The Case Study - Seylan Bank

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.