The Case Study - Seylan Bank

The Case Study > Seylan Bank PLC Annual Report 2009

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Copyright © 2009 Seylan Bank PLCStock Code SEYB. N0000ISBN 978-955-1619-01-5Designed and produced by Smart MediaThis Annual Report is printed on paper containing post-consumer fibre.The paper used in this report is also certified under the Programme for the Endorsement of Forest Certification Schemes (PEFC)/Chain of Custody.

ContentsPrefaceA STORY WORTH SHARING ............................................................... 07Seylan Bank’s return to financial stability warrants a unique case study - withlessons for the entire financial services industry.Chapter 1GROWTH AND ITS CHALLENGES ...................................................... 09From its founding in 1987, ‘The Bank with a Heart’ grew rapidly, and managingthat success became increasingly difficult.Chapter 2A CRISIS OF CONFIDENCE ................................................................ 17In a general climate of uncertainty, misunderstandings around the collapse ofGolden Key Company triggered a run on Seylan Bank.Chapter 3SWIFT AND DECISIVE ACTION .......................................................... 25The Central Bank stepped in quickly, installing a new board of directors tostabilise the business and apply corrective measures.Chapter 4REASSURING THE PUBLIC ............................................................... 35The top priority of the Bank’s new board was to restore confidence throughforthright and transparent communications.Chapter 5REBUILDING THE BUSINESS ............................................................ 41A series of practical steps, including a systematic rethinking of policy in every area,soon yielded measurable positive results.Chapter 6A SOUND FUTURE STRATEGY ........................................................... 49Guided by a comprehensive strategic plan, Seylan Bank is building a healthy,sustainable future for all stakeholders.BENCHMARKS OF SUCCESS ............................................................ 55The ultimate measures of Seylan Bank’s return to stability and growth are thefinancial and operational results for 2009.Financial HighlightsManagement ReportRisk Management ReportCorporate Governance ReportSustainability ReportFinancial ReportsAppendixProfiles of the Board of Directors, Senior Management Team, Ten Year Summary,Summary of Performance Indicators, US$ Accounts, Investor Information, Branch Network,Geographical Analysis, Glossary, Corporate Information, GRI Compliance Index, Subject Index,Notice of Meeting, Sinhala Translations, Tamil Translations, Form of Proxy

9{ Chapter 1 }Growth and ItsChallengesFrom its founding in 1987, ‘The Bank with a Heart’ grewrapidly, and managing that success became increasingly difficult.Seylan Bank PLC was founded in 1987 and opened its doors for businesson 24th March 1988, in Colombo Fort, the traditional banking district ofSri Lanka’s largest city. Originally named Seylan Trust Bank Limited, it wasdesignated a Licensed Commercial Bank and incorporated as a public companywith a broad base of shareholders. From its founding, the new institution waspart of the Ceylinco Group of Companies, a major Sri Lankan conglomerateoperating in a wide range of industries.The goal of the Bank’s Founder Chairman, Dr. Lalith Kotelawala, wasto offer retail customers a more welcoming, service-oriented alternative in abanking culture that was generally perceived to be formal and regimented,even a bit austere. From the outset, Seylan Bank presented itself as a flexible,customer-friendly choice, summing-up its promise in a service motto that sooncaught the attention of prospective customers: ‘The Bank with a Heart’.A Customer Service LeaderSeylan Bank quickly differentiated itself in the Sri Lankan market-place with arange of innovative services, including:• Extended weekday banking hours, as well as Saturday service• 1% bonus interest on minimum average balances for savings accounts• Special high-interest savings accounts with contracted monthly deposits• 5% ‘thank-you’ bonuses on interest reinvested in fixed deposits• Personal Assistance Loans for customers with limited credit opportunities• Cash-card access to non-resident foreign currency accounts (often used bySri Lankan expatriates to transfer funds to their dependents)

10The Case Study > Seylan Bank PLC Annual Report 2009In 1992, the Bank introduced Sri Lanka’s first homegrown credit card -Seylan Card - in association with Golden Key Credit Card Co. Ltd. Threeyears later, Seylan Bank joined the Visa International network and over thenext decade became the largest issuer of Visa cards in Sri Lanka. A network ofAutomated Teller Machines was implemented beginning in 1995.The same period saw the Bank extend its retail network across the country,opening new branches and acquiring those of other institutions, including theSri Lankan branches of the failed Bank of Credit and Commerce International(BCCI). In addition, through the mid-1990s Seylan Bank extended its retailservices internationally, becoming a regional agency of the Western Unionglobal money transfer system and establishing presence in Dubai and Oman toserve expatriate Sri Lankans working in the Middle East.Entering the new millennium, Seylan Bank continued its course of steadygrowth, adding branches in previously under-served areas of Sri Lanka. TheBank also maintained its reputation as an industry innovator, leading the marketwith a mobile palmtop banking solution in 2007 and, in the following year,launching the country’s first corporate website in all three official languages -Sinhala, Tamil and English.At the same time, the Bank sought ways to further strengthen customerrelationships. For example, the Rewards Plus programme, featuring a prize drawthat benefited a few fortunate depositors, was replaced by a more sophisticatedloyalty programme called Merit Rewards, which recognised customers’academic and professional excellence, sporting achievements and medical orbereavement needs. Seylan Bank also affirmed its leadership in the realm ofsocial responsibility - notably by taking an active role in national rebuildinginitiatives following the devastating tsunami of December 2004 (the victims ofwhich included many Bank customers as well as employees).

Growth and Its Challenges11Rapid, Profitable GrowthSeylan Bank enjoyed immediate success, reporting after tax profit of Rs. 11.3 Mn.for its first partial year (i.e., from 24th March) ending 31st December 1988. Overthe next 17 years, the Bank grew at an unprecedented pace, with assets totallingRs. 113.6 Bn. by the end of 2005. Profits in the same period fluctuated to somedegree but followed the same overall rapid trajectory, reaching Rs. 687 Mn. (aftertaxes) in the 2005 financial year.Other key measures showed a similar pattern of dramatic growth.The Bank’s workforce increased steadily from an original staff of 72 to acompanywide total of 3,733 employees. A single head office location grew intoa network of 117 outlets - based, from 1997 onward, in a new headquarters,Ceylinco Seylan Towers. By 2005, Seylan Bank was Sri Lanka’s fifth-largestBank and ranked third among privately owned financial institutions.Unfortunately, that same year brought a dramatic heightening of publicconcern - following several years of increased scrutiny from regulators, bankinganalysts and other industry watchers - that Seylan Bank’s remarkable recordof growth masked some significant underlying management problems. Inretrospect we can see that these unresolved issues, while not the direct cause ofthe Bank run three years later, undoubtedly set the stage for the crisis to come.Overexpansion Carries a PriceIn the view of some stakeholders, the staggering growth achieved by SeylanBank had led to a classic case of overtrading. Banking is by definition a capitalintensivebusiness. However, in the case of Seylan Bank, aggressive expansion,both in terms of business volumes as well as physical infrastructure - openingbranches, expanding the ATM network, building new premises, etc. - had exertedtremendous pressure on the limited amount of capital available. Within fiveyears of the Bank’s founding, its gearing ratio (the degree of leverage requiredto finance operations, calculated as total assets divided by total shareholders’funds) shot up past 29 times. This pointed to serious problems ahead.

12The Case Study > Seylan Bank PLC Annual Report 2009The ratio in fact remained extraordinarily high through the rest of the1990s and beyond. Where other industry players typically hold the gearing ratiobelow a threshold of 15 times, Seylan Bank rarely managed to keep this keyperformance indicator below 20 times, and in many years it rose significantlyhigher. In retrospect, one need only glance at the Bank’s financial performancehighlights from the early 1990s onward to confirm a long-standing gap betweenbusiness needs and available resources.Another, complementary measure of the Bank’s financial health wasits capital adequacy ratio, which had been consistently forced downward asgrowth in capital failed to keep pace with growth in the volume of business.Beginning in 1993, the year it was first reported, this vital ratio was frequentlybelow - and never more than marginally above - the statutory minimum of 8%to 10% at the Tier I and II levels.In retrospect, one need only glance at the Bank’sfinancial performance highlights to confirm along-standing gap between business needs andavailable resources.With concern growing over these and other key indicators, in 2005, theCentral Bank of Sri Lanka moved to impose limitations on Seylan Bank’sexpansion plans. These included restrictions on the number of new branchesthe Bank was permitted to open, as well as its planned expansion of studentservicecentres and even its ATM network. Summing-up several years of suchrestrictions in the 2005 Annual Report, the Chairman expressed frustrationover measures that, in his view, prevented the Bank from fulfilling its mandateas a leader in the ‘bottom-up’ development of an emerging economy:

Growth and Its Challenges13“Despite (our) contribution towards the economy and the employmentwe have generated, I feel sad that we are not given a voice when it comes todevelopment plans or even in our own growth... I feel this is wrong because itis entrepreneurs like us who help grow the economy…”Other Warning SignsIn addition to the obvious indicators of overly ambitious expansion, industryobservers noted a growing number of signs that management at Seylan Bankwas not aligned with current professional standards for the industry. Amongmembers of the public as well, there was a growing perception that the Bankwas not being run properly.The indicators that aroused concern covered various aspects ofmanagement:• Seylan Bank’s cost-to-income ratio was the highest in the industry.• Its ratio of non-performing loans, ranging from just over 11% to more than 18%since reporting began in 1998, was similarly among the highest in the industry.• In addition to the shortfall in capital adequacy, there were other areas wherethe Bank failed to comply with minimum statutory requirements.• Seylan Bank was half the size of the country’s largest private bank in termsof assets, yet it employed virtually the same number of staff.• Operating expenses were as high, in absolute terms, as those of the nation’slargest private bank.• Productivity, gauged by assets per staff member and earnings per staffmember, was below industry norms.• Profitability, measured both by return on assets and return on shareholders’funds, fell significantly below industry norms - and below the returns postedby competing banks.

14The Case Study > Seylan Bank PLC Annual Report 2009In pointing out these warning signs, industry experts drew some generalconclusions about management effectiveness at Seylan Bank. Clearly, there wasreason to question the quality of credit appraisals in the Bank’s lending and otherfinancing activities. Risk management practices likewise fell short of reasonablestandards. And the Bank was significantly overstaffed, demonstrating a lack ofadequate human resource policies and procedures.Equally apparent to outside analysts were more specific problems in onecrucial aspect of the Bank’s business conduct - its relationship to the CeylincoGroup, whose principal shareholder and Chairman was also Seylan Bank’schair, Dr. Lalith Kotelawala.The Ceylinco ConnectionFounded in 1939 as the Ceylon Insurance Co., the company now known asCeylinco had just three small subsidiaries and a total of 100 employees whenMr. Kotelawala took on the Chief Executive role in the early 1960s. Underhis leadership, it grew into one of Sri Lanka’s major corporations, employingover 30,000 people and encompassing more than 250 affiliated companies.Some of those companies were publicly held and listed on the Colombo StockExchange; most, however, were owned by other companies within the Group,or by the Chairman and various Ceylinco directors.The complex interrelationships between SeylanBank and many of the companies associated withCeylinco were a further source of unease for analystsexamining the Bank’s financial performance,management practices and corporate governance.Ceylinco was a major shareholder in Seylan Bank from its founding, withan ownership stake averaging approximately 24% through the end of 2008. Inaddition, the two entities entered into a diverse range of business relationshipsover the years. For instance, in 1992, the Bank established a subsidiary, Ceylinco-Seylan Development Company Limited, which involved a partnership betweenthe two businesses. And, as stated earlier, the Bank’s original credit cards wereissued under a franchise agreement with Golden Key Credit Card Co. Ltd.,a company in the Ceylinco Group.

Growth and Its Challenges15The complex interrelationships between Seylan Bank and many of thecompanies associated with Ceylinco are beyond the scope of this case study.What is salient is that those close connections were a further source of uneasefor analysts examining the Bank’s financial performance, management practicesand corporate governance.In short, it was widely agreed that Seylan Bank (a) had taken on excessiveand unjustified lending exposures with regard to many companies within theCeylinco Group, and (b) had signed contracts deemed unfavourable to theBank’s own interests in order to obtain services from, or deliver services to, alarge number of Ceylinco companies.Again, these specific inferences about Seylan Bank’s connection toCeylinco, and even broader public conclusions about the competence of seniormanagement, did not directly cause the Bank run of December 2008. But thereis no question that they contributed to an overall climate of uncertainty aroundSeylan Bank, such that the actual triggering event, when it did come, hadconsequences that expanded far beyond the immediate crisis.

17{ Chapter 2 }A Crisis ofConfidenceIn a general climate of uncertainty, misunderstandings around thecollapse of Golden Key Company triggered a run on Seylan Bank.The immediate chain of events that led to the historic run on Seylan Bank occurredwithin - and was accelerated by - a broader context of public unease arising fromtwo recent institutional failures in Sri Lanka’s financial services sector.Several years earlier, Pramuka Savings & Development Bank Limited hadfailed, jeopardising the savings of more than 14,000 depositors. The CentralBank of Sri Lanka had subsequently stepped in and liquidated the failed bank,transferring its assets to a new entity. The complex process had taken sometimeto complete, however, and in 2008, the Pramuka Bank saga was still fresh in theminds of Sri Lankan consumers as an example of the potential personal risk ofentrusting deposits to a mismanaged institution.Then, in late September 2008, Sri Lankan media headlines weredominated by revelations that an unlicensed finance company had defraudedseveral thousand depositors of an estimated Rs. 900 million after luring themwith promises of exceptionally high rates of return. In what came to be calledthe Sakvithi Scam (named after the individual reportedly responsible for thecollapsed investment scheme - who subsequently fled the country), attentionquickly shifted from the plight of individual investors to the overall hazards ofdealing with finance companies that operated outside regulatory controls.In an effort to raise public awareness, the Central Bank of Sri Lankapublished - not for the first time - a list of all officially registered financecompanies. Among the significant omissions that immediately drew noticewere several companies within the Ceylinco Group, including Golden KeyCredit Card Co. Limited. In subsequent media reports, it emerged that GoldenKey, while not licensed to do so, had been accepting deposits from credit cardholders in the manner of a bank. Moreover, the Company had been offeringrates of return significantly higher even than those of the more aggressivefinance companies - reportedly in the range of 24% to 30% annually.

18The Case Study > Seylan Bank PLC Annual Report 2009The Problem of Golden KeyThe question of how such extraordinary interest rates could be offered by anyinstitution, licensed or otherwise, took on a new urgency in light of the Sakvithiscandal. And the doubts only intensified as a series of unprecedented crises in theglobal banking industry through the final months of 2008 sent the world’s economyspiralling into a severe recession. Rumours of financial difficulties at Golden Keyappeared to be confirmed by reports of depositors whose interest payment chequeshad bounced and others who had been unable to withdraw their funds.At the beginning of December 2008, Dr. Lalith Kotelawala - in his roleas Chairman of Ceylinco, Golden Key’s corporate parent - wrote to depositorsassuring them that all outstanding interest payments would be settled withintwo months. This did little to calm growing apprehension over the financialhealth of Golden Key, which at that point (according to later Court testimony)held about Rs. 26 Bn. on behalf of some 10,000 depositors. As new depositsdried up, and with no other means of covering the premature withdrawalrequests, the Company could do little more than offer further assurances. Atone point, a large group of angry depositors demonstrated outside the GoldenKey offices, demanding their funds back.Alarm over what appeared to be the imminent collapse of Golden Keyspread to customers of other Ceylinco companies that mobilised deposits - whichsoon faced similar problems in fulfilling the demand for withdrawals. Meanwhile,unsubstantiated stories circulated about behind-the-scenes transactions amongother Ceylinco subsidiaries designed to help Golden Key meet its obligations.In this climate of rising anxiety, it was not surprising that the cloud of rumourssoon enfolded one of the most prominent enterprises in which Ceylinco had amajor shareholding: Seylan Bank. Tainted by association, the Bank tried in vainto dispel suggestions that its own depositors had cause for concern.The Final StrawsWith public fears at their peak, the last few cards were played that brought SeylanBank to the brink. On 19th December 2008, having admitted to mismanagingGolden Key (according to later statements by Ceylinco Chairman, Dr. LalithKotelawala), the Company’s Chief Executive Officer tendered his resignationto Dr. Kotelawala. Police authorities were called and the CEO handed over hispassport. In a subsequent statement, Dr. Kotelawala confirmed that GoldenKey had been enmeshed in a major credit card fraud.On the afternoon of 23rd December, Dr. Kotelawala addressed thousandsof concerned Golden Key depositors at a convention centre in Colombo.After listening to a series of first-person accounts of the hardships causedby Golden Key’s liquidity crisis, the Chairman pleaded with the crowd to be

A Crisis of Confidence19patient and give the Company time to make good on its obligations. Then, on27th December the Executive issued a further statement, which proved to bethe inadvertent triggering event for what happened next to Seylan Bank.In retrospect it’s generally agreed that what Dr. Kotelawala meant tocommunicate, as he tried once again to allay concerns over Golden Key, was thatequity in other companies within the Ceylinco Group would be redeployed tohelp the failed credit card company pay off its depositors and creditors. However,when the Chairman specifically referenced selling his conglomerate’s stake inSeylan Bank, it was misinterpreted - through an unfortunate combination ofunclear reporting and public misunderstanding - as meaning that Ceylinco woulddirectly allocate bank assets in order to refund Golden Key deposits. PanickedSeylan Bank customers, convinced that their savings were about to be divertedtoward a Ceylinco bail out, rushed to their home branches to make withdrawals.In a matter of hours, a classic bank run was rapidly gaining momentum.A Run on the BankOver the next few days, long queues formed outside Seylan Bank locationsacross Sri Lanka. Branch staff faced some tense moments, between fieldingquestions from upset customers and securing additional funds from headoffice to meet the extraordinary demand for withdrawals. Contrary to somemedia rumours, the Bank never attempted to stop withdrawals. Indeed, insome branches, money was conspicuously displayed to reassure anxiousdepositors waiting in line that there were sufficient funds to cover their requests.Meanwhile, the corporate management team, faced with a shrinking numberof funding lines from other banks, worked closely with those institutions thatmaintained support - Bank of Ceylon, Wachovia Bank, Standard CharteredBank, Pan Asia Bank, Nations Trust Bank, People’s Bank, HSBC and StateBank of India - to ensure a steady supply of cash.Seylan Bank staff worked with remarkable diligence and professionalcomposure in handling a crisis situation none of them had ever confrontedbefore. They managed for the most part to keep customers calm and in somecases even managed to convince depositors to leave their accounts intact. But, itwas clear that this impressive grassroots effort could only go so far. History heldplenty of examples of Bank runs that had quickly spiralled out of control, notonly bringing down the original institutions but also threatening entire nationaleconomies. With the worldwide economic downturn already promptingcomparisons to the Great Depression of the 1930s, who could say how far thetremors from one national bank failure might reach?Clearly something had to be done - and at the highest level of Sri Lanka’sbanking system, a remarkable recovery effort was already in motion.

25{ Chapter 3 }Swift andDecisive ActionThe Central Bank stepped in quickly, installing a new board ofdirectors to stabilise the business and apply corrective measures.On 29th December 2008, Seylan Bank issued a statement clarifying theChairman’s press release of two days earlier:“What has been stated in the press release is that our Founder/Chairmanand Ceylinco Group have decided to divest Seylan Bank shares owned by CeylincoGroup so as to raise funds to honour the dues to Golden Key credit card holders.We emphasise that the intended sale is of the shares owned by Ceylinco Groupto a potential reputed investor subject to the permission of the relevant regulatoryauthorities… It is further clarified that what is intended for sale are not the assetsof the Seylan Bank, investments made by the Bank or any shares owned by SeylanBank. Furthermore, we wish to inform that Seylan Bank will not use the depositors’funds to meet the obligations to Golden Key credit card holders.”The clarification may have helped ease concerns in some quarters but, aswe’ve seen, did not succeed in neutralising the run on the Bank. What had fargreater impact, immediately and over the longer term, was a succinct statementissued the same day by the Central Bank of Sri Lanka: The board of directors ofSeylan Bank had been dissolved. State-owned Bank of Ceylon had been askedto appoint a new board and, in the meantime, would be providing managementsupport to Seylan Bank.It was a swift, decisive move following a few days of intensive behind-thescenesconsultations and reflecting the crucial support of the President and theGovernment of Sri Lanka. The general consensus was that a high-profile bankfailure would have disastrous consequences for the financial sector and, indeed,for the overall Sri Lankan economy, which was already shaken by the ongoingglobal crisis. Faced with such circumstances, the Central Bank was empoweredto take action. Under the provisions of Section 31 of the Monetary Law Act,the regulator could suspend the activities of a distressed Bank, remove its boardand order the immediate resumption of business under new management.

26The Case Study > Seylan Bank PLC Annual Report 2009As the Central Bank made clear in its statement, the intervention of itsMonetary Board was sparked not simply by the plight of depositors, but by thebroader threat to economic equilibrium:“The difficulties of Seylan Bank PLC presented a potential danger to thestability of the financial system. Therefore, the Monetary Board is of the viewthat immediate measures require to be taken to stabilise the financial system.”With management support from Bank of Ceylon, the largest commercialbank owned by the Sri Lankan Government, Seylan Bank would carry onoperating under its incumbent General Manager with no interruption inservice, and all current employees would retain their jobs. The Monetary Boardassured Seylan Bank customers that their deposits were safe and they couldconduct all transactions as usual. At the same time, the Central Bank reinforcedthe message to the general public that the banking system was not in jeopardy.This well-orchestrated intervention on behalf of Seylan Bank required aremarkable level of cooperation and support among all key players, including theGovernor of the Central Bank of Sri Lanka, Mr. Ajith Nivard Cabraal, as well asthe Monetary Board, its Bank Supervision Department and staff at many levels.Under New ManagementOn 30th December, the Central Bank Governor, Mr. Cabraal, met with the newlyappointed board of directors of Seylan Bank. The new Executive Chairman wasMr. Eastman Narangoda, a veteran of the banking industry who had previouslyheld the position of General Manager/CEO of National Savings Bank, astate-owned, AAA-rated institution. A former President of the Association ofProfessional Bankers of Sri Lanka, he had also served as Vice-Chairman of FinancialOmbudsman Sri Lanka (Guarantee) Limited and participated as a Commissionerin a Presidential Commission investigating failed financial institutions.Mr. Narangoda was joined by fellow directors Mr. Lalith Withana, aChartered Accountant; Mr. Naomal Goonewardena, a Chartered Accountantand Attorney-at-Law; and Mr. Nihal Jayamanne, President’s Counsel and aformer President of the Bar Association of Sri Lanka. Also at the meetingwas Seylan Bank’s senior management team, led by the General Manager,Mr. Ajitha Pasqual.

Swift and Decisive Action27The significance of this landmark, first meeting was summed up by theCentral Bank Governor: “We have brought in the Bank of Ceylon together withleading professional personalities in the country to head the new Seylan board,and they are expected to perform their duties until that Bank becomes stable.”That same day, trading in Seylan Bank shares, which had been halted bysecurities authorities during the crisis, resumed on the Colombo Stock Exchangeand immediately showed a slight rise in value - an encouraging sign of restoredconfidence. (Significantly, a day earlier the Bank had announced the extensionof a five-year debenture issue, after the full subscription of the first tranche ofRs. 400 Mn. - further evidence of longer-term support from institutional investors.)Mr. Pasqual, Seylan Bank’s General Manager, stressed to the media thatthe Bank was functioning normally with the backing of the Bank of Ceylonand the Central Bank. Now the challenge was to win back those customerswho had withdrawn their savings. He also asserted that the Bank would have noinvolvement with Golden Key, other than to assist with Ceylinco’s anticipatedpartial divestiture of its shareholding in Seylan Bank in order to reimbursedepositors in the credit card company.Highlighting the Bank’s successful track record as a retail servicesinnovator, Mr. Pasqual emphasised that the recent crisis had originated fromone segment of its customer base. Local and overseas funding partners, whileinitially concerned, had for the most part been reassured that Seylan retained asolid foundation on which to move ahead and rebuild any lost business.The spirit of a new beginning was symbolically reinforced when theboard of directors joined Seylan Bank employees at a head office gathering towelcome in the New Year. After the traditional lighting of an oil lamp, the newExecutive Chairman expressed his confidence that the Bank would soon returnto strength. With the immediate crisis already showing signs of abating, it wastime to address some of the deeper management challenges and help SeylanBank reach even greater heights as a leader in the financial services industry.

28The Case Study > Seylan Bank PLC Annual Report 2009

29“WE HAVE HONOURED EACHAND EVERY CUSTOMER WHOCAME TO WITHDRAW MONEYAND NEVER TURNED THEMBACK AT ANY SINGLE POINT...I MUST ALSO TELL YOU THATWHEN THE CENTRAL BANKINTERVENED AND APPOINTEDA NEW BOARD OF DIRECTORS,PUBLIC PERCEPTION CHANGEDAND MANY CUSTOMERS WHOEARLIER WITHDREW MONEYIN FACT RETURNED TO THISBANK TO DO THEIR FINANCIALTRANSACTIONS.”Eastman NarangodaExecutive ChairmanAt a media briefing held on 8th January 2009

30the board of DIRECTORSThe Case Study > Seylan Bank PLC Annual Report 20095123The profiles of the directors are given on pages 228 and 2291. Mr. Eastman Narangoda Executive Chairman2. Mr. R. Nadarajah Executive Director3. Mr. Nihal Jayamanne - President’s Counsel, Director4. Mr. Lalith Withana Director

3110847965. Rear Admiral (Rtd.) B.A.J.G. Peiris Director6. Mr. Pradeep G.S. Kariyawasam Director7. Dr. Nalaka H. Godahewa Director8. Mr. Ajith L. Devasurendra Director9. Mr. Ishara C. Nanayakkara Director10. Mr. Samantha P.S. Ranatunga Director

Swift and Decisive Action33Mr. Narangoda outlined these objectives in a highly publicised mediabriefing on 8th January 2009. The Executive Chairman also used this occasionto share the new board’s perspective on the recent crisis, revealing that a totalof Rs. 7 Bn. had been withdrawn in the preceding weeks:“We have honoured each and every customer who came to withdrawmoney and never turned them back at any single point... I must also tell youthat when the Central Bank intervened and appointed a new board of directors,public perception changed and many customers who earlier withdrew moneyin fact returned to this Bank to do their financial transactions.”Seylan Bank subsequently announced that it would be reducing its lendingto companies in the Ceylinco Group. It was the first in a series of signals thatthe Bank was distancing itself not only from Golden Key, but also from thelarger conglomerate of which it was a part.The failed credit card company continued to generate headlines inearly January, both for the deepening legal difficulties of its principals andfor Ceylinco’s repeated assurances that it would soon begin paying backdepositors. In the weeks and months that followed, there were further protestsby angry Golden Key customers as well as employees - along with wideningcriminal investigations, high-profile arrests and revelations that other Ceylincosubsidiaries faced serious financial problems.At Seylan Bank, meanwhile, that 8th January news conference wasfollowed by a series of proactive steps aimed at getting key messages fullyaired and understood by customers and the general public. It was clear thatcommunications, even ahead of specific management changes, would play avital role in getting the Bank back on a solid footing.

35{ Chapter 4 }Reassuringthe PublicThe top priority of the Bank’s new board was to restoreconfidence through forthright and transparent communications.Seylan Bank not only survived the trying days that closed 2008, but did so ina way that was truly remarkable. Around the world, prominent banks draggeddown by the global financial crisis had been rescued with Government bail outs,either in the form of massive infusions of capital or, in a few cases, outrightnationalisation. By contrast, the express support of the Central Bank and amajor state-owned commercial bank was sufficient for Seylan Bank to quicklyregain its equilibrium and begin moving forward again, with no need for a fullfledgedfinancial rescue.The Full StoryIn mid-January Seylan Bank’s new board oversaw publication of acommunications vehicle entitled The Full Story, which was given wide nationalcirculation. Through a series of executive interviews and partner testimonials,the document affirmed the Bank’s status as an independently run entity thathad prevailed in challenging circumstances by adhering to a core set of soundbusiness practices. It also reinforced the Bank’s continued commitment tothe following “all regulations and compliance initiatives governing financialinstitutions instituted by the Central Bank, the Monetary Board and otherregulatory bodies.”Highlighting Seylan Bank’s strong fundamentals and traditionally highstandards of service, Mr. Pasqual, the Bank’s General Manager, delivered astrong message of pride, commitment and continuity: “Our customers havebeen our partners for 20 years, and we will be with you for the next 20 years andmore.” In a companion interview, the new Executive Chairman, Mr. Narangoda,underlined the professional credentials of the board and senior managementteam, as well as the expressions of solidarity from across the financial sector:“I have utmost confidence that the Bank can emerge from this situation.”

36The Case Study > Seylan Bank PLC Annual Report 2009Also contributing to The Full Story was the Chairman of Bank of Ceylon,Dr. Gamini Wickramasinghe, who spoke frankly about Seylan Bank’s problemswhile affirming his Institution’s unwavering support:“We are the largest bank in the country. We are probably also the moststable due to our large asset base, reserves and risk management capabilities.Moreover, we carry the weight of the Government behind us, and this givespeople immense confidence... Seylan Bank needed large infusions of local aswell as foreign currency. The Central Bank has asked Bank of Ceylon to stepin to fill the void of funding and to help Seylan Bank manage its affairs in thisperiod of restoring confidence and consolidating its finances. I must, however,stress that we have no intention of being privy to privileged information, andour intention is purely to help a good and long-standing bank come throughthis difficult period.”As a testament to the fact that corporate clients had remained solidlybehind Seylan Bank, The Full Story included endorsements from seniorexecutives of several leading Sri Lankan corporations. They expressed theirconfidence in the new board’s leadership and their continuing loyalty to theBank, based on the successes of the past.Lastly, the publication presented a selection of testimonials from Bank’semployees, who recounted how they’d helped cope with the crisis at the retaillevel and shared their first-hand contributions to the Bank’s success in gettingback on track. As the centrepiece of a hurriedly launched media campaign,The Full Story was an effective vehicle for getting important messages acrossand garnering public attention. However, as the outflow of deposits continued- totalling Rs. 18 billion for January and February - there was no question thatmore work was needed to win back the hearts and minds of retail customers.

Reassuring the Public37A Multi-Front CampaignSeylan Bank’s public information campaign began in earnest within days ofthe new board assuming control and targeted a range of fronts simultaneously.Communications initiatives included:Advertising and Public RelationsThe Bank launched a coordinated campaign of press advertisements and PRefforts with major media outlets, all communicating the central message thatthe change in management marked not simply the end of the crisis but thebeginning of a new era. The goal was to maintain constant visibility by issuingnewsworthy releases and fostering journalistic contacts to suggest storiesworthy of coverage. Head office initiatives were supported at the local level bybranch managers, who were encouraged to act as PR representatives with themedia and community groups. In addition, branch staff were briefed on newmarketing plans at regular meetings.Direct Mail CampaignAll customers who had remained with Seylan Bank throughout the crisisreceived a thank you letter expressing gratitude for their support during adifficult period. At the same time, letters were sent to those who had withdrawntheir deposits, expressing understanding for their decision and asking that theynow consider returning to the newly stabilised Bank.

38The Case Study > Seylan Bank PLC Annual Report 2009Management OutreachManagement-level staff across the Bank launched a programme of regularmeetings with customers as well as employees, getting the message out thatthe emergency had passed and smooth, reliable operations had resumed. TheExecutive Chairman and the General Manager visited Seylan Bank branchesacross the country, answering questions and offering personal assurances tomembers of the public as well as branch staff. Indeed, these visits were especiallyeffective in raising morale, as many employees had never seen the Chairman oftheir Bank in person before. Through a steady programme of regional meetingsand less formal gatherings, senior managers found new opportunities to connectwith employees - seeking their input, keeping them informed, helping to shiftattitudes and generally motivating everyone to work together in sustaining theBank’s return to health.Enlisting Customer SupportIn some locations, customers took the lead in showing support for thebeleaguered Bank. Branches in Galle, Matara, Mirigama, Badulla andBandarawela gratefully put up banners created by patrons who wanted othersto know how Seylan Bank helped them through their own difficult times, sonow they were pleased to reciprocate. A number of prominent customers tookpart in publicity campaigns that showed them depositing cash.Door-to-Door CampaignOn the initiative of the Executive Chairman, Seylan Bank took its marketingefforts literally to the streets, introducing its first-ever house-to-house publicawareness and promotional campaign. Launched across the country on31st January 2009, the effort saw Bank’s employees at every level - from branchstaff to the Executive Chairman, the Executive Director and the General Manager -visiting homes and businesses and greeting people in public spaces, spreading

Reassuring the Public39the word that ‘The Bank with a Heart’ was alive and well. Featuring prizedraws, music and a festive street-party atmosphere, the campaign was hugelysuccessful in sparking interactions with new and lapsed customers, and ingenerally rebuilding the Bank’s positive public image - along with employees’team spirit.Seylan Bank took its marketing efforts literally to thestreets, introducing its first-ever house-to-housepublic awareness and promotional campaign.Taken together, these various communications efforts spearheaded by theboard of directors played a huge part in reaffirming Seylan Bank’s place inthe public consciousness as a solid, trusted, customer-focused market leader.Ensuring that the Bank once again met those expectations required a paralleleffort behind the scenes, as the board and management worked to transform thenew strategic plan into real business change with measurable results.

41{ Chapter 5 }Rebuildingthe BusinessA series of practical steps, including a systematic rethinking ofpolicy in every area, soon yielded measurable positive results.The new board of directors understood that the reinvention of Seylan Bankmust begin at the highest level, with new policies and practices aroundcorporate governance. Board meetings, traditionally held once a month, nowbecame weekly events, starting at 4:30 p.m. and often running as late as 2:00the following morning. In addition to the Management Committee, the boardestablished Credit, Audit, Nominations, Remuneration and Risk Managementcommittees. With a better-defined corporate structure, a rigorous set ofstandards and a commitment to lead by example, the executive team could thenbegin implementing the myriad practical measures required to get the Bankmoving forward on a secure and profitable path.In a series of meetings in various forums, the Bank’s leadership soughtto restore employees’ confidence in their institution and obtain their supportfor the collective effort to come. Employees gained a better understanding oftheir individual responsibilities in relation to the Bank’s current position andfuture expectations. The response at all levels was overwhelmingly positive, asstaff affirmed their commitment to returning Seylan Bank to full strength andbeyond. Now the task was to implement specific tactical measures designed tore-engineer existing operations and processes.The range of business challenges fell into three main areas:Banking Practices• As long as a significant number of depositors continued to empty theiraccounts, management met on a daily basis to ensure branches had sufficientfunds to pay out all withdrawals.• The board provided senior management with new targets for reducing theBank’s ratio of non-performing loans (NPLs), which had risen above 30%during the crisis.

42The Case Study > Seylan Bank PLC Annual Report 2009• Credit authority limits were reduced at every level, with all lending appraisals tobe monitored by a Credit Committee that includes two members of the board.• More aggressive measures were adopted for handling defaulters.• Risk management moved to the top of the corporate agenda, beginning withworkshops with an overseas professional on assessment and managementpractices for senior bank staff. The ultimate goal is to systematise riskmanagement throughout the Bank’s transactional operations.• In the absence of proper procurement procedures, the Bank established anew, transparent process (based on the Bank of Ceylon model).Cost ContainmentThe overall objective of the Bank’s new cost-management approach was tocurtail all expenditures that did not contribute to improved profitability.• Employees were informed that the Bank was unable to pay incrementalsalary increases in the near term.• The anticipated April 2009 bonus was cancelled, and the gratuity formulawas reduced to half a month’s salary from previously enhanced levels.• Personal loans to staff were temporarily suspended.• Overtime was severely limited.• Foreign travel was eliminated unless absolutely necessary.• Fuel benefits were curtailed, including for the senior management team(which also accepted fewer perks for entertainment and other expenses).• All capital expenses were suspended unless they had the express approval ofthe Executive Chairman and/or the board.Human Resources• A study was initiated to examine the problem of Seylan Bank’s high staffingratio in relation to competing banks.• Arrangements were discontinued for some individuals who worked for theBank on a consulting basis.• The age of retirement was lowered from 58 to 55.• Some staff members who were considering resignation were offeredencouragement.

Rebuilding the Business43• To support the Bank’s new ethical standards, a revised Disciplinary Codewas put in place.• The Bank’s organisational structure and depth of talent were improved withthe addition of several new people in key positions, including:- a Chief Financial Officer (CFO)- an Executive responsible for corporate and retail banking- an Internal Auditor- an Assistant General Manager (AGM) in charge of premises and supplies- a head of private banking for high-net-worth customers- a Deputy General Manager (DGM) in a new role overseeing Recoveries- an external consultant in Information Technology.• The Bank’s two unions committed to cooperating with the new board. Thatpositive relationship is strengthened through monthly meetings in whichissues are discussed clearly and candidly, building an ongoing dialogue.• The Human Resources department has been brought under the managementof a DGM.As these various pragmatic steps were being implemented, the board ofdirectors made another key decision: For the first time in its history, Seylan Bankwould begin developing a comprehensive three-year strategic plan (which willbe detailed in the next chapter of The Case Study). At the same time, discussionswere underway with the Central Bank regarding potential new sources ofcapital, as it was agreed that new shareholders bringing a fresh infusion of cashwould help further stabilise the Bank, shore up investor confidence – and pavethe way for the Central Bank’s ultimate ceding of full management control backto the Seylan Bank board.In March the Central Bank formally called for expressions of interestfrom potential strategic partners in the recapitalisation of Seylan Bank. Theintended outcome was a new share issue that would result in an overall dilutionof holdings (as opposed to a divestiture by any of the current shareholders).

44The Case Study > Seylan Bank PLC Annual Report 2009A New Way of Doing BusinessAnother of the high-level commitments made by the new Seylan Bank boardwas to demonstrate strict compliance with all industry-specific regulations andother statutory provisions governing the financial services sector, includingadherence to Sri Lanka Accounting Standards. In March the Bank publishedits draft accounts for the 2008 financial year. The board took this opportunityto formally state its intent with regard to financial reporting:“Consequent to recent adverse market perception since December 2008,the Bank under its new directorate has decided to clean up and strengthen itsBalance Sheet position by constantly evaluating its total investment portfolio,including loans and advances and other investments giving weightage to itsrealisability, market risk, interest rate risk and any other associated risks.”The Bank’s statement went on to explain that during the current financialyear, it had made provisions for falling value in its marketable investments andloan portfolio, in keeping with International Accounting Standards and in factexceeding the guidelines stipulated by the Central Bank of Sri Lanka. SeylanBank had established a significant new benchmark, dispelling past criticisms witha pledge to ensure clear, forthright and readily comparable reporting of results.At the same time, there was renewed pressure to further differentiateSeylan Bank from the troubled Ceylinco conglomerate with which it was tooclosely - and now inappropriately - associated in the public mind. For the boardand senior executives, the answer was to stay focused on building a compellingbusiness case, showing how their Institution’s fundamental strengths, reshapedby a new Code of Conduct, would translate into positive results.Welcome Signs of ProgressInterim results for the six months ended 30th June 2009 showed an after-taxprofit of Rs. 188 million for Seylan Bank and its subsidiaries (i.e., the SeylanGroup) and earnings per share of Rs. 4.5 - a dramatic improvement over thefirst quarter. Moreover, a 20% reduction in expenditures compared to the sameperiod in 2008 demonstrated that the new cost-cutting measures were havingan impact. And while a provision of Rs. 296 Mn. for non-performing advances

Rebuilding the Business45definitely affected the bottom line, both liquidity and capital adequacy ratioshad already been restored to accepted levels. In short, the immediate crisis wasdemonstrably past, and the steps toward longer-term recovery were alreadyyielding measurable success - at a time when much of the financial sector wasstill mired in the global economic downturn.Throughout the third quarter of 2009, there were many other signs ofprogress:• By August the Bank had recovered about Rs. 300 Mn. from previously nonperformingloans. The board’s pledge to reduce NPLs and step up recoveryefforts - including more aggressive pursuit of defaulters - was bearing fruit.• Cost-cutting by the end of August had yielded Rs. 860 Mn. in savings,bringing the target of Rs. 1 Bn. for the year well within reach. (Indeed, costsavings reached Rs. 1.2 Bn. by the end of October.)• In July and August the Bank launched a high-profile marketing campaignto win new customer deposits, showcasing its extensive history as a retailbanking innovator with a range of attractive offers, including three-month andone-year fixed products with the highest interest rates of any Sri Lankan bank.The campaign exceeded all expectations, bringing in welcome revenue alongwith the reassurance that customer confidence was significantly restored.• In a further strengthening of its national retail presence, Seylan Bankannounced that it would soon be opening new branches in the East and Northof the country, including areas newly amenable to development following theend of civil-war hostilities in May. The Bank has since opened a branch inNelliaddy and two Convenient Banking Centres in Manipay and Chankanai.An additional new branch in Mannar is scheduled to open in March 2010.• Foreign remittances also increased significantly for the first half of the year,totalling Rs. 12.7 Bn. Seylan Bank’s extensive network of internationalmoney transfer agencies - recently augmented by new partnerships withMoneyGram International, XPRESS MONEY and EzRemit - made iteasier than ever for expatriate workers and the Sri Lankan diaspora to sendfunds home from abroad. The growth in this area indicated that the Bank’sreputation was secure overseas as well.

46The Case Study > Seylan Bank PLC Annual Report 2009The Recapitalisation EffortAs we’ve seen, the recovery of Seylan Bank stands out in the annals of bankingbecause it was achieved without any external infusions of emergency cash.Through prudent management and implementation of the various measuresdiscussed above, the Bank’s declining liquid assets ratio was brought undercontrol and ultimately raised, by the end of August, to 23% - comfortably abovethe minimum threshold of 20%. This was the single most significant sign ofrestored stability that stakeholders had been waiting to see.By year-end, the Bank’s liquid assets ratio had strengthened further to29%. Meanwhile, its capital adequacy ratio, which had dropped as low as 8.0%,had reversed direction, reaching 11.74% against the required 10% minimum.To ensure the availability of capital for future growth, the Central Bank ofSri Lanka made its aforementioned call for expressions of interest frompotential investors. On offer was a 33% stake in Seylan Bank for a specifiedminimum investment of Rs. 5.7 Bn. Six parties expressed serious interest;however, the bids they ultimately submitted were found to be not compliantwith the terms and conditions established for the deal.The Central Bank therefore decided to pursue an alternative methodof recapitalising Seylan Bank - a new share issue that would combine aprivate placement with a public offering to raise slightly more than Rs. 3 Bn.In the private placement, two state-owned entities, Bank of Ceylon andSri Lanka Insurance Corporation, agreed to make a combined investment ofapproximately Rs. 1.1 Bn. in new capital. The remaining Rs. 1.9 Bn. wouldbe raised through a public offering of 54,290,000 ordinary (voting) shares atRs. 35 per share. The issue, with a minimum subscription of 100 shares perapplication, was set for 22nd September 2009.

Rebuilding the Business47The public offering was an extraordinary success, so much so that 10 dayslater Seylan Bank announced it had been oversubscribed and all shares weresold. The Executive Chairman, Mr. Narangoda, summed up the gratitude ofall bank employees:“Given the crisis the Bank underwent towards the end of last year, thisoversubscription is an unequivocal endorsement by the people of Sri Lankademonstrating the confidence they have in the Bank. This has been a great teameffort. On behalf of Seylan Bank, I thank everybody who contributed to thissuccess story and reassure them that Seylan Bank will grow from strength tostrength and live up to their expectations.”With the public and private share issues complete, the total stake in SeylanBank held by Government-owned institutions was now just over 28%, including1.16% held by National Savings Bank. The highly successful initiative alsomarked another milestone in the Ceylinco saga, as the resulting share dilutionfurther reduced the proportionate size of the conglomerate’s holding.The Bank’s third-quarter results added further confirmation that SeylanBank was back on track. An after-tax profit of Rs. 503 Mn. for the nine monthsended 30th September compared favourably with a total of Rs. 155 Mn. for allof 2008. At the same time, the board reported that advances had dropped byRs. 17 Bn for the year to date, and that recoveries had accelerated dramatically.With these gratifying results and a large infusion of capital ensuringcontinued stability and growth, Seylan Bank could now turn its attentionwholeheartedly to the future.

49{ Chapter 6 }A Sound FutureStrategyGuided by a comprehensive strategic plan, Seylan Bank isbuilding a healthy, sustainable future for all stakeholders.Faced with a uniquely challenging threat to its future as an institution, SeylanBank has prevailed by building on - and believing in - its core strengths. TheBank welcomed the support of its partners, but at the same time took pride innever needing the financial rescue sought by so many other banks around theglobe. In retrospect, it’s clear that what helped Seylan Bank most in quicklyrecovering its stride was a collective grasp of the fundamentals:• Commitment to ethical governance and accountability• Respect for basic values such as integrity, commitment and trust• Belief in the power of teamwork• Leadership grounded in experience and sound judgment• Dedication, among thousands of loyal employees, to doing whatever isneeded to ensure successAs the current period of stabilisation and consolidation draws to a close,Seylan Bank expects to maintain its ranking as Sri Lanka’s fifth largest bank,using its solid customer base as a springboard for future growth. It also remains‘The Bank with a Heart,’ but at the same time is ready to make its strong brandeven stronger, exploring new ways to provide the kind of responsive, flexibleservice that has always set Seylan Bank apart.The Bank’s strategic consultations have yielded a new vision:“To be the leading financial solutions provider that delivers exceptionalvalue to stakeholders.”

50The Case Study > Seylan Bank PLC Annual Report 2009And its collective aspirations have been captured in a new missionstatement:“To exceed customer expectations by providing competitively pricedsuperior services through speedy and multiple delivery channels, whilstrewarding staff through recognition and empowerment; being a responsiblecorporate citizen; adopting environmental friendly practices and addingsuperior value to shareholders.”Before Seylan Bank could fully articulate a new strategic plan, however,management first had to make a rigorous and objective evaluation of where thebusiness stands today.Current State AssessmentCombining the specialised knowledge and skills of internal teams withthe expertise of outside consultants, Seylan Bank has analysed systems andprocesses, policies and procedures in every area of its operations.Financial PerformanceThe Bank has identified a broad range of indicators - including return onassets, operating profit, net income growth, cost-to-income ratio and growth indeposits - that can be used to gauge its comparative performance in the marketplace.Seylan Bank’s NPL ratio, for instance, was significantly higher than thatof its competitors in 2008. And the fact that operating expenditure was as highas that of Sri Lanka’s largest private bank - an institution twice the size ofSeylan Bank, measured by assets and branches - underlines a pressing need, asdiscussed earlier, to look for greater efficiencies.Products and Customer SegmentsThe enormously varied segmentation of the Bank’s target market means thatmarketing strategies must be more focused than ever. By grounding campaignsin independent research and solid analysis of feasibility, and by refining theinformation tools used to measure success, Seylan Bank will further its reputationfor highly innovative product development and delivery. A comprehensivestrategic marketing plan is now being implemented.

A Sound Future Strategy51StructureLike most financial institutions, Seylan Bank has a complex organisational structurethat undoubtedly could benefit from some economies of scale and efficiency. Infuture, the Bank aims to become more market-focused in its organisation, creatingnimble business units that can move quickly to pursue opportunities withoutfragmentation or duplication of effort. The branches, in particular, will continue toevolve from self-contained “mini-banks” to delivery channels for a unified mix ofproducts, services and relationship-building strategies.Systems and ProcessesSeylan Bank is conducting exhaustive reviews of systems at all levels, from costallocation in the branches to enterprise-wide management information systems.The overriding goals are to maximise efficiency, increase integration andprovide managers with the best possible reporting and analytical tools. Similarly,processes are being deconstructed and evaluated across the business, bringingtogether those, such as risk management, that benefit from central control and,in other cases, establishing more clean divisions between responsibilities - forexample, relationship management and credit evaluation, or business andconsumer lending. All of these measures will be facilitated by a new strategicplan for information technology, which is currently in development.Human ResourcesInternally, the Bank sees an opportunity to build on the momentum of the pastyear, developing new human resources practices that better reflect employees’demonstrated commitment to collaborative teamwork and tackling toughchallenges. Some will benefit from being redeployed in areas where they canmake more of a contribution. All will come to see the advantages of an HRenvironment in which performance reviews, promotions and rewards are moresystematically and effectively managed, with clearly understood expectationsfrom both management and staff. The sense of confidence and motivation thathas accompanied the Bank’s return to financial stability will help retain existingtalent while strengthening recruitment efforts.

52The Case Study > Seylan Bank PLC Annual Report 2009Image and BrandingAs customer confidence continues to grow, Seylan Bank will balance itsestablished identity as a caring, personally responsive institution with a morebusinesslike image – in effect using the residual positive impact of the crisisrecoverystory to give its brand more depth and credibility. At the same time,efforts will continue to distance the Seylan Bank brand from the negativeassociations of the Ceylinco legacy.The Strategic Plan: 2009–2011Out of the foregoing assessment process, Seylan Bank has identified the criticalsuccess factors for each area and mapped out a comprehensive three-year planthat will guide decision-making through the end of 2011. The specifics of theplan are proprietary in nature and therefore beyond the scope of this case study.However, its main elements can be summarised broadly as follows:• Goals - defined and quantified in relation to seven specific performance indicators:return on equity, profit after tax, cost-to-income ratio, customer deposits, totalassets, NPL ratio and market position in terms of total assets. These goals willbe incorporated into the budgets developed for each financial year.• Strategic Initiatives - including domestic and international expansionopportunities; capital requirements; governance structure and practices;liquidity management, including loans-to-deposits ratio and long-term assetmaturity planning; risk management, especially with regard to NPL recoveriesand credit evaluation; mergers and acquisitions; and image and branding.• Business-Level Strategies - focusing on the core business areas of retail banking,corporate banking, customer segmentation and product market strategy,as well as a range of support areas, including organisational structure,centralisation of management systems and human resources management.Guiding implementation of the strategic plan is a board whose successin stabilising Seylan Bank has won emphatic support from all stakeholders.Originally appointed for a period of six months, the directors, led byMr. Narangoda as Executive Chairman, subsequently had their terms extendedby a further three years. (The appointments were confirmed by a unanimousvote at the Annual General Meeting held in the month of June 2009.)

54The Case Study > Seylan Bank PLC Annual Report 2009Changes, large and small, are evident everywhere at Seylan Bank. Fromthe launch of a Titanium MasterCard, to the relocation of a branch to moreattractive premises, to an ambitious new programme that will make all branchesmore customer-centric - in every respect the Bank is moving forward, propelledby a commitment to innovation and quality service that one twist in the road,however alarming, was not going to stop.A Case for the FutureWhat is the ultimate lesson to be drawn from the crisis at Seylan Bank? Thereare probably as many as there are pages in this case study. But if we had to boilit down to one, it would be this: The ultimate decision-maker in any business is,without question, the customer.It was a sudden, plummeting loss of customer confidence that broughtSeylan Bank to the edge of catastrophe. And it was a longer-term failureto uphold the core values of the customer relationship - trust, integrity,transparency, accountability, respect - that created the climate of uncertainty inwhich such a precipitous fall could happen so easily.No other bank in the world has weathered such a run without a bailout. An investigative team from the International Monetary Fund, followinga recent visit to Sri Lanka, commented that it was a miracle Seylan Bank hadsurvived. The fact that the Bank did survive and, a year later, is poised to growstronger than ever, comes down to the same powerful single factor that almostbrought about its demise: customer confidence. That is the one investment,more fundamental than the deepest cash reserves, that no financial institutioncan take for granted.Through the swift action and judicious planning of its new board, SeylanBank was able to secure the savings of its depositors and protect the interests ofits shareholders while also safeguarding thousands of jobs. These successes inturn helped ensure the economic stability of the entire country.In the final analysis, though, every practical remedy and processstep reviewed in these pages is ultimately directed at one basic goal - givingcustomers all that they need to believe in the value of a relationship. This is thefundamental business case that The Case Study has tried to illuminate. It is thegrassroots truth at the heart of ‘The Bank with a Heart.’ And it is the lessonlearned that Seylan Bank carries forward as it builds a healthy and sustainablebusiness for the future.

55BENCHMARKS OFSUCCESSThe ultimate measures of Seylan Bank’s return to stability andgrowth are the financial and operational results for 2009.Financial Highlights .............................................................................. 56Management Report .............................................................................. 57Risk Management Report....................................................................... 63Corporate Governance Report................................................................ 75Sustainability Report............................................................................ 105Financial Reports................................................................................. 117AppendixProfiles of the Board of Directors (228), Senior Management Team (230), Ten Year Summary (232),Summary of Performance Indicators (233), US$ Accounts (234), Investor Information (236),Branch Network (241), Geographical Analysis (243), Glossary (244), Corporate Information (245),GRI Compliance Index (246), Subject Index (248), Notice of Meeting (249), Sinhala Translations (250),Tamil Translations (252), Form of Proxy (Enclosed)

56Seylan Bank PLC Annual Report 2009Financial HighlightsBANKGROUPDuring the Year 2009 2008 Change 2009 2008 Change(Reclassified)(Restated)Rs. ’000 RS. ’000 % Rs. ’000 Rs. ’000 %Income 23,154,529 25,246,209 (8.29) 24,538,978 27,053,951 (9.30)Net Profit before Income Tax 892,572 155,241 474.96 933,630 (735,579) (226.92)Income Tax on Profits 349,271 – 100.00 484,869 64,224 654.97Net Profit After Taxation andMinority Interest 543,301 155,241 249.97 569,208 (142,993) (498.07)Revenue to Government 910,711 243,056 274.69 1,123,194 309,846 262.50Gross Dividend - Note 133,018 – 100.00 133,018 – 100.00At the Year EndShareholders’ Funds 10,582,474 7,020,011 50.75 11,109,138 7,786,525 42.67Retained Profit 3,930,689 3,420,791 14.91 3,800,891 3,553,052 6.98Deposits from Customers 104,815,899 107,938,801 (2.89) 104,815,899 109,505,539 (4.28)Loans & Advances (ExcludingBills & Leases) 76,038,971 97,746,084 (22.21) 76,045,385 99,078,324 (23.25)Total Assets 132,775,872 154,046,245 (13.81) 137,267,851 163,308,489 (15.95)Information per Ordinary ShareEarnings (Rs.) 2.83 0.90 214.44 2.97 (0.89) (433.71)Dividends (Rs.) - Note 0.50 – 100.00 0.50 – 100.00Net Asset Value (Rs.) 41.60 41.80 (0.48) 43.68 46.39 (5.84)Market Value (Rs.)- As at End of the Year- Voting Shares 37.00 28.50 29.82- Non-Voting Shares 16.00 6.00 166.67Statutory/Other Ratios (%)Core Capital Adequacy(Minimum Requirement - 5%) 9.69 5.74 68.82 11.35 6.86 65.45Total Capital Adequacy(Minimum Requirement - 10%) 11.74 8.06 45.66 13.60 9.44 44.07Liquidity- Domestic Banking UnitOperations % 28.80 20.11 43.21(Minimum Requirement - 20%)- Foreign Currency Banking UnitOperations %24.94 22.11 12.80(Minimum Requirement - 20%)Price Earnings Ratio- Voting (Times) 13.07 31.67 (58.73)Dividend Cover (Times) - Note 4.08 – 100.00Capital Funds to Liabilities andCommitment & ContingentLiabilities % 7.33 4.04 81.44Note: Dividends for year 2009 are accounted for as per the Accounting Standard SLAS 12 (Revised).

Seylan Bank PLC Annual Report 2009 57Management reportCEO’s MessageAn effective business case study not only illuminatesbest practices and valuable lessons learned; it alsopresents measurable outcomes. In the case of SeylanBank, I am pleased to report that this institution’s return tofinancial stability under the guidance of our new board ofdirectors has yielded gratifyingly positive financial results.This Annual Report documents the first full financialyear since the Central Bank of Sri Lanka took steps toestablish a new management mandate at Seylan Bank.In the preceding section, we took the unusual route ofchronicling those efforts in the form of an analytical casestudy. In the pages that follow, we complete the analysisby setting out the benchmarks for Seylan Bank’s success,reviewing both the impressive results our team hasachieved to date and the clear milestones we’ve set alongthe road ahead.Seylan Bank’s after-tax profit for 2009 wasRs. 543.301 Mn., which represents an increase of250% over the previous financial year. During thesame period, the Bank’s cost-to-income ratio showeda marked improvement, decreasing from 75.79% to67.82%, while our total capital adequacy ratio - undersevere pressure during the crisis at the end of 2008 -rose from 8.06% to 11.74%.The recent global economic downturn,precipitated by a sharp decline in financial marketsin late 2008, had a particularly strong impact on thedomestic economy of Sri Lanka. Compounding thenegative impact on Seylan Bank was the collapse ofthe Golden Key Credit Card Co. Limited, which resultedin many of the Ceylinco Group Companies facing aliquidity crisis resulting in those companies defaultingon loans from our institution. An increase in the nonperformingloans coupled with a 23% contraction ofthe loan book increased the ratio of non-performingassets to 33.61% from 16.93% 12 months earlier.The positive indicators, and the many othersdetailed in the following Management Report andfinancial summaries, have brought a corresponding risein confidence among both depositors and shareholders.Seylan Bank now meets or exceeds the liquidity targetsstipulated by the Central Bank. And our share price,which returned to pre-crisis levels immediately followingthe appointment of the new board, has continued to gainstrength as management at all levels implements thewide-ranging initiatives set out in our new strategic plan.In short, Seylan Bank has made a series of decisivestrides forward from the brief, galvanising crisis coveredin the opening chapters of this Report. In the sectionsthat follow, we examine in more detail the Bank’sprogress on a range of fronts, from the adoption ofnew procedures for managing risk to the refinementof our corporate governance practices. We also reviewongoing sustainability efforts, looking at all aspects ofcorporate responsibility - social, environmental andeconomic. We examine some of the key operationalareas, from marketing to information technology,where the introduction of new standards and processesis prompting positive change. And we review SeylanBank’s financial performance, applying the objectiverigour expected of a leading financial institution.For more than 20 years, Seylan Bank has proudlycalled itself “The Bank with a Heart,” and we haveworked to live up to that credo in everything we do. Aswe tackled the unprecedented challenges of the pastyear, the dedicated men and women who make up thisinstitution never lost heart. Buoyed by the continuedsupport of our customers, we redefined our vision andimproved management practices from the top down.At the same time, we reaffirmed the commitment thathas guided Seylan Bank from the day our first branchopened its doors: to provide the best possible servicewhile practicing innovative, responsible managementto the benefit of all stakeholders.It is enormously satisfying to table an AnnualReport that we feel lives up to the high expectations ofall who believe in Seylan Bank. I am confident that thepositive momentum we’ve fostered and sustained willonly continue in the years ahead.Ajita PasqualGeneral Manager/CEO17th February 2010

58Seylan Bank PLC Annual Report 2009Financial ReviewIt is no exaggeration to say that the year under reviewwas a memorable one for Seylan Bank. The collapseof the Golden Key Credit Company which was amember of the Ceylinco Group, of which the Banktoo was then a member, sent shock waves throughSri Lankan society as well as through the country’seconomy and financial services industry. Naturally,Seylan Bank was affected in several ways. Theconfidence of our depositors was temporarily shaken,though in fact the Bank was in a good position tomeet its obligations. Happily, confidence was restoredwhen the Central Bank of Sri Lanka (CBSL) steppedinto the picture, appointing the Bank of Ceylon asSeylan Bank’s managing agent and averting a run ondeposits. Subsequently, CBSL appointed a new boardof directors, empowered by its Monetary Board tomanage Seylan Bank independently.Despite this severe setback, and against abackground of global financial turmoil and economicrecession, Seylan Bank was able to regain investorand depositor confidence; our share price reboundedimmediately following the CBSL announcement, andthe Bank now meets or exceeds all the statutoryrequirements laid down by the regulator. Theseoutcomes represent a complete recovery from itstroubles for the Bank and a strong vote of confidencein its solidity and stability from those who mattermost: our shareholders and customers.Developments in the wider world were hardlyconducive to such a quick recovery. The first halfof 2009 was characterised by limited economicactivity as investors took a wait-and-see attitude inthe face of economic uncertainty and the escalationof the war. The clothing and export industries,fearing the consequences of losing the preferentialstatus granted to them by the EU under the GSP+exemption to WTO rules, were particularly affected.The banking sector also had its own specialdifficulties, among them a fall of nearly 10% ininterest rates, which had a cooling effect on bothlending and borrowing, as well as continued hightaxation. However, declining interest rates enabledSeylan Bank to earn substantial profits from itsinvestments in Government securities. Anotherbright spot in a generally gloomy picture was therecovery of tourism, which led a modest revival ofthe economy in the second half of 2009 and generalanticipation of better things to come in 2010.By far, the year’s most significant achievement wasrestoring the stability and liquidity of the Bank. Thiswas achieved through a number of means.Taking advantage of the buoyant stock market,Seylan Bank made a public issue of 54,290,000ordinary shares at Rs. 35/- per share on 22ndSeptember. The desirability of the issue was bolsteredby the aggregate 28% stake taken in Seylan Bank bytwo State institutions, the Bank of Ceylon and theSri Lanka Insurance Corporation. The success of theissue clearly demonstrated the recovery of investorconfidence in the Bank, being fully subscribed beforethe closing date. Market capitalisation of SeylanBank grew 288% in the course of the year, fromRs. 1.2 Bn. at the end of 2008 to Rs. 4.8 Bn. by theend of 2009. The Bank now has adequate capital tosupport the current business volumes as well as thegrowth plans and we do not foresee the need for anyfurther re-capitalisation effort in the near future.ProfitabilityIn retrospect, 2009 marked a commendable returnto form for Seylan Bank. Special mention deservesto be made of the Bank’s Treasury division, whichperformed extremely well in a year when the focusof many other departments was on Non-PerformingLoans recovery and consolidation.

Seylan Bank PLC Annual Report 2009 59Profit before tax of the Bank increased fromRs. 155.241 Mn. in 2008 to Rs. 892.572 Mn., anincrease of 475%. This is as a result of operatingexpenses and provisions for loan losses decreasingby 21.05% (Rs. 1.729 Bn.) and 11.51% (Rs. 284 Mn.)respectively as against a drop in net income of11.77% (Rs. 1.275 Bn.). Despite a contraction inbusiness volumes, fund-based operations resultedin a marginal increase in net interest income in thebackdrop of an improvement in interest spread.However, income from fee-based operations andinvestments recorded a substantial drop. Profitafter tax increased from Rs. 155.241 Mn. in 2008 (inthe absence of any tax liability) to Rs. 543.301 Mn.after making a provision of Rs. 349.271 Mn. towardsincome tax.Profit before tax of the Group increased froma restated loss for 2008 of Rs. 735.579 Mn. to aprofit of Rs. 933.630 Mn., an increase of 227%. Lossbefore tax of Rs. 71.820 Mn. for 2008 as publishedin the last year’s Annual Report had to be restateddue to the delayed audit of Seylan Merchant Bankconcluding during the year with a higher loss for2008. Group profit after tax too improved from arestated loss of Rs. 799.803 Mn. in 2008 to a profitof Rs. 448.761 Mn. for 2009.Resulting from the improved profitability,Return on Assets and Return on Equity tooimproved from 0.10% and 2.22% to 0.38% and6.20% respectively.The underlying gearing levels have improvedto 16.3 times from 22.2 times in 2008. Earnings pershare of the Bank grew from Rs. 0.90 for 2008 toRs. 2.83 during the year under review.

60Seylan Bank PLC Annual Report 2009Operational EfficiencySeveral structural changes effected helpedthe Bank realise certain economies of scaleand improve the Cost-to-Income ratio by anunprecedented 8% from 75.79% to 67.82%. Some ofthe specific initiatives taken in this regard includedformalising procurement procedure, elimination ofunnecessary costs and a better control over costs.Business VolumesConsequent to the crisis the Bank went through asdetailed in chapters one to six of this Annual Report,the Bank experienced a drop in the business volumes.Though recovered to some extent with the restoring ofthe customer confidence, they fell short of the levelsreported as at 31st December 2008, as detailed below:Item 2009 2008 VarianceRs. Mn. Rs. Mn. %Net Loans &Advances 80,287.81 104,154.13 (23%)Deposits 104,815.90 107,938.80 (3%)Total Assets 132,775.87 154,046.25 (14%)LiquidityA combination of factors such as the issue of shares,recovery of non-performing advances, curtailedlending and improved profitability of the Banksubstantially boosted liquidity ratio of the Bank from20% in December 2008 to 29% in December 2009, apattern that the entire banking industry witnesseddue to a negative growth in credit outstanding in thecountry. Operating activities generated a positivecash flow of Rs. 20.869 Bn. for the Bank as againsta negative of Rs. 6.595 Bn. in 2008 which was used ininvesting and financing activities.ProductivityContraction of business volumes partly set-offby the drop in staff numbers from 3,923 to 3,733caused the assets per staff member to decreasemarginally from Rs. 39.2 Mn. in 2008 to Rs. 35.6 Mn.Improved profitability during 2009 resulted in theprofit after tax per staff member to increase fromRs. 0.040 Mn. to Rs. 0.146 Mn.Asset QualityLoss of customer confidence was not the onlydifficulty the Bank suffered as a consequence of thecollapse of the former Group company. Increasedreputation risk was paralleled by real financiallosses, since the Bank had extended loan facilitiesto a number of Ceylinco Group companies, theeconomic impact of the collapse sent these loansinto default. This coupled with economic recessionand a contraction in the loan book caused the risein the Bank’s NPL ratio in the year under review.Non-PerformingAssetsNon-PerformingAssets Ratio2009 2008 2009 2008Rs. Mn. Rs. Mn. % %Gross NPL 31,149.96 19,428.23 33.61 16.93Net NPL 25,491.07 15,905.54 29.29 14.30StabilityTotal capital adequacy ratio which was below thestatutory minimum of 10% at 2008 year-end improvedto a comfortable level of 11.74% during the year underreview. Fitch Ratings Lanka Ltd’s rating of SeylanBank is BBB+ and the outlook is “Stable”.Consequent to the issue of shares andimproved profitability, regulatory capital of theBank increased from Rs. 9,054.08 Mn. as at31st December 2008 to Rs. 11,612.48 Mn. as at31st December 2009. Market capitalisation toowitnessed a four-fold increase from Rs. 1.2 Bn. toRs. 4.8 Bn. as at 31st December 2009. The increasein the number of shareholders from 7,812 to 11,039reflects the increased investor interest in the Bank.

Seylan Bank PLC Annual Report 2009 61Corporate GovernanceWith a view to enhance corporate governancepractices, several structural improvements wereeffected in the course of the year. These are detailedin the Corporate Governance Report on page 75.OperationsDespite the year’s troubles, we took a firm decisionto continue increasing the reach and relevance ofSeylan Bank to customers through the expansionof our network of outlets, especially in the North ofthe country. A new fully-fledged branch was openedat Nelliady and new ‘convenient banking centres’ atManipay and Chankanai. Our established branchesat Ja-Ela and Malabe were relocated in the interestsof greater efficiency and customer access. Pawningcentres were set up at the Bank’s branches, andfour more ATMs were added to the network.MarketingMarketing activity was emphasised in retailbanking, where competitive pressures increasedlast year. We continued to offer a number of loyaltyand rewards programmes to our customers,such as the Merit Rewards scheme on savingsand current accounts, the Thilina Sayura schemefor foreign-currency account holders and a giftscheme for our Tikiri savings accounts for minors.A special deposit-mobilisation campaign washeld from June to August 2009. The objective ofthe campaign was to raise Rs. 2 Bn. in 50 days.The campaign exceeded its target by as much andmore, raising a total of Rs. 4.2 Bn. and was judgeda great success.During the period when the troubles of theCeylinco Group impacted strongly on the Bank, wecommenced a special effort to retain customersthrough a house-to-house campaign known asJaya Maga. The campaign, still under way, hasyielded very good results.The Marketing Department undertook acustomer satisfaction survey in the course of theyear. The survey revealed that perceptions of servicequality were good, with the Bank receiving an averagescore of 74% on the parameters tested.Information technologyModern banking is uncompromisingly technological.Seylan Bank’s 100-plus branches and convenientbankingcentres are linked through a singleautomated network, which makes possible customerservice quality and product access anywhere on thenetwork and to customers overseas as well as inSri Lanka. This network supports and enables allthe features customers expect of a modern bank:ATMs, telephone, mobile and Internet banking, andcredit cards, as well as traditional high street bankingservices and Seylan’s pioneering mobile branches. Allthese are connected via state-of-the-art IT.Improvements to our IT capability during thecourse of the year included enhancements to theSMS banking module and greater functionality withrespect to funds transfers, utility-bill payments,etc. We also supported the introduction of theSeylan Bank MasterCard.

Seylan Bank PLC Annual Report 2009 63Risk Management reportOur new Path…Seylan Bank views Risk Management as animportant element of the management control andbusiness of the Bank. A renewed and re-emphasisedapproach is being taken under the new board formanaging risks better.We have recognised that risk is the existenceof a range of possible outcomes where suchoutcomes and the potential range can be reasonablyestimated. Where such estimation becomes difficultthe situation is one of uncertainty. A Bank is facedwith both uncertainty and risk. While attempting toavoid uncertainty as a business outcome, the Bankdoes accept risk within acceptable norms and limits,within our strategy set towards our new path.We have categorised the key risks faced by usinto three main risks viz. Credit Risk, Market Riskand Operational Risk. Apart from these three risks,several other risks such as liquidity risk, reputationrisk, solvency risk and event risk, are some of thekey risks faced by the Bank.The Responsibilities for Managing RiskThe board of directors assumes overallresponsibility for managing risks in the Bank.For this purpose, the board has determined theorganisational structure that should prevail toensure a sound and adequate risk managementframework. Further, the board has designatedKey Management Personnel to manage risk andidentify their areas of responsibilities. The boardalso reviews on a regular basis the risk exposuresof the Bank and specifies and approves policieswith regard to risk measurement and control.The board delegates some of its duties tovarious risk management committees and officialsof the Bank.The Risk Management Process andthe Integrated Risk ManagementCommitteeThe following is a schematic presentation of themultifaceted framework of Risk Management thatencompasses three areas of controls viz. FinancialControl, Risk Management Control and Internal Audit.

64Seylan Bank PLC Annual Report 2009The key mechanism in discharging the boardresponsibilities of risk management is throughthe Integrated Risk Management Committee thatcomprises the undermentioned three directorswith the participation of senior managementpersonnel. The Committee meets at least on aquarterly basis.The members of the Board Integrated RiskManagement Committee are:• Mr. Ajith Devasurendra - Director, Chairman ofthe Committee• Mr. Naomal Goonawardene - Director (Resignedw.e.f. 03/12/2009), Chairman of the Committee,till 3/12/2009• Mr. Lalith Withana - Director• Mr. Pradeepa Kariyawasam - DirectorFour meetings of the Risk ManagementCommittee were held during the year 2009.The responsibilities of the Integrated RiskManagement Committee are designed to capture awide range of potential risk-related issues that aredealt in a proactive and preventive manner. Some ofthe key functions include the following:• Taking prompt corrective actions to mitigateeffects of specific risks.• Reviewing and recommending Risk Managementpolicy, strategy and policy controls and systemsfor the Bank.• Establishing risk tolerance for the Bank atenterprise and strategic business unit levels.• Maintaining continued awareness of changesin the Bank’s risk profile and with periodicalreview of the risk exposures of the Bank.• Submission of risk assessment reportsto the board pursuant to the discussionsand observations at the Risk ManagementCommittee meetings.The new board places a very high emphasis onthe risk management function and strengthenedthe committees as well as the organisationalframework. Further, the effectiveness of thecommittees is being elaborated on, rather thanmere functioning for the sake of formality. Thestructures of information dissemination andreporting formats have been improved.A board approved Risk Management Policycovering multifaceted aspects has been put in place.A new Risk Management Department enhancingthe former Risk Management Department withwider scope and functions is set up to concentrateon the risk management function as a second line ofdefence for the Bank’s Integrated Risk Managementsystem. This Department will coordinate the activitiesof risk management and submit quarterly reports tothe Integrated Risk Management Committee. Thesereports include risk identification, risk measurement,reporting on risk-based occurrences, trends in therisks undertaken, risk mitigation and control. TheRisk Management Department will also maintaindata relating to operational loss events for furtherevaluation and study.

Seylan Bank PLC Annual Report 2009 65The Risk Management Department is designedto comprise three units namely, Credit Risk MonitoringUnit, Treasury Middle Office and Operational RiskMonitoring Unit. In addition, a separate unit carriesout Quality Assurance, Business Continuity Planningand Information Systems Security.Our Approach to MonitoringRisk and CapitalAvailability of adequate capital in the businessacts as a cushion against risk. Hence, minimumcapital requirements have been stipulated by theauthorities as a prudential means of regulation.The Bank had a deteriorating capital adequacy ratioin the early part of 2008.The capital adequacy ratio that had fallen belowthe required level towards the end of the year 2008got restored at 11.74% towards December 2009which is above the statutory requirement of 10%.This was a result of several strategic moves andstrategies adopted by the Bank including the issue ofnew shares to boost the capital base. The restorationof the capital adequacy requirement was a majorachievement of the Bank during the year 2009.

66Seylan Bank PLC Annual Report 2009Risks arising from Financial InstrumentsInternational Financial Reporting Standards requirecertain disclosures on the risks arising fromvarious financial instruments. The Bank deals infinancial assets and liabilities and also in financialinstruments such as the fixed income securitiesmainly comprising of Government Securities viz.Treasury Bills and Treasury Bonds. The Bank helda trading portfolio of Treasury Bills and Bondsamounting to Rs. 14.37 Bn. as at 31st December 2009and an investment portfolio of Rs. 14.73 Bn. The mainrisk arising from the trading portfolio is the interestrate risk as detailed elsewhere in this Annual Report.Bank quantifies and monitors this risk on a regularbasis. Further, the instruments result in liquidity riskin a very insignificant manner as the instrumentsthemselves are fairly liquid and can be convertedinto cash quite easily or can be used as collateral toborrow in the REPO market.The Bank also deals in forward exchangecontracts mainly to cover the requirements of theclients and usually the positions are covered byopposite contracts and the level of exposure is notsignificant. The Bank also enters into currencyswaps in a minimal way.Bank does not as a policy usually enter intovarious derivative transactions on a speculative basis.Key risks and risk managementCredit RiskCredit Risk is the risk of default of capital and interestby the borrowers of the Bank as a result of which theBank will encounter loss of revenue and a reductionin the value of its assets leading to reduced profits.The Board Credit subCommitteeThe Board Credit Subcommittee is chaired by theChairman of the Bank and has a minimum of twodirectors.The Board Credit Subcommittee formulatescredit policies for the Bank inclusive of maximumlimits of exposure to each major sector of the economy.The Committee formulates credit strategies towardsmaintaining a healthy credit portfolio and maintainscredit discipline within the Bank.The areas of focus include:• Approval of facilities within a range of specifiedlimits and recommendation of credit facilitiesbeyond such limits.• Formulating credit policies and guidelinesfor the Bank from time to time and review ofexisting policies.• Formulation of policies /review of existing policieson credit risk management.• Monitoring recoveries and formulating recoverystrategies.• Ensuring that the credit portfolio does not exceedaccepted levels of risk.• Review of single borrower limits and sector limitswhere more stringent limits are in place for anysector and also review of other lending criteria.The Board Credit Subcommittee meets ona regular basis at a frequency of at least twicea month. The Chief Executive Officer and KeyManagement Personnel in charge of credit areasare co-opted to the meetings.The Internal Credit CommitteeThis Committee comprises of Executive Managementand deals with approval of facilities within a certainrange of amounts. Further, this Committee deals withrecommendation of credit policies and implementationand monitoring of the same through respective creditdisbursement areas and branch outlets.Credit PoliciesThis Committee formulates and recommendsBank’s credit risk policies based on the board’srisk management strategy. It has also during theyear, improved the process for the management ofcredit and quantification of risk by standardisingreporting formats, following a more stringentpolicy towards collateral requirements for creditfacilities, restricting the exposures to any singlecustomer, scaling down the facilities where theclean exposure is excessive, and application ofshorter repayment periods on term loans.

Seylan Bank PLC Annual Report 2009 67Sectoral Exposure of Credit PortfolioCredit RatingThe Bank also uses a comprehensive credit ratingsystem based on a package acquired from aninternational vendor. The rating engine acquired bythe Bank is capable of developing different ratingmodules. Bank has developed seven credit ratingmodules covering the areas of Corporate, SME, SMI,Leasing, Housing, Credit Cards and Personal Loans.The rating system provides quantitative supportto the very subjective area of credit where bothqualitative and quantitative aspects are captured ina scientific approach to maintain consistency.The largest risk exposure of the Bank is inthe area of credit risk, as common to any bankinginstitution. The total risk weight of the threedifferent risks viz. Credit Risk, Market Risk andOperational Risk as per the capital adequacycomputations based on BASEL II approach underthe Central Bank Guidelines, as at 31st December2009 was Rs. 98.9 Bn. whereas the component ofcredit risk within this was Rs. 79.3 Bn. representing80% of the quantified risk.

68Seylan Bank PLC Annual Report 2009Market RiskMarket Risk is the risk arising from fluctuations in themarket price/value of tradable assets such as foreignexchange, fixed income securities and shares that areheld for trading purposes where the Bank holds eitherlong positions or short positions of such assets.The two risk components of the market riskmost applicable to the Bank are foreign exchangerisk and interest rate risk.The Foreign Exchange Risk arises from theforeign exchange positions maintained by the Bankwhere either the foreign currency denominatedassets exceed such liabilities (long positions) or theforeign currency denominated liabilities exceed theassets (short positions). Such long or short positionscould also be created through the purchase or saletransactions both in spot and forward marketsas well as through swap transactions. Bank isconservative and prudent in its management offoreign exchange exposures and has set out limitson its transactions and exposures including dealerlimits, portfolio limits, daylight limits, overnightlimits, long position limits, short position limits,counterparty limits etc. The Treasury Middle Officemonitors the compliance with the set limits.Seylan maintained a net oversold position ofUSD 3.85 Mn. as at 31st December 2009 where therisk arising from appreciation of foreign currencywas Rs 3.85 Mn. for each one Rupee appreciationof USD against the Rupee or equivalent in othercurrencies; a level of risk considered to be lowbased on the capital and resources of the Bank.

Seylan Bank PLC Annual Report 2009 69Interest Rate Risk arises from the movementof interest rates affecting the value of tradablefixed income securities as well as the interest ratere-pricing gaps of the interest rate sensitive assetsand liabilities. The Bank evaluates the risk levelof the tradable fixed income securities portfolioby assessing the sensitivity of the market valuetowards a change of interest rates by one hundredbasis points, which is one percentage point. Thesize and duration of the trading portfolio is cappedbased on the potential risk exposure as well as theboard approved limits placed on absolute values.Banks also typically have mismatches in there-pricing periods of assets and liabilities and anapproach of minimising the gaps and limiting longtermfixed rates is followed by the Bank.Seylan as a policy does not carry a significantexposure to the equity market whilst of course beingan active investor within applicable prudential limits.The different types of market risks and theBalance Sheet structure with a long-term focus aremonitored by the Asset and Liability ManagementCommittee (ALCO).Asset and Liability ManagementCommittee (ALCO)This Committee comprises of senior managementpersonnel representing Treasury and mainbusiness functions and also the Risk Managementarea. The Committee meets once a month andaddresses matters relating to market risk and tosome extent the business risk which is mainly dealtwith at the board level. A comprehensive reportingsystem is available to provide detailed informationto the ALCO. During the year the ALCO reportingsystem was streamlined and a standardised “ALCOPack” has been introduced for better reportingtowards more effective risk management.Of the total risk weight of the three differentrisks amounting to Rs. 98.9 Bn. the component ofmarket risk was Rs. 4.5 Bn. representing 5% of thequantified risk.Operational RiskOperational Risk refers to the losses arising fromfraud, negligence, oversight, human error, processerrors, system failures, external events etc. TheBank manages most elements of the OperationalRisk through sound internal control systems andwell-defined processes both technology driven andwith human intervention.The areas of risk include process risks wherefaulty processes or errors in the processes couldtrigger losses. Continuous review of the systemsand the processes either on a regular review basisor pursuant to observed loss events and incidentsaddresses potential weaknesses of the processes.In implementation of new products thatinvariably relies on technology as well as humaninvolvement a risk review is an essential aspectthat needs both the marketing objectives as wellas the Risk Management requirements. Bankstrives to subject such new product introductionsto adequate review.Bank also maintains its policies with regard toaccess control and data protection and necessarysafeguards are constantly introduced and upgradedto ensure the integrity of the information and thedata bases. Preventive measures such as firewallsand virus guards among other steps are put in place.Operational Risk Unit - The operational riskis monitored by the Operational Risk Unit and theOperations Department.The objective of operational risk assessmentis to identify the areas of high risk based on theprevalence of occurrences as well as evaluation ofpotential dangers. The Bank is at an early stage ofanalysing loss events and loss data under differentproduct and business categories. Any significantloss events are analysed in depth so as to strengthenthe processes and close out any weak controls.Of the total risk weight of the three differentrisks amounting to Rs. 98.9 Bn. the component ofoperational risk was Rs. 15.1 Bn. representing 15%of the quantified risk.

70Seylan Bank PLC Annual Report 2009Liquidity RiskLiquidity Risk is the risk that an entity may not beable to meet the payments as they fall due. It appearsto be an insignificant risk that does not causeregular losses until such time a major event occursresulting in even a threat to the mere existence ofan organisation. Seylan views Liquidity Risk as animportant aspect in managing risks and pays seriousattention to the management of liquidity. The Bankunderwent a potential liquidity crisis towards theend of year 2008 that was triggered by the externalevents, a situation referred to as ‘event risk’ thattriggered potential crystallising of liquidity risk.Bank always maintained its liquid assets in excessof the statutory requirement of 20% of liabilities;however as a result of the crisis the ratio fell to a rangeof 13%. Due to several measures taken by the Bankand the regulatory authority in meeting the challenges,the deposit base improved significantly and the ratiorestored much above the statutory minimum of 20% toa level of 29% by the end of the year 2009.Asset and Liability Maturity GapsAnother tool used by the Bank in the management oflong-term Balance Sheet Structure of the Bank is tomonitor the gap between the maturity of assets andliabilities under different time bands. This analysisshows the potential risks of mismatches betweenmaturity of assets and maturity of liabilities. Seylanuses this analysis in its risk management process andmonitors the maturity ladder at the ALCO meetingson a monthly basis. While it is typical for a bank tohave mismatches based on contractual maturities,it is also appropriate to analyse the maturities basedon behavioural patterns. Bank has set targets inreducing the mismatches over a time period.Treasury Management CommitteeThis Committee chaired by the Chief Executive Officer,meets on a daily basis to deal with matters relatingto liquidity management and market interest rates.In addition, foreign currency exposures are reviewedregularly. It is a strength of the Bank to have a focusedapproach through the Treasury Committee in itsliquidity management and management of the dayto day forex and money market exposures as well asmonitoring of the market rates for competitive andcurrent pricing of products.Compliance FunctionBank has set up a separate Compliance Departmentspecialised in ensuring compliance with theregulatory and legal framework. The Departmentalso has set in place necessary systems andprocesses to comply with the Anti-Money LaunderingRegulations and Laws.The Bank has taken a serious view thatcompliance with all regulations is an essentialelement of good governance and management ofthe Bank and therefore, emphasis is made on thisaspect throughout the organisation.Information Technology Risk - The technologyteams and users meet regularly and review theinformation systems currently utilised by the Bankand analyse the future technology and systemsneeds of the organization to compete effectivelyand efficiently in the future. Additionally, key areasof focus include Information Security, BusinessContinuity Planning (BCP) and Data Security.Business Continuity Planning (BCP)BCP is a strategic and tactical approach of anorganisation to plan for and respond to incidents andbusiness disruptions in order to continue businessoperations at an acceptable pre-defined level.

Seylan Bank PLC Annual Report 2009 71BCP is a process designed to reduce theorganisation’s business risk arising from anunexpected disruption of the critical functions/operations (manual or automated) necessary forthe survival of the organisation. This includeshuman/material resources supporting the criticalfunctions/operations and the assurance ofcontinuity of minimum level of service necessaryfor critical operations.Bank has set in place a comprehensiveBusiness Continuity Plan which has been developedwith the assistance of external consultants. Theplan addresses the criticality of different businessfunctions and maintains contingency arrangementsaccordingly. Bank maintains an off-site DisasterRecovery Centre as part of the Business ContinuityPlan. Further, data of all critical systems areupdated on a real time basis in the backupmachines at the Disaster Recovery Centre.The initial task was to conduct a detailedBusiness Impact Analysis (BIA) and a RiskAssessment (RA) on 29 business units and a teamwas formed comprising of a business team leader,coordinator and support staff with the assistanceof an external consultant who was given the task offormulating a comprehensive business continuityplan for each business unit. The Plan has beenbuilt considering the following areas that could beaffected due to any disaster or crisis.• Personnel• Building structure• Resources / Utilities and• Access RoutesBusiness Continuity Management(BCM) Structure and FrameworkBCM structure and framework consists of sixstages and components.

72Seylan Bank PLC Annual Report 2009The Bank adopted a six phase approach todevelop the BCP as shown below.Risk Management Related SystemsThe Bank has been developing its systemscapabilities and infrastructure for the purposeof improved Risk Management. Accordingly, acomprehensive Credit Rating System was acquiredin 2007. Bank also acquired a comprehensiveTreasury Management software system way backin the year 2001 and this system provides severalfacilities of stress testing, scenario analysis, gapanalysis and duration measurement that facilitatesmonitoring of Market and Liquidity Risk of Treasuryproducts. Seylan also became one of the pioneeringbanks to acquire BASEL II related software thatcovers capital charge calculations for Market Risk,Credit Risk and Operational Risk. The software iscapable of expansion from the Basic Indicator andStandardised Approaches towards Foundation andAdvanced Internal Rating Based Approaches. Withthe support of these software systems, Seylan Bankwould possess a comprehensive and sophisticatedRisk Management framework.

Seylan Bank PLC Annual Report 2009 73BASEL II Implementation PlanSeylan Bank was able to face its first stage ofmeeting the challenge of implementing the BASEL IIfor credit risk - standardised approach, operationrisk - basic indicator approach, and market risk -standardised approach very successfully throughthe appointment of a dedicated committee whichcomprised several subcommittees for evaluation andimplementation involving key officers representingthe core banking areas of finance, credit, operations,branch banking, and treasury who worked tirelesslytowards achieving the set goals.The first stage, comprised three phases; that ofassessing and planning where a GAP analysis wasconducted on our processes, methods, and systemsinvolving the core system of Kapiti, and other systemsused by Treasury Operations, Pawning, Leasing,Credit Cards, etc, comparing the availability of dataagainst the required data and thereafter developinga master plan involving short-term and long-termgoals. The short-term goal was to initially achievethe CBSL stipulations of meeting the preliminarystandards by 1st January 2008, a goal which wasachieved successfully and on time.After a careful evaluation process a reputedIT software developer was hired to design thesystem to integrate the main operational systemsof the Bank in forming a common data platform andthereafter performing the following tasks ;Risk Measurement• Credit Portfolio Exposure Calculation• Upload of data• Data Validation• Calculation of gross exposure for on-BalanceSheet and off-Balance sheet items• Calculation of credit risk exposure for regulatorypurpose and• Capital charge calculations.Risk Mitigation• Setting up netting agreements and management• Calculation of impact of netting on the exposures• Collateral Management• Collateral set up• Calculation of impact of collateralisation onexposures using simple approach• Guarantees Management and• Calculation of impact of guarantees on exposures.Risk Reporting• Capital charge computation• Statutory reporting.Parallel to the above, the second stage ofgearing and preparing for the advanced approachin credit risk was launched by the introductionof internal credit scoring and rating modulesfor different types of facilities was rolled outthroughout the branch network, and credit SBUsof the Bank. These rating modules are currentlybeing fine tuned through stress testing, and backtestingwith the view of ensuring that they reflect arealistic risk assessment of the counterparty andtransaction, prior to linking them for credit decisionmaking, risk-based pricing and the calculation ofProbability of Default, Exposure at Default, andLoss Given Default.Key Elements of Successful Basel IIRisk Management System• Sponsorship from top management.• Project implementation team who can collaboratebetween systems experts and risk experts.• Bank-wide cross-functional Taskforce, establishedto identify and prioritise data quality issues,evaluate solutions and initiate process changes.Implementing tools that detect data errors andomissions.• Discipline needed to maintain “clean” data.Reports generated regularly to ensure thaterrors are not creeping back into database.

74Seylan Bank PLC Annual Report 2009Way forward on Risk Management -Key Focus Areas of the BankThe following is a summary of the key areasfocused by the Bank for implementation during theyear 2010 onwards:• Further development of internal risk ratingframeworks.• Integration of frameworks through creditredesign initiatives.• Ongoing testing and validation of risk ratingsystems.• Calibration of probability of default.• Development of portfolio managementinformation system.• Building database of default data, loss data andrecovery data.• Measuring credit exposures accurately.• Analytics Engines that support BASEL II capitalrequirements and economic capital attribution.Each is a major project requiring crossfunctionalexpertise and deep skill sets. Projectsdriven via Steering Committee and project leadersare held accountable for project delivery.ConclusionRisk Management is an important function ofany organisation and more so in the case of afinancial institution because the ability to expandthe exposures is much more significant comparedto most other business entities. Seylan Bankrecognises the need for a sound and comprehensiverisk management framework and therefore hasintroduced a risk management framework that isbeing continuously improved and developed.

Seylan Bank PLC Annual Report 2009 75Corporate Governance reportINTRODUCTION“Weak governance of banks reverberatesthroughout the economy with negative ramificationsfor economic development” (Ross Levine - GlobalCorporate Governance Forum, 2003).“Given the important financial intermediationrole of banks in an economy, their high degree ofsensitivity to potential difficulties arising fromineffective corporate governance and the need tosafeguard depositors’ funds, corporate governancefor banking organizations is of great importance…” (BASEL Committee on Banking Supervision -February 2006).For Seylan, the above words serve as a bleakreminder of the events which took place in December2008 - the difficulties faced by the Bank precipitatedby a series of withdrawals which commenced withthe collapse of a company within the CeylincoGroup. Timely intervention by the Central Bank ofSri Lanka together with Management assistancefrom Bank of Ceylon and appointment of a strongand independent board of directors paved the wayfor the Bank to make a recovery unprecedented andunparalleled in the history of the banking sector inthe country particularly when its occurrence was inthe midst of the global financial crisis.The implementation and enforcement of soundcorporate governance principles have thereforebecome even more critical in this context.The newly-appointed board comprising of alleminent professionals in their respective fields arefirm in their resolve that both the board and thesenior management team and staff should act atall times with integrity and honesty and functionin an environment where the highest elementof ethical business conduct is maintained. Theyhave therefore pledged their commitment towardsadoption and implementation of transparent andeffective corporate governance practices within theBank with the view of enhancing business prosperityand corporate accountability and realising notonly long-term shareholder value and acquiringand retaining the trust of its depositors but alsosafeguarding the interests of all its stakeholders.COMPLIANCE REQUIREMENTSPursuant to Seylan Bank board being re-constitutedin December 2008, the new board commenceddetailed compliance with Corporate Governanceprinciples and guidelines with particular referenceto the following during 2009:• the Banking Act Direction No. 11 of 2007(Corporate Governance for Licensed CommercialBanks in Sri Lanka) issued by the MonetaryBoard of the Central Bank of Sri Lanka includingsubsequent amendments there to (CBSL Code);• the Colombo Stock Exchange rules on CorporateGovernance (applicable on a voluntary basis forlisted entities until 1st April 2008 and for banksuntil 31st December 2008) and mandatorythereafter.• the Code of Best Practice of CorporateGovernance jointly issued by the Securities& Exchange Commission of Sri Lanka (SEC)and the Institute of Chartered Accountants ofSri Lanka (ICASL).The Bank is required to mandatorily comply withthe Corporate Governance rules of the Code of BestPractice of Corporate Governance laid down as perCentral Bank Direction No. 11 of 2007 as amendedas aforesaid and also the Colombo Stock Exchangerules of Corporate Governance for listed entitieswhich became mandatory for banks with effectfrom the financial year commencing January 2009.Compliance with the ICASL/SEC Code of Best Practiceon Corporate Governance is on a voluntary basis.

76Seylan Bank PLC Annual Report 2009

Seylan Bank PLC Annual Report 2009 77The Bank’s level of conformity to the Central Bank Code of Corporate Governance issued underBanking Act Direction No. 11 of 2007 (as amended) is given below:For purposes of compliance with Section 3 (1) (xvi) of the Banking Act Direction No. 11 of 2007(as amended) the disclosures made in the following two tables shall be deemed to be the AnnualCorporate Governance Report of the Bank.ANNUAL CORPORATE GOVERNANCE REPORT - CORPORATE GOVERNANCEDISCLOSURE REQUIREMENTS AS PER SECTION 3 (8):Disclosure requirement3(8)(i) The board shall ensure that:(a) annual audited Financial Statementsand quarterly Financial Statements areprepared and published in accordancewith the formats prescribed by thesupervisory and regulatory authoritiesand applicable accounting standards, and(b) such Statements are published inthe newspapers in an abridged form, inSinhala, Tamil and English.3(8)(ii) The board shall ensure that thefollowing minimum disclosures aremade in the Annual Report:(a) A statement to the effect that the annualaudited Financial Statements have beenprepared in line with applicable accountingstandards and regulatory requirements,inclusive of specific disclosures.Level of complianceComplied.The Bank has made a balanced and fair assessment of itsfinancial position for the year ended 31st December 2009through the Audited Financial Statements contained in theAnnual Report of 2009.The Bank has continuously published its Quarterly FinancialStatements supplemented with the necessary explanatorynotes and observations for the information of its shareholdersand other stakeholders. Strict adherence is made to allaccounting formats and other procedures laid down byregulatory authorities such as the Colombo Stock Exchangeand the Central Bank in the disclosure and submission ofsuch information. Financial Statements both audited andinterim unaudited are prepared and published in accordancewith the Sri Lanka Accounting Standards and other regulatoryrequirements inclusive of specific disclosures.Any other financial and non-financial information, whichare price-sensitive or warrant the shareholders’ andstakeholders’ attention and consideration, are promptlydisclosed to the public.Please also refer the Statement of ‘Directors’ Responsibility forFinancial Statements’ appearing on pages 134 and 135 of theAnnual Report.(b) A report by the board on the Bank’sinternal control mechanism thatconfirms that the financial reportingsystem has been designed to providereasonable assurance regarding thereliability of financial reporting, and thatthe preparation of Financial Statementsfor external purposes has been donein accordance with relevant accountingprinciples and regulatory requirements.Complied.Please refer the Statement of ‘Directors’ Responsibility forFinancial Reporting’.

78Seylan Bank PLC Annual Report 2009Disclosure requirement(c) The external auditor’s certification onthe effectiveness of the internal controlmechanism referred to in Direction 3(8)(ii)(b) above, in respect of anystatements prepared or publishedafter 31st December 2008.(d) Details of directors, includingnames, fitness and propriety,transactions with the bank and the totalof fees/remuneration paid by the bank.Level of compliancePending auditing guidelines being issued by the ICASL inrespect to the nature, extent and reporting formats for suchcertification, the Central Bank of Sri Lanka is consideringdeferment of this directive.However, the board has put in place processes and monitorsthe effectiveness of internal controls through the followingboard subcommittees:• Audit Committee• Integrated Risk Management CommitteeComplied.Profiles of the board of directors and other details areprovided on pages 228 to 229 of the Annual Report and alsoin the Annual Report of the Board appearing on pages 119 to128 of the Annual Report.Details of directors’ interest in contracts and related partytransactions are given in Notes 42 and 43 of the FinancialStatements and on pages 129 to 133 of the Annual Report.Aggregate remuneration paid to directors andaccommodation granted are indicated in Note 7 and Note 42to the Financial Statements.(e) Total net accommodation as defined in3(7)(iii) granted to each category of relatedparties. The net accommodation grantedto each category of related parties shallalso be disclosed as a percentage of thebank’s regulatory capital.(f) The aggregate values ofremuneration paid by the bank to itskey management personnel and theaggregate values of the transactionsof the bank with its key managementpersonnel, set out by broad categoriessuch as remuneration paid,accommodation granted and deposits orinvestments made in the bank.(g) The external auditor’s certification ofthe compliance with these Directions inthe annual corporate governance reportspublished after 1st January 2010.Complied.Details of accommodation granted to related partiesare disclosed on pages 129 to 133 and in Notes 42 and 43 ofthe Financial Statements.Net accommodation granted to related parties was 13.18% ofthe Bank’s regulatory capital.Complied.Please refer Notes 7 and 42 to the Financial Statements.The Central Bank of Sri Lanka is considering the defermentof this directive.

Seylan Bank PLC Annual Report 2009 79Disclosure requirement(h) A report setting out details of thecompliance with prudential requirements,regulations, laws and internal controlsand measures taken to rectify anymaterial non-compliances.(i) A statement of the regulatory andsupervisory concerns on lapses inthe bank’s risk management or noncompliancewith these Directions thathave been pointed out by the Director ofBank Supervision, if so directed by theMonetary Board to be disclosed to thepublic, together with the measures takenby the bank to address such concerns.Level of compliancePlease refer the Annual Report of the Board, Risk ManagementReport and Audit Committee Report. There were no materialnon-compliances.Please also refer ’Statement of Directors’ Responsibility’ forFinancial Reporting’.There were no lapses reported in the areas of riskmanagement and non-compliance with Directions issued bythe Central Bank which required disclosure to the public asdirected by the Monetary Board.ANNUAL CORPORATE GOVERNANCE REPORT ISSUED IN COMPLIANCE WITHSECTION 3 (1) (XVI) OF THE BANKING ACT DIRECTION NO. 11 OF 2007 (AS AMENDED)CBSL RuleBOARDResponsibilities of the Board3(1) (i) - ensuring the safety andsoundness of the Bank3 (1) (xiii) - Schedule of matters reservedfor board’s decision:• formulation of strategic objectives andimplementation of overall businessstrategy• ensure identification and managementof risks by implementation of riskpolicies and measurable goals• ensure effectiveness and adequacyof information and internal controlsystems• Ensure competency of CEO and keymanagement personnel and implementsuccession strategyLevel/Extent of complianceThe board has taken relevant measures as necessary toensure the safety and soundness of the Bank in terms ofSection 3(1) (i) of the said Direction. Its responsibilitiesincluded the following:• Providing strategic direction by formulating andimplementing of new Strategic Plan for the Bank.• Formulation of business policies and ensuring effectiveimplementation of same.• Strengthening internal systems of control includingformulation of overall risk policy for the Bank. Riskmanagement procedures with measurable goals arecurrently being implemented.• Monitoring effectiveness of CEO and the corporatemanagement. The board also carried out a substantialre-organisation exercise in the Bank;• Implementation of sound credit policies and ensuring highcredit quality as well as approval of credit facilities exceedingthe delegated limits of the Internal Credit Committee.

80Seylan Bank PLC Annual Report 2009CBSL RuleBOARD• Ensuring compliance with legal andethical standards• Ensure oversight of affairs of the Bankand fulfillment of other functions ofthe board.Level/Extent of compliance• Ensuring internal and external information flows andappropriate financial reporting• Approving annual budgets and corporate plan andapproving annual and interim Financial Statements.• Ensuring adherence to legal and ethical standards.• Rationalisation of administrative and personal expenses andrevisiting human resources and procurement policies.3 (2) Composition of the Board As at present, the board comprises of ten directors whoseprofiles appear on pages 228 and 229 of the Annual Report.All directors are eminent professionals with extensiveexperience in the fields of banking, finance, law, insuranceand other related fields. The board also has severalmembers with financial acumen and experience.The board comprises of two Executive Directors viz.M/s. E. Narangoda (Chairman) and R. Nadarajah, theremaining eight being Non-Executive Directors.The Bank has identified three of the Non-Executive Directorsviz. Messrs P.L.P. Withana, N.M. Jayamanne PC and RearAdmiral (Rtd.) B.A.J.G. Peiris as ‘Independent’ Directorswithin the meaning of Direction No. 3(2) (iv) of the MandatoryCode on Corporate Governance issued by the Central Bankof Sri Lanka (CBSL Code) and the Listing Rules of theColombo Stock Exchange (CSE), thus conforming to theminimum number of Independent Non-Executive Directorsrequired both as per the CBSL Code and the CSE Rules.Pursuant to the re-capitalisation of the Bank, four newdirectors were appointed during 2009 viz.Mr. P.G.S. Kariyawasam, Dr. N.H. Godahewa,M/s. A.L. Devasurendra and I.C. Nanayakkara.Mr. S.P.S. Ranatunge was appointed on 12th January 2010.There were no alternate directors appointed.The Bank’s Executive and Independent Non-ExecutiveDirectors are duly disclosed in the Annual Report and in allcorporate communications.

Seylan Bank PLC Annual Report 2009 81CBSL RuleLevel/Extent of complianceBOARD3 (3) Fitness and Propriety of Directors All directors have satisfied the ‘fit and proper’ criteriaset out in Section 42 of the Banking Act No. 30 of 1988(as amended) and have forwarded to the Bank SupervisionDepartment of the Central Bank signed affidavits anddeclarations confirming their ‘fit and proper’ status to holdoffice as directors as required by Section 42 of the BankingAct and as per Clause 2(3) (i) of the Banking Act DirectionNo. 11 of 2007 (as amended).No directors hold office as a director of more than 20companies/entities or institutions.3(1) (iii) & 3 (1) (xiii) MeetingsBoard meetings to be held regularly withactive participation of members3(1) (iv) - (vi) Compliance with BoardproceduresThe board dedicated sufficient time for board meetings. Totalmeetings held during 2009 were 27 and the attendance atthese meetings is given on page 84 of this Report. The directorshave a formal schedule of matters specifically reserved to it fordecision making. All directors actively contribute to the boardproceedings. Resolutions by circulation are kept at a minimumand restricted to matters of a routine nature.Provision is made for all directors to place matters beforethe board relating to both the promotion of the business andmanagement of risks. Due to board meetings being scheduledtwice a month, directors are noticed of the date of the nextmeeting well in advance and board papers are circulatedapproximately 4-5 days prior to the date of the meeting.3(1) (vii) – (x) Company Secretary All directors have access to the advice and services ofthe Company Secretary who is a chartered secretary andattorney-at-law to ensure that board procedures and allapplicable rules and regulations are followed. The CompanySecretary is responsible for compliance with the provisionsof the Companies Act, rules of the Colombo Stock Exchangeand Banking Act provisions relating to shareholders andprovisions of the Securities & Exchange Commission Act.Minutes of board meetings are also recorded by her insufficient detail to enable a proper assessment to be madeof the depth of deliberations at the meetings.3(1) (xi) Procedure for the Board toobtain Independent AdviceThe board seeks independent professional advice on anymatters whenever required.

82Seylan Bank PLC Annual Report 2009CBSL RuleBOARD3(1) (xii) Directors to avoid conflict ofinterest3 (4) Management Functions delegatedby the Board of DirectorsLevel/Extent of compliance1/3rd of the Bank’s board comprise of Independent Non-Executive Directors and as such there is a strong independentelement in the board. Directors avoid conflicts of interest withthe Bank and any situation which involves or may reasonablybe expected to involve, a conflict of interest with the Bank isdisclosed promptly. Wherever a conflict of interest does arise,the said director abstains from voting on any such resolution.The board has delegated matters pertaining to the affairs ofthe Company to the• Board subcommittees comprising board memberswherever applicable and to the• Chief Executive Officer,• Key management personnel and• line management whilst retaining and not derogating in anymanner the final authority of the board.The subcommittees function through the scope andauthority delegated by the board and as per board approvedterms of reference. Proper delegated authority limits havebeen set out to the CEO and the line Management to conducttheir line functions within their lines of authority.The delegation process to the board subcommittees and tothe CEO and line management is reviewed by the board fromtime to time.3(1) (ii) & 3 (5) Chairman & Chief ExecutiveDivision of responsibilitiesThe positions of the Chairman and the CEO have beenseparated. However, the Chairman functions in an executivecapacity (upon Seylan Bank board being reconstituted inDecember 2008).The Chairman provides leadership to the board and ensures thatthe board members effectively discharge their responsibilitiesand make an active contribution to the board’s affairs. Under theChairman’s supervision, the agenda and matters to be taken upat the board meeting are itemised and scheduled.CEOThe CEO of the Bank is not a member of the board. Heheads the senior management team of the Bank and reportsdirectly to the board of directors.

Seylan Bank PLC Annual Report 2009 83CBSL RuleBOARDLevel/Extent of complianceHis main functions and responsibilities are the overallmanagement and operations of the Bank. He also heads theBank’s Treasury Committee and the Assets & LiabilitiesCommittee (ALCO).The authority over the function of credit administration hasbeen delegated to the Board Credit subcommittee, InternalCredit Committee and levels of management, from the CEOdown to the level of Branch Managers with limits beingstipulated in accordance with the level of authority.The CEO also chairs the Internal Credit Committee, whichapproves credit facilities above his delegated credit authoritylimits upto a limit specified by the board.The functions and responsibilities of the Chairman and the ChiefExecutive are clearly set out in writing and approved by the board.3(5)(ii) Appointment of Senior Director -designateThe board has appointed Mr. N.M. Jayamanne PC, anIndependent Non-Executive Director of the Bank to functionas the ‘Senior Director’ in order to bring in a greaterindependent element to the functioning of the board.Mr. N.M. Jayamanne PC functions in this capacity underboard approved terms of reference.3(1) (xv) Capitalisation of the Bank A re-capitalisation process was carried out in 2009 witha view to meeting regulatory requirements with regard tocapital adequacy. The Bank is compliant with regulatory andprudential requirements relating to capital adequacy.3(1) (xvii) Board to adopt a Scheme ofSelf-AssessmentThe board adopted a scheme of self-assessment based on theirduties and responsibilities as set out on pages 79 and 80 ofthe Annual Report and also with regard to specific targets andobjectives set out for implementation in respect of the year 2009.

84Seylan Bank PLC Annual Report 2009CBSL RuleBOARDLevel/Extent of compliance3(6) Board appointed Committees The board subcommittees that were functional as at end2009 include:• Audit Committee• Integrated Risk Management Committee• Credit Committee• Remuneration Committee and• Nominations CommitteeAll subcommittees function within board-approved terms ofreference and the details of same together with the attendanceof the directors at meetings of subcommittees are given onpages 86 to 88 of the Annual Report. All subcommittees exceptthe Credit Committee are chaired by Non-Executive Directors.In December 2009, two additional board subcommitteesfor Strategic Planning and Sustainability were formed butcommenced its activities only from January 2010. A furthersubcommittee for marketing and product development wasformed in January 2010.3 (7) Related Party Transactions The board has taken adequate measures to ensure that noconflict of interest arises from any transactions of the Bankwith any ‘related parties’ within the definition in Section3 (7) (i) of the CBSL Code.AttendanceThe attendance of directors at the board meetings held during the year 2009 is given below:Executive/Non-ExecutiveCapacityBoard meetingsEligible to attend AttendedMr. E. Narangoda Executive 27 27Mr. R. Nadarajah Executive 26 24Mr. P.L.P. Withana Independent Non-Executive 27 23Mr. F.N. Goonewardena(resigned on 3/12/09) Independent Non-Executive 24 24Mr. N.M. Jayamanne PC Independent Non-Executive 27 23Rear Adm. (Rtd)B.A.J.G. Peiris Independent Non-Executive 26 20Mr. P.G.S. Kariyawasam(Appointed w.e.f. 10/11/09) Non-Executive 04 03Dr. N.H. Godahewa(Appointed w.e.f. 10/11/09) Non-Executive 04 02Mr. A.L. Devasurendra(Appointed w.e.f. 24/11/09) Non-Executive 03 03Mr. I.C. Nanayakkara(Appointed w.e.f. 24/11/09) Non-Executive 03 03

Seylan Bank PLC Annual Report 2009 85Upon the re-constitution of the board on30th December 2008, new board subcommitteeswere formed. However, upon the completion ofthe re-capitalisation process of the Bank and thesubsequent appointment of new directors, theboard subcommittees were further reconstituted on3rd December 2009 and new Committees formedon 17th December 2009. The composition of theCommittees both before and after the reconstitutionis given below. Another subcommittee forMarketing & Product Development was formed on19th January 2010.CategoryAudit CommitteeIntegratedRisk ManagementCommitteeCredit CommitteeHR & RemunerationCommittee*NominationsCommitteeStrategic PlanningCommittee **SustainabilityCommittee **Marketing & ProductDev. Committee ***Mr. E. Narangoda Executive √ ∆ ∆ ∆Mr. R. Nadarajah Executive √ ∆ ∆ ∆ ∆Mr. P.L.P. WithanaIndependent √ ∆ √ ∆ √ ∆ ∆Non-ExecutiveMr. F.N. Goonewardena Independent √ √ √(resigned on 03/12/09) Non-ExecutiveMr. N.M. Jayamanne PC IndependentNon-Executive√ ∆ √ ∆ √ ∆ ∆ ∆Rear Admiral (Rtd.)B.A.J.G. PeirisMr. P.G.S. Kariyawasam(Appointed w.e.f. 10/11/09)Dr. N.H. Godahewa(Appointed w.e.f. 10/11/09)Mr. A.L. Devasurendra(Appointed w.e.f. 24/11/09)Mr. I.C. Nanayakkara(Appointed w.e.f. 24/11/09)Mr. S.P.S. Ranatunga(Appointed w.e.f. 13/01/10)IndependentNon-Executive∆ √ ∆ ∆Non-Executive ∆ ∆ ∆ ∆ ∆Non-Executive ∆ ∆ ∆Non-Executive ∆ ∆ ∆ ∆ ∆ ∆Non-Executive ∆ ∆∆ ∆ ∆√∆Represents committee members before reconstitution of committees.Represents committee members after reconstitution of committees.* Formerly titled as Remuneration Committee.** Strategic Planning and Sustainability Committees were formed in December 2009 and commenced activities in January 2010.*** Marketing & Product Development Committee was formed in January 2010 and commenced activities thereafter.

86Seylan Bank PLC Annual Report 2009The composition and scope/terms of referenceof the board subcommittees which were functionalas at 31st December 2009 and their attendance atcommittee meetings during 2009 are given below:Committee /Composition No. of meetings Scope/Terms of referenceEligibility Attendedto attendAudit Committee:Mr. P.L.P. Withana (Chairman)Mr. F.N. Goonewardena(resigned on 3/12/09)Mr. N.M. Jayamanne PC(appointed w.e.f. 24/2/09)Mr. P.G.S. Kariyawasam(appointed w.e.f. 3/12/09)775N/A*773N/A* No Meetings were held after 3rd December 2009 until 31st December 2009The Audit Committee comprises three Non-ExecutiveDirectors (of whom two are independent) and isheaded by Mr. Lalith Withana an Independent Directorwho possesses relevant financial experience andqualifications.The Executive Director, CEO, Chief Financial Officer andDGM Internal Audit attend the Committee meetingsby invitation. The External Auditors participate atthe meeting whenever required and therefore hasdirect access to the Audit Committee to report on anymatters independently to the board. The Committeehas met seven times during 2009.The Committee reviews Internal Controls, InformationTechnology governance activities and security andcontrols and reviews and monitors all audit activitiesand operations and the effectiveness of internalcontrols including IT/Information Systems controlthat are in place and the Bank’s compliance with keystatutory and regulatory requirements and industrybest practices.The Report of the Audit Committee is set out on page100 to 101 of the Annual Report.

Seylan Bank PLC Annual Report 2009 87Committee /Composition No. of meetings Scope/Terms of referenceEligibility Attendedto attendIntegrated RiskManagement CommitteeMr. F.N. Goonewardena(Chairman)(resigned on 3/12/09)Mr. P.L.P. WithanaMr. A.L. Devasurendra(appointed to the Committeeand as Chairman of theCommittee w.e.f. 3/12/09)Mr. P.G.S. Kariyawasam(appointed w.e.f. 3/12/09)33N/A*N/A*33N/AN/A* No Meetings were held after 3rd December 2009 until 31st December 2009The Integrated Risk Management Committee comprisesof three Non-Executive Directors and is headed byMr. A.L. Devasurendra (consequent to the resignation ofMr. Naomal Goonewardena on 3rd December 2009)The Executive Director, Mr. Nadarajah, the CEO,CFO and key management personnel supervisingbroad risk categories, i.e., credit, market, liquidity,operational and strategic risks attend the Committeemeetings by invitation.The Committee met thrice during the year. TheCommittee’s responsibilities include assessmentof all risks, i.e., credit, market, liquidity, operationaland strategic risks to the Bank through appropriaterisk indicators and management informationand review the adequacy and effectiveness ofmanagement-level committees set up to addressspecific risks and the Asset-liability Committee toaddress and manage such risks.The Report of the Integrated Risk ManagementCommittee is set out on page 102 of the Annual Report.A detailed Report on Risk Management is given onpages 63 to 74 of the Annual Report.Credit CommitteeMr. E. Narangoda (Chairman)Mr. R. NadarajahMr. A.L. Devasurendra(appointed w.e.f. 3/12/09)Mr. I.C. Nanayakkara(appointed w.e.f. 3/12/09)202033201921The Credit Committee comprises of two ExecutiveDirectors and two Non-Executive Directors and isheaded by the Chairman, Mr. E. Narangoda.The CEO and senior management personnelsupervising credit and credit monitoring attend themeeting by invitation.The Committee’s responsibilities includeformulating credit policies and credit strategiesfor the Bank towards maintaining a healthy creditportfolio and credit discipline within the Bank.The Committee approves the credit facilities abovethe delegated authority limits of the Internal CreditCommittee subject to a specified limit and recommendsfacilities to the board in excess of the said limit. TheCommittee also formulates policies /reviews existingpolicies on credit risk management, monitors recoveriesand formulates recovery strategies and ensure that thecredit portfolio does not exceed accepted levels of risk.

88Seylan Bank PLC Annual Report 2009Committee /Composition No. of meetings Scope/Terms of referenceEligibility Attendedto attendRemuneration CommitteeMr. N.M. Jayamanne PC(Chairman)Mr. P.L.P. WithanaMr. F.N. Goonewardena(resigned on 3/12/09)Dr. N.H. Godahewa(appointed w.e.f. 3/12/09)Mr. P.G.S. Kariyawasam(appointed w.e.f. 3/12/09)Rear Admiral (Rtd.)B.A.J.G. Peiris(appointed w.e.f. 3/12/09)Mr. S.P.S. Ranatunga(appointed w.e.f. 13/01/10)222N/A*N/A*N/A22–N/AN/AN/A* No meeting were held after 3rd December 2009 until 31st December 2009The Remuneration Committee during 2009 comprisedof six Non-Executive Directors and was headed byMr. Nihal Jayamanne PC, an IndependentNon-Executive Director.The General Manager/CEO attended the meeting byinvitation wherever permissible.The mandate of the Committee is to determine theremuneration policies relating to directors, theChief Executive Officer and the Key ManagementPersonnel (KMPs) of the Bank; set goals andtargets for the CEO and KMPs and evaluate theirperformance against these targets periodically todetermine the basis of revising remuneration andother benefits paid.The Committee met twice during the year.The Report of the Remuneration Committee includingthe Remuneration Policy is set out on page 103 of theAnnual Report.Nomination CommitteeRear Admiral (Rtd.)B.A.J.G. Peiris (Chairman)11The Nomination Committee during 2009 comprisedof four Non-Executive Directors and was headed byRear Admiral (Rtd.) B.A.J.G. Peiris.Mr. N.M. Jayamanne PCMr. F.N. Goonewardena(resigned on 3/12/09)Mr. A.L. Devasurendra(appointed w.e.f. 3/12/09)Mr. S.P.S. Ranatunga(appointed w.e.f. 13/01/10)11N/A*N/A*1–N/AN/A* No meeting were held after 3rd December 2009 until 31st December 2009The Chairman, Executive Director and the CEO attendthe meeting by invitation wherever permissible.The Committee met once during the year.The Committee makes recommendations to theboard on the selection, appointment of new directorsand key management personnel, determine thequalifications, experience and competenciesrequired by such personnel to hold office of theCEO or other key posts, determine their successionplanning and recommend election of directors andreview the composition and structure of the board ofdirectors having due regard to the balance of skillsrequired to be maintained on the board.

Seylan Bank PLC Annual Report 2009 89COLOMBO STOCK EXCHANGE CORPORATEGOVERNANCE REPORTThe Colombo Stock Exchange rules on CorporateGovernance became mandatory for all listed entitiesfrom the financial year commencing 1st April 2008and for all licensed commercial banks which arelisted entities, from the financial year commencing1st January 2009.The Bank’s compliance with Rule 7.10 of theCSE Revised Rules of Corporate Governance fromthe financial year commencing 1st January 2009 isset out below:Rule7.10.1 The Board of Directors(a) The board of directors should include at least2 Non-Executive directors or 1/3rd of the totalnumber of directors whichever is higher.(b) number of directors to be calculated based onthe number as at the conclusion of the immediatelypreceding Annual General Meeting.(c) Any change occurring to this ratio to be rectifiedwithin 90 days from the date of the change.7.10.2 Independent Directors(c) Independent directors should be at least two Non-Executive Directors or one-third of the Non-ExecutiveDirectors appointed to the board, whichever is higher.(d) Each Non-Executive Director to submit a signedand dated declaration annually to the board of his/her independence or non-independence against thespecified criteria.Status /RemarksCompliedAs at 31st December 2009, the board comprised of9 directors of whom 7 are Non-Executive Directors.On 12th January 2010, an additional Non-ExecutiveDirector was appointed to the board.Profiles of these directors appear on pages 228 to229 of the Annual Report.CompliedThree directors on the board viz. M/s. P.L.P. Withana,N.M. Jayamanne PC and Rear Admiral (Rtd.) B.A.J.G.Peiris are Independent Non-Executive Directors ofthe Company. Mr. F.N. Goonewardena who resignedfrom the board on 3rd December 2009 was also anIndependent Non-Executive Director.CompliedSigned and dated declarations have been providedby the directors confirming their independent nonexecutivestatus in compliance with the CSE Rules.

90Seylan Bank PLC Annual Report 2009Rule7.10.3 Disclosure Relating to Directors(a) Determination made by board annually as tothe independence/non-independence of each Non-Executive Director based on such declaration andother information available to the board and set outnames of the ‘independent’ directors in the AnnualReport.(b) Where a Non-Executive Director does not qualifyas independent but where the board is of the opinionhe is nevertheless deemed to be ‘independent’, takinginto account all other circumstances.(c) Publish a brief résumé of each director onits board in the Annual Report which includesinformation on the nature of his/her expertise inrelevant functional areas.(d) Provision of a brief résumé to the CSE of anew director appointed to the board and informingmatters itemised above.Status /RemarksCompliedBased on declarations received from the directorsby the year end, the independent status of M/s.P.L.P. Withana, N.M. Jayamanne PC,F.N. Goonewardena and Rear Admiral (Rtd.)B.A.J.G. Peiris is indicated on page 123 of theAnnual Report.Not ApplicableCompliedPlease refer pages 228 to 229 for profiles of directors.Complied7.10.5 Remuneration CommitteeA listed company shall have a RemunerationCommittee in conformity with the following:(a) Composition - comprise a minimum of twoindependent Non-Executive Directors orNon-Executive Directors, a majority of whomshall be independent, whichever is higher.One Non-Executive Director shall be appointed asChairman of the Committee by the board of directors.(b) Functions - the Remuneration Committeeshall recommend the remuneration payable to theExecutive Directors and Chief Executive Officerand/or equivalent position thereof to the boardwhich will make the final determination.(c) Disclosure in the Annual Report – set out thenames of directors comprising the RemunerationCommittee, contain a statement of the remunerationpolicy and set out the aggregate remuneration paid toExecutive and Non-Executive Directors.CompliedThe Remuneration Committee comprises six Non-Executive Directors of whom three are independent.CompliedMr. N.M. Jayamanne PC who is an Independent Non-Executive Director is the Chairman of the Committee.CompliedRemuneration of the CEO and the emolumentsof the directors are recommended by theRemuneration Committee.CompliedAggregate remuneration of directors and keymanagement personnel is given in Note 7 tothe Financial Statements. Please also refer theRemuneration Committee Report on page 103 ofthe Annual Report.Total remuneration paid to Executive and Non-Executive Directors including by way of fees as at31st December 2009 amounted to Rs. 10.779 Mn.(2008 - Rs. 74.67 Mn.)

Seylan Bank PLC Annual Report 2009 91RuleStatus /Remarks7.10.6 Audit CommitteeA listed company shall have an Audit Committee inconformity with the following:(a) Composition - should comprise a minimumof two independent Non-Executive Directors orNon-Executive Directors, a majority of whom shallbe independent, whichever shall be higher.One Non-Executive Director shall be appointed asChairman of the Committee by the board of directors.Unless otherwise determined by the AuditCommittee the Chief Executive Officer and theChief Financial Officer of the listed company shallattend Audit Committee meetings.The Chairman or one member of the committeeshould be a Member of a recognized professionalaccounting body.(b) Functions shall include -• Oversight of the preparation, presentationand adequacy of disclosures in the FinancialStatements of a listed company in accordancewith Sri Lanka Accounting Standards.• Oversight of the Company’s compliance withfinancial reporting requirements, informationrequirements of the Companies Act and otherrelevant financial reporting related regulationsand requirements.• Oversight over processes to ensure Company’sinternal controls and risk management areadequate, to meet the requirements of theSri Lanka Auditing Standards.• Assessment of the independence andperformance of the company’s External Auditors.• To make recommendations to the boardpertaining to appointment, reappointment andremoval of External Auditors and to approve theremuneration and terms of engagement of theExternal Auditors.CompliedThe Audit Committee consists of three Non-ExecutiveDirectors, of whom two are independent.CompliedMr. P.L.P. Withana, an Independent Non-ExecutiveDirector is the Chairman of the Committee.CompliedThe CEO and CFO attend the Committee meetingsby invitation.CompliedIn 2009, two members of the Committee weremembers of recognised professional accountingbodies and the Chairman of the Committee was amember of The Institute of Chartered Accountantsof Sri Lanka.CompliedThe Committee reviews all interim unauditedand audited Financial Statements prepared inconformity with Sri Lanka Accounting Standards.CompliedFinancial reporting requirements are strictly compliedin line with the Companies Act, Sri Lanka AccountingStandards and regulatory requirements imposed bythe Colombo Stock Exchange and the Central Bank.CompliedThe Committee monitors and reviews the effectivenessof the internal audit systems which includes theinternal audit and information system audit functions.CompliedThe Committee monitors and reviews the independenceof the External Auditors as part of its scope.Complied

92Seylan Bank PLC Annual Report 2009Rule(c) Disclosure in the Annual Report –• Names of the directors comprising the AuditCommittee to be disclosed in the Annual Report.• The committee shall make a determinationof the independence of the Auditors and shalldisclose the basis for such determination in theAnnual Report.• The Annual Report shall contain a report bythe Audit Committee, indicating the manner ofcompliance in relation to the above.Status /RemarksCompliedMembers of the Audit Committee are listed on page 86.CompliedThe Committee has determined the independenceof the Auditors and have disclosed the basis of theirdetermination in page 128 of the Annual Report.CompliedAudit Committee Report is given on page 100 to 101BANK’S COMPLIANCE WITH THE CODE OF BEST PRACTICE ON CORPORATE GOVERNANCEISSUED JOINTLY BY THE SECURITIES & EXCHANGE COMMISSION OF SRI LANKA (SEC) andthe INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA (ICASL)The Bank commenced voluntary compliance of the above Code of Best Practice commencing from January2009 and the level and nature of compliance with the Code are set out below:A. Annual ReportSubject & Ref. Corporate Governance Principle Level of ComplianceChairman & CEOA.2.1 & A.5.6Board BalanceA.5.5If Chairman and CEO is one and thesame person, disclose the name of theChairman/CEO and Senior IndependentDirector appointed and justification ofthe decision to combine the positions.Should identify the IndependentNon-Executive Directors.As outlined earlier, the positions ofthe Chairman and the CEO have beenseparated.The current Chairman, Mr. E. Narangodawas appointed as a director to the boardon 30th December 2008 upon the reconstitutionof the Bank in terms of Section30(9) of the Monetary Law Act). In view ofthe exigencies of the situation the Bank wasfaced with, he was appointed as Chairmanin an executive capacity by the new board ofdirectors on 5th January 2009.The board has appointedMr. N.M. Jayamanne PC, an IndependentNon-Executive Director of the Bank tofunction as the Senior Director of the board.CompliedThe board maintains the correctbalance of Executive and Non-ExecutiveDirectors. Eight of the ten directors onthe board are Non-Executive Directorswhilst 1/3rd of the board compriseIndependent Non-Executive Directors.

Seylan Bank PLC Annual Report 2009 93Subject & Ref. Corporate Governance Principle Level of ComplianceAppointment ofNew DirectorsA.7.3NominationsCommitteeA.7.1Appraisal ofBoard PerformanceA.9.3When new directors are appointed, thefollowing details should be disclosed.• a brief résumé of each such director;• the nature of his expertise in relevantfunctional areas;• the names of companies in whichthe director holds directorships ormemberships in board committees;and• whether such director can beconsidered independent.The Chairman and members of theNominations Committee should beidentified.Should disclose how performanceevaluations have been conducted.CompliedTimely disclosure of details as requiredherein of new appointments made to theboard are disclosed to the Colombo StockExchange and also in the Annual Report.Profiles of directors are given on pages228 and 229.Chairman of the Committee isMr. N.M. Jayamanne PC who is anIndependent Non-Executive Director.Other members are Rear Admiral (Rtd.)B.A.J.G. Peiris, M/s. A.L. Devasurendraand S.P.S. Ranatunga (appointedw.e.f. 13th January 2010).CompliedThe board’s performance for 2009 wasevaluated in January 2010 anonymously bythe directors against the following criteria:• Developing and monitoringimplementation of strategy;• Level of business and financial acumenand experience and level of contributionto the board in driving business goalsand formulating strategy and policies;• Ensuring robust and effective riskmanagement;• Management of relations withstakeholders including Employeerelations;• Ensuring effectiveness of internalcontrol mechanisms;• Credit management and monitoring;• Effectiveness of board subcommittees;• Discharge of statutory and regulatoryduties and other responsibilities of theboard;• Corporate governance compliance:• Re-visiting Human Resources andProcurement policies;• Overall view of the managementof the business.

94Seylan Bank PLC Annual Report 2009Subject & Ref. Corporate Governance Principle Level of ComplianceBoard RelatedDisclosuresA.10.1Disclosureof RemunerationB.3Major TransactionsC.2The following details pertaining to eachdirector should be disclosed.• name, qualification and brief profile;• the nature of his/her expertise inrelevant functional areas;• immediate family and/or materialbusiness relationship with otherdirectors of the Company;• names of other listed companiesin Sri Lanka in which the directorconcerned serves as a director;• names of companies in which thedirector concerned serves as adirector and/or the fact that he/she holds other directorships in theGroup Companies;• number/percentage of boardmeetings of the Company attendedduring the year;• names of the Committees in whichthe director serves as the Chairmanor a member; and• number/percentage of committeemeetings attended during the year.• A Statement of Remuneration Policyand details of remuneration of theboard as a whole.All major transactions entered into bythe Company should be disclosed.CompliedDirectors’ profiles giving theirqualifications, areas of expertise etc. aregiven on pages 228 to 229.Details of directorships/other positions held,directors’ interests in contracts and relatedparty transactions are given on pages 129and 133 and also disclosed in Notes 42 and43 of the Financial Statements.Details of board meetings and boardsubcommittees, their composition,attendance by directors of meetings heldduring the year are given on pages 84and 86 to 88 of the Annual Report.CompliedPlease refer Remuneration CommitteeReport on page 103 and also Notes 7 and 42of the Audited Financial Statements.There were no major transactions enteredinto by the Company during the year underreview which fell within the definition ofSection 185 of the Companies Act No. 07of 2007 which materially affected the assetbase of the Company.

Seylan Bank PLC Annual Report 2009 95Subject & Ref. Corporate Governance Principle Level of ComplianceAudit CommitteeD.3.4• Names of the members of the AuditCommittee should be disclosed.CompliedPlease refer the Audit Committee Reporton page 100 to 101.Code of BusinessConduct and EthicsD.4.1 & D.4.2Going ConcernD.1.5• Basis for determining theindependence of auditors.• Should disclose whether the Companyhas a Code of Business Conduct &Ethics for directors and members ofthe senior management team.• Should also disclose an affirmativedeclaration that they have abided bysuch Code.• The Chairman must certify that he/she is not aware of any violation ofany of the provisions of this Code.Should report that the Company is a goingconcern, with supporting assumptionsand qualifications as necessary.Please refer page 128 of the Annual Report.CompliedCompliedPlease refer “Statement of Directors’Responsibility for Financial Statements”B. Remuneration Committee ReportSubject & Ref. Disclosure RemarksMembers ofRemunerationCommitteeB.1.3The names of the members ofRemuneration Committee shouldbe disclosed in the RemunerationCommittee Report.CompliedPlease refer the Remuneration CommitteeReport on page 103 of the Annual Reportand also page 124 of the Annual Report ofthe board of directors.

96Seylan Bank PLC Annual Report 2009C. Directors’ ReportSubject & Ref. Disclosure RemarksDirectors’ ReportD.1.2Should contain the followingdeclarations made by the directors• The Company has not engaged inany activities, which contraveneslaws and regulations;• The directors have declared allmaterial interests in contractsinvolving the Company and refrainedfrom voting on matters in which theywere materially interested;• The Company has made allendeavours to ensure the equitabletreatment of shareholders;• The business is a going concernwith supporting assumptions orqualifications as necessary; and• They have conducted a review ofinternal controls covering financial,operational and compliance controlsand risk management and haveobtained reasonable assurance oftheir effectiveness and successfuladherence herewith.CompliedPlease refer pages 119 to 133 of theAnnual Report of the board of directors.Please also refer the Audit CommitteeReport and the Risk Management Reportset out on pages 100 to 101 and 63 to 74respectively in the Annual Report.D. Financial StatementsSubject & Ref. Disclosure RemarksFinancial StatementsD.1.3• The board of directors should includea Statement of Responsibility forthe preparation and presentation ofFinancial Statements.• Auditors should also have a statementabout their reporting responsibility.CompliedPlease refer pages 134 and 135 of theAnnual Report.Please refer pages 136 to 137 of theAnnual Report.

Seylan Bank PLC Annual Report 2009 97E. Management ReportSubject & Ref. Disclosure RemarksManagement ReportD.1.4Should include a ‘ManagementDiscussion and Analysis Report’discussing at least the following issues:• industry structure and developments;• opportunities and threats;• risks and concerns;• internal control systems and theiradequacy;• social and environmental protectionactivities carried out by the Company;• financial performance;• material developments in humanresources/industrial relations; and• prospects for the futureCompliedPlease refer pages 57 to 62of the Annual Report.F. Corporate Governance ReportSubject & Ref. Disclosure RemarksCorporate Governance Should disclose the manner and extentReportto which the Company has complied withD.5.1the principles and provisions of the Code.CompliedG. Audit Committee ReportSubject & Ref. Disclosure RemarksAudit CommitteeReportD.3.3.Should set out the work carried out bythe Committee.CompliedPlease refer page 100 to 101 of the AnnualReport for the Audit Committee Report.other mattersComplianceThe Bank’s Compliance Department is responsiblefor ensuring the Bank’s compliance with bankingregulations and the compliance requirements underspecific statutes namely, the Prevention of MoneyLaundering Act, No. 5 of 2006, the Convention onthe Suppression of Terrorist Financing Act, No. 25of 2005 and the Financial Transactions ReportingAct, No. 6 of 2006. The Bank has fully implementedthe additional requirements in terms of CentralBank’s regulations on Know Your Customer (KYC)and Customer Due Diligence (CDD). Internalguidelines were formulated and circulated on KYCand CDD. External training and periodic extensiveinternal training programmes have been organisedto educate and update the staff.Monthly, quarterly and half yearly compliancereports are forwarded to the Central Bankconfirming the Bank’s compliance with theregulations under Banking Act and its amendments.The board is apprised of the status of complianceby the Bank on a regular basis whilst a detailedcompliance report is submitted on a monthly basis.

98Seylan Bank PLC Annual Report 2009Internal Control SystemsThe establishment of an effective internal controlsystem is a pre-requisite to conduct bankingbusiness in an orderly manner, safeguard its assetsand secure as far as practicable the accuracy andreliability of records.The two major internal control systemsprevalent in the Bank include the internal auditand information system audit. The InternalAudit Department is an independent assurancefunction established within the Bank to examineand evaluate its activities. The Internal AuditDepartment of the Bank carries out regular reviewson the internal control system to assist members ofthe organisation, especially management and theboard of directors, in the effective discharge of theirresponsibilities by furnishing them with analyses,appraisals, recommendations, counsel, andinformation concerning the activities reviewed andby promoting effective control at reasonable cost.Through an effective internal audit mechanism,the risks associated with business decisionstaken to improve productivity through enhancedcustomer services are closely monitored, assessedand wherever deemed necessary tools employed tomanage risks are introduced and existing systemsfurther strengthened. The process of identifyingand evaluating and effectively managing risksassociated with business processes and theirsupporting functions is reviewed by the board on aquarterly basis through the Audit Committee.The Information Systems Audit (ISA)Department plays a key role in the Bank’s internalcontrol system and IT governance structure. ISAprovides information system governance, assuranceand risk management services to the Bank ensuringthat the corporate information system assets aresafeguarded and banking services are delivered inan efficient, reliable and effective manner whilstprotecting stakeholders’ interest. ISA Departmentis engaged in implementing IT Governance andInformation Security Management Programmesthat are in compliance with the industry standardssuch as Control Objectives for Information andRelated Technologies (COBIT), ISO 27001 andGenerally Accepted Good Practice (GAGP). Recentlythe Business Continuity Management Plans havebeen prepared for the Bank as guided by the CentralBank and required structures and processes arein place to recover and resume its critical bankingfunctions in a disaster situation.CORRECTIVE ACTION /IMPROVEMENTSEFFECTED BY THE NEW BOARDIn view of the Bank not being fully compliantprior to 2009 with some of the provisions outlinedabove, the newly constituted board commencedadherence with the Central Bank Code of CorporateGovernance from 2009.Also with the CSE Rules of CorporateGovernance becoming mandatory from the financialyear commencing 1st January 2009, focus wasgiven to both these regulations. The board also tookcognisance of and became compliant with the Codeon Corporate Governance issued jointly by the SECand ICASL in October 2008 as outlined above.The board which was appointed on 30thDecember 2008 (upon the Seylan Bank boardbeing reconstituted) initially functioned with sixdirectors two of whom were appointed as ExecutiveDirectors and four being Non-Executive Directors.The board is headed by an Executive Chairman. Theboard comprised the correct mix of Executive andNon-Executive Directors. The four Non-ExecutiveDirectors fell within the criteria specified for‘independent’ directors within the meaning of bothSection 3 (2) (iv) of the CBSL Code and Rule 7.10.4 ofthe CSE Rules. The Bank has further ensured thatall directors fall within the ‘fit and proper’ criterialaid down by the Central Bank under Section 42 ofthe Banking Act No. 30 of 1988 (as amended).The new board also formulated a three-yearStrategic Plan for the Bank under which a majorrestructuring and reorganisation of the Bank tookplace. The Strategic Plan has already been rolledout and the results of same will be seen towardsthe latter part of 2010/early 2011.

Seylan Bank PLC Annual Report 2009 99The board focused much of their attentionon the following during 2009 in order to revive theBank’s operations and bring it to a point of stabilityas well as to promote and promulgate a productivework culture within the Bank:(A) Re-evaluation of lending criteria in terms ofcredit appraisals, approvals, collateral, singleborrower limits, monitoring and follow up.(B) Non-performing loan classification andincome recognition: Strict compliancewith CBSL guidelines, reversal of interestrecognised, revaluation of collateral and loanloss provisions etc.(C) Reviewing and revising delegated authority ofline Management for lending based on pastloan failures and officers’ credit expertise.(D) Setting out delegated authority for procurement,supplies and administration.(E) Human resources areas - comprehensiverevamping of HR policies includingimplementation of Disciplinary Code, StaffPromotion and Transfer and Rotation Policy,Retention Policy, Recruitment Policy andother policies on performance, training andsecondment.(F) Strategic Plan and reorganisation.All the board subcommittees were reconstitutedviz. Audit Committee, Credit Committee, IntegratedRisk Management Committee and NominationsCommittee. Terms of reference for each of theCommittees were formulated/revised and approved bythe new board.New committees were also formed viz. StrategicPlanning, Sustainability and Marketing and ProductDevelopment Committees which commenced theiractivities in 2010.All subcommittees have met for a minimumof two meetings for the year except for theNominations Committee. The Audit Committee hasmet 7 times during the year.Upon the completion of the Central Bankassisted re-capitalisation process of the Bank, fouradditional directors were appointed to the board inNovember 2009 and one director in January 2010.With the appointment of the additional directors,the board restructured the board subcommittees.A Strategic Planning Committee of the board wasalso formed to give further impetus to the effectiveimplementation of the Strategic Plan. All directorsare members of this Committee which had its firstmeeting in January 2010.OTHER ACTIONS TAKEN /IMPROVEMENTSto be EFFECTED IN FUTUREAll new appointments made to the board in 2009were as a result of the re-capitalisation processundergone by the Bank which concluded in November2009 and as such the Nominations Committee hasnot focused its attention during 2009 towards havinga formal board approved procedure for the selectionof/recommendation of new directors to the board.This will be put in place in 2010.Further, in carrying out the board’sresponsibility of implementing succession strategyfor the CEO and Key Management Personnel(KMPs), the Nominations Committee is currently inthe process of working out a succession plan forthe CEO and the KMPs of the Bank.

100Seylan Bank PLC Annual Report 2009Audit Committee ReportComposition of the Audit CommitteeThe Board Audit Committee comprises ofthree Non-Executive Directors of the Bank, themajority of whom are independent. Consequentto the re-constitution of the board of directors, allsubcommittees of the board were also reconstitutedand the following directors wereappointed to the Audit Committee in 2009. viz -Mr. Lalith Withana (Chairman)Mr. Naomal Goonewardena(resigned on 3rd December 2009)Mr. Nihal Jayamanne PC(appointed w.e.f. 24th February 2009)Mr. Pradeep Kariyawasam(appointed w.e.f. 3rd December 2009)The Chairman of the Committee is Mr. LalithWithana, who is an Independent Non-ExecutiveDirector and a Fellow of The Institute of CharteredAccountants of Sri Lanka. Mr. Nihal JayamannePC is also an Independent Non-Executive Director,whilst Mr. Kariyawasam is a Non-Executive Director.Mr. Naomal Goonewardena, an IndependentNon-Executive Director of the board and who is aChartered Financial Analyst, Associate Member ofThe Institute of Chartered Accountants of Sri Lanka(ACA) and Associate Member of the CharteredInstitute of Management Accountants (ACMA),U.K., functioned as a member of the Committeeuntil his resignation on 3rd December 2009. TheExecutive Director Mr. Nadarajah, Chief ExecutiveOfficer, Chief Financial Officer and Deputy GeneralManager, Internal Audit attend committee meetingsby invitation. The External Auditors attend themeetings whenever the Committee requires theirpresence. The Company Secretary functions as theSecretary to the Audit Committee.MeetingsAs per the Audit Committee Charter, the Committeeis required to meet at least 4 times a year. Howeverduring the year under review, the Committeemet seven times and reports of internal andexternal audits were discussed at these meetings.Attendance of the members at these Committeemeetings are given on page 86 of this AnnualReport. The Minutes of the Committee were madeavailable to the board of directors for informationand necessary action.Terms of ReferenceThe new Charter of the Audit Committee that wasapproved by the board at the beginning of the yeardefines the role, responsibilities and powers of theAudit Committee and it ensures that the compositionand the activities of the Audit Committee are in linewith International Best Practices and CorporateGovernance Rules as laid down in Section 3 (6) (ii)of the Banking Act Direction No. 11 of 2007, titled“Corporate Governance for Licensed CommercialBanks in Sri Lanka” and subsequent amendmentsthereto, Rule 7.10.6 of the Listing Rules of theColombo Stock Exchange and the Code of BestPractice on Corporate Governance jointly issued bythe Securities & Exchange Commission of Sri Lanka(SEC) and The Institute of Chartered Accountants ofSri Lanka (ICASL).Main ResponsibilitiesThe main objective of the Audit Committee is toassist the board of directors to effectively carryout its responsibilities relating to financials andother connected affairs of the Bank. The mainresponsibilities include -1. Reviewing and monitoring the integrity of theFinancial Statements, financial reporting,information databases and audit process.2. Examining any matter relating to financial andother connected affairs of the Bank.3. Monitor all internal and external audits andinspection programmes.4. Review and take action on all internal andexternal audit reports and follow-up on therecommendations.5. Review and monitor IT governance activities.6. Review and monitor the systems of internalcontrols.7. Review and monitor the system for approvaland monitoring of expenses including capitalexpenditure.8. Review and monitor statutory and regulatorycompliance process.

Seylan Bank PLC Annual Report 2009 1019. Approving the annual internal audit plans.10. Review Bank’s annual and interim FinancialStatements.11. Review the process of carrying out investigationswherever necessary to assist the board.Activities during the yearCommittee carried out the following activitiesduring the year under review:1. Audit CharterA new audit charter was prepared and approvedduring the year.2. Financial ReportingThe Committee discussed and reviewed thefinancial reporting process in the Bank on behalfof the board. All interim Financial Statementsand annual Financial Statements were reviewedprior to their release for compliance with statutoryand regulatory requirements including theSri Lanka Accounting Standards, the CompaniesAct No. 07 of 2007, Sri Lanka Accounting andAuditing Standards Act No. 15 of 1995, the BankingAct No. 30 of 1988 (as amended). Conformity wasalso ensured to other regulatory requirementssuch as the Listing Rules of the Colombo StockExchange and Banking Act Direction No. 11 of 2007and subsequent amendments thereto.3. Regulatory ComplianceProcedures were in place to ensure compliancewith banking and other statutory regulations.During the year, these procedures were reviewedthrough monthly/quarterly reports submitted bythe senior management to the board of directors.4. Internal Audit and InspectionBank was able to prepare an annual audit planfor the year under review. A total of 39 auditsand 90 investigations were carried out. The AuditDivision was also restructured and a new DGMwas recruited, who has an extensive industry andauditing experience. Work is currently in progressto restructure the Internal Audit Division againcombining the information systems audit functionswith the Division. The Committee reviews andmonitors the effectiveness of the internal audit andinspection functions and the performance of theInternal Audit and Inspection Department.5. External AuditThe Committee met with the External Auditors -KPMG Ford, Rhodes, Thornton & Co., duringthe year to discuss the Management letters andthe Financial Statements and also to plan outthe scope, approach and the methodology to beadopted in carrying out the annual audit.6. Audit ManualThe Committee has approved outsourcing thepreparation of a risk-based Internal Audit Manualfor the Bank to PricewaterhouseCoopers, CharteredAccountants.7. GovernanceThe Committee also ensured that good corporategovernance was practiced in conformity with theBanking Act Direction No. 11 of 2007 and subsequentamendments thereto (Central Bank Code of CorporateGovernance for licensed commercial banks), theListing Rules of the Colombo Stock Exchange andthe Code of Best Practice on Corporate Governanceissued jointly by the SEC & ICASL and the appropriateprocedures were in place to conduct independentinvestigations whenever it was needed.8. Evaluation of the CommitteeAs authorised by the board, the NominationsSubcommittee of the board through an annualevaluation, assessed the effectiveness of the AuditCommittee as satisfactory.The Audit Committee has recommended to theboard of directors that Messrs KPMG Ford, Rhodes,Thornton & Co., be re-appointed as Auditors for thefinancial year ending 31st December, 2010 subjectto the approval of shareholders at the next AnnualGeneral Meeting.Lalith WithanaChairman - Audit Committee26th January 2010

102Seylan Bank PLC Annual Report 2009Board Integrated Risk Management Committee ReportComposition of the CommitteeThe Board Integrated Risk Management Committeewas set up in 2007. During the year 2009, thecomposition was changed and new board memberswere appointed to the Committee. The Committeecomprised of the following during the year 2009:• Mr. Ajith Devasurendra - Non-ExecutiveDirector, Chairman of the Committee(appointed w.e.f. 3.12.2009• Mr. Naomal Goonawardena - IndependentNon-Executive Director(resigned on 03.12.2009) - Chairman of theCommittee, till 03.12.2009)• Mr. Lalith Withana - Independent Non-ExecutiveDirector• Mr. Pradeep Kariyawasam - Non-ExecutiveDirectorCommittee MeetingsThe Committee met thrice during the year 2009.Process of Functioning of theIntegrated Risk ManagementCommitteeThe Committee works closely with the board ofdirectors as well as the senior management infulfilment of the Bank’s regulatory and statutoryresponsibilities in Risk Management.Ajith DevasurendraChairman - Integrated Risk Management Committee16th February 2010The Executive Director, Mr. Nadarajah,the CEO, CFO and Key Management Personnelsupervising broad risk categories, i.e., credit,market, liquidity, operational and strategic risksattend the Committee meetings by invitation.Functions and Terms of Referenceof the CommitteeThe Committee was assigned revised Termsof Reference (TOR) during the year 2009. TheCommittee’s responsibilities broadly includeassessment of all risks, i.e., credit, market, liquidity,operational and strategic risks to the Bank throughappropriate risk indicators and managementinformation and reviewing the adequacy andeffectiveness of management level committees setup to address specific risks and the Asset-LiabilityCommittee to address and manage such risks.The responsibilities and the key functions ofthe Committee as detailed in the terms of referenceare given under the Risk Management Report ofthis Annual Report.

Seylan Bank PLC Annual Report 2009 103Remuneration Committee ReportThe Remuneration Committee appointed by theboard comprises of six Non-Executive Directors,three of whom are independent. The Committee isheaded by an Independent Non-Executive Chairman,Mr. N.M. Jayamanne PC and the members includeMessrs P.L.P. Withana, P.G.S. Kariyawasam, RearAdmiral (Rtd.) B.A.J.G. Peiris, Dr. N.H. Godahewa andMr. S.P.S. Ranatunga.Messrs P.G.S. Kariyawasam, Rear Admiral(Rtd.) B.A.J.G. Peiris and Dr. N.H. Godahewawere appointed to the Committee with effect from3rd December 2009 when the Committee wasre-constituted. Mr. S.P.S. Ranatunga was appointedto the Committee with effect from 13th January2010. Brief profiles of the members are given onpages 228 and 229 of the Annual Report.The General Manager/Chief Executive ofthe Bank is co-opted to the meeting and theDeputy General Manager - Human Resources andAdministration and Chief Manager - Finance assistthe Committee by providing relevant information fortheir decision making within their board approvedterms of reference.The Committee met twice during the year underreview. The Minutes of the Committee meeting weremade available to the board of directors for theirinformation and necessary action and were affirmedby the board.Remuneration Policy and functionsThe Remuneration Committee is responsible fordetermining the compensation of the ExecutiveChairman and the Executive Director. Aggregateremuneration paid to Executive and Non-ExecutiveDirectors is set out in Note 7 to the FinancialStatements.The Committee also determines thecompensation and benefits of the key managementpersonnel including GM/CEO based on establishedperformance parameters. In addition to that theCommittee is responsible to lay down guidelinesand parameters for the compensation structuresfor all executive staff of the Bank and oversee theimplementation of these policies.The Committee also determines the basis ofrevising remuneration and other benefits paid.Nihal Jayamanne PCChairman - Remuneration Committee16th February 2010

104Seylan Bank PLC Annual Report 2009nominations committee reportThe Nominations Committee appointed by theboard comprises of four Non-Executive Directorstwo of whom are independent. The Committee isheaded by Rear Admiral (Rtd.) B.A.J.G. Peiris andthe members include Messrs Nihal Jayamanne PC,Naomal Goonewardena (until his resignation on3rd December 2009), A.L. Devasurendra and S.P.S.Ranatunga upon Mr. Goonewardena’s resignation,Mr. Ajith Devasurendra was appointed w.e.f. 3rdDecember 2009 and Mr. Samantha Ranatunga wasappointed w.e.f. 13th January 2010. Messrs AjithDevasurendra and Samanatha Ranatunga are Non-Executive Directors. All Committee members areappointed by the board of directors of the Bank. TheCompany Secretary functions as the Secretary of theCommittee.Brief profiles of the members of the Committeeare given on pages 228 to 229 of the Annual Report.The General Manager/Chief Executive of theBank attends the meeting by invitation.Nominations Committee CharterThe Nominations Committee is responsible for thefollowing:• Implementation of procedure to select/appointnew directors, CEO and key managementpersonnel including review of the structure,size, composition and competencies of theboard from time to time;• Recommend (or not recommend) the re-electionof current directors having regard to theirperformance and contribution towards the overalldischarge of the board’s responsibilities.• Establish criteria to determine eligibility forappointment or promotion to the post of CEOand the key management positions.• Ensure that the directors, CEO and keymanagement personnel are fit and properpersons to hold office as specified in the criteriagiven in Direction 3(3) of the Banking Act DirectionNo. 11 of 2007 (‘Code of Corporate Governancefor licensed commercial banks in Sri Lanka’) andsubsequent amendments thereto.• Review and recommend requirements ofadditional/new expertise and the successionarrangements for retiring directors and keymanagement personnel from time to time.The Committee met once during the year underreview. The Bank implemented a strategic plan inSeptember 2009 and made significant changes in theBank’s organisation structure and key managementpersonnel heading core areas commencing fromthe last quarter of 2009 in line with the strategicplan implementation. Further changes to theorganisation structure and determining successionarrangements for key management personnel areyet underway.Also in view of appointments to the board during2009 taking place as a result of the re-capitalisationprocess, the Committee has earmarked its scope forreviewing the composition and structure of the boardwith a view of maintaining a balance of skills onthe board as a necessary function to be performedcommencing from 2010.Rear Admiral (Rtd.) B.A.J.G. PeirisChairman - Nominations Committee16th February 2010

Seylan Bank PLC Annual Report 2009 105SUSTAINABILITY REPORTRaising the BarIn this part of the Report the Bank examines the impact our activities have had onthe economy, the environment and society in general.Today the goal of any corporate entity is not just to deliver consistent financialvalue to its investors, but to ensure that its activities generate a broader social wealththat can be distributed among a wider group of stakeholders, including our investors.This is one of the goals of modern corporate citizenship: to ensure that diverse socialgroups are empowered; to unleash new opportunities; to invest in both Company andsociety; and to fan new and creative ideas.We hope the publication of the Sustainability Report will enhance transparencywith regard to all aspects of our operations and strengthen public confidence in theinstitution. We hope it will enable us to push the bar higher and continue to deliverfinancial, social and environmental value consistently and ethically.Eastman NarangodaExecutive Chairman

106Seylan Bank PLC Annual Report 2009Sustainable Development aims to meetthe needs of the present withoutcompromising on the ability of futuregenerations to meet their own needsSeylan Bank, as a major player in the financialindustry in Sri Lanka, is committed to a vision ofsustainable development. The Bank’s processesand systems are geared to ensuring that the Bankpromotes sustainable development in the wayit designs products, delivers financial services,organises the workplace and engages with society.In this report we document the impact of theBank’s activities on the economy, the environment, andsociety in general. It also documents how the Bankhas been generating a larger social wealth for all ourstakeholders. The Company’s stakeholders are many.They consist of our customers; our employees and theirfamilies; our shareholders; our business partners; thelarger society; and generations yet unborn.While building financial wealth for ourshareholders is one of the things we do, we arealso conscious that our activities have an impacton the physical environment, the economy, andsociety in general. While generating financial valuewe continue to work to protecting the environment,fuelling the economy, empowering communitiesand creating new opportunities for our employees.The Bank hopes that this Sustainability Reportwill provide information on all aspects of ouroperations: the tangible and t he intangible. We hopethis process will enhance transparency, facilitatebetter communication with our stakeholders andincrease stakeholder confidence in our operations.Creating a more enduring social wealth hasrequired the Bank to constantly re-design its strategy,mindset and internal processes. The Bank is constantlyre-evaluating its methods of work and looking at howwe can strengthen our performance on all fronts: thefinancial; the social and the environmental.Reporting on an institution’s economic,environmental and social performance supportsthe Bank’s financial reporting. Candid sustainabilityreporting also enables the Bank to review oursystems scrupulously and to improve on theprocesses we have already established.While generating a broader social wealththe Bank has not compromised on the quality ofits products and services; on business ethics andtransparency; on serving all social segments; andon creating safe and enjoyable workplaces.In 2009, the Bank established a SustainabilityCommittee. The Committee will enable the Bankto engage in CSR activities in a coherent andstructured manner. Within the larger CSR are threethematic subcommittees that look at the relevanceand feasibility of Sustainability projects with regardto society; the economy; and the environment. TheBank also has a Sustainability Committee at boardlevel and all these Committees are responsible forguiding the CSR activities of the Bank.The Global Reporting Initiative (GRI) hasdeveloped a framework for sustainability reporting.The framework was developed through a processof extensive consultation with a wide variety ofstakeholders. We have used the GRI framework asa model for this year’s Report.The BoardThe board of directors establishes overall policyfor sustainable entrepreneurship in consultationwith the three subcommittees: the EconomicSubcommittee; the Environment Subcommitteeand the Social Subcommittee.Organisational ProfileThis Report covers the activities of Seylan BankPLC during the period from 1st January 2009 to31st December 2009. From pages 138 to 226 weanalyse the business and financial activities of theinstitution and provide detailed information on theBank’s performance over the past year.Any questions or comments about thisSustainability Report should be directed to theGeneral Manager/CEO of Seylan Bank PLC, Mr. AjitaPasqual on Telephone No. 00 11 2456755.

Seylan Bank PLC Annual Report 2009 107Seylan Bank SubsidiariesName of Company% Holdingof the BankSeylan50.29% of OrdinaryDevelopments PLC Share CapitalSeylan Bank AssetManagementLimited100% of OrdinaryShare CapitalPrincipal areaof BusinessPropertyDevelopmentDealing inGovernmentSecuritiesAwardsLast year the Bank was placed first in the TradeFinance Quiz organised by the Trade FinanceAssociation of Bankers, first in Inter-Bank Quizorganised by the Association of Chartered Bankersof Sri Lanka and first in the WISDOM 2009, the quizchallenge organised by the Management Club ofGalle Face Hotel. The Bank was placed fourth in theSri Lanka Masterminds Quiz organised by the LionsClub of Moratuwa.Stakeholder DialogueThe Bank values the input of its multiplestakeholders and has put in place a number ofprocesses to enable stakeholders to contribute todecision making within the Company. Stakeholderinput has had an important impact on decisionmaking within the Company previously and willcontinue to play a role within the institution.The Bank has tried to engage with as manystakeholders as possible and to be sensitive to theirviews and interests. Customers and shareholders,generally tend to influence decision making morethan others. However, we have tried to ensure avoice for employees, the community and otherstakeholders as well, and endeavour to see thatdecisions are taken with all interests in mind.ShareholdersThe board encourages the active participation ofthe shareholders at its Annual and ExtraordinaryGeneral Meetings. The AGM is the main forum atwhich shareholders discuss performance, financialstatements, returns, appointments and otherrelevant matters. The heads of the Audit, Creditand Integrated Risk Management Committees arepresent at the AGM to respond to any queries fromthe shareholders.Shareholders are free to communicate withthe Bank and their requirements and queries arepromptly addressed. Suggestions made by themare implemented whenever possible. According tothe Companies Act No. 07 of 2007, notice of at least15 working days must be given to shareholdersprior to the conduct of the AGM. The Bank ensuresthat it complies with this requirement.CustomersThe Bank ensures that its products and servicesare driven and shaped by customer needs andaspirations. With this in mind, the Bank maintainsclose relations with customers and tries to obtainas much feed back and input as possible.Customer feedback is one of the main methodsthe Company uses to improve the levels of itsproducts and services and to respond to customerdemands and expectations.Customer surveys are conducted bi-annuallyby selecting a sample size from the existingcustomer base. Customer complaints are dealt withby the branch managers and the line managers andnecessary corrective measures taken.EmployeesThe employees are represented by two tradeunions: The Seylan Bank Employees’ Union and TheCeylon Bank Employees’ Union.The unions play a crucial role in representingthe interests of the employees with themanagement. Every month the Chairman meetsrepresentatives of the two unions to discussemployee relationships and employee grievances.In addition, the unions have regular access tomembers of the senior management team.The Bank’s ‘Open Door’ policy enables anyemployee to have a face to face discussion withthe Executive Chairman. Every Thursday of theweek is reserved by the Chairman for this purpose.The ‘Open Door’ Policy facilitates closer contactbetween employees and the senior management,enhances employee confidence and forges a dynamicorganisational culture.Regular e-newsletters are circulated by theWelfare Association and can be accessed on theWelfare Website.

108Seylan Bank PLC Annual Report 2009Economic ImpactThe Bank is committed to generating both social andfinancial values. While generating financial valuefor our shareholders is one of the main activities ofthe Bank, we are also conscious of the larger socialobligations we have. This obligation is larger giventhat we provide a broad range of financial solutions toa wide range of customers from all social segments.We are conscious of the impact we have on all thesesocial segments and conscious of the impact ourproducts and policies have on the economy and societyin general.In this respect, the Bank seeks to generatevalue in all geographical regions of the countryand among all social segments. Creating newjobs; establishing new opportunities; designingspecially-tailored products and services; andempowering socially disadvantaged groups; are allpart of the Bank’s attempts in value creation.This part of the Report looks at the Bank’simpact on investors, customers and employees.The ‘Value Added Statement’ of the Bank showsthe wealth the Bank has created with regard to itscustomers, employees and shareholders and thecontribution of the Company to the Government’srevenue and the economy in general.The Bank generated a total value of Rs. 4.66 Bn.for the year under review as against Rs. 4.58 Bn.the previous year. This was distributed amonggovernment, the employees, and shareholders.Rs. 2.34 Bn. or 50.24% of the value generatedwas distributed among employees as compensation.Rs. 0.99 Bn. or 21.25% was paid to the Governmentby way of taxes, including the Special FinancialVAT. A sum of Rs. 1.33 Bn. was retained for furtherexpansion of the Bank’s activities.In the year under review, the Bank supporteda number of initiatives that had broad social goalsby way of loan facilities. A sum of Rs. 4.2 Mn. wasthe loan outstanding for water purification, watersupply and waste water management. A sum ofRs. 12.6 Mn. was outstanding for power generationincluding mini-hydro power projects.Value Added StatementValue added is the wealth the Bank has been ableto create by providing clients with a quality, valueadded service.Last year the Bank went through a crisisresulting from a sudden loss of public confidence. TheCentral Bank stepped into help stabilise the situationand appointed a new board of directors under thestewardship of the Executive Chairman. The Bank isproud to have confronted and overcome this crisiswithout any financial assistance from the State.InvestorsEarnings per share increased by Rs. 1.93 (214%)during the year under review. This was a result ofthe increase in profits by Rs. 388 Mn. The reasonsfor this are discussed more fully on pages … of theIncome Statement.The value that accrues to a shareholder isa combination of the dividend per share and theappreciation/depreciation of the value of a shareover the medium to long term.EmployeesThe Bank has in place a market-based compensationscheme for its employees which is on par with therest of the industry. Statutory requirements arestringently observed.The Bank also provides medical insurancewhich covers most aspects of surgical and medicalillnesses to its staff. In addition, employees areeligible for a variety of other benefits which includeloans at concessionary rates and several otherwelfare facilities.All employees are entitled to benefits under theEmployees’ Provident Fund (EPF) and Employees’Trust Fund (ETF). In 2009, the Bank’s contributiontowards the benefits under the EPF and ETF wasRs. 229.34 Mn. and Rs. 57.30 Mn. respectively.The Bank has in place a comprehensiveretirement benefits plan accounted for as perSri Lanka Accounting Standard 16. The Bankmeasures the present value of the defined benefitobligation every year using the Projected Unit CreditMethod defined by the Actuary. The following aretaken into account by the Actuary when making theassessment: the existing interest rate; the rate ofincrease in salary and the retirement age of 55 years

Seylan Bank PLC Annual Report 2009 109CustomersThe Bank’s products are geared towards meetingthe goals and aspirations of its customers. TheBank is in constant touch with its customersthrough a variety of processes.Dedicated relationship managers oversee highnet worth customers. The Bank’s employees provideadvice and other support to all our customers on aregular basis.2009 2008Rs. ’000 Rs. ’000Value AddedIncome Earned by Providing Banking Services 22,496,007 24,599,015Cost of Services (16,308,349) (18,193,869)Value Added by Banking Services 6,187,658 6,405,146Non-Banking Income 658,522 647,194Provision for Bad Debts (2,183,132) (2,467,187)4,663,048 4,585,1532009 2008Rs. ’000 Rs. ’000 % Rs. ’000 Rs. ’000 %Value AllocatedTo EmployeesSalaries, Wages and Other Benefits 2,342,563 50.24 3,361,212 73.31To Providers of CapitalDividends to Shareholders 6,238 0.13 255,900 5.58To GovernmentIncome Tax 349,271 –Stamp Duty 63,007 65,053VAT 176 38,022VAT on Profit 561,440 243,055Debits Tax 16,890 990,784 21.25 14,673 360,803 7.87To Expansion and GrowthSurplus/(Deficit) 543,301 (100,659)Depreciation 786,400 1,323,463 28.38 707,897 607,238 13.244,663,048 100.00 4,585,153 100.00

110Seylan Bank PLC Annual Report 2009Protecting the EnvironmentThe Bank is committed to preserving andreplenishing the physical environment. All ourpolicies and products are designed with this end insight. Through engagements with our customerswe seek to spread the message of conservation toa broader audience as well. Some of our specialproducts are designed specifically to protect theenvironment and others encourage clients tointegrate environmental concerns into their projectplanning and implementation processes.In this section we examine how the Bank’spolicies and processes help preserve the environmentand ensure its sustainability. A key aspect of theBank’s environmental strategy has been the focuson the employees and on generating a culturalchange within the organisation that is committed toprotecting and preserving the environment.The Bank has integrated energy-savingprocesses and technologies throughout the countryand in all its branches. In redesigning its processesthe Bank has focussed on the following areas:Energy ConservationWaste ManagementPaper ManagementEnergy ConservationThe Bank constantly monitors its energy use witha view to reducing costs and making maximum useof the energy consumed. The main source of theenergy is the national grid. The Bank is exploringthe use of alternative and renewable sources ofenergy in its branches.Energy ConservedEnergy ConsumptionHead Office 2009 2008Consumption (Units) 2,504,928 2,827,026Expense (Rs.) 49,300,577 52,290,190The head office and many of the Bank’sbranches have replaced their incandescent lampswith energy-saving bulbs. By 2011, we will have allour branches using energy-saving bulbs. Naturalsunlight is used where possible.The use of air-conditioners is reduced whereverpossible and temperatures are regulated to createoptimum levels of comfort. Computers come withlow radiation levels and are programmed to transitto stand by mode within a short time of idling.Waste ManagementThe Bank’s policies and processes have beenadapted so as to reduce waste. Where waste doesarise, the Bank tries to reuse and recycle whereverthis is technically and economically feasible.Some of the Bank’s branches have introducedsystems to segregate waste into plastics, solid waste,paper, glass and other materials. We are exploringseveral waste disposal and reuse options in this regard.We have partnered with N.S. Gunaratne andCo. to dispose of discarded accessories from theHead Office and branches in an environmentallyfriendly way.In the coming year, we hope to collect all usedtoner cartridges in a central location and ensure thatthey are disposed of an environmentally friendly way.Paper ManagementThe Bank’s objective is to move towards a paperlessoffice in the near future. With this in view the Bankhas reduced substantially the amount of paperused within the office. Last year, the Bank spentRs. 145.164 Mn. on stationery as against theRs. 174.288 Mn. spent a year previously.Expense 2009Rs.2008Rs.Stationery 145,164,498 174,288,304The Bank makes maximum use of electroniccommunication so as to reduce paper usage.Communications with customers make optimumuse of electronic channels and the Bank has attemptedto keep paper communications to a minimum. Wherepossible, paper is recycled and reused.

Seylan Bank PLC Annual Report 2009 111Empowering PeopleThe Bank’s role as a financial services providermeans it plays a sensitive role in people’s lives.The Bank has been conscious of this role and hasfocused on unleashing new opportunities for societyin general and for its employees. Employees are thesoul of the institution and we have endeavoured tocreate inspiring and safe workplaces for our staff.In this section we look at how the Bank’s activitiesimpact on society and on our employees.Category of EmploymentCategory No. of Employees Percentage (%)Permanent 3,504 94Contract 45 1Trainee 184 5No. of Employes based on CountryCountry No. of Outlets No. of EmployeesOman 1 5Dubai 1 1Saudi Arabia 1 1Sri Lanka* 93 3,726*No. of Employes based on Geographic BreakdownProvince No. of Outlets No. of EmployeesNorthern 3 65Southern 7 170Eastern 5 109Western 49 2,657*Central 9 240North-Central 5 106Uva 2 52Wayamba 5 148Sabaragamuwa 8 179Total 93 3,726*Rewarding Innovation and PassionThe Bank has focused on building a dynamic teamthat is bonded by a common set of values andgoals and committed to a notion of sustainableentrepreneurship. The Bank has encouragedproductivity, rewarded passion and ensured thehighest levels of workplace safety. The Bankcontinues to invest in their skills and future growth.Every member of the staff came together duringthe recent crisis the Bank faced. The Bank had torespond to a sharp decline in public confidence and achange in the ownership and management structureof the Bank. The resilience and innovation displayedby the entire team enabled the Bank to make thistransition relatively smoothly.As at the end of 2009, the Bank had 2,550employees in 93 branches across the country. Theemployee turnover for the year was 146 or 3.8 % ofthe total workforce.AgeNo. ofResignationsNo. ofRetirements-19 – –20 - 24 43 –25 - 29 36 –30 - 34 26 –35 - 39 22 –40 - 44 8 –45 - 49 7 –50 & above 4 20The Bank recognises the right to freedom ofassociation and the right of employees to collectivelybargain for their rights. Two major trade unions operatewithin the Bank. Some employees are members of bothunions. The management is in regular consultationwith representatives of the unions to ensure that* No. of employees includes Head Office staff too

112Seylan Bank PLC Annual Report 2009worker satisfaction is at optimum levels. The Bankalso has an ‘open door’ policy where any employee canspeak directly with the higher management.No. of Employees in the Unions of the BankName of Union/ Associations No. of EmployeesSeylan Bank Employees’ Union 1,858Ceylon Bank Employees’ Union 2,435Breakdown of Employees per Categoryaccording to Gender*Grade 1 2 3 4 5 6 7 8 9 10 11 TotalMale 40 256 878 297 356 155 110 81 66 29 34 2,302Female 1 – 560 268 344 110 79 46 11 5 7 1,431Breakdown of Employees per Categoryaccording to Ethnic Group*Grade 1 2 3 4 5 6 7 8 9 10 11 TotalSinhala 30 238 1,303 527 640 239 167 98 59 28 35 3,364Tamil 9 9 111 28 42 16 13 10 6 3 3 250Muslim – 9 18 6 10 4 6 11 7 3 2 76Burger 1 – 2 4 7 6 2 6 5 – 1 34Others 1 – 4 – 1 – 1 2 – – – 9There were no cases of discrimination orunfair dismissal and there were no court casesthat were pending against the Bank during the yearunder review.The Bank ensures that all employees canpractice their religion without any hindrance.All permanent employees of the Bank arecovered by Bank’s Hospitalisation and InsuranceScheme. The Bank’s Health Policy makes directpayments through the Sri Lanka InsuranceCorporation to the respective hospital on behalfof the employee. Critical Illness Cover and DeathCover are also provided.* Staff Grades1. General Office Assistant I2. General Office Assistant II3. Banking Assistant I & II4. Banking Assistant III5. Executive Officer I6. Executive Officer II7. Assistant Manager8. Manager9. Senior Manager10. Chief Manager11. Assistant General Manager & aboveEducational expenses that pertain to a staffmember’s employment are partially reimbursedand subscriptions for membership in recognisedprofessional bodies are covered by the Bank.Every year the line manager will evaluatean employee’s performance and discuss careeradvancement plans. Permanent employees (whomake up 93.87% of the staff) are appraised everyyear, and employees on contract (who make up1.23% of the workforce) are appraised at the time thecontracts are renewed. Trainee banking assistantsare appraised at the end of their training period.We ensure that every employee goes througha periodic appraisal. Our goal is to ensure that theBank’s aspirations match the employee’s expectationsand to create a win-win situation for both.Child LabourThe Bank has a zero tolerance of child labour. TheBank takes the position that all children under theage of 18 should have an opportunity to furthertheir education and so does not employ anyoneunder that age. We attempt to promote this policywith our customers and business partners.Health and SafetyEnsuring the highest levels of workplace safetyis a priority for the Bank. The Bank periodicallyundertakes an assessment of its safety levels acrossthe country to ensure that the highest levels of safetyare observed across the institution. Last year, therewere no accidents recorded on any of its premises.The Bank periodically arranges for the staff toattend lectures on a variety of health-related mattersconducted by medical experts from private hospitals.Counselling is provided by the Bank onalcoholism, drug addiction, stress managementand emotional illnesses. Regular fire drills and inhouseprogrammes on first aid are also conducted.

Seylan Bank PLC Annual Report 2009 113The Employees of the Bank taking part in the ‘Jaya Maga’ Campaign - January 2009Region-wise sports festival for Bank staff was one of the manyactivities organised to foster solidarity and fellowshipSeylan Bank Sports Club participated in the ‘Api Venuwen Api’Programme to assist security forcesThe Bank donated Surgical Masks to the Cancer Hospital inMaharagama for Child PatientsThe Bank made a donation of essentials towards the welfare ofInternally-Displaced PersonsThe Bank through the Sports Club made donations to ArmyPersonnel of the Sri Lanka Army Camp, Minneriya

114Seylan Bank PLC Annual Report 2009Employee WelfareBank employees enjoy a number of benefits. Theseinclude:BenefitsBonusHoliday PayInsuranceStaff LoansRoutine Medical AllowancesSpectacles AllowanceHonorarium PaymentAnnual MembershipSubscriptionFull-time Employees(Permanent)YesYesYesYesYesYesYesYesTrainingTraining is a crucial component of the Bank’scorporate philosophy. Every year the Bank investssubstantially in upgrading the skills of its employees.Last year, the Bank invested Rs. 27 Mn. onthe training of its employees. 274 employeesbenefitted from External Training Programmes.A total of 7,366 participants attended Regional andIn-House Training Programmes during 2009.EmployeeCategoryNo. ofTraining Hours (X)No. ofEmployees (Y)X/YHours1 360 41 8.782 2,530 256 9.883 25,570 1,438 17.784 10,844 565 19.195 10,891 700 15.566 3,664 265 13.837 2,101 189 11.128 1,215 127 9.579 477 77 6.1910 80 34 2.3511 72 43 1.67SportsThe Bank has an active sports club and a welfaresociety, both of which are self-managed.Among the main events for the year are theregional sports festivals organised in the differentregions. Last year, sports festivals were held in Kandy,Koggala and Polonnaruwa and brought togetherrepresentatives from branches in the vicinity.Apart from participating in a range of sportsactivities, participants also have the opportunity tointeract with their peers at a reception and dinnerafterwards.Promoting Human RightsThe Bank is committed to all those human rightsenumerated in the Constitution of Sri Lanka andthe international covenants that the country hassigned. Promoting and protecting human rights isan important part of our endeavour in sustainableentrepreneurship.The Bank respects, protects and promotes therights of all its employees, including the labourrelatedrights, and also promotes the rights ofall other stakeholders. The Bank encourages ourcustomers and business partners to integratesimilar commitments in their business practices.Ensuring that women have equal rightswithin the institution is important to the Bank.We attempt to create an environment in whichwomen feel comfortable and perform at optimumlevels. Allegations of harassment are investigatedpromptly and remedial measures taken.Empowering LivesEvery year, the Bank invests in the future of thebroader society. Through these initiatives the Bankhopes to empower disadvantaged groups andcreate new opportunities for other social segments.

Seylan Bank PLC Annual Report 2009 115Promoting Ethnic HarmonyThe end of the war in 2009 has created a massiveopportunity for the country. For the first time inthirty years, the Government’s writ runs over theentire country. This opportunity must be seizedby the state, business and civil society and madeuse of to lay the foundations for a peaceful andprosperous society.In the past year, the Bank focussed on promotingethnic harmony and promoting reconciliation amongthe different communities. It is important to providethe opportunity for all communities to overcomethe trauma of the war, to move forward in a spirit ofharmony and to feel a sense of belonging.Over the years, the Bank has been involved inpromoting a sense of harmony by sponsoring initiativesin connection with the Sinhala and Tamil New Year.Last year was no different. The Bank sponsored thetraditional ‘Oil Anointing Ceremony’ (Hisa Thel Gama)at the Haththaka Rajamaha Viharaya, Niyagama,Hiniduma and also sponsored the ‘Kokila WasanthayaAvurudu Ullela’ held at the Poddiwela Maha Vidyalayaorganised by the Niyagama Divisional Secretariat andNiyagama Provincial Council.The Bank also made significant contributionstowards the Annual Kataragama Esala Peraheraand contributed towards the live telecast of theAnnual ‘Jasmine Flower Offering Ceremony’ (thePichcha Mal Poojawa) which was held for the 20thyear in Anuradhapura and organised by the ShanthiFoundation - Seruwila Buddhist Centre.The Bank sponsored the Special TV Programmeon the ‘Madhu Festival’ in August 2009. The MadhuShrine is venerated by Sri Lankan Catholics fromall communities and the festival was conducted in2009 in an atmosphere free of violence for the firsttime after almost 30 years.The Bank made a contribution of Rs. 1.5 Mn.to help the internally displaced persons who werebeing held in camps in Vavuniya and Mannar.The reconstruction of the Yal Devi railway linelinking the South with the North is a major partof the Government’s reconciliation programme.The Bank made a significant contribution towardsthis initiative. Facilitating the movement of peoplebetween the ravaged North and the South of thecountry is vital if the country is to move into an eraof peace and ethnic harmony and the Bank is proudto have been part of this initiative.Empowering the DisadvantagedThere were a number of other initiatives in whichthe Bank was involved.The North-Central Province has recently beenthe site of a number of cases with kidney problems.This has been traced to high levels of calcium in thewater in that area.In 2009, a special renal care and researchcentre was built by the National Kidney Foundationin the Anuradhapura District in order to treat thosepatients. The Bank made a significant contributiontowards the cost of the electrical cables for thetransplant theatre complex.Surgical masks were donated, with theassistance from the Seylan Bank Sports Club, tothe Cancer Hospital in Maharagama, to be worn bythe child-patients undergoing surgical treatment.The Bank also supported the Sri Lanka ModelUnited Nations 2009 Conference, contributed toSri Lanka International Film Award Ceremony andhelped the Association of Professional Bankers ofSri Lanka which, conducted their 21st Anniversarycelebration in September 2009.‘Grameen’ LoansThe Bank provides ‘Grameen’ loans for agriculture,fisheries and small industries. The objective ofthese loans is to enable small business folk toengage in entrepreneurship without the risks andconstraints of conventional financing.

116Seylan Bank PLC Annual Report 2009These loans start at Rs. 5,000/- and areprogressively increased to Rs. 100,000/- dependingon how the customer performs.Grameen LoansNo. of BeneficiariesLoan Outstanding Rs. Bn.157,883 2.499Other Sector LoansSectorAmount Rs. Mn.Agriculture 212.09Fisheries 39.15Education Development 190.15Health Services 159.45Pharmaceuticals 58.40Graduate LoansThe Bank provides small loans at concessionaryrates of interest to graduates who wish to establishtheir own businesses. Rs. 391.1 Mn. was dispensedunder this scheme during the year under review.Senior CitizensCitizens over the age of 55 receive a number ofbenefits from the Bank.Fixed deposit holders receive premium interestrate on their deposits.Critical insurance cover up to Rs. 50,000/- isprovided.In the case of saving accounts senior citizensare entitled to:CorruptionThe Bank has a policy of zero tolerance oncorruption. It does not encourage ethically unsoundor corrupt practices on the part of our customers orbusiness partners. The Internal Audit Departmentcarries out Audits in branches to ensure compliancein this regard.Regular training programmes on anti-corruptionare conducted among the Bank’s employees. Lastyear, 35 training programmes on anti-corruption wereconducted for the staff.Anti-Competitive BehaviourThe Bank does not engage in anti-competitivebehaviour and does not support other institutionsengaging in such practices. No legal actions havebeen filed against the Bank in this regard.Customer PrivacyThe Bank takes the utmost care to respectcustomer privacy and ensure that customer dataand information is fully protected. Employees inpossession of confidential data are required to takean oath of secrecy.The cost of lenses for cataract surgeries.Reimbursement of the cost of surgery.Birthday gifts.The reimbursement of reading material.The reimbursement of medical bills up to Rs. 5,000/-for those over the age of 70.

FINANCIALREPORTSAnnual Report of the Board on the State of Affairs of the Company 119Directors’ Responsibility for Financial Reporting 134Independent Auditors’ Report 136Income Statement 138Balance Sheet 139Statement of Changes in Equity 140Cash Flow Statement 141Notes to the Consolidated Financial Statements 143FINANCIAL CALENDAR• UNAUDITED QUARTERLY FINANCIAL STATEMENTS1st Quarter 31st March 2009Issued to Colombo Stock Exchange 04th June 2009Published in Newspapers 05th June 20092nd Quarter 30th June 2009Issued to Colombo Stock Exchange 27th July 2009Published in Newspapers 29th July 20093rd Quarter 30th September 2009Issued to Colombo Stock Exchange 26th October 2009Published in Newspapers 27th October 20094th Quarter 31st December 2009Issued to Colombo Stock Exchange 16th February 2010• AUDITED FINANCIAL STATEMENTS AND ANNUAL REPORTYear Ended 31st December 2009Issued to the Colombo Stock Exchange March 2010Circulated to Shareholders and Debenture Holders March 2010• 23RD ANNUAL GENERAL MEETING TO BE HELD ON 26th MARCH 2010• PREFERENCE DIVIDENDPayable for the year ended 31st December 2009Date of Payment 31st March 2010• FIRST AND FINAL ORDINARY DIVIDENDPayable for the year ended 31st December 2009Date of Payment 7th April 2010

Seylan Bank PLC Annual Report 2009 119ANNUAL REPORT OF THE BOARD ON THE STATEOF AFFAIRS OF THE COMPANYThe board of directors presents hereto their Report on the State of Affairs of the Company for the year ended31st December 2009. The Report also provides information as required by the Listing Rules of the ColomboStock Exchange, best accounting practices and other disclosures deemed relevant to the stakeholders ofthe Company. The Report was approved by the directors on 17th February 2010.GeneralSeylan Bank PLC was incorporated on 28th August 1987 as a public limited liability company under theCompanies Act No. 17 of 1982 and obtained a listing for its ordinary voting shares on the Colombo StockExchange on 5th January 1989. It is an approved licensed commercial bank under the Banking Act No. 30 of1988. The Bank was re-registered under the Companies Act No. 07 of 2007 on 30th May 2007.Principal ActivityThe principal activity of the Bank is commercial banking and provision of related financial services suchas accepting of deposits, personal banking, trade financing, off-shore banking, resident and non-residentforeign currency operations, travel-related services, corporate and retail credit, pawn broking, projectfinancing, lease financing, rural credit, issuing of local and international credit cards, telebanking facilities,SMS and Internet banking, internet payment gateway and dealing in Government Securities, etc.Changes to the Group StructureThe Bank gradually commenced divesting its investment during the fourth quarter of 2009 in Seylan MerchantBank PLC and accordingly, the Bank’s holding in the entity dropped to 49.58% (Voting Shareholding) as at31st December 2009. As such Seylan Merchant Bank PLC ceased to be a subsidiary of the Bank from thefourth quarter of 2009.SubsidiariesThe Bank’s subsidiaries as at 31st December 2009 and their principal activities are given below:Seylan Developments PLC- Property DevelopmentSeylan Bank Asset Management Limited - Dealing in Government Securities*Seylan Merchant Bank PLC- Merchant Banking(deconsolidated with effect from 1st October 2009)* On 12th February 2010, the boards of Seylan Bank PLC and Seylan Bank Asset Management Limited (SAM)decided to amalgamate as per the provisions of Section 242 (1) of the Companies Act No. 07 of of 2007. Theamalgamated company will be Seylan Bank PLC. The amalgamation is to take effect on 31st March 2010. Approvalin principle has already been obtained for the aforesaid amalgamation from the Central Bank of Sri Lanka.Review of OperationsA review of the operations during the financial year 2009 and the performance of the Bank are given in theManagement Report appearing on pages 57 to 62 of the Annual Report, which report forms an integral partof this Report.Branch NetworkIn November 2009, the Bank opened a branch in Nelliady and two convenient banking centres at Manipayand Chakanai. Two branches viz. Malabe and Ja-Ela were relocated during the year.

120Seylan Bank PLC Annual Report 2009As at 31st December 2009, the Bank had 93 branches and 24 extension offices totalling to 117 in operation,a list of which is given on pages 241 to 242 of this Annual Report. The Bank also has 83 student savingscentres as at end 2009.Vision and MissionDuring the year, the Bank adopted a new vision and a new mission statement for the Bank, which are givenon page 49 to 50 of this Annual Report.Future DevelopmentsAn overview of the future plans and developments of the Bank is also indicated in the Management Reportappearing on pages 57 to 62 of this Annual Report.Financial StatementsThe Audited Financial Statements of the Bank and the Group for the financial year ended 31st December 2009are given on pages 136 to 226 and form an integral part of the Annual Report of the Board.Auditors’ ReportThe Auditors of the Company Messrs KPMG Ford, Rhodes, Thornton & Co., Chartered Accountants havecarried out the audit of the Consolidated Financial Statements for the financial year ended 31st December2009 and their Report on the Financial Statements is given on pages 136 to 137 of this Annual Report.Significant Accounting PoliciesThe significant accounting policies adopted in preparation of the Financial Statements are given on pages143 to 161 of this Annual Report.Financial ResultsIncomeThe income of the Bank for the year 2009 was Rs. 23,154,529,138/- (Rs. 25,246,209,205/- in 2008), whilst theincome of the Group was Rs. 24,538,978,803/- (Rs. 27,053,948,932/- in 2008).ProfitA summary of the consolidated financial results of the operations of the Group during the year ended31st December 2009 is given below:2009 2008(Restated)Rs. ’000 Rs. ’000Profit/(Loss) before Taxation 933,630 (735,579)Less: Taxation 484,869 64,224Profit/(Loss) after Taxation 448,761 (799,803)Attributable to Minority Interest (120,447) (656,810)Net Profit Attributable to Shareholders 569,208 (142,993)Retained Profit brought forward after Dividend 3,546,814 3,693,225Profit available for Appropriation 4,116,022 3,550,232Adjustments/Transfer to Reserve Fund (27,165) (11,504)Other Transfers/Adjustments (287,966) 14,324Balance carried forward 3,800,891 3,553,052

Seylan Bank PLC Annual Report 2009 121DonationsDuring the year, the Company made donations amounting to Rs. 6,692,798/- (Donations made in 2008amounted to Rs. 128,865,170/-).Preference DividendThe directors recommend the payment of a preference dividend of Rs. 1.84 per share to the preferenceshareholders registered with the Bank as at the entitlement date for the year ended 31st December 2009. Thedividend rate is a pre-determined rate as per the prospectus to the Issue, viz. one percentage point over theone year Weighted Average Treasury Bill rate at the primary auctions held during March of the preceding year;i.e. March, 2009. The dividend is payable on 31st March 2010. A preference dividend was not paid in 2009 inrespect of the year ended 31st December 2008.Ordinary DividendThe directors recommend the payment of a First and Final Ordinary Dividend of Rs. 0.50 per share tothe ordinary (voting and non-voting) shareholders, for the year ended 31st December 2009, payable on7th April 2010. There was no dividend payout to ordinary shareholders in 2009 in respect of the year ended31st December 2008.Solvency CertificationThe board of directors is satisfied that the Bank would meet the solvency test in terms of the provisions ofthe Companies Act No. 07 of 2007 immediately after the proposed dividend which will be paid in April 2010.The board has obtained a statement of solvency from the External Auditors in relation to the proposeddividend payment.TaxationProvision for taxation has been computed as shown in Note 11 to the Financial Statements.Capital ExpenditureThe total capital expenditure incurred on the acquisition of property, plant and equipment during the yearamounted to Rs. 227,235,000/- details of which are given in Note 27 to the Financial Statements.Property, Plant and EquipmentThe details of the property, plant and equipment are given in Note 27 to the Financial Statements. Valuationdetails of the properties are also disclosed therein. The Directors consider the market values of the property,plant and equipment not to be significantly different to the amounts disclosed.ReservesTotal reserves (including Statutory Reserve Fund) of the Group as at 31st December 2009 amountedto Rs. 5,541,319,769/- (Rs. 5,244,106,388/- in 2008) details of which are given in Notes 37 and 38 to theFinancial Statements.Stated CapitalThe Stated Capital of the Bank as at 31st December 2009 was Rs 5,567,820,324/- (Rs. 2,542,420,326/- in2008) comprising of 130,000,000 ordinary (voting) shares, 3,390,100 non-redeemable, non-cumulative, nonconvertibleand non-voting preference shares, 123,560,000 ordinary (non-voting) shares and share premiumof Rs. 837,319,324/-.

122Seylan Bank PLC Annual Report 2009Re-capitalisation of Seylan BankIn order to strengthen the Company’s equity capital base, meet regulatory requirements relating to capitaladequacy, facilitate future expansion and enhance business volumes, the Bank made a capital raising ofRs. 3.025 Bn., through a two-tiered process constituting - (i) a Private Placement offering to designated stateinstitutions and (ii) a Public Offering of shares with existing shareholders also being given an opportunity toparticipate in the Share Issue.Through the Private Placement, the Bank allotted 13 Mn. ordinary voting shares to Bank of Ceylonamounting to 10% of the increased share capital of the Bank. 19,150,000 ordinary voting shares were allottedto Sri Lanka Insurance Corporation Limited which together with their existing holding in the Bank amountedto 15% of the increased share capital. A total of Rs. 1,125,250,000/- was raised from the private placement.In October 2009, the Bank concluded the Public Offering of 54,290,000 ordinary voting shares withexisting shareholders also participating in the Share Issue with a preferential allotment of one share forevery two ordinary voting shares held. The allotment was carried out on 13th October 2009. A total sum ofRs. 1,900,150,000/- was raised from the Public Issue.ShareholdingsAs at 31st December 2009, there were 10,984 and 6,146 registered ordinary (voting) and ordinary (nonvoting)shareholders and 967 non-redeemable, non-cumulative, non-convertible and non-voting preferenceshareholders respectively of the Bank. An analysis of the distribution of the ordinary voting and non-votingshareholders is given on page 238 of this Annual report. The twenty largest ordinary voting and non-votingshareholders of the Bank are also given on pages 236 to 237 of this Annual Report.Debt CapitalThe Bank had issued debentures (both listed and unlisted) to the value of Rs. 4,230,365,000/- as at31st December 2009 (2008 - Rs. 4,687,465,000/-).The Bank had the following listed debt as at 31st December 2009, details of which are given on page 239of this Annual Report:TypeNo. of Debenturesof Rs. 100/- eachUnsecured Subordinated Redeemable Five YearDebentures - 2006/11 12,573,150-do- - 2007/12 7,494,000-do- - 2007/12 (Issue 2) 5,592,850-do- - 2008/13 * 6,305,650* The Bank allotted 6,305,650 Unsecured Subordinated Redeemable five-year listed debentures of Rs. 100/- each on 12th January 2009under a public issue which commenced in December 2008 and concluded on 2nd January 2009. The debentures were listed on theColombo Stock Exchange on 10th February 2009. The Debenture Issue was primarily for the purpose of meeting capital adequacyrequirements.Investors’ InformationInformation including earnings, profitability, dividend, net assets and market value per share is given underFinancial Highlights appearing on page 56 of this Annual Report. Information pertaining to share prices(both voting and non-voting) and debenture prices is given on pages 236 to 239 of this Annual Report.

Seylan Bank PLC Annual Report 2009 123Equitable Treatment of ShareholdersThe Bank has at all times ensured the equitable treatment of its shareholders.DirectorateAs outlined in our 2008 Annual Report, the Seylan Bank board was re-constituted on 29th December 2008in terms of Section 30 (9) of the Monetary Law Act (as amended) pursuant to which a new board comprisingof four directors was appointed on 30th December 2008. On 8th January 2009, two additional directors,Mr. R. Nadarajah and Rear Admiral (Rtd.), B.A.J.G. Peiris were appointed.Pursuant to the re-capitalisation of the Bank four new directors were appointed in November 2009, viz.-Mr. P.G.S. Kariyawasam and Dr. N.H. Godahewa, w.e.f. 10th November 2009 and Messrs A.L. Devasurendraand I.C. Nanayakkara, w.e.f. 24th November 2009.Mr. F.N. Goonewardena resigned from the board, on 3rd December 2009.Accordingly, as at the Balance Sheet date, the directors who held office together with their executive,non-executive and independent status are given below:Name of DirectorMr. E. Narangoda (Chairman)Mr. R. NadarajahMr. N.M. Jayamanne PCMr. P.L.P. WithanaRear Admiral (Rtd.) B.A.J.G. PeirisMr. P.G.S. KariyawasamDr. N.H. GodahewaMr. A.L. DevasurendraMr. I.C. NanayakkaraStatusExecutiveExecutiveIndependent Non-ExecutiveIndependent Non-ExecutiveIndependent Non-ExecutiveNon-ExecutiveNon-ExecutiveNon-ExecutiveNon-ExecutiveMr. S.P.S. Ranatunga was appointed to the board as a Non-Executive Director with effect from 12th January 2010.The profiles of the board of directors are given on pages 228 to 229 of this Annual Report.All Non-Executive Directors have signed declarations confirming their independent/non-independentstatus in compliance with the Colombo Stock Exchange Rules of Corporate Governance.Signed affidavits and declarations have also been provided by the new directors to the Bank SupervisionDepartment of the Central Bank of Sri Lanka in terms of Section 42 of the Banking Act (as amended) and asper Direction 2 (3) (i) of the Banking Act Direction No. 11 of 2007, confirming their ‘fit and proper’ status tohold office as directors of the Bank.In terms of Article 82 of the Articles of Association, Mr. N.M. Jayamanne PC retires by rotation at theAnnual General Meeting of the Bank and being eligible, offers himself for re-election.In terms of Article 89 of the Articles of Association, Messrs P.G.S. Kariyawasam, A.L. Devasurendra,I.C. Nanayakkara, Dr. N.H. Godahewa and Mr. S.P.S. Ranatunga, retire as directors and being eligible, offerthemselves for re-election.

124Seylan Bank PLC Annual Report 2009Board SubCommitteesThe following board subcommittees were functional as at 31st December 2009:Audit CommitteeMembersMr. P.L.P. Withana (Chairman)Mr. N.M. Jayamanne PCMr. P.G.S. Kariyawasam (appointed on 3rd December 2009)Integrated Risk Management CommitteeMembers Mr. A.L. Devasurendra (Chairman) (appointed on 3rd December 2009)Mr. P.L.P. WithanaMr. P.G.S. Kariyawasam (appointed on 3rd December 2009)Remuneration CommitteeMembersMr. N.M. Jayamanne PC (Chairman)Mr. P.L.P. WithanaDr. N.H. Godahewa (appointed on 3rd December 2009)Mr. P.G.S. Kariyawasam (appointed on 3rd December 2009)Rear Admiral (Rtd.) B.A.J.G. Peiris (appointed on 3rd December 2009)Nomination CommitteeMembersRear Admiral (Rtd.) B.A.J.G. Peiris (Chairman)Mr. N.M. Jayamanne PCMr. A.L. Devasurendra (appointed on 3rd December 2009)Credit CommitteeMembersMr. E. Narangoda (Chairman)Mr. R. NadarajahMr. A.L. Devasurendra (appointed on 3rd December 2009)Mr. I.C. Nanayakkara (appointed on 3rd December 2009)Reports of the Board Audit, Integrated Risk Management, Remuneration and Nominations Subcommitteesare set out on pages 100 to 104 respectively and form an integral part of the Annual Report of the board.On 3rd December 2009 with the appointment of additional directors to the board, the boardsubcommittees were reconstituted with their members being as detailed above.Two additional board committees, viz. Strategic Planning Committee and Sustainability Committee wereformed in December 2009, but commenced their activities only from January 2010.The composition of all board subcommittees, meetings held and their functions and responsibilities areset out in the Corporate Governance Report appearing on pages 86 to 88 of this Annual Report.Articles of AssociationFor purposes of securing conformity with new regulations, legal provisions and more particularly theCompanies Act No. 07 of 2007, the Bank adopted new Articles of Association at an extraordinary generalmeeting of the shareholders held on 2nd September 2009.

Seylan Bank PLC Annual Report 2009 125Directors’ Responsibility for Financial ReportingThe directors are responsible for the preparation of the Financial Statements of the Bank to reflect a true andfair view of its state of affairs. The directors are of the view that these Financial Statements have been preparedin conformity with the requirements of the Sri Lanka Accounting Standards, the Companies Act No. 07 of 2007,Sri Lanka Accounting and Auditing Standards Act No. 15 of 1995, the Banking Act No. 30 of 1988 (as amended),the Listing Rules of the Colombo Stock Exchange and Banking Act Direction No. 11 of 2007 (as amended) -‘Corporate Governance for Licensed Commercial Banks in Sri Lanka’ issued by the Central Bank of Sri Lanka.The directors’ Responsibility Statement appearing on pages 134 and 135 of the Annual Report forms anintegral part of the Annual Report of the Board.Directors’ Interest RegisterThe directors have declared all material interests in contracts involving the Company at board meetings andrefrained from voting on matters in which they were materially interested. All such disclosures requiredto be made in terms of Section 192 of the Companies Act No. 07 of 2007, have also been duly recorded inthe Interest Register. Related party transactions arising out of these disclosures made are given in Notes42 and 43 in the Audited Accounts and on pages 129 to 133 as an annexure to this Annual Report. A list ofdirectorships held by the directors in public-listed companies during 2009 is also given in the annexure.Directors’ interests in shares of the BankDirectors’ holdings in shares (ordinary voting and non-voting) in the Bank as at 31st December 2009 aregiven below:Name of Director 31.12.2009 31.12.2008 SharesMr. E. Narangoda 34,300 10,050 Ordinary Voting– 90,100 Ordinary Non-VotingMr. R. Nadarajah 30,900 Nil Ordinary Voting10,000 7,000 Ordinary Non-VotingMr. N.M. Jayamanne PC 3,000 – Ordinary VotingMr. P.L.P. Withana 23,363 242 Ordinary VotingMr. F.N. Goonewardena(resigned on 03.12.2009) 48,000 Nil Ordinary VotingRear Admiral (Rtd.) B.A.J.G. Peiris Nil N/AMr. P.G.S. Kariyawasam Nil N/ADr. N.H. Godahewa 2,500 N/A Ordinary Non-VotingMr. A.L. Devasurendra Nil N/AMr. I.C. Nanayakkara Nil N/APercentage Shareholding of Directors:Ordinary voting shares 0.07% 0.02%*Ordinary non-voting shares 0.01% 0.08%** Represents shares held by Mr. E. Narangoda and Mr. P.L.P. Withana only.No change occurred in the directors’ interest in shares after 31st December 2009 and 17th February 2010,the date of this Annual Report.Directors’ interests in Preference shares and DebenturesThe directors had neither non-redeemable, non-cumulative, non-convertible and non-voting preferenceshares nor debentures, registered in their names, both at the beginning or end of the year under review.

126Seylan Bank PLC Annual Report 2009Directors’ RemunerationDetails of directors’ emoluments paid during the year are given in Note 7 to the Financial Statements.Insurance and IndemnityPursuant to a decision taken by the board, the Bank has obtained an insurance policy to cover Directors’ liability.Corporate GovernanceThe board of directors has pledged their commitment towards adoption and implementation of transparentand effective corporate governance practices within the Bank with the view of enhancing business prosperityand corporate accountability.The Bank accordingly ensures that relevant practices and procedures are in place to ensure conformity toCorporate Governance Rules laid down in the following rules/regulations, viz. -• Banking Act Direction No. 11 of 2007 (Corporate Governance for Licensed Commercial Banks inSri Lanka) issued by the Monetary Board of the Central Bank of Sri Lanka, amended by Banking ActDirections Nos. 05 of 2008 and 07 of 2008. The Bank has conformed to these directions except in areaswhere extended dates of compliance have been expressly provided in the rules.• Colombo Stock Exchange (CSE) Rules on Corporate Governance which became mandatory for compliance by alllisted companies in the financial year commencing from 1st April 2008 and for banks - from 1st January 2009.• Code of Best Practice of Corporate Governance jointly issued by the Securities & Exchange Commissionof Sri Lanka (SEC) and The Institute of Chartered Accountants of Sri Lanka (ICASL) in 2008.The extent of compliance with the above rules and regulations and best practice guidelines are describedin the Corporate Governance report appearing on pages 75 to 99 of this Annual Report.Risk and Internal ControlThe board assumes overall responsibility for managing risks in the Bank. Towards this end it has implementeda sound risk management framework and also designated key management personnel to manage risk andidentify their areas of responsibility. The board also reviews on a regular basis the risk exposures of the Bankand specify and approve policies with regard to risk management, measurement and control.The board of directors has put in place an effective system of internal controls so as to safeguard theBank’s assets and ensure continuity of its operations and also to ensure as far as practicable the accuracyand reliability of records. The board from time to time reviews through the Audit Committee, the adequacyand integrity of the internal control systems covering accounting, financial and operational aspects basedon Audit Reports and management information systems.Compliance with Laws and RegulationsThe Bank has not engaged in any activities contravening any laws and regulations currently in force. Keymanagement personnel designated in the Bank for ensuring compliance with laws and regulations submita compliance report on a monthly basis to the board.

Seylan Bank PLC Annual Report 2009 127Going ConcernThe directors are satisfied that having considered the financial position, operating conditions, regulatoryand other factors and such other matters required to be addressed in the Corporate Governance Code,that the Bank has adequate resources to continue its operations in the foreseeable future. The FinancialStatements of the Bank have accordingly been prepared on a going concern basis.Human ResourcesEffective management of people is closely linked with the organisation’s performance and profitability.Therefore, it is essential to have well trained motivated staff to achieve the objectives of the Bank.Moving on to specific challenges where human resource policies and practices can make a competitivedifference in people management, development of human capital becomes a primary goal in achieving acompetitive advantage. The emerging role of human resource management is that of creating a humanorganisation that can provide a competitive advantage.The key challenge in people development is, to ensure that the focus is on business goals and theoverall strategy of the Bank. Developing capabilities to ensure higher performance is closely linked to theorganisation’s performance and profitability.Attracting, retaining and developing its workforce is the best way to achieve the resilience that is requiredto survive in an increasingly turbulent business environment and the Bank is committed towards developingits human capital as an ongoing process to stay ahead of the competition.Statutory PaymentsThe directors are satisfied that to the best of their knowledge and belief, all statutory payments due to theGovernment and to the employees of the Bank have been made up to date.Employees’ Share Owning SchemeThe Bank has in place several employee share owning trusts established with the objective of providing anadditional benefit to the employees at the time of their retirement/resignation in terms of the trust deeds. Thetrusts have acquired shares of the Bank from time to time as and when formed. All shares held by the trustshave been purchased at the market prices prevailing at the time. Details of facilities granted to the trusts andoutstanding as at the Balance Sheet date are provided in Notes 43 and 19.h to the Financial Statements.In October 2009, under the Bank’s Public Share Issue, one of its employee share owning trusts, Seyfest(Pvt) Limited was allotted 700,000 ordinary voting shares at the issue price of Rs. 35/- per share. The shareswere purchased by the trust company out of its own funds.Post-Balance Sheet EventsNo events have occurred after the Balance Sheet date which would require adjustments to or disclosure inthe Accounts, other than those given in Note 41 to the Financial Statements.

128Seylan Bank PLC Annual Report 2009AuditorsThe Bank’s Auditors during the period under review were Messrs KPMG Ford, Rhodes, Thornton & Co.,Chartered Accountants. A sum of Rs. 6,043,000/- (2008 - Rs. 4,317,000/-) is payable to the Auditors by theBank as audit service fees for the year under review and Rs. 480,000/- (2008 - Rs. 1,727,000/-) as auditrelatedfees. No non-audit fees was payable to the Auditors for the year 2009 (2008 - Rs. 197,000/-).Consolidated audit fees payable to the Auditors for the year under review amounted to Rs. 7,170,000/-(2008 - Rs. 6,789,000/-) as audit service fees, Rs. 480,000/- (2008 - Rs. 1,727,000/-) as audit-related fees andRs. 157,000/- (2008 - Rs. 703,000/-) as non-audit fees.Based on the declaration made by Messrs KPMG Ford, Rhodes, Thornton & Co. and as far as the directorsare aware, the Auditors do not have any relationship with or interest in the Company or any of its subsidiariesother than disclosed in the aforesaid paragraphs.The retiring Auditors, Messrs KPMG Ford, Rhodes, Thornton & Co., have signified their willingness tocontinue in office and a resolution to re-appoint them as Auditors and authorising the directors to fix theirremuneration will be proposed at the Annual General Meeting.Independence of the AuditorsBased on an assessment carried out by the Board Audit Subcommittee, the board is of the opinion that theExternal Auditors, Messrs KPMG Ford, Rhodes,Thornton & Co. can be deemed to be independent for allintents and purposes considering the following factors:• No partner from the Firm is on the board of Seylan Bank or on the board of any subsidiary company.• The audit fee is negotiated and not above industry levels.• The Auditors do not receive fees from other assignments except for certifications and SLASimplementation assistance.• Complied in 2009 with Partner and Audit-team rotation.• A firm of high repute.Notice of MeetingNotice of Meeting relating to the Twenty Third Annual General Meeting of the Bank is included in thisAnnual Report.By Order of the Board,E. Narangoda r. Nadarajah (Ms.) M.R.S. GunasekaraExecutive Chairman Executive Director Company Secretary17th February 2010

Seylan Bank PLC Annual Report 2009 129Annexure to the ANNUAL REPORT OF THE BOARDON THE STATE OF AFFAIRS OF THE COMPANYI. interest registerThe Bank carries out transactions in the ordinary course of business at commercial rates with entities inwhich a Director of the Bank is the Chairman or a director of such entities. The transactions with entitieswhere a Director of the Bank either has control or exercises significant influence arising as a result ofcommon directorships and through shareholdings have been classified as related party transactions anddisclosed in Note 43 to the Financial Statements. The transactions with entities where directors of the Bankhold directorships are disclosed below:1. Lending Transactions with the BankAggregate Amount ofAccommodation as at31.12.2009Company Name of Director & Nature ofLimit OutstandingRelationshipTransaction Rs. Mn. Rs. Mn.SecurityBrown &Company PLCMr. A.L. Devasurendra,Deputy ChairmanMr. I.C. Nanayakkara,DirectorStandard Finance Mr. A.L. Devasurendra,(Pvt) Limited DirectorTaprobaneHoldings LimitedMr. A.L. Devasurendra,Managing DirectorOverdraftTerm Loan140.000100.0001.209100.000Corporate Guarantee fromStandard Finance Limited(Group Company of Brown & Co.PLC) for Rs. 240 Mn., pledge of275,100 shares of HNB held inthe custodian account at SeylanBank and availability of leewayon the value of 5.3 Mn. sharesof HNB mortgaged to StandardFinance (Private) Limited.Total 240.000 101.209Term Loan 335.000 218.091 Mortgage over 5.3 Mn. sharesof HNB.Total 335.000 218.091MarginTrading15.000 – Pledge of 5,607,800 quotedshares (MV - Rs. 46.23 Mn.).Mr. I.C. Nanayakkara,DirectorCeyleaseFinancial ServicesLimited *Mr. P.L.P. Withana,Director(*Resigned w.e.f.18.11.2009)RevolvingTerm LoanOverdraft200.00020.000––* Assignment over performinglease agreements at a ratio of1:1.25 with a special Power ofAttorney up to maximum ofRs. 275.00 Mn. (to secure theterm loans)Total 220.000 –* Letter of undertaking tosubstitute with performing leasesif a particular lease falls intoarrears for more than 03 months.Repo for Rs. 2.7 Mn.

130Seylan Bank PLC Annual Report 2009CompanyLanka ORIXLeasing Co. PLCName of Director &RelationshipMr. I.C. NanayakkaraDeputy ChairmanNature ofTransactionShort-TermLoanOverdraftTrustReceiptRevolvingLeaseLetterof CreditUsancePost-DatedChequeFacilityAggregate Amount ofAccommodation as at31.12.2009LimitRs. Mn.640.00020.000135.000180.00010.0005.000OutstandingRs. Mn.440.0000.162–44.337––SecurityLien over fixed deposit forUSD 2,840,678/09.Lien over special foreigncurrency account of USD356,043/79.Assignment over factoring andlease receivables.Commercial Paper for Rs. 600.0Mn. (to be provided at the time ofissuance).Commercial Paper Agreement.Assignment over leaseAgreements for Rs. 625.0 Mn.Absolute ownership over motorvehicles to be leased.Ishara Traders(Pvt) LimitedMr. I.C. NanayakkaraDirectorTotal 990.0 484.499Special Power of Attorney forRs. 10.0 Mn. over leaseagreement for Rs. 15.0 Mn.Overdraft 800.000 0.776 Mortgage and Power of Attorneyover shares of several blue-chipcompanies.

Seylan Bank PLC Annual Report 2009 131Aggregate Amount ofAccommodation as at31.12.2009CompanyName of Director &RelationshipNature ofTransactionLimitRs. Mn.OutstandingRs. Mn.SecurityMaturataPlantationsLimitedMr. I.C. Nanayakkara,DirectorMr. A.L. Devasurendra,DirectorOverdraftTerm Loan(PSRP I)Term Loan(PSRP II)Term Loan(PSRP III)Term Loan(PSRP IV)Term Loan(PSRP V)Term Loan(E-FRIENDS)Term Loan (IV)Term Loan (V)Short-TermLoanTerm Loan(Tea Relief)Term Loan(Tea Relief)Guarantee125.00041.91118.7372.27410.60013.7320.3806.00010.6003.00043.74826.0002.00039.31841.91118.7372.27410.50013.7320.3806.00010.6003.00043.748NIL1.250Mortgage over leasehold rights ofBramley Estate for Rs. 13.0 Mn. (MV -Rs. 27.0 Mn., FSV - Rs. 22.0 Mn.)Primary Mortgage for Rs. 36.0 Mn.Secondary Mortgage forRs. 50.0 Mn. over leasehold rightsof Gonapitiya Estate (MV -Rs. 160.0 Mn., FSV - Rs. 120.0 Mn.)Mortgage over leasehold rights ofAlma Estate for Rs. 26.0 Mn. (MV -Rs. 75.0 Mn., FSV - Rs. 65.0 Mn.)Mortgage over leasehold rightsof Ragala Estate for Rs. 74.75 Mn.(MV - Rs. 190.0 Mn., FSV -Rs. 160.0 Mn.)Mortgage over leasehold rightsof Maha Uva Estate for Rs. 19.5Mn. (MV - Rs. 75.0 Mn., FSV -Rs. 65.0 Mn.)Mortgage over leasehold rightsof Enselwatte Estate forRs. 102.25 Mn. (MV - Rs. 270.0 Mn.,FSV - Rs. 220.0 Mn.)Letter of Comfort from FreeLanka Trading Co. and FreeLanka Plantations Co. (Pvt)Limited for Rs. 75.0 Mn.Overdraft Agreement forRs. 125.0 Mn.Total 303.982 191.450Loan Agreement Forms forRs. 296.986 Mn.

132Seylan Bank PLC Annual Report 2009CompanyLanka HospitalCorporation PLCName of Director &RelationshipMr. P.G.S. Kariyawasam,DirectorDr. N.H. Godahewa,DirectorNature ofTransactionAggregate Amount ofAccommodation as at31.12.2009LimitRs. Mn.OutstandingRs. Mn.SecurityTerm Loan 98.750 8.855 Syndicate Loan Agreemententered into by the Companyand the Bank. Primary mortgagebonds over immovable andmovable assets of the Companycovering the loan up to 42.5%of capital, interest and othercharges in favour of InternationalFinance Corporation (IFC) andConsortium of Banks includingSeylan Bank.- Concurrent mortgage overmoneys receivable in favour ofIFC and the Consortium of Banks.- Partial syndication loanGuarantee from IFC up to 57.5%of the principal amount.Sotse (Pvt)LimitedSeyshop (Pvt)LimitedSeybest (Pvt)LimitedEsots (Pvt)LimitedMr. E. Narangoda,ChairmanMr. R. Nadarajah,DirectorMr. E. Narangoda,ChairmanMr. R. Nadarajah,DirectorMr. E. Narangoda,ChairmanMr. R. Nadarajah,DirectorMr. E. Narangoda,ChairmanMr. R. Nadarajah,DirectorTerm Loan 38.550 30.225 Loan Agreement Form forRs. 38.8 Mn.Term Loan 54.375 30.937 Loan Agreement Form forRs. 55.1 Mn.Term Loan 54.510 30.898 Loan Agreement Form forRs. 55.1 Mn.Term Loan 53.860 31.540 Loan Agreement Form forRs. 54.6 Mn.

Seylan Bank PLC Annual Report 2009 1332. Trading Transactions with the BankCompany Name of Director & Relationship Nature of Transaction AmountRs. Mn.Brown & Company PLCMr. A.L. Devasurendra, Deputy ChairmanMr. I.C. Nanayakkara, DirectorPurchase of 2 Nos. ofmailing metres and base0.537Ceylease FinancialServices Limited*Mr. P.L.P. Withana, Director(*Resigned w.e.f. 18.11.2009) Interest expense 0.292Capital Payment 203.015Interest received 17.406Seylan Bank Employees’Gratuity Trust Fund*Mr. E. Narangoda, TrusteeMr. R. Nadarajah, TrusteeRear Admiral (Rtd.) B.A.J.G. Peiris, TrusteeMr. F.N. Goonewardena, Trustee(*Resigned w.e.f. 03.12.2009)Funds transferred bySeylan Bank 31.758Investment in TreasuryBond 568.423Lanka ORIX Leasing Co. PLC Mr. I.C. Nanayakkara, Deputy ChairmanInterest receivedInterest paid2.63418.097Sri Lanka InsuranceCorporation LimitedMr. P.G.S. Kariyawasam, ChairmanDr. N.H. Godahewa, Managing DirectorInterest payable 2.564Sotse (Pvt) Limited Mr. E. Narangoda, Chairman Interest received 1.385Mr. R. Nadarajah, DirectorSeyshop (Pvt) Limited Mr. E. Narangoda, Chairman Interest received 1.505Mr. R. Nadarajah, DirectorSeybest (Pvt) Limited Mr. E. Narangoda, Chairman Interest received 1.492Mr. R. Nadarajah, DirectorEsots (Pvt) Limited Mr. E. Narangoda, Chairman Interest received 1.526Mr. R. Nadarajah, DirectorII. Directors who held Directorships in Listed Companies during 2009Name of DirectorName of Listed CompanyMr. R. NadarajahSeylan Developments PLC(formerly: Ceylinco Seylan Developments PLC)Mr. P.L.P. Withana Dankotuwa Porcelain PLC (resigned w.e.f. 30.06.2009)Rear Admiral (Rtd.) B.A.J.G. Peiris Seylan Developments PLC(formerly: Ceylinco Seylan Developments PLC)Mr. P.G.S. KariyawasamLanka Hospitals Corporation PLCDr. N.H. GodahewaLanka Hospitals Corporation PLCMr. A.L. DevasurendraBrown & Company PLCMr. I.C. NanayakkaraBrown & Company PLCLanka ORIX Leasing Company PLCTouchwood Investments PLC

134Seylan Bank PLC Annual Report 2009Directors’ Responsibility for Financial ReportingIn terms of the provisions of the Companies Act No. 07 of 2007, the directors are responsible for ensuringthat the Bank maintains proper books of account of all its transactions so as to -(i) enable the financial position of the Company to be determined with reasonable accuracy at any time;(ii) enable the directors to prepare Financial Statements in accordance with the Act; and to(iii) enable the Financial Statements of the Company to be readily and properly audited.In terms of Sections 150 (1), 151 (1), 152 (1) and 153 (1) of the Companies Act, the directors are requiredto ensure that Financial Statements are prepared that give a true and fair view of the state of affairs of theCompany and the Group and the profit or loss for the year ended on the Balance Sheet date.Accordingly, the directors have ensured that proper books of account have been maintained and have alsotaken reasonable steps to ensure the accuracy and reliability of accounting records. The financial reportingsystem is also reviewed by the board through the management accounts submitted at board meetings andby the Audit Committee. The Bank’s Interim and Audited Financial Statements are also reviewed by the AuditCommittee and the board prior to their release.The Financial Statements of the Bank and the Group give a true and fair view of the state of affairs ofthe Bank and its subsidiaries and the profit/loss for the year ended 31st December 2009. The FinancialStatements of the Bank and the Group have been certified by the Bank’s Chief Financial Officer, the personresponsible for their preparation and signed by two directors and the Company Secretary of the Bank on17th February 2010.The Bank’s Financial Statements for the year ended 31st December 2009 and presented in this AnnualReport are consistent with the underlying books of account of the Bank and are in conformity with theSri Lanka Accounting Standards, Companies Act No. 07 of 2007, Sri Lanka Accounting and AuditingStandards Act No. 15 of 1995, the Banking Act No. 30 of 1988 (as amended), the Listing Rules of the ColomboStock Exchange and the Code of Best Practice on Corporate Governance issued jointly by the Securities andExchange Commission of Sri Lanka (SEC) and The Institute of Chartered Accountants of Sri Lanka (ICASL).The directors also confirm that in preparing the Financial Statements for the year ended 31st December2009 published on pages 136 to 226 of this Annual Report, appropriate accounting policies have been selectedand applied on a consistent basis with material departures (if any) disclosed in the Financial Statements andthe rationale for same provided.The directors also confirm that the Bank and its quoted subsidiaries have met all the requirements underSection 7 of the Listing Rules of the Colombo Stock Exchange.The board has also taken reasonable measures to safeguard the Bank’s assets and ensure continuity ofoperations. To this end, effective internal control systems are in place to prevent frauds and irregularitiesand ensure as far as practicable the accuracy and reliability of records.The Bank’s Auditors, Messrs KPMG Ford, Rhodes, Thornton & Co. carry out reviews and sample checks onthe effectiveness of the systems of internal control, as they consider appropriate and necessary in providingtheir opinion on the Financial Statements. Messrs KPMG Ford, Rhodes, Thornton & Co. have examined theFinancial Statements made available together with all other financial records, minutes of shareholders’ anddirectors’ meetings and related information and have expressed their opinion which appears on pages 136and 137 of this Annual Report.

Seylan Bank PLC Annual Report 2009 135The board of directors confirm that they have authorised the distribution of the proposed dividend afterhaving satisfied that the Bank would meet the solvency test in terms of the provisions of the Companies ActNo. 07 of 2007 immediately after the dividend payment. The board has obtained a statement of solvency fromthe External Auditors in relation to the proposed dividend payment.The directors confirm that to the best of their knowledge and belief, all statutory payments due andpayable to all statutory and regulatory authorities as at the Balance Sheet date, have been paid by the Bankor where relevant provided for.The directors further confirm that having considered the financial position, operating conditions,regulatory and other factors and such other matters required to be addressed in the Corporate GovernanceCode, the Bank has adequate resources to continue its operations in the foreseeable future. The FinancialStatements of the Bank have accordingly been prepared on a going concern basis.The directors are of the view that they have discharged their obligations as set out in this statement.By order of the board of directors(Ms.) M.R.S. GunasekaraCompany Secretary17th February 2010

136Seylan Bank PLC Annual Report 2009INDEPENDENT AUDITORS’ REPORTTO THE SHAREHOLDERS OF SEYLAN BANK PLCReport on the Financial StatementsWe have audited the accompanying financial statements of Seylan Bank PLC (the “Company”), and theconsolidated financial statements of the Company and its subsidiaries (the “Group”) as at 31st December2009, which comprise the balance sheet as at that date, and the income statement, statement of changesin equity and cash flow statement for the year then ended, and a summary of significant accounting policiesand other explanatory notes as set out on pages 138 to 226 of this Annual Report.Management’s Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these financial statements inaccordance with Sri Lanka Accounting Standards. This responsibility includes: designing, implementingand maintaining internal control relevant to the preparation and fair presentation of financial statementsthat are free from material misstatement, whether due to fraud or error; selecting and applying appropriateaccounting policies; and making accounting estimates that are reasonable in the circumstances.Scope of Audit and Basis of OpinionOur responsibility is to express an opinion on these financial statements based on our audit. We conductedour audit in accordance with Sri Lanka Auditing Standards. Those standards require that we plan andperform the audit to obtain reasonable assurance whether the financial statements are free from materialmisstatement.An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in thefinancial statements. An audit also includes assessing the accounting principles used and significantestimates 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 werenecessary for the purposes of our audit, including specific directions/exemptions from the Central Bankof Sri Lanka as a measure of ongoing support resulting from the restructuring of the Bank. We thereforebelieve that our audit provides a reasonable basis for our opinion.

Seylan Bank PLC Annual Report 2009 137Opinion - CompanyIn our opinion, so far as appears from our examination, the Company maintained proper accountingrecords for the year ended 31st December 2009 and the financial statements give a true and fair view of theCompany’s state of affairs as at 31st December 2009 and its profit and cash flows for the year then endedin accordance with Sri Lanka Accounting Standards and specific directions/exemptions received from theCentral Bank of Sri Lanka that were used in applying the said Accounting Standards.Opinion - GroupIn our opinion, the consolidated financial statements give a true and fair view of the state of affairs as at31st December 2009 and the profit and cash flows for the year then ended, in accordance with Sri LankaAccounting Standards and specific directions/exemptions received from the Central Bank of Sri Lanka thatwere used in applying the said Accounting Standards, of the Company and its subsidiaries dealt with thereby,so far as concerns the members of the Company.Report on Other Legal and Regulatory RequirementsThese financial statements also comply with the requirements of Section 153(2) to 153(7) of the CompaniesAct No. 07 of 2007 and present the information required by the Banking Act, No 30 of 1988.CHARTERED ACCOUNTANTS17th February 2010Colombo, Sri Lanka.

138Seylan Bank PLC Annual Report 2009INCOME STATEMENTBANKGROUPFor the Year ended 31st December 2009 2008 2009 2008(Reclassified)(Restated)Note Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000Income 2 23,154,529 25,246,209 24,538,978 27,053,951Interest Income 3 20,708,034 21,552,070 21,796,473 23,156,161Less: Interest Expenses 4 13,492,053 14,361,452 14,389,303 15,875,504Net Interest Income 7,215,981 7,190,618 7,407,170 7,280,657Foreign Exchange Profit 521,388 670,731 521,388 670,731Net Fee and Commission Income 5 1,169,124 1,749,737 1,225,310 1,778,320Other Income 6 650,856 1,221,582 879,701 1,385,305Operating Income 9,557,349 10,832,668 10,033,569 11,115,013Less: Operating Expenses 7Personnel Expenses 8 2,385,255 3,405,714 2,500,429 3,608,728Premises, Equipment & EstablishmentExpenses 1,608,097 1,505,226 1,619,848 1,615,111Provision for Loan Losses 9 2,183,132 2,467,187 2,227,623 2,804,112Diminution/(Appreciation) in Value ofInvestments 10 (47,094) 40,684 (41,965) 277,099Other Overhead Expenses 2,535,387 3,258,616 2,794,004 3,545,5428,664,777 10,677,427 9,099,939 11,850,592Profit/(Loss) from Operationsbefore Taxation 892,572 155,241 933,630 (735,579)Less: Income Tax Expense 11 349,271 – 484,869 64,224Profit/(Loss) for the Year 543,301 155,241 448,761 (799,803)Attributable to -Equity Holders of the Bank 543,301 155,241 569,208 (142,993)Minority Interest – – (120,447) (656,810)Net Profit/(Loss) for the Year 543,301 155,241 448,761 (799,803)Basic Earnings/(Loss) per Share (Rs.) 12 2.83 0.90 2.97 (0.89)Dividends per Share (Rs.) * 0.50 – 0.50 –Notes to the Consolidated Financial Statements from pages 143 to 226 form an integral part of these FinancialStatements.* Based on the final dividend proposed to be approved at the Annual General Meeting.

Seylan Bank PLC Annual Report 2009 139Balance SheetBANKGROUPAs at 31st December 2009 2008 2009 2008(Reclassfied)(Restated)Note Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000AssetsCash & Cash Equivalents 14 4,683,805 5,511,331 4,691,881 5,680,774Balance with Central Bank of Sri Lanka 15 5,084,229 6,857,039 5,084,360 6,857,153Commercial Papers 324,500 390,000 324,500 390,000Securities Purchased under Resale Agreements 2,951,860 664,934 2,955,390 855,055Dealing Securities 16 14,544,172 865,977 16,475,533 1,410,066Investment Securities 17 14,897,394 24,243,200 16,421,677 27,261,001Bills of Exchange 18 1,322,364 1,471,831 1,322,364 1,471,831Loans & Advances 19 76,038,971 97,746,084 76,045,385 99,078,324Lease Rentals Receivable within One Year 20 1,598,684 2,245,873 1,598,684 3,189,889Lease Rentals Receivable later than One Yearand not later than Five Years 21 1,325,892 2,686,524 1,325,892 3,792,276Lease Rentals Receivable after Five Years 22 1,894 3,813 1,894 9,927Investments in Associate Companies – – – 54,315Investments in Subsidiary Companies 23 860,166 948,529 – –Group Balances Receivable 24 808,655 623,180 – –Investment Properties 25 520,812 520,812 1,504,676 1,541,058Current Taxation 89,654 108,273 89,654 108,273Deferred Taxation 26 454,213 91,582 454,360 95,790Property, Plant & Equipment 27 3,324,034 4,073,353 4,111,573 4,938,612Leasehold Rights 28 63,083 64,165 664,220 673,180Intangible Assets 29 – – – 25,410Other Assets 30 3,881,490 4,929,745 4,195,808 5,875,555Total Assets 132,775,872 154,046,245 137,267,851 163,308,489LiabilitiesDeposits 31 104,815,899 107,938,801 104,815,899 109,505,539Borrowings 32 3,055,840 7,105,018 3,498,704 9,208,809Securities Sold under Repurchase Agreements 1,878,704 14,516,393 4,174,877 19,085,870Group Balances Payable 33 9,575 1,523,992 – –Advance Received against Debentures 34.a – 630,565 – 630,565Debentures 34.b 4,230,365 4,056,900 4,230,365 4,253,835Current Tax Liabilities – – 142,732 25,343Other Liabilities 35 8,203,015 11,254,565 8,493,187 11,901,450Total Liabilities 122,193,398 147,026,234 125,355,764 154,611,411EquityStated Capital 36 5,567,820 2,542,420 5,567,820 2,542,420Statutory Reserve Fund 37 506,919 479,754 506,919 481,650Reserves 38 4,507,735 3,997,837 5,034,399 4,762,455Total Equity Attributable to Equity Holders of the Bank 10,582,474 7,020,011 11,109,138 7,786,525Minority Interest – – 802,949 910,553Total Equity 10,582,474 7,020,011 11,912,087 8,697,078Total Liabilities & Equity 132,775,872 154,046,245 137,267,851 163,308,489Commitments & Contingencies 39 22,262,562 26,874,375 22,262,562 26,874,375Notes to the Consolidated Financial Statements from pages 143 to 226 form an integral part of these Financial Statements.The Financial Statements have been prepared in compliance with the requirements of the Companies Act No. 07 of 2007.Raaj De SilvaChief Financial OfficerAjita PasqualGeneral Manager/Chief ExecutiveApproved and signed for and on behalf of the board.Eastman Narangoda r. Nadarajah Ms. M.R.S. GunasekaraExecutive Chairman Executive Director Company Secretary17th February 2010

140Seylan Bank PLC Annual Report 2009STATEMENT OF CHANGES IN EQUITYFor the Year ended 31st December - BankStated CapitalShare Share Reserve Retained Revaluation OtherCapital Premium Fund Profits Reserve Reserves TotalRs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000Balance as at 01.01.2008 1,705,101 837,319 468,250 3,374,839 198,918 451,808 7,036,235Effect of Change in Accounting Policy due toAdoption of SLAS 16 (Revised 2006) – – – 74,849 – – 74,849Adjustment to Reserve Fund* – – 3,742 (3,742) – – –Revised Balance as at 01.01.2008 1,705,101 837,319 471,992 3,445,946 198,918 451,808 7,111,084Net Profit Attributable to the Shareholders of the Bank – – – 155,241 – – 155,241Dividends (Note 13) – – – (255,900) – – (255,900)Transfers from/to Retained Profits – – 7,762 75,504 (83,266) – –Other Transfers – – – – 9,586 – 9,586Balance as at 31.12.2008 1,705,101 837,319 479,754 3,420,791 125,238 451,808 7,020,011Balance as at 01.01.2009 1,705,101 837,319 479,754 3,420,791 125,238 451,808 7,020,011Issue of Ordinary Voting Shares 3,025,400 – – – – – 3,025,400Net Profit Attributable to the Shareholders of the Bank – – – 543,301 – – 543,301Dividends (Note 13) – – – (6,238) – – (6,238)Transfers from/to Retained Profits – – 27,165 (27,165) – – –Balance as at 31.12.2009 4,730,501 837,319 506,919 3,930,689 125,238 451,808 10,582,474* 5% of the adjustment to the opening balance of the Retained Profits (as at 01.01.2008) has been transferred to Reserve Fund in order tocomply with the Sections 20 (1) and (2) of the Banking Act No. 30 of 1988.For the Year ended 31st December - GroupStated CapitalShare Share Reserve Special Risk Retained Revaluation Other Minority TotalCapital Premium Fund Reserve Profits Reserve Reserves Total Interest Equity(Restated) (Restated) (Restated) (Restated) (Restated) (Restated) (Restated) (Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000Balance as at 01.01.2008 1,705,101 837,319 470,146 4,515 3,949,125 564,242 714,326 8,244,774 1,711,895 9,956,669Effect of Change in AccountingPolicy due to Adoption of SLAS 16(Revised 2006) – – – – 71,012 – – 71,012 (3,726) 67,286Adjustment to Reserve Fund* – – 3,742 – (3,742) – – – – –Impact of Non-UniformAccounting Policiesby Subsidiaries (Note 48) – – – – (137,830) – – (137,830) (132,372) (270,202)Revised Balance as at 01.01.2008 1,705,101 837,319 473,888 4,515 3,878,565 564,242 714,326 8,177,956 1,575,797 9,753,753Profit as Reported in theprevious year – – – – 166,492 – – 166,492 (259,666) (93,174)Prior Year Adjustment (Note 47) – – – – (309,485) – – (309,485) (397,144) (706,629)Net Profit Attributable to theShareholders/Minority – – – – (142,993) – – (142,993) (656,810) (799,803)Dividends (Note 13) – – – – (255,900) – – (255,900) – (255,900)Transfers from/to Retained Profits – – 7,762 – 75,504 (83,266) – – – –Adjustment of Change inMinority Interest – – – – – – – – 12,972 12,972Dividend Paid to Minority – – – – – – – – (21,406) (21,406)Other Transfers – – – – (2,124) 9,586 - 7,462 – 7,462As at 31.12.2008 (Restated) 1,705,101 837,319 481,650 4,515 3,553,052 490,562 714,326 7,786,525 910,553 8,697,078Balance as at 01.01.2009 1,705,101 837,319 481,650 4,515 3,553,052 490,562 714,326 7,786,525 910,553 8,697,078Issue of Ordinary Voting Shares 3,025,400 – – – – – – 3,025,400 – 3,025,400Net Profit Attributable to theShareholders/Minority – – – – 569,208 – – 569,208 (120,447) 448,761Dividends (Note 13) – – – – (6,238) – – (6,238) – (6,238)Transfers from/to Retained Profits – – 27,165 38,080 (65,245) – – – – –Deconsolidation Adjustment – – (1,896) – (234,709) (6,670) (7,305) (250,580) (784) (251,364)Effect on Change in % holdingin Subsidiary – – – – (15,177) – – (15,177) 13,627 (1,550)Balance as at 31.12.2009 4,730,501 837,319 506,919 42,595 3,800,891 483,892 707,021 11,109,138 802,949 11,912,087* 5% of the adjustment to the opening balance of the Retained Profits (as at 01.01.2008) has been transferred to Reserve Fund in order tocomply with the Section 20 (1) and (2) of the Banking Act No. 30 of 1988.

Seylan Bank PLC Annual Report 2009 141CASH FLOW STATEMENTBANKGROUPFor the Year ended 31st December 2009 2008 2009 2008(Reclassified)(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000Cash Flows from Operating ActivitiesInterest Receipts 19,968,676 20,872,930 21,138,875 22,686,039Fees and Commission Receipts 1,274,251 1,737,414 1,380,835 1,959,650Interest Payments (13,489,437) (13,816,538) (14,386,685) (15,330,589)Exchange Income 521,388 670,731 521,388 670,731Receipts from Other Operating Activities 658,522 647,194 658,522 874,073Cash Payments to Employees and Suppliers (6,174,015) (6,725,188) (6,361,407) (7,814,139)Payments on Other Operating Activities (105,127) (52,089) (116,136) (63,434)Operating Profit before Changes inOperating Assets & Liabilities [Note (a)] 2,654,258 3,334,454 2,835,392 2,982,331(Increase)/Decrease in Operating Assets:Funds (Advanced to)/Repaid by Customers 19,983,292 (7,025,231) 25,020,404 (9,170,454)Deposits Held for Regulatory or Monetary Control Purposes 1,772,810 1,058,621 1,772,793 1,058,587Increase/(Decrease) in Operating Liabilities:Deposits from/(Withdrawals by) Customers (3,194,089) (3,012,171) (4,760,827) (2,582,682)Negotiable Certificates of Deposit 71,187 (348,640) 71,187 (348,640)Cash (Used in)/Generated from Operations 21,287,458 (5,992,967) 24,938,949 (8,060,858)Income Tax Paid (386,797) (467,427) (406,347) (548,251)Contribution Paid into Staff Retirement Benefit Plan (31,739) (134,816) (31,739) (134,816)Adjustment Due to Deconsolidation – – (1,713,474) –Net Cash (Used in)/Generated from Operating Activities 20,868,922 (6,595,210) 22,787,389 (8,743,925)Cash Flows from Investing ActivitiesInvestment in Subsidiary & Associate CompanyShares/Debentures – (201,250) – –Proceeds from Sale of Subsidiary/Associate Investments 4,753 44,848 4,753 18,760Dividends Received 5,199 223,294 5,199 8,710Treasury Bills/Bonds Maturing after 03 Months (10,210,450) (2,041,583) (10,392,733) (792,314)Purchase of Dealing Securities (205,314) – (219,959) (301,267)Proceeds from Sale of Dealing Securities 257,010 – 553,101 537,296Purchase of Non-Dealing Securities/Investments in Projects – (2,250) – (2,250)Proceeds from Sale of Non-Dealing Securities/Investments in Projects 65,500 782,727 320,821 784,136Purchase of Property, Plant & Equipment (227,235) (1,456,575) (227,941) (1,498,408)Proceeds from Sale of Property, Plant & Equipment 194,214 396,531 214,531 402,528Proceeds from Sale of Investment Property – 137,500 – 151,400Purchase of Investment Property – (371,418) – (371,418)Adjustment due to Deconsolidation – – (22,696) –Net Cash (Used in)/Generated from Investing Activities (10,116,323) (2,488,176) (9,764,924) (1,062,827)Cash Flows from Financing ActivitiesProceeds from Issue of Debentures – 72,550 – 64,900Advance Received on Debenture Issue – 630,565 – 630,565Repayments on Redemption of Debentures (457,100) (1,395,010) (654,035) (1,617,612)Proceeds from Issue of New Shares 3,025,400 – 3,025,400 –Securities Sold under Repurchase Agreements (12,637,689) 11,394,739 (14,910,993) 10,197,755Net Increase/(Decrease) in Other Borrowings (5,149,617) 1,917,755 (7,363,936) 1,949,443Dividends Paid (513) (254,924) (8,276) (267,468)Share/Debenture Issue Expenses (18,758) (5,307) (18,758) (5,307)Adjustment due to Deconsolidation – – 2,162,363 –Net Cash from Financing Activities (15,238,277) 12,360,368 (17,768,235) 10,952,276Net Increase in Cash & Cash Equivalents (4,485,678) 3,276,982 (4,745,770) 1,145,524Cash & Cash Equivalents at beginning of the Period 12,240,216 8,963,234 12,937,088 11,791,564Adjustment due to Deconsolidation [Note (b)] – – (359,781) –Cash & Cash Equivalents at End of the Period 7,754,538 12,240,216 7,831,537 12,937,088Reconciliation of Cash & Cash EquivalentsCash and Cash Equivalents - [Note 14] 4,683,805 5,511,331 4,691,881 5,680,774Treasury Bills/Bonds Maturing within 03 Months 118,873 6,063,951 184,266 6,401,259Securities Purchased under Resale Agreement 2,951,860 664,934 2,955,390 855,0557,754,538 12,240,216 7,831,537 12,937,088

142Seylan Bank PLC Annual Report 2009BANKGROUPFor the Year ended 31st December 2009 2008 2009 2008(Reclassified)(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000Note (a) Reconciliation of Operating ProfitProfit before Taxation 892,572 155,241 933,630 (735,579)Dividend Income (5,199) (223,295) (5,199) (8,710)(Profit)/Loss on Sale of Investment Securities – – 7,590 697(Profit)/Loss on Sale ofProperty, Plant & Equipment (2,978) (100,080) (22,531) (103,696)Depreciation - FreeholdProperty, Plant & Equipment 785,318 707,205 812,884 752,954Depreciation - LeaseholdProperty, Plant & Equipment 1,082 692 8,960 8,575Depreciation of Investment Property – – 20,066 22,151(Profit)/Loss on Sale of Investment Property – (53,765) – (56,476)Gain on Transfer of Investments toTrading Portfolio – (197,248) – (197,248)Provision for Loan Losses 2,183,132 2,467,187 2,227,623 2,804,112VAT Accruals 25,813 (9,550) 25,813 (9,550)Provision for Staff Retirement Benefit (458,111) 131,379 (461,272) 141,276Impairment Loss - Provision/(Reversal) (3,855) 301,280 (3,855) 374,030(Profit)/Loss on Sale of Dealing Securities 9,213 – 9,213 (17,750)Provision for Doubtful Receivables 32,880 16,338 112,977 72,664Diminution/(Appreciation) in Value of Investments (47,094) (3,370) (41,965) 221,740(Profit)/Loss on Sale ofShares of Associates/Subsidiaries 6,630 – (187,825) (5,788)Share of Associates (Profit)/Loss(Net of Income Tax) – – 16,962 (4,365)Issue Expenses on Debentures/Shares 18,758 5,307 18,758 5,307Notional Tax (439,968) (251,033) (439,968) (251,033)Interest Receivable (299,388) (448,467) (217,631) (727,515)Leave Encashment Provision 19,408 42,281 19,409 42,282Increase/(Decrease) in InterestPayable & Accrued Expenses (63,955) 794,352 1,753 654,2532,654,258 3,334,454 2,835,392 2,982,331Note (b) Net Cash Flow effect on Deconsolidation of Seylan Merchant Bank PLC on 01st October 2009Elimination of Net Assets Excluding Cash & Cash Equivalents Rs. ’000Investments 22,696Loans & Advances 3,397,347Investment Properties 16,316Property, Plant & Equipment 50,097Other Assets 88,879Deposits (1,568,864)Borrowings (1,672,031)Debentures (196,935)Other Liabilities (497,286)Cash & Cash Equivalents Decrease on Deconsolidation (359,781)

Seylan Bank PLC Annual Report 2009 143Notes to the consolidated financial statements1. Reporting EntitySeylan Bank PLC (‘Bank’) is a public quoted company incorporated on 28th August 1987 and domiciled inSri Lanka. The registered office of the Bank is situated at No. 90, Galle Road, Colombo 03. The shares of theBank have a primary listing on the Colombo Stock Exchange.The staff strength of the Bank as at 31st December 2009 is 3,733 (2008 - 3,923).The Consolidated Financial Statements of the Bank for the year ended 31st December 2009 include theBank and its subsidiaries (together referred to as the ‘Group’ and individually as ‘Group entities’). The Bankdoes not have an identifiable Parent of its own. There were no significant changes in the nature of theprincipal activities of the Bank and the Group during the financial year under review.1.1 Principal Activities1.1.1 BankThe principal activities of the Bank are banking and related activities such as accepting deposits, personalbanking, trade financing, off-shore banking, resident and non-resident foreign currency operations, travelrelated services, corporate and retail credit, project financing, lease financing, rural credit, issuing of localand international credit cards, telebanking facilities, Internet banking, dealing in Government Securities, etc.1.1.2 SubsidiariesThe subsidiaries of the Bank are Seylan Bank Asset Management Limited, Seylan Developments PLC andSeylan Merchant Bank PLC (deconsolidated with effect from 1st October 2009) and the principal activitiesof these subsidiaries are primary dealing, property developing and providing financial services respectively.1.2 Basis of Preparation1.2.1 Statement of ComplianceThe Balance Sheet, Income Statement, Statement of Changes in Equity and Cash Flow Statement have beenprepared in accordance with the Sri Lanka Accounting Standards laid down by the Institute of CharteredAccountants of Sri Lanka and comply with the requirements of the Companies Act No. 07 of 2007 andBanking Act No. 30 of 1988 and amendments thereto.1.2.2 Approval of Financial Statements by DirectorsThe Financial Statements were authorised for issue by the board of directors on 17th February 2010.1.2.3 Basis of MeasurementThe Financial Statements have been prepared on the historical cost basis and applied consistently with noadjustments being made for inflationary factors affecting the Financial Statements, except for the following:• Land and buildings are measured at cost at the time of acquisition and subsequently at revaluedamounts, which are the fair values at the date of revaluation less accumulated depreciation andimpairment losses, if any.• Dealing securities are measured at market value, adjustments for changes in market values areaccounted for in the Income Statement.1.2.4 Functional and Presentation CurrencyThe Financial Statements are presented in Sri Lankan Rupees, which is the Bank’s functional currency. Exceptas indicated, financial information presented in Sri Lankan Rupees has been rounded to the nearest thousand.

144Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial Statements1.2.5 Use of Estimates and JudgmentsThe preparation of Financial Statements requires management to make judgments, estimates andassumptions 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 accountingestimates are recognised in the period in which the estimate is revised and in any future periods affected.In particular, information about significant areas of estimation uncertainty and critical judgmentsin applying accounting policies that have the most significant effect on the amounts recognised in theConsolidated Financial Statements are described in the following Notes:• Notes 16 & 17 - Classification of Dealing (Trading) and Investment Securities• Note 17 - Assessment of Impairment of Investment Securities• Note 19b - Analysis of Provision for Loan Losses• Note 25 - Investment Property• Note 26 - Deferred Taxation• Note 35a - Measurement of Defined Benefit Obligations1.3 Materiality and AggregationEach material class of similar items is presented separately in the Financial Statements. Items of a dissimilarnature or function are presented separately unless they are immaterial.1.4 Significant Accounting PoliciesThe accounting policies set out below have been applied consistently to all periods presented in theseFinancial Statements. The accounting policies of the Bank have been consistently applied by Group entitieswhere applicable and deviations if any, have been disclosed accordingly.1.4.1 Basis of Consolidation1.4.1.1 SubsidiariesSubsidiaries are entities that are controlled by the Bank. Control exists when the Bank has the power,directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits fromits activities. In assessing control, potential voting rights, which presently are exercisable, are taken intoaccount. The Financial Statements of subsidiaries are included in the Consolidated Financial Statementsfrom the date that control effectively commences until the date that control effectively ceases. The minorityinterests are presented in the Consolidated Balance Sheet within Equity, separately from the equityattributable to the equity holders of the Bank.The Group Financial Statements comprise a consolidation of the Financial Statements of the Companyand its subsidiaries incorporated in Sri Lanka, Seylan Bank Asset Management Limited (100%) and SeylanDevelopments PLC (50.29%). Financial Statements of Seylan Merchant Bank PLC have been deconsolidatedwith effect from 1st October 2009.Subsidiary CompaniesSeylan Bank Asset Management LimitedSeylan Developments PLCSeylan Merchant Bank PLC(deconsolidated with effect from 1st October 2009)Nature of BusinessPrimary DealerProperty DevelopersFinancial Services

Seylan Bank PLC Annual Report 2009 145Notes to the Consolidated Financial StatementsThe total profit/loss of the subsidiaries are included in the Consolidated Income Statement, and theproportion of the profit or loss after taxation applicable to outside shareholders is shown under the heading‘Minority Interest’ (SLAS 26). All assets and liabilities of the Company and its subsidiaries are included inthe Group Balance Sheet. The interest of the outside shareholders in the net assets of the Group is statedseparately in the Consolidated Balance Sheet within Equity under the heading ‘Minority Interest’.1.4.1.2 Transactions Eliminated on Consolidation(a) Intra-Group TransactionsIntra-group balances and transactions and any unrealised gains arising from intra-group transactions, areeliminated in preparing the Consolidated Financial Statements. Unrealised losses are eliminated in the sameway as unrealised gains except that they are only eliminated to the extent that there is no evidence of impairment.(b) Profit and LossIn arriving at the profit attributable to the shareholders of Seylan Bank PLC, the total profits or losses of thesubsidiaries are included in the Consolidated Income Statement after eliminating intra-group transactionsand the portion of the profit or loss after taxation applicable to non-group shareholders.(c) Assets and LiabilitiesAll assets and liabilities of the Company and its subsidiaries are included in the Consolidated Balance Sheet.The proportionate interest of the non-group shareholders in the net assets employed is stated separately inthe Consolidated Balance Sheet under the heading ‘Minority Interest’.(d) Non-Uniform Accounting PoliciesThe impact of non-uniform accounting policies adopted by subsidiaries has been adjusted in the consolidatedaccounts. The details of the adjustments are disclosed in Note 48.1.4.2 Foreign Currency TranslationTransactions in foreign currencies in Domestic Banking Unit are translated to Sri Lankan Rupees at themiddle rate of exchange ruling at the date of the transaction. Monetary items denominated in foreigncurrencies at the Balance Sheet date are translated to Sri Lankan Rupees at the middle rate of exchangeruling at that date. Foreign exchange differences arising on the settlement or reporting of the Bank’smonetary items at rates different from those which were initially recorded are dealt in the Income Statement.Non-monetary assets and liabilities denominated in foreign currency that are stated at historic cost at theBalance Sheet date are translated to Sri Lankan Rupees at the foreign exchange rates ruling at that date.Forward exchange contracts are valued at the forward market rates ruling on the date of the BalanceSheet. Unrealised gains and losses are dealt with through the Income Statement.Foreign Currency Banking Unit (FCBU) balances have been converted at closing rate for all monetaryitems and historic rate for non- monetary items. Income Statement of the FCBU has been converted at themonthly average rate. Differences arising from conversion are recognised in the Income Statement.Assets and Basis of their Valuation1.4.3 Statutory Deposit with Central BanksThe Monetary Law Act requires that all commercial banks operating in Sri Lanka maintain reserves againstall deposit liabilities denominated in Sri Lankan Rupees. The details of reserve requirements are givenin Note 15.

146Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial Statements1.4.4 Government of Sri Lanka Treasury Bills and Bonds1.4.4.1 Investment in Treasury Bills and Bonds Held for DealingThe Bank has adopted a policy of marking to market its ‘Trading Portfolio’ of Government Securities in linewith the directions made by the Monetary Board of the Central Bank of Sri Lanka under Section 46 (1) of theBanking Act No. 30 of 1988 amended by the Banking (Amendment) Act No. 33 of 1995 and Act No. 2 of 2005.The Trading Portfolio of Seylan Bank Asset Management Limited is being marked to market based on theweighted average rates circulated by CBSL and gains or losses recognised in the Profit and Loss Account.1.4.4.2 Securities Purchased Under Resale Agreements (Reverse Repurchase Transactions)These are loans collateralised by the purchase of Treasury Bills and/or guaranteed commercial papers fromthe counterparty to whom the loans are granted. The sale by the counterparty is subject to a commitment bythe Bank to sell back the underlying debt securities to the borrower at a predetermined price. These loansare stated in the Balance Sheet at cost.1.4.5 Advances to CustomersAdvances to customers are stated in the Balance Sheet net of provisions for possible loan losses andalso net of interest which is not accrued to revenue. Bank’s policy is to discontinue accruing interest onnon-performing loans and advances after 12 months.1.4.6 Provision for Loan Losses1.4.6.1 Specific Provision for Loan Losses and LeasesIn accordance with the direction issued by the Central Bank of Sri Lanka on 8th May 2008, Direction No. 3of 2008 ‘Classification of Loans & Advances, Income Recognition & Provisioning’ specific provisions on NPA(as a minimum) are made as follows:Category ofNPA Credit QualityMinimum SpecificProvision Requirement(Net of Security)Substandard -Credit Cards 25%Other Advances 20%Doubtful 50%Loss 100%The provision made relates to all categories of loans and advances including pawning and leasingidentified as substandard, doubtful and loss.Where necessary, specific provisions have been made over and above the minimum percentages stipulatedabove, on a case by case basis.In addition to the specific provisions for possible loan losses made on the basis of a continuous review ofall loans and advances to customers in accordance with the Sri Lanka Accounting Standard 23 on RevenueRecognition and Disclosures in the Financial Statements of Banks and the directions issued by the CentralBank of Sri Lanka, the Bank evaluates the need for additional provisions for loans and advances basedupon management’s best estimate of recoverability. In estimating the recoverability the management makesjudgments about the borrower’s financial situation, the workout strategy and the net realisable value of anyunderlying collateral.

Seylan Bank PLC Annual Report 2009 147Notes to the Consolidated Financial Statements1.4.6.2 General ProvisionThe general provisions cover loan losses inherent in portfolios with similar credit risk characteristics(e.g., portfolio of loans, advances and lease receivables), when there is objective evidence to suggest thatthey contain impaired loans, but the individual impaired loans cannot yet be identified. In assessing the needfor general provision for loan losses, management considers factors such as credit quality, portfolio size,concentrations and economic factors. In order to estimate the required provisions, assumptions are madeto define the way inherent losses are determined based on historical experience.The amount of potential losses not specifically identified but which experience indicates are presentin the portfolio of loans, advances and lease receivables are recognised as a general provision in theIncome Statement.In addition, the direction issued by the Monetary Board of the Central Bank of Sri Lanka, in terms of Section46 of the Banking Act No. 30 of 1988, as amended, in ‘Requirements to Maintain a General Provision forAdvances’ requires all licensed commercial banks to maintain a general provision of 1% of the total on BalanceSheet, performing loans and advances and on Balance Sheet overdue loans and advances, net of interest insuspense and credit facilities secured by cash deposits, gold or Government Securities with the same bank. Thegeneral provision was commenced with a minimum of 0.1% provision as at 31st December 2006 and thereafterincremental provisions were made on the same basis till 31st March 2009, with the view of meeting the totalprovision requirement of 1% by 31st March 2009.1.4.7 Investments1.4.7.1 Investments in SubsidiariesInvestments in subsidiaries are stated at cost in the Bank’s Financial Statements in accordance with theSri Lanka Accounting Standard 26 on Consolidated Financial Statements and Accounting for Investmentsin Subsidiaries.1.4.7.2 Investments in AssociatesInvestments in associates are accounted under the Equity Method in Consolidated Financial Statements inaccordance with the Sri Lanka Accounting Standard 27 on Accounting for Investments in Associates.1.4.7.3 Dealing SecuritiesThese are marketable securities acquired and held with the intention to resale over a short period of time.Such securities are recorded at market values, adjustments for changes in market values are accounted forin the Income Statement. In classifying securities as ‘Dealing’ (Trading), the Bank has determined that itmeets the description for such classification.1.4.7.4 Investment SecuritiesThese are acquired and held for yield or capital growth in the medium/long term. Such securities arerecorded at cost. Changes in market values of these securities are not taken into account unless there isconsidered to be a permanent diminution in value. In classifying securities as ‘Investment’, the Bank hasdetermined that it has both the positive intention and ability to hold the securities until their maturity date.Unquoted long-term investments are stated at cost.1.4.7.5 Investment PropertiesInvestment properties are properties held either to earn rental income or for capital appreciation or bothbut not for sale in the ordinary course of business, used in the production or supply of goods or services orfor administrative purposes.

148Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial StatementsBasis of RecognitionInvestment property is recognised if it is probable that future economic benefits that are associated with theinvestment property will flow to the Group and cost of the investment property can be reliably measured.MeasurementAn investment property is measured initially at its cost. The cost of a purchased investment property comprisesof its purchase price and any directly attributable expenditure. The cost of a self-constructed investment isits cost at the date when the construction or development is completed. The Group applies the cost modelfor investment properties in accordance with Sri Lanka Accounting Standard 40 - ‘Investment Property’(Revised 2005). Accordingly, land classified as investment properties are stated at cost and buildings classifiedas investment properties are stated at cost less any accumulated depreciation and any accumulatedimpairment losses. Fair values of these properties are disclosed in Note 25 to the Financial Statements.DerecognitionInvestment properties are derecognised when disposed of, or permanently withdrawn from use becauseno future economic benefits are expected. Transfers are made to and from investment property only whenthere is a change in use.1.4.7.6 Other InvestmentsWhere the Group interest in equity is less than 20% and or in companies where the Bank does not exercisesignificant influence and/or control over the financial and operating policies, investments are valued at cost.1.4.8 Property, Plant & EquipmentProperty, Plant & Equipment are tangible items that are held for servicing, or for administrative purposesand are expected to be used during more than one period.Basis of RecognitionProperty, Plant & Equipment are recognised if it is probable that future economic benefits associated withthe assets will flow to the Group and cost of the asset can be reliably measured.MeasurementAn item of Property, Plant & Equipment that qualifies for recognition as an asset is initially measured at itscost. Cost includes expenditure that is directly attributable to the acquisition of the asset and cost incurredsubsequently to add to, replace part of, or service it. The cost of self-constructed assets includes the cost ofmaterials and direct labour, any other costs directly attributable to bringing the asset to a working conditionfor its intended use and the costs of dismantling and removing the items and restoring the site on which theyare located. Purchased software that is integral to the functionality of the related equipment is capitalisedas part of computer equipment.Cost ModelThe Group applies cost model to Property, Plant & Equipment except for freehold land and buildings andrecords at cost of purchase or construction together with any incidental expenses thereon less accumulateddepreciation and any accumulated impairment losses.Revaluation ModelThe Group applies the revaluation model for the entire class of freehold land and buildings. Such properties arecarried at a revalued amount, being their fair value at the date of revaluation less any subsequent accumulated

Seylan Bank PLC Annual Report 2009 149Notes to the Consolidated Financial Statementsdepreciation and subsequent accumulated impairment losses. Freehold land and buildings of the Bank arerevalued every five years on a roll over basis to ensure that the carrying amounts do not differ materially fromthe fair values at the Balance Sheet date. On revaluation of an asset, any increase in the carrying amountis credited directly to equity, under revaluation reserve or used to reverse a previous revaluation decreaserelating to the same asset, which was debited to the Income Statement. In this circumstance, the increaseis recognised as income to the extent of the previous write down. Any decrease in the carrying amount isrecognised as an expense in the Income Statement or debited directly to equity under revaluation reserve tothe extent of any credit balance existing in the revaluation reserve in respect of that asset.Subsequent CostsThe cost of replacing part of an item of Property, Plant & Equipment is recognised in the carrying amount ofthe item if it is probable that the future economic benefits embodied within that part will flow to the Groupand its cost can be reliably measured. The costs of day-to-day servicing of Property, Plant & Equipment arecharged to the Income Statement as incurred.DerecognitionThe carrying amount of an item of Property, Plant & Equipment is derecognised on disposal or when no futureeconomic benefits are expected from its use or disposal. The gain or loss arising from the derecognition of anitem of Property, Plant & Equipment is included in Income Statement when the item is derecognised. Whenreplacement costs are recognised in the carrying amount of an item of Property, Plant & Equipment, theremaining carrying amount of the replaced part is derecognised. Major inspection costs are capitalised. Ateach such capitalisation, the remaining carrying amount of the previous cost of inspections is derecognised.DepreciationSeylan Bank and Seylan Bank Asset Management Limited provides depreciation from the date the assetsare available for use up to the date of disposal, at the following rates on a straight-line basis over the periodsappropriate to the estimated useful lives of the different types of assets:Life PeriodrateFreehold/Leasehold Building 40 Yrs. 2.5%Motor Vehicles 5 Yrs. 20%Computer Equipment 5-6 Yrs. 16.67%-20%Office Equipment, Furniture& Fittings and Leased Assets 3-10 Yrs. 10%-33 1/3%Building Improvements 5 Yrs. 20%Depreciation is not provided for freehold land.The rate of depreciation of freehold buildings was revised with effect from 1st January 1999 (from 4% to2.5%). Freehold buildings purchased prior to 1st January 1999 have been depreciated over the remaininguseful life based on the revised depreciation rates. Freehold buildings purchased after 1st January 1999have been depreciated based on revised rates.Leasehold building has been depreciated over the useful economic life as the lease period is greater thanthe useful life of the asset.Depreciation of an asset begins when it is available for use and ceases at the earlier of the date that theasset is classified as held for sale and the date that the asset is derecognised.

150Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial StatementsSeylan Developments PLCProperty, Plant & Equipment are recorded at cost of purchase or valuation together with any incidentalexpenses thereon. The assets are stated at cost or valuation less accumulated depreciation which isprovided for on the basis specified below.The property at No. 90, Galle Road, Colombo 03, which includes the leasehold land, buildings andequipment and comprises of two towers namely, East and West were revalued on open market effectivevalue basis. The surplus arising on the revaluation was transferred to revaluation reserve account.The value pertaining to the East tower is apportioned on a square feet area basis and is stated at valuationless accumulated depreciation under Property, Plant & Equipment.Depreciation of common types of assets within the Group are in line with the Group policy disclosed above.Freehold land, antiques and ornamental paintings are not depreciated. Leasehold land and buildings aredepreciated over the remaining unexpired lease period. The depreciation of other assets that are unique toSeylan Developments PLC is provided on the straight-line method at varying rates per annum based on theiruseful lives as follows:Useful Life (Years)Depreciation RateLeasehold Land 81 1.23%Building 81 1.23%Interior Decor - General 02 50%Motor Cycle 04 25%Tools 03 33.33%Cutlery & Crockery 02 50%Equipment - West Tower 02 50%Furniture - West Tower 03 33.33%Interior - West Tower 03 33.33%General Plant & Equipment 20 5%Depreciation of an asset begins when it is available for use whereas depreciation of an asset ceases at theearlier of the date that the asset is classified as held for sale and the date that the asset is derecognised.Capital Work-in-ProgressCapital work-in-progress is stated at cost. These are expenses of a capital nature directly incurred in theconstruction of buildings, major plant and machinery and system development, awaiting capitalisation.Borrowing CostsBorrowing costs that are directly attributable to the acquisition, construction or production of a qualifying assethave been capitalised as part of the cost of the asset in accordance with Sri Lanka Accounting Standard 20 -‘Borrowing Costs’. Capitalisation of borrowing costs ceases when substantially all the activities necessary toprepare the qualifying asset for its intended use are completed.1.4.9 Intangible AssetsGoodwill arising on acquisition was measured at cost and amortised previously. Other intangible assetsincluded in Note 29 has been impaired and charged to Income Statement as set out in Note 1.4.10.2.1.4.10 Impairment1.4.10.1 Financial AssetsThe Bank assesses at each Balance Sheet date whether there is objective evidence that a financial asset isimpaired. A financial asset is impaired and impairment losses are incurred if and only if, there is objectiveevidence of impairment as a result of one or more loss events that occurred after the initial recognitionof the asset and prior to the Balance Sheet date (‘a loss event’), and that loss event or events have had animpact on the estimated realisable value of the asset.

Seylan Bank PLC Annual Report 2009 151Notes to the Consolidated Financial StatementsThe Bank assesses whether objective evidence of impairment exists for financial assets that are significant(except for loans and advance explained in Note 1.4.6). For loans and advances, impairment loss is measuredindividually and collectively as explained in Note 19.When a loan is uncollectible, it is written off against the related provision. Such loans are written offafter all the necessary procedures have been completed and the amount of the loss has been determined.Subsequent recoveries of the amounts previously written off are included under ‘Other Income’ in theIncome Statement.If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be relatedobjectively to an event occurring after the impairment was recognised, the previously recognised impairmentloss is reversed by adjusting the impairment provision account. The amount of the reversal is recognised inthe Income Statement.1.4.10.2 Non-Financial AssetsThe carrying values of Property, Plant & Equipment and investment properties are reviewed for impairmentannually or when events or changes in circumstances indicate that the carrying value may not be recoverable.If such indications exist and where the carrying values exceed the estimated recoverable amount, the assetsare written down to their recoverable amount. Impairment losses are recognised in the Income Statementunless it reverses a previous revaluation surplus for the same asset.Assets with an indefinite useful life, including goodwill, are not subject to amortisation and are tested onan annual basis for impairment and additionally whenever an indication of impairment exists. Assets thatare subject to amortisation are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount may not be recoverable.The recoverable amount of an asset is the higher of its fair value less cost to sell or its value in use. Anydecrease in the carrying value is recognised as an expense in the Income Statement in the reporting periodin which the impairment loss occurs.For assets that do not generate largely independent cash inflows, the recoverable amount is determinedfor the cash generating unit to which that asset belongs. Management judgment is applied to establish cashgeneratingunits. Each of these cash-generating units is represented by an individual primary reportingsegment, or a sub-division of a primary segment.An impairment loss in respect of goodwill is not reversed. In respect of other assets impairment lossesrecognised in prior periods, are assessed at each Balance Sheet date for any indications that the loss hasdecreased or no longer exists. An impairment loss is reversed if there has been a change in estimates usedto determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’scarrying amount does not exceed the carrying amount that would have been determined, net of depreciationor amortisation, if no impairment loss had been recognised.1.4.11 InventoryInventory mainly consists of stationery and gold. Bank’s policy for the accounting of inventory is as follows:Stationery: At weighted average cost method.Gold Stock: Market value at the year end.Liabilities and Provisions1.4.12 Deposits from CustomersDeposits include non-interest bearing deposits, saving deposits, term deposits, deposits redeemable atcall and certificates of deposit. They are brought to account at the gross value of the outstanding balance.Interest paid is charged to the Income Statement.

152Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial Statements1.4.13 Dividends PayableProvision for dividends is recognised at the time the dividend recommended and declared by the board ofdirectors is approved by the shareholders.1.4.14 BorrowingsBorrowings include refinance borrowings, call money borrowings, Vostro account balances and borrowingsfrom financial institutions. They are brought to account at the gross value of the outstanding balance.1.4.15 Securities Sold under Repurchase Agreement (‘Repos’)This relates to Treasury Bills and Bonds sold subject to a commitment to repurchase them at a predeterminedprice. Such Treasury Bills and Bonds remain on the Balance Sheet and the liability is recorded in respect of theconsideration received. The liability is disclosed as borrowing under repurchase agreement. These TreasuryBills and Bonds are not marked to market since the corresponding liability is also not marked to market.1.4.16 Bills Payable and Other LiabilitiesBills payable and other liabilities include all financial liabilities, interest, fees, expenses payable and securitiespurchased but not delivered. These liabilities are recorded at the cash value to be realised when settled.1.4.17 Employee Benefits1.4.17.1 Defined Benefit PlanA defined benefit plan is a post-employment benefit plan other than a defined contribution plan.The Bank operates an approved Gratuity Fund to facilitate the payments for permanent staff of the Bank.The Bank’s obligation in respect of defined benefit gratuity plans is calculated by estimating the amountof future benefit that employees have earned in return for their service in the current and prior periods anddiscounting that benefit to determine its present value, then deducting the fair value of any plan assets. Thediscount rate is the yield at the reporting date on Government Bonds that have maturity dates approximatingto the terms of the Bank’s obligations. The calculation is performed by a qualified actuary using the ProjectedUnit Credit Method which is the method recommended by Sri Lanka Accounting Standard 16 (Revised 2006) -‘Employee Benefits’ (SLAS 16).When the benefits of a plan are improved, the portion of the increased benefit relating to past serviceby employees is recognised in the Income Statement on a straight-line basis over the average period untilthe benefits become vested. To the extent that the benefits vest immediately, the expense is recognisedimmediately in Income Statement.In respect of actuarial gains and losses that arise in calculating the Bank’s obligation in respect of a plan,to the extent that any cumulative unrecognised actuarial gain or loss exceeds 10% of the greater of thepresent value of the defined benefit obligation and the fair value of plan assets, that portion is recognised inIncome Statement over the expected average remaining working lives of the employees participating in theplan. Otherwise, the actuarial gain or loss is not recognised.Monthly provision is made by the Bank for the Gratuity Fund, based on a percentage of the basic salary ofemployees. The percentage of contributions is determined by the same actuary and retirement benefits areprovided to all permanent staff. The Bank carries out an actuarial valuation of the Gratuity Fund in Decembereach year to ascertain the full liability of the fund. The valuation method used by the actuary to value the fundis the ‘Projected Unit Credit Method’, the method recommended by SLAS 16. The demographic assumptionsunderlying the valuation are retirement age (55 yrs.), early withdrawals from service and retirement onmedical grounds, death before and after retirement etc.

Seylan Bank PLC Annual Report 2009 153Notes to the Consolidated Financial StatementsHowever, under the Payment of Gratuity Act No. 12 of 1983, the liability to an employee arises only oncompletion of five years of continual service.Changes to Gratuity PolicyBoard of directors of the Bank at its meeting held on 24th March 2009 decided to change the previouspolicy of gratuity payments of paying one month’s salary (last drawn) to resigned staff members who havecompleted ten years of service in the Bank with effect from 5th March 2009.The policy of paying half a month’s salary (last drawn) to resigned staff members who have completedfive years of service (not completed ten years of service) in the Bank remains unchanged.Subsidiaries have also adopted the Revised SLAS 16 from 1st January 2008 and have made provisionsbased on the above method.Transitional ProvisionOn first adoption of the standard in 2008 the Bank has determined its transitional liability for defined benefitobligation which is less than the liability recognised by the Bank, under previous accounting policy and thedifference was adjusted in the opening balance of the retained earnings.Defined benefit obligations are partly funded by the Bank to a separate Gratuity Trust Fund, which is anapproved investment for tax purposes. The Bank makes annual contributions to the fund not exceedinga total sum equivalent to the half a month’s salary of each employee as depicted in the last month ofthe accounting year together with an additional 25% of the total thereof.1.4.17.2 Defined Contribution PlansA defined contribution plan is a post-employment plan under which an entity pays fixed contributions intoa separate entity and will have no legal or constructive obligation to pay a further amount. Obligations forcontributions to defined contribution plans are recognised as expense in the Income Statement as and whenthey are due.1.4.17.2 (a) Employees’ Provident FundThe Bank and employees contribute 12% and 8% respectively on the salary of each employee to the approvedprivate Provident Fund while the Group entities and their employees contribute the same percentages toEmployees’ Provident Fund [Refer Note 08].1.4.17.2 (b) Employees’ Trust FundThe Bank/Group contributes 3% of the salary of each employee to the Employees’ Trust Fund. The totalamount recognised as an expense to the Bank for contribution to ETF is disclosed in the Notes to FinancialStatements [Refer Note 08].1.4.17.3 Short-Term BenefitShort-term employee benefits are measured on an undiscounted basis and are expensed as the relatedservice is provided.A provision is recognised for the amount expected to be paid under short-term compensated absencesif the Bank has a present legal or constructive obligation to pay as a result of past services provided by theemployees and the obligation can be estimated reliably. Leave encashment policy has been calculated forthe annual leave entitlement up to a maximum of 90 working days that could be carried forward up to thedate of retirement by the staff member.

154Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial Statements1.4.18 ProvisionsA provision is recognised if, as a result of a past event, the Group has a present legal or constructiveobligation that can be estimated reliably, and it is probable that an outflow of economic benefits will berequired to settle the obligation.A provision for onerous contracts is recognised when the expected benefits to be derived by the Groupfrom a contract are lower than the unavoidable cost of meeting its obligations under the contract. Theprovision is measured at the present value of the lower of the expected cost of terminating the contract andthe expected net cost of continuing with the contract before a provision is established, the Group recognisesany impairment loss on the assets associated with that contract.1.4.19 Commitments and ContingenciesAll discernible risks are accounted for in determining the amount of all known liabilities. The Bank’s shareof any contingencies and capital commitments of a subsidiary for which the Bank is also liable severally orotherwise are also included with appropriate disclosures.Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future eventsor present obligations where the transfer of economic benefit is not probable or cannot be reliably measured.Contingent liabilities are not recognised in the Balance Sheet but are disclosed unless they are remote.1.4.20 Events After the Balance Sheet DateAll material and important events which occur after the Balance Sheet date have been considered anddisclosed in Note No. 41 or adjusted as applicable.INCOME STATEMENT1.4.21 Revenue RecognitionInterest Income: Interest receivable is recognised on an accrual basis. Interest ceases to be taken intorevenue when the recovery of interest or principal is in arrears for 90 days. Thereafter interest on advancesis accounted for on a cash basis.Interest on non-performing debts is credited to the ‘Interest in Suspense’ account which is netted in theBalance Sheet against the relevant balance.1.4.22 Interest IncomeInterest receivable is recognised on an accrual basis. Interest from loans and advances ceases to be accruedwhen they are classified as non-performing as explained in Note 19.e. Interest on non-performing loans andadvances is accounted for on a cash basis. Interest on non-performing loans and advances is credited to the‘Interest in Suspense Account’ which is netted in the Balance Sheet against the relevant loans and advances.Interest income from investments is recognised on an accrual basis.1.4.23 Dividend IncomeDividend income is recognised in the period in which it is declared.1.4.24 Accounting for Finance Lease IncomeAssets leased to customers which transfer substantially all the risks and rewards associated with ownershipother than the legal title are classified as finance leases. Amount receivable under finance leases areincluded under ‘Lease Rental Receivable’. Leasing balances are stated in the Balance Sheet after deductionof initial rentals received.The excess of aggregate rentals receivable over the cost of the leased assets constitutes the totalunearned income. The unearned income is taken into revenue over the term of the lease, commencing fromthe month in which the lease is executed in proportion to the remaining receivable balance of the lease.

Seylan Bank PLC Annual Report 2009 155Notes to the Consolidated Financial Statements1.4.25 Accounting for Operating Lease IncomeSeylan Merchant Bank PLC, a subsidiary until 30th September 2009, rental income is recognised as revenueover the term of lease. However, no accrued rental income is recognised where any portion of capital orinterest is in arrears for six months or more. In such cases interest income is accounted for on a cash basis.1.4.26 Income Tax ExpenseIncome tax expense comprises of current and deferred tax. Income tax expense is recognised in the IncomeStatement except to the extent that it relates to items recognised directly in equity, in which case it isrecognised in equity.1.4.26.1 Current TaxationCurrent tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantivelyenacted on the Balance Sheet date, and any adjustment to tax payable in respect of previous years.Provision for taxation is based on the profit for the year adjusted for taxation purposes in accordance withthe provisions of the Inland Revenue Act No. 10 of 2006 and the amendments thereto at the rates specifiedin Note 11.1.4.26.2 Deferred TaxationDeferred taxation is provided using the liability method, providing for temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes and the tax base of assets andliabilities, which is the amount attributed to those assets and liabilities for tax purposes. The amount ofdeferred tax provided is based on the expected manner of realisation or settlement of the carrying amountof assets and liabilities, using tax rates enacted or substantively enacted by the reporting date.Deferred tax liabilities are not recognised for the following temporary differences: the initial recognitionof goodwill, the initial recognition of assets and liabilities in a transaction that is not a business combinationand that affects both accounting nor taxable profit and differences relating to investments in subsidiariesto the extent that they probably will not reverse in the foreseeable future. Deferred tax assets, includingthose related to temporary tax effects of income tax losses and credits available to be carried forward, arerecognised only to the extent that it is probable that future taxable profits will be available against which theasset can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extentthat it is no longer probable that the related tax benefit will be realised.Seylan Developments PLCSince the Company enjoys 7-year tax holiday from the year of assessment 2003/04, certain temporarydifferences will not reverse for a considerable period.Considering the above tax effect and losses carried forward, temporary differences have been excludedfrom the computation of deferred tax expenses for the period under review.1.4.27 Withholding Tax on DividendsDividend distributed out of taxable profit of the subsidiaries attracts a 10% deduction at source and is notavailable for set-off against the tax liability of the Bank. Thus, the withholding tax deducted at source isadded to the tax in the Consolidated Financial Statements as a consolidation adjustment. Withholding taxthat arise from the distribution of dividends by the Bank are recognised at the same time as the liability topay the related dividend is recognised.

156Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial Statements1.4.28 VAT on Financial ServicesThe value base for value added tax for the Bank is the adjusted accounting profit before tax and emolumentsof employees. The adjustment to the accounting profit before tax is for economic depreciation computed onprescribed rates instead of the rates adopted in the Financial Statements.1.4.29 Fee and Commission IncomeAll fee and commission income have been recorded when a trade takes place.1.4.30 Profit or Loss on Sale of Property, Plant & Equipment/InvestmentsGains or losses of a revenue nature on the disposal of Property, Plant & Equipment and share portfolio areaccounted for in the Income Statement.1.4.31 Interest ExpensesInterest payable is recognised on an accrual basis. Other expenses have been recognised in the accounts asthey are incurred in the period to which they relate.1.4.32 Earnings Per ShareThe Group presents basic Earnings Per Share (EPS) data for its ordinary shares. Basic EPS is calculated bydividing the profit or loss attributable to ordinary shareholders of the Bank by the weighted average numberof ordinary shares outstanding during the period.1.4.33 Segment ReportingA segment is a distinguishable component of the Group that is engaged either in providing related products orservices (business segment), or in providing products and services within a particular economic environment(geographical segment), which is subject to risks and returns different from those of other business segments.For the purposes of segment reporting disclosures, the information is presented in respect of the Group’sbusiness segments, which is based on the Group’s management and internal reporting structure. The Groupcomprises the following major business segments: Banking, Leasing, Treasury and Property/Investments.Inter-segment pricing is determined on an arm’s-length basis.Measurement of segment assets, liabilities, segment revenue and results is based on the accountingpolicies set out above. Segment revenue results, assets and liabilities include items directly attributable tosegments as well as those that can be allocated on a reasonable basis.Disclosure by geographical region is not provided for as the Group’s activities are located in Sri Lanka andthe economic environment in which the Group operates is not subject to risk and return that are significantlydifferent on a geographical basis.1.4.34 Cash FlowThe cash flow has been prepared using the direct method of preparing cash flows in accordance with theSri Lanka Accounting Standard 9 - ‘Cash Flow Statements’.For the purpose of the Cash Flow Statement, cash and cash equivalents include notes and coins on hand,unrestricted balances held with the Central Bank and highly liquid financial assets with original maturitiesof less than three months, which are subject to insignificant risk of changes in their value and are used bythe Group in the management of its short-term commitments.1.4.35 Financial Risk Management(a) Introduction and OverviewBank has implemented a risk management framework in order to identify, measure, mitigate and controlthe various risk falling within market credit and operational risk.

Seylan Bank PLC Annual Report 2009 157Notes to the Consolidated Financial StatementsBank has exposure to the following risks from financial instruments:• Credit risk• Liquidity risk• Market risks• Operational risks(b) Risk Management FrameworkThe board of directors has overall responsibility for the establishment and oversight of the Bank’s riskmanagement framework. The board has established the Asset and Liability (ALCO), Risk ManagementCommittees, which are responsible for developing and monitoring risk management policies in theirspecified areas. All board committees have both executive and non-executive members and report regularlyto the board of directors on their activities.The risk management policies are established to identify and analyse the risks faced by the Bank, to setappropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policiesand systems are reviewed regularly to reflect changes in market conditions, products and services offered.Bank, through its training and management standards and procedures, aims to develop a disciplined andconstructive control environment, in which all employees understand their roles and obligations.The Audit Committee is responsible for monitoring compliance with the risk management policies andprocedures.(c) Credit RiskCredit risk is the risk of financial loss to the Bank if a customer or counter party to a financial instrumentfails to meet its contractual obligations, and arises principally from the loans and advances to customersand other banks and investment debt securities.(c.I) Past due but not Impaired Loans and Investment Debt SecuritiesPast due but not impaired loans and investment debt securities are those for which contractual interest orprincipal payments are past due but the Bank believes that impairment is not appropriate on the basis of thelevel of security/collateral available and/or the stage of collection of amounts owed.(c.II) Loans with Re-negotiated TermsLoans with re-negotiated terms are loans that have been restructured due to deterioration in the borrower’sfinancial position and where the Bank has made concessions that it would not otherwise consider. Once theloan is restructured it remains in this category independent of satisfactory performance after restructuring.(c.III) Write-off PolicyThe Bank writes off a loan or investment debt security balance, and any related allowances for impairmentlosses, when Bank credit determines that the loan or security is uncollectible. This determination is reachedafter considering information such as the occurrence of significant changes in the borrower’s/issuer’sfinancial position such that the borrower/issuer can no longer pay the obligation, or that proceeds fromcollateral will not be sufficient to pay back the entire exposure.(d) Liquidity RiskCentral Treasury receives information from other business units regarding the liquidity profile of theirfinancial assets and liabilities and details of other projected cash flows arising from projected futurebusiness. Central Treasury then maintains a portfolio of short-term liquid assets, largely made up of short-

158Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial Statementsterm liquid investment securities, loans and advances to banks and other inter-bank facilities, to ensurethat sufficient liquidity is maintained.All liquidity policies and procedures are subject to review and approval by ALCO. Daily reports cover theliquidity position of the Bank. A summary report, including any exceptions and remedial action taken, issubmitted regularly to ALCO.Exposure to Liquidity RiskThe key measure used by the Bank for managing liquidity risk is the ratio of net liquid assets to depositsfrom customers. For this purpose net liquid assets are considered as including cash and cash equivalents.Liquidity Management 2009 2008 2009 2008Domestic DomesticBanking Unit Banking UnitForeignCurrencyBanking UnitForeignCurrencyBanking UnitAs at 31st December 28.80% 20.11% 24.94% 22.11%Highest 28.80% 22.70% 24.94% 22.72%Lowest 11.87% 20.09% 12.85% 20.25%Average 19.19% 21.55% 20.24% 21.33%(e) Market RisksMarket risk is the risk that changes in market prices, such as interest rates, equity prices, foreignexchange rates and credit spreads (not relating to changes in the obligor’s/issuer’s credit standing) willaffect the Bank’s income or the value of its holdings of financial instruments. The objective of marketrisk management is to manage and control market risk exposures within acceptable parameters, whileoptimising the trading portfolios for risk management purposes. Overall authority for market risk is vestedin ALCO.Market risk is the risk arising from fluctuations in the market price/value of tradable assets such asforeign exchange, fixed income securities and shares that are held for trading purposes where the Bankholds either long positions or short positions of such assets.The two risk components of the market risk most applicable to the Bank are foreign exchange risk andinterest rate risk.(e.I) The Foreign Exchange Risk arises from the foreign exchange positions maintained by the Bankwhere either the foreign currency denominated assets exceed such liabilities (long positions) or the foreigncurrency denominated liabilities exceed the assets (short positions). Such long or short positions could alsobe created through the sale or purchase transactions both in spot and forward markets as well as throughswap transactions. Bank is conservative and prudent in its management of foreign exchange exposures andhas set out limits on its transactions and exposures including dealer limits, portfolio limits, daylight limits,overnight limits, long position limits, short position limits, counter party limits, etc.(e.II) Interest Rate Risk arises from the movement of interest rates affecting the value of tradable fixedincome securities as well as the interest rate re-pricing gaps of the interest rate sensitive assets andliabilities. The Bank evaluates the risk level of the tradable fixed income securities portfolio by assessingthe sensitivity of the market value towards a change of interest rates by one hundred basis points, whichis one percentage point. The size and duration of the trading portfolio is capped based on the potentialrisk exposure as well as the board approved limits placed on absolute values. Banks also typically have

Seylan Bank PLC Annual Report 2009 159Notes to the Consolidated Financial Statementsmismatches in the re-pricing periods of assets and liabilities and an approach of minimising the gaps andlimiting long-term fixed rates is followed by the Bank.Seylan as a policy does not carry a significant exposure to the equity market whilst of course being anactive investor within applicable prudential limits.The different types of market risks and the Balance Sheet structure with a long-term focus are monitoredby the Asset and Liability Management Committee (ALCO).(f) Operational RiskOperational risk refers to the losses arising from fraud, negligence, oversight, human error, process errors,system failures, external events, etc. The Bank manages most elements of the operational risk through soundinternal control systems and well-defined processes both technology driven and with human intervention.The areas of risk include process risks where faulty processes or errors in the processes could triggerlosses. Continuous review of the systems and the processes either on a regular review basis or pursuant toobserved loss events and incidents addresses potential weaknesses of the processes.In implementation of new products that invariably relies on technology as well as human involvement arisk review is an essential aspect that needs both the marketing objectives as well as the risk managementrequirements. Bank strives to subject such new product introductions to adequate review.Bank also maintains its policies with regard to access control and data protection and necessarysafeguards are constantly introduced and upgraded to ensure the integrity of the information and the databases. Preventive measure such as firewalls and virus guards among other steps are put in place.(g) Capital ManagementCapital Adequacy is a measure of a commercial bank’s ability to withstand the associated risks of its business.Regulators find it necessary that every bank holds adequate capital to absorb unexpected losses as a goingconcern, while they price their products and services to take care of expected risks. Capital Adequacy Ratio(CAR) was measured on the basis of credit and Market risk under the BASEL I accord and under BASEL IIit takes into account the credit, market and operations risks. Keeping with the International Standards ofBASEL Committee on Banking Regulations and Supervisory Practices, Sri Lanka has been following BASEL IICAR calculation from January 2008 after conducting parallel calculations in 2007.(g.I) Available CapitalBasel I and Basel II accords recognise three capital elements, namely, Tier I, Tier II and Tier III capital. TierI capital includes paid up ordinary share capital, paid up non-cumulative, non-redeemable preference shares,share premium, statutory reserve fund, published retained earnings, general and other reserves less goodwill.Tier II capital includes 50% of asset revaluation reserves (created by revaluation carried out in every sevenyears) general provision for advances, hybrid debt/equity instruments and approved subordinated term debts.Tier II capital cannot exceed Tier I capital and subordinated debt cannot exceed 50% of the Tier I capital.Tier III capital will consist only of short-term debt instrument and will be used for calculation of market riskonly. Tier III is subject to a maximum of 250% of Tier I capital after meeting the credit and operational risk.Equity investments in unconsolidated banking and financial subsidiaries and investments in capital ofother banks/financial associates are deducted from capital in arriving at the capital base. The Bank isrequired to maintain a minimum total risk-weighted capital ratio of 10% in respect of Domestic BankingUnit (DBU) and Foreign Currency Banking Unit (FCBU) operations.

160Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial StatementsCapital Adequacy Details 31st December (Basel II)BANKGROUP2009 2008 2009 2008(Restated)Rs. Mn. Rs. Mn. Rs. Mn. Rs. Mn.Total Tier I Capital 9,583 6,449 11,717 8,225Total Tier I & II Capital 11,612 9,054 14,038 11,317Risk-weighted Assets & OffBalance Sheet exposure 79,302 95,921 81,681 102,472Off Balance Sheet exposure 4,405 5,259 4,405 5,259Capital Adequacy RatiosTier I 9.69% 5.74% 11.35% 6.86%Tier I & II 11.74% 8.06% 13.60% 9.44%1.4.36 New Accounting Standards Issued but not Effective as at Balance Sheet DateTwo new standards issued by the Institute of Chartered Accountants of Sri Lanka have not been appliedin preparing these Consolidated Financial Statements as they are not effective for the year ended31 December 2009.Sri Lanka Accounting Standard 44 - Financial Instruments: Presentation provides for the following:• Guidance regarding the classification of financial instruments as equity or debt, and for the accounting forcompound instruments with characteristics of both equity and debt instruments based on the substanceof the contractual arrangement.• Criteria are specified for the netting of financial assets and financial liabilities. Netting requires a legalright of set-off as well as the intention to offset the assets and liabilities or settle simultaneously.Sri Lanka Accounting Standard 45 - Financial Instruments: Recognition and Measurement provides theprinciples for recognising and measuring financial assets and financial liabilities.The requirements are summarised below:(a) Recognition and Derecognition• All financial assets and financial liabilities should be recognised in the Balance Sheet. Previouslycertain instruments, in particular derivatives, were held by enterprises without being reflected in theBalance Sheet.• In order to remove (‘derecognise’) assets from its Balance Sheet, the Bank must be deemed to have lostcontrol over those financial assets.• In order to derecognise a liability, the Bank must be legally released from primary responsibility relatedto that liability.(b) Measurement• Financial assets must be classified into one of four categories: fair value through profit or loss (trading);loans and receivables; held-to-maturity and available-for-sale. The categorisation determines whetherand where the remeasurement is recognised in the Bank’s Financial Statements.• Loans and receivables and held to maturity financial assets should be measured at amortised cost usingthe effective interest method. Loan impairment is recognised when objective evidence is available that a

Seylan Bank PLC Annual Report 2009 161Notes to the Consolidated Financial Statementsloss event has occurred and as a consequence the Bank will not likely receive all amounts owed to it. Loanimpairment is calculated as the difference between the carrying amount of the loan and the present valueof future expected cash flows associated with the loan discounted at the loan’s original effective interestrate. This will be a significant change compared to the current method applied by the Bank for loan lossprovisioning based on the direction issued by the Central Bank of Sri Lanka, which is primarily time based.• Financial liabilities are categorised as either measured at amortised cost using effective interest rate orat fair value through profit or loss.• Financial assets should be carried at fair value, with the exception of loans and receivables, held-tomaturityassets, and in the rare circumstances where the fair value of a financial instrument cannot bereliably measured. Remeasurement to fair value must be performed at each financial reporting date.• Derivatives are always categorised as trading and therefore measured at fair value with changes recordedin the Income Statement, unless the enterprise can establish that an effective hedging relationship exists.• The effect of remeasurement to fair value must be recognised and consistently applied in one of twoways: recognise all changes in fair value in the Income Statement; or recognise changes in fair value ofonly trading instruments in the Income Statement, and available-for-sale instruments as a component ofequity until sold or otherwise disposed.(c) Derivatives and Hedge Accounting• All derivatives must be measured at fair value in the Balance Sheet in situations where these arecategorised as trading, as well as when designated as a hedging instrument.• SLAS 45 provides detailed guidance as to when and how hedge accounting should be applied. The Bankmust designate all of its hedging relationships and document their assessment of effectiveness prior tothe application of hedge accounting.• Hedge accounting is permitted provided that the Bank can establish that the hedging instrument and thehedged item have an effective hedging relationship throughout the financial reporting period.• There are three hedging models under SLAS 45. These are: the fair value hedge, the cash flow hedge andthe hedge of a net investment in a foreign operation. Each of these models is based on accounting for thehedging instruments at fair value.The Bank is currently in the process of evaluating the potential effect of these Standards. However, theimpact of the above requirements has not been quantified. Given the nature of the Bank’s operations, theseStandards are expected to have a pervasive impact on the Group’s Financial Statements.The above Standards are effective for annual periods beginning on or after 1st January 2011.1.4.37 Comparative InformationSeylan Merchant PLC and Seylan Developments PLC audited Financial Statements for the year 2008 werecompleted on 5th November 2009 and 29th June 2009 respectively. Accordingly, comparative figures for2008 have been restated. The comparative information is reclassified wherever necessary to conform withthe current year’s presentation in order to provide a better presentation. The details of restatements aredisclosed in Notes 46 and 47 to the Financial Statements.1.4.38 Directors’ Responsibility StatementThe board of directors of the Bank is responsible for the preparation and presentation of these Financial Statements.Please refer to pages 134 and 135 for the Statement of the Directors’ Responsibility for Financial Reporting.

162Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial StatementsBANKGROUP2009 2008 2009 2008(Reclassified)(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’0002. IncomeInterest Income (Note 3) 20,708,034 21,552,070 21,796,473 23,156,161Foreign Exchange Profit 521,388 670,731 521,388 670,731Fee and Commission Income (Note 5.a) 1,274,251 1,801,826 1,341,416 1,841,754Other Income (Note 6) 650,856 1,221,582 879,701 1,385,30523,154,529 25,246,209 24,538,978 27,053,951Income of the Company resulted mainly from the business of banking and related activities.3. Interest IncomeCustomer Advances 14,836,462 17,898,073 15,074,475 18,402,956Treasury Bills, Bonds & Placements withOther Banks 5,820,916 3,511,299 6,603,455 4,422,303Debentures – 24,967 – 1,161Other 50,656 117,731 118,543 329,74120,708,034 21,552,070 21,796,473 23,156,161According to the Section 137 of the Inland Revenue Act No. 10 of 2006, any person who derives income fromthe secondary market transactions in Government Securities is entitled to a notional tax credit in relationto the tax payable by such person. Notional tax credit would be determined by grossing up of the incomefrom the secondary market transactions to an amount equal to 1/9 of same and credit to be afforded fora like sum. Accordingly, Bank has accounted for Rs. 439,968,584/- as notional tax credit for the year 2009(Rs. 251,033,272/- for 2008).BANKGROUP2009 2008 2009 2008(Reclassified)(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’0004. Interest expensesCustomer Deposits 11,106,062 12,415,244 11,105,997 12,667,038Borrowings 249,884 586,400 729,053 979,659Refinance 108,292 117,766 108,292 117,766Treasury Bills Repurchased 1,300,100 498,838 1,691,580 1,290,211Debentures 727,715 743,204 744,942 751,642Other – – 9,439 69,18813,492,053 14,361,452 14,389,303 15,875,5045. Net Fee & Commission Income5.a Fee & Commission IncomeFee Income 499,842 765,964 567,528 806,898Commission Income 774,409 1,035,862 773,888 1,034,8561,274,251 1,801,826 1,341,416 1,841,7545.b Fee & Commission ExpensesCommission Expenses 105,127 52,089 116,106 63,434105,127 52,089 116,106 63,434Net Fee & Commission Income 1,169,124 1,749,737 1,225,310 1,778,320

Seylan Bank PLC Annual Report 2009 163Notes to the Consolidated Financial StatementsBANKGROUP2009 2008 2009 2008(Reclassified)(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’0006. Other IncomeDividend Income from Dealing Securities - Quoted 2,498 3,968 2,498 5,967Dividend Income from InvestmentSecurities - Quoted 540 127 540 127Dividend Income from InvestmentSecurities - Unquoted 2,161 2,588 2,161 2,616Dividend Income from Investmentsin Subsidiaries – 216,612 – –Gain on transfer of Investments to Trading Portfolio – 197,248 – 197,248Profit/(Loss) on Sale of Property,Plant & Equipment 2,978 100,080 22,531 103,696Profit/(Loss) on Sale of Investment Property – 53,765 – 56,476Profit/(Loss) on Sale of Investment Securities – – (7,590) (697)Share of Associate CompanyProfit/(Loss) after Tax – – (16,962) 4,365Profit/(Loss) on Sale of Shares ofSubsidiaries (6,630) – 187,825 5,788Profit/(Loss) on Sale of Dealing Securities (9,213) – (9,213) 17,750Bad Debts Recovered and Written Back 658,522 647,194 658,522 874,073Others – – 39,389 117,896650,856 1,221,582 879,701 1,385,3057. Operating ExpensesOperating Expenses include the following:Directors’ Emoluments 10,779 74,675 26,225 110,879Auditors’ Remuneration - Audit Fees & Expenses 6,043 4,317 7,642 7,186- Audit-Related Fee& Expenses 480 1,727 480 1,727- Non-Audit Services – 197 157 703Depreciation - Freehold Property,Plant & Equipment (Note 27) 785,318 707,205 * 816,072 752,954Depreciation - Leasehold Property,Plant & Equipment (Note 28)* 1,082 692 8,960 8,575Depreciation - Investment Property (Note 25) – – 20,066 22,151Donations 6,693 128,865 6,693 136,009Expenses on Litigation 79,890 109,958 79,889 113,724Issue Expenses on Debentures/Shares 18,758 5,307 18,758 5,307Value Added Tax on Financial Services 561,440 243,056 638,325 245,622Impairment Loss - Provision/(Reversal) (3,855) 301,280 (3,855) 374,030Provision for Doubtful Receivables 32,880 16,338 112,977 72,664* Includes depreciation charge of Seylan Merchant Bank PLC for the nine months period ended 30th September 2009 (Rs. 3.188 Mn.) .

164Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial StatementsBANKGROUP2009 2008 2009 2008(Reclassified)(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’0008. Personnel ExpensesPersonnel Expenses includes the following:Salaries and Wages 1,934,286 1,972,391 2,007,101 2,087,147Contribution to Employees’ Provident Fund 229,342 235,049 238,078 249,169Contribution to Employees’ Trust Fund 57,306 58,719 59,491 62,250Provision for/(Reversal from) StaffRetirement Benefit* (458,111) 131,379 (461,272) 141,276Other 622,432 1,008,176 657,031 1,068,8862,385,255 3,405,714 2,500,429 3,608,728* Impact of Curtailing Gratuity Benefits during the year is disclosed under Note 35.a.8.9. Provision for Loan LossesProvision for Bad & Doubtful Debts -Specific (Note 19.c) 2,411,886 2,006,427 2,411,886 2,302,914Provision/(Reversal) for Bad & DoubtfulDebts - General (Note 19.c) (247,441) 379,149 ** (216,949) 379,149Direct Write Off 18,687 81,611 32,686 122,0492,183,132 2,467,187 2,227,623 2,804,112** Includes general provision for loan losses of Seylan Merchant Bank PLC Rs. 30.492 Mn.10. Diminution/(Appreciation) inValue of InvestmentsDiminution/(Appreciation) Provisionas at 1st January 40,733 49 326,943 49,844Diminution/(Appreciation) Provisionas at 31st December (6,361) 40,733 146,208 326,943Less: Adjustment on Deconsolidation – – (138,770) –Dimunition/(Appreciation) in Value of Investments (47,094) 40,684 (41,965) 277,099BANKGROUP2009 2008 2009 2008(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’00011. Income Tax Expense11.a Charge to Taxation is as follows:Taxation Based on Profits for the Year 601,671 233,877 736,583 253,080Reversal from Deferred Tax (Note 26) (362,631) (185,266) (358,874) (176,142)Withholding Tax on Dividend – – – 36,830(Over)/Under Provision of Taxes in Previous Years 110,231 (48,611) 107,160 (49,544)349,271 – 484,869 64,224(i) Income tax on profits has been computed at the rate of 35% on the taxable income arising from thedomestic operations and On-Shore Banking operations of the Foreign Currency Banking Unit (FCBU)and 20% on the taxable income from Off-Shore Banking operations of the FCBU together with SocialResponsibility Levy.

Seylan Bank PLC Annual Report 2009 165Notes to the Consolidated Financial Statements(ii) The Group companies have computed taxation based on the applicable rates for such companies.BANKGROUP2009 2008 2009 2008(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’00011.b Reconciliation of AccountingProfit and Taxable IncomeProfit/(Loss) as per the Income Statement 892,572 155,241 933,630 (735,579)Add: Disallowable Expenses 5,787,110 6,605,716 5,894,437 7,452,631Less: Allowable Expenses 4,615,483 4,967,938 4,607,903 4,973,374Exempt/Allowable Income 77,123 1,133,755 (149,892) 1,015,137Statutory Income 1,987,076 659,264 2,370,056 728,541Less: Tax Loss Set Off - Note below 289,795 – 292,957 14,829Assessable Income 1,697,281 659,264 2,077,099 713,712Less: Donations to Approved Charities 500 – 500 –Taxable Income 1,696,781 659,264 2,076,599 713,712TaxableIncomeTaxExpenseTaxableIncomeTaxExpenseTaxableIncomeTaxExpenseTaxableIncomeRs. ’000 Rs. ’000 Rs. ’000 Rs. ’000TaxExpenseBank - Domestic Banking Unit &On-Shore Profits - 35% 1,689,489 591,321 657,154 230,003 2,069,307 724,257 711,602 249,061Off-Shore Profits - 20% 7,292 1,458 2,110 422 7,292 1,458 2,110 422Social Responsibility Levy (SRL) – 8,892 – 3,452 – 10,868 – 3,5971,696,781 601,671 659,264 233,877 2,076,599 736,583 713,712 253,080Tax LossesDue to the ambiguity of the Law, the Bank had not claimed the tax losses for the year of assessment2002/03 on profit on sale of Treasury Bills in secondary market. Bank made an appeal to the Board ofReview and the determination was issued on 11th August 2009 in favour of the Bank. As per the board’sdetermination, Bank can claim the Tax Loss of Rs. 289,794,900/-.12. Basic Earnings/(loss) Per ShareBasic Earning/(Loss) per Share has been calculated by dividing profit after taxation, minority interest andpreference dividends by the weighted average number of ordinary shares in issue (both voting and non-voting)during the year ended 31st December.BANKGROUP2009 2008 2009 2008(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000Net Profit Attributable to Shareholders of the Bank 543,301 155,241 569,208 (142,993)Preference Dividends (6,238) (5,185) (6,238) (5,185)Net Profit after Preference Dividends 537,063 150,056 562,970 (148,178)Weighted Average Number of Ordinary Shares 189,813 167,120 189,813 167,120Basic Earnings/(Loss) per Share (Rs.) 2.83 0.90 2.97 (0.89)

166Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial Statements13. DividendsBANKGROUP2009 2008 2009 2008Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000Ordinary Share Dividends (13.a) – 250,679 – 250,679Preference Share Dividends (13.b) 6,238 5,221 6,238 5,2216,238 255,900 6,238 255,90013.a Ordinary Share DividendNet Dividend – 227,184 – 227,184Tax Deducted at Source – 23,495 – 23,495Gross Dividend (Note 41.c) – 250,679 – 250,67913.b Preference Share DividendNet Dividend (Rs. 1.84 per share) 6,238 5,221 6,238 5,221Tax Deducted at Source – – – –Gross Dividend 6,238 5,221 6,238 5,221BANKGROUP2009 2008 2009 2008(Reclassified)(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’00014. Cash and cash equivalentsCash in Hand - Local Currency 4,070,066 3,794,245 4,070,114 3,811,920Cash in Hand - Foreign Currency 197,341 102,647 197,341 102,648Cash at Bank – – 2,085 7,434Balances with Local Banks 13,146 19,536 13,146 19,536Balances with Foreign Banks 358,252 1,594,903 358,252 1,594,903Money at Call and Short Notice 45,000 – 45,000 –Placements with Banks and Finance Companies – – 5,943 144,33315. Balance with Central Bank of Sri LankA4,683,805 5,511,331 4,691,881 5,680,774Cash balance is required to be maintained with the Central Bank of Sri Lanka according to statutoryrequirements. At present, the minimum cash reserve requirement is 7% of the deposit liabilities. Rate has beenreduced from 7.75% to 7% with effect from 27th February 2009.BANK2009 2008Rs. ’000 Rs. ’000Average Deposit Liabilities for thelast week of December 95,665,565 104,897,406Statutory Reserve Requirement 6,696,590 8,129,548Less: Average Sri Lanka Currency Notes andCoins held over & above 2% of average depositLiabilities, but not Exceeding 4% 1,209,967 1,275,504Total Reserve Required to be held with Central Bank 5,486,623 6,854,044Average Balance held by the Bank for thelast week of the year 5,620,347 6,279,267Deposit Balance as at 31st December 5,084,229 6,857,039

Seylan Bank PLC Annual Report 2009 167Notes to the Consolidated Financial Statements16. DEALING SecuritiesCostRs. ’0002009 2008 (Restated)MarketValueCostRs. ‘000 Rs. ’000MarketValueRs. ’000Seylan Bank PLC (16.a) 14,544,172 14,544,172 865,977 865,977Seylan Bank Asset Management Limited (16.b) 1,931,361 1,931,361 544,089 544,089Total Dealing Securities - Group 16,475,533 16,475,533 1,410,066 1,410,066No. ofOrdinaryShares31.12.2009 31.12.2008 (Restated)% of Market No. ofTotal Value Ordinary CostCost Rs. ‘000 Shares Rs. ’000CostRs. ’000MarketValueRs. ’00016.a Seylan Bank PLC16.a.1 Quoted SharesHotels & TravelGaladari Hotels Lanka PLC 443,200 6,465 6,648 – – –Eden Hotel Lanka PLC 44,200 1,110 1,138 – – –Hotel Sigiriya PLC 26,700 1,326 1,435 – – –Stafford Hotels PLC 51,500 1,346 1,416 – – –Serendib Hotels PLC 38,900 2,363 2,577 – – –12,610 7.69 13,214 – –Banks, Finance & InsuranceDFCC Bank PLC 200,000 31,442 33,400 – – –Hatton National Bank PLC 100,000 16,597 17,025 – – –Hatton National Bank PLC -Non-Voting 60,000 5,953 6,285 – – –National DevelopmentBank PLC 150,000 25,683 30,900 – – –Sampath Bank PLC 50,000 8,749 10,213 – – –Nations Trust Bank PLC 99,300 3,555 3,649 – – –Arpico Finance Company PLC – – – 60,651 3,639 1,820Nation Lanka Finance PLC 2,700 41 39 2,700 41 25The Finance Company PLC 110,160 6,197 2,121 110,160 6,197 3,002Ceylinco Insurance PLC – – – 933,055 205,272 174,481Asian Alliance Insurance PLC 50,000 2,881 2,800 – – –Janashakthi InsuranceCompany PLC 200,000 2,328 1,900 – – –103,426 63.08 108,332 215,149 179,328Diversified HoldingsJohn Keells Holdings PLC 114,800 16,463 10.04 19,688 – – –Beverage, Food & TobaccoLanka Milk Foods (CWE) PLC 50,000 3,275 2.00 3,238 – – –Land & PropertyColombo Land & DevelopmentCompany PLC 250,000 1,771 1.08 1,625 – – –

168Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial StatementsNo. ofOrdinaryShares31.12.2009 31.12.2008 (Restated)% of Market No. ofTotal Value Ordinary CostCost Rs. ‘000 Shares Rs. ’000CostRs. ’000MarketValueRs. ’000ManufacturingRichard Pieris & Company PLC 133,300 5,193 5,199 – – –Tokyo Cement Company (Lanka) PLC 50,000 875 988 – – –ACL Cables PLC 75,000 5,293 5,756 – – –Blue Diamonds JewelleryWorldwide PLC 3,191,543 8,617 6,383 3,815,243 10,301 5,34119,978 12.18 18,326 10,301 5,341Chemicals & PharmaceuticalsChemical Industries(Colombo) PLC 93,800 6,448 3.93 5,909 – – –Power & EnergyVallibel Power Erathna PLC – – – 75,000 200 248Total 163,971 100 170,332 225,650 184,917Marked to MarketValuation Gain/(Loss) - (Note 10) 6,361 (40,733) –Total Quoted Shares - Bank 170,332 170,332 184,917 184,91716.a.2 Government of Sri Lanka Treasury BillsDiscounted Value 1,220,260 1,229,788 23,578 23,413Marked to MarketValuation Gain/(Loss) 9,528 – (165) –Total Treasury Bills - Bank 1,229,788 1,229,788 23,413 23,41316.a.3 Government of Sri Lanka Treasury BondsFaceValueRs. ’000Year ofMaturityDiscountedValueRs. ’000316,493 2010 312,2863,895,386 2011 3,838,3424,350,000 2012 4,213,2734,000,000 2013 3,973,959250,000 2014 243,23112,581,091 13,144,052 654,465 657,647Marked to MarketValuation Gain 562,961 – 3,182 –Total Treasury Bonds - Bank 13,144,052 13,144,052 657,647 657,647Total Dealing Securities - Bank(Notes 16.a.1, 16.a.2 & 16.a.3) 14,544,172 14,544,172 865,977 865,977

Seylan Bank PLC Annual Report 2009 169Notes to the Consolidated Financial Statements16.b Seylan Bank Asset Management Limited16.b.1 Government of Sri Lanka Treasury Bills31.12.2009 31.12.2008 (Restated)MarketValueCostRs. ‘000 Rs. ’000CostRs. ’000MarketValueRs. ’000Discounted Value 157,598 159,095 213,086 212,920Marked to MarketValuation Gain/(Loss) 1,497 – (166) –Total Treasury Bills 159,095 159,095 212,920 212,92016.b.2 Government of Sri Lanka Treasury BondsFaceValueRs. ’000Year ofMaturityDiscountedValueRs. ’000328,972 2010 339,421268,075 2011 276,672603,869 2012 629,478400,000 2013 427,7741,673,345 1,772,266 334,531 331,169Marked to Market Valuation Gain/(Loss) 98,921 (3,362)Total Treasury Bonds 1,772,266 1,772,266 331,169 331,169Total Dealing Securities - Seylan Bank AssetManagement Limited (Notes 16.b.1 & 16.b.2) 1,931,361 1,931,361 544,089 544,089Total Dealing Securities - Subsidiaries (Note 16.b) 1,931,361 1,931,361 544,089 544,089Total Dealing Securities - Group 16,475,533 16,475,533 1,410,066 1,410,0662009 2008 (Restated)Cost Market Value Cost Market ValueRs. ‘000 Rs. ‘000 Rs. ’000 Rs. ’00017. INVESTMENT SECURITIESSeylan Bank PLC (17.a) 14,897,394 15,046,527 24,243,200 23,769,304Seylan Merchant Bank PLC (17.b) 229,170 233,339Seylan Developments PLC (17.c) 27,244 3,272 39,324 2,111Seylan Bank Asset Management Limited (17.d) 1,497,039 1,511,939 2,749,307 2,526,330Total Investment Securities - Group 16,421,677 16,561,738 27,261,001 26,531,144

170Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial Statements17.a Seylan Bank PLCQuoted Shares2009 2008 (Restated)No. of Cost Market No. of Cost MarketOrdinary Value Ordinary ValueShares Rs. ’000 Rs. ’000 Shares Rs. ’000 Rs. ’00017.a.1 Quoted SharesVisa Inc. 13,328 65,184 133,294 13,328 64,414 78,993Seylan Merchant Bank PLC 22,064,566 249,535 105,910Less - Loss on ImpairmentSeylan Merchant Bank PLC (168,701)Total Quoted Shares - Bank 146,018 239,204 64,414 78,993Unquoted Shares2009 2008No. of Cost Directors’ No. of Cost Directors’Ordinary Valuation Ordinary ValuationShares Rs. ’000 Rs. ’000 Shares Rs. ’000 Rs. ’00017.a.2 Unquoted SharesCredit Information Bureauof Sri Lanka 2,900 290 5,627 2,900 290 5,627Transnational LankaRecords Solutions(Pvt) Limited 1,000,000 10,000 14,250 1,000,000 10,000 13,787Lanka Clear (Pvt) Limited 1,000,000 10,000 35,010 1,000,000 10,000 28,638Lanka Financial ServicesBureau Limited 225,000 2,250 2,828 225,000 2,250 1,767Total Unquoted Shares - Bank 22,540 57,715 22,540 49,819The valuation is based on net assets per share as per the Audited Financial Statements of these companiesas at following dates:Credit Information Bureau of Sri Lanka - 31st December 2008.Transnational Lanka Records Solutions (Pvt) Limited - 30th June 2009.Lanka Clear (Pvt) Limited - 31st March 2009.Lanka Financial Services Bureau Limited - 31st March 2009.

Seylan Bank PLC Annual Report 2009 171Notes to the Consolidated Financial Statements2009 2008 (Restated)Cost Market Value Cost Market ValueRs. ’000 Rs. ’000 Rs. ’000 Rs. ’00017.a.3 Government of Sri Lanka Treasury BillsFaceValueRs. ’000Year ofMaturityDiscountedValueRs. ’0005,000 2010 4,821 4,821 4,822Total Treasury Bills - Bank 4,821 4,822 – –17.a.4 Government of Sri Lanka Treasury BondsFaceValueRs. ’000Year ofMaturityDiscountedValueRs. ’0001,223,554 2010 1,260,292755,760 2011 786,1423,060,500 2012 2,995,7924,513,000 2013 4,493,3451,700,000 2014 1,687,7131,300,000 2015 1,272,47612,495,760 12,516,531 16,030,145 15,514,391CWE Bond 2016 250,000 250,000 250,000 250,000Total Bonds - Bank 12,745,760 12,766,531 16,280,145 15,764,39117.a.5 Foreign Currency BondsFaceValueUSD. ’000Year ofMaturityDiscountedValueUSD. ’000300 2010 30017,000 2011 17,0001,978,255 1,978,255 7,876,101 7,876,101Total Foreign Currency Bonds - Bank 1,978,255 1,978,255 7,876,101 7,876,101Total Bonds - Bank 14,724,015 14,744,786 24,156,246 23,640,49217.a.6 Quoted Debentures held by the BankSeylan Merchant Bank PLC (50 Mn. -14%, 60 Mn. -12.75%, 18.724 Mn. - 16%) 128,724Less - Loss on Impairment (128,724)Total Quoted Debentures - Bank – – – –Total Investment Securities - Bank (Note 17.a.1,17.a.2, 17.a.3, 17.a.4, 17.a.5 & 17.a.6) 14,897,394 15,046,527 24,243,200 23,769,304

172Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial StatementsInvestment Securities held by Subsidiaries17.b Seylan Merchant Bank PLC2009 2008 (Restated)No. of Cost Market No. of Cost MarketOrdinary Value Ordinary ValueShares Rs. ’000 Rs. ’000 Shares Rs. ’000 Rs. ’00017.b.1 Quoted SharesThe Finance Company PLC 108,997 5,652 2,970Blue Diamonds JewelleryWorldwide PLC 3,180,280 47,818 4,452Metal Recyclers Colombo PLC 69 3 –Kotmale Holding PLC 1,000 16 10Sierra Cables PLC 5,400 16 7Dialog Telekom PLC 9,000 256 43Diminution in Value (Note 10) – (50,508) –Total Quoted Shares – 3,253 7,4822008No. of CostOrdinaryShares Rs. ’00017.b.2 Unquoted SharesCeylinco Sports Complex Limited 300,000 3,000Ceylinco Express (Pvt) Limited 37,050 371MBSL Savings Bank Limited 1,189,600 11,896Openarc Global Solutions (Pvt) Limited 45,000 450Ceylinco Investment & Reality (Pvt) Limited 100,000 1,000South Asian Travels Limited 30,000 300Ceylinco Coloured Stones (Pvt) Limited 500,000 5,000Seraka Investment Limited(5,655,900 Non-Cumulative, Non-Redeemable,Preference Shares) 48,645Diminution in Value (Note 10) (70,662)Total Unquoted Shares –2008CostRs. ’00017.b.3 Unquoted DebenturesCeylinco Automobiles Limited 17,600Diminution in value (Note 10) (17,600)Total Unquoted Debentures –

Seylan Bank PLC Annual Report 2009 173Notes to the Consolidated Financial Statements2009 2008 (Restated)Cost Market Cost MarketValueValueRs. ’000 Rs. ’000 Rs. ’000 Rs. ’00017.b.4 Government of Sri Lanka Treasury BillsDiscounted Value – – 126,448 126,448Total Treasury Bills – – 126,448 126,44817.b.5 Government of Sri Lanka Treasury BondsDiscounted Value – – 99,469 99,469Total Treasury Bonds – – 99,469 99,469Total Investment Securities - Seylan MerchantBank PLC (Notes 17.b.1, 17.b.2, 17.b.3, 17.b.4 & 17.b.5) – 229,170 233,33917.c Seylan Developments PLC17.c.1 Quoted Shares2009 2008No. of Cost Market No. of Cost MarketOrdinary Value Ordinary ValueShares Rs. ’000 Rs. ’000 Shares Rs. ’000 Rs. ’000Nation Lanka Finance PLC 200,000 2,000 2,900 200,000 2,000 1,850Associated Property Developers PLC 100 1 – 100 1 6CT Land Developers PLC 100 1 2 100 1 1City Housing & Real Estate PLC 250 2 5 250 2 3The Colombo Fort Land & BuildingCompany Limited 100 1 3 100 1 –Overseas Reality Ceylon PLC 100 – 2 100 – 1Kelsey Developments PLC 100 1 1 100 1 1Property Development PLC 100 2 2 100 2 6Colombo Land & DevelopmentCompany PLC 1,250 – 8 1,250 – 1East West Company PLC 200 1 2 100 1 –Equity One PLC 100 1 2 100 1 1O'nally Holdings PLC 100 1 4 100 1 2York Arcade Holdings PLC 100 – 1 100 – 1Blue Diamonds Jewellery &Worldwide PLC 170,000 383 340 170,000 383 238Total Quoted Shares 2,394 3,272 2,394 2,111

174Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial Statements17.c.2 Unquoted Shares2009 2008 (Restated)No. of Cost Market No. of Cost MarketOrdinary Value Ordinary ValueShares Rs. ’000 Rs. ’000 Shares Rs. ’000 Rs. ’000Ceylinco Venture CapitalInvestment Limited 95,000 950 95,000 950Ceylinco Sports Complex Limited 220,000 2,200 220,000 2,200Ceycom Global CommunicationsLimited 40,500 405 40,500 405Asian Finance Company Limited 75,000 750 75,000 750MBSL Savings Bank Limited 25,000 250 25,000 250Ceylinco - Cisco Security Corporation(Pvt) Limited 10,000 – 10,000 –Ceylinco International PropertyDevelopers (Pvt) Limited 50,000 500 50,000 500Ceyenergy Electronics Co. (Pvt) Limited 15,000 150 15,000 150Ceylinco SwiftCare (Pvt) Limited 75,000 750 75,000 750Independent Financial News & Views(Pvt) Limited 4,900 49 4,900 49Ceylinco International Realty(Pvt) Limited 200,000 2,000 200,000 2,000e.Ceylinco.Com (Pvt) Limited 60,000 600 60,000 600International Consultancy & CorporateServices (Pvt) Limited 5,000 50 5,000 50Ceylinco PLC Technology (Pvt) Limited 177,500 1,775 177,500 1,775Ceylinco Investments & Realty(Pvt) Limited 4,000,000 40,000 4,000,000 40,000The Sitar (Pvt) Limited 60,000 600 60,000 600Seraka Investments Limited 510,000 5,100 510,000 5,100Ceylinco - Cisco Ranaviru Services(Pvt) Limited 10,000 100 10,000 100Ceylinco - Cisco Cash Management andTransport Company Limited 10,000 100 –Diminution in Value (Note 10) (31,479) (19,299)Total Unquoted Shares 24,850 36,930Total Investment Securities -Seylan Developments PLC(Notes 17.c.1 & 17.c.2) 27,244 3,272 39,324 2,11117.d Seylan Bank Asset Management Limited17.d.1 Quoted SharesBlue Diamond JewelleryWorldwide PLC 300,000 2,392 600 1,344,200 10,725 3,764Diminution in Value (Note 10) (1,792) – (8,843) –Total Quoted Shares 600 600 1,882 3,764

Seylan Bank PLC Annual Report 2009 175Notes to the Consolidated Financial Statements2009 2008No. of Cost No. of CostOrdinaryOrdinaryShares Rs. ’000 Shares Rs. ’00017.d.2 Unquoted SharesCeylinco Venture Capital Co. Limited 500,000 5,000 500,000 5,000Ceylinco Foliage Exports (Pvt) Limited 850,000 8,500 850,000 8,500Ceylinco - CISCO Ranaviru Services (Pvt) Limited 50,000 500 50,000 500Ceylinco Niranjan Invention (Pvt) Limited 33,249 350 33,249 350Ceylinco Travels & Tours Limited 100,000 1,000 100,000 1,000Ceylinco Tourist Hotels Ltd. - Hotel Ceysands 33,000 3,500 33,000 3,500Ceylinco Development Bank Limited 725,000 7,250 725,000 7,250Ceylinco Vocational Training (Pvt) Limited 120,000 1,482 120,000 1,482The Finance & Guarantee Co. Limited 30,000 3,000 30,000 3,000Ceylinco Employees Sports Complex (Pvt) Limited 200,000 2,000 200,000 2,000Ceylinco Lexcon Services (Pvt) Limited 77,847 778 77,847 778Ceylinco Automobiles Limited 500,000 5,000 500,000 5,000Tropical Foliage Limited 150,000 1,500 150,000 1,500Ceylinco Bio Tech Limited 150,000 1,500 150,000 1,500Economic Resurgence Association (Pvt) Limited 1,000,000 10,000 1,000,000 10,000Ceylinco Seylan Housing & CommercialProperties Limited 20,000 200 20,000 200Ceylinco Building Society 10,000 5,000 10,000 5,000Ceylinco Aruna Accessories (Pvt) Limited 25,000 250 25,000 250The Sitar (Pvt) Limited 380,000 6,000 380,000 6,000Independent Financial News & Views (Pvt) Limited 100,000 1,000 100,000 1,000Ceylinco Coloured Stones (Pvt) Limited 1,000,000 10,000 1,000,000 10,000Ceylinco Freight International (Pvt) Limited 400,000 4,000 400,000 4,000Ceylinco Hotels Limited 475,000 4,750 475,000 4,750Ceylinco Cellular Company (Pvt) Limited 100,000 1,000 100,000 1,000South Asian Travels Limited 500,000 5,000 500,000 5,000Ceylinco Packaging Company Limited 500,000 5,000 500,000 5,000Ceylinco - Cisco Cash Management &Transit Company 50,000 500 50,000 500Ceylinco Consolidated International PropertyDevelopment (Pvt) Limited 700,000 7,000 700,000 7,000Middleway Printing (Pvt) Limited 1,375,000 13,750 1,375,000 13,750Ceylinco Design & Project Management (Pvt) Limited 200,000 2,000 200,000 2,000Diminution in Value (Note 10) (116,810) (116,810)Total Unquoted Shares – –17.d.3 Unquoted DebenturesCeylinco Vocational Training (Pvt) Limited 988 988(8,000 Debentures of Rs. 100/- each)MBSL Savings Bank Limited 1,500 1,500(15,000 Debentures of Rs. 100/- each)Diminution in Value (Note 10) (2,488) (2,488)Total Unquoted Debentures – –

Seylan Bank PLC Annual Report 2009 177Notes to the Consolidated Financial StatementsBANKGROUP2009 2008 2009 2008(Reclassified)(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’00018. Bills of ExchangeExport Bills 849,682 1,090,162 849,682 1,090,162Import Bills 319,993 147,370 319,993 147,370Local Bills 181,781 250,496 181,781 250,4961,351,456 1,488,028 1,351,456 1,488,028Less: Provision for Bad & Doubtful Debts (Note 19.a) (29,092) (16,197) (29,092) (16,197)1,322,364 1,471,831 1,322,364 1,471,83119. Loans and AdvancesSri Lanka Rupee Loans and AdvancesOverdrafts 20,565,334 30,003,713 20,565,334 30,003,713Trust Receipt Loans/Revolving Import Loans (RIL) 2,377,152 3,731,720 2,377,152 3,731,720Staff Loans 4,543,552 3,665,637 4,549,431 3,677,272Housing Loans 8,426,228 9,242,718 8,426,228 9,242,718Pawning Advances 3,550,851 2,731,828 3,550,851 2,731,828Refinance Loans 1,185,931 1,594,264 1,185,931 1,594,264Other Loans 38,547,615 43,495,807 38,548,150 44,842,23479,196,663 94,465,687 79,203,077 95,823,749Foreign Currency Loans and AdvancesOverdrafts 677,773 1,317,592 677,773 1,317,592Trust Receipt Loans/Revolving Import Loans (RIL) 155,603 933,398 155,603 933,398Other Loans 7,769,329 10,761,933 7,769,329 10,761,9328,602,705 13,012,923 8,602,705 13,012,922Total Loans & Advances - Gross 87,799,368 107,478,610 87,805,782 108,836,671Less: Loan Loss Provision (Note 19.a) (6,167,662) (6,279,669) (6,167,662) (6,283,989)Interest in Suspense (Note 19.a) (5,592,735) (3,452,857) (5,592,735) (3,474,358)Total Loans & Advances - Net 76,038,971 97,746,084 76,045,385 99,078,32419.a Analysis of Provision for Loan Losses and Interest in SuspenseBANKGROUP2009 2008 2009 2008Loan Loss Interest in Loan Loss Interest in Loan Loss Interest in Loan Loss Interest inProvision Suspense Provision Suspense Provision Suspense Provision Suspense(Reclassified) (Reclassified) (Restated) (Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000Bills of Exchange 29,092 – 16,197 – 29,092 – 16,197 –Loans and Advances 6,167,662 5,592,735 6,279,669 3,452,857 6,167,662 5,592,735 6,283,989 3,474,358Lease Rental Receivable 269,254 66,156 264,400 69,837 269,254 66,156 450,185 127,0526,466,008 5,658,891 6,560,266 3,522,694 6,466,008 5,658,891 6,750,371 3,601,410

178Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial Statements19.b Analysis of Provision for Loan LossesBANKGROUP2009 2008 2009 2008(Restated)Loan Loss Loan Loss Loan Loss Loan Loss Loan Loss Loan Loss Loan Loss Loan LossProvision Provision Provision Provision Provision Provision Provision ProvisionSpecific General Specific General Specific General Specific General(Reclassified) (Reclassified) (Restated) (Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000Bills of Exchange 17,490 11,602 3,282 12,915 17,490 11,602 3,282 12,915Loans and Advances 5,698,546 469,116 5,577,567 702,102 5,698,546 469,116 5,581,887 702,102Lease Rental Receivable 240,796 28,458 222,800 41,600 240,796 28,458 408,585 41,6005,956,832 509,176 5,803,649 756,617 5,956,832 509,176 5,993,754 756,617Loan Loss Provision - Specific 5,956,832 5,803,649 5,956,832 5,993,754Loan Loss Provision - General 509,176 756,617 509,176 756,617Total Loan Loss Provision -(Note 19.a) 6,466,008 6,560,266 6,466,008 6,750,37119.c Movement in Loan Loss ProvisionBANK2009 2008(Reclassified)GROUP2009 2008(Restated)Specific General Specific General Specific General Specific GeneralRs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000Balance Brought Forward 5,803,649 756,617 4,594,758 377,468 5,993,754 756,617 4,715,254 377,468Additional Provision Made 2,411,886 (247,441) 2,006,427 379,149 2,411,886 (247,441) 2,302,914 379,149Fully Provided Loans Written Off (1,673,732) – (248,936) – (1,673,732) – (248,936) –Recoveries Made During the Year (598,040) – (588,268) – (598,040) – (815,146) –Exchange Rate Variance onForeign Currency Provisions 13,069 – 39,668 – 13,069 – 39,668 –Adjustment on Deconsolidation – – – – (190,105) – – –5,956,832 509,176 5,803,649 756,617 5,956,832 509,176 5,993,754 756,61719.d Movement in Interest in SuspenseBANKGROUP2009 2008 2009 2008(Reclassified)(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000Balance Brought Forward 3,522,694 3,302,165 3,601,410 3,433,765Interest Suspended During the Year 4,754,247 2,172,347 4,754,247 2,232,174Interest Recovered During the Year (1,422,925) (1,485,534) (1,422,925) (1,598,245)Reversal of Interest for Write Off/Write Down (1,197,101) (471,493) (1,197,101) (471,493)Exchange Rate Variance on ForeignCurrency Provisions 1,976 5,209 1,976 5,209Adjustment on Deconsolidation – – (78,716) –5,658,891 3,522,694 5,658,891 3,601,410

Seylan Bank PLC Annual Report 2009 179Notes to the Consolidated Financial Statements19.e Basis for ProvisioningAs detailed in Note 19.b, Bank makes general provision for the potential losses (not specifically identified) inthe performing portfolio of loans and advances and lease receivables, other than credit facilities secured bycash deposits, Gold or Government Securities with the Bank. Bank has made a cumulative general provisionof Rs. 509.176 Mn. (2008 - Rs. 756.617 Mn.) to meet the regulatory requirement. The total general provisionof Rs. 509.176 Mn. is 0.59% (2008 - 0.68%) of the total performing and overdue loans and the advances netof interest in suspense as at the Balance Sheet date.19.e.1 Non-Performing Lending PortfolioLoans, advances and leases are classified as non-performing as detailed in Note 19.f.1. The criteria used forthe classification of lending portfolio of the Bank as non-performing is set out below. This is in accordancewith the direction issued by the Central Bank of Sri Lanka on 8th May 2008, on ‘Classification of Loans andAdvances, Income Recognition and Provisioning’.Categorisation of Non-Performing Lending PortfolioType of Facility Determinant Overdue/SpecialMentionSubstandard Doubtful LossOverdraftsCredit facilitiesrepayablein monthlyinstalmentsOther creditfacilitiesCredit CardsExceeds thesanctioned limitfor a continuousperiod ofPrincipal and/orinterest due andunpaidPayments are inarrears from thedue dateMinimumpayments are inarrears from thedue date90 days or morebut less than 180days3 instalmentsor more butless than 6instalments90 days or morebut less than 180days90 days or morebut less than 120days180 days or morebut less than 360days6 instalmentsor more butless than 12instalments180 days or morebut less than 360days120 days or morebut less than 180days360 days or morebut less than 540days12 instalmentsor more butless than 18instalments360 days or morebut less than 540days180 days or morebut less than 240days540 days or more18 instalments ormore540 days or more240 days or moreProvision for loan losses are made on the basis of continuous review of all advances to the customers inaccordance with the Sri Lanka Accounting Standard 23 - ‘Revenue Recognition and Disclosure in FinancialStatements of Banks’, and the direction issued by the Central Bank of Sri Lanka, which has been disclosed inthe Financial Statements of the Bank after considering the values of the collateral, obtained against therespective non-performing loans and advances.Valuation of collateral is performed based on the direction issued by the Central Bank of Sri Lanka asexplained in Note 19.e.2.

180Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial Statements19.e.2 Valuation of Securities for Provisioning PurposeAs per the amendment to the direction issued by the Central Bank of Sri Lanka on 15th August 2003(Effective from 1st January 2004), under Section 46 of the Banking Act No. 30 of 1988, as amended byBanking (Amended) Act No. 33 of 1995, the initial and progressive discount that need to be applied to theforced sale value of immovable properties held as collateral, are as follows:CategoryForced Sale Value of ImmovableProperty that can be Considered as theValue of Security (%)At the Time of 1st Provisioning 751 - 2 Years in the Loss Category 602 - 3 Years in the Loss Category 503 - 4 Years in the Loss Category 40Over 4 Years in the Loss Category At the Discretion of the ManagementProvision for Loans and Advances - Ceylinco Group ExposureIn view of the special circumstances under which the Bank was reconstituted by the direction of the CentralBank of Sri Lanka, the Monetary Board has granted an exemption to Seylan Bank PLC, from the requirementto apply progressive discount on the forced sale value of immovable property, in terms of the Banking ActDirection No. 03 of 2008 on Classification of Loans and Advances, Income Recognition and Provisioningwhen computing the provisioning to be made as at 31st December 2009, for the facilities granted to thespecific group of Companies against mortgage over immovable property.BANKGROUP2009 2008 2009 2008(Restated)Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘00019.f Non-Performing Advances DisclosuresNon-Performing Advances (with BCCI)Bills of Exchange 191,269 53,069 191,269 53,069Loans & Advances 24,734,686 15,189,717 24,734,686 15,353,010Lease Rentals Receivable 565,113 662,754 565,113 996,617Total 25,491,068 15,905,540 25,491,068 16,402,69619.f.1 Non-performing Assets included in the Bills of Exchange, Loans and Advances,Pro Notes and Lease Rentals Receivable on which Interest is not being Accrued are as follows:BANKGROUP2009 2008 2009 2008(Restated)Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Total Non-Performing AdvancesExcluding Former BCCI Advances 25,460,589 15,861,311 25,460,589 16,358,467Former BCCI Advances 30,479 44,229 30,479 44,22925,491,068 15,905,540 25,491,068 16,402,696

Seylan Bank PLC Annual Report 2009 181Notes to the Consolidated Financial StatementsBANK2009 2008Advances Advances ChangeRs. ‘000 %* Rs. ‘000 %* %Total Gross Loans and Advances including Bills ofExchange, Pro Notes, Lease Rentals Receivableand Group Balance Receivable 92,680,732 114,765,174 (19.24)Interest in Suspense (Note 19.a) (5,658,891) (3,522,694) 60.64Total Loans and Advances including Bills ofExchange, Pro Notes, Lease RentalsReceivable and Group Balance Receivable(Net of Interest in Suspense) 87,021,841 111,242,480 (21.77)Non-Performing Advances (Gross) 31,149,959 33.61 19,428,234 16.93 60.33Non-Performing Advances(Net of Interest in Suspense) 25,491,068 29.29 15,905,540 14.30 60.27Less: Provision for Bad & Doubtful Debts (Note 19.a) (6,466,008) – (6,560,266) – (1.44)Net Non-Performing Advances 19,025,060 21.86 9,345,274 8.40 103.58* As a percentage of total loans and advances as at 31st December.Rs. 19,025.060 Mn. net non-performing advances is covered by tangible securities valued at approximatelyRs. 20,629.911 Mn.19.f.2 Non-Performing Portfolio of Grameen Micro Credit Company LimitedSubsequent to the Balance Sheet date the Bank has restructured its loan portfolio to Grameen Micro CreditCompany Limited (Rs. 2.725 Bn.) and obtained approval from the Monetary Board to convert Rs. 1 Bn. of theoutstanding loans to 15% Cumulative, Redeemable, Convertible Preference Shares of the said company.Further, Bank has converted the balance of Rs. 1.725 Bn. to Secured Debentures at an Interest Rate ofTreasury Bills +10% per annum (maturing 2012 to 2019).2009Rs. ’000Grameen Loans Outstanding as at the Balance Sheet date 2,499,468Interest Receivable 225,532Amount Considered for Restructuring 2,725,00019.f.3 As per the direction issued by the Central Bank of Sri Lanka on 31st December 2004, the Non-PerformingRatio net of Interest in Suspense after inclusion of Investment Properties is as follows:2009 2008% %Non-Performing Ratio before Adjusting Investment Properties 29.29 14.30Non-Performing Ratio after Adjusting Investment Properties 29.71 14.70

182Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial Statements19.g.1 Collateral-Wise Analysis of Gross Non-Performing PortfolioThe Bank holds collateral against its lending portfolio in the form of mortgage interest over property,other registered securities and assets. Estimation of fair value/realisable value are based on the value ofcollateral, assessed at the time of lending and generally are not updated except when a loan is individuallyassessed as non-performing.2009 2008Rs. ‘000 Rs. ‘000Secured by Tangible Assets 19,025,060 9,345,274Secured by Movable Assets (Non-Performing Lease Receivable) 644,106 599,306Other Securities – –Clean 11,480,793 9,483,65431,149,959 19,428,23419.g.2 Foreclosed PropertiesLoans & Advances 1,099,823 889,454Bills of Exchange 68,630 28,1101,168,453 917,56419.h Balance Outstanding on Advances Granted to Employee Share Owning Trust CompaniesAmountOutstanding2009AmountOutstanding2008Rs. ’000 Rs. ’000Seybest (Pvt) Limited 30,898 32,896Sotse (Pvt) Limited 30,225 30,530Esot (Pvt) Limited 31,540 33,462Seyshop (Pvt) Limited 30,937 32,932

Seylan Bank PLC Annual Report 2009 183Notes to the Consolidated Financial Statements19.i Concentration of Credit RiskSector-wise analysis credit portfolio given below, reflects the exposure to credit risk in the various sectorsof the economy.BANKGROUP2009 2008 2009 2008(Reclassified)(Restated)Rs. ’000 % Rs. ’000 % Rs. ’000 % Rs. ’000 %Food, Beverages & Tobacco 1,314,948 1.50 3,515,077 3.27 1,314,948 1.50 3,538,868 3.25Agriculture, Agro Business & Fisheries 3,467,424 3.95 4,202,230 3.91 3,467,424 3.95 4,343,374 3.99Textiles & Wearing Apparel 2,117,555 2.41 7,212,904 6.71 2,117,555 2.41 7,264,431 6.67Wood & Paper Products 1,058,202 1.21 958,051 0.89 1,058,202 1.21 996,635 0.92Rubber & Leather Products 721,436 0.82 1,417,015 1.32 721,436 0.82 1,467,679 1.35Metals, Chemicals & Engineering 2,564,190 2.92 3,193,956 2.97 2,564,190 2.92 3,294,051 3.03Hotels 1,897,208 2.16 2,099,516 1.95 1,897,208 2.16 2,121,951 1.95Services 7,275,258 8.29 10,271,850 9.56 7,275,258 8.29 10,732,017 9.86Others 67,383,147 76.74 74,608,011 69.42 67,389,561 76.74 75,077,665 68.98Gross Loans & Advances 87,799,368 100.00 107,478,610 100.00 87,805,782 100.00 108,836,671 100.00Loans & Advances 87,799,368 107,478,610 87,805,782 108,836,671Lease Rentals Receivable 3,261,880 5,270,446 3,261,880 7,569,329Bills of Exchange 1,351,456 1,488,028 1,351,456 1,488,028Inter-Company Loans 268,028 528,090 – –Gross Loans & Advances Including LeaseReceivables & Bills of Exchange 92,680,732 114,765,174 92,419,118 117,894,028‘Others’ Category Comprises the following AdvancesExports 7,418,660 11.01 5,786,708 7.76 7,418,660 11.01 5,786,708 7.71Imports 3,719,104 5.52 5,217,972 6.99 3,719,104 5.52 3,719,104 4.95Trading 8,194,541 12.16 14,812,309 19.85 8,194,541 12.16 8,194,541 10.91Financial Services 4,059,196 6.02 5,028,335 6.74 4,059,196 6.02 4,059,196 5.41Housing 14,851,747 22.04 13,591,431 18.22 14,851,747 22.04 14,851,747 19.78Consumption 8,610,171 12.78 8,400,440 11.26 8,610,171 12.78 8,610,171 11.47Miscellaneous 20,529,728 30.47 21,770,816 29.18 20,536,142 30.47 29,856,198 39.7767,383,147 100.00 74,608,011 100.00 67,389,561 100.00 75,077,665 100.00BANKGROUP2009 2008 2009 2008(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’00020. Lease Rentals Receivablewithin One YearFrom the Balance Sheet date 2,470,278 3,377,886 2,470,278 4,965,751Less: Unearned Income (536,184) (797,776) (536,184) (1,198,625)1,934,094 2,580,110 1,934,094 3,767,126Less: Loan Loss Provision (Note 19.a) (269,254) (264,400) (269,254) (450,185)Interest in Suspense (Note 19.a) (66,156) (69,837) (66,156) (127,052)1,598,684 2,245,873 1,598,684 3,189,889

184Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial Statements21. Lease Rentals Receivable Later Than One Yearand not later than five yearsBANKGROUP2009 2008 2009 2008(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000From the Balance Sheet Date (Note 21.a) 1,606,273 3,257,487 1,606,273 4,587,676Less: Unearned Income (280,381) (570,963) (280,381) (795,400)1,325,892 2,686,524 1,325,892 3,792,27621.a Lease Rentals Receivable 1,787,491 3,382,025 1,787,491 4,712,214Less: Deposit of Rentals (181,218) (124,538) (181,218) (124,538)1,606,273 3,257,487 1,606,273 4,587,67622. Lease Rentals Receivable Later Than Five YearsFrom the Balance Sheet Date (22.a) 1,971 4,029 1,971 11,106Less: Unearned Income (77) (216) (77) (1,179)1,894 3,813 1,894 9,927Less: Loan Loss Provision (Note 19.a) – – – –Interest in Suspense (Note 19.a) – – – –1,894 3,813 1,894 9,92722.a Lease Rentals Receivable 1,971 4,029 1,971 11,106Less: Deposits of Rentals – – – –23. INVESTMENTS IN SUBSIDIARIES - BANKQuoted - Ordinary Shares& DebenturesSeylan Merchant Bank PLC(Note 23.1)Seylan Developments PLCPrincipalActivity1,971 4,029 1,971 11,106Number ofShares%HoldingCost as at31.12.2009MarketValue as at31.12.2009Number ofShares%HoldingCost as at31.12.2008MarketValue as at31.12.200831.12.2009 Rs. ’000 Rs. ’000 31.12.2008 Rs. ’000 Rs. ’000MerchantBanking – – – – 23,071,066 42.88 260,919 69,213PropertyDevelopment 37,203,584 50.29 358,916 353,434 37,203,584 51.01 358,916 148,814DebenturesSeylan Merchant Bank PLC(50 Mn. - 14%, 60 Mn. -12.75%, 18.724 Mn. - 16%) – 100.00 128,724 –Less: Loss on ImpairmentSeylan MerchantBank PLC - Shares – – (172,556) –Seylan MerchantBank PLC - Debentures – – (128,724) –358,916 353,434 447,279 218,027

Seylan Bank PLC Annual Report 2009 185Notes to the Consolidated Financial StatementsPrincipalActivityNumber ofShares%HoldingCost as at31.12.2009Directors’Valuation31.12.2009Number ofShares%HoldingCost as at31.12.2008Directors’Valuation31.12.200831.12.2009 Rs. ‘000 Rs. ‘000 31.12.2008 Rs. ‘000 Rs. ‘000Unquoted - Ordinary SharesSeylan Bank AssetManagement LtdPrimaryDealers 19,750,000 100.00 501,250 573,234 19,750,000 100.00 501,250 420,914Total 860,166 926,668 948,529 638,94123.1 Reasons for DeconsolidationAs the Bank does not exercise control over the activities of Seylan Merchant Bank PLC and has no intentionto do so in the future, the board resolved during the last quarter to gradually divest its investment in thisentity. Further, there are no common directors to exercise influence, any longer. Accordingly, the Bank sold1,006,500 shares during the last quarter of the year and by 31st December 2009 the Bank’s holding in theentity dropped to 42.45%. As such, Seylan Merchant Bank PLC has been deconsolidated with effect from1st October 2009 in the Group accounts of the Bank and the investment is classified as ‘Investment Securities’in the Bank’s Financial Statements.23.2 Jointly-controlled OperationsThe Bank had a jointly-controlled operation for the Seylan Credit Card activities. The Bank reconstituted thisoperations at the year end under a new Memorandum of Understanding. However, no adjustments were requiredin the Bank’s Financial Statements.BANKGROUP2009 2008 2009 2008(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’00024. Group Balances ReceivableName of CompanySeylan Merchant Bank PLC – 342,314 – –Seylan Developments PLC 349,028 280,866 – –Seylan Bank Asset Management Limited 459,627 – – –Total 808,655 623,180 – –

186Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial StatementsBANKGROUP2009 2008 2009 2008(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’00025. Investment PropertiesCostBalance as at 1st January 520,812 149,394 1,764,455 1,403,880Add: Additions During the Year – 371,418 – 371,418Transferred from Property, Plant & Equipment – – – 346Disposals During the Year – – – (11,189)Adjustment on Deconsolidation – – (16,316) –Cost as at 31st December 520,812 520,812 1,748,139 1,764,455Less - Provision for Impairment – – (134,795) (134,795)Cost Less Impairment as at 31st December 520,812 520,812 1,613,344 1,629,660Accumulated DepreciationBalance as at 1st January – – 88,602 66,451Charge for the year – – 20,066 22,151Balance as at 31st December – – 108,668 88,602Carrying Value as at 31st December 520,812 520,812 1,504,676 1,541,058Bank has accounted its investment properties at cost and revalues these properties periodically on asystematic basis for disclosure purposes.25.a Investment Properties (Bank) - 2009BANKCost Market ValueAddress Extent Date of Valuation Rs. ’000 Rs. ’000Kohalwila Road, Gonawala, Gampaha 0A 1R 19.14P 26.08.2008 6,166 10,900Walpolawatte, Kudawaskaduwa, Wadduwa 2A 0R 25.4P 06.04.2009 28,799 28,800Kahapola, Piliyandala 20A 1R 39.5P 10.04.2009 114,429 137,11997, Station Road, Kandana 1A 1R 9.84P 27.10.2008 139,319 150,850161, Galle Road, Wellawatta 0A 1R 27.48P 23.11.2009 232,099 233,429520,812 561,098Bank is confident on the valuation carried out on above dates and the values have not significantly changedas at the Balance Sheet date.

Seylan Bank PLC Annual Report 2009 187Notes to the Consolidated Financial Statements25.b Investment Properties (Group) - 2009GROUPCostValuationMarketValueAddress Extent Date of Valuation Rs. ’000 Rs. ’000Kohalwila Road, Gonawala, Gampaha 0A 1R 19.14P 26.08.2008 6,166 10,900Walpolawatte, Kudawaskaduwa, Wadduwa 2A 0R 25.4P 06.04.2009 28,799 28,800Kahapola, Piliyandala 20A 1R 39.5P 10.04.2009 114,429 137,11997, Station Road, Kandana 1A 1R 9.84P 27.10.2008 139,319 150,850161, Galle Road, Wellawatta 0A 1R 27.48P 23.11.2009 232,099 233,42990, Galle Road, Colombo 3Seylan Towers (West Tower)** 54,897.52 Sq.Ft 29.12.2009 1,022,792 1,151,494257, Union Place, Colombo 2 52.27P 28.12.2008 204,535 250,2561,748,139 1,962,848** The rent income from the Seylan Towers (West Tower) for the year 2009 is Rs. 54.8 Mn. - (2008 Rs. 53.16 Mn.).BANKGROUP2009 2008 2009 2008(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’00026. Deferred TaxAtionBalance Brought Forward 91,582 – 95,790 13,332Transferred from Deferred Tax Liability – (93,684) – (93,684)Charge/(Reversal) for the Year - (Note 11) 362,631 185,266 358,874 176,142Adjustment for Seylan Merchant Bank PLC – – (304) –Balance Carried Forward - (Note 26.a & 26.b) 454,213 91,582 454,360 95,790TemporaryDifferenceRs. ‘00026.a Analysis of Deferred Tax Assets and LiabilitiesDeferred Tax - Liability2009 - BANK 2008 - BANKTemporaryTax DifferenceRs. ‘000 Rs. ‘000TaxRs. ‘000Property, Plant & Equipment 1,060,002 371,000 1,083,333 379,167Lease Rentals 242,702 84,946 289,417 101,2961,302,704 455,946 1,372,750 480,463Deferred Tax - AssetsDefined Benefit Obligation* – – 614,318 215,012Unclaimed Bad Debt Provision - Specific 2,451,368 857,979 874,778 306,172Bad Debt Provision - General** 149,087 52,180 128,474 44,966Tax Losses Carried Forward – – 16,843 5,8952,600,455 910,159 1,634,413 572,045Net Deferred Tax Assets/Liabilities - (Note 26.a.1) 1,297,751 454,213 261,663 91,582

188Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial Statements26.a.1 Movement in Temporary DifferencesDeferred Tax - Liability2009 - BANK 2008 - BANKBalance as at Recognised Balance as at Balance as at Recognised Balance as at1st January in Profit or Loss 31st December 1st January in Profit or Loss 31st DecemberRs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000Property, Plant &Equipment 1,083,333 (23,331) 1,060,002 949,568 133,765 1,083,333Lease Rentals 289,417 (46,715) 242,702 182,810 106,607 289,4171,372,750 (70,046) 1,302,704 1,132,378 240,372 1,372,750Deferred Tax - AssetsDefined BenefitObligation* 614,318 (614,318) – 635,060 (20,742) 614,318Unclaimed Bad DebtProvision - Specific 874,778 1,576,590 2,451,368 – 874,778 874,778Bad Debt Provision -General** 128,474 20,613 149,087 377,468 (248,994) 128,474Tax Losses CarriedForward 16,843 (16,843) – – 16,843 16,8431,634,413 966,042 2,600,455 1,012,528 621,885 1,634,413Net Deferred TaxAssets/Liabilities 261,663 1,036,088 1,297,751 (119,850) 381,513 261,6632009 - GROUP 2008 - GROUPTemporaryTax DifferenceRs. ‘000 Rs. ‘000TemporaryDifferenceRs. ‘000TaxRs. ‘00026.b Analysis of Deferred Tax Assets and LiabilitiesDeferred Tax - LiabilityProperty, Plant & Equipment 1,062,455 371,859 1,071,311 374,959Lease Rentals 242,702 84,946 289,417 101,2961,305,157 456,805 1,360,728 476,255Deferred Tax - AssetsDefined Benefit Obligation* 2,874 1,006 614,318 215,012Unclaimed Bad Debt Provision - Specific 2,451,368 857,979 874,778 306,172Bad Debt Provision - General 149,087 52,180 128,474 44,966Tax Losses Carried Forward – – 16,843 5,8952,603,329 911,165 1,634,413 572,045Net Deferred Tax Assets/Liabilities (Note 26.b.1) 1,298,172 454,360 273,685 95,790

Seylan Bank PLC Annual Report 2009 189Notes to the Consolidated Financial Statements26.b.1 Movement in Temporary DifferencesDeferred Tax - Liability2009 - GROUP 2008 - GROUPBalance as at Recognised Balance as at Balance as at Recognised Balance as at1st January in Profit or Loss 31st December 1st January in Profit or Loss 31st DecemberRs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000Property, Plant &Equipment 1,071,311 (8,856) 1,062,455 949,568 121,743 1,071,311Lease Rentals 289,417 (46,715) 242,702 182,810 106,607 289,4171,360,728 (55,571) 1,305,157 1,132,378 228,350 1,360,728Deferred Tax - AssetsDefined BenefitObligation* 614,318 (611,444) 2,874 635,060 (20,742) 614,318Unclaimed Bad DebtProvision - Specific 874,778 1,576,590 2,451,368 – 874,778 874,778Bad Debt Provision -General** 128,474 20,613 149,087 377,468 (248,994) 128,474Tax Losses CarriedForward 16,843 (16,843) – – 16,843 16,8431,634,413 968,916 2,603,329 1,012,528 621,885 1,634,413Net DeferredTax Assets/Liabilities 273,685 1,024,487 1,298,172 (119,850) 393,535 273,685* Defined Benefit Obligation (Gratuity Provision)The Bank has a separate Gratuity Trust Fund which was approved by the Commissioner General of Inland Revenue. As per the approval,Bank could transfer Gratuity Provision of 62.5% of the last month’s salary of the year and deduct from the tax computation. Therefore,temporary differences have not arisen.** General ProvisionRecognition of deferred tax assets arising from General Provision at Balance Sheet date was limited to non-performing ratio of thetemporary difference. In management’s view the Bank’s NPA Ratio as at Balance Sheet date is an indicator of deferred tax assets whichcould be recovered in the future periods.The Bank has recognised deferred tax assets on the General Provision of Rs. 149,086,976 (Amount not recognised - Rs. 360,089,806).Seylan Developments PlcIn accordance with the BOI agreement dated 30th March 1993, the profits and income of the Companyare exempt from taxation until the year 2011 and at the expiry of the said period the following options areavailable for the Company.(a) Income tax payable for the Year of Assessment shall be computed at 2% of the turnover of the Companyfor 15 years;(b) The provisions of the Inland Revenue Laws for the time being imposed shall apply.In the event the Company elects option (a) no Deferred Tax Liability will arise even after the expiry of thetax exemption period.The Company needs to make the election only 90 days prior to the expiration of the said tax exemptionperiod after evaluating all tax implications prevailing at that time. Therefore, no provision has been madein the Financial Statements by the Company for Deferred Tax Liability which could be arised after the taxexemption period in the event the Company elects option (b).

190Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial Statements27. Property, Plant & EquipmentBank Freehold Freehold Computer Machine/Land Building Equipment EquipmentRs. ’000 Rs. ’000 Rs. ’000 Rs. ’000Cost/ValuationBalance as at 01st January 387,214 946,867 4,976,594 1,157,904Additions & Improvements 39,418 13,597 117,544 28,100Disposals – – (342,479) (11,372)Transfers – – (2,802) 1,811As at 31st December 426,632 960,464 4,748,857 1,176,443Accumulated DepreciationBalance as at 01st January – 96,863 2,845,444 894,823Charge for the year – 24,390 536,808 91,130Disposals – – (152,365) (11,332)Transfers – (10) 17,816 (22,695)As at 31st December – 121,243 3,247,703 951,926Carrying Amount as at 31.12.2009 426,632 839,221 1,501,154 224,517Carrying Amount as at 31.12.2008 387,214 850,004 2,131,150 263,081Group Freehold Freehold Computer Machine/Land Building Equipment EquipmentRs. ’000 Rs. ’000 Rs. ’000 Rs. ’000Cost/ValuationBalance as at 01st January 387,214 1,696,286 5,092,782 1,276,036Additions & Improvements 39,418 13,597 118,175 28,122Disposals – – (342,479) (11,525)Transfers – – (2,802) 1,811Adjustment on Deconsolidation – – (84,342) (29,611)As at 31st December 426,632 1,709,883 4,781,334 1,264,833Accumulated DepreciationBalance as at 01st January – 133,904 2,918,842 943,928Charge for the Year – 33,607 539,490 97,960Disposals – – (152,365) (11,371)Transfers – (10) 17,816 (22,695)Adjustment on Deconsolidation – – (51,984) (20,362)As at 31st December – 167,501 3,271,799 987,460Carrying Amount as at 31.12.2009 426,632 1,542,382 1,509,535 277,373Carrying Amount as at 31.12.2008 387,214 1,562,382 2,173,940 332,108

Seylan Bank PLC Annual Report 2009 191Notes to the Consolidated Financial StatementsFurniture/ Motor Leased Capital Work- 31.12.2009 31.12.2008Fittings Vehicles Assets in-Progress Total Total(Reclassified)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000946,501 434,451 57,903 – 8,907,434 7,916,73527,331 238 – 1,007 227,235 1,456,408(12,427) (17,480) (40) – (383,798) (465,709)1,136 – (145) – – –962,541 417,209 57,718 1,007 8,750,871 8,907,434708,568 230,524 57,859 – 4,834,081 4,296,13463,517 69,455 18 – 785,318 707,205(11,940) (16,885) (40) – (192,562) (169,258)14,674 (9,640) (145) – – –774,819 273,454 57,692 – 5,426,837 4,834,081187,722 143,755 26 1,007 3,324,034 –237,933 203,927 44 – – 4,073,353Furniture/ Motor Leased Capital Work- 31.12.2009 31.12.2008Fittings Vehicles Assets in-Progress Total Total(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000988,536 465,136 75,519 – 9,981,509 8,957,23427,384 238 – 1,007 227,941 1,498,408(12,536) (22,434) (2,085) – (391,059) (473,113)1,136 – (145) – – (1,020)(28,782) (9,515) – – (152,250)975,738 433,425 73,289 1,007 9,666,141 9,981,509735,416 247,037 63,770 – 5,042,897 4,464,22464,851 73,667 3,309 – 812,884 752,954(11,973) (21,508) (1,842) – (199,059) (174,281)14,674 (9,640) (145) – – –(20,655) (9,153) – – (102,154)782,313 280,403 65,092 – 5,554,568 5,042,897193,425 153,022 8,197 1,007 4,111,573 –253,120 218,099 11,749 – – 4,938,612

192Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial Statements27.a Fully Depreciated AssetsThe initial cost of fully-depreciated plant, machinery, equipment & furniture as at 31st December 2009which are still in use as at Balance Sheet date:BANK2009Rs. ’000GROUP2009Rs.'000Buildings – –Computer Equipment 1,976,346 1,985,179Office Machines & Equipment 679,732 680,590Fixtures, Fittings & Furniture 605,518 608,508Motor Vehicles 70,358 70,358Leased Assets 57,626 57,6263,389,580 3,402,26127.a.1 Temporarily Idle Plant & EquipmentThe following assets as at 31.12.2009 have been identified as temporarily idle plant & equipment.CostRs. ‘000BANKDepreciationRs. ‘000NetBook ValueRs. ‘000CostRs. ‘000GROUPDepreciationRs. ‘000NetBook ValueRs. ‘000ATM Machines 7,834 1,814 6,020 7,834 1,814 6,020Mobile Banking Equipment 31,454 6,870 24,584 31,454 6,870 24,58439,288 8,684 30,604 39,288 8,684 30,60427.b Freehold/Leasehold Land & Buildings - BankAddress Extent Cost/ValuationAccumulatedDepreciationNet BookValue as at31.12.2009Rs. ’000 Rs. ’000 Rs. ’000Free HoldMt. Lavinia198, Galle Road, Ratmalana 25.75 P 23,908 3,147 20,761Badulla10, Cocowatte Road, Badulla 1 R 6.40 P 57,866 2,065 55,801Kochchikade66, 66 1/1, 68 2/1, Chilaw Road, Kochchikade 8.0 P 5,228 868 4,360Avissawella71, Ratnapura Road, Avissawella 19.13 P 9,574 1,888 7,686Grandpass401, Prince of Wales Avenue, Colombo 14 1R 6.0 P 44,372 201 44,171Hingurakgoda13 & 14, Airport Road, Hingurakgoda 15.84 P 12,000 731 11,269Bandarawela240, Badulla Road, Bandarawela 23.20 P 36,898 1,204 35,694Sarikkamulla97, Old Galle Road, Sarikkamulla 11.56 P 4,059 1,143 2,916

Seylan Bank PLC Annual Report 2009 193Notes to the Consolidated Financial StatementsAddress Extent Cost/ValuationAccumulatedDepreciationNet BookValue as at31.12.2009Rs. ’000 Rs. ’000 Rs. ’000Tissamaharama547, Debarawewa, Tissamaharama 0.091 H 11,193 483 10,710Raddolugama171, National Housing Scheme, Raddolugama 12.80 P 11,500 476 11,024Nuwara Eliya12, Lawson Street, Nuwara Eliya 20.28 P 6,365 1,602 4,763Maradagahamula150, Divulapitiya Road, Maradagahamula 35.0 P 7,569 1,197 6,372Anuradhapura23-A1, Anuradhapura 43.65 P 3,500 609 2,891Embilipitiya53 & 53/1, New Town Road, Embilipitiya 22.1 P 27,295 916 26,379Nugegoda211, High Level Road, Nugegoda 14.0 P 36,061 2,258 33,803Nawalapitiya77/1, 79, Dolosbage Road, Nawalapitiya 10.52 P 5,719 422 5,297Ratnapura5, Inner Circular Road, Ratnapura 9.31 P 24,552 1,238 23,314EmbilipitiyaPettigala Road, Embilipitiya 32.9 P 5,500 – 5,500Private Banking2, Deal Place, Colombo 3 19.0 P 192,095 467 191,628Gampola44, Kandy Road, Gampola 13.5 P 15,599 1,030 14,569Negombo115, Rajapaksa Broadway, Negombo 29.15 P 51,999 52 51,947Head Office90, Galle Road, Colombo 3 (Level - 1, 2, 13, 14) 31,704 794,244 99,246 694,998Square FeetTotal Freehold Land & Buildings - Bank 1,387,096 121,243 1,265,853Total Freehold Buildings - Seylan Developments PLC 749,419 46,258 703,161Total Freehold Land & Buildings - Group 2,136,515 167,501 1,969,014Leasehold Properties - (Note 28)Nuwara Eliya48 & 48/1, Park Road, Nuwara Eliya 19.08 P 66,148 3,065 63,083Total Leasehold Land & Buildings - Bank 66,148 3,065 63,083Seylan Tower Land90, Galle Road, Colombo 3 640,549 39,412 601,137Total Leasehold Land - Seylan Developments PLC 640,549 39,412 601,137Total Leasehold Land & Buildings - Group 706,697 42,477 664,220Total Land & Buildings - Group 2,843,212 209,978 2,633,234

194Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial StatementsCost/ValuationRs. ‘000BANKDepreciationRs. ‘000Net Book ValueRs. ‘00027.c Summary of Freehold/Leasehold PropertiesFreehold Land 426,632 – 426,632Freehold Building 960,464 121,243 839,2211,387,096 121,243 1,265,853Leasehold Land 22,603 – 22,603Leasehold Building 43,545 3,065 40,48066,148 3,065 63,083Total - Bank 1,453,244 124,308 1,328,936Leasehold Land - Seylan Developments PLC 640,549 39,412 601,137Freehold Building - Seylan Developments PLC 749,419 46,258 703,161Total Land & Buildings - Group 2,843,212 209,978 2,633,23427.d Revaluation - Land & BuildingThe Bank’s land & building were revalued in year 2006 by a qualified valuer. Valuation was made on thebasis of open market value and the revaluation surplus was transferred to the revaluation reserve.If land & building were stated at historical cost, the amounts would have been as follows:BANKLand Building TotalRs. ‘000 Rs. ‘000 Rs. ‘000Properties RevaluedCostFreehold 22,204 61,588 83,792Leasehold 8,894 31,596 40,490Accumulated DepreciationFreehold – (12,490) (12,490)Leasehold – (1,153) (1,153)Carrying Value 31,098 79,541 110,639Properties Not RevaluedCostFreehold 364,726 827,497 1,192,223Leasehold – – –Accumulated DepreciationFreehold – (114,130) (114,130)Leasehold – – –Carrying Value 364,726 713,367 1,078,093Total Carrying Value 395,824 792,908 1,188,732

Seylan Bank PLC Annual Report 2009 195Notes to the Consolidated Financial Statements28. Leasehold RightsCost/ValuationBANKGROUP2009 2008 2009 2008(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000Balance as at 01st January 66,148 65,981 706,697 706,530Additions for the Year – 167 – 167As at 31st December 66,148 66,148 706,697 706,697Accumulated DepreciationBalance as at 01st January 1,983 1,291 33,517 24,942Charge for the Year 1,082 692 8,960 8,575As at 31st December 3,065 1,983 42,477 33,517Carrying Amount as at 31st December 63,083 64,165 664,220 673,180Bank - Leasehold property consists of the property situated at Park Road, Nuwara Eliya acquired in the year 2001.Seylan Developments PLC - Year 1993, Seylan Developments PLC, a subsidiary of Seylan Bank PLC acquired theleasehold rights of the land situated at No. 90, Galle Road, Colombo 03 for a period of 94 years to construct theSeylan Towers.BANKGROUP2009 2008 2009 2008(Reclassified)(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’00029. Intangible AssetsDeferred Expenses/Others – 25,410– – – 25,41030. Other AssetsDeposits & Prepayments 461,808 455,423 482,080 486,021Interest Receivable 1,289,039 989,650 1,289,039 1,071,409Clearing House Balance 1,189,688 969,160 1,164,869 969,160Inventories 334,630 1,383,405 335,904 1,384,676Investment in Projects – – 209,500 459,007Sundry Debtors 99,130 137,488 115,447 229,212Other Receivables 133,513 178,069 272,489 225,781Due From Trust Companies 124,154 124,154 124,154 124,154Others 249,528 692,396 202,326 926,1353,881,490 4,929,745 4,195,808 5,875,555

Seylan Bank PLC Annual Report 2009 197Notes to the Consolidated Financial StatementsBANKGROUP2009 2008 2009 2008(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’00033. Group Balances PayableSeylan Merchant Bank PLC – 92,804 – –Seylan Developments PLC 3,509 2,706 – –Seylan Bank Asset Management Limited 6,066 1,428,482 – –9,575 1,523,992 – –34. Subordinated Debentures34.a Advance Received on Debenture IssueThis balance consists of cash received in advance for debentures in 2008 which was allotted after theBalance Sheet date (12th January 2009) of the previous year.34.b DebenturesYear ofIssueRedemptionPeriodPrivate/PublicIssueRateAnnual Monthly Floating(Annual)Floating(03 Months)BANKAmountOutstandingas at 31.12.2009Rs. ’000GROUPAmountOutstandingas at 31.12.2009Rs. ’0002005 2005-10 Private Issue 14.50% – – – 699,000 699,0002006 2006-11 Public Issue 13.50% 13.00% 15.74% – 1,257,315 1,257,3152006 2006-11 Private Issue 15.00% 14.00% 12.71% – 162,250 162,2502007 2007-12 Public Issue - I 16.75% 15.75% 20.13% – 749,400 749,4002007 2007-12 Public Issue - II 18.00% 17.00% 21.56% 14.36% 559,285 559,2852007 2007-12 Private Issue 19.50% – – – 100,000 100,0002008 2008-13 Private Issue 20.00% 18.50% 22.50% – 72,550 72,5502008 2008-13 Public Issue 21.50% 20.50% 19.06% 12.78% 630,565 630,5654,230,365 4,230,365BANKGROUP2009 2008 2009 2008(Reclassified)(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’00035. Other LiabilitiesAccrued Expenses and Interest Payable 4,283,666 4,347,620 4,308,554 4,365,497Margin Accounts 604,512 693,321 604,512 693,321Deposit Funding Accounts 1,189,313 988,225 1,189,313 988,225Dividend Payable 22,668 16,393 23,314 24,802Provision for Defined BenefitObligations (Net) (Note 35.a) 36,322 526,172 50,714 552,551Sundry Creditors 422,149 1,622,841 451,536 1,645,829Value Added Tax & Other Statutory Payables 350,987 (78,671) 526,782 38,426Cheques & Drafts Payable 711,826 2,223,506 711,826 2,223,506Unredeemed Debentures – 104,990 – 104,990Others 581,572 810,168 626,636 1,264,3038,203,015 11,254,565 8,493,187 11,901,450

198Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial Statements35.a Defined Benefit ObligationsThe Bank pays half-a-month’s salary (last drawn) for each completed year of service as gratuity foremployees who has worked for more than 5 years at the time of retirement/resignation.Board of directors of the Bank at its meeting held on 24th March 2009, decided to change the previouspolicy of gratuity payments of paying one month salary (last drawn) to resigned staff members who havecompleted ten years of service in the Bank with effect from 5th March 2009.BANKGROUP2009 2008(Reclassified)2009 2008(Restated)Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘00035.a.1 The Amount Recognised in the Balance SheetPresent Value of Defined BenefitObligations (Note 35.a.3) 663,119 1,258,285 693,568 1,300,355Fair Value of Plan Assets (Note 35.a.4) (595,920) (542,563) (611,977) (558,254)Unrecognised Actuarial Gain or (Loss) (Note 35.a.5) (37,966) (189,550) (37,966) (189,550)Unrecognised Past Service GainNon-Vested (Note 35.a.6) 7,089 – 7,089 –Provision for Defined Benefit Obligations 36,322 526,172 50,714 552,55135.a.2 Plan Assets Consists the FollowingBalance with Banks 28,729 4,228 44,786 19,126Investment in Treasury Bonds 567,191 530,463 567,191 530,463Interest Receivable – 7,872 – 8,665Provision for Defined Benefit Obligations 595,920 542,563 611,977 558,254Plan assets are held by an approved external gratuity fund.35.a.3 Movement in the Present Value of Defined Benefit ObligationsLiability for Defined Benefit Obligationsas at 1st January 1,258,285 1,276,475 1,300,355 1,304,148Effect of Change in Accounting Policy due toAdoption of SLAS 16 (Revised 2006) – (236,734) – (229,171)Revised Balance as at 1st January 1,258,285 1,039,741 1,300,355 1,074,977Current Service Cost 52,295 98,791 55,481 102,259Interest Cost 150,994 124,769 155,012 128,938Past Service Cost/(Gain) Non-Vested Benefits (10,633) – (10,633) 3,688Past Service Cost/(Gain) Vested Benefits (588,269) – (588,269) –Transferred from Gratuity Trust Fund – – – 468Unrecognised Actuarial (Gains)/Losses (149,068) 131,689 (148,383) 130,260Payments Made (Including benefitspaid by the Plan) in 2009 (50,485) (136,705) (61,037) (140,235)Adjustment on Deconsolidation (8,958) –Liability for Defined Benefit Obligationsas at 31st December 663,119 1,258,285 693,568 1,300,355

Seylan Bank PLC Annual Report 2009 199Notes to the Consolidated Financial StatementsBANKGROUP2009 2008(Reclassified)2009 2008(Restated)Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘00035.a.4 Movement in Plan AssetsFair Value of Plan Assets as at 1st January 542,563 421,215 558,254 434,759Effect of Change in Accounting Policy due toAdoption of SLAS 16 (Revised 2006) – 88,917 – 88,917Revised Balance as at 1st January 542,563 510,132 558,254 523,676Expected Return on Plan Assets 75,959 92,181 78,085 94,376Contribution Paid into Plan 31,739 134,816 31,739 134,816Benefits Paid by the Plan (50,485) (136,705) (61,169) (136,705)Unrecognised Actuarial Gains/(Loss)on Plan Assets (3,856) (57,861) 5,068 (57,909)Fair Value of Plan Assets at 31st December 595,920 542,563 611,977 558,25435.a.5 Unrecognised Actuarial (Gain) or LossBalance as at 1st January 189,550 – 189,550 –Actuarial (Gain)/Loss for Year - Obligation (149,068) 131,689 (148,524) 131,689Actuarial (Gain)/Loss for Year - Plan Assets 3,856 57,861 3,856 57,861Actuarial Gain/(Loss) Immediately Recognised (6,372) – (6,916) –Balance as at 31st December 37,966 189,550 37,966 189,55035.a.6 Unrecognised Past Service Cost Non-Vested BenefitsBalance as at 1st January – – – –Past Service Cost/(Gain) Non-Vested Benefits** 10,633 – 10,633 –Amount Recognised in the Income Statement (3,544) – (3,544) –Balance as at 31st December 7,089 – 7,089 –** The Past Service Cost on Non-Vested Benefits is recognised on a straight line basis over 3 years.35.a.7 Amount Recognised in the Income StatementCurrent Service Cost 52,295 98,791 55,481 102,259Interest Cost 150,994 124,769 155,012 128,938Expected Return on Plan Assets (75,959) (92,181) (78,085) (94,376)Actuarial (Gains)/Loss Immediately Recognised 6,372 – (1,867) 767Past Service Cost/(Gain) Vested Benefits (588,269) – (588,269) –Past Service Cost/(Gain) Non-Vested Benefits (3,544) – (3,544) 3,688(458,111) 131,379 (461,272) 141,276

200Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial StatementsBalance beforeReducing of Benefitsfor Future ServiceRs. ’000Gain onReductionof BenefitsRs. ’000Balance afterReducing theBenefitsRs. ’00035.a.8 Movement in Defined Benefit Plan with theReduction of Benefits - BankNet Present Value of Obligations (Note 35.a.3) 1,258,285 595,166 663,119Fair Value of Plan Assets (Note 35.a.4) (542,563) 53,357 (595,920)715,722 648,523 67,199Unrecognised Actuarial Gains (Note 35.a.5) 189,550 151,584 37,966Unrecognised Past Service GainNon-Vested (Note 35.a.6) – (7,089) 7,089Adjustment to Net Liability Recognisedin Balance Sheet 526,172 489,850 36,322BANK2009 200835.a.9 Actuarial Assumptions- BankNormal Retirement Age 55 years 55 yearsRate of Discount 11% 12%Salary Increase 5%,7.5% and thereafter 8% 10% increase per annum forper annum. (Next increment first 5 years and 8% perdue on 1st July 2010)annum thereafterBANKGROUP2009 2008 2009 2008(Reclassified)(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’00036. Stated CapitalOrdinary Shares - Voting (Note 36.a) 3,461,000 435,600 3,461,000 435,600Ordinary Shares - Non-Voting (Note 36.b) 1,235,600 1,235,600 1,235,600 1,235,600Preference Shares - Non-Redeemable,Non-Cumulative, Non-Convertible andNon-Voting (Note 36.c) 33,901 33,901 33,901 33,901Share Premium (Note 36.d) 837,319 837,319 837,319 837,3195,567,820 2,542,420 5,567,820 2,542,42036.a Ordinary Shares - VotingBalance as at 01st January -43,560,000 Ordinary Shares 435,600 435,600 435,600 435,600Issued during the year -86,440,000 Ordinary Shares of Rs. 35/- each 3,025,400 – 3,025,400 –130,000,000 Ordinary Shares - Voting 3,461,000 435,600 3,461,000 435,60036.b Ordinary Shares - Non-VotingBalance as at 01st January -123,560,000 Ordinary Shares 1,235,600 1,235,600 1,235,600 1,235,600123,560,000 Ordinary Shares - Non-Voting 1,235,600 1,235,600 1,235,600 1,235,600

Seylan Bank PLC Annual Report 2009 201Notes to the Consolidated Financial StatementsBANKGROUP2009 2008 2009 2008(Reclassified)(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’00036.c Preference SharesBalance as at 01st January -3,390,100 Shares of Rs. 10/- each 33,901 33,901 33,901 33,9013,390,100 Preference Shares 33,901 33,901 33,901 33,90136.d Movement in Share PremiumBalance as at 01st January 837,319 837,319 837,319 837,319Balance as at 31st December 837,319 837,319 837,319 837,319BANK GROUP2009 2008 2009 2008(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’00037. Statutory Reserve FundBalance as at 01st January 479,754 468,250 481,650 470,146Add: Transferred During the Year 27,165 ** 7,762 ** 27,165 7,762Adjustments During the Year – 3,742 – 3,742Adjustment on Deconsolidation – – (1,896) –Balance as at 31st December 506,919 479,754 506,919 481,650** 5% of Net Profit After TaxStatutory Reserve Fund represents the statutory requirement in terms of the Section 20 (1) and (2) of the Banking Act No. 30 of 1988.BANKGROUP2009 2008 2009 2008(Reclassified)(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’00038. reservesCapital Reserve (Note 38.a) 418,021 418,021 418,021 418,021Revaluation Reserve (Note 38.b) 125,238 125,238 483,892 490,562General Reserve (Note 38.c) 33,787 33,787 33,787 33,787Capital Redemption Reserve Fund (Note 38.d) – – 255,213 258,997Special Risk Reserve (Note 38.e) – – 42,595 4,515Reserve on Script Issue – – – 3,521Retained Profits 3,930,689 3,420,791 3,800,891 3,553,0524,507,735 3,997,837 5,034,399 4,762,45538.a Movement in Capital ReserveBalance as at 01st January 418,021 418,021 418,021 418,021Balance as at 31st December 418,021 418,021 418,021 418,021Consists of the Debenture Redemption Reserve Fund of Rs. 400 Mn. transferred to Capital Reserve in 2004.Debenture Redemption Reserve Fund was created for the redemption of five-year debentures amounting toRs. 400 Mn. issued in November 1999. Balance consisting of Rs. 18 Mn. transferred to Capital Reserve in 1991.

202Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial StatementsBANKGROUP2009 2008 2009 2008(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’00038.b Movement in Revaluation ReserveBalance as at 01st January 125,238 198,918 490,562 564,242Transferred to/from Revaluation Reserve – (73,680) (6,670) (73,680)Balance as at 31st December 125,238 125,238 483,892 490,562In addition to the Bank’s Revaluation Reserve, Group includes the surplus on revaluation of fixed assets ofSeylan Developments PLC.BANKGROUP2009 2008 2009 2008(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’00038.c Movement in General ReserveBalance as at 01st January 33,787 33,787 33,787 33,787Balance as at 31st December 33,787 33,787 33,787 33,787Consist of Rs. 25 Mn. transferred in 1995 to General Reserve, Rs. 2.7 Mn. transferred from Bad DebtsReserve and Rs. 6 Mn. transferred from Contingency Reserve in 2002 to General Reserve.BANKGROUP2009 2008 2009 2008(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’00038.d Movement in Capital RedemptionReserve FundBalance as at 01st January – – 258,997 258,997Add: Transferred during the Year – – – –Less: Adjustment on Consolidation – – (3,784) –Balance as at 31st December – – 255,213 258,997Capital Redemption Reserve Fund was created at the time of redeeming the preference shares ofSeylan Developments PLC.BANKGROUP2009 2008 2009 2008(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’00038.e Movement in Special Risk ReserveBalance as at 01st January – – 4,515 4,515Add: Transferred during the Year – – 38,080 –Balance as at 31st December – – 42,595 4,515According to the circular Ref. No. 08/24/002/005/003 issued by the Central Bank of Sri Lanka, Seylan BankAsset Management Ltd. is required to appropriate 25% of the net profit after tax for the year towards theSpecial Risk Reserve Fund.

Seylan Bank PLC Annual Report 2009 203Notes to the Consolidated Financial Statements39. Commitments and ContingenciesIn the normal course of business, the Bank makes various commitments and incurs certain contingentliabilities with legal recourse to its customers. No material losses are anticipated as a result of thesetransactions.BANKGROUP2009 2008 2009 2008(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’00039.a CommitmentsUndrawn Credit Lines 8,698,972 8,943,671 8,698,972 8,943,671Capital Commitments (Note 40.a) 2,684 143,252 2,684 143,2528,701,656 9,086,923 8,701,656 9,086,92339.b ContingenciesAcceptances 2,781,914 3,544,212 2,781,914 3,544,212Stand by Letters of Credit 283,255 559,581 283,255 559,581Guarantees 7,194,304 8,005,123 7,194,304 8,005,123Documentary Credit 2,007,403 1,983,522 2,007,403 1,983,522Bills for Collection 1,335,048 3,353,715 1,335,048 3,353,715Forward Exchange Contracts (Net) (41,018) 341,299 (41,018) 341,29913,560,906 17,787,452 13,560,906 17,787,452Total Commitments and Contingencies 22,262,562 26,874,375 22,262,562 26,874,37539.c Cases Against the BankIn the normal course of business, the Bank is involved in various types of litigation with borrowers or otherswho have asserted or threatened claims/counter claims against the Bank. Including the following:c. i. Civil Cases1. Some of the appeals relate to cases;• CHC 128/2001 (1) and CHC 14/98 both cases are in appeal. Both appeals not yet listed.• CA (Rev) 1788/04. Appeal pending. Fixed for argument on 12th March 2010.• CHC 157/2001 (1) Case pending in Supreme Court. Case is fixed for argument on 21st June 2010.• HC (Civil) 137/99(1). Judgment delivered in favour of the Bank. Plaintiff appealed against judgment.• DC Colombo 15958/M. Appeal pending.2. DC Mt. Lavinia 4246/03 Case is filed against the Bank claiming wrongful seizure. The case is coming upon 24th March 2010 for inquiry.3. DC Colombo 157/2007 claiming that, Bank had honoured 3rd party cheque which, allegedly forged by thecustomer of our Raddolumgama Branch (RDL) and credited to his account. Trial on 10th March 2010.4. DC Ratnapura 23391/M case filed by customer for wrongful take over of assets not mortgaged. Case isfixed for answer on 12th March 2010.5. CHC Colombo 403/09/MR. Case filed by plaintiff claiming that Bank has not permitted the customer toutilise the facilities and charging high rate of interest. Case is fixed for Answer.

204Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial Statements6. DC Colombo 07219/09/DMR. Case filed by the customer for collecting proceeds of a cheque crediting toa fictitious account. Answer 7th May 2010.7. DC Colombo DSP 212/2009 an enjoining order preventing the Bank from paying monies under the Letterof Credit issued by the Bank to Bank of China. Written submissions on 2nd March 2010 and noticereturnable on the 2nd defendant Veihai Joylong International.8. D C Bandarawela 1687/L to 1695/L (9 cases) occupants before the mortgage have filed actions againstthe Bank. Government intervened and acquired the property and we lodged the claim. Settlement date7th May 2010.9. DC Mt. Lavinia 500/4/P Bank has been added as 13th defendant and 10th defendant had mortgaged theproperty to the Bank. There is no claim against the Bank. Case to be called.10. DC Colombo 26321/M action claiming an ex-gratia payment. Trial fixed.11. CHC 638/09/MR (DC Colombo 6033/SPL) Bank has filed the case for an injunction, counter claim hasbeen made by the defendant.12. CHC 232/2002. This is instituted with regard to sale of shares of Blue Diamond Jewellery World Wide(BDJWL) held as security for the facility of Gold Lada. Action filed for damages claiming from Bank.Calling same. CHC 320/2002 (1) Case is fixed for hearing.13. CHC 243/2002 (1). This action is filed seeking a declaration from Courts that the Bank is not entitled tosell/alienate/transfer shares of the BDJWL company among other claims. Trial on 3rd May 2010.c. ii. Labour Tribunal Cases1. LT 1/377/97. Case filed by an employee. Settlement pending. To be called on 1st March 2010.2. Labour Department Inquiry No. IR/1055/2009 CA Writ 891/2009. Retired employees of Seylan Bank VsSeylan Bank. Labour Commissioner ordered to pay gratuity at the rate of one month salary for each yearof service for the employees who completed ten years service. Bank has filed a writ application in Courtof Appeal.Based on the available information and current status of the above cases, the Bank is not in a position toquantify the potential financial impact if any, as at the Balance Sheet date. Further, based on legal advice theBank does not expect the outcome of any action to have a material effect on the financial position of the Bank.39.d Tax Assessments Against Bank1. Assessment No. VATFS/BFSU/09/130 for VAT on Financial Services for 2007, amounts to Rs. 359,126,131/-.Bank made the appeal on 22nd December 2009, and Department of Inland Revenue acknowledged thesame on 15th January 2010.2. Income Tax for Y/A 2003/2004 amounting to Rs. 190,738,861/- determined by the Commissioner Generalof Inland Revenue, on assessment No. 8224200. Bank has made an appeal to the Board of Review andthe final hearing will be scheduled in April 2010.The Bank is in the view that the above assessments would not have any material impact on theFinancial Statements.

Seylan Bank PLC Annual Report 2009 205Notes to the Consolidated Financial Statements40. CAPITAL COMMITMENTSCapital expenditure approved by the board of directors for which provision has not been made in theseaccounts amounted to approximately:BANKGROUP2009Rs. Mn.2008Rs. Mn.2009Rs. Mn.2008Rs. Mn.40.a Approved and Contracted for 2.684 143.25 2.684 143.2540.b Approved but not Contracted for – 140.54 – 140.5441. Events occurring after balance sheet date(a) The board has approved the amalgamation of Seylan Bank Asset Management Limited with Seylan BankPLC as per the provision of Section 242(i) of the Companies Act No. 07 of 2007. The Central Bank of Sri Lankahas approved in principle the amalgamation of Seylan Bank Asset Management Limited with Seylan BankPLC and the appointment of Seylan Bank PLC as a primary dealer in principle, subject to the fulfilment ofthe terms and conditions applicable to the appointment of Licensed Commercial Banks as Primary Dealersas stipulated in Registered Stock and Securities (Primary Dealers) Regulation No. 01 of 2009 and LocalTreasury Bills (Primary Dealers) Regulation No. 01 of 2009.(b) Subsequent to the year end loan granted to Grameeen Micro Credit Company Limited has beenrestructured as referred in Note 19.f.2.(c) The board of directors of the Bank has recommended a final ordinary dividend of Rs. 0.50 per share for theyear 2009 and to be approved at the Annual General Meeting.Subsequent to the Balance Sheet date, no circumstances have arisen which require adjustments to ordisclosure in the Financial Statement.42. RELATED PARTY TRANSACTIONSa. According to Sri Lanka Accounting Standard 30 (Revised 2005) - Related Party Disclosure, Key ManagementPersonnel are those having authority and responsibility for planning, directing and controlling the activitiesof the entity. Accordingly, the board of directors, General Manager/Chief Executive Officer (GM/CEO) and keyemployees of the Bank holding directorships in subsidiary companies have been classified as Key ManagementPersonnel of the Bank.

206Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial Statementsb. Transactions with Key Management Personnel (KMP)FacilitiesLimitRs. Mn.OutstandingRs. Mn.SecurityMr. Ajita Pasqual Overdraft 1.5 0.819 Lien over REPO for Rs. 1,366,891.23 and for Rs. 250,000Employee ProvidentFund Loan 5.9 5.527 Against Employees Provident Fund balance of Rs. 7,409,465/-Housing Loan- I 6.0 2.736 Primary Mortgage Bond for Rs. 6,000,000/- over the property at KirulaponeTerm Loan – I 3.558 3.092Term Loan – II 0.205 0.187Term Loan – III 0.711 0.677}Lien over deposits for USD 69,417.36 and Rs. 500,500/-Term Loan – IV 2.061 1.886Mr. A. Madurapperuma Employee ProvidentFund Loans 7.060 7.060 Employees Provident Fund balance of Rs. 7,933,950/-Mr. S. Palihawadana Overdraft 0.015 DPN /Overdraft AgreementEmployee ProvidentFund Loans 3.910 3.910 Employees Provident Fund balance of Rs. 4,398,183/-Housing Loan - I 1.582 0.844 Primary Mortgage Bond for Rs. 1,582,000/- over the property at Pita-KottePiyasa Housing Loan 2.375 0.180Housing Loan - II 1.500 1.088 Secondary Mortgage Bond for Rs. 2,375,000/- over the above propertyHousing Loan - III 0.500 0.359DepositsRs. Mn.Mr. E. Narangoda Total 0.396Mr. R. Nadarajah Total 0.246Mr. A.L. Devasurendra Total 0.124Mr. A. Madurapperuma Total 0.950Mr. S. Palihawadana Total 0.272Other InstrumentsMr. E. Narangoda Treasury Bonds 1.821Mr. A.L. Devasurendra RepoInterest Earned onMargin Trading Shares0.1051.886}

Seylan Bank PLC Annual Report 2009 207Notes to the Consolidated Financial Statementsc. Accommodation Granted to KMP for Credit CardsName of Key Management PersonnelCredit Card LimitRs. ’000OutstandingRs. ’000Mr. E. Narangoda 500 NilMr. R. Nadarajah 500 6Mr. N.M. Jayamanne PC 500 194Mr. P.L.P. Withana –Mr. F.N. Goonewardena** –Rear Admiral (Rtd.) B.A.J.G. Peiris 500 NilMr. P.G.S. Kariyawasam –Dr. N.H. Godahewa –Mr. A.L. Devasurendra 500 NilMr. I.C. Nanayakkara –Security TypeMr. Ajita Pasqual 1,750 277 Secured on TreasuryBond of Rs. 1,000,000/-Mr. A. Madurapperuma 600 33Mr. S. Palihawadana 500 116** Mr. F.N. Goonewardena resigned with effect from 3rd December 2009.d. Compensation to KMP2009 2008Rs. MnRs. MnShort-Term Employee Benefits 28.63 66.83Post-Employement Benefits 3.98 26.56In addition to their salaries Bank also provides non-cash benefits to the directors and executive officersand contributes to a post-employment define benefit plan on their behalf. Directors emoluments aredisclosed in Note 7 to the Financial Statements.e. All the other interests of each director, direct or indirect in financial and other arrangements are disclosedunder Note 43 - Other Related Party Transactions.

208Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial Statements43. Other Related Party TransactionsThe Bank had the following financial dealings during the year 2009 with companies which are considered,related parties and unless otherwise stated, transactions were carried out in the ordinary course of businesson an arm’s-length basis at commercial rates with the companies mentioned below. The parties given beloware considered related parties mainly due to significant influence arising as a result of common directorshipsand through shareholdings. These companies, names of the directors and the nature of transactions enteredinto are listed below:Party/PartiesAccommodatedName of Director/Key ManagementPersonnelRelationshipDeposit Aggregate Amount of Accommodationoutstanding as at 31.12.2009Rs. Mn.Nature ofAccommodationLimitRs. Mn.FundedRs. Mn.Non-FundedRs. Mn.Interest inSuspenseProvisionfor the YearRs. Mn.Bad &DoubtfulDebtProvisionfor the YearRs. Mn.(a) Direct Subsidiaries of the BankSeylan Development PLC Rear Admiral (Rtd.)B.A.J.G. PeirisChairman Demand Deposit 3.509 Overdraft 66.000 64.802 8.998Term Loan 165.000 162.3973.509 Guarantee 10.245231.000 227.199 10.245 8.998Mr. R. NadarajahDirectorMr. A. MadurapperumaDirectorMr. S. PalihawadanaDirectorPrimary Mortgage Bondfor Rs. 17.6 Mn.units 3 and 4.Additional MortgageBond - Rs. 9.4 Mn.Market Value -Rs. 42.6 Mn. ForcedSale Value Rs. 36 Mn.Seylan Towers,Primary MortgageBond for Rs. 21 Mn.Unit 8 - Market Value -Rs. 25 Mn., Forced SaleValue - Rs. 24 Mn.Mortgage Bond forRs. 187 Mn. obtainedover Units 27, 30 and 33depicted in PlanNo. 59/2004Forced Sale Value -Rs. 275 Mn.Market Value Rs. 300 Mn.Seylan Bank AssetManagement LimitedMr. E. NarangodaChairman Demand Deposit 6.0666.066Mr. R. NadarajahDirectorMr. A. PasqualDirectorMr. A. MadurapperumaDirectorMr. S. PalihawadanaDirectorReverse Repo 459.4 Mn.

Seylan Bank PLC Annual Report 2009 209Notes to the Consolidated Financial StatementsServices Obtained/Other TransactionsNature of ServiceAmount Payable/ReceivableAmountPaid/ReceivedRs. Mn.Rs. Mn.ExpensesBank Charges 0.143Rent 92.217Management Fees 4.000Work Order Jobs 0.768Interest Expenses 0.02997.157Interest Income 40.829 10.48340.829 10.483Rent Deposit Rs. 81 Mn.Interest Paid 82.739Interest Payable 0.2270.227 82.739Reverse Repo Income 13.415Branch Commission 0.521Over Draft Interest Income 0.00113.937

210Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial StatementsParty/PartiesAccommodatedName of Director/Key ManagementPersonnelRelationshipDeposit Aggregate Amount of Accommodationoutstanding as at 31.12.2009Rs. Mn.Nature ofAccommodationLimitRs. Mn.FundedRs. Mn.Non-FundedRs. Mn.Interest inSuspenseProvisionfor the YearRs. Mn.Bad &DoubtfulDebtProvisionfor the YearRs. Mn.(b) Trust Companies and Funds set up under the BankSeylan Bank Employees’ Mr. E. NarangodaGratuity Trust Fund TrusteeMr. R. NadarajahTrustee Demand Deposit 22.601 Investment in Treasury Bond amounting to face value Rs. 568.423 Mn.22.601 Funds transferred by Seylan Bank PLC amounting to Rs. 31.758 Mn.Rear AdmiralB.A.J.G. PeirisTrusteeMr. F.N. GoonewardenaTrustee (Resignedw.e.f. 03.12.2009)Seylan Bank Employees’Provident FundMr. Ajita PasqualTrusteeMr. S. PalihawadanaTrustee Savings Account 1.821.235 Investment in Seylan Bank PLC Debenture amounted to Rs. 220 Mn.1,821.235Sesot (Pvt) LimitedMr. E. NarangodaChairmanDemand Deposit 0.064 No. of Voting Shares - 2,252,900Seyfest (Pvt) LimitedSotse (Pvt) Limited0.064 Rs. 52.153 Mn. Payable to Seylan Bank PLCMr. R. NadarajahDirectorMr. E. NarangodaChairmanMr. R. NadarajahDirector Demand Deposit 0.067 Rs. 23.2 Mn. Payable to Seylan Bank PLC0.067 No. of Voting Shares - 2,977,996Mr. E. NarangodaChairman Term Loan 38.550 30.22538.550 30.225Loan Agreement Form for Rs. 38.8 Mn.Mr. R. NadarajahDirector No. of Voting Shares - 962,331Rs. 8 Mn. Payable to Seylan Bank PLCSeyshop (Pvt) LimitedSeybest (Pvt) LimitedEsots (Pvt) LimitedMr. E. NarangodaChairman Term Loan 54.375 30.93754.375 30.937Loan Agreement Form for Rs. 55.1 Mn.Mr. R. NadarajahDirector No. of Voting Shares - 2,132,900Rs. 14.10 Mn. Payable to Seylan Bank PLCMr. E. NarangodaChairman Term Loan 54.510 30.89854.510 30.898Loan Agreement Form for Rs. 55.1 Mn.Mr. R. NadarajahDirector No. of Voting Shares - 2,132,900Rs. 14.10 Mn. Payable to Seylan Bank PLCMr. E. NarangodaChairman Term Loan 53.860 31.54053.860 31.540Loan Agreement Form for Rs. 54.6 Mn.Mr. R. NadarajahDirectorNo. of Voting Shares - 2,115,857Rs. 13.1 Mn. Payable to Seylan Bank PLC

Seylan Bank PLC Annual Report 2009 211Notes to the Consolidated Financial StatementsServices Obtained/Other TransactionsNature of ServiceAmount Payable/ReceivableAmountPaid/ReceivedRs. Mn.Rs. Mn.74.204Interest Expenses74.204Interest Received 1.3851.385Credit facilities have been allowed at preferential rates of interestsince these facilities were utilised to purchase shares which areallotted to the employees in proportion to their gratuity.Interest Received 1.5051.505Interest Received 1.4921.492Interest Received 1.5261.526

212Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial StatementsParty/PartiesAccommodatedName of Director/Key ManagementPersonnelRelationshipDeposit Aggregate Amount of Accommodationoutstanding as at 31.12.2009Rs. Mn.Nature ofAccommodationLimitRs. Mn.FundedRs. Mn.Non-FundedRs. Mn.Interest inSuspenseProvisionfor the YearRs. Mn.Bad &DoubtfulDebtProvisionfor the YearRs. Mn.(c) Common Directorship EntitiesBrown & Company PLCMr. A.L. DevasurendraDeputy Chairman Overdraft 140.00 1.209Term Loan 100.00 100.000240.00 101.209Mr. I.C. NanayakkaraDirectorCorporate Guarantee from Standard Finance Limited (Group Company ofBrowns) for LKR 240 Mn. 275,100 shares of HNB presently lodged in thecustodian account of Brown & Co. PLC at Seylan Bank PLC. Leeway available onthe value of 5,300,000 shares of HNB mortgaged to Standard Finance LimitedStandard Finance(Pvt) LimitedTaprobane HoldingsLimitedCeylease FinancialServices LimitedMr. A.L. DevasurendraDirector Demand Deposit 0.024 Term Loan 335.000 218.0910.024 335.000 218.091Mortgage over 5,300,000 shares of HNBMr. A.L. DevasurendraManaging Director Margin Trading 15.00Mr. I.C. NanayakkaraDirector Demand Deposit 0.0650.065 15.000Secured by Rs. 46,230,000 worth of quoted sharesNo. of Non-Voting Shares - 5,607,800Mr. P.L.P. WithanaDirector (Resignedw.e.f. 18.11.2009) Demand Deposit 1.231 Revolving Terms Loan 200.0001.231 Overdraft 20.000220.000Assignment over performing lease agreements at a ratio of 1:1.25 with a specialPower of Attorney up to maximum of Rs. 275.00 Mn. (to secure the term loans).Letter of undertaking confirming that the Company will settle the full outstanding orsubstitute same with performing leases if a particular lease falls into arrears for more than03 months.Letter of undertaking that they will keep us informed in the event of any change in themanagement/ownership of the Company.Loans Agreement Form.Series of Loans.Overdraft Agreement Form.Letter of Set Off (Company)Repo Rs. 2.7 Mn.SriLankan Catering(Pvt) LimitedMr. N.M. Jayamanne PCDirector Time Deposits 5.2805.280

Seylan Bank PLC Annual Report 2009 213Notes to the Consolidated Financial StatementsServices Obtained/Other TransactionsNature of ServiceAmount Payable/ReceivableAmountPaid/ReceivedRs. Mn.Rs. Mn.Purchase of 2 Nos. of mailingmeters and base. 0.5370.537Interest Expense 0.001 0.291Capital Repayment 203.0150.001 203.306Interest Received 17.40617.406

214Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial StatementsParty/PartiesAccommodatedName of Director/Key ManagementPersonnelRelationshipDeposit Aggregate Amount of Accommodationoutstanding as at 31.12.2009Rs. Mn.Nature ofAccommodationLimitRs. Mn.FundedRs. Mn.Non-FundedRs. Mn.Interest inSuspenseProvisionfor the YearRs. Mn.Bad &DoubtfulDebtProvisionfor the YearRs. Mn.Lanka Orix Leasing Mr. I.C. Nanayakkara Time DepositCompany PLC Deputy Chairman (USD 2,840,678.09) 324.832 Short-Term Loan 640.000 440.000Savings Account 0.004 Overdraft 20.000 0.162Demand Deposit 2.284 Trust Receipt 135.000327.120 Revolving Lease 180.000 44.337Letters of Credit Usance 10.000Post-Dated ChequeFacility 5.00990.00 484.499Lien over fixed deposit for USD 2,840,678.09 (Commercial Paper Loan at Treasury)Assignment over factoring and lease receivables.Commercial Paper for Rs. 600.0 Mn. (to be provided at the time of issuance)Commercial Paper Agreement.Assignment over lease agreements for Rs. 625.0 Mn.Absolute ownership over motor vehicles to be leased.Special Power of Attorney for Rs. 10.0 Mn. over lease agreement for Rs. 15.0 Mn.Lien over special foreign currency account USD 356,043.79 (Revolving Short-Term Loan)No. of Voting Shares 66No. of Non-Voting Shares 19,733,400Ishara Traders(Pvt) LimitedMr. I.C. NanayakkaraDirector Demand Deposit 0.01 Overdraft 800.000 0.7760.01 800.000 0.776Mortgage and Power of Attorney over a basket of quoted Blue-Chip Company Shares.MaturataPlantations LimitedMr. I.C. NanayakkaraDirector Overdraft 125.000 39.318Term Loan (PSRP I) 41.911 41.911Mr. A.L. DevasurendraDirector Term Loan (PSRP II) 18.737 18.737Term Loan (PSRP III) 2.274 2.274Term Loan (PSRP IV) 10.600 10.500Term Loan (PSRP V) 13.732 13.732Term Loan (EFRIENDS) 0.380 0.380Term Loan (IV) 6.000 6.000Term Loan (V) 10.600 10.600Short-Term Loan 3.000 3.000Term Loan (Tea Relief) 43.748 43.748Term Loan (Tea Relief) 26.000 NILGuarantee 2.000 1.250303.982 190.200 1.250

Seylan Bank PLC Annual Report 2009 215Notes to the Consolidated Financial StatementsServices Obtained/Other TransactionsNature of ServiceAmount Payable/ReceivableAmountPaid/ReceivedRs. Mn.Rs. Mn.Interest Paid 18.09718.097Interest Received 2.6342.634

216Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial StatementsParty/PartiesAccommodatedLanka HospitalsCorporation PLCSri Lanka InsuranceCorporation LimitedName of Director/Key ManagementPersonnelRelationshipDeposit Aggregate Amount of Accommodationoutstanding as at 31.12.2009Rs. Mn.Nature ofAccommodationLimitFundedNon-FundedInterest inSuspenseProvisionfor the YearBad &DoubtfulDebtProvisionfor the YearRs. Mn.Bond 60%of FSVRs. Mn. Rs. Mn. Rs. Mn. Rs. Mn.MortgageValueMortgage over leasehold rights of Bramley Estatefor Rs. 13.0 Mn. Forced Sale Value Rs. 22.0 Mn. Market ValueRs. 27.0 Mn. valued by Mr. S.N. Wijepala on 11.05.2009. 13.00 13.00Primary Mortgage for Rs. 36.0 Mn. Secondary Mortgage forRs. 50.0 Mn. over leasehold rights of Gonapitiya Estate ForcedSale Value Rs. 120.0 Mn, Market Value Rs. 160.0 Mn. valued byMr. S.N. Wijepala on 17.04.2009 86.00 72.00Mortgage over leasehold rights of Alma Estate forRs. 26.0 Mn. Forced Sale Value LKR 65.0 Mn. Market ValueRs. 75.0 Mn. valued by Mr. S.N. Wijepala on 17.04.2009 26.00 39.00Mortgage over leasehold rights of Ragala Estate forRs. 74.75 Mn. Forced Sale Value Rs. 160.0 Mn. Market ValueRs. 190.0 Mn. by Mr. S.N. Wijepala on 17.04.2009 74.75 96.00Mortgage over leasehold rights of Maha Uva Estate forRs. 19.5 Mn. Forced Sale Value Rs. 65.0 Mn. Market ValueRs. 75.0 Mn. valued by Mr. S.N. Wijepala on 17.04.2009. 19.50 39.00Mortgage over leasehold rights of Enselwatte Estate forLKR 102.25 Mn. Forced Sale Value LKR 220.0 Mn. Market ValueLKR 270.0 Mn. valued by Mr. S.N. Wijepala on 03.06.2009. 102.25 132.00Letter of Comfort from Free Lanka Trading Co. and Free Lanka Plantations Co. (Pvt) Limitedfor Rs. 75.0 Mn.Overdraft Agreement for Rs. 125.0 Mn.Loan Agreement Forms for Rs. 296.986 Mn.Existing security cover and mortgage bonds are adequate to cover enhanced overdraft.(ii) Proposed security: (Additional if any) Treasury Guarantee to be obtained to coverproposed Term Loan of Rs. 26.0 Mn.Mr. P.G.S.KariyawasamDirector Demand Deposit 0.028 Term Loan 98.750 8.8550.028 98.750 8.855Dr. N.H. GodahewaDirectorBrowns Plantations Mr. A.L. DevasurendraInvestments (Pvt) Limited DirectorMr. P.G.S.KariyawasamChairman Time Deposit 500500Dr. N.H. GodahewaManaging DirectorSyndicate Loan Agreement entered into by Lanka Hospital Corporation PLC andSeylan Bank PLC.Primary Mortgage Bond Nos. 167 and 168 over immovable and movable assets of theCompany covering the loan up to 42.5% of capital and interest and other charges on theloan execution in favour of DFCC, NDB, HNB and SBK.Concurrent mortgage over all moneys receivable executed in favour of InternationalFinance Corporation (IFC), DFCC, NDB, HNB and SBK.Partial Syndication Loan Guarantee from IFC up to 57.5% of the principal amount.Sri Lanka Insurance Corporation Limited held 1,500,000 Seylan Bank Debentures(Rs. 150,000,000/-) as at 31.12.2009 (Private Placement of Debentures 2005/10).Sri Lanka Insurance Corporation Limited - No. of Voting Shares 19,500,000- No of Non-Voting Shares 714,000Investor in Seylan Bank PLCNo. of Voting Shares - 12,416,966No. of Non-Voting Shares - 6,588,700Commercial LeasingCompany PLCMr. I.C. NanayakkaraDirectorInvestor in Seylan Bank PLCNo. of Non-Voting Shares - 72,400(d) Significant Provision of Finance/Economic DependenceGrameen MicroCredit Co. LimitedSeylan Credit Card Mr. A. PasqualCo. LimitedDirectorMr. T. NanayakkaraDirectorMr. C. KotigalaDirectorLoan and interest of Rs. 2,725,000 Mn. restructured post-year end (Note 19.f.2).The Bank jointly controlled operations for the Seylan Credit Card activitiesThe Bank reconstituted their operations at the year end under a new Memorandum ofUnderstanding (Note 23.2).Leasing 5.403 3.375** Total rentals outstanding. Absolute ownership over the vehicle

Seylan Bank PLC Annual Report 2009 217Notes to the Consolidated Financial StatementsServices Obtained/Other TransactionsNature of ServiceAmount Payable/ReceivableAmountPaid/ReceivedRs. Mn.Rs. Mn.Interest Payable 2.564 _2.564

218Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial Statements44. Maturity AnalysisBank44.a An analysis of the total assets employed as at 31st December 2009, based on the remaining period atthe Balance Sheet date to the respective contractual maturity dates is given below:Up to 3 3 to 12 1 to 3 3 to 5 More Than Total as atMonths Months Years Years 5 Years 31.12.2009Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000Interest Earning AssetsBills of Exchange 1,119,644 148,660 54,060 – – 1,322,364Loans & Advances 19,801,856 18,025,676 12,584,684 5,756,331 19,870,424 76,038,971Lease Receivable 677,920 920,764 1,186,286 139,606 1,894 2,926,470Balances with Banks 371,398 – – – – 371,398Short-Term Funds 45,000 – – – – 45,000Commercial Paper – 324,500 – – – 324,500Treasury Bills/Bonds 118,873 2,735,148 14,236,830 10,489,349 1,522,476 29,102,676Securities Purchased UnderResale Agreement 2,951,860 – – – – 2,951,860Group Balance Receivable 714,031 – 13,397 – – 727,42825,800,582 22,154,748 28,075,257 16,385,286 21,394,794 113,810,667Non-Interest Earning AssetsCash in Hand 4,267,407 – – – – 4,267,407Balances with CBSL 5,084,229 – – – – 5,084,229Investments 251,163 – – – 947,893 1,199,056Investment Property 520,812 – – – – 520,812Group Balances Receivable 81,227 – – – – 81,227Property, Plant & Equipment – – – – 3,387,117 3,387,117Income Taxation 89,654 – – – – 89,654Deferred Tax Assets 454,213 – – – – 454,213Other Assets 3,881,490 – – – – 3,881,49014,630,195 – – – 4,335,010 18,965,205Total Assets 40,430,777 22,154,748 28,075,257 16,385,286 25,729,804 132,775,87244.b An analysis of the total liabilities as at 31st December 2009, based on the remaining period at theBalance Sheet date to the respective contractual maturity dates is given below:Up to 3 3 to 12 1 to 3 3 to 5 More Than Total as atMonths Months Years Years 5 Years 31.12.2009Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000Interest Bearing LiabilitiesDeposits 61,341,193 22,668,800 3,704,450 1,720,810 6,322,681 95,757,934Securities Sold UnderRepurchase Agreements 1,679,754 198,950 – – – 1,878,704Borrowings 1,884,310 194,361 427,305 211,767 338,097 3,055,840Debentures – 699,000 2,828,250 703,115 – 4,230,36564,905,257 23,761,111 6,960,005 2,635,692 6,660,778 104,922,843

Seylan Bank PLC Annual Report 2009 219Notes to the Consolidated Financial StatementsUp to 3 3 to 12 1 to 3 3 to 5 More Than Total as atMonths Months Years Years 5 Years 31.12.2009Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000Non-Interest Bearing LiabilitiesDeposits 8,467,465 590,500 – – – 9,057,965Other Liabilities 8,180,347 – – – – 8,180,347Dividend Payable 22,668 – – – – 22,668Group Balances Payable 9,575 – – – – 9,575Equity – – – – 10,582,474 10,582,47416,680,055 590,500 – – 10,582,474 27,853,029Total Liabilities 81,585,312 24,351,611 6,960,005 2,635,692 17,243,252 132,775,872Notes - ‘Up to 3 months’ Interest Bearing Liabilities includes the Bank’s Savings Deposits base of Rs. 25.5 Bn.‘More than 5 years’ Interest Bearing Liabilities reflects the Bank’s Tikiri Deposit Base of Rs. 6.3 Bn.Shareholders’ Funds (Equity) are classified into the ‘More than 5 years’ category since no contractualdate of maturity can be identified.Group44.c An analysis of the total assets employed as at 31st December 2009, based on the remaining period atthe Balance Sheet date to the respective contractual maturity date is given below:Up to 3 3 to 12 1 to 3 3 to 5 More Than Total as atMonths Months Years Years 5 Years 31.12.2009Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000Interest Earning AssetsBills of Exchange 1,119,644 148,660 54,060 – – 1,322,364Loans & Advances 19,801,871 18,025,676 12,585,335 5,762,079 19,870,424 76,045,385Lease Receivable 677,920 920,764 1,186,286 139,606 1,894 2,926,470Balances with Banks 371,398 – – – – 371,398Short-Term Funds 50,943 – – – – 50,943Commercial Paper – 324,500 – – – 324,500Treasury Bills/Bonds 184,266 3,885,681 15,820,086 11,117,969 1,522,476 32,530,478Securities Purchased UnderResale Agreement 2,955,390 – – – – 2,955,39025,161,432 23,305,281 29,645,767 17,019,654 21,394,794 116,526,928Non-Interest Earning AssetsCash in Hand 4,269,540 – – – – 4,269,540Balances with CBSL 5,084,360 – – – – 5,084,360Investments 252,761 5,943 – – 108,028 366,732Investment Properties 520,812 – – – 983,864 1,504,676Property, Plant & Equipment – – – – 4,775,793 4,775,793Income Taxation 89,654 – – – – 89,654Deferred Tax Assets 454,213 147 – – – 454,360Other Assets 3,892,632 142,639 160,537 – – 4,195,80814,563,972 148,729 160,537 – 5,867,685 20,740,923Total Assets 39,725,404 23,454,010 29,806,304 17,019,654 27,262,479 137,267,851

220Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial Statements44.d An analysis of the total liabilities as at 31st December 2009, based on the remaining period at theBalance Sheet date to the respective contractual maturity date is given below:Up to 3 3 to 12 1 to 3 3 to 5 More Than Total as atMonths Months Years Years 5 Years 31.12.2009Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000Interest Bearing LiabilitiesDeposits 61,341,193 22,668,800 3,704,450 1,720,810 6,322,681 95,757,934Securities Sold UnderRepurchase Agreements 3,253,739 919,974 1,164 – – 4,174,877Borrowings 1,936,081 291,170 721,590 211,766 338,097 3,498,704Debentures – 699,000 2,828,250 703,115 – 4,230,36566,531,013 24,578,944 7,255,454 2,635,691 6,660,778 107,661,880Non-Interest Bearing LiabilitiesDeposits 8,467,465 590,500 – – – 9,057,965Other Liabilities 8,155,962 249,304 – 64,607 – 8,469,873Deferred Taxation – – – – – –Tax Payable – 142,732 – – – 142,732Dividend Payable 23,314 – – – – 23,314Equity – – – – 11,109,138 11,109,138Minority Interest – – – – 802,949 802,94916,646,741 982,536 – 64,607 11,912,087 29,605,971Total Liabilities 83,177,754 25,561,480 7,255,454 2,700,298 18,572,865 137,267,851Notes - ‘Up to 3 months’ Interest Bearing Liabilities includes the Seylan Bank’s Savings Deposits base of Rs. 25.5 Bn.‘More than 5 years’ Interest Bearing Liabilities reflects the Seylan Bank’s Tikiri Deposit Base of Rs. 6.3 Bn.Shareholders’ Funds (Equity) are classified into the ‘More than 5 years’ category since no contractualdate of maturity can be identified.45. Segment Reporting45.a GroupSegment information is presented in respect of the Group’s business segments. The primary format,business segments are based on the Group’s management and internal reporting structure.Business SegmentsThe Group comprises the following main business segments:Banking: Loans (other than Leasing), deposits and other transactions and balances with corporate andretail customers.Leasing: Leasing balances with corporate and retail customers.Treasury: Undertakes the Group’s funding and centralised risk management activities throughborrowings, issue of debt securities, use of derivatives for risk management purpose andinvesting in liquid assets such as short-term placements and corporate and Government debtsecurities.Property/Investment: The property investment related income, expenses, assets & liabilities.

Seylan Bank PLC Annual Report 2009 221Notes to the Consolidated Financial StatementsBanking Leasing Treasury Property/Investments Total2009 2008(Restated)2009 2008(Restated)2009 2008(Restated)2009 2008(Restated)2009 2008(Restated)Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000External RevenueInterest Income 16,053,472 19,757,109 – – 5,448,666 2,987,399 2,949 81,577 21,505,087 22,826,085Foreign Exchange Profit 130,003 187,647 – – 376,481 443,754 – – 506,484 631,401Lease Income/Brokering – – 212,720 701,251 – – – – 212,720 701,251Fee and CommissionIncome 1,245,899 1,691,844 29,134 28,702 62,382 (15,335) – – 1,337,415 1,705,211Dividend Income &Other Income 754,309 1,363,952 9,704 55,058 85,092 244,396 158,669 (29,952) 1,007,774 1,633,454Total Revenue fromExternal Customers 18,183,683 23,000,552 251,558 785,011 5,972,621 3,660,214 161,618 51,625 24,569,480 27,497,402Inter Segment Revenue 1,654,387 1,868,287 (266,113) (283,833) (1,388,274) (1,584,454) – –Total Segment Revenue 19,838,070 24,868,839 (14,555) 501,178 4,584,347 2,075,760 161,618 51,625 24,569,480 27,497,402Depreciation Chargefor the Year 248,835 263,094 678 13,325 27,313 5,225 29,565 31,874 306,391 313,518Reportable SegmentProfit Before Income Tax (22,981) 1,316,968 85,701 (404,534) 2,759,979 783,133 (275,944) (23,057) 2,546,755 1,672,510OTHER INFORMATIONReportable SegmentAssets 114,335,758 122,942,874 118,823 3,516,011 12,970,249 29,005,102 2,966,835 4,112,520 130,391,665 159,576,507Segment Amortisations (1,789,743) (1,719,922) (9,018) (78,692) (115,374) (107,093) (142,576) (128,514) (2,056,711) (2,034,221)Total Assets 112,546,015 121,222,952 109,805 3,437,319 12,854,875 28,898,009 2,824,259 3,984,006 128,334,954 157,542,286Reportable SegmentLiabilities 111,696,536 121,173,015 109,805 3,235,580 12,581,641 27,224,146 1,103,277 1,615,629 125,491,259 153,248,370Total Liabilities 111,696,536 121,173,015 109,805 3,235,580 12,581,641 27,224,146 1,103,277 1,615,629 125,491,259 153,248,3702009 2008Rs.’000Rs.’00045.b Reconciliation of Reportable Segment Revenues,Profit or Loss and Assets and LiabilitiesTotal Segment RevenuesTotal Revenue for Reportable Segments 24,569,480 27,497,402Unallocated Amounts 262,792 164,568Elimination of Inter-Segment Revenue (293,294) (608,019)24,538,978 27,053,951Reportable Segment Profit before Income TaxTotal Profit or Loss for Reportable Segments 2,546,755 1,672,510Unallocated Amounts (1,613,125) (2,408,089)933,630 (735,579)Reportable Segment Total AssetsTotal Assets for Reportable Segments 128,334,954 157,542,286Other Unallocated Amounts 8,932,897 5,766,203Consolidated Total Assets 137,267,851 163,308,489Reportable Segment Total LiabilitiesTotal Liabilities for Reportable Segments 125,491,259 153,248,370Other Unallocated Amounts 11,776,592 10,060,119Consolidated Total Liabilities 137,267,851 163,308,489

222Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial Statements46. Comparative InformationThe following comparative figures have been reclassified in the 2009 Financial Statements to maintaincomparability of Financial Statements in order to provide a better presentation.Income statementAs disclosedBankReclassified Adjustmentin 2008in 2009Rs.‘000 Rs.‘000 Rs.‘00046.aInterest Income 21,572,430 21,552,070 20,360Other Income 1,201,222 1,221,582 (20,360)Net Fee and Commission Income 1,801,826 1,749,737 52,089Fee and Commission Expense 52,089 – 52,089Operating Expenses 8,262,329 10,677,427 (2,415,098)Provision for Loan Losses 2,467,187 – 2,467,187Personnel Expenses 3,274,335 3,405,714 (131,379)Provision for Staff Retirement Benefit 131,379 – 131,379a i Capital gains/losses from Government Securities (Rs. 21.916 Mn.) and gain/loss from marked to marketvaluation Rs. 1.555 Mn. included in other income have been reclassified as Treasury Bills, Bonds andplacements with other Banks (Rs. 20.36 Mn.) under Interest Income.a ii Fee and Commission Income included in other income has been reclassified as net fee and commissionincome. Accordingly, commission expense included under operating expense amounting to Rs. 52.089 Mn.is deducted from the Fee and Commission Income.a iii Loan loss provision of Rs. 2,467.187 Mn. (after profit on ordinary activities before loan loss provision, taxesand associate company profits) has been reclassified and presented separately as provision for loan lossesunder operating expenses.a iv Provision for staff retirement benefit amounting to Rs. 131.379 Mn. included in the operating expenseshas been reclassified under personnel expenses in operating expenses.

Seylan Bank PLC Annual Report 2009 223Notes to the Consolidated Financial StatementsBalance SheetBankAs Disclosed Reclassified AdjustmentRs. ‘000 Rs. ‘000 Rs. ‘00046.bCash and Cash Equivalents 5,491,795 5,511,331 (19,536)Other Assets 4,944,560 4,929,745 14,815Property, Plant & Equipment 4,142,241 4,073,353 68,888Leasehold Rights – 64,165 (64,165)b i Balance with local banks amounting to Rs. 19.536 Mn. classified under Other Assets has been reclassifiedunder cash and cash equivalents.b ii Freehold land amounting to Rs. 4.724 Mn. under Property, Plant & Equipment is reclassified as other assets.b iii Leasehold Land & Building amounting to Rs. 64.165 Mn. is reclassified as Leasehold Rights.BankAs Disclosed Reclassified AdjustmentRs. ‘000 Rs. ‘000 Rs. ‘00046.CTreasury Bills & Bonds Eligible for Rediscounting withCentral Bank within One Year 13,176,451 – 13,176,451After One Year 11,660,853 – 11,660,853Government and Other Securities Held for Dealing Purpose 184,917 865,977 (681,060)Investment Securities 476,956 24,243,200 (23,766,244)Commercial Papers - 390,000 (390,000)25,499,177 25,499,177 –c i Treasury Bills and Bonds eligible for rediscounting with Central Bank within one year and after one yearhave been reclassified under Government and other securities held for dealing purpose and as InvestmentSecurities. Accordingly, those balances are reclassified and presented in the Notes 16 and 17.c ii Commercial papers held by Seylan Bank PLC (Lanka ORIX Leasing & Co.) of Rs. 390,000/- which wasdisclosed under Investment securities previously was reclassified as commercial papers in the Balance Sheet.BankAs Disclosed Reclassified AdjustmentRs. ‘000 Rs. ‘000 Rs. ‘00046.d Analysis of Provision for Loan Lossesand Interest in SuspenseBills of Exchange 1,484,746 1,471,831 12,915Loans and Advances 97,691,569 97,746,084 (54,515)Lease Rentals Receivable within One Year 2,287,473 2,245,873 41,600Provision for bad and doubtful debts for above figures are restated including general provisions forloan losses.

224Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial Statements47. Comparative Information in the Consolidated Financial Statements havebeen restated as follows:Income Statement for the Year Ended 31st December 2008Net Profit/(Loss)After TaxRs. ’000As per the Financial Statements Published in 2008 (93,174)As per the Financial Statements Restated in 2009 (799,803)Change - Profit/(Loss) (706,629)Balance Sheet as at 31st December 2008Assets Liabilities EquityRs. '000 Rs. '000 Rs. '000As per the Financial Statements Published in 2008 164,210,437 154,530,749 9,679,688As per the Financial Statements Restated in 2009 163,308,489 154,611,411 8,697,078Change (901,948) 80,662 (982,610)Net profit before tax has been restated due to adjustment carried out subsequent to the consolidation in2008 based on unaudited Financial Statements, in the following subsidiary companies:∙ Seylan Merchant Bank PLC - Audited Accounts signed on 05th November 2009.∙ Seylan Developments PLC - Audited Accounts signed on 29th June 2009 (comparative figures wererestated in 2009 Audited Financial Statement dated 08th February 2010).47.a Income Statement for the year ended 31st December 2008Seylan Merchant Bank PLCSeylan Developments PLC2008Restated2008Published Change2008Restated2008Published ChangeRs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000Income 1,180,717 920,433 260,284 292,235 280,883 11,352Net Interest Income 96,315 44,171 52,145 (93,175) (92,599) (576)Other Income 321,358 164,537 156,821 278,382 267,029 11,353Operating Income 417,673 208,708 208,965 185,207 174,430 10,777Less: Operating Expenses 1,072,806 362,377 710,429 570,612 515,023 55,589Profit/(Loss) before Taxation (655,133) (153,669) (501,464) (385,405) (340,593) (44,812)Less: Income Tax Expense 41,947 (922) 42,869 7,062 7,062 –Profit/(Loss) after Taxation (697,080) (152,747) (544,333) (392,467) (347,655) (44,812)

Seylan Bank PLC Annual Report 2009 225Notes to the Consolidated Financial Statements47.b Balance Sheet as at 31st December 2008Seylan Merchant Bank PLCSeylan Developments PLC2008Restated2008Published Change2008Restated2008Published ChangeRs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000Total Assets 4,224,557 4,850,023 (625,466) 3,510,440 3,558,831 (48,391)Liabilities 4,302,511 4,387,914 (85,403) 1,220,507 1,216,478 4,029Equity (152,280) 381,099 (533,379) 2,289,933 2,342,353 (52,420)Minority Interest 74,326 81,010 (6,684) – – –Total Liabilities & Equity 4,224,557 4,850,023 (625,466) 3,510,440 3,558,831 (48,391)47.c Reconciliation of Profit After Tax as at 31st December 2008Rs.’000Change in Profit of Seylan Merchant Bank PLC (SMB) (544,333)Change in Profit of Seylan Developments PLC (SD) (44,812)Elimination of Provision made by SMB for SD Shares 7,690Change in Profit Portion of Associate Company Profits & its Classification 2,441Impact of Non-Uniform Accounting Policies by Subsidiaries (127,615)(706,629)Adjustment to Equity Holders of the Bank (309,485)Minority Holders (397,144)(706,629)47.d Reconciliation of Equity as at 31st December 2008Rs.’000Change in Equity of Seylan Merchant Bank PLC (SMB) - Attributable to Equity Holders of the Bank (533,379)- Attributable to Minority Interest (6,684)Change in Equity of Seylan Developments PLC (SD) (52,420)Elimination of Provision made by SMB for SD Shares 7,690Impact of Non-Uniform Accounting Policies by Subsidiaries (Note 48 (b)) (397,817)(982,610)

226Seylan Bank PLC Annual Report 2009Notes to the Consolidated Financial Statements48. Non-Uniform Accounting PoliciesThe impact of non-uniform accounting policies adopted by subsidiary companies has been adjusted in theConsolidated Financial Statements as set out below:48.a Depreciation Adjustment due to Different Rates Applied by Seylan Bank AssetManagement LimitedRs. ’000 Rs. ’000Group ImpactRs. ’000Minority ImpactCharges Depreciation Adjusted to Income Statement of 2008Depreciation Charge as per the Seylan Bank Rates 5,878 5,878 –Depreciation Charge as per the Seylan Bank AssetManagement Limited Rates 6,231 6,231 –Charge made to Consolidated Financial Statements (353) (353) –48.b Adjustment due to Different Accounting Policies for Investment Properties by SeylanDevelopments PLC (Fair Value), whereas the Bank Accounts Investment Properties at CostRs. ’000 Rs. ’000Group ImpactRs. ’000Minority ImpactReversal of Revaluation GainsReversal of Revaluation Gains Adjusted to Opening Balanceof Equity in 2008 (48.c) (203,751) (103,933) (99,818)Reversal of Revaluation Gains Adjusted toIncome Statement of 2008 (48.c) (105,465) (53,798) (51,667)Reversal of Revaluation Gains Adjusted toIncome Statement of 2009 (115,149) (57,908) (57,241)(424,365) (215,639) (208,726)Charging of DepreciationCharges Depreciation Adjusted to Opening Balance of Equityin 2008 (48.c) (66,451) (33,897) (32,554)Charges Depreciation Adjusted to Income Statementof 2008 (48.c) (22,150) (11,299) (10,851)Charges Depreciation Adjusted to Income Statement of 2009 (20,066) (10,091) (9,975)(108,667) (55,287) (53,380)Total Adjustment Made - Income/(Charge) (533,032) (270,926) (262,106)48.c Impact on Opening EquityRs. ‘000Revaluation gain 309,216Depreciation 88,601397,817

APPENDIXProfiles of the Board of Directors 228Senior Management Team 230Ten Year Summary 232Summary of Performance Indicators 233US$ Accounts 234Investor Information 236Branch Network 241Geographical Analysis 243Glossary 244Corporate Information 245GRI Compliance Index 246Subject Index 248Notice of Meeting 249Sinhala Translations 250Tamil Translations 252Form of Proxy Enclosed

228Seylan Bank PLC Annual Report 2009PROFILEs OF the board of DIRECTORSMr. Eastman NarangodaExecutive ChairmanBA (Econ.), FIB, FIMS (UK), FITD (SL),Dip. in Advanced Bank Management(Stockholm)Mr. Eastman Narangoda has vastexperience in the Sri Lankan bankingsector. He spearheaded NationalSavings Bank as its General Manager/CEO for over five years. During histenure, NSB was awarded AAA rating byFitch Ratings for four consecutive years.Mr. Narangoda is a former Presidentof the Association of Professional Bankersof Sri Lanka and had held the positionsof Director/Vice-Chairman of FinancialOmbudsman (Sri Lanka) Limited, Directorof NSB Fund Management Co., AshaCentral Hospital Limited and MercantileLeasing Limited and had also been aDirector of the Institute of Bankers. Hewas also appointed as the Commissionerof the Presidential Commission on FailedFinance Companies. He is currently aDirector of Wealth Trust Corporation (Pvt)Limited and the President of Sri LankaInstitute of Training and Development.Mr. Narangoda was appointed to theBoard of Seylan Bank PLC on30th December 2008.Mr. R. Nadarajah Executive DirectorB.Sc. (Hons.), MBA, FCIB (London)Mr. Ramanathan Nadarajah brings withhim 40 years of banking experience inboth state and private sector banks. Heserved as Managing Director/GeneralManager/CEO of Pan Asia Bank for sixyears and previously served at Bank ofCeylon in various capacities includingas a Deputy General Manager. He wasthe inaugural President of the PrimaryDealers Association and has been aPast President of the Association ofProfessional Bankers of Sri Lanka.Mr. Nadarajah was appointed to theBoard of Seylan Bank PLC on8th January 2009.Mr. Nihal Jayamanne - President’sCounsel DirectorMr. Nihal Jayamanne PC is an eminentlawyer and holds key offices in the fieldsof law, including as Member of theAdvisory Council of Jurists of the AsiaPacific Forum for the Advancement ofHuman Rights, Chairman-Law CollegeFoundation and Member of the Board ofTrustees of the Judicial InfrastructureMaintenance Trust. He was also thePresident of the Bar Association ofSri Lanka, the Vice-Presidentof SAARCLAW and a Member of theLaw Commission of Sri Lanka and ofthe National Police Commission ofSri Lanka. Mr. Jayamanne PC is on theBoards of SriLankan Airlines Limitedand SriLankan Catering (Pvt) Limited.He is also a former Commissioner ofthe Telecom Regulatory Commission ofSri Lanka and a former member of theCouncil of Legal Education.Mr. Jayamanne was appointed to theBoard of Seylan Bank PLC on30th December 2008.Mr. Lalith Withana DirectorMBA, BA (Hons.), FCMA, FCAMr. Lalith Withana counts over 20 yearsin management positions within thecorporate sector of which more than12 years have been at senior levels inbanking, trade and manufacturing, withexperience at organisations such asBrandix, Messrs Ernst & Young, AmroBank, IBM and Carson Cumberbatch PLC.He currently holds the position ofConsultant at Brandix Asia Limitedand has also been the CEO of BrandixCasualware Limited, Brandix LightsewLimited and CEO - Procurement ofBrandix Apparels Limited. He hadserved on the Boards of Bank of Ceylon,Dankotuwa Porcelain PLC, MerchantBank of Sri Lanka and Ceylease FinancialServices Limited. He had also been aCommissioner of the TelecommunicationRegulatory Commission.Mr. Withana was appointed tothe Board of Seylan Bank PLC on30th December 2008.Rear Admiral (Rtd.) B.A.J.G. PeirisDirectorRSP, VSV, USP, ndc, psc, DISSRear Admiral (Rtd.) Ananda Peiris is adecorated officer of the Sri Lanka Navycounting a service record of over 34years. His naval experience includesserving as the Area Commander -Eastern Naval Command, WesternNaval Command and Southern NavalCommand. He was also twice appointedthe Deputy Area Commander ofNorthern Naval Command and SquadronCommander Fast Attack Craft and hastaken part in almost all major operationsin the North and East. He had also beenthe Director - Naval Administration &Welfare, Director - Naval Personnel &Training and Director General (Services),Sri Lanka Navy. He retired from theregular naval service on 29th January2009 and has since been mobilised to theregular naval reserve. He currently holdsthe post of Director General - Sri LankaCivil Defence Force to which position hewas appointed in mid February 2010.Rear Admiral (Rtd.) Ananda Peiriswas granted the accolades of RanaSura Padakkama (RSP), Vishishta SewaVibhushanaya (VSV) and Uttama SevaPadakkama (USP) for his service tothe nation, while he was also awardedseveral medals during his tenure ofservice in the Navy including Sri LankaNavy 50th Anniversary Medal (2001),Sri Lanka Armed Services Long ServiceMedal, President’s Inauguration Medal(1978), North-East Operation Medal andPurna Bumi Padakkama.Rear Admiral (Rtd.) Ananda Peiris wasappointed to the Board of Seylan BankPLC with effect from 8th January 2009.He was also elected as the Chairmanof the Bank’s subsidiary, SeylanDevelopments PLC (formerly CeylincoSeylan Developments PLC) with effectfrom 11th September 2009.Mr. Pradeep G.S. Kariyawasam DirectorMr. Pradeep Kariyawasam is thepresent Chairman of Sri LankaInsurance Corporation Limited and isalso on the Board of Lanka HospitalsCorporation PLC (Apollo Hospitals).Mr. Kariyawasam is a senior corporatefigure with over thirty years of experiencein the private sector, of which over15 years has been as Chief Executiveand General Manager level at UnimoEnterprises, United Motors Lanka PLCand Browns Group of Companies.Mr. Kariyawasam could also be singularlycredited in the setting-up of overalloperations at Ceylinco Limited, theforemost Principal Agency of NationalInsurance Corporation during a 3-yearperiod from the late 80s to early 90s. Hisextensive experience in marketing andsales management encompasses a crosssection of large corporate conglomerates.Mr. Kariyawasam has also functionedas a respected consultant in businessmanagement and project management.He holds a Certificate of Marketing fromCIM (UK).

Seylan Bank PLC Annual Report 2009 229Mr. Pradeep Kariyawasam wasappointed to the Board of Seylan BankPLC on 10th November 2009.Dr. Nalaka H. Godahewa DirectorPh.D. (University of South Australia), MBA(Sri J.), B.Sc. Eng. (Moratuwa), FCIMA (UK),FCMA (Aus.) and FCIM (UK)Dr. Nalaka Godahewa is the ManagingDirector of Sri Lanka InsuranceCorporation and is also on the boardof Lanka Hospitals Corporation PLC(Apollo Hospitals) and CSC Kandia(Pvt) Limited. He gained managerialand leadership experience at someof Sri Lanka’s leading corporateinstitutions including Unilever, Sunteland apparel giant MAS. Whilst at MASHoldings, he was the CEO of severaloverseas operations. Dr. Godahewa isacademically and professionally qualifiedin the multiple fields of engineering,marketing and finance. He holds a Ph.D.from the University of South Australiaas well as a B.Sc. in Electronics andTelecommunication Engineering from theMoratuwa University and a MBA from theUniversity of Sri Jayewardenepura. He isalso a Fellow Member of the CharteredInstitute of Management Accountants(UK), a Fellow Member of the Instituteof Certified Management Accountants(Aus.) and a Fellow Member of theChartered Institute of Marketing (UK).He has also served as Consultant to theBoard of Investment and as Chairman,Imperial College of Business Studies.Dr. Godahewa is currently the Presidentof the Sri Lanka branch of the Instituteof Certified Management Accountantsof Australia, Honorary President of theGlobal Marketing Network and Chairmanof the Association of Licensed BankerOperations of Sri Lanka.Dr. Nalaka Godahewa was appointedto the Board of Seylan Bank PLC on 10thNovember 2009.Mr. Ajith L. Devasurendra DirectorMr. Ajith Devasurendra counts over30 years experience both in Sri Lankaand overseas in the financial sector.He is currently the Deputy Chairmanof Brown & Company PLC, ManagingDirector/CEO of Taprobane HoldingsLimited and Director of Taprobane FundManagement Limited. He is also theChairman of Galoya Plantation(Pvt) Limited.Mr. Devasurendra was alsoinstrumental in pioneering the moneybroking and Government Securitiesmarkets in Sri Lanka and had the honourof being the first President of the Sri LankaMoney Brokers Association and had alsobeen a past President of the Sri LankaPrimary Dealers Association.He had also been a consultant toPricewaterhouseCoopers, Bombay, Indiaon a USAID project (assigned as consultantto Reserve Bank of India and Securities &Exchange Commission of India on FixedIncome Securities Market). Further, hewas also appointed to the Expert Group onStimulus Package for Banking, Financeand Leasing Industry by the Central Bankof Sri Lanka and is also a member of theFinancial System Stability ConsultativeCommittee (FSSCC) appointed by theCentral Bank of Sri Lanka.Mr. Ajith Devasurendra wasappointed to the Board of Seylan BankPLC on 24th November 2009.Mr. Ishara C. Nanayakkara DirectorDiploma in Business Accounting &Finance (Aus.)Mr. Ishara Nanayakkara who holds aDiploma in Business Accounting fromAustralia, ventured into the arena offinancial services with the strategicinvestment in the LOLC group. He servesas the Deputy Chairman on the board ofLanka ORIX Leasing Co. PLC and all itssubsidiaries and associate companies,including Commercial Leasing Company,the latest development in LOLC’s relatedexpansion. He is a Director of IsharaTraders Group, Associated BatteryManufacturers (Cey.) Limited and BrownsGroup of Companies, a conglomeratewith exposure in trade, leisure andmanufacturing. He is also a Director ofColombo Land Exchange and TaprobaneFund Management Limited, focusing onprimary markets.Mr. Nanayakkara’s businessphilosophy based on sustainabledevelopment has made LOLC enter intomany new business ventures with highpotential for growth in all three spheres;economic, social and environmental.With the exposure in the SME and microsectors, he spearheads LOLC Micro CreditLimited and Sundaya Lanka (Pvt) Limited,and PRASAC, the largest micro financecompany in Cambodia.In line with his focus on sustainableforestry and plantations, Mr. Nanayakkarais also the Deputy Chairman ofTouchwood Investments Limited and aDirector of Maturata Plantations Limited,Pussallawa Plantations Limited andGal Oya Plantations (Pvt) Limited, thefirst Public-Private Partnership withGovernment of Sri Lanka.Mr. Ishara Nanayakkara wasappointed to the board of Seylan BankPLC on 24th November 2009.Mr. Samantha P.S. Ranatunga DirectorMBA (Birmingham), B.Sc. (Hons.) (Delhi)Mr. Samantha Ranatunga who hasover 20 years experience in the fieldof marketing and managing FMCGbusiness, is the Managing Director/CEO of Chemical Industries (Colombo)PLC. He joined the Board of ChemicalIndustries (Colombo) PLC in May 2002and was appointed Managing Director/CEO in April 2009.Mr. Ranatunga holds a Degree fromthe University of Delhi and a Masters inBusiness Administration, UK.He is a Non-Executive Director inmany of the unlisted companies in the CICGroup including Akzo Nobel Lanka Paints(Pvt) Limited and Perfunova InternationalLimited, India. He is the President of theSri Lanka-Africa-Middle East BusinessCouncil of the Ceylon Chamber ofCommerce and the Vice-President of theSri Lanka Maldivian Business Council.He has led the Sri Lankan Chamber ofCommerce delegations to many overseascountries. He is also a CommitteeMember of the Mercantile ServicesProvident Society representing the CeylonChamber of Commerce by virtue of hiscommittee membership in the CeylonChamber of Commerce.

230Seylan Bank PLC Annual Report 2009senior management team010203040506070809101112131415161718192021222324GM/CEO1. Mr. Ajita Pasqual General Manager/Chief Executive OfficersConsultants2. Mr. Sunil De Silva Credit Monitoring/Recoveries3. Mr. R.B. Ekanayake Information TechnologySnr. DGMs4. Mrs. L. Seneviratne Corporate & Retail Banking5. Mr. C. Kotigala Legal6. Mr. Ajantha Madurapperuma Banking Services & Risk Management7. Mr. Tissa Nanayakkara Seylan Card CentreDGMs8. Mr. Raaj de Silva Chief Financial Officer9. Mr. S. Jebaratnam Operations & International10. Mr. Kithsiri Perera Recoveries11. Mr. Sarath Dias Bandaranayake Human Resources & Administration12. Mr. Ravi Divulwewa Zone I13. Mr. K.D.W. Rohana Zone II14. Dr. P. Niranjan Zone III15. Mr. Ranjith Fonseka E-Commerce & IT International16. Mr. S. Palihawadana Chief Dealer17. Ms. Shalini Perera Corporate & Foreign Currency Banking18. Mr. Chithral De Silva Development Banking19. Mr. A.R.M. Hanan Information Technology20. Mr. Damith Vitharanage Audit & Inspection

Seylan Bank PLC Annual Report 2009 23125262728293031323334353637383940414243AGMs21. Mr. Ravi Dissanayake Personal Assistant to GM/CEO22. Mr. Hiran Amarasinghe Treasury23. Ms. Rohini Weerakkody Operations24. Mr. T.J. Pathirage Information Systems Audit25. Mr. Shafeek Samad International26. Mr. Lalantha Kulatunga Zone I27. Mr. Nandalal Ranasinghe Treasury & International Audit28. Mr. Delvin Pereira Zone II29. Mr. Christie Nanayakkara Corporate & Foreign Currency30. Mr. A. Emmanuel Zone III31. Mr. Kamal Deshapriya Marketing32. Ms. Damayanthi Tillekeratne International/Exports33. Mr. M.K. Prematilleke Property Unit34. Mr. Sirilal Amarasinghe Development Banking35. Mr. Neomal Suraweera Zone I36. Ms. Deeshani Goonaratne Human Resources37. Mrs. G. Edwards Private Banking38. Mrs. Y. Udurawana Consumer Finance Unit39. Mr. Rohan Fernando Audit & Inspection40. Mr. Sumith Fernando Zone III41. Mr. Shanaka Perera Senior Dealer42. Mr. Asanga Dayaratne Premises Maintenance43. Mr. Wasantha Karunaratne Supplies

232 Seylan Bank PLC Annual Report 2009Ten Year Summary of Financial StatementsYear Ended 31st December 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000 Rs. ’000(Reclassified) (Reclassified) (Restated) (Restated) (Restated)Trading ResultsGross Income 23,154,529 25,246,209 21,079,885 17,183,481 13,090,715 10,072,376 9,973,644 8,988,278 8,475,059 6,745,575Profit before Income Tax 892,572 155,241 1,439,069 1,606,882 1,061,033 478,291 705,953 677,989 278,435 256,536Taxation 349,271 – 515,880 718,814 373,200 69,648 114,539 10,021 5,928 10,932Profit after Taxation 543,301 155,241 923,189 888,068 687,833 408,643 591,414 667,968 272,507 245,604Dividends Proposed(Ordinary)Rs. 0.50Per ShareRs. 1.50Per ShareRs. 1.50Per Share20% 16% 15% 15% 12.5% 12%Balance SheetASSETSCash & Short-Term Funds 7,635,665 6,176,265 26,824,927 21,833,056 17,322,763 12,080,206 15,669,097 11,673,027 10,634,811 10,582,643Statutory Deposit withCentral Bank of Sri Lanka 5,084,229 6,857,039 7,915,660 6,913,224 5,908,292 5,050,665 3,951,940 3,866,450 3,351,904 3,617,909Investments (IncludingInvestment Properties) 30,286,878 26,019,989 1,370,762 333,960 333,755 649,117 1,076,728 1,201,947 1,075,990 658,291Bills of Exchange 1,322,364 1,471,831 1,967,091 1,827,824 2,154,916 2,210,842 1,745,701 1,652,786 1,502,995 2,009,411Loans, Advances & Leases 78,965,441 102,682,294 95,684,286 91,431,102 79,314,465 60,613,807 49,903,047 42,998,354 37,254,770 33,408,337123,294,577 143,207,418 133,762,726 122,339,166 105,034,191 80,604,637 72,346,513 61,392,564 53,820,470 50,276,591Investment in Subsidiary 860,166 948,529 1,093,407 1,048,559 1,029,656 1,095,231 1,435,231 1,444,275 1,444,275 1,441,011Other Assets (IncludingIncome Taxation) 5,234,012 5,752,780 4,954,206 3,783,353 4,648,548 3,698,682 4,285,255 2,961,309 3,090,017 1,691,530Property, Plant & Equipment 3,387,117 4,137,518 3,690,014 3,135,030 2,896,049 2,785,092 1,984,070 1,980,472 1,947,968 2,518,481132,775,872 154,046,245 143,500,353 130,306,108 113,608,444 88,183,642 80,051,069 67,778,620 60,302,730 55,927,613LIABILITIESDeposits from Customers 104,815,899 107,938,801 111,299,612 100,078,809 85,833,954 68,301,154 59,362,955 52,431,165 47,859,511 41,695,054Borrowings & Debentures 9,164,909 26,308,876 14,775,780 13,167,204 13,037,404 6,648,055 8,606,998 6,355,156 4,400,760 6,947,041Other Liabilities 8,189,922 12,762,164 9,901,004 9,860,078 9,998,624 9,296,381 7,838,625 6,106,586 5,796,800 5,291,888Taxation – – 472,306 817,297 105,420 (187,856) (145,304) (46,339) (55,800) (32,156)Dividends 22,668 16,393 15,416 14,442 6,763 21,716 22,396 85,006 63,426 55,588122,193,398 147,026,234 136,464,118 123,937,830 108,982,165 84,079,450 75,685,670 64,931,574 58,064,697 53,957,415EQUITYStated Capital- Share Capital 4,730,501 1,705,101 1,705,101 1,705,101 869,501 869,501 869,501 469,501 446,141 435,600- Share Premium 837,319 837,319 837,319 837,319 674,922 696,235 713,399 183,167 194,485 202,144Reserve Fund 506,919 479,754 468,250 422,091 377,688 343,296 303,146 289,158 275,799 270,349Reserves 4,507,735 3,997,837 4,025,565 3,403,767 2,704,168 2,195,160 2,479,353 1,905,220 1,321,608 1,062,10510,582,474 7,020,011 7,036,235 6,368,278 4,626,279 4,104,192 4,365,399 2,847,046 2,238,033 1,970,198TOTAL LIABILITIES &EQUITY 132,775,872 154,046,245 143,500,353 130,306,108 113,608,444 88,183,642 80,051,069 67,778,620 60,302,730 55,927,613Commitments andContingencies 22,262,562 26,874,375 24,335,965 22,924,450 22,942,795 20,983,027 17,743,062 13,206,586 10,083,442 10,274,265

Seylan Bank PLC Annual Report 2009 233Summary of Performance IndicatorsMeasure 2009 2008 2007 2006 2005(Reclassified) (Reclassified) (Restated)SIZEAssets Growth % (13.81) 7.35 10.13 14.70 28.83Contingent/(Total Assets + Contingent) % 9.27 10.35 11.33 12.29 14.36Interest Earning Assets/Total Assets % 85.17 85.20 85.26 86.62 85.30Cash & Reserves/Total Assets % 7.36 8.03 7.50 7.57 7.89Risk Weighted Assets Growth % (11.91) 23.00 5.37 19.04 22.22PROFITABILITYReturn on Average Assets % 0.38 0.10 0.67 0.73 0.68Return on Average Equity % 6.20 2.22 13.84 16.25 15.76Net Profit/(Total Assets + Commitment &Contingencies) % 0.35 0.09 0.55 0.58 0.52Net Interest Margin (NII/Avg. Int. Earn. Assets) % 5.91 5.67 5.77 5.84 6.19Net Interest Income/Total Income % 31.16 28.48 32.18 35.67 40.22Cost to Income Ratio % 67.82 75.79 66.31 64.18 60.68Average Interest Yield % 16.95 17.00 15.14 13.47 12.39Average Interest Cost % 11.72 11.98 10.14 8.38 6.79Interest Rate Spread % 5.23 5.02 5.00 5.09 5.60Int. Yield on Customer Advances % 18.48 17.18 15.79 14.03 12.22Int. Cost on Customer Deposits % 10.60 11.50 8.27 6.56 5.19Spread on Customer Deposits & Advances % 7.88 5.68 7.52 7.46 7.03Dividend Payout (Note) % 24.48 – 27.72 28.74 49.02Growth Rate of Equity % 50.99 (0.23) 10.54 37.93 12.83Earnings per Share Rs. 2.83 0.90 5.50 6.69 8.20Ordinary Dividends per Share (Note) Rs. 0.50 – 1.50 1.50 2.00ASSET QUALITYLoss Provisions Rs. Mn. 6,466 6,560 4,972 4,559 4,267Provision Recoveries Rs. Mn. 598 588 720 874 600Provisions/Loans + Bills + Leases % 7.00 5.74 4.69 4.53 4.85NPL with Interest in Suspense Rs. Mn. 31,150 19,428 16,345 13,951 13,502NPL with Interest in Suspense/Gross Loans % 33.61 16.93 15.39 13.85 15.34Interest in Suspense on Advances Rs. Mn. 5,659 3,523 3,302 2,725 2,291NPL Excluding Interest in Suspense Rs. Mn. 25,491 15,906 13,043 11,226 11,211NPL Excluding Interest in Suspense/GrossLoans Excluding Interest in Suspense % 29.29 14.30 12.68 11.45 12.74Int. in Suspense/Gross Loans % 6.11 3.07 3.11 2.70 2.60Net Assets Value per Share Rs. 41.60 41.80 41.90 37.90 55.36CAPITAL ADEQUACYLeverage on Shareholders' Funds Times 11.55 20.94 19.45 19.46 23.56Leverage on Capital Funds (Including Debentures) Times 7.96 12.16 10.46 10.69 12.31Percentage Earnings Retained (Note) % 75.52 100.00 72.28 71.26 50.98Equity/Deposits, Borrowings & SecuritiesSold Under Repurchase Agreements % 9.61 5.39 5.81 5.84 4.87Equity/Total Assets % 7.94 4.54 4.88 4.86 4.07Equity/Loans + Bills + Leases % 13.14 6.71 7.17 6.79 5.68LIQUIDITY & FUNDINGLoans + Bills + Leases/Deposits, Borrowings &Securities Sold Under Repurchase Agreements % 73.15 80.39 80.98 85.98 85.79Customer Deposits/Deposits, Borrowings,Securities Sold Under RepurchaseAgreements & Debentures % 91.96 80.40 88.28 88.37 86.81Liquid Assets/Total Assets % 31.63 24.70 24.21 22.06 20.40Liquid Assets/Deposits, Borrowings & SecuritiesSold Under Repurchase Agreements % 38.26 29.37 28.81 26.50 24.40Net Lending or (Borrowings) in Call Money Market Rs. Mn. (1,331) (4,449) (4,430) (2,538) (3,321)OTHER DATANumber of Banking Centres 117 114 114 116 116Number of Staff Members 3,733 3,923 3,871 3,934 3,700Profits per Staff Member Rs. ’000 146 40 238 226 186Number of Ordinary Shares - Voting ’000 130,000 43,560 43,560 43,560 43,560- Non-Voting ’000 123,560 123,560 123,560 123,560 40,000Share Prices as at 31st December - Voting Rs. 37.00 28.50 32.00 35.00 36.75- Non-Voting Rs. 16.00 6.00 8.00 9.75 16.25Note: Dividends for year 2009 are accounted for as per the Accounting Standard SLAS 12 (Revised).

234Seylan Bank PLC Annual Report 2009INCOME STATEMENT IN US DOLLARSBankGroupFor the year ended 31st December 2009 2008 2009 2008(Reclassified)(Restated)US$ ’000 US$ ’000 US$ ’000 US$ ’000Income 202,488 223,418 214,595 239,415Interest Income 181,093 190,726 190,612 204,922Less: Interest Expenses 117,989 127,092 125,836 140,491Net Interest Income 63,104 63,634 64,776 64,431Foreign Exchange Profit 4,560 5,936 4,560 5,936Net Fee and Commission Income 10,224 15,484 10,715 15,737Other Income 5,692 10,810 7,693 12,559Operating Income 83,580 95,864 87,744 98,663Less: Operating ExpensesPersonnel Expenses 20,859 30,139 21,866 31,936Premises, Equipment & Establishment Expenses 14,063 13,321 14,166 14,293Provision for Loan Losses 19,092 21,834 19,481 24,815Diminution/(Appreciation) in Value of Investments (412) 360 (367) 2,452Other Overhead Expenses 22,172 28,837 24,434 31,37675,774 94,491 79,580 104,872Profit/(Loss) from Operations before Taxation 7,806 1,373 8,164 (6,509)Less: Income Tax Expense 3,054 – 4,240 568Profit/(Loss) for the Year 4,752 1,373 3,924 (7,077)Attributable toEquity Holders of the Bank 4,752 1,373 4,978 (1,265)Minority Interest – – (1,053) (5,812)Net Profit/(Loss) for the Year 4,752 1,373 3,925 (7,077)Basic Earnings/(Loss) per Share (US$) 0.025 0.008 0.026 (0.008)Exchange rate of US$ 1 was Rs. 114.35 as at 31.12.2009 (Rs. 113.00 as at 31.12.2008)The Income Statement given on this page is solely for the convenience of the shareholders, bankers, investors,customers and other users of Financial Statements and do not form part of the Audited Statements.

Seylan Bank PLC Annual Report 2009 235BALANCE SHEET IN US DOLLARSBankGroupAs at 31st December 2009 2008 2009 2008Assets (Reclassified) (Restated)US$ ’000 US$ ’000 US$ ’000 US$ ’000Cash & Cash Equivalents 40,960 48,773 41,031 50,272Balance with Central Bank of Sri Lanka 44,462 60,682 44,463 60,683Commercial Papers 2,838 3,451 2,838 3,451Securities Purchased Under Resale Agreements 25,814 5,884 25,845 7,567Dealing Securities 127,190 7,664 144,080 12,478Investment Securities 130,279 214,542 143,609 241,248Bills of Exchange 11,564 13,025 11,564 13,025Loans & Advances 664,967 865,010 665,023 876,799Lease Rentals Receivable within One Year 13,981 19,875 13,981 28,229Lease Rentals Receivable later than One Year andNot later than Five Years 11,595 23,775 11,595 33,560Lease Rentals Receivable after Five Years 17 34 17 88Investments in Associate Companies – – – 481Investments in Subsidiary Companies 7,522 8,394 – –Group Balances Receivable 7,072 5,515 – –Investment Properties 4,555 4,609 13,159 13,638Current Taxation 784 958 784 958Deferred Taxation 3,972 810 3,973 848Property, Plant & Equipment 29,069 36,047 35,956 43,705Leasehold Rights 552 568 5,809 5,957Intangible Assets – – – 225Other Assets 33,943 43,625 36,691 51,996Total Assets 1,161,136 1,363,241 1,200,418 1,445,208LiabilitiesDeposits 916,624 955,211 916,624 969,076Borrowings 26,724 62,876 30,596 81,494Securities Sold Under Repurchase Agreements 16,429 128,464 36,510 168,902Group Balances Payable 84 13,487 – –Advance Received Against Debentures – 5,580 – 5,580Debentures 36,995 35,902 36,995 37,645Current Tax Liabilities – – 1,248 224Other Liabilities 71,735 99,597 74,273 105,322Total Liabilities 1,068,591 1,301,117 1,096,246 1,368,243EquityStated Capital 48,691 22,499 48,691 22,499Statutory Reserve Fund 4,433 4,246 4,433 4,262Reserves 39,421 35,379 44,026 42,146Total Equity Attributable to Equity Holders of the Bank 92,545 62,124 97,150 68,907Minority Interest – – 7,022 8,058Total Equity 92,545 62,124 104,172 76,965Total Liabilities & Equity 1,161,136 1,363,241 1,200,418 1,445,208Commitments & Contingencies 194,688 237,826 194,688 237,826Exchange rate of US$ 1 was Rs. 114.35 as at 31.12.2009 (Rs. 113.00 as at 31.12.2008)The Balance Sheet given on this page is solely for the convenience of the Shareholders, Bankers, Investors,Customers and Other Users of Financial Statements and do not form part of the Audited Statements.

236Seylan Bank PLC Annual Report 2009Investor InformationTwenty Largest Shareholders as at 31st December2009 2008*Ordinary Voting Shares No. of Shares % No. of Shares %1. Sri Lanka Insurance Corporation Limited(**Including 350,000 shares of Sri Lanka InsuranceCorporation Limited - Life Fund)19,500,000 ** 15.00 350,000(Life Fund)2. Bank of Ceylon 13,000,000 10.00 – –3. Dr. T. Senthilverl 13,000,000 10.00 2,178,000 5.004. Browns Plantations Investment (Pvt) Limited 12,416,966 9.55 – –5. Lanka Orix Information Technology Limited 12,416,966 9.55 – –6. Seyfest (Private) Limited 2,977,996 2.31 2,177,996 5.007. Employees’ Provident Fund 2,865,600 2.20 – –8. Sesot (Private) Limited 2,252,900 1.73 2,177,900 5.009. Nation Lanka Finance PLC(Formerly Ceylinco Finance PLC) 2,139,010 1.65 2,140,226 4.9110. Seybest (Private) Limited 2,132,900 1.64 2,177,900 5.0011. Seyshop (Private) Limited 2,132,900 1.64 2,177,900 5.0012. Esots (Private) Limited 2,115,857 1.63 2,160,857 4.9613. Ceylinco Limited 1,680,896 1.29 1,680,896 3.8614. National Savings Bank 1,510,900 1.16 1,510,900 3.4715. The Finance Company PLC 1,473,223 1.13 1,473,223 3.3816. Phoenix Ventures Limited 1,337,400 1.03 90,000 0.2117. Miss. M.D. Bollagala 1,194,500 0.92 – –18. Sotse (Private) Limited 962,331 0.74 1,002,331 2.3019. Mr. K.R.B. Fernando 955,400 0.73 – –20. Ceylinco Insurance PLC, A/C No. 2 (General Fund) 798,610 0.61 65,000 0.15Sub Total 96,864,355 74.51 21,363,129 49.04Balance Shares Held by Other Voting Shareholders 33,135,645 25.49 22,196,871 50.96(10,964 Shareholders) (7,812 Shareholders)Total Voting Shares 130,000,000 100.00 43,560,000 100.000.80* Comparative shareholdings as at 31st December, 2008 of the twenty largest shareholders as at 31st December, 2009.Note: During the year, in order to part settle their liabilities to the Bank (Settlor), under their respective Trust Deeds,four employee share owning trusts set up by the Bank disposed of shares which were in turn purchased by two otheremployee share owning trusts of the Bank out of their own funds. Details of the sales/purchases are given below:Purchases ofOrdinary VotingShares of SBKSales ofOrdinary VotingShares of SBKSesot (Private) Limited 75,000 –Seyfest (Private) Limited 100,000 –Seyshop (Private) Limited – 45,000Seybest (Private) Limited – 45,000Sotse (Private) Limited – 40,000Esots (Private) Limited – 45,000In addition, Seyfest (Private) Limited was allotted 700,000 Ordinary Voting Shares in the Seylan Bank'sPublic Issue at an issue price of Rs. 35/- per share. The shares were purchased by the Trust Company outof its own funds.

Seylan Bank PLC Annual Report 2009 2372009 2008*Ordinary Non-Voting Shares No. of Shares % No. of Shares %1. Lanka Orix Leasing Company PLC 19,733,400 15.97 – –2. Pershing LLC S/A Averbach Grauson & Co. 8,582,400 6.94 10,119,200 8.193. Browns Plantation Investments (Pvt) Limited 6,588,700 5.33 – –4. Taprobane Holdings Limited 5,607,800 4.54 – –5. Mr. S.V. Somasunderam 4,368,800 3.54 5,591,900 4.526. Mr. L.M.S.H. Alnaqib 3,000,000 2.43 – –7. Miss. M.D. Bollagala 2,937,300 2.38 – –8. Questnet Limited 2,409,500 1.95 – –9. Mr. T.T. Al-Nakib 2,021,900 1.64 – –10. Mr. W.K.V.M. Fernando 1,669,300 1.35 – –11. Mr. M.M. Udeshi 1,424,000 1.15 100 0.0012. Phoenix Ventures Limited 1,400,000 1.13 – –13. Prime Lands (Pvt) Limited 1,376,300 1.11 – –14. Mrs. K.W.S.H. Fernando 1,362,600 1.10 – –15. Mr. N.R. Somaiya 1,248,500 1.01 1,248,500 1.0116. Mr. E. Thavagnanasooriyam 1,183,900 0.96 500,000 0.4017. Employees’ Trust Fund Board 1,099,400 0.89 1,099,400 0.8918. Miss. S.A. Fernando 1,095,700 0.89 – –19. Mrs. S. Surendini 935,900 0.76 500,000 0.4020. Mr. H.W.M. Woodward 914,800 0.74 30,000 0.02Sub Total 68,960,200 55.81 19,089,100 15.45Balance Shares Held by other Non-Voting Shareholders 54,599,800 44.19 104,470,900 84.55(6,126 Shareholders) (5,642 Shareholders)Total Non-Voting Shares 123,560,000 100.00 123,560,000 100.00* Comparative shareholdings as at 31st December, 2008 of the twenty largest shareholders as at 31st December, 2009.

238Seylan Bank PLC Annual Report 2009ANALYSIS OF THE DISTRIBUTION OF SHAREHOLDERS AS AT 31ST DECEMBER 2009Range of ShareholdingNo. ofShareholdersOrdinary (Voting) Shares Ordinary (Non-Voting) SharesNo. ofNo. of No. ofSharesShareholders SharesPercentage(%) ofShareholdingPercentage(%) ofShareholding1 - 1,000 8,241 2,516,018 1.94 3,007 1,430,033 1.161,001 - 10,000 2,318 7,630,830 5.87 2,354 9,524,999 7.7110,001 - 100,000 362 9,974,365 7.67 669 19,196,675 15.54100,001 - 1,000,000 46 16,080,773 12.37 98 26,298,793 21.281,000,001 & Above 17 93,798,014 72.15 18 67,109,500 54.31Total 10,984 130,000,000 100.00 6,146 123,560,000 100.00Resident/Non-ResidentResident 10,900 128,906,075 99.16 6,079 102,966,980 83.33Non-Resident 84 1,093,925 0.84 67 20,593,020 16.67Individuals/InstitutionsIndividuals 10,707 62,679,649 48.22 5,948 63,553,261 51.44Companies 277 67,320,351 51.78 198 60,006,739 48.56Ordinary Shares (Quoted)Voting (SEYB-N) Non-Voting (SEYB-X)2009 2008 2009 2008No. of Shares Issued 130,000,000 43,560,000 123,560,000 123,560,000First & Final Dividend - Proposed (Rs. per share) 0.50 – 0.50 –Share PricesHighest (Rs.) 49.25 34.00 19.50 10.00Lowest (Rs.) 27.00 15.75 4.90 4.90Last Traded (Rs.) 37.00 28.50 16.00 6.00Percentage of Public Holding (%) 64.90 99.96 83.99 99.89Shareholdings of Directors and Chief Executive Officer as at 31st December 2009Directors’ shareholdings are given on page 125 of the Annual Report of the board of directors. Shares heldby the Chief Executive Officer, Mr. A.M. Pasqual as at 31st December 2009 are as follows:No. of Shares% Holding33,000 Ordinary Voting Shares 0.02533,000 Ordinary (Non-Voting) Shares 0.027

Seylan Bank PLC Annual Report 2009 239Debentures (Quoted)Debentures 2006/2011(Listed on CSE in July 2006)(SEYB D86, D87 and D88) Monthly Interest(13%)Annual Interest(13.50%)FloatingRate of Interest2009 2008 2009 2008 2009 2008No. of Debentures Issued 7,646,400 4,620,800 305,950Debenture Prices:Highest (Rs.) 100.00 74.00 97.00 75.69 NotLowest (Rs.) 60.00 74.00 97.00 75.69 tradedLast Traded (Rs.) 98.00 74.00 97.00 75.69 in 2009Debentures 2007/2012 – Issue 1(Listed on CSE in June 2007)(SEYB D118, D119 and D120) Monthly Interest(15.75%)Annual Interest(16.75%)FloatingRate of Interest2009 2008 2009 2008 2009 2008No. of Debentures Issued 2,916,200 4,275,450 302,350Debenture Prices:Highest (Rs.) 100.26 74.14 90.00 84.00 86.00 82.44Lowest (Rs.) 77.51 74.14 77.50 84.00 80.00 82.44Last Traded (Rs.) 100.00 74.14 90.00 84.00 80.00 82.44Debentures 2007/2012 – Issue 2(Listed on CSE in January 2008)(SEYB D127, D128, D129 and D130)Monthly Interest(17.00%)Annual Interest(18.00%)FloatingRate of InterestPayable QuarterlyFloatingRate of InterestPayable Annually2009 2008 2009 2008 2009 2008 2009 2008No. of Debentures Issued 2,089,550 2,962,400 433,350 107,550Debenture Prices:Highest (Rs.) 84.00 99.47 90.00 85.00 100.00 Not traded Not TradedLowest (Rs.) 59.69 99.47 90.00 85.00 100.00 During the During theLast Traded (Rs.) 80.00 99.47 90.00 85.00 100.00 Year 2008 Years 2008/09Debentures 2008/2013(Listed on CSE in February 2009)(SEYB D141, D142, D143 and D144)Monthly Interest(20.50%)Annual Interest(21.50%)FloatingRate of InterestPayable QuarterlyFloatingRate of InterestPayable Annually2009 2008 2009 2008 2009 2008 2009 2008No. of Debentures issued 3,954,450 2,316,100 1,200 33,900Debenture Prices:Highest (Rs.) 100.04 N/A Not N/A Not N/A Not N/ALowest (Rs.) 78.75 Traded Traded TradedLast Traded (Rs.) 95.00 in 2009 in 2009 in 2009

240Seylan Bank PLC Annual Report 2009Current PreviousPeriod ComparativePeriod**31.12.2009 31.12.2008Interest Rate of Comparable Government Security 11.65% 18.64%Debt/Equity Ratio 0.40 0.68Interest Cover 2.23 1.21Quick Asset Ratio 0.59 0.73Interest Yield as at Date of Last Trade2006/11 IssueAnnual Interest (27.10.2009)/(29.09.2008) 13.92% 17.84%Monthly Interest (22.12.2009)/(03.10.2008) 14.08% 18.65%Floating Interest - Annual* * *2007/12 Issue IAnnual Interest (24.11.2009)/(17.09.2008) 18.61% 19.94%Monthly Interest (15.12.2009)/(29.09.2008) 16.94% 22.84%Floating Interest - Annual (09.10.2009)/(08.10.2008) 25.16% 23.05%2007/12 Issue IIAnnual Interest (08.12.2009)/(14.08.2008) 20.00% 21.18%Monthly Interest (17.11.2009)/(02.12.2008) 22.99% 18.49%Floating Interest - Quarterly (07.12.2009)/* 15.15% *Floating Interest - Annual* * *2008/13 IssueAnnual Interest* * *Monthly Interest (15.10.2009)/* 23.73% *Floating Interest - Quarterly* * *Floating Interest - Annual* * *Yield To Maturity of Trade Done On2006/11 IssueAnnual Interest (27.10.2009)/(29.09.2008) 15.49% 26.82%Monthly Interest (22.12.2009)/(03.10.2008) 14.45% 26.52%Floating Interest - Annual* * *2007/12 Issue IAnnual Interest (24.11.2009)/(17.09.2008) 22.12% 23.53%Monthly Interest (15.12.2009)/(29.09.2008) 15.74% 27.06%Floating Interest - Annual (09.10.2009)/(08.10.2008) 32.06% 26.90%2007/12 Issue IIAnnual Interest (08.12.2009)/(14.08.2008) 22.98% 23.79%Monthly Interest (17.11.2009)/(02.12.2008) 26.83% 17.19%Floating Interest - Quarterly (07.12.2009)/* 14.36% *Floating Interest - Annual* * *2008/13 IssueAnnual Interest* * *Monthly Interest (15.10.2009)/* 22.35% *Floating Interest - Quarterly* * *Floating Interest - Annual* * ** No trading during the period.** Comparative Period - Immediate Preceding Financial Year.

Seylan Bank PLC Annual Report 2009 241Branch NetworkAmbalangodaNo. 24 A, Galle Road, AmbalangodaTel: 091 2258010/2256154AmparaRegal Cinema Complex129, D.S. Senanayake Street, AmparaTel: 063 2224897-9AnuradhapuraNo. 250, Main Street, AnuradhapuraTel: 025 2224649/4580940AttidiyaNo. 214, Main Road, Attidiya, DehiwelaTel: 2738453/4203565AvissawellaNo. 71, Ratnapura Road, AvissawellaTel: 036 2222007/5673333BadullaNo. 10, Cocowatta Road, BadullaTel: 055 2223414/4499524BalangodaNo. 123, Barns Ratwatte Mawatha, BalangodaTel: 045 2287007/2288020BandaragamaNo. 17 A, Horana Road, BandaragamaTel: 038 2290706/4290263BandarawelaNo. 240, Badulla Road, BandarawelaTel: 057 2223144/2231085BatticaloaNo. 06, Lloyd’s Avenue, BatticaloaTel: 065 2224419/2224587BeliattaNo. 50, Walasmulla Road, BeliattaTel: 047 2243619/2251478BogawanthalawaNo. 79, Main Street, BogawanthalawaTel: 052 2267576/060 2538295BoralesgamuwaNo. 24, Kesbewa Road, BoralesgamuwaTel: 2517548-9/5525054BorellaNo. 1119, Maradana Road, Borella, Colombo 08Tel: 2681191-2/2678189Ceylinco HouseNo. 69, Janadhipathi Mawatha, Colombo 01Tel: 2445840-3/4714655ChilawNo. 46, Kurunegala Road, ChilawTel: 032 2222121/4860550Cinnamon GardensNo. 4, Baptist Chapel Road, Colombo 07Tel: 2694966/2683726Colombo SouthNo. 30, Galle Road, Colombo 06Tel: 2593405/4510030DehiattakandiyaNo. 83/84, Main Street, DehiattakandiyaTel: 027 2250268-9DehiwelaNo. 166 D, Galle Road, DehiwelaTel: 4201756-7/2726395Embilipitiya53, New Town Road, EmbilipitiyaTel: 047 2230340/4379635First City OfficeNo. 33, Sri Baron Jayathilake Mawatha,Colombo 01Tel: 4725000/4714365Free Trade ZoneUnit 3, Plaza Complex, KIPZ, KatunayakeTel: 2252566/2251462GalleNo. 34, 1st Cross Street, Talbot Town, GalleTel: 091 2223514/5454647GampahaNo. 1 J, Bauddhaloka Mawatha, GampahaTel: 033 2222618/2230717GampolaNo. 44, Kandy Road, GampolaTel: 081 2352741-2/4485435GanemullaNo. 187/1, Kirindiwatta Road, GanemullaTel: 033 2260230/2260738GrandpassNo. 401, Prince of Wales Avenue, Colombo 14Tel: 2331726-7/2451061HambantotaNo. 32 & 34, Wilmet Street, HambantotaTel: 047 2220507/2220518HattonNo. 42, Dunbar Road, HattonTel: 051 2222347/2222234Havelock TownNo. 164,166, Havelock Road, Colombo 05Tel: 2596550-3/2597497HingurakgodaNo. 13 & 14, Airport Road, HingurakgodaTel: 027 2246242/027 2246087HomagamaNo. 94 , High Level Road, HomagamaTel: 4442021-2/2855065HoranaNo. 160/1/1, Ratnapura Road , HoranaTel: 034 2261176/2261018Ja-elaNo. 165 and 165/2/1, Colombo Road, Ja-elaTel: 2237421/5858373JaffnaNo. 560 & 562, Hospital Road, JaffnaTel: 021 2223047/2225073KadawathaNo. 28 B, Ganemulla Road, KadawathaTel: 2925594-5/4816821KalubowilaNo. 32, S. De S. Jayasinghe Mawatha,KalubowilaTel: 5557567/4202648KalutaraNo. 338, Main Street, KalutaraTel: 034 2225035-7/5081841KandyNo. 65, King’s Street, KandyTel: 081 2232767/2233484KattankudyNo. 230, Main Street, KattankudyTel: 065 2247456/2246625KatuneriyaNo. 99/1, Chilaw Road, KatuneriyaTel: 031 2255209/2257764-5KegalleNo. 143, Colombo Road, KegalleTel: 035 2223538/2222100KekirawaNo. 06, Yakalla Road, KekirawaTel: 025 2264590-1/2263215KiribathgodaNo. 52, Kandy Road, KiribathgodaTel: 2910581/4936902KochchikadeNo. 66, Chilaw Road, KochchikadeTel: 031 2277661/2277580KoggalaNo. 09, E.P.Z, Koggala, HabaraduwaTel: 091 2283390Kollupitiya428, R.A. De Mel Mawatha, Colombo 03Tel: 2576911-3/2576910KottawaNo. 34, Nawasiri Building, Highlevel Road,KottawaTel: 2842682-3/4304784Kuliyapitiya139, Hettipola Road, KuliyapitiyaTel: 037 2281450/4696450KurunegalaNo. 54, Colombo Road, KurunegalaTel: 037 2223581-2/2224276MaharagamaNo. 201, Highlevel Road, MaharagamaTel: 2841997-8/2841999MalabeNo. 11, Athurugiriya Road, MalabeTel: 4547400/2560403ManampitiyaMain Street, ManampitiyaTel: 027 2224455/060 2279685MaradanaNo. 250, Sri Sangaraja Mawatha, Colombo 10Tel: 2473281/2473773MarandagahamulaNo. 150, Divulapitiya Road, MarandagahamulaTel: 031 2246377/2246096MataleNo. 166, 168, Main Street, MataleTel: 066 2223241-2/4460123MataraNo. 45, Anagarika Dharmapala Mawatha, MataraTel: 041 2221181-2/2222393MatugamaNo. 06, Aluthgama Road, MatugamaTel: 034 2247544/4931350MawanellaNo. 21, Courts Road, MawanellaTel: 035 2246007/2246988

242Seylan Bank PLC Annual Report 2009MeegodaMeegoda Economic Centre, MeegodaTel: 2830820/2830817MillenniumSeylan Towers,No. 90, Galle Road, Colombo 03Tel: 2456145/2456135MirigamaNo. 42, Danowita Road, MirigamaTel: 033 2273001-2MoratuwaNo. 509, Galle Road, Rawathawatte, MoratuwaTel: 2647900/2642954Mount LaviniaNo. 198, Galle Road, Mount LaviniaTel: 2731266-7/4213194NawalaNo. 48/A, Narahenpita Road, NawalaTel: 2806727/2807329NawalapitiyaNo. 02, Baily Road, NawalapitiyaTel: 054 2222056-7/2222018NegomboNo. 141, Rajapaksha Broadway, NegomboTel: 031 2224334-6/2233054NelliaddyNo. 149, Point Pedroo Road, NelliaddyTel: 021 3205961-3NittambuwaNo. 195/1, Colombo Road, NittambuwaTel: 033 2295270-1NugegodaNo. 211, High Level Road, NugegodaTel: 2811180-1/2809955Nuwara EliyaNo. 48, Park Road, Nuwara EliyaTel: 052 2223026/2234338Old Moor StreetNo. 315/317, Old Moor Street, Colombo 12Tel: 5358885/2421483PanaduraNo. 401, Galle Road, PanaduraTel: 038 2233172-3/2238355PelmadullaNo. 17, Galwatta Road, PelmadullaTel: 045 2275034/2275625PettahNo. 96, Main Street, Colombo 11Tel: 2337823-5/2441471PolonnaruwaLake View Building, PolonnaruwaTel: 027 2223168-9/2224590PuttalamNo. 56, K.K. Street, PuttalamTel: 032 2265194/2265580RaddolugamaNo. 171, N.H.S., RaddolugamaTel: 2292778/2292252RatnapuraNo. 06, Goodshed Road, RatnapuraTel: 045 2225801-2/2223730RuwanwellaNo. 52, Main Street, RuwanwellaTel: 036 2267445-6/2268623SarikkamullaNo. 97, Galle Road, Sarikkamulla, PanaduraTel: 038 4282844-5/2235265Savings & TravelNo. 202,204, Main Street, Colombo 11Tel: 4718344-5/2345797SoysapuraNo. 164/2, Soysapura, MoratuwaTel: 2622756/5524673ThalawakeleNo. 08 & 10, Kothmale Road, ThalawakeleTel: 052 2258635-8TissamaharamaNo. 547, Debarawewa, TissamaharamaTel: 047 2237161-2/2239583TrincomaleeNo. 289, Central Road, TrincomaleeTel: 026 2227701-2/2227704VavuniyaNo. 45, 2nd Cross Street, VavuniyaTel: 024 2222633-4/2220077WarakapolaNo. 192, Main Street, WarakapolaTel: 035 2267628-9/2267100WattalaNo. 276, Negombo Road, WattalaTel: 4814717/2946266WelimadaNo. 107, Nuwara Eliya Road, WelimadaTel: 057 2245617/2244628WeliweriyaNew Kandy Road, WeliweriyaTel: 033 2255291/2257710YakkalaNo. 104, Kandy Road, YakkalaTel: 033 2226378/2227014Extension OfficesBaduraliyaNo. 92, Ratnapura Road, BaduraliyaTel: 034 2246716BeruwelaNo. 82, Galle Road, BeruwelaTel: 034 2279887ChankanaiMallakkam Junction, Ponnalai Road,Main Street, ChankanaiTel: 021 3205965/3205967DambullaNo. 601, Anuradhapura Road, DambullaTel: 066 2283023HasalakaNo. 95, 96, Corporative Society Building,Kandy Road, HasalakaTel: 055 2258324IngiriyaNo. 23, Central Building, Padukka Road,IngiriyaTel: 034 2269754KatugastotaNo. 444, Katugastota Road, KandyTel: 081 2212870KirindiwelaNo. 89, Gampaha Road, KirindiwelaTel: 033 2269709/4923886KotagalaMain Street, KotagalaTel: 051 2222797KotahenaNo. 310, George R. de Silva Mawatha, KotahenaTel: 2399660/4172460KotikawattaNo. 260 A, I.D.H. Road, KotikawattaTel: 2418883KotiyakumburaNo. 05, Main Street, KotiyakumburaTel: 035 2289035ManipayNo. 103, Ward No. 07, Jaffna Road, ManipayTel: 021 3205964/3205968MaswelaNo. 53, Mawela, MaswelaTel: 081 4927683MawathagamaNo. 56 F, Kandy Road, MawathagamaTel: 037 2298666MinuwangodaNo. 40, Cargills Building, Colombo Road,MinuwangodaTel: 2299004KirulaponeNo. 280 B, High Level Road, Colombo 06Tel: 2829054PallekeleBOI, PallekelleTel: 081 2423135/2423958PiliyandalaNo. 90 A, Horana Road, PiliyandalaTel: 2604982-3RanpokunugamaNo. 1, Maduwegedara, NittambuwaTel: 033 2282242SamanthuraiNo. 113, Hijra Junction, 1st Street,SamanthuraiTel: 067 2261284VeyangodaNo. 177, Main Street, VeyangodaTel: 033 2295050-1WijeramaNo. 525, Highlevel Road, Wijerama,NugegodaTel: 4301878YatiyantotaNo. 51/1/2, Ginigathhena Road, YatiyantotaTel: 036 2271480

Seylan Bank PLC Annual Report 2009 243GEOGRAPHICAL ANALYSISDeposits and AdvancesAs at 31st December 2009ProvinceNo. ofBranchesDepositsAdvancesIncludingLeasing**Rs. Mn. % Rs. Mn. %Western 46 67,938 64.8 61,876 77.0Southern 7 5,739 5.5 2,891 3.6Uva 3 2,138 2.0 846 1.1North-Central 5 2,463 2.3 1,308 1.6North-Western 7 6,604 6.3 3,204 4.0Eastern 5 3,637 3.5 1,808 2.3Northern 3 2,382 2.3 1,033 1.3Sabaragamuwa 9 6,921 6.6 3,469 4.3Central 8 6,994 6.7 3,853 4.8Total 93 104,816 100.0 80,288 100.0** Loans and advances excluding loan loss provision and interest in suspense.Commitments and ContingenciesAs at 31st December 2009ProvinceNo. of AcceptancesBranchesRs. Mn.Stand byLetters ofCreditRs. Mn.GuaranteesRs. Mn.DocumentaryCreditRs. Mn.Bills ForCollectionRs. Mn.ForwardExchangeContractsRs. Mn.TotalincludingCommitmentsRs. Mn.Western 46 2,600 279 4,864 1,845 1,246 (41) 10,793Southern 7 19 4 337 8 13 – 381Uva 3 – – 262 – – – 262North-Central 5 – – 347 – – – 347North-Western 7 69 – 451 35 14 – 569Eastern 5 – – 199 – 1 – 200Northern 3 – – 134 5 – – 139Sabaragamuwa 9 16 – 248 48 35 – 347Central 8 78 – 352 67 26 – 523Commitments 8,702Total 93 2,782 283 7,194 2,008 1,335 (41) 22,263

244Seylan Bank PLC Annual Report 2009GlossaryCapital Adequacy RatioThe percentage of risk-adjustedassets supported by capital asdefined under the frameworkof risk-based capital standardsdeveloped by the Bank forInternational Settlements (BIS)and as modified to suit localrequirements by the Central Bankof Sri Lanka.Cash EquivalentsCash equivalents are short term,highly liquid investments thatare readily convertible to knownamounts of cash and which aresubjected to an insignificant risk ofchanges in value.Contingent LiabilitiesConditions or situations at theBalance Sheet date, the financialeffect of which are to be determinedby the future events which may ormay not occur.Cost to Income RatioOperating expenses as a percentageof net income.Deferred TaxSum set aside in the FinancialStatements for taxation that maybecome payable/receivable ina financial year other than thecurrent financial year.Dividend YieldDividend earned per share as apercentage of its market value.Dividend CoverProfit after tax divided by grossdividends. This ratio measuresthe number of times dividendis covered by the current year’sdistributable profits.Equity Growth RateThe percentage increase in totalequity over the year under review.EquityTotal of shareholders’ funds; sharecapital + statutory reserves + otherreserves.ImpairmentThis occurs when recoverableamount of an asset is less than itscarrying amount.Interest Earning AssetsAssets, which earn interest - thetotal of Advances, Bills, Leases,Government Bills & Bonds, CallMoney and Placements with otherinstitutions.Interest in SuspenseInterest Income of non-performingloans; these are accrued but notconsidered as profits.Interest Rate SpreadThe difference between theeffective interest yield and theeffective interest cost of the Bank.Liquid AssetsCash, Bills, Short-Term Funds,Balance with Central Bank andDealing Securities.Non-Performing LoansLoans which are not activated for90 days (3 months), or more.NPA RatioTotal non-performing advances(net of interest in suspense)divided by total advances portfolio(net of interest in suspense).Price Earning RatioMarket price of the Bank’sshare as number of times of theearnings per share.Profit HandoutDividends as a percentage of profitafter tax.Provision for Bad andDoubtful DebtsProvisions made for possible loanlosses, according to the periodof non-performance and theexposure over the collateral.REPOsRepurchase agreements; thesecurities sold to creditors (wholend money for funding purposes);with the intention of buying themback at a set price.Return on Average Assets (Roaa)Profit after tax as a percentage ofaverage assets.Return on Equity (ROE)Profit after tax as a percentage ofaverage equity.Risk Weighted AssetsThe assets and off Balance Sheetitems weighted according to therisk involved as stipulated by theCentral Bank.Statutory Reserve FundCapital reserve created as per theprovisions of Banking ActNo. 30 of 1988.Tier 1 CapitalConsists of the sum total of paid upordinary shares, non-cumulative,non-redeemable preference shares,share premium, statutory reservefund, published retained profits,general and other reserves, lessgoodwill.Tier 2 CapitalConsists of the sum totalof revaluation reserves, generalprovisions, hybrid capitalinstruments and approvedsubordinated debentures.Total CapitalTotal Capital is the sum of Tier 1Capital and Tier 2 Capital.Value AddedValue added is the wealth createdby providing banking services lessthe cost of providing such services.The value added is allocated amongthe employees, the providers ofcapital, to Government by way oftaxes and retained for expansionand growth.

Seylan Bank PLC Annual Report 2009 245CORPORATE INFORMATIONNAME OF COMPANYSeylan Bank PLCLEGAL FORMA public limited liability companyincorporated in Sri Lanka on28th August 1987 and listed onthe Colombo Stock Exchangein January 1989. A licensedcommercial bank regulatedunder the Banking Act No. 30 of1988 (as amended).COMPANY REGISTRATIONNUMBERPQ 9REGISTERED OFFICESeylan TowersNo. 90, Galle Road, Colombo 03HEAD OFFICESeylan TowersP.O. Box 400,No. 90, Galle Road, Colombo 03Tel : (94)-(11)-2456789,(94)-(11)-4-701000Fax : (94)-(11)-2456456Swift: SEYBLKLXE-mail: info@seylan.lkWebsite: www.eseylan.comBOARD OF DIRECTORSMr. Eastman Narangoda(Executive Chairman)BA (Econ.), FIB, FIMS (UK),FITD (SL), Dip. in Advanced BankManagement (Stockholm)Mr. R. Nadarajah(Executive Director)B.Sc. (Hons.), MBA, FCIB (London)Mr. Nihal M. Jayamanne PCMr. P. Lalith P. WithanaMBA, BA (Hons.), FCMA, FCARear Admiral (Rtd.)B. Ananda J.G. PeirisRSP, VSV, USP, ndc, psc, DISSMr. Pradeep G.S. KariyawasamDr. Nalaka H. GodahewaPh.D. (University of South Australia),MBA (Sri. J.), B.Sc. Eng. (Moratuwa),FCIMA (UK), FCMA (Aus.) andFCIM (UK).Mr. Ajith L. DevasurendraMr. Ishara C. NanayakkaraDip. in Business Accounting &Finance (Aus.)Mr. Samantha P.S. RanatungaMBA (Birmingham), B.Sc. (Hons.)Delhi(Appointed w.e.f. 12.01.2010)Company SECRETARYMs. M.R.S. GunasekaraACIS, LLB (Hons.) ColomboAttorney-at-LawAUDITORSMessrs KPMG Ford, Rhodes,Thornton & Co.Chartered Accountantscredit ratingThe Bank has been assigneda BBB+ (lka) national creditrating for implied long termunsecured senior debt by FitchRatings Lanka Limited.SUBSIDIARY COMPANIESSeylan Developments PLC(formerly Ceylinco SeylanDevelopments PLC)Seylan Bank Asset ManagementLimitedEXCHANGE HOUSEMANAGED BY SEYLANBANK PLCAsia Express Exchange,Muscat, Oman

246Seylan Bank PLC Annual Report 2009GRI Compliance indexIndexNo.Description Report Level PageNo.1. STRATEGY AND ANALYSIS1.1 Statement from the most senior decision-maker of the Sustainability Report 105organization about the relevance of sustainability to theorganization and its strategy2. ORGANISATIONAL PROFILE2.1 Name of the organisation Corporate Information 2452.2 Primary Brands, Products, and/or services Management Report 57-622.3 Operational Structure of the organisation Corporate Governance Report 75-992.4 Location of organisation's headquarters Corporate Information 2452.5 Number of countries where the organisationSustainability Report 111operates, and names of countries with either majoroperations or that are specifically relevant to thesustainability issues covered in the report2.6 Nature of ownership and legal form Corporate Information 2452.7 Markets served Geographical Analysis 2432.8 Scale of the reporting organisation Labour, Ten Year Summary 111,2302.9 Significant changes during the reporting period Investor Information,236,136Financial Statements2.10 Awards received in the reporting period Sustainability Report 1073. Report Parameters3.1 Reporting Period Sustainability Report 1063.2 Date of most recent previous report First Report based on GRI Guidelines –3.3 Reporting cycle Sustainability Report 1063.4 Contact point for questions regarding the report or its contents Sustainability Report 1063.5 Defining report content Sustainability Report 1063.6 Boundary of the report Sustainability Report 106-1073.7 Any specific limitations on the scope or boundary of the report None –3.8 Basis for reporting on joint ventures, subsidiaries,Not Applicable –leased facilities, outsourced operations, and other entitiesthat can significantly affect comparability from period toperiod and/or between organisations3.10 Explanation of the effect of any re-statementNot Applicable –of information provided in earlier report3.11 Significant changes from previous reportingNot Applicable –periods in the scope, boundary, or measurement methodsapplied in the report4. Governance, Commitments and Engagement4.1 Governance Structure of the Organisation Corporate Governance Report 764.2 Indicate whether the Chair of the highest governance body Corporate Governance Report 75-99is also an executive officer4.3 For organisations that have a unitary board structure, state the Corporate Governance Report 75-99number of members of the highest governance body that areindependent and/or non-executive members4.4 Mechanisms for shareholders and employees toCorporate Governance Report 75-99provide recommendations or direction to the highestgovernance body4.14 List of Stakeholder group engaged by the organisation Sustainability Report 1074.15 Basis for identification and selection of stakeholders Sustainability Report 107

Seylan Bank PLC Annual Report 2009 247IndexNo.Description Report Level PageNo.5. Management Approach and Performance IndicatorsEconomicEC1 Direct economic value generated and distributed, including Sustainability Report 108-109revenues, operating costs, employee compensation, donationsand other community investments, retained earnings andpayments to capital providers and governmentsEC3 Coverage of the organisation’s defined benefit plan obligations. Sustainability Report 108EC4 Significant financial assistance received from government. None –EC9 Understanding and describing significant indirect economic Sustainability Report 108impacts, including the extent of impactsEnvironmentalEN1 Materials used by weight or volume Sustainability Report 110EN5 Energy saved due to conservation and efficiency improvements Sustainability Report 110SocietySO1 Nature, scope and effectiveness of any programmes andpractices that assess and manage the impacts of operationson communities including entering, operating and exiting.SO2 Percentage and total number of business units analysed forrisks related to corruptionSO3 Percentage of employees trained in organisation’s anticorruptionpolicies and proceduresSO6 Total value of financial and in-kind contributions to politicalparties , politicians and related institutions by CountrySustainability Report 116Sustainability Report 116Sustainability Report 116NoneLabourLA1 Total workforce by employment type, employment contract, Sustainability Report 111and regionLA2 Total number and rate of employee turnover by age group, Sustainability Report 111gender, and regionLA4 Percentage of employees covered by collective bargaining Sustainability Report 112agreementsLA6 Percentage of total workforce represented in formal joint Sustainability Report 112management–worker health and safety committees thathelp monitor and advice on occupational health and safetyprogrammesLA7 Rates of injury, occupational diseases, lost days, andSustainability Report 112absenteeism, and number of work related fatalities by region.LA8 Education, training, counseling, prevention of diseases, Sustainability Report 112and risk-control programs in place to assist workforcemembers, their families, or community members regardingserious diseasesLA10 Average hours of training per year per employee bySustainability Report 114employee categoryLA11 Programmes for skills management and lifelong learning Sustainability Report 112,114that support the continued employability of employees andassist them in managing career endingsLA12 Percentage of employees receiving regular performance and Sustainability Report 112career development reviewsLA13 Composition of governance bodies and breakdown ofemployees per category according to gender, age group,minority group membership, and other indicators of diversitySustainability Report 112

248Seylan Bank PLC Annual Report 2009Subject IndexPage No.Annual Report of the Board of Directors 119Asset and Liability ManagementCommittee (ALCO) 69Asset Quality 60Audit Committee Report 100Auditors 128Auditors’ Report 136Balance Sheet 139Balance with Central Bank of Sri Lanka 166BASEL II Implementation Plan 73Basis of Provisioning for Loan Losses 179Bills of Exchange 177Board Integrated Risk ManagementCommittee Report 102Board of Directors 30, 123, 228Board Subcommittees 85, 124Borrowings 196Branch Network 241Business Continuity Planning 70Capital Adequacy Ratios 160Capital Commitments 205Cash and Cash Equivalents 141Cash Flow Statement 141CEO’s Message 57Chairman’s Message 07Commitments and Contingencies 203Concentration of Credit Risk 183Corporate Governance Report 75Corporate Information 245Cost to Income Ratio 233Credit Rating 245Credit Risk 66, 157Debentures 239Debt-Equity Ratio 240Deferred Tax 187Deposits 196Depreciation Rates 150Directors’ Interests in Contractswith the Company 129Directors' Interests in Shares 125Directors’ Responsibility for Financial Reporting 134Dividend Cover 56Dividend Payout 233Dividends 121Donations 121Earnings Per Share 56Events Occurring After Balance Sheet Date 205Financial Calendar 117Financial Highlights 56Financial Review 58Foreign Exchange Profit 138Form of ProxyEnclosedGeographical Analysis 243Glossary 244GRI Compliance Index 246Income Statement 138Income Tax Expense 164Page No.Independence of Auditors 128Interest Cover 240Interest Expense 162Interest Income 162Interest Rate Risk 69, 158Interest Register 125Interest Yield on Advances 233Interest Yield on Debentures 239Investor Information 236Lease Receivable 183Liquidity 158Liquidity Risk 70, 157Loan Losses & Provisions 178Loans & Advances 177Management Report 57Market Capitalisation 60Market Risk 68Maturity Analysis 218Net Asset Value Per Share 56, 233Nomination Committee 104Non-Performing Loans & Advances 179Notice of Meeting 249Operating Expenses 163Operational Efficiency 60Operational Risk 69Performance Indicators 233Price Earnings Ratio 56Principal Activities 143Productivity 60Profiles of the Board of Directors 228Profitability 58Property, Plant & Equipment 190Quick Assets Ratio 240Related Party Disclosures 205Remuneration Committee Report 103Return on Average Assets 233Return on Average Equity 233Risk Management Report 63Sectoral Exposure of Credit Portfolio 67Segment Reporting 220Senior Management Team 230Share Prices 238Significant Accounting Policies 144Stability 60Stated Capital 200Statement of Changes in Equity 140Statutory Reserve Fund 201Strategic Plan 52, 62Subsidiaries 119Sustainability Report 105The Case Study 07Ten Year Summary 232Total Equity 139US$ Accounts 234Value Added Statement 109Vision & Mission 49, 50Yield to Maturity of Debentures 240

Seylan Bank PLC Annual Report 2009 249Notice of MeetingNOTICE IS HEREBY GIVEN THAT the Twenty Third Annual General Meeting of Seylan Bank PLC will be heldon Friday 26th March 2010 at the “Oak Room”¸ Cinnamon Grand Colombo, No. 77, Galle Road, Colombo 03,at 10.30 a.m. for the following purposes:ROUTINE BUSINESS1. To receive and consider the Annual Report of the Board of Directors on the Affairs of the Company andthe Audited Financial Statements for the year ended 31st December 2009, together with the Report ofthe Auditors thereon.2. To declare a preference dividend as recommended by the Directors.3. To declare a first and final ordinary dividend as recommended by the Directors.4. To re-elect Mr. N.M. Jayamanne PC, who retires by rotation at the Annual General Meeting in terms ofArticle 82 of the Articles of Association of the Company, as a Director.5. To re-elect Mr. P.G.S. Kariyawasam at the Annual General Meeting in terms of Article 89 of the Articlesof Association of the Company, as a Director.6. To re-elect Dr. N.H. Godahewa at the Annual General Meeting in terms of Article 89 of the Articles ofAssociation of the Company, as a Director.7. To re-elect Mr. A.L. Devasurendra at the Annual General Meeting in terms of Article 89 of the Articles ofAssociation of the Company, as a Director.8. To re-elect Mr. I.C. Nanayakkara at the Annual General Meeting in terms of Article 89 of the Articles ofAssociation of the Company, as a Director.9. To re-elect Mr. S.P.S. Ranatunga at the Annual General Meeting in terms of Article 89 of the Articles ofAssociation of the Company, as a Director.10. To re-appoint Messrs KPMG Ford, Rhodes, Thornton & Co., Chartered Accountants as the Auditors forthe ensuing year and authorise the directors to determine their remuneration.11. To authorise the board of directors to determine donations for 2010.12. To transact any other business of which due notice shall be given.By Order of the Board(Ms.) M.R.S. GunasekaraCompany SecretaryColombo,25th February 2010Notes(a) A member entitled to attend or attend and vote is entitled to appoint a proxy to attend/vote instead of him/her. A proxy holderneed not be a member of the Company. A form of proxy is enclosed for this purpose.(b)(c)The completed Form of Proxy should be deposited at the Office of the Company Secretary at Seylan Towers, No. 90, Galle Road,Colombo 03 not less than 48 hours before the time appointed for the holding of the Annual General Meeting. Only registeredholders will be permitted to attend the Annual General Meeting.Shareholders/proxy holders are requested when attending the Annual General Meeting to bring with them their NationalIdentity Cards or any other form of valid identification.In order to minimise wastage, the Bank has taken steps to avoid more than one copy of the Annual Reportbeing dispatched, to any one shareholder.However, please inform the Company Secretary if you have received more than one copy of the Annual Report.

250fi,dka nexl=j mS't,a'iS' ys 2009 jd¾Isl jd¾;djfmrjokfnodyod .;hq;= w;aoelSulafi,dka nexl=j kej; uQ,Huh ia:djr;ajhg meñKSu uq¨ uy;a uQ,H fiajd fCIa;%hgu mdvï /ila lshdfokiqúfYaIS isoaê wOHhkhls'2008 foieïn¾ udifha§ fi,dka nexl=j yÈis iy wkfmaCIs; f,i uyck úYajdih ì|jeàfï ;;a;ajhlguqyqK ÿks' YS% ,xldfõ miajk úYd,;u nexl=j uqyqK ÿka fuu ;;a;ajh we;sùug f,dal wd¾Ólfha miqneiaufya;=fldgf.k we;s jQ wia:dhS jd;djrKho hïlsis n,mEula we;slf

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nryhd; tq;fp gpvy;rp Mz;lwpf;if 2009253Mf;fg+u;tkhd tu;j;jf Ma;nthd;W rpwe;j eilKiwfisAk; fw;Wf; nfhz;l ngWkjp kpf;f ghlq;fisg; gw;wpAk;njspT gLj;JtNjhL kl;Lk; epd;W tplhky; tpise;j ngWNgWfisAk; Kd;itf;fpd;wJ. nryhd; tq;fpiag;nghWj;jtiu mJ Gjpa gzpg;ghsu; rigapd; topfhl;lypy; kpfj; jpUg;jpahdJk; ];jpukhdJkhd ngWNgWfismile;Js;sijj; njuptpg;gjpy; ehd; ngUkfpo;tilfpd;Nwd;.,yq;if kj;jpa tq;fp Gjpa epu;thfj;ij epu;khzpf;Fk; eltbf;iffis vLj;jgpd; ntspahFk; Kjy;epjpahz;bd; mwpf;if ,JthFk; ,jw;F Ke;jpa gf;fq;fspy; xU Ma;twpf;if %yk; ehk; vLj;j tof;fj;Jf;Fkhwhd njhlu; Kaw;rpfisg; gw;wpf; Fwpg;gpl;Ls;Nshk;. njhlu;e;J tUk; gf;fq;fspy; me;j Ma;twpf;ifianryhd; tq;fp ,Jtiu ngw;w ntw;wpapd; milahsr; rpd;dkhfTk; vkJ vjpu;fhyg; ghijapd; njspthd iky;fw;fshfTk; ehk; njspT gLj;jpAs;Nshk;.2009 ,y; thpf;F gpd;dhyhd tUkhdk; 543.301 kpy;ypad; &ghthf ,Ue;jJ. ,J mjw;F Ke;jpa epjpahz;iltpl 250 rjtPj cau;r;rpiaf; fhl;bAs;sJ. mNjNtis tq;fpapd; tUkhdj;Jf;nfjpuhd nryT tpfpjk;Fwpg;gplj;jf;f Kd;Ndw;wj;ijf; fhl;bAs;sJ. ,J 75.79 tpfpjj;jpy; ,Ue;J 67.82 rjtpfpjkhff; Fiwe;Js;sJ.2008 k; Mz;bd; kpfTk; mOj;jk; epiwe;j rpf;fyhd Ntisapy; vkJ NgJkhd %yjd tpfpjk; 8.00 tPjj;jpy;,Ue;J 11.74 rjtpfpjkhf cau;e;jJ. 2008k; Mz;L ,Wjpg;gFjpapy; cyfyhtpa uPjpapy; Vw;gl;l rLjpahdnghUshjhur; ruptpd; fhuzkhf ,yq;ifapd; cs;ehl;L nghUshjhuj;jpy; ghupa gpd;dilT Vwgl;lJ. ,e;jvjph;kiwj;jhf;fj;jpd; fhuzkhf rpypq;Nfh FOkj;jpy; nryhd; tq;fpaplk; Vida epWtdq;fs; ngw;w fld;fspd;kPs; nfhLg;gdT Kw;whfj; jilg;gl;lJld; vkJ FOkj;jpd; ,iz mq;fj;Jt epWtdq;fSk; mt;thNw ngUksTghjpf;fg;gl;ld.,aq;f Kbahj epiyf;Fj; js;sg;gl;l fld;fspy; Vw;gl;l cau;r;rpapdhy; vkJ tq;fpapd; ,af;fKbahjnrhj;Jf;fspd; f;ld; tpfpjk; 16.93% ,Ue;J 33.61% tiu fle;j 12 khjq;fspy; cah;tile;Js;sJ ,J gw;wpatpguq;fs; ,e;j Mz;lwpf;ifapd; epu;thf mwpf;ifapYk; epjpepiyik RUf;fwpf;iffspYk; njspTgLj;jg;gLtJld;KjyPl;lhshu;fspdJk; gq;Fjhuu;fspdJk; ek;gpf;ifia ntd;wpl fsk; mikf;fg;gl;Ls;sijAk; njspTgLj;Jf;fpd;wJnryhd; tq;fpahdJ ,yq;if kj;jpa tq;fp jd;kPJ tpjpj;j jputj;jd;ik ,yf;Ffisf; fle;J my;yJ mjw;Fmg;ghYk; Kd;Ndw;wk; fz;Ls;sJ. Gjpa epu;thf rig epu;zapf;fg;gl;lgpd;du; vkJ Mf;fu;tkhd jpl;lq;fspd;gpufhuk;. gq;Fr;re;ij tpiyfs; njhlh;r;rpahd Kd;Ndw;wj;ijg; ngw;Ws;sd.RUf;fkhfr; nrhy;yg;Nghdhy; ,e;j Mz;lwpf;ifapd; Muk;gj;jpy; Fwpg;gp;lg;gl;Ls;s rpf;fy;fisAk;gpd;dilTfisAk; jPu;j;Jf;nfhs;s Mf;fg+u;tkhd eltbf;iffisAk; jPu;khdq;fisAk; njspthfntspg;gLj;jpAs;sNjhL mtw;wpd; rhjf ghjfq;fisAk; njspTgLj;jpAs;Nshk;. mj;Jld; epiyj;J epw;ff;$baKaw;rpfisAk; vy;yhf; Nfhzq;fspYk; Muha;e;j gpd;dh; r%f> nghUshjhu> Rw;whly; mgptpUj;jpapd;Nkk;ghl;ilAk; fUj;jpy; nfhz;L vkJ vjpu;fhy eltbf;iffis Kd;ndLj;Jr; nry;yTs;Nshk;.mj;Jld; Kf;fpa Nfe;jpuq;fshd jfty; njhopy;El;gk; njhlf;fk; re;ijg;gLj;jy; tiu rfy njhopy;JiwfspYk; nryhd; tq;fp jdJ fhybiag; gjpg;gjw;Fj; jPu;khdpj;Js;snjdTk; mjd; %yk; Mf;fu;g+tkhdnjhUkhw;wj;ij cUthf;f tpUk;GtijAk; ehd; Rl;bf; fhl;l tpUk;GfpNwd; ,e;j eltbf;iffs; %ykhf nryhd;tq;fpia ,e;ehl;bd; Kd;zzp tq;fpahf kPz;Lk; epiy epWj;j ehk; Kide;J epw;fpd;Nwhk;.fle;j ,UgJ tUlq;fSf;F Nkyhf nryhd; tq;fp “md;Gld; mutizf;Fk; tq;fp” vd ngUikAld; jd;idgiwrhw;wp te;Js;sJ vdNt vkJ vjpu;fhy eltbf;iffisAk; mNj J}a ,jaj;Jld; Kd;ndLj;Jr; nry;yKide;J epw;fpd;Nwhk;.fle;j xU tUl fhykhf tq;fp tuyhw;wpy; eilngw;wpuhj rthy;fSf;F ehk; Kfk; nfhLf;f Ntz;bapUe;j,f;fl;lhd Ntisapy; vkJ ek;gpf;iff;Fk; md;Gf;Fk; cl;gl;bUe;j vkJ thbf;ifahsh;fSk; KjyPl;lhsh;fSk;vk;kPJ itj;jpUe;j mgupjkhd ek;gpf;ifiaAk; mgpkhdj;ijAk; mbg;gilahf;fp kPz;Lk; nryhd; tq;fp jiyepkpu;e;J epw;Fk; fhyk; ntF Jhuj;jpy; ,y;iynad;W jplkhf ek;GfpNwhk;.mNj Ntis vkJ tq;fpapd; KjyhtJ fpis jpwf;fg;gl;lJ Kjy; ,d;Wtiu ehk; vLj;Jf; nfhz;lmf;fiwAk; nghWg;Gzu;Tk; njhle;Jk; Kd;ndLf;fg;gLnkdTk; vk;kPJ gy;yhapuf;fzf;fhd thbf;ifahsh;fSk;KjyPl;lhsh;fSk; itj;Js;s ek;gpf;ifAk; mgpkhdKk; tPz;Nghfhj tifapy; ele;J nfhs;Nthk; vdTk; ehd;cWjpaspf;fpd;Nwd;,Wjpahf nryhd; tq;fp kPJ ngupJk; mgpkhdKk; ek;gpf;ifAk; itj;Js;s vkJ thbf;ifahsh;fisAk;KjyPl;lhsh;fisAk; ,e;j Mz;lwpf;if %yk; re;jpf;f tha;g;G fpilj;jijapl;L NgUtif nfhs;tJld; ,e;jtug;gpurhjk; vdf;F gy;yhz;L fhyk; epiyngw Ntz;LnkdTk; gpuhu;j;jpf;fpd;Nwd;m[pj ng];Fthy;nghJKfhikahsu; gpujk epiwNtw;W mjpfhupngg;utup 17> 2010

Seylan Bank PLC Annual Report 2009 255FORM OF PROXYI/We* ……………..………………………………………………......…………………………......................................…...……..............of ………………..…………………………………………..................………………..being a shareholder/s of Seylan Bank PLChereby appoint Mr./Mrs./Miss.*…………………………………...……………….............................……................................(N.I.C. No...….....................………………) of …………….................................……………………………………………………. orfailing him/her* Mr. Eastman Narangoda of Rajagiriya, whom failing, Mr. Ramanathan Nadarajah ofColombo 07, whom failing, Mr. Nihal Michael Jayamanne PC of Colombo 08, whom failing, Mr. Punsisi LalithPatuwatha Withana of Battaramulla, whom failing, Rear Admiral (Rtd.) Baminahennadige Ananda JayalalGurukula Peiris of Pannipitiya, whom failing, Mr. Pradeepa Gamini Suraj Kariyawasam of Colombo 08, whomfailing, Dr. Nalaka Harshijeewa Godahewa of Mount Lavinia, whom failing, Mr. Ajith Lasantha Devasurendraof Colombo 05, whom failing, Mr. Ishara Chinthaka Nanayakkara of Rajagiriya, whom failing, Mr. SamanthaPradeep Samarawickrama Ranatunga of Colombo 05, as my/our* Proxy to represent me/us* and to vote onmy /our* behalf at the Annual General Meeting of the Company to be held on 26th March 2010 and at anyadjournment thereof. I/We* the undersigned hereby authorise my/our Proxy to vote for me/us* and on my/our*behalf in accordance with the preferences indicated below:(**) For Against1. To receive and consider the Annual Report of the Board of Directors on theAffairs of the Company and the Audited Financial Statements for the yearended 31st December 2009, together with the Report of the Auditors thereon.2. To declare a preference dividend as recommended by the Directors.3. To declare a first and final ordinary dividend as recommended by the Directors.4. To re-elect Mr. N.M. Jayamanne PC, who retires by rotation in termsof Article 82 of the Articles of Association of the Company, as a Director.5. To re-elect Mr. P.G.S. Kariyawasam, who retires in terms of Article 89of the Articles of Association of the Company, as a Director.6. To re-elect Dr. N.H. Godahewa, who retires in terms of Article 89of the Articles of Association of the Company, as a Director.7. To re-elect Mr. A.L. Devasurendra, who retires in terms of Article 89of the Articles of Association of the Company, as a Director.8. To re-elect Mr. I.C. Nanayakkara, who retires in terms of Article 89of the Articles of Association of the Company, as a Director.9. To re-elect Mr. S.P.S. Ranatunga, who retires in terms of Article 89of the Articles of Association of the Company, as a Director.10. To re-appoint M/s. KPMG Ford, Rhodes, Thornton & Co.,Chartered Accountants as the Auditors for the ensuing year andauthorise the directors to determine their remuneration.11. To authorise the board of directors to determine donations for 2010.(* Please delete the inappropriate words)(** Please mark your preference with “X”)Signed this …………………………. day of March 2010................................................ ................................................Signature/s of Shareholder/sShareholder/s’ N.I.C/Co. Reg. No.Notes and Instruction as to the completion of the Form of Proxy are noted on the reverse hereof:

256Seylan Bank PLC Annual Report 2009NotesOnly proxy holders of Ordinary voting shareholders are entitled to vote on their behalf at the Annual General Meeting and atany adjournment thereof. Ordinary (Non-voting) shareholders and Preference shareholders can only appoint a proxy holder torepresent them at the Annual General Meeting.INSTRUCTIONS FOR THE COMPLETION OF FORM OF PROXY1. In terms of Article 63 of the Articles of Association of the Company -This instrument appointing a proxy shall be in writing and(a) in the case of an individual be under the hand of the appointer or his attorney or(b) if such appointer is a company or corporation either under its common seal or under the hand of anofficer or attorney authorised in that behalf in accordance with its Articles of Association or constitution.In terms of Article 69, a company or corporation being a member of the Company may appoint any of itsofficers or any other person to be its representative or proxy at any meeting or meetings of the Companyand any person so appointed shall be entitled to be present and vote and exercise all other powers inregard to any such meeting on behalf of the Company or Corporation which he represents as if he werea member holding the shares of such company or corporation.2. The full name and address of the shareholder should be filled in legibly on the Form of Proxy togetherwith the National Identity Card Number/Passport/Company Registration Number (as applicable).3. The completed Form of Proxy should be deposited at the Office of the Company Secretary at Level 13,Seylan Towers, No. 90, Galle Road, Colombo 03 not later than 48 hours before the time appointed for theholding of the Meeting.4. If the Form of Proxy has been signed by an attorney, the relative power of attorney should also accompanythe completed Form of Proxy for registration, if such power of attorney has not already been registeredwith the Company.5. If there is any doubt as to how the vote is to be exercised, by reason of the manner in which the Form ofProxy has been completed, no vote will be recorded by the Form of Proxy.

Seylan Bank PLC Annual Report 2009 257