committee is Chaired by Managing Director, the committeeresponsible for reviewing the overall credit policy and comprises of key decision makers in the areasportfolio, credit procedures, credit risk management of IT, Operations, Marketing, Risk, Systems Auditand also resolve significant credit policy issues. and Finance. The committee oversees the overallThe Committee is chaired by the Managing Director responsibility for the feasibility, business caseand the other members of the committee are the and the achievement of outcomes of operations,Heads of Credit Departments, Recoveries and Group infrastructure, automation, development,Chief Risk Officer. procurement and security aspects related to Information Technology infrastructure at SampathAsset & Liability Management Committee Bank, in line with the strategic vision and long term(ALCO) goals. The Steering Committee will exercise oversightAsset & Liability Management Committee (ALCO) over the deliverables and rollout of IT strategies,comprising the Bank`s senior management, headed monitor and review the strategic alignment of theby the Managing Director, is the top executive Bank’s overall vision, mission, and goals with that ofcommittee for managing the balance sheet of the the IT Department. All activities of the committee isBank from a risk return perspective, including Market conducted as per the related IT policies.Risk within the risk appetite defined by the BOD.This Committee meets regularly and the committee ICAAP Committeereports are reviewed by the Board Treasury Chaired by the Group Chief Financial Officer,Committee. the committee comprises of key representatives from Finance, Risk, ALCO, Planning, IT, InternalInvestment Committee Audit, and ensures that the Bank continuouslyThe Investment Committee headed by the Managing meets requirements under ICAAP in a timely andDirector comprises of decision makers representing comprehensive manner. The Bank has alreadyall relevant areas of the Bank such as Treasury, submitted the ICAAP document to CBSL in FebruaryFinance and Risk. The committee shall be responsible 2013 for Regulator review. The next key target of theto take all decisions pertaining to Investment committee would be to submit the ICAAP documentactivities. The Bank invests surplus funds in Stocks, and the Bank’s approach to Capital Managementdebentures, Bonds or other special instruments as to the regulator within six months from end of 2013decided by the committee, thereby contributing financial year in accordance with the Central Bankto the investment income of the Bank. All activities of Sri Lanka Directives on ICAAP.of the Investment Committee are governed by theInvestment Policy of the Bank.164

Outsourcing Committee formulation, ensuring procedures are in place asChaired by the Managing Director, the Committee required by the SLFRS, and implementation planningcomprises of key decision makers from Compliance, / execution, and reporting functions are includedRisk, Operations, IT and Systems Audit, and ensures among the main functions/responsibilities of thethat the Bank’s policy on Outsourcing of Banking and committee.ancillary functions is reviewed annually and updatedto reflect any changes in line with CBSL guidelines Management Committeeand industry best practice. Based on the policy, the Chaired by the Managing Director, the Committeecommittee overseas, the criteria for selection of comprises of all members of the Corporateareas for outsourcing, approves selection of service Management. The Committee meets at least onceproviders and various other decisions on outsourcing a month, and the key management decisions of theactivities of the Bank. . BRMC is regularly updated on Bank are taken by the committee. Responsibilitiesthe status of outsourced activities of the Bank and and Scope of the Committee are set-out in the Termsrecommendations are duly implemented. of Reference of the Management Committee.Procurement Committee Integrated Risk Management Unit (IRMU)Chaired by the Managing Director, the Committee The Integrated Risk Management Unit manages thecomprises of Group Chief Financial Officer, and the Bank`s risk function and is independent of profit andrespective Line AGM/DGM of the business/functional volume targets. The Unit is headed by the Grouparea where the procured asset would be used. Chief Risk Officer and is responsible for formulatingActivities of the committee and its functions are the policy framework addressing multiple andset-out in the procedures on procurement of Fixed interdependent risks, measuring and monitoring risk,Assets (Capital Expenditure), and on Payments other and benchmarking with international best practice.than on Capital Expenditure. Accordingly the unit reviews and assesses key risk indicators covering Credit risk, Operational Risk,SLFRS Committee (Sri Lanka Financial Strategic Risk, Reputational Risk, Market Risk, InterestReporting Standards) rate risk, Liquidity risk, Equity Price Risk and ForeignThe Committee is chaired by the Managing Exchange risk within the framework, including stressDirector, and membership includes Group Chief test results, for various risks. It also carries out anFinancial Officer, Group Chief Risk Officer, and assessment of the capital adequacy based on thecorporate management members, and Heads of key requirements under Basel II norms.departments/units in SLFRS implementation. PolicyIntegrated Risk Management UnitCredit Risk Management Unit Operational Risk Market Risk Management Unit Management UnitPre-Credit risk Evaluation Post- credit Risk Monitoring Special Projects Monitoring of Portfolio Risk 1. Internal Loss Event Data Collection 2 Key Risk Indicators 3. Risk & Control Self Assessments 1 Risk Reviews/Recommendations and Periodic Reporting to Corporate Management & BRMC 2 Risk in IT Projects 3 Special Risk Review Projects on need basis 1 Limit Monitoring and Reporting 2. Specific reviews and Assessments of RIsk in areas coming under Market Risk 1 Stress Testing 2 VAR Calculations 3. BRMC/ALCO Reporting Annual Report 2013 Sampath Bank PLC 165

RISK MANAGEMENTREPORTBY MAKING RISK A PART OF DECISION MAKINGPROCESS, THE BANK REFLECTS ITS KEENNESSTO DEVELOP A HEALTHY AND SUSTAINABLE RISKCULTURE WHICH SIGNIFICANTLY CONTRIBUTESTO IMPROVEMENT OF BUSINESS OUTCOMES.Risk Performance Review Risk Reviews duringOur Balance Sheet and liquidity position continue the year 2013to remain strong although Tier 1 capital adequacy %reflects a marginal decrease over the previous year. 2 46Our lending portfolio is diversified across a wide 23range of products, customer segments and industrysectors which serves to mitigate risk concentration. 29Impairment provisions increased significantly thisyear due to higher product exposure for pawning Policies, Procedures & Directiveswhich was adversely impacted due to a sharpdecline in world markets prices for gold. We have Service Level Agreements/ MOUtaken adequate measures to manage the pawningportfolio which includes, Sign-offs for Product / System / Concept Papers reducing the exposure to pawning reducing the loan to value ratio Other Reviews increasing the frequency of auctions stringent recovery process Risk Reviews and related recommendations for improved operations provide a significantPawning remains a key product to achieve contribution and value addition from the Riskgeographical diversity of our portfolio as it is a Management function to all other business andpopular retail lending product that our customers administrative activities of the Bank. By making risk aoutside the Western province know and understand, part of the decision making process, the Bank reflectsparticularly those in farming communities subject its keenness to develop a healthy and sustainableto seasonal variations in income and in areas where risk culture which significantly contributes toother forms of collateral remains an issue. improvement of business outcomes.166

CREDIT RISKRisk Appetite   Policy Limit /RangeMARKET RISKCriteria Credit Quality / Concentration Minimum 80% Exposure above rating of C+ to total advances as per CBSL Single Borrower Limit (Individual) -LKR/Mn as per CBSL Single Borrower Limit (Group) -LKR/Mn Aggregate exposure(funded +non funded) to large borrowers(i.e. over as per CBSL 15% of the Capital)/Total exposure(funded +non funded) (%) 10% - 15% Lending to Agriculture (%) – mandatory requirement 10% <= 7.5% Exposure Against Shares/Credit Portfolio (%) Below 25% Top 20 Adv. (direct - quarterly basis)/Total Adv.(%) Cap at existing level Lending to Maldives(FCBU)/Total Advances % Below 40% Aggregate term loans over 3yrs (residual maturity)/Total Advances % Below 20% (OD+ M. Market Lns)/Total Advances (%) Below 0.16 Sector wise Concentration (HHI Score) Below 0.16 Product wise Concentration (HHI Score) Foreign Exchange Risk USD 7 Mn Net Open Position USD 5000 per deal Stop Loss Limit Liquidity Risk Minimum 21% Liquid Assets Ratio Less Than 75% Net Loans to Total Assets 85% - 95% Total Loans to customer Deposits 30% - 35% Liquid Assets to Short Term Liabilities Less than 15% Bulk Deposits to Total Deposits Less than 12% Purchased Funds to Total Assets Less than 45% Commitments to total Loans 20% * Internal Fraud 50% * External fraudOPERATIONAL RISK Employment Practices and Workplace Safety 10% * Clients, Products & Business Practices 10% * Damage to Physical Assets 10% * Business disruption and system failures 10% * Annual Report 2013 Sampath Bank PLC Execution, Delivery & Process Management 60% * OVERALL CUMULATIVE OPERATIONAL RISK APPETITE LIMIT Rs. 50.0 MN % from overall Cumulative Operational Risk Appetite Limit 167

RISK MANAGEMENTREPORTThe above limits have been defined for respective ICAAP Implementation – Basel II Pillar IIrisk areas with the BRMC/Board approval. They are compliance. Capital allocation for Identifiedbeing monitored on a monthly basis and reported material Risks not covered in Pillar I of Basel IIto management/BRMC. In case of deviations, as per CBSL Guideline, and submission of ICAAPsuch incidents are being closely monitored and document updated as at 2013 year end, toappropriate action taken to ensure compliance. regulator within the six month period stipulated by the regulatorWe continuously invest in improving the range oftools and techniques we use to measure, monitor and Submission of Sample calculation of Capitalmanage risk. During 2013 we completed the following charge for Credit Risk Using- IRB-Foundationkey projects which have significantly enhanced our method.ability to manage risks to which the Bank is exposed: Applying to CBSL for migrating to Credit Risk Completed IT System implementation –Phase I. IRB foundation approach on receipt of guidelines Hosting of Risk rating models/scorecards by Regulatory Directives Parallel calculation of Credit Risk Capital Charge Applying to migrating to Operational Risk The using the Credit Risk Management IT System, Standardised Approach on receipt of Regulatory through ‘Standardise Method’ Directives. Estimation of Probability of default to move Operational Risk Stress Testing, Calculation towards IRB Advance methods. of Operational Risk VAR, and validation of VAR Models once sufficient data is available Sample calculation of Credit Risk Capital Charge in Credit Risk Management IT System, Groundwork for moving on to Operational Risk through Internal Risk based – Foundation Method Advanced Measurement Approach under Basel II ICAAP Framework documentation submitted to VAR Models used in Market Risk to be validated CBSL. Bi- annual updates carried out Applying for migrating to Internal Models Completed customisations and system Approach of Market Risk Management of Basel II implementation of all Operational Risk Modules once the necessary CBSL directives are issued. of the Risk Management IT System Credit Risk Management Internal Loss Data Collection module has been in Credit risk is defined as the potential for loss due to use by the entire network during the whole year the failure of a customer or counterparty to meet its 2013, and the Risk & Control Self Assessment and obligations to pay in accordance with agreed terms Key Risk Indicator Modules commenced bank and conditions. Credit risk arises from bank’s lending wide implementation during the last quarter of activities and other areas such as international trade, 2013. treasury and off balance sheet activities such as guarantees. Consequently, credit risk is the highest Implemented Board Approved Operational contributor to overall risk exposure of the Bank and and Market Risk Appetite Limits, and regular credit risk management is an activity that is critical monitoring and reporting of the actual against for the sustainable growth and profitability of the limits at monthly/quarterly intervals. Bank. Implemented VAR Calculations for Foreign Credit risk is managed through a framework of Exchange Portfolio using the Treasury IT System, policies and procedures covering the identification, and currently gathering data required for VAR measurement and management of credit risk. There model validation is clear segregation of duties between transaction originators in the business units, risk management,We have commenced work on the following projects compliance and internal audit in line with the 3which are expected to be completed in 2014, thereby lines of defence model. All credit exposure limitsfurther enhancing the capabilities of the Risk are approved and managed within the DelegationManagement function of the Bank. of Authority, taking into account the Risk Appetite Framework to be in place for Internal Risk approved by the Board. Credit exposures are managed following the principle of diversification Based- Advance Approach, in Capital Calculation across products, geographies, industry/sector client for Credit Risk. and customer segments. Completion of Credit and Operational Risk IT Systems Implementation and Project Sign-off168

Credit Risk Management Policy on an annual basis. Implementation of credit riskThe Credit Risk Management policy of the Bank management policy is monitored by the Credit Riskis based on the Integrated Risk Management Management Unit. Risk Sign-off by the Group ChiefGuidelines issued by CBSL, Basel II guidelines, Risk Officer for facility proposals over a selectedinternational best practice and the risk appetite threshold and weak risk rating, presence in the Boardof the Bank. It is reviewed, updated and approved Credit Committee meetings would further strengthenby the Board of Directors on recommendation of the credit risk management of the bank.the Board Risk Management Committee, at leastCredit risk environment Nurture a culture of risk awareness Effective risk governance structure Comprehensive training programme for all risk initiators, reviewers, monitors and policy makers. Clear segregation of credit approval, risk management, administration, control and auditCredit granting processes Clear segregation of duties between transaction originators and approving committees. Structured and standardised credit appraisal process Specialists in assessing credit appraisal process Facilitates prudent client selection and due diligence Independent pre-credit review by CRMU for large and higher risk exposuresEnsuring an adequate Authority is delegated by the Board of Directors to Board sub committeescontrol over credit risk and Executive Committees The Bank’s portfolio is rated using internal risk ratings in accordance with the guidelines of Basel II Advance approachesMaintaining an appropriate The Bank has established procedures for Post Credit Risk identification,credit administration, monitoring and management. Branch and Relationship Managers havemeasurement and primary responsibility for identifying internal and external Early Warningmonitoring process Signals (EWS) that may impact credit quality and notifying their respective Credit Committees. Facilities and clients indicating large number of Early Warning Signals and deteriorating credit quality would be Watch Listed with the approval of the respective Credit Committees for more stringent monitoring. Credit Risk Management Unit carries out a comprehensive interim review of selected large exposures routed through the unit, within 3-4 months from the date of approval. The unit will evaluate adherence to approval conditions, interim financial position and utilisation/conduct of facilities for selected exposures and alert on any Early Warning Signals detected during the review. A detailed report on this on-going activity is submitted to the Credit Policy, Risk and Portfolio Review Committee periodically. Evaluation of top 20 group exposure & reporting to Board Credit Committee on a quarterly basis.Concentration Risk Managing the Concentration risk on a portfolio basis to ensure that theManagement Bank’s lending is well diversified Credit Risk concentration positions are reported to the Board Risk Annual Report 2013 Sampath Bank PLC Management Committee on a periodic basis. Analytical tools such as the Herfindahl-Hirschman Index, Gini Coefficient are used to quantify Concentration Risk. Development Banking criteria include environmental criteria to integrate sustainability principles into the normal business activities of the Bank.Credit Risk Mitigation Collaterals used for risk mitigation include cash, residential and commercial property, fixed assets such as plant and machinery, marketable securities, inventories, bank guarantees and standby letters of credit. Collateral netting agreements, credit insurance and other guarantees. Reliability of mitigants is carefully assessed taking into account the legal enforceability, market value correlation and the counterparty risk of guarantors. Procedures have been implemented to ensure that the value of the collateral is recorded, reviewed and updated regularly. The requirement for collateral is not a substitute for the ability to repay which is the primary consideration for any lending decision. 169

RISK MANAGEMENTREPORTCredit Risk Register Risk Factor Impact Risk Management/ Assessment Risk Mitigating Factors RiskCREDIT RISK RatingRisk of borrowerdefault High 1. Key Committees : BRMC, 1. Board approved credit Medium HighConcentration Credit Committees, Credit policies/procedures,Risk:Credit & Policy Review Committees framework, annual reviewexposure beingconcentrated 2. Credit Risk Management 2. Delegated authority levels,on one or Unit(CRMU) reviewed regulationsfew lending Segregation of dutiessectors, groups, 3. Structured & standardised between loan originator,insufficient credit sanction process. Administration & risk.diversification 4. Internal Risk Rating 3. Key input from the Risk Department for pre/post 5. Pre-Credit Risk Evaluation credit risk by specialised staff at Credit Departments & 4. Independent Pre-credit Risk Regional Offices. evaluation by CRMU for over Rs. 100 M. 6. Post-Credit monitoring and Loan Review Mechanism 5. Watch listing, Early Warning Signals (EWS) – Portfolio management 1. Review the Bank’s 1. Board approved limits Low concentration in a number on maximum exposure of areas, such as Top 20 guidelines exposure as a % of total 2. Setting of prudential limits, portfolio, Top 20 NPAs on maximum exposure, product-wise /sector wise reviewed annually. region-wise, collateral - wise etc. 3. CBSL guidelines - single borrower/related party 2. Identify principal Risk 4. Classification of borrower – factors which affect the sector/subsector portfolio and required to be stressed. 5. Monitoring of exposure 3. Concentration risk assessed against the limits and NPAs based on Herfindahl - on MOM & YOY basis. Hirshman Index (HHI) 6. Trends analysis reported to BRMC. 7. Stress testing/Sensitivity analysis results reported to Management / BRMC on quarterly basis for necessary action.170

Credit }We continuously invest Risk in improving the range of tools and techniquesManagement we use to measure, monitor and manage risk. Risk Factor Impact Risk Management/ Assessment Risk Mitigating Factors Risk High RatingConcentration Risk Indicator LowRisk Contd. Quantification of concentration risk based on Herfindahl- Hirschman Index (HHI){ Scale 0(low) to 10,000(high)} Sector : score 531 Name: score 100 Sector-wise 3% 2% 2% 3% 18% 3% 4% 5% 7% 18% 1% 10% 11% 13% Traders Tourism Annual Report 2013 Sampath Bank PLC Other Customers - Pawning Construction Manufacturing Infrastructure Agriculture & Fishing Other Services (Edu/Health/Media ,Oth) Other customers New Economy Other Customers - Staff Other Customers - Credit Card Financial & Business Transport Services Sector-wise There is a higher concentration of pawning and strategies have been implemented to reduce the Bank’s exposure to this sector which is reflected in the exposures for 2013. We expect this to improve further in 2014. 171

RISK MANAGEMENTREPORT Risk Factor Impact Risk Management/ Assessment Risk Mitigating Factors Risk High RatingConcentration Top 20 LowRisk Contd. 21% 79% TOP 20 Customers Other Customers Collateral - wise 0% 2% 1% 0% 18% 8% 2% 4% 28% 11% 4% 0% 18% 2% 2% Documentary bills Rfc,nrfc & rnnfc accounts Fds,cds&other deposits Shares,bonds,life policy Govt. Securities Stock in trade Hire purchase agreements Tractors & motor vehicles Immov. Property, pl&machin Trust receipts Clean Unsecured loans Other securities Gold Person.Guarant & pronotes Geographical-wise 3% 2% 2% 2% 3% 4% 5% 5% 74% Western Northern Southern Eastern Central Sabaragamuwa North Western Uva North Central172

Risk Factor Impact Risk Management/ Assessment Risk Mitigating Factors Risk Rating High geographical concentration in the Western region is partly due to concentration of business activities in this region and also due advances being booked in Head Office Credit Departments.COUNTRY RISK Low 1. Sovereign Risk rating 1. Limitations on lending/caps Low 2. Monitoring of specific on lending.A collection ofrisks associated sanctions on countries 2. Monitoring of country-wisewith investing in 3. Assessment of the political exposurea foreign country.These risks include & economical situationpolitical risk,exchange raterisk, economicrisk, sovereignrisk and transferrisk, which is therisk of capitalbeing lockedup or frozen bygovernmentactionStress Testing: 1) Large Exposure defaultStress testing hasbeen carried out Scenario 1 Scenario 2 Scenario 3to measure theimpact on capital Current Capital Largest exposure Top 3 Exposure default Top 5 Exposureadequacy ratio Adequacy Ratio default default (CAR) 14.22% 13.68% 13.29% 12.97% 2) Increase in HHI Score Scenario 1 Scenario 2 Scenario 3 Current CAR 10% increase 20 % Increase 30% Increase Annual Report 2013 Sampath Bank PLC 14.22% 14.21% 14.20% 14.19% HHI score indicates the level of concentration risk on account of ‘Name concentration’ and ‘Sector concentration’ based on ‘Herfindahl-Hirschman Index’. 3) Impact of Deterioration of gold prices by 10%, 20% & 30% on pawning Scenario 1 Scenario 2 Scenario 3 Current CAR 10% decrease 20 % decrease 30% decrease 14.22% 13.93% 13.63% 13.29% 173

RISK MANAGEMENTREPORTSPECIFIC AND FORWARD LOOKING SCENARIOSARE GENERATED TO ANALYSE HOW THE BANK`SPROFITABILITY AND CAPITAL ADEQUACY WOULDBE IMPACTED IF BUSINESS CONDITIONS BECAMESIGNIFICANTLY MORE CHALLENGINGMarket Risk Management by the committee. Commodity Risk (Gold Prices) isMarket Risk is defined as the potential for change in also monitored by this committee as the Bank hasthe market value of on or off balance sheet positions. a significant exposure to Pawning. ALCO managesMarket Risk arises from changes in interest rates, these risks through constant monitoring andcredit spreads, foreign exchange rates, equity prices, implementing corrective action through variouscommodity prices and other relevant parameters. banking products and mechanisms such as theThe main objective of Market Risk management management of advances, deposits and investmentis to optimise the risk reward relationship without portfolios. The Committee’s key functions includeexposing the Bank to unacceptable losses exceeding decisions on product pricing, determining theour risk appetite. optimum mix of assets and liabilities and stipulating the liquidity gap position and interest rate riskMarket Risk Policies limits, formulating views on interest rates, settingThe Bank has a well-established framework benchmark lending rates and determining the assetfor managing Market Risk with the Market Risk and liability management strategy in light of theManagement Policy, Asset and Liability Management current and expected operating environment.Policy and the Treasury Policy forming the basis forstructure, procedure, processes and controls in line The Middle Office function, which is independent ofwith Basel II requirements, CBSL regulations and the Treasury, is an integral part of Integrated Riskinternational best practice. These policies reflect the Management Unit and monitors the comprehensiveBank’s risk appetite and provide guidance on: framework of Treasury operating limits approved Establishing and maintaining an appropriate by the Board, including open position limits, dealer limits, counterparty limits, gap limits, FCBU and structure for managing market risk Domestic operations limits, stop loss limits, country Ensuring Treasury Operations are efficient and limits etc., which are regularly reviewed and updated as per the prevailing business requirements, effectively managed in line with regulatory business opportunities, regulator guidelines, Basel requirements and industry best practices. II recommendations and industry best practices. Establishing appropriate limits for all areas Limit exceptions are escalated to respective of Treasury activities, including trading and approving authorities, and also to the Board Treasury investment positions Committee / BRMC at regular meetings. Monitoring and managing impacts arising from the operating environment on relevant Specific and forward looking scenarios are generated parameters, including results of Stress Testing to analyse how the bank`s profitability and capital Evaluation of new business opportunities with adequacy would be impacted if business conditions respect to their creation of Market Risks became significantly more challenging in line with the Bank`s Stress Testing Policy and FrameworkThe Asset & Liability Committee (ALCO) chaired which has been established by the Board. The Stressby the Managing Director, is the key management Testing results for Exchange Rate Risk, Liquidity Riskcommittee that has responsibility for managing the and Equity Price Risk are given on next page.Bank’s Assets and Liabilities and its key components,interest rate risk, exchange rate risk, liquidity riskand equity risk, which are constantly monitored174

Market Risk RegisterRisk Factor Impact Risk Management/ Risk Mitigating Factors Risk Assessment RatingFOREIGN EXCHANGERISKRisk arising High 1. Board Approved Policies 1. Continuous Monitoring of Board Mediumfrom 2. Assessment of Foreign approved limit framework as perunhedged Exchange Risk considered in 2. CBSL requirements depending(net open) 3. setting Treasury Limits and 3. on the capital requirements & riskforeign 4. Products 4. management capability.exchange Regular revaluation of open 5. Regular stress testing for keypositions and positions variables, reporting to BRMC, andpoor treasury Assessment of Foreign appropriate decisions made.controls Exchange Risk during Segregation of responsibilities Economic Capital between Front Office, Middle 5. Calculation under Internal Office & Back Office Capital Adequacy IT System in place enables Assessment Process (ICAAP) tracking and monitoring of Value at Risk (VAR) exposures calculation on Foreign Monitoring exposures including Exchange Rate Sensitive monitoring of forex exposures with portfolios. preparation of maturity of assets & liabilities 6. Monitoring of Risk Appetite Limits for Foreign Exchange Risk and VAR limits Exchange Rate Movement 2013 % 206.48 198.74 216.29 213.30 180.00 168.44 191.81 170.34 178.23 162.18 127.65 130.40 130.75 126.75 132.05 Q4 2012GBP Q1 2013EUR Q2 2013USD Q3 2013 There was a slight increase in exchange rates during the year Q4 2013 2013, while USD has appreciated marginally GBP and EUR shows a comparatively higher appreciation against LKR. Annual Report 2013 Sampath Bank PLC Stress Testing Low % Medium High as at 31 December 2013 % % Magnitude of Shock (percentage -5 -10 -15 reduction in value of open position due to exchange rate movement)  Revised CAR %   14.2088 14.2010 14.1932 In the Foreign Exchange Risk Stress Testing Total Capital Adequacy Ratio remains over 10% minimum value under all Stress Testing Scenarios 175

RISK MANAGEMENTREPORTMarket Risk RegisterRisk Factor Impact Risk Management/ Risk Mitigating Factors Risk Assessment RatingINTEREST RATE RISKEffect to Medium 1. Board approved Policies 1 Maturity gap analysis (various LowEconomic 2. Prudential limits ie. maximum time bands) – residual termValue of Equity maturity, duration etc. 2. maturity (Fixed Rate) / or next re-(EVE), and 3. Assessment of Interest Rate 3. pricing (floating rate)Earnings at Risk during Economic Capital Interest rate risk related reportingRisk (EAR) Calculation under Internal and analysis at ALCO and BRMCdue to interest Capital Adequacy Assessment Stress Testing and Scenariorate movement Process (ICAAP) Analysis, and the resultson Net Interest are reported to BRMC, andMargin (NIM) appropriate decisions are made to mitigate risks. Stress Testing Low Medium High as at 31 December 2013 301,520 603,039 904,559 Combined effect on (767,339) EVE and EAR due to (255,780) (511,560) (0.8686) Interest Rate movement (0.2971) (0.5866) from -1.5% to +1.5% 13.9195 13.3480 are ranked, and three 13.6301 most severe impact scenarios are taken as High, Medium, Low in respective order. Increase in EVE Impact on Earnings at Risk (Tax Adjusted P&L) Net Impact on CAR Revised CAR In the Interest Rate Risk Stress Testing, total Capital Adequacy Ratio remains over 10% minimum value, under all Stress Testing Scenarios.EQUITY RISK Medium 1. Board Approved Policies 1. Return of equity portfolio / LowImpact to the 2. Equity Portfolio Performance movements in stock marketvalue of theBank’s Equity Review monitored by InvestmentPortfolio(investments in 3. Investment Committee Committee and risk mitigationShare Market)due to adverse 4. Mark to market of the decisions made.movements instock market investment portfolio 2. Stress Testing on a regular basis,prices 5. Assessment of Equity Risk and reported/decisions made at during Economic Capital BRMC Calculation under Internal Capital Adequacy Assessment Process (ICAAP)176

Risk Factor Impact Risk Management/ Risk Mitigating Factors RiskEQUITY RISK Assessment Low Medium High Rating Stress Testing -10 -25 -50 as at 31 December 2013 14.2120 14.2050 14.1934 Magnitude of Shock (percentage reduction in value of Equity Portfolio due to stock market price movement) CAR after Shock % In the Equity Stress Testing, total Capital Adequacy Ratio remains over 10% minimum value, under all Stress Testing Scenarios.LIQUIDITY RISK High 1. Board Approved Policies 1. Monitoring of Board Approved Medium 2. Measurement through key Liquidity Risk Appetite LimitsInabilityto meet ratios such as Net loans to 2. Measurement of liquidity in allobligations as Assets, loans to customer major currencies reported toand when they deposits, liquid assets to ALCO, analysed and decisionsfall due Short Term liabilities etc. taken at ALCO. 3. Preparation of maturities of Assets and liabilities 3. Stress Testing results on Liquidity statement into time bands Risk are reported to BRMC and 4. Measurement of liquidity in appropriate risk mitigation all major currencies. decisions made. 5. Assessment of Liquidity Risk during Economic 4. Board approved Liquidity Capital Calculation under Contingency plan. Internal Capital Adequacy Assessment Process (ICAAP) Stress Testing Low Medium High as at 31 December 2013 10 15 20 Magnitude of Shock 14.1337 13.8898 13.4280 Potential deposit run and loan rollover impact the asset/liability gap, and, if a negative cumulative gap is observed in the first 3 months maturity bucket, the Bank executes contingency plan, where loss of revenue is likely. Respective percentage of shock applied to deposits maturing beyond 3 months and loans due within 3 months. Revised CAR % In the Liquidity Stress Testing, total Capital Adequacy Ratio remains over Annual Report 2013 Sampath Bank PLC 10% minimum value, under all Stress Testing Scenarios.CAPITAL RISK High 1. Capital adequacy ratios 1. Fluctuation in capital Adequacy Medium computed regularly. ratios are monitored regularlyRisk of (Finance)insufficient 2. Stress testing under variouscapital adverse scenarios 2. Capital augmentation measuresresources, are put in place dependingto ensure the on the outcome of monitoringBank is well (Finance/ALCO)capitalisedrelative to the 3. Regular Economic Capitalminimum Calculation under Internalregulatory Capital Adequacy Assessmentrequirements Process (ICAAP) as per CBSL Guidelines 177

RISK MANAGEMENTREPORTOperational Risk Management } Key Risk Indicators areOperational Risk is the risk of losses as a reviewed quarterly andconsequence of failed or incomplete internal appropriate risk mitigationprocesses, people issues, systems issues, or from activities are initiated atexternal events. We manage Operational Risk Corporate Managementthrough a comprehensive set of internal controls andmanagement processes that drive risk identification, Systems Audit functions. Where specific expertise isassessment, control and monitoring as an on-going required, professional services of external experts areactivity. The Operational Risk Management Policy sought.approved by the Board of Directors provides a broadframework for identification and assessment of risk Risk and Control Self Assessments are carried out atand controls, new product and process approval least annually by all key business units of the Bank forframework, measurement through incidents and their business processes to identify and review theexposure reporting, monitoring through Key Risk inherent risks and controls available to mitigate orIndicators and risk mitigation through process manage the residual risks. IRMU conducts workshopsenhancement and insurance as a Risk Transferring with the business units to assess the residual risksmechanism. and to introduce additional mitigants or controls depending upon the severity and probability of theThe prime responsibility for achieving the residual risk in line with the Basel II Standardised andorganisational objectives and management of Advanced Measurement Approaches.Operational Risk lies with the business/functionalunits where risks originate. A comprehensive Policy, The Bank has developed a Key Risk Indicator (KRI)Procedure and Directive Framework stemming from Framework that outlines the risks faced by keythe Bank’s Vision, Values and Corporate Strategy and business units in a non-technical and meaningfulapproved by the Board of Directors provides the links manner that clearly communicates the nature ofbetween achieving organisational objectives while risks and the related trends to the business units,managing risks in the process. Policies are reviewed Corporate Management and the BRMC. Theseannually or more frequently by the Operational Risk KRIs are reviewed quarterly and appropriate riskManagement Unit to ensure that appropriate risk mitigation activities are initiated at Corporatemitigation strategies are embedded and submitted Management level.for approval by the BRMC. The Operational Riskfunction within the Integrated Risk Management Business units are required to report their operationalUnit reviews the need to introduce new policies risk losses on regular and event driven basis toas a continuing activity in line with the regulatory IRMU and these are classified according to the Baselenvironment, industry best practice and any gaps II business lines. The Operational Risk Functionidentified in consultation with the BRMC. rates the loss events based on severity and impact. Events rated over and above an agreed thresholdManaging Risks in Innovation and Change are regularly reported to Corporate ManagementManagement and the BRMC. Additionally, low risk events whichRisk Management, Compliance and Systems accumulate to substantial losses over a period ofAudit units are represented in all New Product time are detected during the Trend Analysis andCommittees and appropriate sign off is obtained similarly reported to Corporate Management andprior to implementing new or improved products. BRMC. Analysis of events and trends have led toAdditionally, Legal, Finance and Internal Audit significant improvements notably in the areas of cashfunctions are appropriately involved and sign counter operations, ATM operations, Pawning, Foreignoff obtained as required. Similarly, all systems Remittances and outsourced services.developments, new system acquisitions andupgrades are reviewed by Operational Risk In addition, Anti-Fraud Policy of the Bank, approvedManagement Unit and they are also represented in by the Board provides an outline of the Anti-Fraudall project teams handling systems implementations culture, activities and policies adopted by the Bank inor changes. All contractual documents such as minimising the effect of frauds to the Bank.product applications and Service Level Agreementswith external parties are approved by the ChiefLegal Officer and reviewed by Risk, Compliance and178

Operational Risk RegisterRisk Factor Impact Risk Management/ Assessment Risk Mitigating Factors Risk RatingOPERATIONAL RISKThe risk of loss High 1. Adequacy & effectiveness of 1. Operational Risk Policies, Mediumresulting frominadequate or Operational Risk Policies are reviewed annually or morefailed internalprocesses, regularly assessed by IRMU frequently based on thepeople andsystems or from and at BRMC meetings need.external events.This definition 2. Operational Risk is managed 2. Risk Management monitoringincludes legalrisk, but excludes by business units in through newly installedstrategic andreputational risks. accordance with internal Operational Risk IT System. control requirements. Comprehensive operational 3. Risk and Control Self loss database is maintained Assessments provided by the in the System to track losses respective business units, and by Event Type and Business Key Risk Indicators Line as per Basel II 3. Material losses regularly analysed by cause, and action taken to improve system and controls to prevent future recurrence 4. Risk review on new products, processes, external suppliers/ outsourced service providers. 5. Operational Risk Appetite Limits Key Risk Indicators Key Risk Indicators provide a unique perspective on Risks arising from different areas of the organisation. Diversity of measurements, as shown below, provides a comprehensive overview of coverage by Key Risk Indicators. Internal Loss Event Reporting 2013 The Bank operates in five out of eight business lines defined in the Basel Framework. The widest coverage and operations are in Retail Banking, followed by Commercial Banking, Payments & Settlements, and Trading & Sales. Therefore, the spread of Loss Events shows a similar pattern. Key Risk Indicator Business Line wise Loss Framework Event Count Composition Composition % 14 5 0 18 18 6 1490 Annual Report 2013 Sampath Bank PLC 12 17 35 12 Technology Audit Aspects Retail Banking Credit Operations Credit Card Operations Trading & Sales Staffing & HR Commercial Banking Legal & Compliance Corporate Finance Payment & Settlement 179

RISK MANAGEMENTREPORTOperational Risk Register Contd.Risk Factor Impact Risk Management/ Assessment Risk Mitigating Factors Risk RatingOPERATIONAL RISK Risk Type Wise Actual & Potential Loss Event Reports 3 year Comparision 421 329 476 68 35 63 75 74 0 3 4 0 1 1 0 3 0 0 0 76 0 2011 2012 2013 Business disruption and system failure External Fraud Clients, Products & Business Practices Internal Fraud Damage to Physical Assets Employment Practices and Workplace Safety Execution, Delivery & Process Management As common to any service sector organisation, most of our Risk generating events are reported from Execution, Delivery and Process Management. Due to the conservative reporting practices adopted by the industry in order to cater to comprehensive analytical capabilities as required in Basel advanced approaches, any event which caused, or could cause operational risks are reported. Nevertheless, most of the events reported are recoverable through appropriate measures, and do not lead to actual financial losses impacting Profit & Loss Accounting.PEOPLE RISK High 1. Manpower planning in line 1. Robust HR policies, MediumLack of with expansion & changes in governance structures,appropriatehuman resources, business requirements. programmes and processesfailure to manageperformance 2. Upgrading of minimum in place and policies areand reward link,unauthorised or 3. qualifications and skill levels 2. applied in a consistentinappropriate 4. Recognition of specialised manner.employee skills Recruitment, Preactivity and Quarterly reviews/ employment screening,failure to comply Employer feedback/ Exitwith employment assessment of performancerelated interviewsrequirements 5 Performance management 3. Proactive HR programmes systems in place to to engage and receive recognise and reward feedback from staff performance and identify throughout the bank training needs 4. Strong staff development 6. Succession and programmes in place combining e-learning, development plans classroom training and on the job training. Programmes cover both general and specialised areas and soft skills.180

Risk Factor Impact Risk Management/ Assessment Risk Mitigating Factors RiskPEOPLE RISK 5. Rating 6. Maintaining a Low staff 7. turnover ratio Recruitment, Pre employment screening, Employer feedback Consistently applied disciplinary procedures and exit interviewsTECHNOLOGY RISKRisk arising from High 1. Technology planning is 1. Technology planning as Mediumnon -availability conducted during the 2. a part of annual strategicof IT systems, annual strategic planning. 3. planning process whichsystems break 4. covers a 3 year perioddowns and 2. Performing systems audits Systems audits aredisruptions, or for each & every system performed for each andnot keeping before deploying into every system beforein line with production environment deploying into productionthe trends in environmenttechnology 3. External/Internal External/Internaland delivery vulnerability assessment vulnerability assessmentchannels. with risk management. with risk management. Process of identifying and Process of identifying and assessing risk. assessing risk. Bank’s IT Department/ 4. IT and Systems Audit IT Steering Committee continuously review and together with the business analyse new cost efficient lines, continuously review delivery channels. and analyse new cost efficient delivery channels. 5. IT Steering Committee Based on the outcome of the systems audit, 5. necessary controls are implemented before live 6. implementation. 7. External vulnerability assessment carried out by 8. external consultants based Annual Report 2013 Sampath Bank PLC on the need. IT Policies/ procedures investment in latest technology, IT systems, ensure competitive advantage. Back up & disaster recovery, Planning & testing in place. (BCP)LEGAL RISK High 1. Independent Legal 1. Board Approved Legal Risk Low Management Policy beingRisk arising from Department applied in all legal matterslitigation againstthe Bank, faulty 2. Specialist legal advicedocumentationor business not obtained from externalbeing conductedas per the consultants on a need basis.applicable laws 3. Adequacy & effectiveness of the controls reviewed by Legal Department. 181

RISK MANAGEMENTREPORTOperational Risk Register Contd. Risk Factor Impact Risk Management/ Assessment Risk Mitigating Factors RiskLEGAL RISK Rating 2. Adequacy & effectiveness of the controls reviewed by Legal Dept. 3. Policies & procedures in place to ensure that business activities with legal impact are properly risk assessed and executed. 4 All legal documents/ Service Level Agreements are specifically approved by Chief Legal Officer & also signed off by Risk & Compliance departments. 5. Company Secretary function/compliance to ensure compliance with specific regulatory requirementsStrategic & Reputational Risk Management The Bank takes a holistic approach to strategic andStrategic Risks are those that arise from the strategic reputational risk management and relies on criticaldecisions that Directors and Corporate Management factors such as the combined skills of its Corporatetake concerning an organisation’s objectives. Management Team, its risk management policy framework and a learning culture that rewardsEssentially, strategic risks arise due to external causes, both qualitative and quantitative achievements.arising out of adopting wrong strategies and choices Additionally, reputation risk management andthat can cause losses to the bank in the form of mitigation aspects are embedded in the Bank’sreduction of shareholder value, loss of earnings etc. policies and procedures, training programmes, the Business Continuity Plan and through the Audit andStrategic risk levels link-in with how the whole Board Risk Management Committees.organisation is positioned in relation to itsenvironment and are not affected solely by what the We also have a Customer Grievance Handling PolicyDirectors decide. under which the customers have a range of options through which they can forward their grievances toThe Strategic Risk Management Policy approved the Bank including a public help line that is mannedby the Board outlines the strategic initiatives and on a 24 hour basis. A senior officer is tasked withintentions in place to manage strategic risks faced by coordinating such grievances and handling customerthe Bank. relations. Significant public or customer grievances are submitted for appropriate action by CorporateReputational risk is defined as the current or Management and review by BRMC.prospective risk to earnings and capital arisingfrom an adverse perception of financial institutions Further, the Bank’s Whistle Blowing Policy approvedon the part of existing and potential transactional by the Board provides a channel to raise issues, if any,stakeholders such as clients, trading counterparties, on breaches of any law, ethics, statutory or regulatoryemployees, suppliers, regulators/governmental concerns shared by them.bodies, and investors.182

WE ALSO HAVE A CUSTOMER GRIEVANCEHANDLING POLICY UNDER WHICH THECUSTOMERS HAVE A RANGE OF OPTIONSTO FORWARD THEIR GRIEVANCES TOTHE BANKThe Business Strategy has been tested in the last few Sector winner – Economic Sustainabilityyears of global crisis, with improvement observed Category winner – Economic Contributionin customer confidence due to continuous focus in Top 10 category recipientapplying best banking practices. The Strategic Risk d. National Project Management Excellencecapital charge is assessed using a scorecard and asit appears from the calibration, the Bank does not Awards 2013 Joint Runner Upneed to hold any additional capital for this risk. e. National Best Quality Software Award 2013 –Sampath Bank has won the following accolades that Silver and Merit awardsprovide evidence of the success of our reputational f. National HR Excellence Awards 2013risk management capabilities: Best Talent Management (HRM) and Peoplea. Credit Ratings – Rating was affirmed by Fitch Development Ratings Lanka Ltd., at AA- with a stable outlook and RAM Ratings Lanka Ltd at AA with a stable The Bank has not faced any ma jor adverse publicity, outlook. deposit runs or regulatory penalties, and has createdb. Award for Best Bank in Sri Lanka 2013 from a strong brand recall in the minds of Sri Lankan Euromoney customers. We have assessed the Reputational Riskc. Best Corporate Citizen Sustainability Awards within the ICAAP framework and based on the result, 2013 there is no requirement for the Bank to hold capital for Strategic and Reputational Risk.Strategic & Reputational Risk RegisterRisk Factor Impact Risk Management/ Assessment Risk Mitigating Factors Risk RatingSTRATEGIC RISKFailure to High 1. Bank’s 2-3 year strategic 1. Board approved Strategic Lowmanage medium plan covering all business Risk Management Policy/ long term units approved by thestrategic goals of Board. 2. Strategic Risk Assessmentthe business in ICAAP and provisions under Economic Capital Annual Report 2013 Sampath Bank PLC 3. Regularly monitoring by business line heads/ Planning Division 4. Accuracy of Financial reporting ensured by internal controls and adoption of SLFRS standards 5. Monthly / quarterly reporting of assessment of the stages achieved , submitted to the Board of Directors for review. 6. Review actions/ plans depending on the outcome and any external, economic environment changes. 183

RISK MANAGEMENTREPORTStrategic & Reputational Risk RegisterRisk Factor Impact Risk Management/ Assessment Risk Mitigating Factors Risk RatingREPUTATIONAL RISKNegative effects High 1. Complaint handling policy/ 1. Timely & efficient Lowof public opinion,customer opinion procedure is in place in communications among alland marketreputation and terms of the customer stakeholders.the damagecaused due to charter as per CBSL 2. Corporate Governancebrands by failureto manage public guidelines. practicesrelations. 2. Procedure for receiving 3. Procedure for receiving customer complaints and customer complaints and resolution mechanism is in resolution mechanism is in place. place. 3. Complaints and process 4. Reputational Risk of resolution relating Assessment in ICAAP and to operational risk / provisions under Economic compliance if significant Capital is escalated to Corporate 5. Business Continuity Management / Risk Planning Committee. 6. Training and capacity building. 7. Code of conduct for Board and all staff membersBasel II Compliance In year 2014, the Bank’s ICAAP committee will ensureThe Bank has complied with Regulatory requirements that updated ICAAP documentation as at end ofof Basel II, and will continue to comply as per 2013 will be submitted to the regulator on timelinesindustry best practices and the regulatory stipulated by the regulator.instructions. Basel IIIInternal Capital Adequacy Assessment Process The latest updated version of Basel framework is(ICAAP) is a part of Pillar II of Basel II framework Basel III, which has already been published by thethat bridges the gap between the Regulatory Committee on Banking Supervision of the BankCapital and Economic Capital requirements of the for International Settlements. The new frameworkBanks by taking all material Risks such as Credit includes new standards for capital, leverage andConcentration, Reputational, Liquidity and Strategic liquidity to strengthen the regulations, supervisionRisks etc. not covered in Pillar I of Basel II into and risk management of the banking sector.consideration. Implementation of Basel III is expected to beginIn accordance with the Central Bank of Sri Lanka in the next few years, and the Banking industry isGuidelines, the Banks are required to submit the continuously engaged in gearing itself with theICAAP document and the Bank’s approach to Capital necessary skills, tools, data, and infrastructure.Management to the regulator within six months fromend of each financial year. In order to comply with We are fully committed to implement Basel IIIthis requirement, during late 2012, and early 2013, we standards in line with the Regulations and Road Mapsecured the assistance of an internationally reputed for Banking Industry prepared by the Central Bank ofconsultant to complete the ICAAP implementation Sri Lanka.planning, and the initial ICAAP report was submittedto the regulator in February 2013.184

Compliance Compliance Department comprises the Regulatory Compliance Unit and the Anti Money LaunderingAn independently functioning Compliance (AML) Compliance Unit. While this department isDepartment was established under the purview responsible for ensuring that operating and businessof the Board Risk Management Committee in units comply with statutory, regulatory and internalDecember 2012 adopting best practices and good guidelines and directions in accordance with thegovernance advocated by the Banking Act Direction Bank’s Compliance Policy, the Group ComplianceNo 11 of 2007 on Corporate Governance for Licensed Policy of the Sampath Bank Group outlines theCommercial Banks in Sri Lanka and the position of group-wide compliance function implementedGroup Compliance Officer reporting to the Board through each company in the Group. This policyRisk Management Committee was created to encapsulates the Bank’s compliance philosophy,monitor compliance with regulatory and supervisory principles governing the compliance function, therequirements imposed by the regulators including structure and processes to ensure effective andanti-money laundering procedures on a group wide timely management of Compliance Risk.basis. The Bank also has an AML policy which encapsulates AML compliance standards which apply to allCompliance Risk Management business units within the Bank, all its branchesCompliance Risk is the risk of legal or regulatory and spreads over to its fully owned subsidiariessanctions financial loss, or loss to reputation a bank in its overseeing capacity. The Bank has takenmay suffer as a result of its failure to comply with into account, the regulatory / legal requirements,applicable laws, regulations, codes of conduct and the strategic challenges and opportunities thatstandards of good practice. The Compliance function regulatory developments may present for the Bank’sestablished at Sampath Bank manages the Bank’s business model and how the Bank should dischargecompliance risk as per CBSL and other regulatory its corporate responsibility when formulating theseand internal standards and requirements. The policies.Industry Regulatory Customer Annual Report 2013 Sampath Bank PLC Best Due CompliancePractice Framework DiligenceStatutory Know Anti Your Money Customer Laundering 185

RISK MANAGEMENTREPORTThe Compliance Department adopts a risk based The Compliance Department is responsible forapproach and proactively identifies, documents monitoring and reporting of suspicious transactionsand recommends measures to mitigate compliance which include large and structured transactionsrisk which is inherent in the business activities above a specified threshold as per regulatory andof the Bank. This Department is responsible for statutory provisions. Accounts are categorised todissemination of regulatory requirements to business reflect the risk and Customer due diligence andunits for necessary action and monitoring that they Know Your Customer processes are monitoredoperate within the boundaries set by the Bank and on a continuous basis. IT solutions have beenthe regulators. Other functions include facilitating implemented to identify unusual transactionincorporation of regulatory requirements into patterns, suspicious transactions as well as to screenoperational procedures, recommending corrective transactions involving sanctioned parties, facilitatingaction to remedy instances of non-compliance and mandatory reporting to the Financial Intelligenceto mitigate compliance risk exposure. A monthly Unit and compliance with the provisions of theCompliance Certificate is provided to BRMC covering Financial Transactions Reporting Act. The Compliancethe following: Department’s activities contribute towards establishing a compliance culture that fosters compliance on statutory / regulatory reporting prudent risk management and strict compliance with requirements statutory and regulatory requirements. significant new regulations / directions issued Central Bank has issued numerous Directions relevant by the regulators to Licensed Commercial Banks during 2013 and the status of compliance with key directions is given significant non compliant events below: training undertaken and identification of training needs relating to compliance function compliance monitoring on Regulatory / Anti Money LaunderingRegulatory Requirement StatusPreparation, Presentation and The new format introduced by CBSL for thePublication of annual auditedaccounts of banks dated 11th preparation, presentation and publication of annualFebruary 2013 audited accounts of licensed commercial banks, CompliantPublic Disclosure by Publicationof Quarterly Financial Statements effective from the financial reporting periods beginningof Banks in the press dated 11thFebruary 2013 on or after 1st January 2012 The new format introduced by CBSL for the publication of quarterly financial statements of licensed Compliant commercial banks in the press effective from the 1st quarter of 2013Banking Act Direction No 3 of 2013 A person shall not hold office as a director of more Compliantamendments to directions on than 20 companies / entities /institutions inclusive ofCorporate Governance issued to subsidiaries or associate companies of the bank.Licensed Commercial Banks dated12th April 2013 The procedure to open, maintain and close MigrantSale of Foreign Exchange toEmigrants dated 12th June 2013 Blocked Accounts (MBA) for migrants, who have Compliant obtained Permanent Residency (PR) of another countrySecurities Investments Account (SIA)dated 12th June 2013. after 12th June 2013. As a measure of facilitating inward remittances into Sri Lanka for investment purposes, investors have been granted more flexible avenues to receive and repatriate Compliant funds in and out of SIA.186

Regulatory Requirement StatusIssuance of Foreign Currency Notes to Issuance of foreign currency notes up to USD 5,000/-Sri Lankans travelling abroad dated or its equivalent in any other convertible foreign Compliant12th June 2013 currency after exercising due diligence and assessing the bona fides of individual requests.Appointment of Compliance Officers Appointment of a Compliance Officer to handle Compliantdated 17th June 2013 Exchange Control mattersInterest Rates on Credit Cards and Reduction of interest rates of Credit Cards and all otherother Loans and Advances dated 7th loans and advances CompliantJune 2013Cap on penal interest charged Licensed Banks have been instructed by the Monetaryby Licensed Banks on loans and Board to reduce the penal interest rates charged on alladvances dated 26th July 2013 loans and advances including credit facilities already Compliant granted, to a level not exceeding 2% p.a. for the amount in arrears during the overdue period, with effect from 1st August 2013Supervisory Review Process (Pillar 2 Commencing from 1st January 2014 , everyof BASEL II) for Licensed Commercial Licensed Commercial Bank to maintain at all times, As a Policy, the Bank shallBanks and Licensed Specialised Banks adequate capital to cover its exposure to all risks complydated 31st July 2013 , notwithstanding that it has complied with the requirements of Banking Act Directions No 9 and 10 of 2007 dated 26th December 2007 .Publication of financial statements Annual, bi-annual and quarterly disclosure of reportsand other disclosures on the websites and statements as specified in the Direction Compliantdated 17th September 2013Introduction of New Returns under Submission of Statement of Financial Position and Compliantthe web-based off-site Surveillance Statement of Comprehensive Income through web-System dated 22nd November 2013 based off-site surveillance system for the years 2011 Compliant and 2012 by 20th December 2013Misleading and Unethical Banks are required to refrain from publishing ProcessAdvertisement dated 8th November misleading and unethical advertisements and to has been2013 ensure highlighting all important information in initiated to a visible manner by complying with Circular No be compliantImplementing the Official Language 02/17/800/0007/001 dated 6th November 2008 at allPolicy in banks and financial timesinstitutions Banks are requested to facilitate implementation of the official language policy Annual Report 2013 Sampath Bank PLC 187

SUSTAINABILITYHIGHLIGHTSINNOVATION, CREATIVITY AND PIONEERING‘OUT OF THE BOX’ THINKING ATTITUDE HAVEBEEN OUR PROMINENT INTANGIBLE ASSETSFOR SUSTAINING RELATIONSHIPS AMONGTHE SRI LANKANSReduce Green-house gas CSR & by 59,624 Kg’s of the Sustainability carbon equivalent Projects for 1,013 the year fully grown trees p.a 244 238,496Kwh SAVINGS OWING TO RECYCLING OF Electricity p.a PAPER WASTE1,894,850litres of Water p.a 178Cubic Sampath Bank Managing Director, Aravinda Perera and CEO of Think Green (Pvt) Ltd Silvahar Muthuramalingan exchange the MOU of the meters of Landfill p.a E-waste programme OIL 104,640 litres of Oil p.a188

Long EndATM Network Access – 1,842 Moving to the Super Branch concept for sustainable lifestyles of our customersCUSTOMER BASE Category Quantity- YearSERVED OVER 1.9 MN 2013 Learning- Total Training 167,409Sustainability Overview conducted (hours)The analysis of sustainability trends marks the Health & Safety- Ma jor & Minor 0commencement of our journey in charting a course Accidenttowards creating sustainable progress. As a country Gender equality ratio 1.07 : 1experiencing a dramatic economic resurgence Men : Women (Based on Salary)following the conclusion of a tumultuous civil conflictspanning nearly three decades, the potential for possibly temper our success in the future. Therebyeconomic growth is undeniable. However, we remain inferring only trends that have a clear bearing on us,cautious in planning our future actions, diligently as a leading banking institution in Sri Lanka.following both global and local events which could Having studied these trends, together with certainOur Sustainability Priorities inherent qualities of the sustainability mechanism, we then proceed to envision potential opportunities and risks that could pervade on our business and affect the long term sustainability of Sampath Bank PLC. FocusVision - Add value to all stakeholders by building a sustainable banking platform. StrategyFinancial Performance and Risk Management Management Approach Annual Report 2013 Sampath Bank PLCWealth creation for all stakeholders of Re-align strategic goals to move away from aSampath Bank PLC by implementing forward traditional philanthropic focus, towards a morelooking corporate strategies , while assessing strategic approach that creates competitivethe risk of the market. advantages for all our stakeholders. ReportingResponsible Stewardship - Developing a voluntary reporting code that integrates allaspects of environmental, social, economic, human rights and labour practices. 189

SUSTAINABILITYHIGHLIGHTSWE CREATE A BETTER FUTURE FOR OURSTAKEHOLDERS BY LISTENING,COLLABORATING, HELPING AND RESPONDINGTO THEIR NEEDS.Focus governance framework underpins the importanceThe pursuit of a sustainable business model has of responsible business practices that embody ourled us to factor in certain integral characteristics promise to create a sustainable future for all thoseassociated with Sampath Bank’s 5E sustainability associated with our business.philosophy. Among them is our steadfast commitmentto uphold the values of integrity and transparency at Reflecting our commitment to generate a soundall times. We will resolutely adhere to these principles business model, stakeholder management andand the dictates indoctrinated in our governance engagement forms the penultimate segment incode, when formulating business strategies and our overall sustainability strategy. Steered by aconducting our business in an ethical and sustainable strict management ethos, which clearly defines ourmanner. At Sampath Bank PLC, responsible custodial role in fostering meaningful relationships,stewardship is driven by an equal measure of our sustainability framework aims to bring aboutaccountability and dedication. Accordingly, our enduring change that transmits meaningful future change for all stakeholder groups. Sus tainable DevelopmakEenDtherevoperloeldpnmeeuernrt Manageme ent VEatlhuiecss &nt St overnmEeonfmtpaConodwmReremgmuulenaitnttoyryonal Goals bodies 5E’S Customers, Shareholders, Environment DEedvuecloaptimonenfotr Achieving Protection & Conservation Emplo yees, Suppliers, Environment, Community, GOrganisational and Nati190

SMART Banking PracticesSpecificMeasurableAttain Reliable Timely Annual Report 2013 Sampath Bank PLCenvironmentalopportunitieswith customers tohelping hand tocontributionsresponse for career better understand resolve current towardsmanagement progression, needs and social issues of sustainablepractices and alongside a redesign services communities, developmentoperational culture that to meet their thereby laying throughprocedures set recognises changing needs the foundation for investments thatup to reduce the individual needs by continually future success. aim to set theoverall impact of by encouraging reviewing our We provide highest standardsthe business. accountability and standards and focused, relevant of corporate teamwork. processes to and timely governance in the ensure we support that industry. exceed customer addresses key requirements. causes of national importance. Defining Stakeholder Rights Customers Create a stable and progressive banking environment, whichShareholders renders high quality banking solutions, backed by superior technology and a customer-friendly service platform. EmployeesEnvironment Support shareholder wealth creation and sustainable growthGovernment through prudent banking strategies, re-inventing products and services, aggressive expansion and nurturing a pay-for-performance Society corporate culture Develop a culture that is committed to build an environment where people can make a difference, both as individuals and as a team Manage and control the organisational impact on the environment through the use of modern technology, lean consumption and eco-friendly practices Ensure compliance through statutory and voluntary compliance codes Initiate responsible stewardship and strategies that would transmit change through the social and economic parameters of the business operations. 191

SUSTAINABILITYHIGHLIGHTSCorporate Social Responsibility CSR model. While outlining the importance of socialBeing clearly ingrained into Sampath Bank PLC’s responsibility, the ensuing CSR value curve alsocultural fabric, right from the inception, Corporate introduces a new dimension of social responsivenessSocial Responsibility (CSR) has always had a to the equation.profound impact in all that we do. Evolving in tandemwith emerging socio economic needs, our CSR Sampath Bank PLC - CSRphilosophy is a reflection of the changing times and Proclamation:unchanging values. We believe that Social Development is an ongoingCentered on the aforementioned 5E platform, our process that has a monumentalCSR policy aims to accomplish corporate goals in impact on individuals and thesync with national priorities, while promoting global communities they live in. It isbest practices in cognizance with stakeholder needs. our priority to empower theseShifting from a philanthropic focus to embrace a community cells in such amore strategic approach, we have endeavoured manner that will enable themto create competitive advantages for all our to overcome both real andstakeholders. Overseeing this process, is a highly perceived limitations and createfocused strategic planning exercise that aims to sustainable livelihoods for thegrow the Bank’s market share, while at the same future.time prudently managing associated businessrisks. By initiating an attitudinal shift we havesuccessfully moved away from the conventionalcharity driven approach in favour of a more strategicCSR Value Curve - Charity Driven Approach vs Strategy Driven CSR ApproachCharity Integrating CSR Driven initiatives as part of Issue corporate strategies Driven Strategy Promoting employee Driven involvement Philanthropic Community Activities Development InitiativesStrategic CSR Focus } In its quest to providingWe believe that building strong communities is better focus in its CSRthe key to ensuring financial security and long initiatives, Sampath Bankterm sustainability for all citizens of Sri Lanka. As a place greater emphasisresponsible corporate citizen and a leading bank in on underprivileged areasthe country, we are endowed with the capability of in Sri Lanka.performing a leading role in enacting change at acommunity level. We understand our responsibilityto nurture progressive communities and steer themto achieve their own goals, while contributing to longterm national development. Accordingly, our effortsencompass a broad range of community engagementand social inclusion initiatives aimed at enablingthese communities to pursue their future aspirations.192

Entrepreneur Empowering Community CapacityDevelopment - Communities- Building -36 projects 80 Projects 35 Projects Investments for 2013 over Rs 57 Mn Community based Environmental Protection and Conservation - 93 ProjectsHighlights of Our Social ResponsibilityEducation for Development Empowerment of Community AIESEC local committee of University of Neuro Navigator to National Hospital of Sri Jayawardenepura Sri LankaA Youth Empowerment Project was conducted in Neuro Navigator was contributed to the National Annual Report 2013 Sampath Bank PLCcollaboration with AIESEC Sri Lanka which included 6 Hospital of Sri Lanka with the motive of resolvingleadership campaigns, 6 CSR projects and 6 training a national level issue. As a result neuro surgeonssessions. These projects were conducted throughout have the capability to do more operations per daySri Lanka. compared to before and reduce the waiting list. Through this system doctors have the capability to find the exact location where the problem has occured. Within the past 5 month they have conducted 75 successful operations which is far above the average. 193

SUSTAINABILITY Entrepreneur DevelopmentHIGHLIGHTS Islandwide SME programsEnvironmental Protection and Conservation Environmental Day CelebrationsSampath Bank celebrated Environment Day along} Island wide SME development programs werewith the bank’s Environmental Club, SNaPC. An conducted to motivate the small and medium scaleawareness program was conducted on how to save entrepreneurs.energy among employees. The program includedefforts to calculate the carbon footprint of Sampath StrategyBank and contribution to FOGSL to initiate a researchproject on the endangered Blue Eared Kingfisher. The sustainability strategy and development framework bring together three fundamentalEthics and Values elements, which dictate that sustainability at Mind Developing Programs Sampath Bank is viewed as an on-going process. This three pronged strategy, known as the strategyIslandwide programmes were conducted to develop development matrix, is aligned to our sustainabilityethics and values among school children. vision and echoes through the very fabric of our business. Culminating to promote the stakeholder Through ethical business rights framework, Sampath Bank PLC’s strategy practices we ensure our development matrix also accentuates our overall responsible behaviour in approach towards sustainability as outlined below; the industry Innovate - Develop a timely and relevant value proposition that uniquely reflects the sustainability philosophy of Sampath Bank PLC Manage - Pursue an integrated business model that promotes sustainability at all levels of business Improve - Compliance, continuous monitoring, review and initiating corrective action pertaining to every aspect of the business Reporting Reaffirming our commitment to create cohesive development impacting all economic, environmental and social stakeholders of our business, in 2013, we moved towards the new Global Reporting Initiative (GRI) G4 guidelines for sustainability reporting. The ubiquitous approach of the G4 guidelines not only favours our campaign for equitable wealth distribution among stakeholders but culminates to spotlight greater transparency and reporting accuracy.194

Strategy Development Matrix Analysis of Stakeholder Aspirations Fundamental Strategy Customers Innovate Improve Promoting island-wide customer inclusiveness Manage Promoting bankability among an island-wide customer network Annual Report 2013 Sampath Bank PLC Establishing a broader based nationwide SME lending across the country Ethical lending practices Enhancing financial market awareness of the customer Complaint resolution Monitoring of security procedures Shareholders Stable share price Consistent bottom line Ensuring sustainable return on investment Transparency and responsible stewardship Maintaining the bank’s reputation and credibility Employees Fair and equitable recruitment Developing the talent pool through training and education Retention strategy Conflict resolution Occupational health and safety and employee welfare Social inclusion Human Rights Environment Reduction of the Bank’s carbon footprint Managing the impact on the environment Resource Efficiency Regulatory Authorities Compliance with mandatory and statutory regulations Community Empowerment Community development and capacity building Education and literacy Health and Nutritional Development of society Ethical sourcing 195

SUSTAINABILITYHIGHLIGHTSWe seek guidance from our sustainability reporting element of the business according to the highestframework to fulfill the reporting requirements of G4 standards of integrity. We do not look to prevailingguidelines. As such, our reporting format demands, “market practices” as an indication of appropriatethat we evaluate both internal and external drivers behaviour. We base our decisions on legal andto sustainability. Both internal and external drivers regulatory rules, our code, our business principlesare subject to a materiality assessment to determine and our values, while safeguarding the constitutionalmaterial aspects relevant to each segment. and human rights of all stakeholders we remain committed to address any matters of conflict with allAt Sampath Bank PLC, we believe the best way appropriate disclosure and transparency.to build and to maintain trust is to conduct everyAssessment Criteria Significance to society and other Material Aspect Reason for Materiality Material Stakeholder stakeholders Segment Awareness of Promoting Delivering the promise of financial All rural and provincial issue Relevance to the Inclusive Banking inclusiveness to a broader unbanked communities, organisation demographic across the country and Evidence of Product not limited to Sampath impact Responsibility Developing an ethically responsible Bank customers Environmental product range All Sampath Bank PLC Industry and management and Following through on the national bank customers competitor Resource Efficiency pledge to reduce the impact of the response “Green” lending bank’s carbon footprint Society as a whole Community Promoting investment in carbon- Potential short- Development and neutral projects National economy and and long-term Capacity Building Commitment to deliver meaningful society as a whole business impact Developing Ethical change to society in line with Banking Practices national development goals National economy and Ethical relevance society as a whole and policy Product Creating a sustainable framework considerations Responsibility to support future banking needs Shareholders, employees and Peer practices Reaching Diverse Promoting best practices across the regulatory authorities and accepted Markets value chain Shareholders, social norms employees, suppliers Development and Introducing product differentiation and customers Stakeholder management of and service enhancements that reactions and the talent pool deliver consistent performance in Shareholders and reputational risk the longer term customers Creating an empowered workforce to act as a facilitator of long term Employees, sustainable progress of the bank shareholders, and customersEthical behaviour requires us to comply fully Conclusionwith all laws and regulations, our Code of Ethics, Our aspirations to build a more sustainable business,supplemented to our employees’ principles and has led us to a deeper understanding of the internalcompendium of internal policies, inform and guide and external drivers that influence our business. Byour employee in their roles. obtaining insights on how our actions impact the stakeholders of the business, we remain committedOur success has been and will continue to be to convey in meaningful value to all stakeholders,dependent on the trust that our shareholders place through an equal measure responsibility andin us. Everything we do, every piece of advice we accountability. In short, by engaging our SMARTgive, every transaction we execute, every rupee we banking ethics, we will strive to deliver the level ofmanage, every interaction in which we take part, tangible value that truly personifies our image as themust serve to strengthen manner. “Bank that Presents the Future”.196

I SPEAK FOR THE ENTIRECOMMUNITY IN AKKARAIPATTUWHEN I SAY THAT WE AREVERY GRATEFUL FOR THEPART PLAYED BY SAMPATHBANK IN HELPING TO DEVELOPOUR LOCAL ECONOMY.THE BANK IS OUR PRIMARYFINANCIAL INSTITUTIONAND WE APPRECIATE THEIRCOMMITMENT TO US.M A C M ISMAILPROPRIETOR(BROADWAY MOTORS,AKKARAIPATTU)17TH FEBRUARY 2014

Financial Calendar Financial Calendar - 2013 22nd February 2013 2012 Annual Report and Audited Financial Statements signed on 26th February 2013 2012 4th Quarter Interim Results released on 4th April 2013 27th Annual General Meeting held on 9th April 2013 Rs 6.00 per share Cash Dividend for 2012 paid on 16th April 2013 Rs 6.00 per share Scrip Dividend for 2012 paid on 18th February 2014 2013 Annual Report and Audited Financial Statements signed on 31st March 2014 28th Annual General Meeting to be held on *April 2014 Rs 8.00 per share Cash Dividend for 2013 payable in Interim Financial Statements published in terms of Rule 8.3 of the Colombo Stock Exchange and as per the requirements of the Central Bank of Sri Lanka: 1st Quarter Interim Results released on 15th May 2013 2nd Quarter Interim Results released on 14th August 2013 3rd Quarter Interim Results released on 7th November 2013 4th Quarter Interim Results to be released on or before 28th February 2014 Proposed Financial Calendar - 2014 2014 Annual Report and Audited Financial Statements to be signed in February 2015 29th Annual General Meeting to be held in March 2015 Dividend for 2014 to be payable in **April 2015 Interim Financial Statements published in terms of Rule 8.3 of the Colombo Stock Exchange and as per the requirements of the Central Bank of Sri Lanka: 1st Quarter Interim Results to be released on or before 13th May 2014 2nd Quarter Interim Results to be released on or before 15th August 2014 3rd Quarter Interim Results to be released on or before 14th November 2014 4th Quarter Interim Results to be released on or before 27th February 2015 * Subject to confirmation by Shareholders ** Subject to confirmation by Directors and Shareholders 198