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STEPPING TOWARDS SUCCESS

Annual Report 2011-12

Annual Report 2011-12

Success is not simply about being the best in one thing, but it is about taking the opportunities that are presented to us and making the most out of them. Within every oyster lies an untouched pearl and within every market lies untapped potential. This year your Company - People’s Merchant Finance PLC steps towards new opportunities and new areas in the finance industry to maximize from this potential. This is the first step as PMB starts stepping towards success…

STEPPING TOWARDS SUCCESS

Vision,Mission

Mission To provide an optimum return to shareholders by maximising the return on equity.

To provide business solutions that add value to clients’ business ventures and ensure their continuous growth in wealth.

To create a pleasant working environment for employees through training, empowerment and recognition of good performance.

To be a socially responsible organization that maintains high standards of business ethics and to have good corporate governance practises.

Vision Be the most sought after financial services provider for tailor made, quality merchant financing solutions, with a human touch and business acumen.

Highlights

Contents

Divested subsidiary finance Company for

of 4 shares for every 5 existing shares at Rs 15/-each.Rs.450Mn

Rs.934Mn

Rs.137Mn

Raised through a rights issue

Equity increased to

- income

Returned to profitability with a profit before tax of

Rs.430Mn

Rs.33.7Mn

Vision / Mission ........................................... 1 Highlights ..................................................... 2 Financial Highlights ..................................... 3 Chairman’s Statement ................................. 4 Chief Executive Officer’s Review ................. 7 Board of Directors ...................................... 10 Business Review ........................................ 14 Financial Review ....................................... 26Corporate Governance ............................... 30 Risk Management and Internal Control ...... 37

Financial Information

Financial Calender ..................................... 45 Annual Report of the Board ........................ 46Director’s Responsibility For Financial Reporting .................................... 49Report of the Audit Committee ................... 50

Independent Auditor’s Report ..................... 51Income Statement ...................................... 52Balance Sheet ............................................ 53Statement of changes in equity .................. 54Cash Flow Statement ................................. 55Notes to the financial statements ............... 57Statement of Value Added ......................... 88Graphical Review ....................................... 89Ten Year Summary .................................... 90Investor Information ................................... 91Share Information ....................................... 93Our Services ............................................... 94Glossary of Financial Terms ....................... 95Notice of Meeting ....................................... 97Notes .......................................................... 98Form of Proxy ............................................. 99Corporate Information .........Inner Back Cover

Annual Report 2011/12 3

Group CompanyFor the year ended 31 March 2012 2011 Change % 2012 2011 Change % Rs'000 Rs'000 Rs Rs'000 Rs'000

Income ( Rs.000's) 620,485 666,691 (6.93) 622,318 586,830 6.05

Profit/(Loss) before taxation ( Rs.000's) 14,244 (63,842) 122.31 33,703 (215,320) 115.65

Profit/(Loss) after taxation ( Rs.000's) 506 (61,659) 100.82 20,198 (202,500) 109.97

Earnings/(Loss) per share (Rs.) 0.00 (1.55) 0.40 (5.06)

Equity ( Rs.000's) 926,915 484,019 91.50 933,979 470,553 98.49

Return on average equity (%) 0.07 (11.97) 2.88 (35.40)

Total assets ( Rs.000's ) 2,947,772 3,881,605 (24.06) 2,951,489 3,705,730 (20.35)

Return on average total assets (%) 0.01 (1.67) 0.61 (5.97)

Financial Highlights

0

100

200

300

400

500

600

700

800

'07 '08 '09 '10 '11 '12

Rs.

Income

303

375

541

544

587 62

2

'07 '08 '09 '10 '11 '12

Rs.

8,000

200

400

600

800

1,000

Equity

459

442

460

674

471

934

'07 '08 '09 '10 '11 '12

Rs.

Total Assets

1,65

1 1,87

7

2,66

6

3,07

9

3,70

6

2,95

1

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Annual Report 2011/124

Chairman’s Statement

I am pleased to welcome you to the 29th Annual General

Meeting of People’s Merchant Finance PLC and to present you, our Annual Report and Audited Accounts for the Financial Year 2011/12.

Country economic environment

Sri Lankan economy recorded a growth rate of 8.3 % for the year 2011 continuing from the growth momentum of 8% recorded in the year 2010. The positive macroeconomic conditions, expansion of infrastructure facilities and renewed economic activity in the north and east contributed for the growth. Per capita income increased to US$2,836 from US$2,400 in the previous year. The market interest rates were stable in the three quarters of the year and started to rise from October 2011. Annual average inflation was 6.7% and inflation remained at single digit level for the third consecutive year.

Both All Share Price Index (ASPI) and the Milanka Price Index (MPI), declined in 2011 following upsurges in the previous two years resulting in a market correction. The

Stepping Towards Success with Finance

Company License.Back to profitability

with the Company recording a Profit after

tax of Rs. 20Mn

indices started declining during the year after reaching high peaks in February 2011.

Financial sector

The financial sector performed satisfactorily during the year with increased profitability and improved asset quality as Non performing loans declined over the year. In order to regularize deposit acceptance, a new Finance Business Act was enacted during the year.

The Central Bank issued a series of new directions to

the leasing institutions as a measure of strengthening

supervision and regulation. It required maintenance of

5% of liabilities in liquid assets as defined by the Central

bank.

Specialized Leasing Companies including your

Company, experienced challenges in raising funds

in the competitive financial markets due to various

limitations imposed on issue of type of instruments

issued for raising funds and maximum borrowing limits

set based on Company capital funds.


Chairman’s Statement Contd....

We cater to the important category of small and medium

sector that do not have ready access to Commercial

Bank financé. The profitability of specialized leasing

companies has become constrained due to narrowing

margins, as borrowings costs become higher and rely on

commercial banks heavily for borrowings requirements

that imposes various conditions when lending.

Accomplishment

Your Company achieved the following milestones:

The Company obtained the license under the Finance

Business Act No.42 of 2011 from the Central Bank of Sri

Lanka in April 2012. The Company name was renamed

as People’s Merchant Finance PLC to be in line with the

Finance Act. This widens our scope of activities and now

we have access to accepting public deposits. I express

my appreciation to the Governor of Central Bank and

other officials for prompt approval given to the PMF.

The Board of Directors decided to raise funds through a

rights issue in September 2011. The Company made a

rights issue of 4 new ordinary shares for every 5 existing

ordinary shares at a price of Rs.15/- per share. We

raised Rs.450Mn through the rights issue in November

2011. The funds were utilised to meet CBSL liquid asset

requirements, retire short term debts and for business

expansion. My appreciation goes to our major share

holder People’s Bank Group and other shareholders for

supporting the rights issue.

Disposal of Subsidiary Company

The subsidiary finance Company People’s Merchant

Finance Ltd. (Formerly Silvereen Finance Company

Ltd.) was disposed in May 2011 at a price of Rs.430Mn.

This disposal generated a net profit of Rs.137Mn. Due to

the sound management of the Company under People’s

Merchant Finance PLC group we were able to command

a good price when disposing the entity. This generated

needy cash flows to the company.

Company performance

Your Company made a profit after tax of Rs.20Mn.

This is after reporting two years of consecutive losses

endured due to the impact on acquiring the credit card

business operations in March 2009. The profit for the

year is attributable to income of Rs.137Mn realized from

the disposal of the subsidiary fiancé Company in May

2011.

When the Company edged close to the maximum limit

on borrowings set by the Central Bank, we restricted

lending to stay within the set limits. This prevented us

from building up liquid assets as well to capitalize from

the industry credit growth prevailed during the year.

Gross Income of the bank increased to Rs.622Mn in

FY11/12 from Rs.587Mn in FY10/11, a modest growth

of 6%. This is mainly due to the capital gains generated

from the sale of the subsidiary finance company.

The asset quality of the advances improved during the

year as non performing advances gradually reduced

during the year. However, on a prudence basis more

provisions were made for long outstanding overdue

loans. As a result the Company profit after tax reached

to Rs.20Mn compared to the loss of Rs.203Mn in the

previous year.

The total assets of the company decreased to

Rs. 2,951Mn at end of FY 11/12, by 20%. The main

reason for the decrease was the disposal of the

subsidiary finance Company in May 2011 and funding

limitations faced by the Company.

During the year the Company added Margin Trading

as a new product line. Also pawning was introduced

to all the branches during the year. Further Company

obtained Authorised Money Exchange license to deal in

foreign currency in June 2012.

The Company credit rating of ‘BB+ (lka)’/stable National

Rating was reaffirmed by Fitch Rating in FY2011/12

indicating the financial standing of the Company.

Change in Company shareholdings among shareholders

took place in the year. The Lanka Orix Leasing Company

PLC and South Bridge Capital Investments (Sri Lanka)

Ltd. sold their stakes in the Company. Capital Trust

Holdings (Pvt) Ltd. is the new shareholder. We welcome

the new party and look forward to a new partnership.


Acknowledgements

In conclusion, I wish to thank Mr. Rajeeva Bandaranaike

CEO who resigned from the Company in May 2012 for

the services rendered to the Company for the past year.

Dr. C. Samarasinghe was appointed as the CEO of the

Company in May 2012. While congratulating him on his

appointment, I wish him all success in his role as CEO

of the Company.

During the year Mr. Kapila Jayawardena, Director

representing the LOLC, Mr. R. Johnston Director

representing South Bridge Capital Investments (Sri

Lanka) Ltd and Mr. M.P. Haradasa Alternate Director

resigned from the Board on selling their interests in the

Company. I wish to thank all of them for the contribution

and support extended to the Company. I also welcome

the new Directors Mr. Tushan Wickramasinghe, Mr.

G. Ramanan, Mr. Anil Weerasinghe, Mr.N.M.S.K

Rajapakse, Ms. Sita Amarasekara and Mr. Neville Peiris

to the Board.

I wish to thank the Chairman Mr. W Karunajeewa of

People’s Bank and our major shareholders People’s

Bank and People’s Leasing PLC for the continued

support. Further, I wish to thank all other Directors

for their support and contribution and I place my

appreciation to them. Furthermore, my appreciation

goes to the PMF team for their commitment. Finally I

wish to place my gratitude to our shareholders for the

support and trust placed in us.

P.A. Ajith Panditharatne

Chairman

29th August 2012

Chairman’s Statement Contd....


Chief Executive Officer's Review

As a means of overcoming the challenges encountered,

the company has taken appropriate strategic decisions

in timely manner to ensure smooth operations and

continuity.

Divestment of the subsidiary finance company

A strategic decision was taken during the year to divest

the subsidiary Company i.e. People’s Merchant Finance

Co. Ltd (Formerly Silvereen Finance Co. Ltd.) for a

value of Rs.430Mn, leading to reaping of capital gains

to the value of Rs. 137Mn. The divestment enabled the

company to record an after tax of Rs.20Mn, thereby

reversing the loss making trend, experienced over the

last two years, resulting from the acquisition of ABC

Credit Card Company Ltd. A sum of Rs.95Mn has been

set aside as provision against long term, non-performing

advances during the current year and as a result of this

provision the profits for the year under review has been

reduced to Rs.20Mn.

Rights Issue

In the financial year the Company faced borrowing

constraints as it reached the Central Bank imposed

maximum borrowing limit and the company was

compelled to restrict borrowings in order to comply with

regulatory restraints. This development precluded the

company from maximizing from the favourable market

conditions which prevailed in the financial sector and

achieve a growth. Under these circumstances the

lending portfolio of the company too was shrinking

leading to a decline in interest income as well as in the

balance sheet.

With a view to raising capital funds and strengthening

the shareholder fund base the Board of Directors took

an initiative to raise Rs.450Mn through a rights issue,

offering four ordinary shares for every five existing

ordinary shares, at a price of Rs.15/- per share. The

Company raised Rs.450Mn through the rights issue, in

The company has revamped its operations in all areas covering strategic direction, financial discipline, new products and services, focused marketing, and human resource development.


Chief Executive Officer's Review Contd....

November 2011. The funds raised through the rights

issue were used to meet CBSL liquid asset requirements,

settle short term borrowings and expand business

operations. Present increased equity position allows

the Company to expand business operations through

increased borrowings. The shareholders’ confidence in

the Company was evident from the success achieved

through the rights issue. The Company share price

declined from Rs.23.50 at beginning of the year to

Rs.12.90 at the end of FY2011/12. The rights issue in

November 2011 and the general decline in the stock

market continued during the year contributed to this

decline.

Operational results

Interest income of the Company decreased from

Rs.550Mn in FY2010/11 to Rs.465Mn in FY2011/12, a

decrease of 15%. This is due to the reduction in the

Balance sheet size over the year. However, the net

interest margins increased to 35% in FY2011/12 from

30% in the previous year due to savings in interest on

disposal proceeds, funds generated through the rights

issue and the low rates prevailed in the year. Also the

total income increased from Rs.587Mn to Rs.622Mn in

FY2011/12 as an outcome of the capital gains realized

from the disposal of the subsidiary finance Company.

Companies total assets decreased to Rs. 2,951Mn from

Rs. 3,705Mn at end of FY 10/11, a reduction of 20%.

The disposal of the subsidiary finance Company in May

2011 and lower credit approvals during the year are the

reasons for the drop.

The main income generating arms of People’s Merchant

Finance PLC are leasing and hire purchase. Jointly they

netted Rs. 494Mn as interest income, representing 90%

of the company’s interest income and accounted for

59% of the company’s assets, amounting to Rs. 1,757

Mn. These sectors continue to bring in good revenue

and profits to the company. Leasing & HP portfolio is

heavily entrenched in financing of vehicles and therefore

the associated risk is low.

Term Loans and Bill Discounting portfolio declined to

Rs.381Mn at the end of the year from Rs.454Mn at end of

previous year. Income from Trade Financing amounting

to Rs.32Mn accounted for 5 % of the total income of the

company. The quality of the Trade Finance portfolio has

been tainted by the presence of high volume of NPLs

this has adversely affected the overall profitability of

the Company. The Company had to make provisions

amounting to Rs.106Mn for the overdue non performing

trade finance facilities. However, every effort has been

taken to recover all those NPLs through litigation and

other means. An appointment at senior management

level and new batch of qualified officers have been

recruited to streamline and improve the appraisal

standards at the company.

New product lines

The company introduced Margin Trading (MT) facilities

in the last quarter of the year, assisting investors to

acquire shares at the Colombo Stock Exchange. MT

is a secured form of credit facility and associated risks

could be minimized through proper monitoring. The

MT portfolio reached Rs.38.8Mn within a period of few

months. Further, Pawning introduced in the last year

has now been extended to our entire branch network.

The related portfolio stands at Rs.41.4Mn. Introduction

of new products and services would be persisted with

as a strategy to enhance revenue and attain lesser

dependency on Leasing and Hire Purchase.

Asset quality

Due to the adverse experience the Company faced with

regard to trade finance facilities our Recovery Division

has been strengthened with an addition of a Deputy

General Manager and new recruitment. Follow up

and monitoring of defaulting clients has been revived,

following the changes at the Recovery Department.

Recovery department will concentrate and focus on all

out recovery efforts and sustain the momentum to reduce

NPAs and maintain the NPA portfolio at manageable

levels. The NPA’s over six months have been reduced to

12.5% from 17.3% at end of the previous year, following

the revival at Recovery Department.

Funding position

Leasing and Finance Companies are often faced

with mismatches in maturities of assets and liabilities


due to the industry wide practice of using short term

borrowed funds to meet long term loan commitments.

Lack of accessibility for long term funding too, added

to this development. The Treasury Division which was

established in the recent past is actively managing the

funding requirements of the company, giving priority

attention to establishing long term funding lines from

diversified sources and minimizing maturity mismatches.

Interest rate fluctuations in the market are subject

to close and constant monitoring in order to maintain

healthy net interest margins across all advances.

Future outlook

In May 2012, the company succeeded in obtaining

accreditation from Central Bank of Sri Lanka as a

licensed Finance Company and the new finance

company status allows the company to raise funds from

the general public. The company has now recovered

from the burden placed on it by the acquisition of

the credit card company and a platform is yet again

set for an aggressive growth period. On obtaining

Finance Company status, the Company introduced

Fixed Deposits and an aggressive advertising and

promotional campaign was launched to attract new

deposits. Following Fixed Deposits, savings accounts

too have been introduced thereby providing our clients

with wider choices for products and services. Plans are

in progress to provide value addition to our savings

clients by introducing ATM facilities.

The Company has obtained license from the Central

Bank to function as an Authorized Money Exchanger

and to operate SFIDA accounts. These new product

lines are expected to enhance the image of the

company in the market and contribute to profits in

the future. Following obtaining approval from Central

Bank an Islamic Finance Unit is also being set up and

it is expected to add to the revenue and profits of the

company in a significant manner.

Human Resource Management has been strengthened

and batch of competent and experienced professionals

have been recruited to the company with a view to

expanding business operations and adding depth to

the existing carder.

Chief Executive Officer's Review Contd....

The company has revamped its operations in all areas

covering strategic direction, financial discipline, new

products and services, focused marketing, and human

resource development. Combined effects of these

developments will positively impact the company and

its operations and lay the foundation for improved

performance in the ensuing financial year.

Acknowledgements

I place on record my sincere thank to our loyal customers

for the continued trust and confidence placed on us,

which enable us to lead the company in the path of

progress and growth.

I take this opportunity to thank the Chairman and the

Board of Directors for the stewardship and leadership

provided in guiding us through the company operations.

I also thank the members of the board level committees

for the valuable services rendered by them.

I deeply appreciate the Chairman, People’s Bank and

the People’s Bank group and other shareholders for

their continued support and contribution to the last

rights issue of the Company.

I thank each member of staff for the dedication support

extended and loyal commitment shown.

C Samarasinghe

Chief Executive Officer

29th August 2012


Board of Directors

Mr P A Ajith Panditharatne

Mr Panditharatne was appointed as Chairman with effect from 3rd June, 2010. He also serves as a Director of People's Bank, People's Leasing Property Development Ltd. and Consultant/Director (Special Projects) of the Globe/Monta Group of Companies.

He was the National Organizer of the Sri Lanka Commerce Student Foundation and as founder member played a dynamic role in establishing, managing and guiding it. Mr Panditharatne has served in a number of state sector institutions namely at the National Paper Corporation - as Working Director/Chairman, Lanka Cement Limited - as Working Director, Paranthan Chemical Corporation - as Chairman and Sri Lanka Export Development Board - as Executive Director.

Mr Ahamed Sabry Ibrahim

Mr Ibrahim was appointed as a Director in June 2009. He counts over 26 years of banking experience, locally as well as internationally, primarily in management and risk management. He holds an Honors Degree (B.Sc) from the University of Colombo and he is a Fellow of the Chartered Institute of Bankers- UK (FCIB).

He is the Senior Deputy General Manager (Risk Management) of People's Bank.

Mr Jehan P Amaratunga

Mr Amaratunga is an associate member of the Institute of Chartered Accountants of Sri Lanka. He was

awarded with a 'First in Order of Merit' Prize at the final level examination. Mr Amartunga was appointed

as a Director on 29th October 2010. He counts over 24 years of extensive experience in finance and

management and he has served as Consultant and Director at a large number of corporations and private

entities. He was a member of the Governing Council of the Institute of Chartered Accountants of Sri Lanka. He

is currently the CEO / Country Head of MTD Walkers PLC, Sri Lanka.

He also serves as a Director of People's Bank.


Board of Directors Contd....

Mr B.S. Yapa

B.A. (Ceylon), B.Com (Ceylon), FCA and FSCMAMr Yapa has been a Director since September 2004 and has over 30 years of experience in Accounting and Finance. He has received specialized training in Port Management, Finance & Planning at the University of Antwerp. Mr Yapa held the positions of Deputy Chief Finance Manager and Chief Internal Auditor at the Sri Lanka Ports Authority. He is also a former member of the Accounting Standards Committee, Auditing Standards Committee and Taxation Committee of ICASL.

Mr Govindasami Ramanan

Mr Ramanan is an experienced Corporate Finance professional counting over 18 years of experience in Insurance, Banking, Fund Management, Portfolio Management, Investment Banking and Corporate Finance. He presently serves as the Managing Director /CEO of Capital Trust Financial and Capital Trust Wealth Management. He served as Chief Executive Officer of HNB Securities, Head of Investment Banking of HNB and he was the founder/ Managing partner of Lepoard Capital Sri Lanka. Mr. Ramanan is a CFA holder, an Associate Member of the Chartered Institute of Management Accountants (UK) and he also holds a MBA from the University of Chicago - Booth School of Business. He has been selected as the "CIMA Manager of the Year" in 2007.

Mr Thushan Wickremasinghe

Mr Wickremasinghe is the Chairman of Capital Trust Holdings (Pvt) Ltd and the Managing Director of

Capital Trust Securities (Pvt) Ltd. He, having served at three stock broking companies in various responsible

positions and also as a Director at Lanka Orix Leasing Company Limited possesses extensive experience and expertise in finance and capital markets. He also heads

'Shakthi' Institute which is an educational Institute with over 10,000 students under its wings.

Mr Wickremasinghe's experiences span over 20 years in financial markets including Corporate Finance,

Wealth Management, Venture Capital, Money Broking and Stock Broking. He holds a MBA from Edith Cowen

University Australia and he is a certified Investment Advisor of the Colombo Stock Exchange.



Mr Anil Weerasinghe

Mr Weerasinghe is a Director of many companies including Silicon Valley Software solutions, JP Weerasinghe & Co. and J. P. Weerasinghe Beverages. He was formally a Director of People's Bank and he has also served as a Director of the Export Development Board and Lanka Cement. He also served as the Senior Deputy General Manager of Hyosung Corp Korea and he has overseas experience and exposure by having worked for Etacol in Hong Kong. Mr Weerasinghe brings with him a wealth of experience in business and banking.

Mr Weerasinghe holds a degree with second class honors in Textile Technology.

Mr Sarath Kumara Rajapakse

Mr Rajapakse was appointed as a Director in February 2012. He served as an Assistant Director General of

Sri Lanka Tea Board from December 1980 to February 1981 and he also served as the chief Executive

Officer / Director of Skills Lanka Limited from June 2000 to March 2005. Mr Rajapakse also has overseas experience by having worked as the president of GMI

Finance & Investment Co. Ltd., Hong Kong and the General Manager of Golden Brand Development Co.

Ltd., Hong Kong from 1991 -1992.

He currently holds directorship at Capital Trust Research Private Ltd, Capital Trust Information

Technologies Private Ltd, Capital Trust Credit Private Ltd and Capital Trust Markets Limited.

Mr Rajapakse holds Master of Economics (MEcon) Degree from University of Colombo (2011), Master of

Business (M.Bus) Degree in Financial Management and Economics, Curtin University of Technology, Perth, Western Australia (1990) and Bachelor of

Science (B.Sc) Degree in Chemistry, Botany & Zoology, University of Ceylon, Peradeniya (1972).

He is also a member of the British Institute of Management (MBIM), Fellow of the Institute of Training

and Development (FITD). He also holds Diploma in Marketing Management awarded by Sri Lanka Institute

of Marketing, a Certificate in Marketing awarded by National Institute of Business Management.



Mr Neville Chrysoston Peiris

Mr Peiris was appointed as an independent, non-executive director with effect from 20th August 2012. He is a fellow member of the Institute of Chartered Accountants (FCA) and he has at his disposal years of experience and expertise in business and finance which he has amassed by working exclusively in private sector organizations, local as well as international.

Presently he serves as an independent director at the Boards of Namunukula Plantations and Humter & Co, PLC. Mr Peiris’ experience and expertise in business and finance spans over a period of forty years during which he held responsible positions such as Chief Internal Auditor, Chief Accountant, Financial Director & Company Secretary, Regional Financial Controller and Group Finance Director at leading companies both in Sri Lanka and abroad.

Mr Peirs has added to his experience and expertise through his exposure to different cultures by working abroad in countries such as USA and Zambia.

Mrs. Sita Vinothini Amarasekera

Mrs. Amarasekera was appointed as an independent, non-executive director with effect from 20th August

2012. She is an Attorney of Law, Notary Public, Commissioner of Oaths & a Registered Company

Secretary. She has excelled in her profession as a lawyer and presently is partner of Varners (Firm of

Lawyers)

She has gathered a wealth of experience and expertise by working in leading organization in both private and state sector holding various responsibilities,

commencing from year 1969 with Cragills Ceylon Ltd she progressed to become the Head of HR, Legal &

Company Secretarial Matters.

Mrs Amarasekera has held the position of a Partner at F J G & G Seram (Attorneys at Law); served the

Ministry of Finance in the capacity of legal Consultant and contributed in good measure for the formation of

the Independent Public Debt Management Office. She also had a stint in UK, working at leading firms - Price

& Price Solicitors & Leads Permanent Bldg Society.


Business Review

Overview

Sri Lanka economy grew by 8.3% in 2011compared to

8% in 2010, sustaining a growth momentum in excess

of 8% over the two consecutive years. The positive

conditions of peace after the end of war, favorable

macroeconomic conditions, increased capacity

utilization and more infrastructure facilities supported

this growth.

The business entities continued to expand operations to

North and East by setting up branches due to renewed

economic activities in the regions. The Company added

a new product line - margin trading during the year.

The Company also expanded pawning “PMB Ran

Naya” product line introduced in the previous year to

the entire branch network. However, Company was

more focused on consolidating the operations to control

the adverse effects of acquisition of ABC Credit Card

Company Ltd. business in March 2009 and controlling

the non performing advances. In this regard one of the

major assets received when acquiring the credit card

Company – subsidiary Company People’s Merchant

Finance Company Ltd. (Formerly Silvereen Finance

Company Ltd.) was disposed in May 2011 at a price of

Rs.430Mn generating a profit of Rs.137Mn.

The Company interest revenue declined during the

financial year. The reduction in the loan advances

attributed to the low revenue for the year. The Company

borrowing limits reached high levels during the year

and prevented expansion of the loan book. Also with

the Central Bank of Sri Lanka (CBSL) introducing

new statutory liquid asset requirements for leasing

companies during the financial year, funds were utilized

to build up reserves for this purpose which otherwise

would be channeled for lending purposes. The impact

on acquisition of credit card operations continued to

have negative effects due to the main asset – property

not generating cash flows / returns to the Company

and capital being tied up in financing this asset. The

Company raised funds amounting to Rs.450Mn through

a rights issue in November 2011 to meet CBSL liquid

asset requirements and increase core capital for

business expansion.

In order to expand business operations the Company

sought license under the Finance Business Act from the

CBSL and the finance Company license was granted to

the Company in April 2012 which allows the Company

to access public deposits. The Company changed its

name to People’s Merchant Finance PLC (PMF) from

May 2012 to comply with the CBSL requirements.

Leasing & Hire Purchase

Leasing and Hire Purchase business continue to be

the main income and profit producer to the company.

The last financial year saw a reduction in the portfolio

due to limitations faced by the Company when reached

the maximum levels of borrowings as per the CBSL

guide lines, the Company curtailed lending in order to

comply with the regulatory requirements. As a result the

total amount of leasing & hire purchase disbursements

reduced to Rs.565Mn, numbering 741 approvals

compared to Rs.1.5B, numbering 1,642 approvals in

the previous year. The income generated from Lease

and Hire Purchase business amounts to Rs.434Mn.

PMF Leasing is well known for its excellent service

and most of our business is through word of mouth

recommendations. We remain confident that our

speedy and efficient service levels and caring attitudes

will continue to be the strengths in our marketing efforts.

As we concentrate on serving the SME and middle

market clientele, we purchased three wheelers in bulk

form and granted lease facilities to release them in the

office premises. This produced results where we were

able to lease 211 numbers of three wheelers through

our branch offices. Further, we promoted and leased

Massey Ferguson tractors to the farmer community

and arranged structured rentals to suit their seasonal

income.

The branch network serving the outstations is utilized

to the maximum to market activities of the company to

gain success. These activities are possible mainly due

to the team spirit and commitment of the staff.

The main income source of PMF continues to be

leasing and hire purchase. It accounts for 90% of

the interest income of the Company. Our present


Business Review Contd....

leasing and hire purchase portfolio decreased by

21% to Rs.1,757Mn from Rs. 2,244Mn as at end of

last financial year due to reduced lending. However,

lease and hire purchase portfolios account for a major

portion of the assets of the company.

Net specific provisions for bad and doubtful debts of

leasing & Hire Purchase was a reversal of Rs.11.2Mn

during the year, compared to the provision of

Rs.33.7Mn in previous year. This is due to the results of

recovery efforts made by the Company during the year.

Though, the portfolio reduced compared to the previous

year, we have reduced our NPL’s to a lower level of

3.5% (over 6 months) at the end of the financial year.

Leasing and hire purchase operations contributed

a profit level of Rs.73Mn towards profit before tax, compared to Rs.25Mn contribution in last year.

Former CEO Mr. Rajeeva Bandaranaike handing over tractor key to a leasing client

TRADE FINANCE

Trade Finance services include Bill discounting facilities, short and medium term loans, pawning, margin trading and issue of letters of Undertakings/Guarantees. The services are channeled through the head office and branch network.

The Company received license to function as a margin trading provider during January 2012 which facilitate customers to purchase shares in the Colombo Stock Exchange. This was initially started with the prominent stock brokering arm of Capital Trust Group. The portfolio is steadily increasing from the commencement. During the present financial year we serviced 31 margin trading customers. The total outstanding portfolio stood at Rs.38.8Mn at the year end, which was developed during the period January to March 2012. Margin trading contributed a gross interest income of Rs.2.2Mn. The client database keeps



been strengthened with well experienced and qualified personnel during the final quarter of current financial year. The benefits of the recruitments will be reaped through the following financial years and the outlook is much stronger in providing a better and a competitive service. Corporate Finance & Capital Markets

The All Share Price Index (ASPI) and the Milanka Price Index (MPI), decreased by 9% and 26% respectively in 2011 following upsurges in the previous two years resulting in a market correction. The indices started declining during the year after reaching high peaks in February, due to restrictions on availability of credit, continued net foreign outflows and liquidity drain as a result of Initial Public Offerings (IPO) and rights issues. The market price earnings ratio also declined to 15.8 at end of the year from a high of 25.2 in 2010. During the year Rs.47Bn was raised through 13 IPOs and 22 rights issues. The market capitalization remained at Rs.2.2Trillion at end of the year.

The capital market activities also felt the adverse conditions in the market. The loss on sale of shares during the year amounted Rs.2.8Mn compared to the profit of Rs.8.1Mn recorded in FY 2010/11 from it's stock portfolio. Also a provision of Rs.0.6Mn was made for decline in the dealing portfolio (FY2010/11 Rs.1.1Mn). The sector recorded loss of Rs.10.2Mn for the year.

The investment banking operations are under close review and the division is under reorganization to penetrate into investment banking arena.

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

1,000

0

2,0003,000

4,000

5,000

6,000

7,000

8,000

9,000

MPI ASPI

Performance of ASPI and MPI during the year 2011

growing along with the total outstanding. Further, pawning which was commenced in the last financial year also showed a promising growth in the branches where pawning facilities were made available.

Also a new appointment at Senior Management level was made to the recovery division that was set up last year to reorganize and bring in new recovery measures to closely monitor all non performing facilities. The division is taking various appropriate measures to improve the collection of arrears by providing concessions, rescheduling and in some cases liquidating collateral obtained as security in consultation with the client. The company also obtains the services of professional debt recovery companies for recovery of long outstanding facilities.

Due to the undesirable performance of loan portfolio and the Company liquidity situation, loan approvals during the year were restricted. The total term loans numbering 80 facilities amounting to Rs.133Mn were only approved in the year.

The total loans and advances reduced by Rs.77Mn to Rs.349Mn at the end of the year from Rs.426Mn at end of previous year. Trade bills portfolio marginally increased to Rs.32Mn from Rs.28Mn at end of previous year. Trade finance income of Rs.32Mn accounted for 5 % of the total income of the company compared to previous year income of Rs.42Mn. This is due to reduction in portfolio, reduced interest on advances, provisions and suspension of interest income on overdue facilities.

Specific provisions for Trade Finance loans and bills for the year amounted to Rs.104Mn compared to the amount of Rs.12Mn in the previous year. The increase is mostly due to some of long overdue loan facilities turning in to arrears category requiring additional provisions.

Trade Finance operations incurred a loss before tax of Rs.137Mn in the year, compared to the loss of Rs.39Mn in last year.

The Trade finance and Corporate finance Departments now work as a combined department servicing both business segments under a Deputy General Manager Corporate and Trade Finance. The Department has



Real Estate

Real Estate sector undertakes land development and sale of land, development of land with construction of houses thereon and owner behalf sale properties.'Resilient" is the word that almost everyone is using to describe Sri Lanka's housing market - and its economy in general. Specialists say sales have slowed in the last year, but there continues to be widespread optimism that real estate on this island of 65,740 square kilometers, or 25,380 square miles, will be a good investment in the middle to long range.

The real estate market in Sri Lanka can be distinguished into several categories. The high value segment of this market consists of the luxury apartment and condominium sector

Another important category of the market is the middle-income segment that is also increasingly dominated by property developers who sell ready-built houses and plots of land. This segment is dependent on interest rates and the domestic economy and several other

Entrance to "Green Meadow" project Malabe

key factors including demographic trends. Cultural

and societal trends that are leading to wider home

ownership in Sri Lanka, especially amongst young

newly married couples who are increasingly looking

to own their own home as compared with the option of

living with their parents is also driving the market.

Another force in the land and property market is the

leisure property segment that is mainly driven by

foreign interest. This market is directly connected to the

tourism trade which is now set to fulfill its true potential

after a long period of under-achievement.

FY2011/12 was a complex year with challenges and

uncertainties, but also a year of opportunities for the

real estate industry On account of these changes in the

market, the company decided to focus mainly on land

development and sale only for the present and not to

engage in large and medium scale housing projects till the market become conducive. Despite all these facts our real estate division managed to contribute an income of Rs.9.2Mn for the year in review.



Chairman Mr. Ajith Panditharatne and former CEO along with real estate Staff and clients at project launch

amongst existing and potential customers, through carefully targeted marketing and sales strategies. The division will continue its strategy of selective expansion and provide more value to customers.

The division ended up with a loss of Rs.8.1Mn compared to the Rs.27Mn loss in the previous year. Interest costs and other overhead costs as well as taking more time to complete projects resulted in a loss for the division. Further, our policy of charging all interest to income without capitalizing interest on real estate projects has a direct impact on profitability.

Project “Summer Side Garden” in Athurugiriya continued throughout the year. The Company embarked on a new project during the year, “Green Meadow” Malabe and completed successfully. The carefully identified strategic locations and marketing concepts of the projects were harmonized well with our brand positioning of convenience, privacy class and exclusive living conditions. The real estate stock increased to Rs.68Mn at end of FY11/12 from Rs.58Mn at end of previous year.

The government is placing increased emphasis on carrying out large infrastructure projects, which will not only improve communications in established areas, but also unlock the hidden potential of other locations. We look forward to enhance our position further, both in terms of brand awareness and profitability. Awareness of the brand, “PMF Real Estate” will be enhanced



Branch Location

1. Kurunegala2. Matara3. Matugama4. Gampaha5. Avisawella6. Elpitiya7. Kandy8. Negombo9. Trincomalee10. Anuradhapura

Head office income Branch income

2012

Rs. 271 MnRs. 351 Mn

2011

Rs. 400 Mn

Rs. 186 Mn

Head office and Combined Branch Income

Branch profitability

The Profit before tax contribution from all branches amounted to Rs. 46Mn compared to Rs. 61Mn in the previous year. Except for four branches all the branches operated profitably in the year.

Branch Operations

Branches are equipped to handle Leasing, Hire Purchase, Term loans, Pawning, Guarantees and Deposits. All branches are connected with the Head Office through an IPVPN network and transactions are updated on line.

New branches were not opened during the year with the company intention on consolidating existing branch network as well as due to reaching maximum borrowing levels as per operating guidelines. However, pawning facilities were extended to the entire branch network by establishing units at Kandy, Avissawella, Negombo, Gampaha and Elpitiya to provide customers an excellent service in their financial needs.



Human Resources

IntroductionThe Human Resource policies and practices of the Company are in par with the industry and instill excellence to ensure their optimum contribution in achieving Company objectives.

At PMF, we create a pleasant work environment for employees to learn, develop, progress and perform to the best of their qualifications and skill levels. Opportunities are provided for job enlargement and job enrichments in various fields of finance business operations and apply concepts learned in various fields. This is achieved through training, job rotation, recognizing and rewarding good performance.

Recruitment and retentionSelecting suitable people for the company is a very vital area. The Company advertises through print and other media for vacancies. Selection of employees is done through an interview panel consisting CEO and Senior Managers. Minimum requirements have been stipulated for various job categories at different levels

of the Company. We have been able to select good talent in a competitive business environment. It has been the practice of the Company to recruit employees for junior positions and provide opportunities for existing staff for advancement wherever possible.

Retaining people in a competitive economic growth situation is a challenge. Despite low profitability recorded by the Company, reasonable salary increments were given to the employees to compensate for increased inflation that prevailed in the last year. Further, the employees continued to enjoy other benefits such as medical insurance, leave encashment, concessionary lease facilities, etc. The employees who have performed above the expected levels were promoted to higher grades and positions.

Performance ManagementAn updated performance management appraisal system was introduced in the previous financial year. Key Performance Indicators (KPI) was developed for each division. These indicators were used to measure employee performance as well as divisional performance in the last year. The employee rewards are now based on this system.

Employees of PMF PLC enthusiastically participating in a Staff Development Training Programme



Internal Training

During the period under review the company carried out the following in house training programmes for its staff with the intention of enhancing their productivity and building team spirit. The training programmes were carried out by trainers who are professionals in their respective fields

Serial

No.

Name of the Training No. of

Participants

1 Outbound Training –

Generative teams session

120

2 Credit Analysis & Recovery 36

3 Fixed Deposits Training 64

4 Business Development Plans 154

5 Savings Accounts 21

6 Pawning 40

Training and DevelopmentThe Company continuous developing employee efficiency and effectiveness based on a good primary qualification, knowledge and experience. The HR division carried out a number of new training programmes during the year. Professional training specialists in various fields were invited to conduct trainings sessions. The internal training programmes are conducted at the Company Training Centre at the head office. Specialised training in various technical areas were provided by nominating employees to programmes conducted by outside institutions such as Central Bank of Sri Lanka, IBSL, other Professional bodies, etc.

Training strategy is intended to cover soft and technical skills across all functions of the organization. Some programmes focused on developing management, leadership, communication skills and customer relationship. These have helped employees to perform better to achieve business aspirations as a team. Further, all staff members are encouraged to accept/perform various job functions through job rotation within their divisions and other divisions. This facilitates employees to have a wider area of job knowledge and also to cover up for various functions if the need arises.

“Puzzle Time” at PMF outbound training

The necessary support is provided by the Managers and other senior staff.

Training sponsored by the Human Resources Department during the year 2011/2012


External Training

Further, employees in the managerial grades as well as executive grades were nominated for training programmes relating to their respective work areas with a view for developing their skills.

Name of the Training No. of

Participants

1 Effective Credit Appraisal & Credit

Risk Management

03

2 Treasury Operations and Asset &

Liability Management

02

3 Customer Relationship

Management

02

4 EPF/ETF & Good Employer

Employee Relationship

01

5 Workshop on ‘How to conduct a

disciplinary Inquiry’

01

6 ‘Be Your Best’ 45

7 Capital Planning and Risk

Management

04

8 Credit Evaluation 02

0

2,000

'07

Rs.

'08 '09 '10 '11 '12

4,000

6,000

8,000

10,000

12,000

Training and development expenditure

Expenses per empoloyee



Service Analysis of the staff as at March 31

Servic Group(years)

Senior Managers

& Managers

Asst Managers

Executives Non Executive

SupportStaff

2011/12Total

2010/11Total

16-20 - 2 2 - 2 06 05

11-15 3 2 - - 1 06 06

6-10 2 2 2 - - 06 12

5 & below 10 9 35 50 2 106 100

Total 15 15 39 50 5 124 123

Average service of the employees as at March 31,2012 was 3.5 years ( FY 10/11 3.8 Years)

Age Analysis of the Staff as at March 31

Age Group(years)

Senior Managers

& Managers

Asst Managers

Executives Non Executive

SupportStaff

2011/12Total

2010/11Total

51-60 2 - - 5 2 09 07

41-50 7 3 6 2 - 18 15

31-40 6 11 19 5 2 43 51

21-30 - 1 14 38 1 54 50

Total 15 15 39 50 5 124 123

Average age of the employees as at March 31,2012 was 34 years ( FY 10/11 34 Years)

Age Analysis of staff (years)2011/12

Service Analysis of staff (years)2011/12



the system application functionalities to execute the business operations effectively and fulfill the information need of management. Many user trainings were conducted to improve user knowledge and skills on systems applications.

Hardware and Network infrastructure

All executive employees are allocated with a dedicated computer to perform their duties. All computer users are interconnected including the branch users through a secured network connection. All information and business applications have been implemented in the centralized secured Data Center and shared according to access levels of the users. During the last financial year the Desktop Computer Backup system was introduced in view of ensuring the availability of computer users’ data and information. This system helps to recover any document or email of users’ in a critical incident of the Desktop computers.

People’s Merchant Finance PLC continued focusing on research and development to find cost effective solutions. Many new projects have been already planned to executing for the next financial year in view of improving the performance of IT infrastructure and especially on the security of information.

Information Technology

Information is the major asset in the business world especially in the financial industry today. The People’s Merchant Finance PLC has been continuing maintaining effective and efficient information environment with the new expansion of the company. Last financial year many new procedures and guidelines were introduced in view of improving the information technology related services as a service department. And also many new measurements were introduced to monitor and control the level of service of information technology in order to improve the same.

Business applications and SoftwareThe company focused in improving its business applications to improve performance of business and administrative entities of the company. Newly introduced Human Resources Management System improved the performance and service levels of Human Resources Division. This application facilitates executing the HR functions from attendance to employee evaluations. We believe that the company should have a lawful environment to play in the business world. Company insists on legalized software and in view of cost reduction pays more attention towards the Free and open source software. The Company has been continuing improving


Server Room packed with state of the art technology


Corporate Social Responsibility (CSR)

The Company is committed to meeting its obligations towards the nation and community where the Company branches are in operation. The total funds committed for donations amounted to Rs. 3,262,970/-. Some of the activities conducted during the year are given below.

Nawam Maha Perahara

The Colombo Nawam Maha Perahera is one of the most important religious and cultural events in Sri Lanka. The Perehara revives the ancient forms drawing dancing troupes from all parts of the country and providing an occasion to display their prowess. The beneficiaries of events such as these are the traditional Dance Troupes, who now enjoy a revival of interest in their dance and forms of entertainment. Company contribution has a direct relevance to the preservation of our ancient Cultural Heritage.

National Vesak Festival

Vesak is considered as both a religious and cultural festival in Sri Lanka. National Vesak festival is held yearly. We have made a contribution towards preserving this traditional religious festival

Commonwealth games Hambantota 2018.

A contribution was made towards Sri Lanka’s bid for commonwealth games which would have been a boost for the development of sports to higher levels among youth in the country.

Charity for terminally ill children

A contribution was made for this charity which provides terminally ill children and their families with comprehensive financial and emotional support.

Group Business review

The Company has one subsidiary Company PMB Services Ltd. as at end of the financial year. The

other subsidiary Company People’s Merchant Finance Company Ltd. (Formally Silvereen Finance Company Ltd.) was disposed in May 2011 at a price of Rs.430Mn. The profit on this transaction amounted to137Mn. This was affected to induce cash inflows to the Company as these subsidiary investments were funded through debt financing which results in high interest costs.

PMB Services Ltd. (Formerly PMB Financial Services Ltd. and PMB Credit Card Company Ltd.)

This is a 100% owned subsidiary of People’s Merchant Finance PLC. The Company was set up in March 2009 to take over selected assets and liabilities of ABC Credit Card Company Ltd. The Company was not able to meet the regulatory requirements for credit card operations of the Central Bank and the board decided to discontinue credit card operations in the previous year. Thereafter, the name of the Company was changed to PMB Financial Services Ltd in FY2010/11. The name was once more renamed as PMB Services Ltd to be in line with the Finance Business Act No.42 of 2011.

We wish to reiterate that the security deposit liabilities amounting to over Rs.700Mn have been settled along with interest to the customers or transferred to the parent Company where pro notes were issued for funds borrowed. This is our share of support towards the stability of the financial sector. This was done only at a high cost to the parent Company.

At present the Company continues to collect long outstanding overdue amounts due from credit card holders. The services of third party persons are obtained for collections. The Company incurred a loss of Rs.5.7Mn for the year.


PMF’s CSR extended to add beauty to Vesak Celebrations at Nawam Mawatha


Financial Review

Overview

The financial year 2011/12 was a testing year to People’s Merchant Finance PLC (PMF), as it reached close to the maximum level of borrowings as per the Central Bank (CBSL) directions. Also a new direction was introduced by the CBSL with regard to maintaining liquid assets amounting to 5% of the liabilities. This aggravated the funding situation as it required allocating funds to build up a liquid asset base. The maximum limit prevented us from building up reserve funds as well as raising funds for meeting expanding credit, to meet debt maturities and also arranging obligations of the security deposit holders of the subsidiary Company PMB Services Ltd. (PMBS) which was set up in March 2009.

The other subsidiary Company People’s Merchant Finance Ltd. (Formerly Silvereen Finance Company Ltd.) was disposed in May 2011 at a price of Rs.430Mn, settlement being made in two tranches, initial payment on signing the agreement and the balance in September 2011. This disposal generated a net profit of Rs.137Mn. This eased the cash flows of the company to a certain extent and allowed limited lending catering to the huge demand that prevailed during the year. Since due to low business volumes generated the portfolio continued to decline and the Company was not able to generate operating profits. In order to overcome the situation the Board of Directors decided to raise funds through a rights issue. The Company raised Rs.450Mn through the rights issue in November 2011 to meet CBSL liquid asset requirements, meeting maturities and for lending activities.

The non performing advances gradually reduced during the year. However, the improvement was not up to expectation, which resulted in requiring to make more provisions and not being able to recognize income due to transfer of interest income in to suspense accounts.

Due to these reasons the Company was only able to make a profit before tax of Rs. 33.7Mn for the year compared to the loss of Rs.214Mn in the previous year.

The details of the operations are elaborated below:

Income & Profitability

IncomeGross Income of the bank increased to Rs.622Mn in FY11/12 from Rs.587Mn in FY10/11, a modest growth of 6%. This is mainly due to the capital gains generated from the sale of the subsidiary finance company.

Interest income decreased from Rs.550Mn to Rs.465Mn in FY 10/11, a reduction of 15%. The interest expenses also reduced from Rs.384Mn to Rs.301Mn in FY11/12. The interest income decrease was due to reduction in the Company lending portfolio. During the year, income from Finance leases, Hire Purchase and loan interest income decreased while new product line pawning interest grew to Rs.3.7Mn from Rs.0.3Mn in the previous year. Also income from margin trading introduced in the year recorded an income of Rs.2.2Mn. Leasing and Hire Purchase income accounted for more than 90% of the company interest income.

Other income increased to Rs.157Mn from Rs.37Mn in the previous year. The main reason is net income realized from the disposal of the subsidiary finance company amounting to Rs.137Mn. The income from stock portfolio recorded a loss of Rs.2.8Mn compared to a profit of Rs.8.1Mn in the previous year due to decline in the market.

The net interest spread for the year increased to 35% compared to previous year spread of 30% as a result of low rates prevailed in the year as well as interest savings made during the last quarter through the rights issue. The total net income increased by 58 % to Rs.321Mn from Rs.203Mn in FY 10/11. This is

Yearly interest margin

0

10

20

30

40

50

60

‘12‘11‘10‘09‘08


Financial Review Contd....

as a result of income generated through sale of the subsidiary company.

ExpensesTotal operating expenses decreased from Rs.418Mn in FY10/11 to Rs.287Mn in FY11/12, a decrease of 31% amounting to Rs.131Mn. The FY2010/11 high figure is due to absorbing total losses arising from the subsidiary Company PMB Services Ltd. (PMBS).

However, further provisions for bad and doubtful debts were made during the year amounting to Rs.94Mn an increase of Rs.44Mn over previous year charge of Rs.50Mn. A provision of Rs.0.6Mn was made during the year for the dealing portfolio against Rs.1.1Mn in the previous year.

Other operating expenses increased by 7% to Rs.195Mn in FY2011/12 from Rs.181Mn in FY 2010/11. The personnel expenses increased to Rs.84Mn in FY2011/12 from Rs.64Mn in FY 2010/11, an increase of 32%. The staff strength increased to 124 at end of FY 11/12 from 123 at end FY 2010/11 as more staff was recruited due to reorganization, creation of new divisions and new product lines for business expansions.

The balance expenses consisting establishment and other overhead expenses have decreased to Rs.107Mn in FY2011/12 from Rs.117Mn in FY2010/11 as the previous year expenses included new branch setting up expenses.

During the year although overall NPL improved, the company made a net provision for bad & doubtful debts amounting to Rs.94Mn for long overdue facilities. This compares adversely with the provisions amount made in FY 10/11 of Rs.50Mn, which is an increase of 82%. The quality of companies lease and hire purchase portfolios are similar with the leasing sector industry. The high non performing facilities are mainly due to adverse situation in term loan facilities. The Company has strengthened the recovery department by appointing a person at a senior level to the team monitoring the recovery of all non performing facilities. Total receivables are separated into different categories depending on the recoverability position and appropriate strategies are put in place for recovery by next financial year. The Company is presently very focused for recovery and control of high non performing advances. This financial year saw a reduction in NPL’s towards industry levels.

ProfitsThe Company recorded a profit before tax of Rs.33.7Mn compared to the loss of Rs.215.3Mn in FY10/11. This is after a period of two consecutive years of losses. The profit is mainly due to the income generated from the sale of subsidiary finance Company. The business operations did not generate a profit due to additional provisions made in respect of long overdue non performing loans. The Company incurs additional non operational interest expenses due to financing the property owned by the Company amounting to Rs.470Mn through borrowings. Also high NPL on loan facilities do not generate desired interest

Composition of the expenses

Yearly provisions made



income on loans. The tax charge for the year amounted Rs.13.5Mn consisting charge for the year, prior year under provision and deferred tax provision. There was a reversal of Income tax charge in the previous year amounting to Rs.12.8Mn due to reversal of provision required for deferred taxation. The profit after tax for FY2011/12 amounted to Rs. 20.1Mn compared to the loss after tax of Rs.202.5Mn in FY 10/11.

AssetsThe total assets of the company decreased by Rs.755Mn (20%) to Rs. 2,951Mn from Rs.3,705Mn at end of FY 10/11. The main reason for the decrease was the disposal of the subsidiary finance Company in May 2011. Also due to funding limitations faced by the Company the finance lease portfolio decreased by Rs.74Mn (8%) to Rs.916Mn at end of FY 11/12 from Rs.990Mn at previous year end and hire purchase portfolio decreased by Rs.412Mn (33%) to Rs.841Mn from Rs.1,253Mn at previous year end. The leasing and hire purchase advances amounted to Rs.1,757Mn and account for 59% of the total assets of the Company. The bill discounting portfolio marginally increased to Rs.32Mn from Rs.28Mn at end of FY10/11. The term loans and advances portfolio reduced to Rs.349Mn at end of the year from Rs.425Mn at end of previous year. The newly introduced pawning and margin trading portfolios amounted to Rs.41.4Mn and Rs.38.8Mn respectively.

BorrowingsBorrowings from banks and corporate entities and individuals decreased to Rs.1,891Mn at end of FY 10/11 from Rs.3,067Mn as at end of previous year, a decrease of Rs.1,175Mn (38%). The total borrowings were at a high of 6.5 times the equity of the company as at the beginning of the year. This was close to the Central Bank upper limit of 7 times. The reason for increase in multiple is due to high losses incurred by the Company in the previous year due to charging all dues in respect of the subsidiary Company PMB Services Ltd. The total equity of the Company was at Rs.471Mn at beginning of the financial year. In order to overcome the tight situation the subsidiary finance Company was disposed for Rs.430Mn in May 2011 generating a profit of Rs.137Mn to improve the equity position of the Company as well as cash flows.

Rights issueThe company made a rights issue of 4 for every 5 existing shares and raised Rs.450Mn in November 2011. This is was done to further strengthen the equity of the Company and to meet liquid asset requirements introduced by the Central Bank of Sri Lanka in the last financial year for registered leasing Companies. This eased the cash flows of the Company to some extent as we experienced a withdrawal of institutional investment placed with the Company due to those institutions undertaking more direct lending activities as a result of industry growth experienced during the financial year. The Company maturity analysis shows a period mismatch with regard to assets and liabilities. This is mainly due to utilizing short term borrowings for lending and investment purposes. The company rectified this matter through funds raised from disposing the subsidiary finance company and the rights issue.

Profit before provisions

Lease and HP portfolio at the end of financial year



Provision for loan losses & Non - Performing Loans (NPL’S)The Companies Non-Performing advances decreased by 50% to Rs.348Mn at end of FY 11/12 from Rs.668Mn at end of FY 10/11. The Company was able to bring down the non performing advances through recovery of a major portion of the arrears especially on leases and loans. Also write off of long outstanding non performing advances amounting to Rs.170Mn was the other reason for the reduction in value.

The Company policy on provisions commence when advances reach arrears of 3 months. The requirment to make provisions commence after 6 months as stipulated by the Central Bank. The Company NPL’s over 6 months reduced to 12.5% at end of the year (FY 10/11 17.3%).

The specific provisions made at the year-end amounts Rs.84.2Mn compared with Rs.160Mn at end of the previous year, which is a reduction 71.2Mn (47%). Specific provisions for NPL’s remained at 24% at year-end, same as at previous year end. Further, General Provisions at financial year-end amount to Rs.5Mn.

Group financial review

PMB Services Ltd. (PMBS)The Company was set up in March 2009 to take over selected assets and liabilities of ABC Credit Card Company Ltd. The Company did not carry out credit card operations due to not being able to register the business under the new credit card legislation.

OperationsThis Company had security deposits which originated from the acquired Company. Since the Company did not have approval from the Central Bank of Sri Lanka (“CBSL”) for such business, the Board decided to cease that part of the business of the Company in FY2010/11. The Company operations are carried out only for the purpose of collection of long overdue credit card receivables.

LossesThe loss for the year amounted to Rs.5.7Mn compared to the loss of Rs.51.9Mn in the previous year. The main reason for the loss is the impairment of all assets which have no carrying value. Presently the main focus of the business is collection of outstanding credit card receivables. During FY 2011/12 the Company collected Rs.3.1Mn from customers on account of credit card outstanding - comprising credit used, interest and other charges. In FY 2010/11 the Company was able to collect Rs.22Mn. As these are long outstanding credit, the Company has made full provisions in financial statements for all receivables and all future collections could be recognized as income in financial statements.

Balance SheetTotal assets of the Company are now only Rs.0.3Mn at end of FY 2011/12 form Rs.10Mn. at end of FY 2010/11. This is due to impairment of all assets with no carrying value. The cumulative loss as at end of the year was Rs.200Mn and the equity of Rs.175Mn is fully eroded. The total equity as at 31st March 2012 is a negative figure of Rs.25Mn.

Borrowings at the end of the financial year


Corporate Governance

Corporate Governance is the system by which a company is directed and controlled and which influences the manner in which the objectives of the company are formulated, communicated and achieved. The Corporate Governance principles focus on sustaining long term shareholder value and they are mainly concerned with the way in which authority is exercised by the management in directing the affairs of the company and with the supervision of executive actions in order to ensure accountability to owners and other stakeholders. The Board of Directors hold responsibility for maintaining corporate governance within the company by developing appropriate rules, structures, processes etc. in order to ensure integrity and transparency in all transactions, at all times and thereby enhancing the company’s accountability towards its stakeholders and the general public.

Corporate Governance at People’s Merchant Finance PLC

This section herein portrays manner in which People's Merchant Finance PLC (''PMF'') applied Corporate Governance Practices through its policies, processes and procedures during the year under review.

On obtaining finance company license under the Finance Business Act No.42 of 2011, PMF has given additional prominence for conforming to the best Corporate Governance practices and procedures, which are set out therein. The Board of Directors of the company complies with the best and stricter Corporate

Governance practices adopted by the finance industry, as stipulated under the Finance Leasing (Corporate Governance) Direction No.04 of 2009 issued to finance leasing companies by the Central Bank of Sri Lanka (“CBSL”). Along with the addition of finance related business, PMF placed much emphasis in conforming to regulatory and industry wide requirements with regard to Corporate Governance and managed this transition smoothly adjusting itself to the emerging implications in the most cost effective manner. PMF is currently engaged in the process of complying with the Finance Companies (Corporate Governance) Direction No.3 of 2008, which applies to every finance company in the country.

PMF takes all initiatives to carry out its operations in a socially and ethically acceptable manner, giving priority consideration to the interest of all stakeholders. PMF considers Corporate Governance as an essential tool to achieve desired objectives through effective market operations and creation of wealth for the shareholders. The Board of Directors of the company provides corporate leadership and guides the company towards performance excellence through timely direction and instructions on vision, mission, policies and strategies. PMF gives priority attention to conforming to Corporate Governance requirements issued by the Central Bank of Sri Lanka and other regulatory institutions.

Following (Table 1.1) are the Corporate Governance measures and the appropriate compliance initiatives taken by the company in order to comply with the aforesaid Directions issued by the CBSL.

Corporate Governance rule People's Merchant Finance PLC’s Compliance Towards the Rule

01. Board of Directors

- Composition A single Board is properly constituted of Executive and Non Executive Directors (NED). 04 out of 10 NEDs are independent

- Functions Segregation of functions of Chairman and CEO

- Disclosure in the annual report

Brief resumes of each director are given on pages 10 to 13 of the Annual Report.

02. Audit Committee

- Composition Consist of 03 NEDs as at 31st March 2012

- Functions Audit functions are stipulated by the Board


Functions disclosed under "Audit Committee"


Corporate Governance Contd....

The Board of Directors

A single Board is properly constituted of executive and non-executive directors providing guidance and leadership for the company and collectively responsible for the effective business performance and continuation of the Company. Board provides entrepreneurial leadership, direct and controls the operations of the company within a prudent and effective internal control framework with continuous monitoring and feedback communication system. The Board consists of Chairman and nine directors who are all non-executive directors. The composition of the Board and the directorship changes as at 29th August 2012 are demonstrated as follows in table 1.2.

03. Remuneration Committee


- Functions Committee functions are stipulated by the Board


Functions disclosed under "Remuneration Committee"

04. Integrated Risk Management Committee


- Functions Committee functions are stipulated by the Board


Functions disclosed under "Integrated Risk Management Committee"

05. Rights of shareholders Board effectively communicate with share holders

Table 1.1 Corporate Governance rules practiced by the company and its compliances

Table 1.2 Composition of the Board

Director (name) Position held on the Board (Chairman/MD/ director)

Nature of appoint-ment (ex./non ex./ Nominee)

Date of appointment Date of Resig-nation

P. A. Ajith Panditharathna Chairman Non-Executive 3rd June 2010

B. S. Yapa Director Non-Executive, Independent

24th September 2004

A. S. Ibrahim Director Non-Executive 25th June 2009

J. P. Amaratunga Director Non-Executive 29th October 2010

T.H.M. Wickramasinghe Director Non-Executive 06th January 2012

G. Ramanan Director Non-Executive 06th January 2012

A.P. Weerasinghe Director Non-Executive, Independent

06th January 2012

M.M.S.K. Rajapakse Director Non-Executive 14th February 2012

Ms. S.V. Amarasekara Director Non-Executive, Independent

20th August 2012

N.C. Perirs Director Non-Executive, Independent

20th August 2012

A. R. Wickremasinghe MD/CEO Executive 01st July 2009 30th June 2011

Roger Johnston Director Non-Executive 05th January 2001 05th July 2011

M. P. Haradasa (alternate to Roger Johnston)

Director Non-Executive 27th July 2006 05th July 2011

W. D. K. Jayawardena Director Non-Executive 28th November 2007 10th June 2011



The brief resumes of directors are provided in the annual report under Board of Directors on page 10 to 13. Appointments to the Board, Names and their Resumes are informed to the stock exchange in order to make this change available to shareholders. Same is provided to the Central Bank of Sri Lanka as well and prior approval is obtained before the appointment of a Director.

The vacancies that arise from the resignations are filled by the remaining directors collectively after taking in to consideration of views of all the directors at the Board meetings. The Board shall appoint the Chairman and the CEO and define and approve the functions and responsibilities for them.

Duties of Chairman and CEO

The roles of Chairman and CEO shall be separated and PMF ensures that these roles are not performed by the same individual. There is a clear division of responsibilities at the head of the company. Further, the Chairman is a non- executive director.

The Chairman is responsible for leadership of the Board, for the efficiency of the company and conduct of the Board's functions. Under this, the primary responsibility of the Chairman is the preparation

of the agenda for each Board meeting, and this function may be delegated to the Company Secretary. Chairman ensures that the Board works effectively and discharges its responsibilities and ensures that all key issues are addressed by the Board in a timely manner. Chairman takes the lead to ensure that the Board acts in the best interest of the company and encourage them to make their full commitment towards the Board's affairs.

The Chairman takes initiative to maintain active and effective communication with shareholders and that the views of shareholders are communicated to the Board.

Meetings of the Board

PMF Board continues to evaluate and monitor its performance on a monthly basis with more focus and emphasis on group performance. This ensures effective discharge of duties and responsibilities owed to the Company. The information being provided to the Board allowing sufficient time for them to review and call for additional information. This enhances the performance measurement of operations and internal controls. These meetings also focus on risk faced by the Company and risk mitigation strategies adapted on a regular basis.

The dates of the Board meetings held and the participated directors are depicted in table 1.3 as follows.

Ajith Pandithar-athna

B. S. Yapa

A. S. Ibra-him

J. P. Ama-ratunga

T.H.M. Wickrama-singhe

G. Ra-manan

A.P. Weeras-inghe

M.M.S.K. Rajapakse

A. R. Wickre-masinghe

W. D. K. Jayawar-dena

M. P. Ha-radasa

11/04/11 P P P P P A A

28/04/11 P P P P P P P

30/05/11 P P P P P A A

28/06/11 P P P P P CD P

13/07/11 P P A P CD CD CD

28/07/11 P P P P

30/08/11 P P P P

29/09/11 P P P P

10/10/11 P P P P

31/10/11 P P P A

11/11/11 P P P A

17/11/11 P P P P

05/12/11 P A P P

20/12/11 P P P P

26/01/12 P P P P P P P

27/02/12 P P P P P P P P

06/03/12 P P P P P P P P

27/03/12 P P P A P P P P

P - Present A - Absent CD - Ceased to be a DirectorTable 1.3



Audit Committee

As a good Corporate Governance practice facilitated by the Corporate Governance rules, PMF appointed an Audit Committee to review the performance and monitor the operations of the company on a continuous basis. The Audit Committee was established by the Board in a formal and transparent manner and the Board ensures the maintenance of independence of the Committee which consists of three Non Executive Directors. Two out of the three committee members are independent. Chairman of the Audit Committee is a non executive, independent director appointed by the Board, who possesses qualifications and experience over 30 years in accountancy.

Name of the Director 23rd June 2011 27th February 2012 27th March 2012

B.S. Yapa (Chairman)- Independent, Non executive Present Present Present

M.P. Haradasa - Non Executive PresentCeased to be a

member-

A.S. Ibrahim - Non Executive PresentCeased to be a

member-

A.P.Weerasinghe - Independent , Non Executive Not a member Absent Present

G. Ramanan - Non Executive Not a member Present Present

Table 1.4 Composition of the Audit Committee

The main functions of the Audit Committee

● Review internal audits and maintain an appropriate relationship with external auditors

● Keeping under review the scope, results of the audit, its effectiveness, independence and objectivity of the auditors

● Dealing clearly with its authority and duties with terms of reference

● Assist Board on;

- Preparation presentation and adequacy of disclosures in the financial statements and review of compliance with related regulations

- To ensure that the PMF’s internal controls and risk management procedures are adequate to meet the standards

- Assessing the company’s ability to continue as a going concern in the foreseeable future- Continuous review of independence and performance of company’s external auditors

● To make recommendations to the Board pertaining to appointment, re-appointment and removal of external auditors and to approve the remunerations and terms of engagement of external auditors

● Discussion of the audit plan, key audit issues , resolutions, management responses and the annual audit of the company

During the year under review three Audit Committee meetings were held to evaluate the operations of lease, hire purchase, loans, real estate and branch operations. They make their recommendations based on the audit findings with the intention of enhancing internal controls, assessment of risk and review of the feedback and management response towards the recommendations.

The names of the members and the dates of meeting held during the year are set out as follows in table 1.4.



The main functions of Remuneration Committee are;

● Developing policy on executive remuneration and packages for directors and to ensure that no director is involved in deciding his own remuneration

● Recommendation to the Board on the company's framework for remuneration packages for executive directors and senior management

● To seek appropriate professional advice as and when it is required as authorized by the Board

People’s Merchant Finance PLC’s Board consists of ten Non Executive Directors as at 29th August 2012 and none of them were paid monthly remuneration. Directors allowances paid during the period are disclosed under Note 14.

Remuneration Committee

The Remuneration Committee consists of three directors who are all non executive. Two out of the three committee members are independent. The Remuneration Committee was established by the Board on a formal and transparent manner and Board ensures the maintenance of independence. The Chairman of the Committee is a non-executive director.

The names of the members and the date of meeting are shown in the table 1.5.

Name of the Director Date of Meeting06th March 2012

Mr. B.S. Yapa - Non executive Independent director Present

Mr. A.P.Weerasinghe - Non executive Independent director Present

Mr. T.H.M. Wickramasinghe - Non executive director present

Table 1.5 Composition of the Remuneration Committee

Integrated Risk Management Committee

The Integrated Risk Management Committee (IRMC) consists of the following members;

Mr. J. P. Amaratunga - Chairman of IRMC (Non- Executive Director) Mr. A. S. Ibrahim (Non- Executive Director)Mr. G. Ramanan (Non- Executive Director)

The Integrated Risk Management Committee was established by the Board in compliance with the FinanceLeasing (Corporate Governance) Direction, No. 4 of 2009 issued by the Central Bank of Sri Lanka. During the year under review one IRMC meeting was held on 28th March 2012 to evaluate the overall Risk management framework and Risk Policy of the Company including internal controls, and Terms of reference (TOR) for the Committee.

The Main functions of the Committee include;

● To assess and evaluate all risks including business or operational, financial, liquidity, credit, interest rate, IT and security risk on a regular basis, following appropriate risk measures.

● Review the Internal controls of the Company and take initiatives to improve the effectiveness of these controls.

● Review the adequacy of all the management committees such as ALCO, credit etc.

● To closely monitor and update company’s Business plan.

In addition to the Corporate Governance direction issued by the Central Bank of Sri Lanka, the Company also followed and complied with the Corporate Governing rules issued by the Colombo Stock Exchange (“CSE”).



Table 1.6 below provides the summary of compliance with the Corporate Governance requirements under the listing rules of the CSE.

Rule No. Disclosures regarding Board of Directors Compli-ance Status

Details

i. 7.10.1(a) The correct number of executive /non-execu-tive directors

Compliant All ten directors are non execu-tive directors. The Chairman is a non- executive director.

ii. 710.2(a) The correct number of Independent Non-Executive Directors.

compliant Four out of ten non -execu-tive directors are Independent directors.

iii. 7.10.2(b) Whether the non-executive directors submit-ted a declaration annually of his/her indepen-dence or non-independence to the Board of Directors

Compliant The Board obtained declara-tion from the non-executive directors

iv. 7.10.3(a) Confirmed that the Board of directors made an annual determination as to the indepen-dence or non-independence of each non-executive director based on the declaration mentioned-above and other information available to the Board and states the names of non-executive directors

Compliant

v. 7.10.3(b) If the Director does not qualify as 'Indepen-dent', but if the Board taking into account all the circumstances is of their opinion that the non-executive director is 'Independent', the Board has specified, in the Annual Report, the qualification not met under Rule 6.4 of the CSE Listing Rules and the basis for determin-ing the director to be 'Independent' - Rule 6.3 (b)

Compliant

vi. 7.10.3(c) Published a brief resume in the Annual Report, of each director of the Board, which includes information on the nature of his/her expertise

Compliant Brief resume of each director is provided in page 10 & 13.



Table 1.6 Compliance with Corporate Governance Rules – CSE Requirements

Rule No. Disclosures regarding Audit Committee Compli-ance Status

Details

xiv. 7.10.6(a) The number of independent non-executive directors in the Audit Committee

Compliant Two out of three non executive directors are independent

xv. 7.10.6(a) Whether the Chairman of the Audit Commit-tee is a non-executive director -

Compliant Chairman is an non executive and independent director

xvi. 7.10.6(a) Whether the Chairman or 1 member of the Audit Committee is a member of a recog-nized professional accounting body

Compliant Chairman is a member of a professional accounting body

xvii. 7.10.6(a) Whether the CEO and CFO attended Audit Committee Meetings, Unless otherwise de-termined by the Audit Committee

Compliant

xviii. 7.10.6(b) Confirmed that the functions of the Audit Committee as being in accordance with Rule 7.10.6 (b)

Compliant Audit Committee function as stipulated in page 33.

xix. 7.10.6(c) Whether a separate Audit Committee was formed or whether listed parent's Audit Com-mittee was used

Compliant Separate Audit Committee was formed

xx. 7.10.6(c) Names of directors comprising the Audit Committee (where the parent company's Audit Committee qualifies to function as the listed company's Audit Committee, a state-ment to this effect and disclosed the names of the director

Compliant Refer page 33.

xxi. 7.10.6(c) The basis for determining external auditors as being independent

Compliant Disclosed in Report of the Audit Committee on page 50.

Rule No. Disclosures regarding Remuneration Com-mittee

Compli-ance Status

Details

vii. 7.10.5(a) The number of Independent non-executive directors in the Remuneration Committee


viii. 7.10.5(a) Whether a separate Remuneration Commit-tee was formed or whether listed parent's Remuneration Committee used

Compliant Remuneration Committee was formed

ix. 7.10.5(a) Whether the Chairman of the Committee is a non-executive director

Compliant Chairman is a non-executive director

x. 7.10.5(b) Disclosed the functions of the Remuneration Committee

Compliant Provided in page 34 under Remuneration Committee

xi. 7.10.5(c) Names of directors comprising the Remu-neration Committee (where the parent com-pany's Remuneration Committee qualifies to function as the listed company's Remunera-tion Committee, a statement in the Annual Report to this effect and disclosed the names of the directors


xii. 7.10.5(c) The Annual Report contained a statement on the Remuneration Policy


xiii. 7.10.5(c) The aggregate remuneration paid to execu-tive and non-executive directors in the An-nual Report

Compliant Provided in page 66 Note no 14.


Risk Management and Internal Control

In Peoples Merchant Finance PLC (PMF), Risks are considered as threats against achievement of its various strategies, objectives and goals. The risk management and internal controls within the company consist of policies, processes, practices and procedures, established by the management and/or the Board of Directors to provide reasonable assurance that:

(a) The companies established corporate and business strategies and objectives are achieved;

(b) Risk exposures are identified and adequately monitored and managed;

(c) An effective Management Information System incorporating financial, managerial and operational information assuring accuracy, relevance, timeliness and reliability is in place at the company.

(d) An adequate level of compliance with policies, standards, procedures and applicable laws, regulations and licenses are in place.

In this backdrop this "Policy statement for Risk management" has been introduced by the Integrated Risk management Committee of PMF in order to establish sound Risk management practices within the Company. Accreditation granted by CBSL as a Licensed Finance Company compels the company to strengthen corporate governance and internal controls within the company and the importance of having a proper risk management policy and framework in place is thereby necessitated.

OBJECTIVES OF THE RISK MANAGEMENT POLICY STATEMENT

Identify and define the broad risk categories to which the company may be exposed

Define areas of authority and key responsibilities for the Board and the key management personnel for the management of each Risk category

Explain polices, practices to manage each category of business risks along with the procedure to review and amend.

''Risk Management is the identification, assessment and handling of risks enacted through corporate actions to monitor, control via eliminate, mitigate or minimize the adverse effect of unfortunate events or maximize the achievement of opportunities. In other words, Risk management means taking deliberate actions to shift the odds in corporate favor - increasing the odds of good outcomes and reducing the odds of bad outcomes.''

"In Peoples Merchant Finance PLC, the Risk Management Policy has been developed based on best practices for identification, evaluation and planning the risks and taking measures to control risks in a cost-effective manner in order to ensure that risks are either eliminated or reduced to an acceptable level. It takes a holistic look at risks both from the downside and the upside"

Risk Management

basics of PMF

Communicate/ document the Risk

Control (Eliminate, mitigate, Accept)

Track / monitor the Risk

Plan the Risk

Assess the Risk

Identify the Risk


Risk Management and Internal Control Contd....

RISK MANAGEMENT FRAMEWORK

At PMF, the Board of directors, supported by the Integrated Risk Management Committee and Audit Committee of the Company bear overall responsibility for Risk management framework within the company. The Chief Executive Officer of the Company plays the role of a monitor as well as that of a coordinator between the Risk owners and the Board. Risks to be encountered when achieving objectives of the Company are identified by the Owners of Risk. Business units in association with the respective committees recognize the Risk owners when defining the Risk framework. Risk owners are responsible for identifying, evaluating and reporting

the risk to the Board through the Integrated Risk Management Committee or CEO in order to decide on the appropriate course of action to manage the Risk. The Risk Owners are further responsible on implementing approved processes and providing adequate MIS for monitoring purposes in a timely manner.

Both Internal and External Audit will provide assurance to the Board through the Audit Committee mainly on

1) integrity of financial reporting framework

2) effective, efficient , risk free business processes

3) compliance to the laid down processes

Given below is the overall Risk Management framework of the Company.

Business Units

Compliance Officer

IT SteeringCommittee

Credit Com &Recovery Committee

ALCO

External & InternalAudit Audit Commmittee

CEO

CorporateManagementCommittee

Intaegrated Risk Management

Committee

Policies & Procedures

Board of Directors

Business Risk

Compliance Risk

IT Risk

Credit Risk

Liquidity & Interest rate Risk

Market Risk

Business Continuity Risk

Risk of trained staffturnover

Risk of falling BusinessVolume

Reputation Risk

Operational Risk

Audit Risk



The Board of Directors has overall responsibility for the establishment and oversight of the Company's risk management framework. In achieving this task the Board shall actively participate in defining risk appetite and approving the broad risk parameters. To assist them in this task, the Board has appointed two committees, namely (1) Integrated Risk Management Committee and (2) Audit Committee.

On a regular basis, the Board considers the significant business risks applicable to the business and ongoing operations by reviewing the 'Risk Dash Board' which provides Risk thresholds and Actual. Additionally, the Board considers the overall Policies and Procedures as part of evaluating annual financial statements and reviewing budget planning. To assist the Board in discharging its responsibilities in relation to risk management, the Board delegates those activities relating to managing business risk to the Integrated Risk Management committee (IRMC) who shall mainly focus on the following activities in the area of managing risk ;

placing the framework to identify the risk;

delegating responsibility to subcommittees appointed by IRMC to manage the risk

Review and assess the risk

Advice the board on placing frameworks, strategies, policies, systems, processes and tools

The Audit Committee plays a key role for the Board in overviewing Risk management strategies and polices of the company mainly on managing audit risk by ;

Ensuring independent, efficient and effective External Audit functions in order to reduce inherent Risks

Ensuring Integrity of the Financial Statements by reviewing its Financial Reporting framework

Ensuring that the internal audit function is independent of the activities it audits and that it is performed with impartiality, proficiency and due professional care;

Considering suggestions / complains on financial reporting framework, internal control or other related matters from stakeholders

Risk Assessment Matrix

Company' risk management is a continuous process that is followed by a set of procedures and principles which have been identified as the most viable to the predictable situations of the company. Past experiences are documented and analyzed and these are helpful in assessing risk for future business opportunities and better controls. In order to understand the risk, PMF assess and documents the risk. A step by step process is followed and in identifying them in the likelihood of occurrences and the impact it will have.

Given below is the Risk Assessment Matrix and the risk is categorized in accordance with the matrix;

Impact

Insignificant Low Average High Catastrophic

Very Frequent(>50%)

High High Extreme Extreme Extreme

Frequent(%-50%)

Moderate High High Extreme Extreme

Moderate(5%-20%)

Low Moderate High Extreme Extreme

Unlikely(1%-5%)

Low Low Moderate High Extreme

Rare(<1%)

Low Low Moderate High High

Lik

elih

oo

d



The steps flowed by PMF are as follows:

Step 01 - Identifying and documenting the risk associated with business operations of the company. The associated operational risks are measured in terms of the likelihood or probability of occurrence and the expected impact or consequence, using the risk matrix.

Step 02 - Listing the likelihood of the risk occurring and the impact it could cause to the company.

Step 03 - Listing what arrangements the company currently have in place to prevent or reduce the likelihood of the risk occurring.

Step 04 - Listing what arrangements that could be put in place to prevent or reduce the risk on the company.

Step 05 - Using the information gathered and assigning a likelihood score to each risk with pre-determined measures and plotting them in the risk matrix.

Step 06 - Ranking them accordingly to identify high impact and high likelihood to prioritize them in order to take immediate actions or to ignore it.

The Risk management strategy of the company rests on the commitment of the top management headed by the Board, followed by internal audit committee and the Asset and Liabilities Committee. The risk culture encompassing all activities and operations of the company is being created. All members of the staff have recognized the importance of the risk culture and the level of risk the company is ready to accept. All key decisions are taken after analyzing the risk factors and wherever possible decisions are taken collectively.

Risk categories

Risk is categorized by identifying the similarities faced in the different level of operations. The different risk categories identified are; Financial, Market, Credit, Business or Operational, Interest rate, IT, Legal and Systematic.

Each category of risk has been addressed separately within the common framework for organizationwide risk management, using the risk matrix to assess and quantify associated risk. This gives the management more confidence and an easy framework to manage risk which is relevant to their scope of work and to address them through separate directives.

Regulatory bodies deploy strict standards to measure, report and disclose risk exposures and the risk management strategies of the company and the following are the measures which the company has taken with regard to these requirements.

Business or operational riskThis is the risk that relates to the activities carried out within the company arising from structure, systems, people, services or processes. Business or operational risk includes business interruption, errors or omissions by employees, failures of IT systems, frauds and loss of key employees. Operational risks arise as a result of inadequate or failures in internal control processes, people and system within the control of the company as well as from exposures to unfavorable external environment which is beyond company's control.

Business and operational risks of PMF has been reduced by introducing a well defined internal control system. The Company focuses on the existing customer base to enhance market share by providing excellent and efficient customer oriented services.

The company has laid down procedures with regard to safeguarding legal/ security documents with regard to lease, hire purchase and other trade finance facilities. These are filed in fire proof cabinets placed in security rooms with restricted access and recording of movements of in and out files.

PMF's operational risk management strategy includes assessment of changes in market on a monthly basis or more frequently if needed. The ALCO committee evaluates the company assets, liabilities and set company borrowing and lending rates to be in line with the market rates. The Credit committee monitors and evaluates the procedures when granting advances on a continuous basis. Senior Management participates and reports to the Board for decision making and follow up purposes.



Financial riskThe range of operational activities have increased in a significant manner following elevation of the Company to Central Bank approved, licensed Finance Company and this also has increased the financial risks to be faced by the company. Accepting Fixed deposits, opening up of Savings accounts, dealing in Foreign exchange etc., widen the risk related to the financial operations of the company. Credit risk, liquidity risk, currency risk, Interest rate risk, cash flow risk are some of financial risks associated with such activities.

As a risk mitigation strategy, the Company follows a strategy of matching financial risks through different ways and methods such as fixed interest rates against floating interest rates, short term borrowings against long term borrowings, Insurance policies, etc.

Liquidity riskThis risk occurs when the company is unable to meet its credit obligations in time without incurring unacceptable losses. Liquidity is managed by categorizing assets and liabilities of the company into various time bands of maturities and assessing any short falls, along with fund requirements as per forecast lending /investments. If there are any gaps, arrangements will be made with financial institutions to meet such requirements well in advance. Also approved credit lines for short term use are established for utilization in case of unforeseen requirements that may arise.

Credit riskThis arises due to borrowers not being able to settle loan obligations either capital or interest as per the terms agreed with the lender on scheduled dates. The Company identified this as a high risk area especially with the rapid growth in lending during the last financial year.

The company has developed procedures which includes comprehensive credit appraisals for different risk levels, approvals by higher grade and assessment by a credit committee of high value loans, obtaining collateral where possible, setting exposure limits for borrowers and industry sectors, appraisals of clients through CRIB reporting system, regular review of clients falling into overdue category and closely following them up, updating staff on new requirements and directions issued by Central bank of Sri Lanka.

Interest rate riskThis can arise due to changes in the interest rates prevailing in the market. Adverse movements and volatile rate fluctuations can affect the company's funding and such movements always affect the company's lendings, borrowings and investments.

Peoples Merchant always uses natural hedging techniques to neutralize the worst effects and to maintain a balance in fixed and variable interest rates. Fixed to variable term borrowing of the company is about 60% to 40%. The Assets and Liabilities Committee (ALCO) monitors and controls market risks i.e. interest rate risks and liquidity risk. The committee meets once a month and decides on borrowing/ lending rates by taking market conditions in to account. Also due consideration is given to the maturity pattern of assets and liabilities to reduce period mismatches.

IT riskThis encompasses the full spectrum of risks that may arise from IT operations, external natural disasters, internal processing and loss of intellectual property, supervisory of legal controls.

The Company has taken steps to manage possible IT risks such as information security risk, availability of system risk, performance risk and compliance risk and an Information Technology Policy has been implemented. Company has invested on IT software and hard ware in order to cope up with the changes and emerging trends in technology. A Disaster Recovery site is in operation with online real time information replication in force.

Security riskThis arises from the information being accessed, manipulated or used by unauthorized parties. This risk is controlled by a properly administrated user name and password mechanism coupled with audit check list to review data entries. These controls guard against unauthorized personnel having access to the data base. Data protection has further been strengthened by installing state-of-the art firewall security and antivirus security.

Availability and Performance RiskThis arises when information or applications are made inaccessible by processes, people or system failures,



natural disasters, and underperforming systems and applications which will diminish business productivity or value. Peoples Merchant has an agreement with SLT to provide a 24 hour IPVPN network connection to connect branches with the head office. Also an uninterrupted power supply system is in place to avoid sudden power failures and resultant data losses. The company has a business continuity plan to ensure data security and continuity of the business operations. Support for this continuity process has been obtained through another communication services provider.

Compliance RiskCompliance risk is the risk that information handling or processing will fail to meet regulatory, IT or business policy requirements. This has been avoided by selecting the most suitable software and partnering with reliable vendors in the market. New controls and procedure have been implemented in the business application to ensure management of information accuracy.

Legal riskThis arises due to potential loss from the uncertainty of legal proceedings, litigations against the company, outcomes of potential legal proceedings for recovery of advances and any trends that may need to be considered in future agreements and contracts. PMF has procedures in place for ensuring proper legal documentation for all disbursements in order to ensure that the company can take appropriate legal action against defaulters, when

necessary. External consultation is sought where and when necessary. The company ensures compliance with all legal requirements.

Risk Owners…..Business units and respective committees, who focus on each risk to ensure that the relevant risk is properly managed and monitored, are recognized as Risk owners. The Risk owners are responsible for the following tasks in relation to their specified risk;

Identify and evaluate the relevant risks faced by the Company and assist to determine the acceptance level by the Integrated Risk Management Committee (IRMC);

Implementing approved risk management process to reduce the likelihood of unwelcome surprises or impact;

Ensure that the less significant risks are being actively managed, with the appropriate controls in place and they are working effectively.

Update the Risk dashboard and provide adequate MIS in a timely manner along with its comments on the status of risks and controls to the IRMC to monitor the risk

Report annually on risk management action plan, implementation status and the top ten significant risks to IRMC;

Committee Corporate Mgt Com

ALCO Credit Committee

Recovery Committee

IT Steering Committee

Executive Operation Committee

Permanent

Members

CEO All

department

Heads

CEO

CFO

DGM (Credit & Asset

Finance)

DGM (Corporate and

Trade Finance)

DGM( Business

Promotion)

Head of Treasury

DGM Recoveries

CEO

CFO

DGM (Credit &

Asset Finance)

DGM

(Corporate and

Trade Finance)

CLO

DGM

-Recoveries

CEO

DGM (Credit &

Asset Finance)

DGM (Corporate

and Trade

Finance)

Chief Legal Officer

DGM (Recoveries)

CEO

All

department

heads

CEO

CFO

Head of HR &

Administration



Managing Business Risk

Business risk of "Failure to achieve desired profit due to numerous factors, including sales volume, per-unit price, input costs, competition, and overall economic climate and government regulations" will be owned by respective business units and they are responsible on providing assessments to the Board to take appropriate decisions to mitigate such risks. This can be routed through CEO and/or IRMC. Further they are responsible on implementation of agreed actions to manage such risk.

Assurance….

Assurance on complying with the existing policies and procedure will be provided by the external audit and internal audit.

External Audit will mainly focus on providing assurance on true and fair view of financial statements. In addition to the main objectives EA may review the internal controls on financial reporting process to ensure integrated financial information.

Internal Audit will ensure the existence of efficient and effective systems and procedures to identify, control & monitor the risk and as well as to achieving business objectives. While ensuring proper processes IA further ensure the compliance to the already established business processes.

Documentation

Ultimate documented result of the Risk Management is to place Policies and procedures for each and every business process to ensure;

- economical, efficient and effective business process and

- identifying, managing and monitoring Risk during the process

CONTINUOUS AWARENESS

All employees must understand the nature of risk and accept responsibility for risks associated within their area of authority. The necessary support, assistance and commitment of senior management along with the IRMC will be provided.

Therefore it is essential to provide training on risk awareness by maintaining effective communication from top to the bottom in the line on a continued basis.

MONITORING

The Tool of Risk Dash Board (RDB) is used to collect data from different sources quickly in order to accelerate decision-making and drive better risk management.

IRMC shall design and review the appropriate "Risk Dash Board" in order to cover overall Risk in consultation with the Board considering Key Performance Indicator of PMF. Compliance officer appointed by IRMC shall coordinate data collecting tasks and all departmental heads are responsible for providing accurate information in a timely manner and they shall forward them to the IRMC in a monthly basis.

Basic RDB shall cover the 5 main identified risk categories which the PMF may have to encounter in a given time. In addition to these basic indicators introduced based on specially identified major risks must be indicated in the Risk Dash Board.

Financial Reports Page No.

Financial Calender 45

Annual Report of the Board 46

Director’s Responsibility for Financial Reporting 49

Report of the Audit Committee 50

Independent Auditor’s Report 51

Income Statement 52

Balance Sheet 53

Statement of Changes in Equity 54

Cash Flow Statement 55

Notes to the Financial Statements 57

Financial CalendarInterim Financial Reports

First Quarter to 30.06.2011 [Unaudited] 05th August 2011

Second Quarter 30.09.2011 [Unaudited] 31st October 2011

Third Quarter 31.12.2011 [Unaudited] 09th February 2012

Annual Report for the year ended 31.03.2012 29th August 2012

[Audited]

Meetings

28th Annual General Meeting 29th September 2011

29th Annual General Meeting 28th September 2012


Annual Report of the Board

The Board of Directors have pleasure in presenting to the Shareholders their Report together with the audited finan-cial statements of People’s Merchant Finance PLC (for-merly known as People's Merchant PLC) (the Company) and the audited consolidated financial statements of the Group for the year ended 31st March 2012.

People’s Merchant Finance PLC is a public limited liability company incorporated in Sri Lanka on 26th January 1983, quoted in the Colombo Stock Exchange in July 1994, re-registered as per the Companies Act No.07 of 2007 on 16th September 2008 and registered under Finance Leasing Act No. 56 of 2000 and registered under Finance Business Act No. 42 of 2011 on 17th April 2012.

This Report was approved by the Directors at a meeting held on 29th August 2012.

1. Principle Activities

The principal activities of the Company are Leasing, Hire Purchase, Trade Finance, Real Estate, Investments, Pawning, Margin trading and Corporate Finance Services.

The Monetary Board of the Central Bank of Sri Lanka has granted the Company the License to carry on Finance Business under the Finance Business Act No. 42 of 2011 with effect from 17th April 2012.

2. Review of operations

The Chairman’s Statement and the Chief Executive Officer’s Review of Operations on pages 4 to 9 in this Report, contain a detailed review of the operations which forms an integral part of this Report.

3. Financial Statements

The Financial Statements of the Company comprises the Balance Sheet, Statement of Income, Statement of Changes in Equity and Cash Flow statement to-gether with the Accounting Policies and Notes to the Financial Statements for the year ended 31st March 2012 are set out in pages 52 to 87.

4. Summary of Financial Results For the year ended 31st March

Profit/(Loss) before taxation 14,244 (63,842) 33,703 (215,320) Income tax expenses (13,738) 2,183 (13,505) 12,820 Profit/(Loss) after taxation 506 (61,659) 20,198 (202,500) Revenue reserve b/f (167,467) (104,523) (180,095) 23,005 Profit/(Loss) available for appropriation (166,961) (166,182) (159,897) (179,495) Appropriations Finance leasing reserve fund 1,010 685 1,010 - Investment fund account 7,838 - 7,838 - 6% preference dividend 600 600 600 600 Ordinary dividend paid - - - - Revenue reserve c/f (176,409) (167,467) (169,345) (180,095)

Group Company

2012 2011 2012 2011

Rs'000 Rs'000 Rs'000 Rs'000


Annual Report of the Board Contd....

5. Taxation

Provision for taxation has been computed at the rates given in Note 17 to the Financial Statements.

6. Dividends

The Directors have not recommended the declaration of divided for the financial year ended 31st March 2012. (Nil per share for 2010/11)

7. Independent Auditor's Report

The Independent Auditor's Report on the Financial Statements is given on page 51.

8. Accounting Policies

The accounting policies adopted in the preparation of the Financial Statements are given on pages 57 to 64. There have been no changes in the accounting policies adopted by the Company during the year under review.

9. Statement of Directors' Responsibilities

The statement of Directors' responsibility for the Financial Statements is given in page 49.

10. Directorate

The following were the directors of the Company during the financial year ended 31st March 2012:

Mr. Ajith Panditharatne - Chairman Mr. J. P. Amaratunga Mr. A.S.Ibrahim Mr. B. S. Yapa Mr. T.H.M. Wickramasinghe (Appointed with effect

from 06th January 2012) Mr. G. Ramanan (Appointed with effect from 06th

January 2012) Mr. A.P. Weerasinghe (Appointed with effect from

06th January 2012) Mr. M.M.S.K. Rajapakse (Appointed with effect from

14th February 2012)

Mr. Anura R. Wickramasinghe - MD/CEO (resigned with effect from 30th June 2011)

Mr. W. D. K. Jayawardena (resigned with effect from 10th June 2011)

Mr. R. Johnston (resigned with effect from 05th July 2011) Mr. M. P. Haradasa (Alternate to Mr. R. Johnston)

(resigned with effect from 05th July 2011)

Ms. S.V. Amarasekara and Mr. N.C. Perirs were appointed with effect from 20th August 2012)

All the Directors including the Chairman are non-executive Directors and the four directors namely Mr. B.S. Yapa, Mr. A.P. Weerasinghe, Ms. S.V. Amarasekara and Mr. N.C. Perirs are Independent Directors.

Mr. B.S. Yapa who has passed the age of 70 years, has not offered himself for re-election at this Annual General Meeting (“AGM”) in compliance with the Finance Companies (Corporate Governance) Direction No. 3 of 2008. Accordingly at the conclusion of the AGM Mr. Yapa ceases to be a Director.

11. Interest Register

The Interest Register is maintained by the Company as per the requirements in the Companies Act No.7 of 2007. All directors have made declarations as provided for in section 192 (2) of the Companies Act. The related entries were made during the year ended 31st March 2012.

11.1 Directors' Emoluments

The emoluments and other benefits made to the Directors during the year are disclosed in Note 14 to the Financial Statements.

11.2 Director's Interest in Contracts

No Director has any material interest in any transactions or proposed contract involving People's Merchant Finance other than those disclosed in Note 47 to the financial Statements.

11.3 Directors Interest in Shares

Shareholding of Directors and their spouses and dependent children are as follows:

No. of No. of Shares Shares as at as at 1st April 31st March 2011 2012

Mr. P. A. Ajith Panditharathna - Chairman Nil NilMr. J.P. Amarathunga Nil NilMr. A.S.Ibrahim Nil NilMr. B. S. Yapa 8,324 17,500Mr. G. Ramanan Nil 4,413,497Mr. T.H.M. Wickramasinghe Nil NilMr A.P. Weerasinghe Nil NilMr. M.M.S.K. Rajapakse Nil Nil


Annual Report of the Board Contd....

12. Donations

Donations amounting Rs.3,262,970/- were made during the year under review (Rs.530,000/- in 2011)

13. Employees

Number of employees as at 31st March 2012 was 124 (31st March 2011-123)

14. Auditors

Messrs. KPMG has expressed their willingness to continue in office as Auditors of the Company. Accordingly, a resolution to re-appoint them as Auditors until the next Annual General Meeting at a remuneration to be agreed upon with them by the Board and to audit the Financial Statements of the Company for the accounting period ending 31 March 2013 will be proposed at the Annual General Meeting.

Auditors, Messrs. KPMG were paid Rs. 927,000/- and Rs. 32,000/- as audit fee & expenses and audit related services & expenses respectively by the Company. Further they were paid Rs. 177,000/- as non audit services during the year under review.

Based on the written representation made by the Auditors to the Board, the Directors are satisfied that the Auditors did not have any relationship with or any interest in the Company.

15. Investments in Subsidiaries

The details of investments made by the Company are given in Note 28 to the Financial Statements.

16. Corporate Governance

The Board of Directors of the Company in complying with the Finance Leasing (Corporate Governance) Direction No. 4 of 2009 issued to Finance Leasing Companies by the Central Bank of Sri Lanka have placed great emphasis in conforming to the best corporate governance practices and procedures set out therein. The Board from time to time has introduced better systems and procedures for the internal controls and risk management of the Company and thereby improved accountability and transparency in the Company. The corporate governance report of the Company is given in pages 30 to 36.

Further the company obtained the license under the Finance Business Act No. 42 of 2011 and is in the

process of complying with the Finance Companies (Corporate Governance) Direction No. 3 of 2008, which applies to every registered finance company.

17. Events subsequent to the Balance Sheet date

There had not been any circumstances since the Balance sheet date, which would require adjustments to or disclosed in the Notes to the Accounts, except those disclosed in Note 50 to the accounts.

17.1 Change of Name of the Company

Special resolution was passed on 08th May 2012 to change the name of the Company to People's Merchant Finance PLC consequent to obtaining the approval from the Central Bank of Sri Lanka and the Registrar General of Companies.

For and on behalf of the Board of Directors

Mr. Ajith Panditharatne Mr. B.S.YapaChairman Director

DirectorCorporate Services (Private) LimitedSecretaries

Colombo, Sri Lanka29th August 2012.


Directors' Responsibility for Financial Reporting

Financial statements for the year ended 31st March 2012 represented in this report are in conformity with Sri Lanka Accounting Standards and the Companies Act No. 07 of 2007. In preparing the above Financial Statements appropriate accounting policies have been selected and applied consistently. Where necessary, reasonable and prudent judgments and estimates have been made in line with Accounting Standards.

The Directors are responsible for ensuring that the Company maintains sufficient accounting records to disclose with reasonable accuracy the financial position of the Company. They are also responsible for taking reasonable measures to safeguard the assets of the Company and in that context, to have proper regard to the establishment of appropriate systems of internal control with a view to prevention and detection of fraud and other irregularities.

The Directors are of the opinion that Company has adequate resources to continue in operation to adopt the going concern basis in preparing the Accounts.

The Company's external Auditors KPMG have examined the Financial statement made available by the Board of Directors together with all financial records, related data, minutes of shareholders and Directors, meetings and express their opinion in Auditors' Report on page 51 of the Annual Report.

By order of the Board

People's Merchant Finance PLCCorporate Services (Private) LimitedSecretaries



Report of the Audit Committee

CompositionThe Audit Committee appointed by and responsible to the Board of Directors comprise the following membersMr. B.S. Yapa – Chairman - Independent /Non

Executive DirectorMr. G. Ramanan - Independent /Non

Executive Director Mr. A. Weerasinghe - Independent /Non

Executive Director

The Chairman Mr. B.S. Yapa is a fellow member of the Institute Of Chartered Accountants of Sri Lanka with over 30 years of experience in Accounting & Finance.

Meetings The Committee met three times during the year under review. The CEO and the Chief Financial Officer attended the meetings by invitation. Members of the management team were invited to participate at the meetings as and when required. Corporate Services Limited acted as secretaries to the Audit Committee. The proceedings of the Audit Committee were reported to the Board of Directors on a regular basis.

Role of the CommitteeThe main objectives of the Audit Committee is to assist the Board of Directors in fulfilling its oversight responsibilities in the financial reporting process, the system of internal controls and risk management , the independence and audit process of the external auditors ,and the process for monitoring compliance with laws and regulations .

Internal AuditIn-house Internal Audit Department along with the Messrs Ernst & Young carried out internal audit function during the year. The In-house Internal audit department mainly focuses on establishing and improving policies and procedures of the business processes during the year under review, whilst outsourced internal auditors mainly focus with compliance with existing policies and procedures.

The internal auditors are responsible to review and report on the accuracy and integrity of the financial statements, efficiency of the internal control system and compliance with statutory and other regulations and the accounting and operational policies. Internal audit reports are regularly tabled at Audit committee meetings. Control weaknesses highlighted in the internal audit reports are critically examined by the committee and follow up action taken by management on the audit recommendations are

also reviewed. Internal Audit representatives are present at audit committee meetings during the discussion of their respective reports.

External AuditDuring the year the Committee met with the Messrs KPMG, External Auditors to discuss the Auditors management letter pertaining to the previous year’s audit and Management’s response thereto. Discussions were also held in regard to the nature, scope and approach of the audit for 2011/12 prior to commencement of the audit. The Audit Committee has recommended to the Board of Directors that Messrs KPMG, is reappointed as Auditors for the financial year ending 31st March 2013 subject to the approval of the shareholders at the Annual General Meeting.

ConclusionFinally I would like to thank all the members who served on the audit committee during the year for their valuable contribution to the deliberations of the committee.

B.S.YapaChairman Audit Committee

Colombo, Sri Lanka29th August 2012


Independent Auditors' Report

INDEPENDENT AUDITORS' REPORT

TO THE SHAREHOLDERS OF PEOPLE'S MERCHANT FINANCE PLC (FORMERLY KNOWN AS PEOPLE'S MERCHANT PLC)

Report on the Financial Statements

We have audited the accompanying financial statements of People's Merchant Finance PLC ("Company"), the consolidated financial statements of the Company and its subsidiaries as at 31st March 2012 which comprise the balance sheet as at 31st March 2012, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes as set out on pages 52 to 87 of this Annual Report.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with Sri Lanka Accounting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Scope of Audit and Basis of Opinion

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Sri Lanka Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting policies used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purposes of our audit. We therefore believe that our audit provides a reasonable basis for our opinion.

Opinion

In our opinion, so far as appears from our examination, the Company maintained proper accounting records for the year ended 31st March 2012 and the financial statements give a true and fair view of the Company's state of affairs as at 31st March 2012 and its profits and cash flows for the year then ended in accordance with Sri Lanka Accounting Standards.

In our opinion, the consolidated financial statements give a true and fair view of the state of affairs as at 31st March 2012 and the profits and cash flows for the year then ended, in accordance with Sri Lanka Accounting Standards, of the Company and its subsidiaries dealt with thereby, so far as concerns the shareholders of the Company.

Report on Other Legal and Regulatory Requirements

These financial statements also comply with the requirements of Sections 153(2) to 153(7) of the Companies Act No. 07 of 2007.

Chartered AccountantsColombo.29th August 2012


Income Statement

Group Company

For the year ended 31st March 2012 2011 2012 2011

Note Rs'000 Rs'000 Rs'000 Rs'000

Income 10 620,485 666,691 622,318 586,830

Interest income 11 472,437 597,767 465,234 550,215

Interest expense 12 (303,259) (426,315) (301,190) (383,609)

Net Interest Income 169,178 171,452 164,044 166,606

Other income 13 148,048 68,924 157,084 36,615

317,226 240,376 321,128 203,221

Less : Operating Expenses 14

Personnel expenses 85,887 77,069 85,137 63,789

Provision/(reversal) for employee benefits 2,963 (798) 2,947 238

Premises, equipment & establishment expenses 41,747 46,471 40,205 34,965

Provision for bad & doubtful debts 15 94,691 65,015 94,691 49,727

Provision for change in value of dealing securities 16 651 1,598 651 1,105

Provision/(reversal) for other receivable - 13,719 (3,175) 186,386

Other overhead expenses 77,043 101,144 66,969 82,331

302,982 304,218 287,425 418,541

Profit/(Loss) before Taxation 14,244 (63,842) 33,703 (215,320)

Income tax (expense)/reversal 17 (13,738) 2,183 (13,505) 12,820

Profit/(Loss) for the year 506 (61,659) 20,198 (202,500)

Basic Earnings/(Loss) Per Share (Rs.) 18 0.00 (1.55) 0.40 (5.06)

The notes to the Financial Statements from pages 57 to 87 form an integral part of these Financial Statements.


Balance Sheet

Group Company

As at 31st March 2012 2011 2012 2011

Note Rs'000 Rs'000 Rs'000 Rs'000

AssetsCash & short term funds 19 20,572 125,537 20,313 47,557Government securities & deposits 106,180 15,230 106,180 -Dealing securities 20 3,059 21,446 3,059 8,274Investment securities 21 23 776 23 773Bills of exchange 22 31,659 28,286 31,659 28,286Loans & advances 23 348,953 457,809 348,953 425,946Finance leases 24 915,440 1,127,876 915,440 990,535Hire purchases 25 840,472 1,327,428 840,472 1,253,547Inventories 26 81,712 71,851 81,712 69,281Amounts due from related parties 27 - - - 383Investment in subsidiary companies 28 - - - 287,089Goodwill 29 - 82,595 - -Property, plant & equipment 30 509,492 513,426 513,489 494,182Intangible assets 31 1,905 3,273 1,905 2,963Other assets 32 88,305 106,072 88,284 96,914Total Assets 2,947,772 3,881,605 2,951,489 3,705,730 LiabilitiesBank overdraft 130,017 39,769 130,017 38,242Borrowings 33 1,762,366 3,065,813 1,762,366 2,929,063Interest accrued 34 67,729 129,934 67,729 126,758Debentures 35 - 100,000 - 100,000Dividends payable 36 1,800 1,276 1,800 1,276Employee benefits 37 9,881 8,026 9,881 7,096Deferred tax liabilities 38 7,685 13,710 8,121 7,712Other liabilities 39 41,379 39,058 37,596 25,030Total Liabilities 2,020,857 3,397,586 2,017,510 3,235,177

EquityStated capital 40 1,088,227 644,399 1,088,227 644,399Statutory reseves 15,097 7,087 15,097 6,249Revenue reserve (176,409) (167,467) (169,345) (180,095)Total Equity 926,915 484,019 933,979 470,553Total Liabilities & Equity 2,947,772 3,881,605 2,951,489 3,705,730

The notes to the Financial Statements from pages 57 to 87 form an integral part of these Financial Statements.The Financial Statements are in compliance with the requirements of Companies Act No. 7 of 2007.

A. WickramatungeChief Financial Officer

Approved and signed for and on behalf of the Board of Directors

Ajith Panditharathna B. S. YapaChairman Director

Colombo, Sri Lanka29th August 2012


Statement of Changes in Equity

Group Statutory Reseves

For the year ended 31st March 2012 Investment Finance Stated Fund Leasing Revenue Capital Account Reserve Fund Reserves Total Rs'000 Rs'000 Rs'000 Rs'000 Rs'000

Balance as at 01.04.2010 644,399 - 6,402 (104,523) 546,278Loss for the year - - - (61,659) (61,659)Preference dividend (6%) - - - (600) (600)Transferred to finance leasing reserve fund - - 685 (685) -

Balance as at 01.04.2011 644,399 - 7,087 (167,467) 484,019

Right issues 450,000 - - - 450,000Less: Right issue expenses (6,172) - - - (6,172)Profit for the year - - - 506 506Preference dividend (6%) - - - (600) (600)Adjustment on disposal of subsidiary - - (838) - (838)Transferred to finance leasing reserve fund - - 1,010 (1,010) -Transferred to Investment Fund Account - 7,838 - (7,838) -Balance as at 31.03.2012 1,088,227 7,838 7,259 (176,409) 926,915

Company Statutory Reseves

For the year ended 31st March 2012 Investment Finance Stated Fund Leasing Revenue Capital Account Reserve Fund Reserves Total Rs'000 Rs'000 Rs'000 Rs'000 Rs'000

Balance as at 01.04.2010 644,399 - 6,249 23,005 673,653Loss for the year - - - (202,500) (202,500)Preference dividend (6%) - - - (600) (600)

Balance as at 01.04.2011 644,399 - 6,249 (180,095) 470,553

Right issue 450,000 - - - 450,000Less: Right issue expenses (6,172) - - - (6,172)Profit for the year - - - 20,198 20,198Preference dividend (6%) - - - (600) (600)Transferred to finance leasing reserve fund - - 1,010 (1,010) -Transferred to Investment Fund Account - 7,838 - (7,838) -Balance as at 31.03.2012 1,088,227 7,838 7,259 (169,345) 933,979 The notes to the Financial Statements from pages 57 to 87 form an integral part of these Financial Statements In accordance with Section 58 of Companies Act No 7of 2007, share capital, share premium and preference shares have been clasified as stated capital.


Cash Flow Statement

Group Company


Rs'000 Rs'000 Rs'000 Rs'000

Cash flows from operating activitiesInterest income 413,749 535,865 413,749 498,969Interest payments (304,188) (400,388) (304,188) (359,609)Receipts from other operating activities 16,274 42,842 13,092 19,727Cash payment to employees (83,094) (73,080) (83,094) (59,354)Payments on other operating activities (94,304) (109,954) (93,100) (98,800)Operating profit/(loss)before changes in operating assets/liabilities ( Note A ) (51,563) (4,715) (53,541) 933

Decrease/(Increase) in operating assetsLease rentals & deposits received 484,311 567,291 484,311 537,461Hire purchase rentals & deposits received 632,449 607,223 632,449 585,260Real estate 1,070 80,329 1,070 80,329Assets leased (405,729) (710,222) (405,729) (697,359)Assets hire purchased (209,421) (798,999) (209,421) (785,036)Bills discounted (3,299) 24,929 (3,299) 24,929Pawning advanced (27,335) (11,879) (27,335) (11,879)Margin lending (38,872) - (38,872) -Receivables & prepaid expenses 25,683 (109,377) 25,683 (312,764)Loans 15,390 (5,519) 15,390 11,503 422,684 (360,939) 420,706 (566,623)

Increase/(Decrease) in operating liabilitiesOther payables (6,867) (46,517) (6,867) (38,941)Net cash generated from/(used in) operating activities before tax 415,817 (407,456) 413,839 (605,564)Income tax paid - (9,340) - (4,132)Net cash generated from/(used in) operating activities after tax 415,817 (416,796) 413,839 (609,696)

Cash flows from investing activitiesPurchase of dealing securities (3,474) (63,033) (3,474) (34,560)Sale of dealing securities 5,159 55,648 5,159 38,105Investments in call deposits (106,180) - (106,180) -Purchase of property, plant & equipment (29,236) (12,549) (29,236) (9,547)Purchase of intangible assets (612) (1,808) (612) (1,808)Net cash effect on disposal of subsidiary (Note B) 349,295 - 424,517 -Sale of property, plant & equipment - 6,102 - 3,290Dividend receipts 239 322 239 322Net cash generated from/(used in) investing activities 215,191 (15,318) 290,413 (4,198)

Cash flows from financing activitiesSecuritisation loans / borrowings (316,476) 9,293 (313,526) 52,545Payment for finance leases - (1,637) - -Debentures redeemed (100,000) - (100,000) -Debentures issued - - - -Right issue (net of expenses) 443,828 - 443,828 - - - -Other borrowings (853,573) 573,843 (853,573) 657,111Net cash generated from/(used in) financing activities (826,221) 581,499 (823,271) 709,656Net cash inflow / (outflow) from all activities (195,213) 149,385 (119,019) 95,762Cash and cash equivalents at beginning of the year 85,768 (63,617) 9,315 (86,447)Cash and cash equivalents at end of the year (109,445) 85,768 (109,704) 9,315

Cash and cash equivalents at end of the yearCash & short term funds as at 31st March ( Note 19 ) 20,572 125,537 20,313 47,557Bank overdraft as at 31st March (130,017) (39,769) (130,017) (38,242) (109,445) 85,768 (109,704) 9,315


Cash Flow Statement Contd...

Group Company


Rs'000 Rs'000 Rs'000 Rs'000

Note AReconciliation of Operating ProfitProfit /(loss) before taxation 14,244 (63,842) 33,703 (215,320)Add / (Less) :(Profit)/loss on sale of shares 2,879 (13,639) 2,879 (8,142)Profit on real estate sales (9,203) (8,424) (9,203) (8,424)(Profit)/loss on sale of property, plant & equipments (145) 1,126 - (103)Dividend income (239) (322) (239) (322)Provision for falling value of dealing securities 651 1,598 651 1,105Net provisions & accruals 48,008 66,672 44,496 225,112Depreciation - property plant and equipment 12,538 9,968 9,930 5,330Amortization of intangible assets 1,830 2,148 1,670 1,697Profit from sale of subsidiary (122,126) - (137,428) - (51,563) (4,715) (53,541) 933

Note BNet cash effect on disposal of subsidiary company - People's Merchant Finance Company Ltd (Formerly Silvereen Finance Company Ltd) 2012 Rs'000

Property plant & equipment 15,256Investments 28,405Cash & cash equivalents 75,222Other current assets 258,415Current liabilities (160,376)Net identifiable assets and liabilities 216,922

Net consideration received in cash 424,517Cash disposed off 75,222Net cash inflow 349,295

The notes to the Financial Statements from pages 57 to 87 form an integral part of these Financial Statements.


Notes to the Financial Statements

1. REPORTING ENTITY

People's Merchant Finance PLC (Formerly People's Merchant PLC) ("Company") is a public quoted company incorporated on 26th January 1983 and domiciled in Sri Lanka. The registered office of the Company is situated at No.21, Nawam Mawatha, Colombo 2.

The consolidated financial statements of the Company for the year ended 31st March 2012 include the Company and its Subsidiaries (together referred to as the "Group" and individually as "Group entities").

The staff strength of the Company as at 31st March 2012 is 124 (2011 - 123).

1.1 Principle activities.

1.1.1. Company The principal activities of the Company

continued to be Leasing, Hire Purchase, Trade Finance, Real Estate, Short-term investments and Corporate Finance services.

1.1.2. Subsidiaries Pepole's Merchant Finance Company Ltd

was a subsidiary upto May 2011 untill it was sold.

PMB Services Ltd (Formerly PMB Financial Services Ltd), Currently PMB Services Limited is not operative.

2. BASIS OF PREPARATION

2.1. Statement of Compliance

The Financial statements of the Company are prepared in accordance with the Sri Lanka Accounting Standards laid down by the Institute of Chartered Accountants of Sri Lanka and comply with the requirements of Companies Act No 7 of 2007.

2.2. Approval of Financial Statements by Directors

The Financial statements were authorized for issue on 29th August 2012.

2.3. Basis of Measurement

The financial statements are prepared under the historical cost convention except for dealing securities, which are measured at fair value. No adjustments have been made for inflationary factors affecting the financial statements. Where appropriate the accounting policies are disclosed in the succeeding notes.

2.4. Functional and Presentation Currency

The Financial Statements are presented in Sri Lankan Rupees, which is the Company's functional currency. Financial information presented in Sri Lankan Rupees has been rounded to the nearest thousand unless indicated otherwise.

2.5. Use of Estimate and Judgment

The preparation of Financial Statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected.

Information about significant areas of estimation, uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the Financial Statements are described in Notes 2.5.1 to 2.5.3.

2.5.1 Classification of Dealing (Trading) and Investment Securities

In classifying securities as "Dealing" (Trading), the Company has determined that it meets the description set out in Note 4.5.1.

In classifying securities as "Investment", the Company has determined that it has both the positive intention and ability to hold the securities until their maturity date as described in Note 4.5.2.

2.5.2 Assessment of Impairment

The Company assesses at each Balance Sheet date whether there is objective evidence that an asset or portfolio of assets is impaired. The recoverable amount of an asset or Cash Generating Unit (CGU) is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to present value using appropriate discount rates that reflects the current market assessments of the time value of money and risks specific to the asset. The carrying value of goodwill is reviewed at each Balance Sheet date and is written down to the extent that it is no longer supported by probable future benefits. Goodwill is allocated to the respective CGU for the purpose of impairment testing.


Notes to the Financial Statements Contd....

2.5.3 Employee Retirement Benefits

The liability in respect of employee retirement benefits of the Company's as at Balance Sheet date was actuarially valued based on the assumptions set out in Note 37.

3. MATERIALITY AND AGGREGATION

Each material class of similar items is presented separately in the Financial Statements. Items of a dissimilar nature or function are presented separately unless they are immaterial.

4. SINGNIFICANT ACCOUNTING POLICIES

The accounting policies are applied consistently to all periods with due regard to prudence, materiality and substance over form criteria as explained in Sri Lanka Accounting Standard No.3 on Presentation of Financial Statements.

The accounting policies of the Company have been consistently applied by Group entities where applicable and deviations if any have been disclosed accordingly.

4.1 Basis of Consolidation

4.1.1 Subsidiaries

Subsidiaries are entities that are controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights, that presently are exercisable, are taken into account. The financial statements of Subsidiaries are included in the consolidated financial statements from the date that control effectively commences until the date that control effectively ceases.

The Minority Interests are presented in the consolidated Balance Sheet within Equity, separately from the equity attributable to the Equity Holders of the Company. Minority Interests in the profit or loss of the Group are disclosed separately in the consolidated Income Statement.

The consolidated financial statements are prepared to a common financial year end of 31st March. The accounting policies of subsidiaries have been changed where ever necessary to align them with the policies adopted by the Group.

4.1.2. Associates

Associates are entities in which the Company has significant influence, but no control over the financial and operating policies. Significant influence is presumed to exist when the Company holds between 20 and 50 percent of the voting power of another entity. The Associates are accounted for using the equity method and are recognised initially at cost. The Company's investments include goodwill identified on acquisition, net of any accumulated impairment losses. The consolidated financial statements include the Company's share of the income and expenses and equity movements of the Associate, after adjustments being made to align the accounting policies with those of the Group from the date that significant influence effectively commences until the date that significant influence effectively ceases.

When the Company's share of losses exceeds its interest in the Associate, the carrying amount of that interest is reduced to nil and the recognition of further losses is discontinued except to the extent that Company has an obligation or made payments on behalf of the Associate. If the associate subsequently reports profits, the Company resumes recognising its share of those profits only after its share of the profits equals the share of losses not recognised.

The Company discontinues the use of the equity method from the date that it ceases to have significant influence over an Associate and re classifies the investment as "Investment securities" in accordance with Sri Lanka Accounting Standard 22 "Accounting for Investments".

4.1.3. Transactions Eliminated On Consolidation

Intra-group balances and transactions and any unrealised gains arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with Associates are eliminated to the extent of the Group's interest in the Associates against the investment in the Associate. Unrealised losses are eliminated in the same way as unrealised gains except that they are only eliminated to the extent that there is no evidence of impairment.


4.1.4. Foreign Currency Transactions

All transactions in foreign currencies are converted at rates of exchange prevailing at the dates of the transactions are affected. Monetary assets and liabilities denominated in foreign currencies are translated at the rates prevailing on the balance sheet date. Exchange differences arising on the settlement of monetary items, and on the translation of monetary items, are included

in loss for the period.

ASSETS AND BASES OF THEIR VALUATION

4.2. Lease Rentals, Trade Bills, Hire Purchase & Other

Receivables

Lease rentals receivables, trade bills, hire purchase and other receivables are stated in the Balance Sheet net of provision for doubtful debts, prepaid lease rentals and net of interest which is not accrued to revenue on non performing advances.

4.3. Provision for Bad & Doubtful Debts

Specific and general provisions are made for bad and doubtful debts on advances comprising loans, bills of exchange, finance leases and hire purchases. Only a general provision is made in respect of guarantees issued to recognize liabilities that may arise, as any claim made on and honoured by us on a guarantee is considered as a loan with 100% provision.

Specific provisions for doubtful debts are based on a continuous review of advances. These provisions relate to bad and doubtful debts identified in accordance with Sri Lanka Accounting Standard No.23 - "Revenue Recognition and Disclosures in the Financial Statements of Banks" and above the stipulated guidelines issued by the Central Bank of Sri Lanka.

General provision is made on advances where no specific provisions have been made.

Provisions are applied to write off advances, in part or in whole, when loans are considered partly or

wholly irrecoverable.


Provisions on advances are made as follows:

As disclosed under Note 50, the company received its License to operate as a Finance Company subsequent to the balance sheet date. This will require a change in the provisioning policy of the company to be in line with the Finance ACT and will have an impact in the future provisioning in the income statement.

4.4. Investment in Treasury Bills and Treasury Bonds Held for Dealing

Investments in treasury bills and treasury bonds in dealing portfolio are those investments that the Group acquires or incurs principally for the purpose of selling, or holds as part of a portfolio that is managed for short term profit. These investments are initially recognised and subsequently measured at market value in the Balance Sheet. Gains and losses on marked to market valuation are dealt with through the Income Statement.

4.5. Investments

4.5.1. Dealing Securities

These are marketable securities acquired and held with the intention of resale over a short period of time. Such securities are initially recognized at cost and subsequently measured at market value. Gains and losses on marked to market valuations are dealt with through the income statement.

4.5.2. Investment Securities

These are acquired and held for yield or capital growth in the medium or long term. Such securities are recorded at cost. Changes in market values of these securities are not taken into account unless there is considered to be a diminution in value, which is other than temporary.

Non-quoted investments are valued at cost.

Classification Leases and

Hire purchases

Loans and Bills

of exchange

Guarantees

Specific provisionMore than 3 monthsLess than 6 months

5% 10% 100%

More than 6 monthsLess than 12 months

Sub-standard

20% 20% -

More than 12 monthsLess than 18 months

Doubtful 50% 50% -

More than 18 months Loss 100% 100% -

General provisionLess than 3 months

Regular 0.25% 0.5% 0.25%



4.5.3. Investments in Subsidiaries

Investments in Subsidiaries are stated at cost less impairment loss in the Company's financial statements.

4.5.4 Investments in Associates

Investments in Associates are accounted for at cost in the Company's financial statements and under the Equity method in the consolidated financial statements. Under the Equity method, the Investments in Associates are initially accounted for at cost and the carrying amount is adjusted for post acquisition changes in the Company's share of net assets of the Associates, less any impairment in the Company's net Investments in Associates.

4.5.5. Investment in Real Estate

Real estate inventories are stated at cost or market values which ever is lower. These costs include cost of purchase of the land and expenses on development that are capitalized.

4.6. Assets Held for Sale

Assets that are expected to be recovered primarily through sale rather than through continuing use are classified as "Held for Sale" once identified that the carrying amount will be recovered principally through a sale transaction rather than through continuing use. These are assets which are available for immediate sale in their present condition, subject to only the terms that are usual and customary for sale of such assets and their sale is highly probable.

"Assets Held for Sale" are presented separately on the face of the Balance Sheet at the lower of its carrying amount and fair value less costs to sell.

Assets classified as "Assets Held for Sale" are neither amortised nor depreciated.

Impairment losses on initial classification as held for sale and subsequent gains and losses on remeasurement are recognised in the Income Statement.

4.7. Property, Plant and Equipment

Property, plant and equipment are tangible items that are held for servicing, or for administrative purposes and are expected to be used during more than one period.

4.7.1. Basis of Recognition

Property, plant and equipment are recognised

if it is probable that future economic benefits associated with the assets will flow to the Group and cost of the asset can be reliably measured.

4.7.2 Measurement

An item of property, plant and equipment that qualifies for recognition as an asset is initially measured at its cost. Cost includes expenditure that is directly attributable to the acquisition of the asset and cost incurred subsequently to add to, replace part of, or service it. The cost of self constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use and the costs of dismantling and removing the items and restoring the site on which they are located. Purchased software that is integral to the functionality of the related equipment is capitalised as part of computer equipment.

4.7.3 Cost Model

The Group applies cost model to property, plant and equipment except for freehold land and buildings and records at cost of purchase or construction together with any incidental expenses thereon less accumulated depreciation and any accumulated impairment losses.

4.7.4 Subsequent Costs

The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within that part will flow to the Group and its cost can be reliably measured. The costs of day to day servicing of property, plant and equipment are charged to the Income Statement as incurred.

4.7.5 Derecognition

The carrying amount of an item of property, plant and equipment is derecognised on disposal or when no future economic benefits are expected from its use or disposal. The gain or loss arising from the derecognition of an item of property, plant and equipment is included in Income Statement when the item is derecognised.

When replacement costs are recognised in the carrying amount of an item of property, plant and equipment, the remaining carrying



amount of the replaced part is derecognised. Major inspection costs are capitalised. At each such capitalisation, the remaining carrying amount of the previous cost of inspections is derecognised.

4.7.6 Depreciation

Group provides depreciation on a straight-line method over the estimated life of the asset category. Depreciation is provided on a pro rata basis on the assets purchased /disposed of during the year.

The depreciation is provided at the following rates for each category:

Category Rate (per annum) Buildings 10%Motor vehicles 20%Computers 25%Office equipment, furniture, fittings 15%

4.7.7 Operating Leased Assets

Operating lease assets are stated at cost less accumulated depreciation charged on a straight- line method at the rate of 25%per annum. The depreciation commences in the month the asset is purchased and ceases in the month of disposal.

4.7.8 Impairment of Property, Plant & Equipment

The carrying value of the property, plant & equipment is reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists and where the carrying value exceed the estimated recoverable amount the assets are written down to their recoverable amount. Impairment losses are recognized in the Income Statement.

4.7.9 Intangible Assets

4.7.9.1 Basis of Recognition

An intangible asset is recognized if it is probable that future economic benefits that are attributable to the asset will flow to the enterprise and the cost of the asset can be measured reliably in accordance with the Sri Lanka Accounting Standard no. 37 - "Intangible assets". Accordingly these assets are stated in the Balance Sheet at cost less accumulated amortisation, less accumulated impairment losses if any.

4.7.9.2 Goodwill

Goodwill arising on the acquisition represents the excess of the cost of acquisition over the Group's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities at the date of acquisition. Upon transition to revised Sri Lanka Accounting Standard 25 "Business Combinations", goodwill is no longer amortised. Instead, goodwill is tested for impairment annually and assessed for any indication of impairment at each reporting date to ensure that its carrying amount does not exceed its recoverable amount. If an impairment loss is identified, it will be recognised immediately in the Income Statement.

The negative goodwill is recognised immediately in the Income Statement.

4.7.9.3 Computer Software

Computer software is stated at cost less accumulated amortisation, less accumulated impairment losses. The rate of amortisation is 25% per annum.

4.7.9.4 Subsequent Expenditure

Expenditure incurred on software is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred.

4.7.9.5 Amortisation

Intangible assets are amortised on a straight-line basis over the estimated life of the asset.

Amortisation is provided on a pro rata basis on the assets purchased /disposed of during the year.

4.7.9.6 Retirement and Disposal

An intangible asset is derecognised on disposal or when no future economic benefits are expected from its use and subsequent disposal.

4.7.9.7 Impairment of Assets

As per Sri Lanka Accounting Standard 41 - "Impairment of Asset", impairment is required to be determined for identifiable assets. Identifiable assets of the Company are reviewed at each Balance Sheet date to determine whether there is any indication of impairment. If any such indication exists,



the recoverable amount of the assets is estimated and shown in the Balance Sheet. The impairment loss is charged to the Income Statement.

LIABILITIES AND PROVISIONS

4.8 Commitments and Contingencies

All discernible risks are accounted for in determining the amount of other liabilities.

4.9 Employee Benefits

4.9.1 Employee Benefit Plan-Gratuity

The Group is liable to pay gratuity in terms of the Payment of Gratuity Act No 12 of 1983.

Based on the revised Sri Lanka Accounting Standards 16 (Revised 2006) - Employee Benefits ("SLAS 16") which became effective from the financial year commencing after 1 July 2007, the Company has adopted the actuarial valuation method from 1st April 2008. The liability recognized in the balance sheet is the present value of the defined benefit obligation using the projected unit credit method at the balance sheet date based on an actuarial valuation carried out by a professional actuary.

However, under the Payment of Gratuity Act No. 12 of 1983, the liability to an employee arises only on completion of five years of continual service.

4.9.2 Employee's Provident Fund and Employees' Trust Fund

All employees who are eligible for Employees' Provident Fund contributions and Employees' Trust Fund contributions are covered by relevant contribution funds in line with the respective statutes.

4.10 Provisions for Liabilities

A provision is recognized in the balance sheet only when the Company has a legal or constructive obligation as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation.

REVENUE AND EXPENSE RECOGNITION

4.11 Interest Income on Advances

Interest receivable on advances is recognized on an accrual basis. Interest ceases to be taken to revenue when interest or principal is in arrears for

three (3) months or more and thereafter such income is recognized on a cash basis. Further in instances where interest is suspended, the interest accrued up to three months is also removed from the interest income and transferred to the interest in suspense account.

4.12 Lease Income

4.12.1 Finance leases

Gross earnings from leases comprising the excess of rentals receivable over the cost of leased assets are allocated over the term of the lease, commencing with the month in which the lease is granted in proportion to the declining receivable balances.

Income of finance leases in respect of lease rentals due ceases to be taken to revenue when rentals are in arrears for three (3) months or more and thereafter such income is recognized on a cash basis. Further in instances where interest is suspended, the interest accrued up to three months is also removed from the interest income and transferred to the interest in suspense account.

4.12.2 Operating leases

Rental income is recognized as revenue on a straight-line basis over the term of lease.

Income of operating leases in respect of lease rentals due ceases to be taken to revenue when rentals are in arrears for three (3) months or more and thereafter such income is recognized on a cash basis. Further in instances where interest is suspended, the interest accrued up to three months is also removed from the interest income and transferred to the interest in suspense account.

4.13 Hire Purchase Income

Gross earnings from hire purchases comprising the excess of rentals receivable over the cost of hire purchase assets are allocated over the period of the hire purchase contract, commencing with the month in which the hire purchase is granted in proportion to the declining receivable balances.

Income of hire purchases in respect of rentals due ceases to be taken to revenue when rentals are in arrears for three (3) months or more and thereafter such income is recognized on a cash basis. Further in instances where interest is suspended, the interest



accrued up to three months is also removed from the interest income and transferred to the interest in suspense account.

4.14 Pawning income

Income on pawning is recognized proportionately on accrual basis over the period of the advance.

4.15 Bills of Exchange

Income on discounting of bills of exchange is recognized proportionately over the period of the instrument.

Interest income accrued on discounting of bills of exchange are reversed and transferred to the interest in suspense account, when bills are not settled on due dates.

4.16 Overdue charges

Overdue charges for late payment of lease rentals and other advances, and for delayed redemption of bills of exchange are recognized as income on a cash basis.

4.17 Dividend Income

Dividend income from shares is recognized in the period in which they are declared.

4.18 Interest Income from other sources

Interest on treasury bills and commercial paper is recognized proportionately over the period of instrument.

4.19 Gain on Real Estate Sales

Profit on real estate sales are recognized as follows:

4.19.1 The non-refundable deposits are recognized into income in the year of receipt, on signing the sales agreement and collection of.non-refundable deposit

4.19.2 The balance profit is recognized as follows:

4.19.2.1 On sale of land, on receiving at least 25% of the selling price and granting of an internal loan facility for the balance amount

4.19.2.2 On sale of houses constructed, only on completion of the house and after receipt of the full payment or confirmation from a recognized institution for payment.

4.20 Gains or Losses on Disposal of Property, Plant and Equipment.

Gains and losses resulting from the disposal of property, plant and equipment have been accounted for in the income statement.

4.21 Fee based Income

Fee based income is recognized on cash basis.

4.22 Profit or Loss on Sales of Marketable Securities

Profit or loss arising on sale of equity shares, commercial papers and other marketable securities is accounted for on cash basis.

4.23 Interest Expense

Interest payable is recognized on accrual basis. All interest expenses are charged to Income without capitalizing any amount.

4.24 Income Tax

Income tax expense comprise of current and deferred tax. Income tax expense recognized in profit or loss except to the extent that it relates to items recognized directly in equity in which case it is recognized in equity, in which case it is recognized in equity.

4.24.1 Current Taxation

Provision for Current tax on the profit for the year is computed in accordance with the provisions of the Inland Revenue Act No. 10 of 2006 and amendments there to, at the rates specified in Note No.17 to the financial statements.

4.24.2 Deferred Taxation

Deferred taxation is provided using the Balance sheet liability method providing for all temporary differences between the carrying amount of assets and liabilities for financial reporting purpose and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities using tax rates enacted or substantively enacted by the reporting date.

Deferred tax assets, including those related to temporary tax effects of income tax losses and credits available to be carried forward are recognized only to the extent that it is probable that future taxable profits will be available against which the assets can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the future related tax benefit will be realized.

5 CASH FLOW STATEMENT

The cash flow statement has been prepared by using the "Direct Method" of preparing Cash Flows in



accordance with the Sri Lanka Accounting Standard No.9 on Cash Flow Statements. Cash and cash equivalents comprise of cash balances and short-term funds.

6 SEGMENTAL REPORTING

A segment is a distinguishable component of an enterprise that is engaged either in providing products and services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.

Segmentation has been determined based on the activities of the Company. The activities of the segment are described in Note 45 to the financial statements.

7 COMPARATIVE FIGURES

Where ever necessary amounts shown for the previous year have been reclassified to facilitate comparison with the current year's presentation.

8. EVENTS AFTER THE BALANCE SHEET DATE

All the material post balance sheet events have been considered and appropriate adjustments /disclosures

have been made in the Financial Statements where necessary.

9. NEW ACCOUNTING STANDARDS ISSUED BUT NOT EFFECTIVE AS AT BALANCE SHEET DATE

The Institute of Chartered Accountants of Sri Lanka (ICASL) has issued a new volume of Sri Lanka Accounting Standards - 2011, applicable for financial periods beginning on or after 1st January 2012. These new Accounting Standards are prefixed as both SLFRS and LKAS which correspond to the relevant International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS).

Accordingly, these Standards have not been applied in preparing these financial statements as they were not effective for the year ended 31st March 2012.

The Company is currently in the process of evaluating the potential effects of these Standards on its financial statements and the impact on the adoption of these Standards have not been quantified as at the Balance Sheet date.

The Table below sets out the key impact areas for the Company in 2012 with the adoption of LKAS/SLFRS.

Accounting Standard Key requirement in the StandardsPreliminary assessment of potential impact to the Company

LKAS 32 - “FinancialInstruments Presentation”,LKAS 39 - “FinancialInstruments: Recognitionand Measurement”SLFRS 7 - “FinancialInstruments:Disclosures”

The Financial assets classified as Loans and Advanc-es will be initially recognised at fair value. Subsequent measurement of Loans and Advances will be at amor-tised cost using effective interest rates.

Impairment of financial assets will be based on the ob-jective evidence assessed by the Company at the end of the reporting period.

Individually significant loans & advances will be tested for impairment separately while loans which are not individually significant are collectively assessed for impairment.

The Company is in the process of quantifying the potential impact.

SLFRS1–“First-time Adoption of Sri Lanka Accounting Stan-dards”

This Standard is applicable to the company when it first applies SLFRS /LKAS. The opening SLFRS state-ments at the date of transition to SLFRSs need to be prepared. The same accounting policies should be used in its opening SLFRS statements and throughout all periods presented in its first SLFRs financial state-ments.

The Company is in the process of preparing the financial statements under SLFRS.



Group Company


Note Rs'000 Rs'000 Rs'000 Rs'000

10 Income Interest income 11 472,437 597,767 465,234 550,215 Other income 13 148,048 68,924 157,084 36,615 620,485 666,691 622,318 586,83011 Interest Income Bills of exchange 2,050 3,881 2,050 3,881 Finance & operating lease 186,407 222,384 183,428 202,054 Hire purchase 242,304 312,529 240,498 300,345 Term loans 31,088 53,473 30,085 43,146 Short-term investments 3,222 2,987 3,166 463 Pawning interest 3,773 326 3,773 326 Margin trading 2,234 - 2,234 - Other interest income 1,359 2,187 - 15,642 Provision for other interest income - - - (15,642) 472,437 597,767 465,234 550,21512 Interest Expense Bank overdraft 11,144 9,094 11,144 9,094 Other interest & charges 292,115 417,221 290,046 374,515 303,259 426,315 301,190 383,609

13 Other Income Profit/(loss) on sale of shares (2,879) 13,639 (2,879) 8,142 Profit on real estate sales 9,203 8,424 9,203 8,424 Fee based income 5,949 8,029 5,949 8,029 Dividend income 239 322 239 322 Profit/(loss) on disposal of fixed assets 145 (1,126) - 103 Profit on disposal of subsidiary 13.1 122,126 - 137,428 - Provision reversals 2,880 21,792 . - Sundry income 10,385 17,844 7,144 11,595 148,048 68,924 157,084 36,615 13.1 Profit on disposal of subsidiary Peoples Merchant Finance Company Ltd 28.2 122,126 - 137,428 - (Formerly Silvereen Finance Company Ltd)

The Company disposed its' entire holding of 99.99% in the subsidiary company, Peoples Merchant Finance Company Limited on 12th May 2011 for a consideration of Rs. 430Mn.



Group Company


Rs'000 Rs'000 Rs'000 Rs'000

14 Operating Expenses Expenses among others include the following : Directors emoluments 3,254 6,346 3,254 6,105 Depreciation 12,538 9,968 9,930 5,330 Amortisation of intangible assets 1,830 2,148 1,670 1,697 Auditors remuneration - Audit fee and expenses 1,062 1,107 927 867 - Audit related services and expenses 32 - 32 - - Non audit services and expenses 177 201 177 201 - Fee for other auditors - 310 - 310 Legal expenses 1,033 1,833 944 1,396 Financial & non refundable VAT 1,988 10,782 1,716 8,745 Salaries 59,795 50,426 59,147 39,602 Employer's contribution to Employees' Provident Fund 6,632 5,777 6,547 4,503 Employer's contribution to Employees' Trust Fund 1,654 1,404 1,637 1,126 Branch opening and relocation expenses 1,087 11,805 1,087 11,682 Donations 3,263 740 3,263 530 Provision for/(reversal of) employee benefits 2,947 (798) 2,947 238 Impairment loss - investment on subsidiary - - - 163,000 Provision for insurance receivables - 8,777 - 8,777 Provisions for arbitration expenses - 2,100 - 2,100 Provision for advance corporation tax receivables - 2,794 - 2,794

For the year ended 31st March

15 Provision for Bad & Doubtful Debts

Specific provision for bills of exchange 2,035 2,980 2,035 2,980 Specific provision for loans 103,870 16,866 103,870 12,021 Specific provision/(reversal) for lease (6,552) 23,193 (6,552) 14,432 Specific provision/(reversal) for hire purchase (2,596) 20,985 (2,596) 19,303 Total 96,757 64,024 96,757 48,736 General provision/(reversal) for bills of exchange 15 (78) 15 (78) General provision/(reversal) for guarantees (33) 45 (33) 45 General provision for loans 26 306 26 306 General provision reversal for lease (157) (593) (157) (593) General provision/(reversal) for hire purchase (1,918) 1,311 (1,918) 1,311 Total (2,066) 991 (2,066) 991 Total provisions made during the year 94,691 65,015 94,691 49,727

Group Company

2012 2011 2012 2011

Rs'000 Rs'000 Rs'000 Rs'000



16 Provision for Change in Value of Dealing Securities

Provision for fall in value of dealing securities at beginning of the period (1,789) (191) (1,202) (97) Adjustment due to disposal of subsidiary 587 - - - Provision for fall in value of dealing securities at end of the period (Note 20) 1,853 1,789 1,853 1,202 Provision/(reversal) during the year 651 1,598 651 1,105

17 Income Tax Expense Current tax on profits of the company has been provided at 28% on the taxable income.

17.1 Reconciliation of Effective Tax Rate

Accounting profit/(loss) 14,244 (63,842) 33,703 (215,320) Tax at the domestic rate of 28% 3,988 (22,345) 9,437 (75,362) Tax effect on exempted income 5,379 496 (67) 496 Tax effect on disallowable expenses (12,601) 105,595 (12,601) 85,097 Tax effect on capital allowances (101,208) (152,858) (101,208) (139,341) Tax effect on leasing activities 110,012 144,221 110,012 135,422 Social responsibility levy - 176 - 95 Effect of taxable losses of subsidiaries - (63,482) - - 5,573 11,803 5,573 6,407 Effective Tax Rate 39.13% (18.49%) 16.54% 2.98%

Tax on current year profit 5,573 11,803 5,573 6,407 Under/(over) provision 7,523 (43) 7,523 (43) Adjustment to deferred tax liability resulting from change in tax rate - (3,595) - (1,928) Deferred tax provision (Note 38) 642 (10,348) 409 (17,256) 13,738 (2,183) 13,505 (12,820)

Group Company


Rs'000 Rs'000 Rs'000 Rs'000

Group Company


Rs'000 Rs'000 Rs'000 Rs'000

Group Company


Rs'000 Rs'000 Rs'000 Rs'000



19 Cash and Short Term Funds

Cash in hand 3,741 2,561 3,741 1,556 Cash at bank 16,831 122,976 16,572 46,001 20,572 125,537 20,313 47,557

20 Dealing Securities

Cost of quoted dealing securities (Note 20.1) 4,912 15,905 4,912 9,476 Provision for fall in value of quoted dealing securities ( Note 16) (1,853) (1,789) (1,853) (1,202) Aggregate market value of the quoted dealing securities (Note 20.1) 3,059 14,116 3,059 8,274 Fixed income securities/commercial papers First Capital Treasuries Limited - 7,330 - - 3,059 21,446 3,059 8,274

Group Company

As at 31st March 2012 2011 2012 2011

Rs'000 Rs'000 Rs'000 Rs'000

Profit/(loss) after taxation (Rs.'000) 506 (61,659) 20,198 (202,500) Less : Dividends on cumulative preference shares (Rs.'000) 600 600 600 600 Profit/(loss) attributable to ordinary shareholders (Rs.'000) (94) (62,259) 19,598 (203,100) Weighted average number of ordinary shares (a) 49,250,000 40,125,000 49,250,000 40,125,000 Basic earnings/(loss) per share (Rs.) 0.00 (1.55) 0.40 (5.06)

(a) Qualifying ordinary shares at the beginning of the year 37,500,000 37,500,000 37,500,000 37,500,000 Effect of rights issued (Note 40) 11,750,000 2,625,000 11,750,000 2,625,000 Weighted average number of ordinary shares at the end of the year 49,250,000 40,125,000 49,250,000 40,125,000

Group Company


18 Basic Earnings/(Loss) Per Share

The calculation of basic earning per share is based on the net profit/(loss) attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding during the year, as per the requirement of the

Sri Lanka Accounting Standard No 34 "Earning per share".



As at 31st March 2012 2011 No of Cost Market No of Cost Market Shares Value Shares Value Name of Company Rs'000 Rs'000 Rs'000 Rs'000

20.1 Quoted Dealing Securities held by the Company

BANKS, FINANCE & INSURANCE Vanik Incorporation PLC 61 3 - 61 3 - Nation Trust Bank PLC 3,000 214 171 6,000 428 458 DFCC Bank 5,400 1,210 608 5,400 1,210 928 People's Leasing PLC 69,000 1,242 800 - - - National Development Bank 3,900 1,468 1,328 Sampath Bank PLC 23 6 4 1,000 268 288 Union Bank PLC 200 5 7 2,675 1,583 3,382 3,009 Sectoral percentage 54.46% 35.69% DIVERSIFIED HOLDINGS John Keells Holdings PLC 300 78 86 Richared Pieris and Company PLC - - - - - - - - - 78 86 Sectoral percentage 0.00% 0.82% PLANTATIONS Balangoda Plantations PLC - 5,000 299 281 - - 299 281 Sectoral percentage 0.00% 3.16% CHEMICALS Haycarb PLC - 2,800 466 435 - - 466 435 Sectoral percentage 0.00% 4.92% MANUFACTURING Chevron Lubricant Lanka PLC 1,849 316 336 6,000 1,024 960 ACL Cables PLC 4,700 451 294 10,000 960 940 767 630 1,984 1,900 Sectoral percentage 15.61% 20.94% HOTEL & TRAVELS Keells Hotels PLC 7,085 150 89 73,785 1,564 1,269 Hotel Services Ceylon PLC 43,500 1,320 757 50,000 1,517 1,155 1,470 846 3,081 2,424 Sectoral percentage 29.93% 32.51% INVESTMENT TRUST Environment Resources Investment PLC - - - 1,800 186 139 - - 186 139 Sectoral percentage 0.00% 1.96% Total dealing securities 4,912 3,059 9,476 8,274




20.1 Quoted Dealing Securities held by the Subsidiary Companies

John Keells Hotels PLC - - - 32,584 673 557 ACL Cables PLC - - - 5,800 552 538 Balangoda Plantation PLC - - - 22,100 1,478 1,225 Hotel Corporations PLC - - - 4,500 177 140 Hotel Services Ceylon PLC - - - 15,000 437 342 Richard Pieris and Company PLC - - - 67,500 506 907 Sunshine Holdings PLC - - - 31,000 2,187 1,653 Tokyo Cement Company (Lanka) PLC - - - 8,000 419 480 Total dealing securities held by the subsidiary company - - - - 6,429 5,842

Total dealing securities held by the Group 4,912 3,059 - 15,905 14,116

21 Investment Securities

Investments in debentures ( Note 21.1) - - - - Investments in shares ( Note. 21.2) 23 776 23 773 23 776 23 77321.1 Investments in Debentures

Vanik Incorporation Ltd 48 48 48 48 Provision for fall in value of investments in debentures (48) (48) (48) (48) - - - -21.2 Investments in Shares

Unquoted Unquoted investments in shares ( Note 21.2.1) 23 776 23 773 Provision for fall in value of investments in shares - - - - 23 776 23 773

Group Company

As at 31st March 2012 2011 2012 2011

Rs'000 Rs'000 Rs'000 Rs'000



22 Bills of Exchange

Gross receivable 35,515 56,042 35,515 56,042 Interest to be earned (235) (1,868) (235) (1,868) Interest in suspense (778) (1,644) (778) (1,644) 34,502 52,530 34,502 52,530 Provision for doubtful debts Specific (2,807) (24,222) (2,807) (24,222) General (36) (22) (36) (22) 31,659 28,286 31,659 28,28623 Loans & Advances

Term loans 394,401 648,879 394,401 608,069 Interest in suspense (102,206) (172,529) (102,206) (168,185) 292,195 476,350 292,195 439,884 Provision for doubtful debts Specific (23,069) (30,146) (23,069) (25,543) General (452) (426) (452) (426) 268,674 445,778 268,674 413,915 Margin trading advances 38,872 - 38,872 - Pawning advances 41,407 12,031 41,407 12,031 348,953 457,809 348,953 425,946

Group Company

As at 31st March 2012 2011 2012 2011

Rs'000 Rs'000 Rs'000 Rs'000


a Unquoted Investments in shares

I.D.M. Holding Ltd. - - - 75,000 750 750 Credit Information Bureau of Sri Lanka 100 23 23 100 23 23 23 23 773 773

b Unquoted Investments in shares by the subsidiary company

Credit Information Bureau of Sri Lanka - - - 25 3 3 - - - - 3 3

Unquoted Investments in shares by Group 23 23 776 776

21.2.1 Unquoted Investments in Shares



24 Finance Leases

Lease rentals receivable within one year Lease rentals receivable within one year from balance sheet date 531,043 711,164 531,043 605,933 Rental received in advance (752) (4,423) (752) (2,138) Interest in suspense (9,435) (26,576) (9,435) (22,860) Unearned lease income (110,551) (141,392) (110,551) (132,262) provision for lease receivable Specific (12,055) (64,814) (12,055) (61,221) General (2,118) (1,002) (2,118) (1,002) Lease rentals receivable within one year 396,132 472,957 396,132 386,450 Lease rentals receivable from one to five years Lease rentals receivable after one year from balance sheet date 632,025 819,094 632,025 732,344 Rental received in advance - (2,187) - (1,587) Unearned lease income (91,955) (150,660) (91,955) (120,072) provision for lease receivable Specific (20,762) (11,328) (20,762) (6,600) General - - - - Lease rentals receivable from one to five years 519,308 654,919 519,308 604,085 Total lease rentals receivable 915,440 1,127,876 915,440 990,535

25 Hire Purchases

Hire purchase rentals receivable within one year Hire purchase rentals receivable within one year from balance sheet date 540,651 793,962 540,651 750,499 Rental received in advance (218) (492) (218) (275) Interest in suspense (13,586) (23,564) (13,586) (23,080) Unearned hire purchase income (110,224) (201,792) (110,224) (194,697) provision for hire purchase receivable Specific (11,130) (32,156) (11,130) (31,787) General (1,938) (3,513) (1,938) (3,513) Hire purchase rentals receivable within one year 403,555 532,445 403,555 497,147 Hire purchase rentals receivable from one to five years Hire purchase rentals receivable after one year from balance sheet date 518,301 983,782 518,301 914,129 Rental received in advance - (795) - (50) Unearned hire purchase income (66,911) (176,747) (66,911) (147,460) Provision for hire purchase receivable Specific (14,473) (11,257) (14,473) (10,219) Hire purchase rentals receivable from one to five years 436,917 794,983 436,917 756,400 Total hire purchases receivable 840,472 1,327,428 840,472 1,253,547

Group Company

As at 31st March 2012 2011 2012 2011

Rs'000 Rs'000 Rs'000 Rs'000

Group Company

As at 31st March 2012 2011 2012 2011

Rs'000 Rs'000 Rs'000 Rs'000



Group Company

As at 31st March 2012 2011 2012 2011

Rs'000 Rs'000 Rs'000 Rs'000

26 Inventories

26.1 Vehicle

Vehicle stock 13,366 13,113 13,366 13,113 As at end of the year 13,366 13,113 13,366 13,113

26.2 Real Estate

As at beginning of the year 60,808 110,790 58,238 108,220 Additions for the year 40,225 14,081 40,225 14,081 Disposals during the year (28,047) (64,063) (28,047) (64,063) Real estate Inventories before provisions 72,986 60,808 70,416 58,238 Provision for real estate inventories (2,070) (2,070) (2,070) (2,070) Adjustment due to disposal of subsidiary (2,570) - - - As at end of the year 68,346 58,738 68,346 56,168

Total Inventories 81,712 71,851 81,712 69,281

As at 31st March 2012 2011 Principle Cost of Directors Cost of Directors activity Holding investment valuation Holding investment Valuation Rs'000 Rs'000 Rs'000 Rs'000

28 Investments in Subsidiary companies

PMB Services Limited (Formerly known as PMB Financial Services Ltd)

(Note 28.1) Not in operation 100% 175,000 - 100% 175,000 -

People's Merchant Finance company Ltd. Finance company 0.00% - - 99.99% 287,089 287,089

(Note 28.2)

Provision for impairment of subsidiary (175,000) - (175,000) - - - 287,089 287,089

Group Company

As at 31st March 2012 2011 2012 2011

Rs'000 Rs'000 Rs'000 Rs'000

27 Amount due from Related Parties

PMB Services Limited (Note 47.1) (Formerly known as PMB Financial Services Ltd) - - 22,133 25,308

People's Merchant Finance Company Limited - - - 383 Less: Provisions for related party receivables - - (22,133) (25,308) - - - 383



28.1 PMB Services Ltd (Formerly known as PMB Financial Services Ltd)

PMB Financial Services Ltd Ltd was setup in March 2009, as a fully owned subsidiary company of People's Merchant Finance PLC (formerly known as People's Merchant PLC) for taking over credit card operations carried out by ABC Credit Card Company Ltd. PMF initially invested Rs.23Mn. towards capital of this company.

The investment was increased to Rs.175Mn during the year 2010/2011 financial year. It was treated as a subsidiary company when group accounts are prepaired under Sri Lanka Accounting Standards No.26. The investment is fully impaired taking into account of decline in the value of investment due to losses in this company.

28.2 People's Merchant Finance Company Ltd (Formerly Silvereen Finance Company Ltd)

The Company acquired 44% of shares of People's Merchant Finance Company Ltdin March 2009. It became a subsidiary company in June 2009 with the acquistion of 55.99% balance shares. The fair value of the company was established by a valuation carried out by a professional firm as Rs.287Mn.

The Company disposed its' entire holding of 99.99% in the subsidiary company, People's Merchant Finance Company Limited on 12th May 2011.

The details of this transaction is given below;

Group Company Rs'000 Rs'000 Net Disposal Proceeds 424,517 424,517 Less: Cost of Investment - (287,089) Net Assets of Subsidiary as at 12th May 2011 (219,796) - Goodwill (82,595) - 122,126 137,428

29 Goodwill The cost of aquisition of 99.99% share holding in People's Merchant Finance Company Ltd amounted to Rs. 287

Mn. Goodwill arising on consolidation amounted to Rs. 82.6 Mn which is staed below.

2012 2011 Rs'000 Rs'000 Purchase consideration - 287,089 Net assets value of the company - 204,494 Gooodwill - 82,595



30.1 Group Free hold Land Building Motor Operating Furniture Computers Office Total Total Vehicles Lease & Fittings Equipment 2012 2011 Assets Rs'000 Rs'000 Rs'000 Rs'000 Rs'000 Rs'000 Rs'000 Rs'000 Rs'000

30.2 Company Free hold Land Building Motor Operating Furniture Computers Office Total Total Vehicles Lease & Fittings Equipment 2012 2011 Assets Rs'000 Rs'000 Rs'000 Rs'000 Rs'000 Rs'000 Rs'000 Rs'000 Rs'000

CostAs at 1st April 464,215 17,416 12,352 2,741 15,610 24,202 18,148 554,684 88,707Additions - - 24,893 - 36 2,145 2,163 29,236 484,743Disposals - - - (2,741) - - - (2,741) (16,251)Write off - - - - - - - - (2,515)Adjustment due to disposal of subsidiary (8,313) (3,662) (1,429) - (1,514) (4,075) (2,210) (21,203) -As at 31st March 455,902 13,754 35,816 - 14,132 22,272 18,101 559,977 554,684

Accumulated DepreciationAs at 1st April - 1,618 8,755 2,741 5,304 16,625 6,215 41,258 38,084Charge during the year - 1,418 3,799 - 1,900 2,938 2,483 12,538 9,968Impairment (30.1.a) - - - - 1,226 1,410 2,741 5,377 -Depreciation on disposals during the year - - - (2,741) - - - (2,741) (6,142)Write off - - - - - - - - (652)Adjustment due to disposal of subsidiary - (1,145) (877) - (492) (2,821) (612) (5,947) -

As at 31st March - 1,891 11,677 - 7,938 18,152 10,827 50,485 41,258

Net book value as at March 455,902 11,863 24,139 - 6,194 4,120 7,274 509,492

Net book value as at March 464,215 15,798 3,597 - 10,306 7,577 11,933 - 513,426

CostAs at 1st April 455,902 14,177 14,303 2,741 11,830 14,311 10,878 524,142 44,853Additions - - 24,893 - 36 2,145 2,163 29,236 485,789Disposals - - - (2,741) - - - (2,741) (6,500)As at 31st March 455,902 14,177 39,196 - 11,866 16,456 13,041 550,638 524,142

Accumulated DepreciationAs at 1st April - 473 7,832 2,741 4,112 10,759 4,043 29,960 27,942Charge during the year - 1,418 3,775 - 1,560 1,453 1,724 9,930 5,330Depreciation on disposals during the year - - - (2,741) - - - (2,741) (3,312)As at 31st March - 1,891 11,607 - 5,672 12,212 5,767 37,149 29,960Net book value as at March 455,902 12,286 27,589 - 6,194 4,244 7,274 513,489 -Net book value as at March 455,902 13,704 6,471 - 7,718 3,552 6,835 - 494,182

30.3 Information on the Freehold Land & Building of the Group

Location Extent Cost of Land and Building (Purches) Rs'000

Land at No. 21, Nawam Mawatha, Colombo 02. 108.40 469,656

Fair value of the property (Land and Building) (108.40 purches) amounted to Rs.525 Mn as at 21st January 2010, as valued by Mr.N.M. Jayathilake, Dip. In Val, B,Sc Est.Mat & Val., N.C.T. a registered valuer.

30 Property, Plant & Equipment

30.1.a All the property plant & equipment other than motor vehicles of PMB Services Limited have been fully impaired as at 31st March 2012.



31 Intangible Assets - Computer Software

Cost As at beginning of the year 13,862 13,803 13,223 11,415 Additions 612 1,808 612 1,808 Disposals/ write off - (1,749) - - As at end of the year 14,474 13,862 13,835 13,223 Accumulated Amortisation As at beginning of the year 10,589 9,128 10,260 8,563 Amortisation for the year 1,830 2,148 1,670 1,697 Disposals/ write off 150 (687) - - As at end of the year 12,569 10,589 11,930 10,260 Net book value as at 31st March 1,905 3,273 1,905 2,963

32 Other Assets

Deposits 6,181 6,669 6,160 4,995 Stationery stock 1,023 655 1,023 555 Real estate debtors 12,309 8,282 12,309 8,282 Staff debtors 665 380 665 329 Other receivables 78,120 103,758 78,120 96,425 Less: provisions for other receivables (9,993) (13,672) (9,993) (13,672) 88,305 106,072 88,284 96,914

33 Borrowings

Unsecured borrowings 1,404,977 2,394,898 1,404,977 2,258,148 Securitised borrowings (Note 33.1) 357,389 670,915 357,389 670,915 1,762,366 3,065,813 1,762,366 2,929,063

Payable within one year 836,531 276,064 836,531 265,082 Payable after one year 925,835 2,789,749 925,835 2,663,981 1,762,366 3,065,813 1,762,366 2,929,063

33.1 This represents borrowings from People's Bank, National Savings Bank, Hatton National Bank PLC and Bank of Ceylon for which part of lease and hire purchase portfolio amounting to Rs.375 Mn is securitised and Company

property at No.21, Nawam Mw, Colombo 02 is mortgaged for these facilities.

34 Interest Accrued

Securitised loans 3,441 6,905 3,441 6,905 Unsecured loans 7,498 7,152 7,498 7,152 Commercial papers 24,393 80,426 24,393 80,426 Promissory notes 32,397 35,451 32,397 32,275 67,729 129,934 67,729 126,758

Group Company

As at 31st March 2012 2011 2012 2011

Rs'000 Rs'000 Rs'000 Rs'000

Group Company

As at 31st March 2012 2011 2012 2011

Rs'000 Rs'000 Rs'000 Rs'000



35 Debentures ( Unsecured, redeemable )

Fixed interest, payable half-yearly 12% p.a , redemption 2012 - 100,000 - 100,000 - 100,000 - 100,00036 Dividends Payable

Unclaimed ordinary dividends - 76 - 76 Preference dividends 1,800 1,200 1,800 1,200 1,800 1,276 1,800 1,27637 Employee Benefits Balance brought forward 8,026 9,344 7,096 6,932 Adjustment due to disposal of subsidiary (930) - - - Charge/(reversal) for the year 2,947 (798) 2,947 238 Payments made during the year (162) (520) (162) (74) Balance carried forward 9,881 8,026 9,881 7,096

Group Company

As at 31st March 2012 2011 2012 2011

Rs'000 Rs'000 Rs'000 Rs'000

38 Deferred Tax Liabilities

Balance brought forward 13,710 27,653 7,712 26,896 Impact on rate change reversed to income statement - (3,595) - (1,928) Charge/(reversal) for the year 642 (10,348) 409 (17,256) Adjustment due to Disposal of subsidiary (6,667) - - - Balance carried forward (Note 38.1) 7,685 13,710 8,121 7,712

Group Company

As at 31st March 2012 2011 2012 2011

Rs'000 Rs'000 Rs'000 Rs'000

Employee Benefits- Gratuity

For People's Merchant Finance PLC (Formerly known as People's Merchant PLC), an actuarial valuation of the gratuity liability was carried out as at 31st March 2012 by Mr. M. Poopalanathan, AIA, Messrs Actuarial and Management Consultant (Pvt) Ltd, a firm of professional actuaries.

The valuation method used by the actuaries to value the liability is the "Projected Unit Credit Method", the method recommended by the Sri Lanks Accounting Standard No.16 (Revised 2006) "Employee Benefits".

Discount rate used 11% ( 2011-10%) Future salary increase 10% ( 2011-10%)



Group Company

As at 31st March 2012 2011 2012 2011

Rs'000 Rs'000 Rs'000 Rs'000

Group Company

As at 31st March 2012 2011 2012 2011

Rs'000 Rs'000 Rs'000 Rs'000

38.1 Deferred Taxation Deferred Tax Liabilities [Note 38.1.a] 12,663 15,957 13,099 9,699 Deferred Tax Assets [Note 38.1.b] (4,978) (2,247) (4,978) (1,987) 7,685 13,710 8,121 7,712

38.1.a Deferred Tax Liabilities Balance as at 1st April 15,957 30,923 9,699 29,321 Adjustment on disposal of subsidiary (6,927) - - - Impact on rate change - (4,157) - (2,424) Originated/(reversed) during the year 3,633 (10,809) 3,400 (17,198) 12,663 15,957 13,099 9,699

Deferred tax on property plant & equipment 1,009 5,739 1,400 858 Deferred tax on intangible assets 136 1,619 181 242 Deferred tax on lease assets 11,518 8,599 11,518 8,599 12,663 15,957 13,099 9,699

38.1.b Deferred Tax Asset Balance As at 1st April 2,247 3,270 1,987 2,426 Adjustment on disposal of subsidiary (260) - - - Impact on rate change - (562) - (496) Deferred tax asset recognized/(reversed) [Note 38.2] 2,991 (461) 2,991 57 4,978 2,247 4,978 1,987 Deferred tax on gratuity 2,767 2,247 2,767 1,987 Deferred tax on tax losses 2,211 - 2,211 - 4,978 2,247 4,978 1,987

38.2 During the year, the Company has incurred a tax loss of Rs. 7,896,725 from which company has recognised a deferred tax asset amounting to Rs. 2,211,083.

Based on the tax losses incured by the PMB Service Limited, there is a deferred tax assets of Rs. 49,042,896 (2011 - Rs. 49,146,256) as at the balance sheet date . However, due to the uncertainty regarding the availability of future taxable profits againgst which the deferred tax asset would be utilized, deferred tax asset has been recogniised only up to the temporary differences.

39 Other Liabilities

General provision for Guarantees 49 82 49 82 Lease / hire purchase suppliers 15,008 24,729 15,008 20,652 Other payables 24,086 11,046 20,303 2,063 Current taxation 2,236 3,201 2,236 2,233 41,379 39,058 37,596 25,030



40 Stated Capital

In accordance with section 58 of Companies Act No.7 of 2007, which became effective from 3rd May 2007 share capital,preference shares and share premium have been combined and reclassified as Stated Capital. The comparative information has been reclassified accordingly.

2012 2011 Rs.'000 Rs.'000

Ordinary Shares Opening balance - 37,500,000 ordinar shares 375,000 375,000 Rights issue of 30,000,000 Ordinary shares* 450,000 - Less Right Issue Expenses (6,172) Closing balance - 67,500,000 Ordinary shares 818,828 375,000 Share premium 259,399 259,399 Preference Shares 1,000,000 - 6% Cumulative non redeemable Preference shares 10,000 10,000 Stated capital as at 31st March 1,088,227 644,399

* Right issue of four ordinary shares for every five ordinary shares was exercised in November 2011. A total of 30 Mn shares were issued at a price of Rs. 15/- per share. The right issue funds were utilised to retire short term debt and to increase the Company's lending portfolio and to build up liquid asset requirement as laid down in Direction No.2 of 2011 issued by the Central Bank of Sri Lanka.

Revenue Reserve This represents the undistributed earnings held by the Company to be used in the Company's operations. This

could be used to absorb future probable losses or dividends payable.

Finance Leasing Reserved Fund This represent a reserve fund created in FY05/06, as per the directions issued by the Department of Non Banking

Financial institution of Central Bank of Sri Lanka, under the direction no 06 of 2005 of Finance Leasing Act No 56 of 2000.

This requires a sum equivalent to not less than 5% of profit after tax being transferred to the reserve fund until the amount of the reserve fund is equal to 50% of the issued and paid-up ordinary share capital of the Company, and thereafter, a further sum equivalent to not less than 2% of profit after tax until the amount of the reserve fund is equal to the issued and paid up ordinary share capital of the Company.

Accordingly an amount of Rs 1.01Mn was transferred to the finance leasing reserve fund from profit after tax for the FY 2011/12. (FY 2010/11 - Nil).

Investment Fund Account As proposed in the Government Budget 2011, every person or partnership that is in the business of banking or

financial services is required to establish and operate an Investment Fund Account (IFA).

Investment Fund Account consist of 8% of the profits calculated for the payment of Value Added Tax on financial services and 5% of the Profit Before Tax calculated for payment of Income Tax purposes during the year.

Accordingly the Company created the investment fund account by separately investing the required funds in bank deposits with the intention of reinvesting this amount in long term government securities.

41 Ordinary Dividends

There were no interim dividends paid to the Ordinary Shareholders during the year. Directors have not recommended the payment of a final dividend for the year ended 31st March 2012.



42 Non-performing Advances and Provisions

In the case of earnings under loans, finance leases and other advances interest income ceases to be taken to revenue when it is in arrears for three (03) months or more and thereafter such income is recognized on cash basis. As at 31st March 2012 the balances on which interest is not accrued are as follows

Bills of exchange 22,898 27,585 22,898 27,585 Loans 211,813 395,891 211,813 361,839 Lease 60,239 171,303 60,239 145,572 Hire purchase 54,047 140,425 54,047 133,487 348,997 735,204 348,997 668,483

Less: Specific provisions made as at 31st March ( Note. 42.2 ) 84,296 173,923 84,296 159,592 Net non-performing lending portfolio 264,701 561,281 264,701 508,891 Net non-performing advances of Rs.265 Mn is secured by immovable assets, movable assets and other registered

securities. The value of securities are discounted, if permitted, as per the directions of the Central Bank of Sri Lanka, when specific provisions are computed.

42.1 Movement in Bad & Doubtful Debts Provision

Balance brought forward 178,968 113,953 164,637 114,910 Additional provision made - specific 96,757 64,024 96,757 48,736 Provision / (reversal) - general (2,066) 991 (2,066) 991 Written off (170,439) - (170,439) - Adjustment due to Disposal of Subsidiary (14,331) - - - Balance carried forward ( Note. 42.2 ) 88,889 178,968 88,889 164,637

Group Company

As at 31st March 2012 2011 2012 2011

Rs'000 Rs'000 Rs'000 Rs'000

Group Company


Rs'000 Rs'000 Rs'000 Rs'000

As at 31st March 2012 31st March 2011 Group Specific General Total Specific General Total Rs'000 Rs'000 Rs'000 Rs'000 Rs'000 Rs'000

As at 31st March 2012 31st March 2011 Company Specific General Total Specific General Total Rs'000 Rs'000 Rs'000 Rs'000 Rs'000 Rs'000

Bills of exchange ( Note. 22) 2,807 36 2,843 24,222 22 24,244 Loans ( Note. 23) 23,069 452 23,521 30,146 426 30,572 Lease ( Note. 24) 32,817 2,118 34,935 76,142 1,002 77,144 Hire purchase ( Note. 25) 25,603 1,938 27,541 43,413 3,513 46,926 Guarantees - 49 49 - 82 82 84,296 4,593 88,889 173,923 5,045 178,968

Bills of exchange ( Note. 22) 2,807 36 2,843 24,222 22 24,244 Loans ( Note. 23) 23,069 452 23,521 25,543 426 25,969 Lease ( Note. 24) 32,817 2,118 34,935 67,821 1,002 68,823 Hire purchase ( Note. 25) 25,603 1,938 27,541 42,006 3,513 45,519 Guarantees - 49 49 - 82 82 84,296 4,593 88,889 159,592 5,045 164,637

42.2 Made up as follows:

42.3 Made up as follows:



43 Maturity Profile of Assets and Liabilities

Allocation of Amounts

Amounts were allocated to respective maturity groupings based on installments falling due as per contract. The amounts therefore represent total amount receivable or payable in each maturity grouping.

43 (a) Group

Group

As at 31.03.2012 Up to 3 - 12 1 - 3 3 - 5 More than Total 3 Months Months Years Years 5 Years Rs'000 Rs'000 Rs'000 Rs'000 Rs'000 Rs'000


Interest bearing assets Cash & short term funds 20,572 - - - - 20,572 Deposits, dealing securities & investment securities 109,191 - - - 71 109,262 Bills of exchange 31,659 - - - - 31,659 Loans 119,547 92,784 102,355 34,203 64 348,953 Leases 131,967 264,165 422,221 94,419 2,668 915,440 Hire purchase 135,957 267,598 400,252 36,665 - 840,472 Inventories - 81,712 - - - 81,712 Total Interest bearing assets 548,893 706,259 924,828 165,287 2,803 2,348,070 Total Non - Interest bearing assets 26,492 30,907 17,661 13,246 511,396 599,702 Total assets 575,385 737,166 942,489 178,533 514,199 2,947,772 Percentage 19.52% 25.01% 31.97% 6.06% 17.44% 100.00%

Interest bearing liabilities Securitised borrowings 223,704 58,715 74,970 - - 357,389 Unsecured borrowings 298,533 255,579 743,576 92,165 15,124 1,404,977 Bank overdraft 130,017 - - - - 130,017 Total interest bearing liabilities 652,254 314,294 818,546 92,165 15,124 1,892,383 Total Non- Interest bearing Liabilities 32,730 38,185 22,807 16,365 18,387 128,474 Equity - - - - 926,915 926,915 Total liabilities & equity 684,984 352,479 841,353 108,530 960,184 2,947,772 Percentage 23.24% 11.96% 28.53% 3.68% 32.58% 100.00%

Interest bearing assets Cash & short term funds 125,537 - - - - 125,537 Government, dealing securities & investment securities 37,426 3 - - 23 37,452 Bills of exchange 28,286 - - - - 28,286 Loans 208,968 105,593 121,918 21,330 - 457,809 Leases 150,824 303,502 489,643 164,133 19,774 1,127,876 Hire purchase 176,763 329,081 669,805 125,178 26,601 1,327,428 Inventories 26,937 44,914 - - - 71,851 Total Interest bearing assets 754,741 783,093 1,281,366 310,641 46,398 3,176,239 Total Non - Interest bearing assets 189,884 884 - - 514,598 705,366 Total assets 957,738 783,977 1,281,366 310,641 563,097 3,881,605 Percentage 24.34% 20.20% 33.01% 8.00% 14.45% 100.00%

Interest bearing liabilities Debentures - 100,000 - - - 100,000 Securitised borrowings 56,800 553,965 60,150 - - 670,915 Unsecured borrowings 705,664 1,473,319 214,804 1,111 - 2,394,898 Bank overdraft 39,769 - - - - 39,769 Total interest bearing liabilities 802,233 2,127,284 274,954 1,111 - 3,205,582 Total Non- Interest bearing Liabilities 145,589 40,490 - 8,026 - 194,104 Equity - - - - 484,019 484,019 Total liabilities & equity 947,822 2,167,774 274,954 9,137 484,019 3,881,605 Percentage 24.41% 55.83% 7.07% 0.24% 12.46% 100.00%



43 (b) Company

Company



Interest bearing assets Cash & short term funds 20,313 - - - - 20,313 Deposits, dealing securities & investment securities 109,239 - - - 23 109,262 Bills of exchange 31,659 - - - - 31,659 Loans 119,547 92,784 102,355 34,203 64 348,953 Leases 131,967 264,165 422,221 94,419 2,668 915,440 Hire purchase 135,957 267,598 400,252 36,665 - 840,472 Inventories 81,712 - - - 81,712 Total Interest bearing assets 548,682 706,259 924,828 165,287 2,755 2,347,811 Total Non - Interest bearing assets 26,485 30,899 17,657 13,243 515,394 603,678 Total assets 575,167 737,158 942,485 178,530 518,149 2,951,489 Percentage 19.49% 24.98% 31.93% 6.05% 17.55% 100.00%

Interest bearing liabilities Securitised borrowings 223,704 58,715 74,970 - - 357,389 Unsecured borrowings 298,533 255,579 743,576 92,165 15,124 1,404,977 Bank overdraft 130,017 - - - - 130,017 Total interest bearing liabilities 652,254 314,294 818,546 92,165 15,124 1,892,383 Total Non- Interest bearing Liabilities 31,598 36,864 22,053 15,799 18,813 125,127 Equity - - - - 933,979 933,979 Total liabilities & equity 683,852 351,158 840,599 107,964 967,916 2,951,489 Percentage 23.17% 11.90% 28.47% 3.66% 32.79% 100.00%

Interest bearing assets Cash & short term funds 47,557 - - - - 47,557 Government, dealing securities & investment securities 9,024 - - - 23 9,047 Bills of exchange 28,286 - - - - 28,286 Loans 193,147 94,364 120,314 18,121 - 425,946 Leases 124,236 243,583 454,275 148,667 19,774 990,535 Hire purchase 155,301 315,245 648,175 108,225 26,601 1,253,547 Inventories 26,937 42,344 - - - 69,281 Total Interest bearing assets 584,488 695,536 1,222,764 275,013 46,398 2,824,199

Total Non - Interest bearing assets 373,408 884 25,308 - 495,044 881,531 Total assets 957,896 696,420 1,248,072 275,013 543,543 3,705,730 Percentage 25.50% 18.79% 33.68% 7.42% 14.61% 100.00%

Interest bearing liabilities Debentures - 100,000 - - - 100,000 Securitised borrowings 56,800 553,965 60,150 - - 670,915 Unsecured borrowings 670,456 1,382,760 204,932 - - 2,258,148 Bank overdraft 38,242 - - - - 38,242 Total interest bearing liabilities 765,498 2,036,725 265,082 - - 3,067,305 Total Non- Interest bearing Liabilities 133,645 27,131 - 7,096 - 167,872 Equity - - - - 470,553 470,553 Total liabilities & equity 899,143 2,063,856 265,082 7,096 470,553 3,705,730 Percentage 24.26% 55.69% 7.14% 0.19% 12.71% 100.00%



44 Concentration of Assets

44.1 Concentrations in the Distribution of Assets

44.1.1 In order to minimise potential risks inherent in the realisation of the assets, the bank adheres to prudent exposure limits on customer and industry groups.

44.1.2. Industrywise distribution of main assets are given below:

Industry sector

1. Agriculture 4.0 11.0 4.0 10.0 2. Industry 12.0 15.0 12.0 16.0 3. Trading 6.0 31.0 6.0 30.0 4. Transport 15.0 9.0 15.0 8.0 5. Construction 15.0 9.0 15.0 9.0 6. Service 48.0 25.0 48.0 27.0 100.0 100.0 100.0 100.0

Group Company

As at 31st March 2012 2011 2012 2011

% % % %

45 Segment Information-Business Segments

45 (a) Group

For the year ended Trade bills & Leasing & Real Corporate Pawning Other Total 31 st March 2012 loans Hire purchase Estate Finance Rs'000 Rs'000 Rs'000 Rs'000 Rs'000 Rs'000 Rs'000

Income

Interest income 33,138 428,711 - 2,234 3,773 4,581 472,437 Other income 352 10,498 9,203 (2,640) - 130,635 148,048 Total income 33,490 439,209 9,203 (406) 3,773 135,216 620,485 Percentage 5.4% 70.8% 1.5% (0.1%) 0.6% 21.8% 100.0% Expenses

Interest 39,100 228,603 10,638 5,700 5,391 13,827 303,259 Other expenses 132,797 145,764 7,305 4,533 3,702 8,881 302,982 Total expenses 171,898 374,367 17,944 10,233 9,093 22,708 606,241 Profit before taxation (138,408) 64,842 (8,741) (10,639) (5,320) 112,508 14,244 Income tax expense (13,738) Profit for the year 506 Segment assets 334,381 2,203,404 77,702 43,371 45,243 243,671 2,947,772 Percentage 11.3% 74.7% 2.6% 1.5% 1.6% 8.3% 100.0% Segment Liabilities 228,357 1,509,580 52,542 30,313 32,334 167,731 2,020,857 Information on Cash Flows (Group) for the year ended 31st March 2012

Cash flow from operating activites 45,229 578.033 1,070 (38,872) (27,335) (142,308 415,817 Cash flow from investing activites - - - 1,924 - 213,267 215,191

Cash flow from financing activites (93,165) (613,113) (25,449) (12,143) (12,647) (69,703) (826,221)



45 (b) Company


Income

Interest income 52,180 534,913 5,174 - - 5,500 597,767 Other income 520 32,969 8,424 14,161 - 12,850 68,924 Total income 52,700 567,882 13,598 14,161 - 18,350 666,691 Percentage 8.0% 85.0% 2.0% 2.1% 0.0% 2.9% 100.0%

Expenses

Interest 55,358 319,209 16,565 2,238 - 32,945 426,315 Other expenses 38,116 207,656 24,010 7,271 - 27,165 304,218 Total expenses 93,474 526,865 40,575 9,509 - 60,110 730,533 Profit before taxation (40,774) 41,017 (26,977) 4,652 - (41,760) (63,842) Profit before taxation (63,842) Income tax expense 2,183 Loss for the year (61,659)

Segment assets 608,895 3,073,472 73,577 27,836 - 97,825 3,881,605

Percentage 15.7% 79.2% 1.9% 0.7% 0.0% 2.5% 100.0% Segment Liabilities 533,114 2,690,699 64,420 24,372 - 84,981 3,397,586

Information on Cash Flows (Group) for the year ended 31st March 2011

Cash flow from operating activites 77,086 (256,584) 80,329 - - (317,627) (416,796) Cash flow from investing activites - - - (7,063) - (8,255) (15,318) Cash flow from financing activites 116,337 436,535 24,209 6,055 - (1,637) 581,499


Income

Interest income 32,135 423,926 2,234 3,773 3,166 465,234 Other income 352 10,498 9,203 (2,640) - 139,671 157,084 Total income 32,487 434,424 9,203 (406) 3,773 142,837 622,318 Percentage 5.2% 69.8% 1.5% (0.1%) 0.0% 23.6% 100.0%

Expenses

Interest 38,834 227,043 10,566 5,661 5,354 13,732 301,190 Other expenses 130,712 133,574 6,738 4,229 3,415 8,758 287,425 Total expenses 169,546 360,617 17,304 9,890 8,769 22,490 588,615 Profit before taxation (137,059) 73,807 (8,101) (10,296) (4,996) 120,347 33,703 Income tax expense (13,505) Profit for the year 20,198

Segment assets 332,811 2,190,210 90,912 43,378 45,179 248,999 2,951,489 Percentage 11.3% 74.2% 3.1% 1.5% 1.5% 8.4% 100.0% Segment Liabilities 227,979 1,496,992 62,543 30,263 30,262 169,471 2,017,510

Information on Cash Flows for the year ended 31st March 2012

Cash flow from operating activites 44,226 579,036 1,070 (38,872) (27,335) (144,286) 413,839 Cash flow from investing activites - - - 1,924 - 288,489 290,413 Cash flow from financing activites (106,108) (620,598) (28,880) (15,475) (14,635) (37,536) (823,271)



Company


Income

Interest income 41,853 502,399 5,174 - - 789 550,215 Other income 520 7,309 8,424 8,664 - 11,698 36,615 Total income 42,373 509,708 13,598 8,664 - 12,487 586,830 Percentage 7.2% 86.9% 2.3% 1.5% 0.0% 2.1% 100.0%

Expenses

Interest 52,104 312,702 16,565 2,238 - - 383,609 Other expenses 29,085 171,695 24,010 7,365 - 186,386 418,541 Total expenses 81,189 484,397 40,575 9,603 - 186,386 802,150 Profit before taxation (38,816) 25,311 (26,977) (939) - (173,899) (215,320) Income tax expense 12,820 Loss for the year (202,500)

Segment assets 560,513 2,767,051 79,530 11,164 - 287,472 3,705,730

Percentage 15.1% 74.7% 2.1% 0.3% 0.0% 7.7% 100.0%

Segment Liabilities 489,379 2,415,624 69,437 9,747 - 250,990 3,235,177,

Information on Cash Flows (Group) for the year ended 31st March 2011

Cash flow from operating activites 83,459 (267,341) 80,329 - - (506,143) (609,696) Cash flow from investing activites - - - 3,867 - (8,065) (4,198) Cash flow from financing activites 116,295 574,544 16,501 2,316 - - 709,656

46 Contingent Liabilities and Commitments for Capital Expenditure as at 31st March 2012

46.1 The Company had issued Letters of Guarantee to the value of Rs.13.1Mn.

46.2 Litigation against the Company

H C (Civil) 198/2010/MR This case was filed by Siththy Nehimiya Junaideen against us seeking an injunction to stop us from

selling a land she provided as security. This case was dismissed by Court.

DLM 000133/2009 This case was filed by one Sunil Perera against the Company since he says that the Company has given

a loan to a third party on a security of an immovable property owned by Sunil Perera. The case was filed in the District Court of Colombo and at present the case is proceeding with the trial and now the plaintiff is giving his evidence.

DLM 00026/2010 This case was filed by S P Y D Lakmali against the Company since she has given her immovable property

to the Company as a security for the loan which was taken by her and her father and the case is pending in the District Court of Colombo and it is pending in the preliminary stage.



H C (Civil) 502/2009/MR Yasunaga Residencies (Pvt) Ltd has filed the above mentioned action in the Commercial High Court

against the Company by asking a sum of Rs.26,500,000/- and the Company has filed the Answer claiming a mortgage Bond action against the Yasunaga Residencies (Pvt) Ltd and at present the case is pending in the calling stage.

N. Soysa Vs People's Merchant Bank Ltd. The Ex CEO of the Company, Mr. Naomal Soysa has filed this suit against the Company in the Labour

Tribunal seeking reinstatement in service and compensation for termination of his services. The judgment was given in his favour but only compensation was awarded to him in a sum of Rs 2.1 Mn. We have appealed against the judgment and Mr Soysa too has filed an appeal asking to vary the judgment by setting aside the findings of the Labour Tribunal that Mr Soysa had failed to maintain cordial relations with his subordinates, vary the judgment awarding re instatement with back wages or in the alternative, by awarding enhanced compensation. The judgment is due on this case.

Dhammika Sumanasekara A case has been filed by an employee whose services were terminated by us in the Labour Tribunal

seeking re instatement in service, back wages and gratuity withheld. Trial is still going on.

Anura Fernando A case has been filed by an employee whose services were terminated by us in the Labour Tribunal

seeking re instatement in service and back wages 2011.Judgment is due.

Minone Gunawardana We have intervened in this testamentary case of one of our customers who died which is pending in

the District Court of Nugegoda. The case No. 238/2010/T was filed by our customer’s wife Minon Gunawardane. The diseased husband has taken a facility from the Company on a security of a Property mortgage and the Company has Intervened to get court permission to sell the mortgaged property to recover our dues which amounts to Rs 6.5Mn.

46.3 There were no commitments approved by the Board of Directors or contracted by the Company.

47 Related Party Disclosures The Company carried out transactions in the ordinary course of its business on normal commercial terms basis

with parties who are defined as related parties in Sri Lanka Accounting Standard 30 (Revised 2005) "Related Party Disclosures", the details of which are reported below.

47.1 Transaction with Subsidiaries

Name of Related Party Relationship Name of Common Transaction Limit / Amount paid Amount Director Type Value during Receivable year as at 31.03.12 Rs.000 Rs.000 Rs.000

PMB Services Ltd Subsidiary Settlement of (Formerly known as amount payable - 3,175 22,133 PMB Financial Services Ltd)

The Company has invested 175Mn in PMB Services Limited (Formerly known as PMB Financial Services Ltd), for which full provision has been made due to the impairment of the investment. Further the Company has fully provided for the amounts receivable from PMB Services Limited.

The Company has provided a letter of Comfort to its subsidiary confirming its intention to continue to provide financial and other support and meet liabilities to enable the subsidiary to continue as going concern.



47.2 Transaction with Other Related Parties

Name of Relationship Name of Common Transaction Limit / Amount paid AmountRelated Party Director Type Value during as at year 31.03.12 Rs.000 Rs.000 Rs.000

Peoples Bank Major Shareholder Mr.P.A.Ajith Panditharatne Overdraft 120,000 - 113,491 Chairman Interest - 11,114 -

Term Loan (Secured) 100,000 - 100,000 Mr.J.P.Amarathunga Interest - - -

Director Term Loan (Secured) 250,000 229,167 20,833 Interest 16,460

Mr.Sabri Ibrehim Term Loan (Secured) 70,000 23,400 19,300 Director Interest - 5,855 -

Term Loan (Secured) 130,000 22,000 - Interest 871 -

Term Loan (Secured) 300,000 91,250 - Interest 8,734 -

Term Loan (Unsecured) 40,000 36,667 - Interest - 2,244 -

Preference shares 10,000 - 10,000 Dividend - - -

Lanka Orix Leasing Comp Shareholder Mr.Kapila Jayawardena Short Term Loan 25,000 50,000 25,000 (unsecured) Director Interest - 5,653 -

Ceylon Strategic Holding Ltd Director Mr.Anura R Wickremasinghe Investment in 1,500 1,500 - MD/CEO Commercial Papers

47.3 Transactions with Key Management Personnel (KMP)

According to Sri Lanka Accounting Standard 30 (Revised 2005) "Related Party Disclosures", 'Key Management Personnel are those having authority and responsibility for planning, directing and controlling the activities of the entity. Accordingly, the Directors of the Company (including executive and non-executive Directors) and there immediate family members having classified as KMP of the Company.

Immediate family member is defined as spouse or dependent. Dependent is defined as anyone who depends on the respective Director for more than 50% of his/her financial needs.

In addition to their salaries/fees, the Company provides non-cash benefits to KMP. The Company also contributes to a post employment defined benefit plan on behalf of the Executive Director.

Remunerations paid to Key Management Personnel are disclosed in Note 14.

48 Directors Responsibility Statement

The Board of Directors take the responsibility for the preparation and presentation of the financial statement. Please refer page 49 of the Annual Report for the Statement of Directors Responsibility for Financial Reporting.

49 Reclassification of Comparative Figures

Where appropriate comparative information have been reclassified to confirm to the classification of 31st March 2012 financial statements.

50 Post Balance Sheet Events

People’s Merchant Finance PLC (Formerly known as Peolpe's Merchant PLC) was granted with the Finance Company License under the Finance Business Act No. 42 of 2011 by The Central Bank of Sri Lanka enabling the company to accept public deposits from 17th April 2012 onwards.The company name was changed to People's Merchant Finance PLC to be in line with Finance Business Act No 42 of 2011.


Statement of Value Added

Group Company


Rs'000's % Rs'000's % Rs'000's % Rs'000's %

Value Added Income 620,485 666,691 622,318 586,830 Less: Finance cost 303,259 426,315 301,190 383,609 Cost of other services 101,834 126,154 93,258 100,924 Provision for bad & doubtful debts 94,691 78,734 91,516 236,113 Diminution in value of investments 651 1,598 651 1,105 120,050 33,890 135,703 (134,921) Value Allocated To employees Salaries, wages and other benefits 88,850 74% 76,271 225% 88,084 65% 64,027 48% To providers of capital Dividends to shareholders 600 0% 600 2% 600 0% 600 0% To Government as taxes 15,726 13% 7,231 21% 15,221 11% (4,075) (3%) To Expansion and growth Retained income and depreciation 14,874 13% (50,212) (148%) 31,798 24% (195,473) (145%) 120,050 100% 33,890 100% 135,703 100% (134,921) (100%)

Value added per employee ( Rs.000's) 968 265 1,094 (1,216)


Graphical Review

Composition of Assetsas at 2011/12

Distribution of assets

Maturity annalysis of intrest bearing Assets and Liabilities as

at 31.03.2012

Cost to income ratio Income,interest and other expenses

Non Performing advances and affected Percentage

Total advances and Bad & Doubtful Debt Provision percentage

[on advances]

Composition of Assetsas at 31.03.2012


Ten Year Summary

Year ended 31st March 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 Rs. 000's

OPERATING RESULTS

Income 622,318 586,830 543,749 540,922 376,090 303,306 220,744 166,064 146,414 134,206

Interest income 465,234 550,215 501,796 497,933 351,071 270,372 181,211 139,181 125,876 112,634

Interest expense 301,190 383,609 387,053 351,822 215,396 129,669 83,903 54,470 57,404 58,287

Profit before taxation 33,703 (215,320) (14,286) 51,653 21,817 68,827 58,753 41,586 20,597 10,766

Profit after taxation 20,198 (202,500) (20,409) 28,849 14,791 44,789 36,468 32,434 20,597 10,766

EQUITY 933,979 470,553 673,653 460,291 442,042 459,101 192,571 181,703 191,725 179,228

RATIOS

Return on equity (%) 2.88 (35.40) (3.60) 6.39 3.28 13.75 19.49 17.37 11.10 6.21

Interest cover ( times ) 1.42 1.11 1.06 1.18 1.27 1.44 1.50 1.79 1.61 1.42

SHARE INFORMATION

Net assets per share ( Rs. ) 13.69 12.28 17.70 18.01 17.28 17.96 14.61 13.74 14.54 13.54

Earnings per share ( Rs. ) 0.40 (5.06) (0.66) 0.95 0.57 2.38 2.33 2.55 1.60 0.81

Gross ordinary dividend ( Rs.000 ) - - - 10,000 10,000 31,250 25,000 25,000 18,750 7,500

Dividend per share (Rs.) - - - 0.40 0.40 1.25 2.00 2.00 1.50 0.60

Market value per share (Rs.) 12.90 23.50 23.50 29.75 56.50 23.00 33.00 20.50 11.75 12.25

Price Earnings ratio 32.4 - - 31.3 99.1 9.7 14.2 8.0 7.3 15.1

Net assets per share Market value per share


Investor Information

Distribution of Share Holdings as at 31st March 2012 Residents Non- Reisdents Total Range of No. of No (%) of No. of No (%) of No. of No (%) of Shareholding Share of Share Share of Share Share of Share Holders Shares holdings Holders Shares holdings Holders Shares holdings

1 - 1,000 10,683 1,984,445 2.94 13 2,410 - 10,696 1,986,855 2.941,001 - 10,000 1,507 5,236,518 7.76 14 45,200 0.07 1,521 5,281,718 7.8310,001 - 100,000 211 5,481,969 8.12 5 187,300 0.28 216 5,669,269 8.40100,001 - 1,000,000 25 6,423,457 9.52 - - - 25 6,423,457 9.521,000,000 & above 6 43,557,196 64.52 1 4,581,505 6.79 7 48,138,701 71.31 12,432 62,683,585 92.86 33 4,816,415 7.14 12,465 67,500,000 100.00

Categories of Shareholders - Individuals / Institutions

31.03.2012 31.03.2011 No.of share No. of No.of share No. of Holders Shares % Holders Shares %

Individual 12,257 16,782,309 24.86 11,331 9,932,591 26.49Institutions 208 50,717,691 75.14 176 27,567,409 73.51Total 12,465 67,500,000 100.00 11,507 37,500,000 100.00

Categories of Shareholders - Residents / Non-Residents

31.03.2012 31.03.2011 No.of share No. of No.of share No. of Holders Shares % Holders Shares %

Residents 12,432 62,683,585 92.86 11,479 35,407,240 94.42Non Residents 33 4,816,415 7.14 28 2,092,760 5.58Total 12,465 67,500,000 100.00 11,507 37,500,000 100.00

Resident Non-Resident

2012 2011

7.14 %

92.86 %

5.58 %

94.42 %


Investor Information Contd....

Public Holding Non Public Holiday

2012 2011

34 %

66 %

41 %

59 %

Twenty Major ShareholdresName of the Share Holder Shareholding % Shareholding % 31.03.2012 31.03.2011

People's Bank 17,639,982 26.13 9,799,990 26.13People's Leasing Company Limited 8,819,992 13.07 4,899,996 13.07Sampath Bank PLC /Capital Trust Holdings Private Limited 5,500,000 8.15 - -Seylan Bank PLC / Capital Trust Holdings Private Limited 5,000,000 7.41 - -HSBC International Nominees Ltd-SSBT-Deustche Bank AG Singapore 4,581,505 6.79 - -Seylan Bank Ltd / Mr. G. Ramanan 3,459,497 5.13 - -Capital Trust Holdings (Pvt) Ltd 3,137,725 4.65 - -Mrs.K.I Ranaweera 895,780 1.33 - -Commerical Bank of Ceylon PLC / Mr.G Ramanan 684,000 1.01 - -Mr.M.M.Udeshi 626,099 0.93 545,500 1.45Mr.J.Gajendran 383,276 0.57 - -Environment Resources Investment PLC 380,400 0.56 2,444,300 6.52Mr.A.Sithampalam 359,076 0.53 - -Mr.K.S.D.Senaweera 310,496 0.46 - -Mr.G.M.Dhansingani 271,400 0.40 243,400 0.65Mr.C.N.Pakianathan 224,324 0.33 - -Mr.V.G.U.I.Ranaweera 210,500 0.31 - -Mr.Z.G.Carimjee 192,825 0.29 - -Mr.W.G.D.C.Ranaweera 187,560 0.28 - -Mrs.S.Umeshwary 180,000 0.27 - -

Other Shareholders who have either sold their Shares or present holding has fallen below top 20 - - 10,860,079 28.96 53,044,437 78.60 28,793,265 76.78

As per rule No.8.7(h) of the Colombo Stock Exchange, percentage of public holding as at 31.03.2012 was 23,241,277 (15,386,797 as at 31st March 2011). Public holding as a % of shares issued was 34.43% (41.03% as at 31st March 2011).


Share Information

Financial year ended 31.03.2012 31.03.2011 31.03.2010 31.03.2009 31.03.2008

Market value of shares

Highest price during the year ( Rs. ) 42.00 35.90 61.75 59.00 93.50

Lowest price during the year ( Rs. ) 12.00 19.90 23.50 23.75 18.50

Closing price ( Rs. ) 12.90 23.50 23.50 29.75 56.50

Investor Ratios

Price Earnings Ratio 32.4 - - 31.3 99.1

Net Asset value per share ( Rs. ) 13.69 12.28 17.70 18.01 17.28

Debt Equity Ratio 65:35 86:14 75:25 83 : 17 74 : 26

Interest Cover ( Times ) 1.42 1.11 1.06 1.18 1.27

Share Trading

Number of transactions 27,194 18,631 6,106.00 1,387 10,305

Number of shares traded 89,795,017 33,394,800 7,648,900.00 641,800 18,779,753

Value of shares traded ( Rs.000's ) 2,132,042 934,953 288,451.00 27,996 770,707

Market Capitalisation ( Rs.000's ) 870,750 881,250 881,250.00 743,750 1,412,500

PMF share price movementwith market performance

Rs.

F

‘07 ‘08 ‘09 ‘10 ‘11

8,000

9,000


Our Services

Deposit DivisionFixed Deposit & SavingsContact: Yasas 0777736171 011 2314322

Foreign CurrencySFIDA - Savings & FD in Foreign Currency and Local CurrencyEncashment of Foreign Currency Notes & Travelers ChequesSale of foreign Currency NotesContact: Sirisena- 0724834358 011 2300191

Corporate FinanceFeasibility Studies/ReportsSyndication of LoansMergers, Acquisitions and BuyoutsPrivatizations & Infrastructure ProjectsConsultancy ServicesBusiness ValuationFund ManagementInvestment Advisory ServicesPlacement of Equity/DebtSecuritizationContact: Anuradha 0773831392 011 2300191

Trade Finance

Margin TradingShort/Medium - Term LoansBills DiscountingBank GuaranteesContact: Anuradha 0773831392 011 2300191

LeasingLeasing of Vehicles and EquipmentsOperating LeasesHire PurchaseContact: Charith 0777873515 011 2300191 Waruni 0773127569 011 2300191

PawningGold LoansContact: Rajinda 0777719429 011 2300191

Real EstateSale of Property DevelopmentsOwner behalf saleContact: Jeewana 0772614216 011 2300191

Islamic BankingInvestment Products (Facilities)WakalaMurabahaIjarah

DepositMudaraba Savings and Fixed DepositsContact: Nilam 0773746237 011 2300191

Branches

Kurunegala183C, 2nd Floor, Colombo Road, KurunegalaContact: Nalin Rajakaruna 0777-811125 037-7389091-2

Matara213,Anagarka Dharmapala Mawatha , Nupe,MataraContact: Naleen Jayasekera 0777-238078 041-22200600/700

Matugama74B,Naboda Road, MatugamaContact: A. H. Piyasena 0714436871 034-2243828 034-2243869

Gampaha64, Queens Mary's Road, GampahaContact: Suneetha Jayanada 0773048486 033-2233633

Awissawella75,Yatiyanthota Road, AwissawellaContact: Amal Geeekiyanage 0714-848177 036-2233520 036-2233790

Elpitiya10/5, Pituwala Road ,ElpitiyaContact: Tushan Abeytunga 0773408043 091-2290498-9

Kandy145, Kotugodella Street, KandyContact: P. Mayadune 0777-274701 081-2200798-9

Negombo51/A, Thammita Road, NegomboContact: Prasad Fernando 0773063379 031-7389091-3

Trincomalee118 NC Road, TricomaleeContact: Ranjana Thoradeniya 0771855636 026-7389090-3

Anuradhapura09,Maithripala Senanayake Mawatha, AnuradhapuraContact: Buddhika Pothupitiya 0773914332 025-7389090-3


Glossary of Financial Terms

Associate CompanyAn enterprise in which an investor has significant influence and which is neither a subsidiary nor a joint venture of the investor

Bill of exchangeIt is a signed, written, unconditional order by one person to pay another a specific sum on a specific date in the future

Commercial PaperA debt instrument issued by a corporate body for borrowing funds which undertake to meet obligations on maturity date. It is a lower cost source of finance for companies to meet short-term financial needs.

Contingent AssetA possible asset that arise from past events and whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the control of the enterprise

Contingent LiabilitiesConditions or situations at the balance sheet date, the financial effect of which to be determining by future events which may or may not occur not wholly within the control of the enterprise

Financial LeasesA lease that transfers substantially the entire risks and rewards incident to ownership of an asset, to the Lessee

GuaranteesPrimarily represent irrevocable assurance that a Bank or an enterprise will make payments in the event that its applicant cannot meet its financial obligations to third parties

Interest MarginNet interest income divided by average interest earning assets, expressed as a percentage

Interest SpreadRepresent the difference between the average interest rate earned and the average rate paid on funds

Market CapitalizationNumber of ordinary shares in issue multiplied by the market value of each share

Net Asset Value per ShareEquity, less preference share capital divided by the number ordinary shares in issueNet Interest IncomeThe difference between income earned from interest bearing assets and cost incurred on financial instrument/facilities used for funding the interest bearing assets

Non - Current AssetsAn asset which is not easily convertible to cash or not expected to become cash within the next year

Non-performing AdvancesLeases, loans and other advances that are in arrears for 3 months or more area classified as non-performing advances. Interest income is recognized on these loans only on a cash Basis

Operating LeaseA lease where the substantial ownership lies with the Lessor and Lessee pays a rental for the use of asset

Price Earning Ratio (P/E Ratio)Market Price of an ordinary share divided by Earning per Share (EPS)

Provision for Bad and Doubtful DebtsA charge to income, on account of probable losses on advances granted. Specific provisions are established to reduce the book value of specific assets to estimated realizable values. General provisions are made for possible future losses

Promissory NoteIt is an agreement between an investor & the issuer, promising that the relevant amount will be paid on the given date

Related PartiesParties who could control or significantly influence the financial and operating policies of the business


Glossary of Financial Terms Contd....

Return on Average Assets (ROA)Net profit after tax expressed as a percentage of average total assets. Used along with ROE, as a measure of profitability and as basis of intra-industry performance comparison.

Return on Average Equity (ROE)Net profit after tax, less preference share dividend if any, expressed as percentage of average ordinary shareholders' equity.

Shareholders' Funds / EquityShareholders' funds / Equity consist of issued and fully paid share capital plus revenue and other reserves.

Segmental AnalysisAnalysis of financial information by segments of an enterprise specifically, the different industries and the different geographical areas in which it operates

Subsidiary CompanyAn enterprise that is controlled by another enterprise (known as the parent)

Syndication of LoansThis is the process by which the corporate finance department breaks through several different lenders in order to facilitate various portions of a loan.

Value AddedValue added is the wealth created by providing services less the cost of providing such services. The value added is allocated among the employees, the providers of capital, to government by way of taxes and retained for expansion and growth


Notice of Meeting

NOTICE IS HEREBY GIVEN that the 29th Annual General Meeting of PEOPLE’S MERCHANT FINANCE PLC will be held at the People’s Merchant Finance PLC Office complex at No. 21, Nawam Mawatha, Colombo 02 on 28th September 2012 at 2.00 p.m. for the following purposes.

1. To Receive and consider the Annual report of the Board of Directors on the Affairs of the Company and the Financial Statements for the year ended 31st March 2012 together with report of the Auditors thereon.

2. To reappoint Messrs KPMG Chartered Accountants, as the Auditors of the Company until the next Annual General Meeting at a remuneration to be agreed upon with them by the Board of Directors and to audit the Financial Statements of the Company for the accounting period ending 31st March 2013.

3. To approve donations and contributions made by the Directors during the year under review and to authorize the Board to determine donations and contributions for the ensuing year.

By order of the Board

Corporate Services (Private) LimitedSecretariesPeople's Merchant Finance PLC


Note: A Shareholder entitled to attend and vote at this meeting is entitled to appoint a proxy to attend and vote/ speak in his/her seat and a form of proxy is sent herewith for this purpose. A proxy need not be a shareholder of the company.

The completed form of proxy must be deposited at the Head office of the Company, No: 21 Nawam Mawatha, Colombo 2, not later than 48 hours prior to the time appointed for the holding of the meeting.


Notes


Proxy Form

I/We ……………………………………………………………………………………. of ……………………………………………………………………………………………… being a shareholder/shareholders of People's Merchant Finance PLC, hereby appoint …………………………………………………………………………….………. of ……………………………………………………………………………………………… or failing him/her Mr. P.A.A. Panditharatne or failing him Mr. B. S. Yapa or failing him Mr. A. S. Ibrahim or failing him Mr. J.P. Amaratunga or failing him, Mr. T.H.M. Wickramasinge, or failing him, Mr. M.M.S.K. Rajapakse, or failing him, Mr. G. Ramanan, or failing him, Mr. A.P. Weerasinghe, or failing him, Ms. S.V. Amarasekara, or failing her, Mr. N.C.Perirs as my/our proxy to attend and vote/speak at the 29th Annual General Meeting of the Company to be held on the 28th day of September 2012 and at any adjournment thereof.

For Against

(1) To Receive and consider the Annual Report of the Board of Directors on the Affairs of the Company and the Financial Statements for the year ended 31st March 2012 together with report of the Auditors thereon.

(2) To reappoint Messrs KPMG, Chartered Accountants, as the Auditors of the Company until the next Annual General Meeting at a remuneration to be agreed upon with them by the Board of Directors and to audit the Financial Statements of the Company for the accounting period ending 31st March 2013.

(3) To approve the donations and contributions made by the Directors during the year under review and to authorize the Board to determine donations and contributions for the ensuing year.

As witness my/our hand this ………….......................................… day of ……..............…. Two Thousand and Twelve.

……………………………………………… Signature

Note: Delete what is inapplicable Please see overleaf for instructions as to completion.


Proxy Form Contd....

INSTRUCTIONS AS TO COMPLETION

1. In order to appoint a proxy, this form duly completed, together with any power of attorney under which it is signed, must be deposited at the Registered Office of the Company, No.21, Nawam Mawatha, Colombo 2, not later than 48 hours prior to the time appointed for the holding of the meeting.

2. The proxy appointed need not be a shareholder of the Company.

3. You are kindly requested to bring with you, your National Identity Card or other valid source of identification (eg. Passport, Driving License).

Corporate Information

Name of CompanyPeople's Merchant Finance PLC

Legal formPublic Quoted Company registered under the Companies Act No.17 of 1982 and re-registered under the Companies Act No.07 of 2007

Company Incorporation & Registration No.Incorporated in Sri Lanka on 26th January 1983 bearing Registration No: N (PBS) 22

New Registration No: PQ 200

VAT Registration No: 134000228 7000

Stock Exchange Listing The Ordinary shares of the Company were listed with Colombo Stock Exchange in July 1994

Ordinary shares listed - 67,500,000

Registered OfficeNo. 21, Nawam MawathaColombo 02.Tel.: 2300191Fax.: 2300190E-mail: [email protected]: www.peoplesmerchant.lk

Board of Directors P. A. A. Panditharatne - ChairmanA. S. IbrahimJ. P. AmaratungaB. S. YapaT. H. M. WickramasingheG. RamananA. P. Weerasinghe M. M. S. K. RajapakseMs. S. V. AmarasekaraN. C. Peiris (as at 29th August 2012)Auditors KPMG Chartered Accountants 32A, Sir Mohamed Macan Makar MawathaColombo 03.

SecretariesCorporate Services (Private) LimitedNo. 216, De Saram PlaceColombo 10

LawyersFJ & De SaramAttorneys-at-LawNo. 216, De Saram PlaceColombo 10

Registrars SSP Corporate Services (Pvt.) Limited 101, Inner Flower RoadColombo 03

BankersPeople's BankHatton National BankBank of Ceylon

Corporate ManagementC. Samarasinghe - Chief Executive Officer M. Kiritharan - Chief Legal Officer A. Wickramatunge - Chief Financial OfficerC. Guneratne - DGM-Credit & Assets Finance (Range - 01) Waruni Wijenaike - DGM-Credit & Assets Finance (Range - 02)A. Gamage - DGM-Corporate Finance & Trade Finance N. C. B. Kottegoda - DGM- Recoveries & Real Estate Y. Ariyarathna - DGM-Business Promotions

Senior Management N.J.De.S. Karunasiri - Senior Manager - Real Estate Muditha Jayawickrema - Senior Manager - LegalG. Hirimbura - Senior Manager HR & AdministrationM. Ariyananda - Senior Manager - Recoveries A. Handaragama - Head of ITD.P. Assarapperuma - Head of Treasury M. F .M. Nilam - Head of Islamic BankingA. A .Sirisena - Head of Compliance & Foreign Currency S. Premaratne - Financial Accountant

Ayesha Thennakoon - Senior Assistant Manager - Internal Audit

Credit RatingBB+ (Ika) stable-credit rating from Fitch Ratings Lanka Ltd

No.21, Nawam MawathaColombo 02.

Tel - 011 2300191 Fax - 011 2300190E-mail - [email protected]

Web - www.peoplesmerchant.lk

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