Annual Report 2012 - National Savings Bank

ROOTEDANNUAL REPORT 2012

ROOTEDNATIONAL SAVINGS BANK l ANNUAL REPORT 2012

ROOTEDNATIONAL SAVINGS BANK l ANNUAL REPORT 2012...a savings bank that is loved, trusted andknown everywhere, as the partner forInculcating savings habit among people.

4VISIONThe most reliable and soughtafter choice for savings andinvestments solutions.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

5MISSIONProviding our customers with total financialsolutions to optimise their savings andinvestment needs, whilst meeting theexpectations of all our Stakeholders.VALUESIn conducting our day-to-day business wewill respond promptly and act creativelywith trust, mutual respect and integrity.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

6“Today we are stronger than ever;empowered by our strong roots to ourpast and still holding the values andtraditions that have made us who weare today:...”NATIONAL SAVINGS BANK. ANNUAL REPORT2012

7ROOTEDFor over 40 years, the National Savings Bank has been a beacon of hope and reliable friend to thousandsof Sri Lankans from all across the island. We have been at the forefront in creating and spreading the habitof savings to every citizen of our nation. Our heritage is unmatched: we were the first Post Office SavingsBank, that operates continuously through the islandwide network of national post offices - serving remoteregions and people who have little or no access to a wide range of banking services.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

81832 - 2012THE LONG JOURNEY...CONTINUES1972Establishment of National Savings Bank, a single entity incorporatingCeylon Savings Bank (est 1832), Ceylon Post Offi ce Savings Bank(est 1885), Savings Certifi cate Section of the Postmaster General’sDepartment (est 1938) and National Savings Movement (est 1942).1979Introduction of Savings Certifi cates with a draw1994Introduction ofAutomated TellerMachine1981Implementation of Mobile Banking1995Business Diversifi cation throughAmmendment of NSB Act1998Launch of Children’s Savings Scheme “Hapan& Punchi Hapan”NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

92000Establishment of subsidiary company1999Opening of 100th Branch – Nittambuwa1999Introduction of Ithuru Mithurusavings scheme for youth2002Launch of new products“Sthree & Friends”2003Obtained AAA (Sri) Credit Rating fromFitch Ratings2004Inauguration ofIBU Operation2008Establishment of NSB Call Centre whichfunctions 24 x 72011Opening of 200th Branch – Medawachchiya2012Celebration of 40th AnniversaryNATIONAL AL SAVINGS S BANK. ANNUALREPORT 2012

10HOW WE PERFORMED IN 2012FINANCIAL HIGHLIGHTSNET PROFIT4.3bCAPITAL ADEQUACY RATIO20.4%NET ASSETS24.3bREVENUE53bAAA (lk)Deposit BaseReached 458 BillionLong Term Credit Ratingby Fitch for the 10thConsecutive YearAsset BaseSurpassed 500 BillionNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

11HOW WE PERFORMED IN 2012FINANCIAL HIGHLIGHTSBankGroup2012 2011 % 2012 2011 %Rs.Million Rs.Million Growth Rs.Million Rs.Million GrowthResults for the YearGross Income 53,045 46,545 14 54,152 47,532 14Net Interest Income 13,531 17,800 (24) 13,714 18,104 (24)Net Profit Before Income Tax 6,169 9,255 (33) 6,221 9,411 (34)Income Tax on Profit 1,838 3,193 (42) 1,881 3,307 (43)Net Profit After Taxation 4,331 6,062 (29) 4,341 6,104 (29)Contribution to the Government 5,900 7,970 (26) 5,952 8,103 (27)At the Year EndTotal Assets 509,694 465,974 9 519,270 479,881 8Loans & Investments 498,151 455,914 9 507,680 469,764 8Deposits from Customers 457,650 421,849 8 457,650 421,849 8Shareholders’ Funds (Capital and Reserves) 24,336 23,052 6 25,586 24,293 5RatiosReturn on Average Shareholder’s Funds (%) 18.3 26.6 17.4 25.4Return on Assets (%) 1.3 2.1 1.2 2.1Net Interest Margin (%) 2.8 4.1 2.7 4.0Liquidity Ratio (%) 69.5 74.4 - -Tier I (%) (Statutory Minimum Ratio Required is 5%) 20.4 20.1 21.3 20.5Tier I & II (%) (Statutory Minimum Ratio Required is 10%) 19.1 17.7 21.2 18.2Cost: Income (%) 54.6 45.4 54.4 45.0Non-Financial IndicatorsBranches 219 210 - -Agents (Post Offices & Sub-Post Offices) (No.) 4,053 4,058 - -Accounts Holders (Million) 17.47 17.0 - -Staff (No) 3,128 3,275 - -School Bank Units (No.) 1,185 349 - -ATMs (No.) 231 221 - -NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

12NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

13CHAPTER 1FIRMLY ANCHOREDSTRATEGY AND VISIONNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

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15A MESSAGE FROM MR SUNIL S. SIRISENACHAIRMAN“Our relationship withcustomers must become avisible asset...”“We need to forge our own path to achieve intended growth. We need tobelieve in what we do. We have already initiated this by working on ourpenetration and accessibility strategy, as we believe it is better to be highlyvisible in locales that will embrace us and complement us than to placeourselves in the same space and level as our competitors.”NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

16A MESSAGE FROM MR SUNIL S. SIRISENACHAIRMANFour decades back, when we became areality, our founder, Dr N M Perera hadone vision in mind. A bank that wouldinculcate the virtue of saving among thepublic; a bank that would facilitate notonly the rich and the privileged but alsoencourage the rural masses to save.With my appointment as chairman ofNSB, I took it upon my duty to analyseour past, the present and to envision ourBank’s future in a national context.There’s an age - old adage which goes“Times change and we with time”.Likewise, times have certainly changedsince the days of our founding; ourcountry has emerged into a new erawhere national development is animperative. National Savings Banktoo has transformed into a dynamicentity that has consistently returnedsuperlative performances. Whileassuring you that this organisation willcontinue to pursue the principles ofenterprise, I’m also a strong proponentof the Bank’s founding principles ofinculcating the savings habit. In fact, itis high time that we, National SavingsBank set a new benchmark as thesavings leader of the country. It is timewe distinguished ourselves and stoodout from the rest as opposed to beingone of many. In this light, capitalisingon the concept of school banking willbe the key in moulding the future notonly of our bank but also of our nationin the years to come.I also believe it is important to reinforceour roots and the strong traditions,ethics and values of our past, that areintertwined with postal banking, in ourjourney forward.Competitive playing fieldOne fact is crystal clear. With virtuallylimitless options out there, this is a greattime to be a customer. We, on the otherhand, while narrowed by our Act, mustcompete with the extensive productportfolios of other commercial banks,amidst formidable competition.Hence, it is vital that we take advantageof our competitive strength being theone and only bank in Sri Lanka withgovernment guarantee on depositsand interest liability, an assurance thatdepositors’ hard earned savings willalways be safe.We need to meet the competition headon and forge our own path to achieveintended growth. We need to believe inwhat we do. We have already initiatedthis by working on our penetration andaccessibility strategy, as we believe it isbetter to be highly visible in locales thatwill embrace us and complement us thanto place ourselves in the same space andlevel as our competitors.Reaching out to the underservedOur focus for this year, as the NationalSavings Bank is to serve as a conduit inproviding a secure saving and investmentproposition to the rural masses in general,with a special focus on untapped segmentsin farming and shing industries, the selfemployedand the entrepreneurs.NSB team members are beingencouraged to interact with theseprospective stakeholders, by reachingout to them, and becoming activeparticipants in their local communities.We are a service entity and that entailsgoing to our customers and would becustomers, who have the means anddesire to save but lack the opportunity forsame. We intend to promote this cultureNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

17A MESSAGE FROM MR SUNIL S. SIRISENACHAIRMAN“NSB team membersare being encouragedto interact with theseprospective stakeholders,by reaching out to them,and becoming activeparticipants in their localcommunities.”of seeking out customers, by mobilisingbranch teams to make extensive eld visitsand strategically deploying mobile unitsto rural areas, to be based in particularlocations where the community gatherson designated days.As I mentioned earlier, I’m also highlyenthusiastic about promoting schoolbanks because this not only inculcates thesavings habit at a very young and formativeage, but also creates opportunity for longterm deposits, the funds of which couldbe channeled towards the larger macro –development canvas. With approximately9,700 schools across the island, theopportunities are many.A warm welcomeI’ve felt most welcomed by the Board ofDirectors, the CEO and the NationalSavings Bank Team. Their supporthas been immense and this has givenme added impetus to ensure that Ispearhead the Bank to newer heights.AppreciationsMany people have contributed towardsthe NSB success story this year and it ismy duty to extend them our appreciationfor their support. I am grateful to HisExcellency the President, the DeputyMinister of Finance and Planning andthe Secretary to the Treasury for theirconstant guidance. The Governor ofthe Central Bank, the Auditor General,the Attorney General and their ofcialsas well as heads of other statutorybodies must be thanked for their readyassistance. The Postmaster General andofcials of Sri Lanka Post, Postmasters,Sub Postmasters, and other ofcialshave extended vital assistance to us inour efforts to reach the grassroots-mysincere appreciations go out to them.In a customer – centric market where somany attractive options are on offer, it isthe loyalty and trust of our customersthat have driven our success – I thankeach and every one of them.The NSB Staff, who I have just begunto get to know, have struck me as aprofessional and motivated group ofpeople who truly believe in the valuesof this organisation. My thanks to allof them and I look forward to workingclosely with them to achieve our vision.I’m enthusiastic about the journey wehave embarked on, knowing full wellthat we will face challenges along theway. But when we place our age oldfundamentals side by side with ourpragmatic strategies for the future, I’mcertain we are on the right track.Sunil S SirisenaChairmanColombo28 March 2013NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

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19A REVIEW BYMR. HENNAYAKE BANDARAGENERAL MANAGER / CEO“Today we reaffi rm ourvision on being the mostreliable savings bank inthe country.”Sustainable economies are built on sustainable savings. Whether rural or urban,the concept of savings must be part of the process of development. In the biggerpicture of national development, this is a responsibility we have been mandated.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

20A REVIEW BY MR HENNAYAKE BANDARAGENERAL MANAGER / CEOThe National Savings Bank has aformidable legacy of over 180 years asthe nation’s premier savings bank.This means that we have been steeringthe course of Sri Lanka’s savings culturefor nearly two centuries: evidence ofhow rmly we are rooted in this land, itspast, its transformational chapters and itsprogress into the future.Our long history informs our future,showing just how inextricably the Bank’soperations are intertwined with thetraditions, conventions and values thatare a vital part of the nation’s heritage;that our rm roots in those fundamentalshave made us integral to this country’sdevelopmental journey.Today we reafrm our vision and focuson being the most reliable and soughtafter savings and investment solutionoption for the people of this land. We doso by bringing the values and practices oflong term corporate social responsibilityinto every transaction we undertake,by looking to our roots in the nation’shistory, of being the original, most trustedNational Savings Bank. This is our visionand we will never lose sight of it .“The fi ve thousandcustomer access pointsthat now constitutethe largest individualbanking network in thecountry mean we havethe ability to be in touchwith the people of thisnation anywhere, at anytime.”To achieve these ambitions we havereached out to the people wherever theyare, in the remotest regions of the island.The ve thousand customer access pointsthat now constitute the largest individualbanking network in the country mean wehave the ability to be in touch with thepeople of this nation anywhere, at anytime.Sustainable economies are built onsustainable savings. Whether rural orurban, the concept of savings must bepart of the process of development. In thebigger picture of national development,this is a responsibility we have been givenor mandated perhaps, to develop a strongsavings base that offers the people ofSri Lanka the assurance that their savingsare guaranteed by the Government ofSri Lanka and therefore safe with us andthat their savings make them key playersin the country’s developmental agenda.A new chapter is writtenOur Board was changed in mid 2012and as it did so, we once again reectedon our roots. Questions were asked andthe answers brought us back to our corepurpose of being a savings bank. I’mmost excited that our Board, led by theChairman Mr Sunil Sirisena envisionsour future in a business context thatwill surely be ambitious. I am mostappreciative of the fact that the eminentindividuals who form our Board bringgreat expertise and experience to thetable and continue to give me leadershipand guidance to lead the Bank forward.My team is the foundation upon whichwe plan to grow. They are unique as theynot only believe that they can achieve theimpossible, but also they can drive theBank forward on this journey. Workingtogether we can surely triumph inwhatever we set out to do.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

21A REVIEW BY MR HENNAYAKE BANDARAGENERAL MANAGER / CEOThe challenges however weremanyHowever, everything was certainly notrosy. We were hurt, quite a number oftimes in fact. The negative publicity thatensued as a result of the The Finance Co.Plc share transaction by the NSB in lateApril 2012 did not reect well on us. Theyear under review therefore presented uswith numerous challenges that affectedthe smooth operation of our day to dayactivities.We have now turned the corner andput that chapter behind us. We believewe have regained any condence thatwe may have lost due to this issue,emphasizing more than ever that ourdeep roots and excellent reputation willcontinue to be our strength and anchorin the years ahead. Even though wehave always strived for the best practicein governance, ethics, transparency andaccountability, this episode made useven more aware of our responsibilitiestowards our many stakeholders. Wewent back to the drawing board andre-analysed our corporate governanceand best management practices. Weplaced on record the lessons we learnedand established even more stringentgovernance and regulation in order toguard against the recurrence of suchtransgressions. We are very conscious thatgood governance must be maintained atall costs.So what were our achievementsin 2012?We took our ambitious objective ofreaching the people any time, anywhere,further this year by adding nine branchesto the existing network. This expansionis part of our strategic plan founded oncustomer aspirations and the need for usto be accessible in identied locations.Our partnership with the people mustbe nurtured from the beginning. Ourname “National Savings Bank” must beetched in young minds. While we do havededicated products for infants, youth andeven senior citizens, it is to the schoolsthat we have now turned our attention.The school banking operation we began40 years ago has been one of the beststrategies we have put into action. Ithas succeeded in bringing thousands ofstudents into the savings net. This successcombined with the pro-active educationalprogrammes we conduct in the schoolsand our offering of scholarships for highachievers, makes us condent that wehave successfully created a savings cultureamong students. We believe that we havesteered them towards a rm belief in thevalue of long-term savings - one that willpersist into their adult years.This large accrual of savings gives usthe exibility to prudently invest in themany national development programsdesigned to safeguard the future of thesevery stakeholders: our youth - the adultsof tomorrow.Another essential feature in our strategyis our conviction that every Sri Lankanmust have their primary needs met. Goodhousing is one of these needs - one that isaligned to the Mahinda Chinthana Goalsthat dictate shelter for all. Our products –the Mihindu Sevana Housing Loan andIthurum Nivasa Housing Loan both didexceptionally well this year, due in partto the fact that we have brought addedexibility and speed into the approvalprocess.There was immense competition inthe deposit mobilization arena withinthe banking industry. Given that ourmandate precludes us from pursuingNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

22A REVIEW BY MR HENNAYAKE BANDARAGENERAL MANAGER / CEOsome opportunity areas, growing depositsis certainly a challenge, especially sincewe compete with other commercialbanks. The challenge led us to rethinkour strategies in more innovative waysin order to meet our targets in depositmobilization.One of our strategic routes is therestructuring of our branch operations in2013. As part of this plan, we reorganisedour team to be ‘eld people’ who wouldhave face-to-face contact with ourstakeholders. In this way, NSB would berepresented by more than simply our boldorange signage; our customers wouldnow meet caring, responsive servicepeople who would always be accessible tothem. The branch ofce network becamethe base upon which we would grow ourbusiness and with this came expandedbranch autonomy as well.The restructuring will be based on aRegional Management System and isdesigned to improve the overall efciencyof the branch network which we planto expand exponentially in the next fewyears. The branches will be headed byRegional Managers who will be fullyresponsible for branch performance andfor turning them into independent protcenters. The managers will be identiedleaders who will have total discretionarypower and authority, supported bya trained team that will focus oncapitalizing on market opportunities.An uphill taskYou will see a more detailed reviewof our performance in the FinancialStatements but I would like to give youa synopsis of our activities, in light of thefact that the Bank achieved these resultsin a very competitive and challengingenvironment.As a state bank, we are very aware thatthe contribution we make to the Treasurythrough taxes and transfers is also onewe make to the country’s economy - itsinfrastructure and development projects.This year, the sum paid by NSB as tax wasRs.3,077 million. Deposit mobilisationalso plays a major role in contributingtowards the national economy and NSBdeposits to the value of Rs.457,650million (an increase of 8.5%), wenttowards national development as well.While our asset base surpassed Rs.500,000 million milestone, recording agrowth of 9% to Rs.509,694 million, thereare a few other notable achievements inour nancial performance. One is thatthe Bank’s Tier I and Tier I & II capitalhave been maintained well above theregulatory minimum of 5% and 10%as was the statutory liquid assets ratio,which also demonstrates our relentlessdrive to take our performance andoperations beyond the requirements ofcompliance. Secondly, our NPL ratio isbelow the industry ratio, sitting at 2.71%.The need for changeOur vision is very ambitious and soare the proposals we have written intoour Strategic Plan. We will continueto review our overall operations tointroduce the necessary transformationsfor a fast evolving business landscape.We must not forget that the nation iscurrently accelerating a very ambitiousdevelopment plan while retaining strongeconomic fundamentals.We are well aligned to our vision,mission and the Strategic Plan we nowhave. We know that we will denitelybe able to achieve our vision within areasonable timeline. I strongly believethat our present team is a powerfullyNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

23A REVIEW BY MR HENNAYAKE BANDARAGENERAL MANAGER / CEOunited and motivated one that cancertainly overcome the numerouschallenges emerging in this competitiveenvironment. We are very serviceoriented and we have great condencein our efciency, our innovation andproductivity and our capability to thinkdifferently, in ways that would benet ourbank and add value to the industry as awhole.We give our team the competitive edgeby continuing to upgrade our knowledge.We will also seek to acquire specializedexpertise in diverse areas of our industrythat will help manage change.The future beckonsSouth Asia’s economic hub - that’swhat Sri Lanka aspires to be. We arean extraordinary country. Despite achequered history, we are resilient.Our economic indicators have for themost part been consistent and in thelast three years, the dividends of peacehave been in evidence. Our growth isabove world average and among thefastest in South Asia. The world indicesshowcase Sri Lanka for performingbetter than most regional nations, whichmeans we have been getting things“We must not forget thatthe nation is currentlyaccelerating a veryambitious developmentplan while retainingstrong economicfundamentals.”right. The Government’s Ten YearVision is now well on track with theaccelerated development agenda alreadyin operation.In this larger canvas, I observe the bankingindustry as a key driver. We cannot forgetthat NSB is rmly aligned with this largernational vision - to develop the habits ofnancial empowerment and saving andto add impetus to the rural economy.We are seeing new business areasemerging, especially in nancialinnovation and real estate development.We also see the rural economy burgeoningto become a signicant contributor to thenation’s economy. And we know that wecan drive these business areas.Right now, our Strategic Business Plan2011 to 2013 has proved to be a goodbase. We have met our targets andhave absolute condence that we cancomplete our Strategic Plan as planned.In support of this, our Action Plan for2013 maps out our short term strategy(post a comprehensive SWOT analysis),designed to move us towards our newStrategic Plan of 2014 to 2016.Rooted we are and rooted we shall be.But these roots also harbour the buddingof newer and better prospects for us. Ourorigins in savings will always be the corearound which we operate, but in a fastpaced world we are now broadening ourfocus. We know there are opportunitiesout there for us and we intend to take fulladvantage of every one of them. Andthat vision is what will chart our courseinto the future.H M Hennayake BandaraGeneral Manager / CEOColombo28 March 2013NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

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25CHAPTER 2HOW WE PERFORMED IN 2012MANAGEMENT DISCUSSION AND ANALYSISNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

26HOW WE PERFORMED IN 2012FINANCIAL REVIEWMost of Sri Lankans have come toan NSB branch at some point in theirlives. NSB is no ordinary nancialinstitution, it is a social institution withdirect and indirect impacts on the livesof a majority of people in Sri Lanka.This is why the nancial welfare andstability of NSB is so important. Somany generations of Sri Lankans haveput their trust in us for the past 40 yearsand it becomes a social responsibilityon our part to ensure a strong nancialperformance that would in turn ensurereturns for the people of this country.However, we, as a National Bank,cannot lose sight of the larger pictureof overall national development andgrowth. We cannot be hemmed in by anarrow prot focus. Instead, our businessoperations have always had a widerdevelopmental approach, where we useour expertise to support the nationaldevelopment drive. Whether this isdone by supporting the governmentnance large development projects, orby supporting a small farmer in ruralSri Lanka through a small loan, wehave always maintained the integrity of“So many generationsof Sri Lankans haveput their trust in usfor the past 40 yearsand it becomes a socialresponsibility on ourpart to ensure a strongfi nancial performancethat would in turnensure returns for thepeople of this country.”our operations by ensuring the nancialviability of our involvement.In 2012, we faced some unexpectedchallenges that, in some cases, affectedour targets for the year. For instance,policy changes, such as the credit ceilingon bank lending and rising interest rateson deposits, had an impact on our topand bottom lines. However, we havecontinued to sustain growth and extendour support to our customers and thenational economy as a whole.Changes to Financial ReportingStandardsThe Bank adopted new AccountingStandards (SLFRS/LKAS) from 1stJanuary 2012. The ConsolidatedFinancial Statements for the year ended31 December 2012 is the rst nancialstatements prepared in accordance withSLFRS/LKAS.The Financial Statements for theprevious year were prepared inaccordance with the Sri LankaAccounting Standards (SLAS). Asper the requirements of SLFRS/LKAS, the new standards have to beapplied retrospectively. Therefore theIncome Statement for the year ended31 December 2011 and the assets andliabilities as at 31 December 2011 and 1January 2011 were restated as per newaccounting standards and are presentedas comparatives in Financial Statementsof 2012.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

27HOW WE PERFORMED IN 2012FINANCIAL REVIEWImpact on adoption of newAccounting StandardsThe transition from SLASs to LKASs/SLFRS affected its previously reportednancial position as of 31 December2011 and nancial performance for2011. The net assets as of 31 December2011 were reduced by Rs.1,152 Milliondue to increase of liabilities by Rs.491Million and decrease of total assets byRs.661 Million. The net prot for year2011 was reduced by Rs.936 Million. Themain reason was recognition of Rs.2,025Millions of liability for the differencebetween present value of Bank’s PensionFund and the asset value of the fund, tothe opening retained earnings.Adhering to the statutory requirements,the current year quarterly performanceand nancial position have beenprepared and published in accordancewith SLASs along with the disclosurenote for the impact of LKASs/SLFRSsadjustments.The Bank prepared a reconciliationto disclose the movement from theFinancial Statements 2011 which havebeen prepared in line with earlierAccounting Standards (SLAS) toRestated Financial Statements 2011which have been prepared as per LKAS/SLFRS. This is a requirement under SriLanka Financial Reporting Standards 1(SLFRS – 1) rst time adoption of SriLanka Accounting Standards.IncomeNet Interest IncomeThe Interest Income mostly includedRs.34,289 Million of interest ongovernment securities portfolio andRs.18,384 Million of interest incomeRs.Mn20,00015,00010,0005,000-Net Interest Income16,65517,8002010 201113,5312012on retail lending and other investmentportfolio. During the year, the policyrates were increased and the tight marketcompetition also put pressure on theinterest rates offered to the customers.Market interest rates continued to riseand the interest costs increased over andabove the increase in interest income.The interest income increased byRs.5,577 Million to Rs.52,673 Millionfrom Rs.47,096 Million in 2011 whilethe interest cost echoed the increasein interest rates with an increase ofRs.9,846 Million in 2012.As a result, Net Interest Income hasdropped by Rs.4,269 Million (24%)making the net interest margin 2.8%compared to 4.1% in 2011.Net Gain Losses from TradingNet gain losses from trading consistedof the gain/ (losses) on nancialinstruments held for trading which is aRs.70 Million gain in 2012, against aRs.860 Million loss recorded in 2011.The interest rates have increased duringthe year, which in turn reduced thecapital gains on treasury bills/bonds inNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

28HOW WE PERFORMED IN 2012FINANCIAL REVIEWthe trading account. Though the bearishsentiments at the Colombo StockExchange continued during the year, theprice indices have recovered their valuecompared to those of year 2011. As aresult, there was positive change in fairvalue of equity investments of the Bankto the trading income of the year.Impairment and Loan LossProvisionThe implementation of SLFRS/LKAS changed the Bank’s method ofprovisioning for loans and advancesfrom specic and general provision toindividual and collective impairment.The Bank has made Rs.131 Millionof provision for impairment losses.The impairment of loans andadvances portfolio is based on thecollective impairment of all retailloan categories and 0.5% judgmentalprovision on total loan capital madefor probability of performing loansbecoming non performing loans. Ourtests for individual impairment onproject nance loans did not reveal anyimpairment losses.The decrease in impairment loss fromRs.143 Million in 2011 was reectedby the improvement in NPL ratio from3.03% to 2.71%.ExpensesThe network expansion was limited to9 branches compared to 24 branchesopened in 2011, changing thedirection from channel expansion tochannel optimisation by productivityimprovements. The total personnel costfor the year 2012 showed a decrease fromprevious year despite the salary increasemade by the revision of collectiveagreements with employee’s unions.Rs.Mn4,2004,1004,0003,9003,8003,7003,600Personnel Cost3,71420104,1404,0772011 2012The actuarial valuation was carried outfor the pension fund retirement benetsas at 31 December 2012, resulting ina reduction to the retirement benetliability. As a result the adjustments alsoreduced the retirement benit expensesduring the year.The increase in other expenses wasby inationary effects and the allembracingaction plans which weremade to increase the productivity. Asa result the cost to income ratio wasmanaged at 45.7% from 36.4% in2011 despite the percentage drop in netinterest income by 24% of the Bank.Service Charge to PostmasterGeneral (PMG)Service charge for the year 2012 onpostal agency network of the Bankamounted to Rs.111 Million (2011 -Rs.103 Million) calculated on the samebasis used for 2011.ProfitabilityThe Bank had maintained its long termstability at the expense of the higherNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

29HOW WE PERFORMED IN 2012FINANCIAL REVIEWRs.Mn7,0006,0005,0004,0003,0002,0001,000-Net Profit5,39120106,0624,3312011 2012“The marketcompetition was intensefor mobilisation andput pressure on ourinterest margins. Butwe continued to buildup skill competencies ofour staff and enrich thecustomer care.”Rs.MnDividend Paidto the Treasury3,5003,2133,0002,6642,5002,0001,5001,00050002010 20112,8232012prots during a precarious year in whichour internal strengths were tested. Themarket competition was intense formobilisation and put pressure on ourinterest margins. But we continued tobuild up skill competencies of our staffand enrich customer care. Therefore,the Bank’s prot of Rs.4,331 Millionwhich although was 29% less than thepost tax prot of 2011, was encouragingin light of the many challenges we facedduring the year.The Return on Assets (ROA) andReturn on Shareholders Equity (ROE)also dropped to 1.3% and 18.3%respectively.Contribution to State FundsThe Bank contributed Rs.5,900 Millionto the Government by way of taxes andtransfers, of which the details are asfollows:Rs.MnRs.Mn2012 2011Value Added Tax 1,239 1,564Income Tax 1,838 3,193Dividend paid 2,823 3,213Total contribution 5,900 7,970In addition the treasury portfolio andnancial facilities extended to theGovernment increased by Rs.16,533Million.Investment Fund Account (IFA)The amount lying to the Credit ofInvestment Fund Account which wascreated as per the CBSL Directive wasRs.2.8 Billion (2011 - Rs.1.6 Billion).A sum of Rs.384 Million was given tothe RDA infrastructure developmentprojects, a sum of Rs.3.3 Million wasgiven as agricultural loans and theNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

30HOW WE PERFORMED IN 2012FINANCIAL REVIEWremaining amount of IFA is invested inGovernment Securities.Deposit MobilisationThe Bank mobilised Rs.31,126 Milliondeposits compared to the Rs.55,648Million deposits in 2011 and recorded8.5% growth over its deposit base as at31 December 2011 against 18% depositgrowth of banking sector in 2012.Rs.Mn700,000600,000500,000400,000300,000200,000100,000-Deposit Base364,4302010421,849457,6502011 2012Deposit growth for the year was adverselyimpacted by rising competition thatsaw attractive negotiable rates being“NSB also raisedawareness among thepublic about havinggreater security fortheir deposits at NSB,highlighting ouradvantage of having‘100% GovernmentGuarantee’.”offered in the market for xed deposits.As a result, customers were negotiatinghigher rates and shifting their funds toother nancial institutions that offeredmore attractive rates.In response to these developments,NSB encouraged 1-month and2-months xed deposits with specialrates and conducted a special ‘SavingsFortnight’ programme that offers giftschemes to attract savings customers.NSB also raised awareness among thepublic about having greater securityfor their deposits at NSB, highlightingour advantage of having ‘100%Government Guarantee’.Foreign Currency MobilisationNSB mobilised Rs.705 Million throughNRFC and RFC accounts, which is anincrease of 14.4% compared to 2011.Inows to RFC and NRFC accountsincreased during the year due to theuctuation of foreign exchange rates.However, the year saw high amounts ofwithdrawals of USD, GBP, AUD andEUR, due to higher exchange rates andhigher interest rates for local currencydeposits.The total value of remittances receivedduring the year increased by 61%compared to 2011, of which 36.9%was received through exchange housesand 10.3% through CorrespondentBanks. Meanwhile, NSB representativesoverseas directly canvassed remittances,which were channelled into NSB LKRFD/Savings accounts.Postal Banking MobilisationThe Post Ofce sector mobilisedRs.352 Million compared to Rs.718Million in 2011. The slower results aredue to the declining trend in the postalsector savings. A number of reasonsNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

31HOW WE PERFORMED IN 2012FINANCIAL REVIEWcan be cited for this declining trend.Consumers are transferring their postalsavings to Fixed Deposits at NSB andother nancial institutions, to gainhigher returns. Postal customers havealso been pulled away by competitorsoffering convenient micro creditschemes for deposits.NSB has responded to the change in thepostal sector by conducting mega savingscampaigns in Anuradhapura, Matale,Gampaha, Jaffna, Mullaitivu andTrincomalee Districts covering 497 Post/Sub Post Ofces and pocket campaignsin selected 23 Sub Post Ofces.AssetsWith the adoption of SLFRS/LKASthe Bank’s investments which werepreviously classied as investmentportfolio and trading portfolio werecategorised as assets held for trading,assets held to maturity, loans andreceivables and assets available for sale.Government securities and equitysecurities held for trading purposesare designated as Financial AssetsHeld for Trading. Unquoted longterm investments in equity capital andstrategic investments in quoted equityare reected in Financial InvestmentsAvailable for Sale. Investment inGovernment securities which are heldtill maturity, are reected in FinancialInvestments Held to Maturity.Rs.Mn700,000600,000500,000400,000300,000200,000100,000Total Assets404,3932010465,974509,6942011 2012Investments Held for Trading andInvestments Held to MaturityNSB’s total investment portfolio wasvalued at Rs.339,598 Million as atend December 2012, which has seen agrowth of 3.6% over the previous year.Of this, 95% is in government securities,while 2% was in equity investment andthe balance in alternative investments.The Bank’s assets grew by 9.4%,reaching Rs.509,694 Million fromRs.465,974 Million in 2011 against theBanking sector asset growth of 18% in2012. Sixty percent (60%) (2011 - 64%)of the Bank’s assets are invested innancial instruments held to maturity,2.1% (2011 - 2.5%) was invested inassets held for trading and 33% (2011 -29%) was given as loans and receivables.The fair value of the equity portfoliowhich was held for trading was Rs.4,453Million, as at 31st December 2012. Dueto the downturn seen in the ColomboStock Market, the market value ofNSB’s equity portfolio further declinedby 9%. This decline has necessitatedadjustment to the value of Rs.119Million, in order to compensate for thefall in value of market prices.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

32HOW WE PERFORMED IN 2012FINANCIAL REVIEWLoans and ReceivablesThe Bank’s loan portfolio is the total ofloans and receivables to banks and loansand receivables to other customers,which amounted to Rs.168,619 Millionas of 31 December 2012.During the year, retail lending increased toRs.114,226 Million as at 31st December2012, representing 82% of the Bank’sloan portfolio. In its role as a wholesalelender, NSB had Rs.13,374 Million ofloans to banks and nancial institutionsas at 31 December 2012. The Bank hadextended loans amounting to Rs.1,226Million for agricultural purposes andRs.10,386 Million for housing, againtaking care of national interests.The NPL ratio was improved from3.03% to 2.71% with sound creditevaluation process. The credit ceilingimposed by the Central Bank of SriLanka did not stop us from building acredit portfolio of national interest. Weprovided 9,535 of loans for housingpurposes which was a 23% growth. Thegrowth of development project loanswas 15% more than the previous year.StabilityThe Bank’s Tier I and Tier I & II capitalremained well above the regulatoryminimum of 5% and 10%, notched at20.4% and 19.1% respectively, as at 31stDecember 2012. The statutory liquidassets ratio stood at 69.5%, which too,is well above the regulatory requirementof 20%.Group Performance andPerformance of SubsidiaryThe NSB Group comprises NSB andits subsidiary, NSB Fund ManagementCo. Ltd. As at end December 2012,the Group prot before tax stood atRs.6,221 Million from Rs.9,411 Millionin 2011. Prot after tax decreased by29% to Rs.4,341 Million from Rs.6,104Million in 2011.NSB Fund ManagementOur fund management subsidiary, oneof eight dedicated primary dealersin Government Securities appointedby the Central Bank, commencedoperations in 2000, with an initialcapital of Rs.150 Million. NSB FundManagement is active in the primarymarket and the secondary market. It isalso an ofcially designated issuer of SriLanka Development Bonds, which aredenominated in US dollars.The NSB Fund Management Companyacts jointly with NSB as a lead managerfor the issue of Government Securitiesto Sri Lankans abroad, managing itscustomers’ investments under thisscheme as an agent of the Central Bank.The Company recorded a prot after taxof Rs.9.3 Million. This is a decrease inprotability of 78% compared to 2011.The net assets value stood at Rs.1,400Million on 31st December 2012,compared to Rs.1,390 Million in 2011.The Company paid Rs.9 Million by wayof VAT and provided Rs.43 Million asliability on income tax for 2012. Netinterest income for the year was Rs.183.6Million, down by 39% compared to2011. The Company incurred a tradingloss of Rs.139 Million compared toRs.136 Million loss made in 2011 fromnancial instruments designated at fairvalue through prot or loss.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

33HOW WE PERFORMED IN 2012ECONOMIC REVIEWThe World Remains ChallengedIt hasn’t exactly been the year wehoped would ensue. There were veryoptimistic predictions of an economicturnaround which would naturallycascade to countries performing betterat the beginning of 2012. But this wasnot to be. What did happen was that theworld continued to wallow in the depthsof its economic woes, while the US andthe Eurozone fought its own economicbattles. Recovery was excruciatinglyslow, if at all, but that’s not to say thatthe rest of the world did not feel itseffects.The Arab Spring continued to cascadeits fallout across the world, seenmost in the volatile oil prices, whilenatural disasters including oods, res,earthquakes and droughts stied growthacross continents and the ‘Chindianmasters’ India and China, whichsomehow did not remain clear of themorass unfolding, were hence forced tore-forecast growth targets. Meanwhile,Europe saw countries like Greece beingtipped for bankruptcy, while othersdesperately sought bailouts.The passing of the American TaxpayerRelief Act of 2012, on the 31st ofDecember 2012, saw an increase inrevenue and an incline in spendingprojected for the coming scal year.The optimistic feature is that therewill denitely be positive permeationacross Africa, Asia and Europe, as theUS continues to have signicant tradinginuence on these geographic areas.Developed economies continued to beharbingers of continuing problems,remaining at the core of the world’sworries. There was a renewed escalationin the Euro debt crisis and this wasreected in the meager growth seen inthe global economy, which was just 3%compared to 3.6% in 2011. Economistspredict a growth of 3.25% in 2013,as the world is now looking towardsemerging markets, such as India andChina, for growth leadership. It mustbe noted however, that these emergingmarkets are not yet cut away enoughfrom the world to stand independently,and thus remain vulnerable to theworld’s economic paradigms.Emerging economies are dependent ondeveloped economies for exports andthe fragile export demand was one ofthe reasons that saw a slowing growthin Emerging Asia. This prompted thebloc to introduce initiatives that wouldreduce trade dependence on the USand Europe, by encouraging greaterregional integration and intra regionaltrade. Hence, Emerging Asia did seea pick up in growth to 6.3% in 2012,which is believed to be bettered in 2013.Heralding Transformations in theSri Lankan EconomyThe path to progress has been etched,the map for development chartered; SriLanka is ready for the transformation.Three years after an end to one of themost debilitating chapters in Sri Lanka’shistory, peace dividends are clearlyvisible and the process of reconciliation,reconstruction and nation building isseeing fruition. The Ten Year NationalVision, the Mahinda Chinthana, ismeeting its targets, based on a strongclear foundation of ensuring that thiscountry becomes a US $100 BillionNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

34HOW WE PERFORMED IN 2012ECONOMIC REVIEWeconomy with a Per Capita income ofUS $4,000 targeted for 2016.All key sectors of the economy haveperformed admirably in 2012; macroeconomicfundamentals have beenrmly established, business condenceseeing a palpable increase andglobal indices and rankings givingthe country a positive nod. The factthat the International MonetaryFund concluded its US $2.6 BillionStandby Arrangement by presentingSri Lanka with the nal tranche isample evidence that the country is onthe right path to progress. In an yearwhen countries the world over had theirsovereign credit ratings downgraded,Sri Lanka maintained its ratings, whichis indicative that the country has itsfundamentals in place. Fitch Ratingskept Sri Lanka at BB- Stable, Standard& Poors rated Sri Lanka at B+ Stableand Moody’s also maintained Sri Lankaat B+ Positive.From a growth perspective, Sri Lankaachieved her target of 6.5%, but notbefore implementing a re-forecaststrategy mid-year, due to the heightenedglobal and domestic challenges whichprompted a more realistic target.Although the beginning of 2012 didbring with it much promise and a highgrowth anticipated at 8.3%, Sri Lanka’spragmatic stance came to the fore.Internally, the country battled thenatural vagaries of the weatherincluding droughts and oods, whichaffected agricultural output andhydropower generating capacities,excessive credit demand and highimports, lessening demand for exportsdue to less global spending power,an interest rate regime that began anupward curve and oil prices becomingprohibitive. Externally of course, theEurozone and US problems and geopoliticaluncertainties added to the needto input more sustainable strategies. Thisprompted a more focused applicationin key scal strategy and managementbeing infused this year.Having always possessed resilientcharacteristics even through the mostchallenging times, Sri Lanka proved thatthe panacea was in its progressive policydecisions. Monetary, exchange rate,scal and administered pricing policieswere brought in. This encouraged a29.9% increase in investment of GDP,unemployment reaching unprecedentedlows of 3.9%, a decrease in the budgetdecit and government debt to GDPratio being the lowest in 30 years.Ination was maintained at single digitlevels although having to face its fairshare of challenges. Core ination wascurbed at 7.6% YOY, while annualaverage was 5.8% in December 2012.Since June 2012, the Sri Lankan Rupeeappreciated 5.3% with expectationsof stabilising over the medium term,although in an overall context, therupee depreciated 10.4% against theUS dollar, reecting increased demandfor foreign exchange in the market,primarily due to oil imports.Also, the scal management initiativessaw cumulative expenditure on importscurtailed at 31.5% of GDP, a declineof 4.5%, although the country did haveto contend with a decline in exportNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

35HOW WE PERFORMED IN 2012ECONOMIC REVIEWearnings due to weakening globaldemand which showed at 16.5% ofGDP. The trade decit was 14.4% ofGDP by end 2012, and the currentaccount decit too, was slated toreduce to 5.5% of GDP compared to7.8% in 2011. This is all reective ofthe prevailing economic accelerants,namely tourism, worker remittancesand BPO and KPO services gatheringmomentum.Sri Lanka’s vision to become SouthAsia’s Economic Hub by 2015 is goingaccording to plan. The accelerated focuson mega infrastructure developmentaligned to the Economic Hub visionin the road, power, ports, airports andrural infrastructure sectors continuedon target.the foundation for a well equippedprosperous nation.National mileposts targeted for 2016therefore, is to ensure the country’spoverty be brought down to less than2%, unemployment below 3% andacute malnutrition among childrenunder ve years to decrease to lessthan 5%. Public investment must be6% of GDP and national savings/investment gap should be targeted for0.5% of GDP. There is also a concertedimperative to aggressively grow theequity market which, by 2016, is aimedat seeing stock market capitalisation ofUS $ 70 Billion and a Corporate BondMarket of US $10 Billion. Bank assetsit is believed can reach Rs.10 Trillion.Sri Lanka’s ten year plan now restson the shoulders of the nation. Weare a Middle Income Country thathas performed exceptionally well inextraordinary circumstances. However,achieving our ambitious plans must bewell thought out, with applicable goalsand targets that will assuredly formNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

36HOW WE PERFORMED IN 2012ACHIEVEMENTS AGAINST STRATEGIC OBJECTIVES FOR THE YEAR 2012Attaining Objectives; RealisingTargetsStrengthening roots and spreadingour reach, point to fundamentalsbeing in place; these fundamentalslead NSB to analysing emergingtrends and planning strategies for theyear ahead, where paradigms wouldlead to solidifying our roots in thecontext of quantiably realising ourtargets. However, as was characteristicof the instability displayed in theglobal economic environment, somemandates introduced to the nancialservices industry and NSB also lookinginward prudently to ensure consistentsustainability in a transformingenvironment, some planned activitieswere either not achieved, deferred orchanged accordingly.Having planted our roots rmly, weplanned the spreading of our branchesstrategically at the beginning of the year.This involved channel optimisationencompassing the addition of fortybranches to our branch network,strategic relocation and forging andnurturing global relationships. However,in observing the external environment,it became necessary to maintain thisfocus albeit on a smaller scale. There wasimmense competition prevailing in themarket especially in the deposits arena,which saw NSB change emphasis onmobilisation instead of expansion. Byend 2012, NSB nevertheless maintainedits core focus working on a strategy thatwould be aligned to the transformingmilieu, opening nine branches, whilerelocating thirteen others. NSB alsoestablished ve new arrangements thatwould gain more access to the foreignremittance market in France, whileenhancing accessibility into Bahrainand Korea and collaborating with aglobal exchange company as well.Research and Development form thefertile ground upon which our rootsprosper and hence, there was addedmomentum into this scope when adedicated team was identied withinNSB, conducting far reaching marketresearch studies to add value to theBank’s operations.This focus on R&D also gave impetusto our plans for re-launching existingproducts and enhancing productpromotion, while also focusing on thecore-products that were re-launchedin 2011. The forty year celebrationsformed the core of the specialpromotional campaigns conductedduring the year including the launchof a two year Fixed Deposit. Addingto this, product focus was furtheraugmented with post re-launch reviewsfor the products launched in 2011 wherecontinuous promotional campaignsadded the necessary impulsion and topof mind recall among our customers.The plans to establish a TechnologyManagement Work Group whilebenchmarking technology began takingshape with the IT strategic planningprocess integrating various kinetics intothe planned agenda. These includedstrengthening Disaster Recoveryinfrastructure, implementation of anIT Security Policy, a comprehensivereview of the SMS Banking Systemand the upgrading of both card andPOS banking solutions. Other areasNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

37HOW WE PERFORMED IN 2012ACHIEVEMENTS AGAINST STRATEGIC OBJECTIVES FOR THE YEAR 2012that required additional interventionwere risk management, controls andcompliance. The imperatives were put inplace for the implementation of a soundinternal control system, where throughbranch, system and follow up audits, asound and comprehensive system ofinternal controls was established. Intothis equation, a fully integrated riskmanagement system was entrenchedby introducing and modifying policiesand reviewing charters and existingrisk monitoring mechanisms. Strategiesto ensure full compliance with lawsand regulations were also inuencedby initially monitoring the existingcompliance steps by review andthen revising the compliance policy,conducting compliance audits andimplementing compliance standards.A blueprint was also in the pipeline toautomate connectivity with Sri LankaPost, to further strengthen our verystrong postal banking network at thebeginning of 2012. This involved theinstallation of an IT system that wouldfacilitate online transactions throughpost ofces. However, this systemcould not be implemented with thePostal Department due to challengesencountered in developing a softwaresystem that would be applicable andaligned to the postal sector of Sri LankaPost.The focus we have always maintainedin creating and nurturing our team alsogained epochal consideration, rootedas we are in the annals of customerservice, innovation, governance, ethicsand sustainability, all driven by themotivated dynamism of teamwork.We were most emphatic on developingbusiness and work ethic competencies,having focused at the beginning of 2012on the evolving and transforming macrooperating environment. The training wethus infused is afrmed as an investmentto our long term sustainability andsuccess, given the direct impact it hason our service quality and quality ofour product portfolio. The TrainingPlan thus reected this burgeoningemphasis on the business and work ethic,which aligned to developing individualcompetencies, would in turn complimentthe Bank’s end goals and vision.The ethos of sustainability remainedthe overarching concentration inensuring economic sustainabilityas well, where maximising returnon investment through astute andvisionary diversication of investmentsand the loans and advances portfoliowas planned. However, the equitymarket investment portfolio remainedrestricted due to the prior mentionedTFC transaction and the Loans andAdvances Portfolio was also conneddue to the CBSL credit ceilingdiktat. Hence, it was here that NSB’sprudent perspicacity in maintaininga strong and consistent investmentgrowth paradigm rmly rooted itself.Investment in the corporate sectorincluding in debentures, securitisationand corporate lending heraldedremarkable growth. The loan portfoliotoo was diversied by extending projectloan facilities to diverse industries andgranting small scale loans to rural areasthrough Ithurum Ayojana Kawa, whichalso added llip to the micro and SMEsectors around the country.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

38HOW WE PERFORMED IN 2012OPERATIONAL REVIEWWe are forty years. Young, you may say,but not quite, because our foundingethos was one of being a savings bank.We retain that ethos, the vision of ourfounders, because that is fundamentalto the way we do business. But, with thisforty year heritage also comes the factthat we must remain with the people;that we espouse those age old valueswithin the roots we have strongly putdown in this country. We put downour roots as a savings bank, wantingSri Lankans to save not only to developthemselves but to develop the nation.Today, NSB’s roots have spread farand wide. Our entire persona is aboutspreading this ethos of being stronglyrooted, with a vision that is overarchingto ensure overall development. We havemoved beyond being simply a savingsbank, to one that is a leading corporatesteward observing trends and challengesto transform and innovate accordingly.For forty years, these roots ensuredthat from the savings we harnessed,a majority was invested in nationaldevelopment projects, whether it bein mega infrastructure projects forthe betterment of all or in investingin smaller communities to uplift theirlifestyles. While this formed a majorityof the savings mobilised, we alsoconcentrated on enabling Sri Lankansto meet their primary need, shelter.This meant that our reach, throughthe extensive branch network andthe numerous touch points, is able topermeate our concept of being rooted,into every Sri Lankan’s mindset, givingthem shelter, uplitng lifestyles anddeveloping the nation.Being rooted to our fundamentals iscrucial in this journey and what youread in the next few pages, will surely tellyou that we are true to our philosophy;empowering the people in a nationwhere geographic, economic and socialdemographics can be challenging.Accessibility and ReachEnhancedWe must ensure that we are strategicallylocated in geographic areas thatwill serve our customers better. It isimperative therefore that we spreadour roots enabling our stakeholdersto access our products and servicesbetter. For this, we have brought in atwo pronged approach. Firstly, to addmore branches to our network, thusspreading our roots astutely to reachall stakeholder segments and secondly,to infuse the imperatives of modernityand technology into existing branches,which will help us to be stronglyrooted in everything we do. We dothe latter by refurbishing, relocatingand rehabilitating them, all aligned towhat our stakeholders have told us theywant to see in us. We also continue toNumber220210200190180170160150Number of branchesat the end of the year186201021020112192012NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

39HOW WE PERFORMED IN 2012OPERATIONAL REVIEWimprove our customer service levelsthrough constant training and strategicadditions and developments into ourproduct and service portfolio.NSB opened a total of 9 branchesduring the year, while 13 brancheswere relocated to better access pointsand 2 branches were refurbished toreect the benchmarked features ofthe Head Ofce. 675 Ayojana Kawaand 793 school banking units, the latterholding a total of 1,185 units aroundthe country were established. This wasdone primarily to create top of themind recall and a sense of uniformityin design, concept and corporatebranding. An accelerated expansion ofthe branch network was envisaged at thebeginning of the year. But CorporateManagement very prudently decided toslow down the process and re-strategisethe envisaged network expansion plan,concentrating more on managing thechange in market condition to ensurethat targets were met, and our roots arenurtured.“We also continue toimprove our customerservice levels throughconstant training andstrategic additions anddevelopments into ourproduct and serviceportfolio.”The emphasis on mobilisation arose,during mid 2012, both time and savingsmobilisation fell short of targetedamounts. This was due to the intensecompetition & encountered issue ofTFC transaction, the industry beingvery competitive in the interest ratearena, rapid expansion of networks andmassive penetrative promotional drivesacross the industry. It was time then tochange course and focus on a plan toaccelerate the process. This strategybore fruition when savings depositsamounted to Rs.1,269 Million andtime deposits was notched at Rs.29,857Million by the end of 2012.Countering CompetitionWe analysed the trends and introducedinitiatives to counter and overcomechallenges emanating from competition,as our team, as is habitual, rose tothe rising challenges. They began tocharter a course that was innovativeand different, mapping focus areas thatwould increase yields, while preservingthe core values of remaining rootedto our savings concept. This led to thelaunch of new features to productsand campaigns to infuse the necessarypositive results. A 24 month FixedDeposit scheme on a very competitiveinterest rate, a savings promotionalcampaign that ran in tandem with theBank’s 40th anniversary celebrations,Win Win Thegi Warusa with attractiveprizes and bonus interest scheme andthe introduction of branch savingspromotional teams. While the alreadyestablished competitions had theirdraws for Sthree, SMILE, Ridee Rekhaand Prarthana, the branches also addedfurther momentum to their mobilisationfeatures in the month of October whichwas declared Thrift Month, with myriadNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

40HOW WE PERFORMED IN 2012OPERATIONAL REVIEWprogrammes aimed at inculcating asavings culture in our stakeholders.Beyond Conventional InitiativesIt is imperative that customer servicecontinues to improve, as this is anintegral facet that remains fundamentalto our roots. Taking banking to thedoorstep using technology infusedwith human intervention has alwaysbeen a part of our service process.This year, we increased the numberof POS machines which naturallycascaded to an incline in the volumeand value of transactions with a valueadded service of bill payments throughPOS being facilitated as well. We alsolaunched value added services into ourservice portfolio by tying in businessagreements with Union Assurance,Ceylinco Insurance and Dialog Axiata.Customer engagement is a valuablefacet in our continuous improvementprocess. To further fortify this, wevisited identied customer entities andsegments and expressly brought inprocesses that would validate customercomments and suggestions, making iteasier for us to respond more efciently.A Call Center Contact Programmeis also being implemented, with thenumber being displayed at all ATMsand branch ofces as well. Our CallCenter continues to be a vital conduitin communicating with our customers,fueling continuous dialogue andfeedback which is an imperative in thecontinuous improvement required forbetter customer service.Despite 2012 being a year ofconsolidation for the IT functionswithin the Bank, we nevertheless hada busy year. The product portfolio wasadded to with the launch of a new card,IT systems were enhanced to improveefciencies and we were conferredan accolade at the 10th anniversarycelebrations of Lanka Clear. We wonthe ‘Best T+O Contributor in SLIPS’,an award that is considered a uniqueachievement for the Bank, as we area licensed specialised Bank, operatingamong 27 participatory commercialbanks within the Sri Lanka Inter BankPayment (SLIP) System.NSB launched Visa Debit Cards inafliation with Sampath Bank, givingour customers the opportunity ofenjoying the benets and advantagesof two global card payment systems,namely Mastercard and Visa. Plansare also underway to launch anInternational Student Card in afliationwith Mastercard and the World SavingsBank Institute (WSBI).Feasibility studies and analyses arecurrently being conducted to launcha customer loyalty programme, whichwould cascade numerous benetsand intangibly, a strengthening ofstakeholder relationships.The Postal AngleMaintaining the founding ethos of theNational Savings Bank which was to laydown our roots and build and strengthena savings culture within the nation, ouroutreach possesses a unique dimensionthat no other bank in Sri Lanka has.This is the phenomenon of postalbanking, which under the aegis of SriLanka Post has an extensive collation of641 post ofces, 3,412 sub post ofcesNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

41HOW WE PERFORMED IN 2012OPERATIONAL REVIEWand 23 postal banking branches, built onthe base of banking being truly taken toeven the most remote geographical partof the country. With over two millioncustomers comprising primarily thoseliving in rural and difcult areas comingunder the postal banking umbrella, thisyear the total savings mobilised throughthis facet of banking was Rs.352Million.The signicant increase in depositmobilisation was fueled by astuteinitiatives that were implementedthroughout the year. An opportunityarose at the “Deyata Kirula”Programme, which is the government’sdevelopment drive to conduct a specialsavings promotional campaign in theAnuradhapura and Polonnaruwadistricts, covering all post ofces and subpost ofces in those areas. In addition,new nancial markets evolving in thenorthern province have fueled newsavings demographics, especially in theJaffna and Mullaitivu districts. Theseaugmented the deposit mobilisationseen during the year.“With over two millioncustomers comprisingprimarily those living inrural and diffi cult areascoming under the postalbanking umbrella, thisyear the total savingsmobilised through thisfacet of banking wasRs.352 Million.”However, there were some challengesthat ensued during the year, for whichsolutions were implemented, ensuringthat our market share in postal bankingremains as per forecast targets. Withcompetition emanating from ruralnancial institutions offering convenientcredit facilities, NSB launched the microcreditloan scheme “Ithurum AyojanaKawa” to overcome that challenge,which gained a considerable following.Rs.Mn250002000015000100005000-Inward Remmittances8,556201011,665201118,7542012Moving Beyond the HorizonAmply evidencing our rmly rootedpersonality in all areas of business,having commenced foreign currencyremittance business in 2005, we haveenjoyed a signicant market share inall these years. 2012 echoed similarparadigms. We have seen a sustainingannual growth in market share eachyear, due to the implementation ofpromotional campaigns, designedspecically for countries in which alarge number of expatriate Sri Lankanmigrant workers are employed. Thisyear, we saw an increase of 61% inNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

42HOW WE PERFORMED IN 2012OPERATIONAL REVIEWremittance values over last year, despitethe remittance market encounteringintense competition from other localbanks, all of which showcase aggressivepresence in those countries, posingfurther challenges to our remittancebusiness growth.Putting down our roots internationally,new markets were pursued by the Bankthis year specically in Asia, Europe andthe Middle East, augmenting operationsand implementing strategic marketingcampaigns to fuel growth. The mutualrelationship and the condenceplaced between the Bank and overseasExchange Houses has also resulted infurther improving our services, whichencompass excellent customer service.Coupled with this service excellence,low cost, speedy, convenient and securefund transfer systems and processes havebeen introduced by NSB, prompting SriLankan expatriates to have immensecondence and assurance of theirremittances reaching the recipients.“We have seen asustaining annualgrowth in market shareeach year, due to theimplementation ofpromotional campaigns,designed specifi callyfor countries in whicha large number ofexpatriate Sri Lankanmigrant workers areemployed.”The foreign currency deposit baseincreased by 14.4% this year, contributing1.2% to the Bank’s total deposit base.Proactively etching and expandingpresenceFifty Exchange Houses andCorrespondent Banks are directlyengaged in foreign remittances withNSB, with some of the Exchange Housesbeing renowned global players. We addedanother global Exchange House into ourportfolio this year. We also penned venew arrangements in France, Korea andBahrain, gaining a signicant foothold inthese markets and enhancing accessibility.Over 2013, we intend increasing thenumber of NSB Agents deployedoverseas to ensure that the customeroriented value added service, whichis certainly a strong point for us,will be further augmented. This willbe ably supported with penetrativecommunication and promotionalcampaigns, establishment of newstrategic relationships and moreinitiatives being introduced to improvecustomer service.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

43HOW WE PERFORMED IN 2012OPERATIONAL REVIEWMaking our migrants ‘overseas’readyNSB has also continued to nurture therelationship with the Sri Lanka Bureauof Foreign Employment (SLBFE) giventhe large number of migrant workerswho are our customers. Over and abovethis reason, we also believe that ourmigrant workers must be made awareand be equipped with the necessaryskills and knowledge to be a success inthe countries they work in. We thereforepartner the SLBFE in its awareness,orientation and training programmes,which are compulsory for thoseseeking employment overseas. Theseprogrammes are conducted islandwide,with the Bank also educating themigrant workers on the importanceof money management, investmentavenues and nancial discipline.Treasury ManagementNSB primarily invests in GovernmentSecurities, Equity Market Investments,Alternative Investments andInvestments in Loans and Advances.Given that our overarching ethosremains rmly in partnering the nationin its development activities, we drawstrength from our roots to keep to thestatute that mandates the Bank to investa minimum of 60% of its deposits ingovernment securities.The Government Securities Portfoliorecorded a marginal growth during theperiod of 2012. However, due to theupward policy rates adjustment by theCentral Bank and low liquidity levels inthe market, interest rates increased inthe rst nine months of 2012. The policyrate reduction halted the issue of newTreasury Bonds and this low volumehas created high demand pressure onGovernment Securities. Accordingly,interest rates began declining duringthe latter of 2012.However it is pertinent to note, thatNSB’s total income generated throughour Treasury Bill and Treasury Bondportfolio increased signicantly in 2012compared to 2011. The maturity proleof the Government Security portfolioshows that 57% of total maturities havea maturity period of one year or moreat the year end 2012.In Equity Investments, the marketshowed a positive movement duringthe third quarter of 2012. Theperformance during the period wasnot ourished. The stagnancy thatprevailed otherwise was echoed in theBank’s equity portfolio as well. TheBank’s primary investments are in thesectors of Bank, Finance & Insurance(BFI) for 39% and Diversied holdings(DIV) for 18%, which account for57% of the total portfolio. Given thesesectors’ sensitivity to the macro socioeconomicenvironment, performanceis exceptional during favourableconditions, although, the generallacklustre milieu was quite pervasivethis year, when the Power & Energy,Manufacturing and Banking, Finance& Insurance sectors were not doing toowell during the year.Alternative Investments represented bydebentures, loans to nancial institutionsand investment in securitised papers,the Bank’s Alternative InvestmentPortfolio focuses on investing in highcredit quality nancial institutionsand grant funds to corporates to earnNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

44HOW WE PERFORMED IN 2012OPERATIONAL REVIEWhigher yields, augmented with a welldiversied investment portfolio posing amoderate risk level. The portfolio, thisyear, saw a decline of 27%, with boththe Debentures and Loans Portfolio andTrust Certicated portfolio decreasingby 27% and 13% respectively. This wasprimarily due to competitive debentureinvestments not being available in themarket.Changing CourseWe began the year 2012 with the focuson retail lending. Our plans were toRs.Mn320,000310,000300,000290,000280,000270,000260,000250,000240,000230,000Government SecuritiesPortfolio262,9472010298,135309,5962011 2012invest 29% of our mobilisation target,that is Rs.16,820 Million during theyear for lending. Branch managers weregeared to invest more on retail lendingproducts, which would permeate toimprove branch protability. However,our plans had to change. Since theCBSL imposed a credit ceiling inApril 2012, which stipulated that totalloan and advances cannot exceed the118% total outstanding loans andadvances as at 31st December 2011,we arranged our credit portfolio to fallin line with the stipulated limit andchange course. Being rmly rooted inour fundamentals, we realised that theemerging trends required innovation.Housing – a PriorityHousing certainly is very integral to ourconcept of being rooted. We urge ourstakeholders to empower themselvesand one avenue which we are mostemphatic about is that our customerslay down their roots by meeting aprimary need. We are very consciousthat housing is a primary need. Andso, we have taken the responsibility toensure that Sri Lankans have accessto owning their own home where wealso have a competitive edge due tocomparatively lower interest rates anda speedy and efcient approvals processand service.However, despite concentrating on thecredit ceiling imposed by CBSL as wellas considerable competition emanatingfrom the marketplace, we had a good year.The housing loan portfolio increasedby Rs.6,889 Million and exceeded thetarget by granting 9,535 loans. The totaloutstanding housing balance stands atRs.44,274 Million end 2012.We continued extending loans to thepublic sector at concessionary rates.We disbursed Rs.4,492.91 Million ofloans. 18.45% of the loan portfolio wasdisbursed at 14% interest and 81.55%was disbursed at 12%. This indirectlycontributed towards the upliftment ofthe public sector employees.We also extended concessionaryhousing loans for university academicand non-academic staff. Loans inthis segment was Rs.43.34 Million asNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

45HOW WE PERFORMED IN 2012OPERATIONAL REVIEWend of 2012. In collaboration withStandard Chartered Bank and theRoad Development Authority, specialhousing loan arrangements were alsoentered into as well.Expanding the loan compassWe continued to extend funding benetsto a host of diverse segments which wefeel have potential and which will alsopermeate a wider growth paradigmoverall. Personal loans for exampleis built on the formula of improvingsavings deposits, while assisting ourcustomers to develop themselves.“We continuedextending loans tothe public sector atconcessionary rates. Wedisbursed Rs.4,492.91Million of loans.”Under the Auto Loans we extended thefacility to senior media personnel andartistes under a government initiatedprogramme, granting loans this year toa total of Rs.85.5 Million.the fact that we now have an easy creditpolicy as an added incentive, growthwas good. At the beginning of the year,our pawning advances were grantedat a relatively competitive interest ratebut due to external market conditionsthe rates were forced on an incline.However, despite these factors, weincreased our portfolio signicantly andearned a considerable interest income.UpskillingTo remain rooted to our core objectives,our team has to retain and develop onthe core vision and mindset. ThereforeRs.MnRetail Lending PortfolioEnsuring the sustainability of ourfarmers and the country’s agriculturalsector remains a priority. We have beena rm partner in the Government’sPaddy Purchasing programme,releasing Rs.1,226 Million.Rs.Mn60,00050,000Pawning Portfolio48,133150,000100,00050,000-83,88267,2112010 2011114,2262012Pawning gains groundWe have faced intense competitionin the pawning business due to thegrowing number of players in themarket. However, given our reputationfor a speedy and efcient service and40,00030,00020,00010,000-21,725201032,6002011 2012NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

46HOW WE PERFORMED IN 2012OPERATIONAL REVIEWtraining and development initiativesof our branch teams also included thefacet of maintaining discipline, code ofconduct, operational and administrativeprocedures and marketing activities,communicated within the inductionprogramme conducted for our newrecruits to the branches.The Branch Managers’ Conferencesheld regularly during the year, includeddiscussions and responses to challengesemanating in this competitive milieu, avery positive feature in infusing practicalsolutions in branch management. Giventhe new branch strategy being rolled out,NSB believes that branches are the keyto taking on the mantle for the Bank’sprogress. Branches are now tasked withadding impetus for the future and to dothis, we want our branch teams to bewell equipped with the apt knowledgeand skills.Being Technology DrivenThe Bank’s In House developedIT Systems continued to add thenecessary impetus to uplift customerservice, taking the concept of ‘Banking,“We have been afi rm partner in theGovernment’s PaddyPurchasing programme,releasing Rs.1,226Million.”Anytime, Anywhere’ that much further.The existing credit system was alsoimproved, facilitating settlement fromany branch, centralising strategicoperations and adding better efcienciesinto services. The pawning systemwas one such business area that wascentralised. We also observe increasedusage of our Internet banking andSMS banking services as well as our BillCollection Services, which facilitatescustomers in paying utility bills orinsurance premiums.Communicating Our IdeasInstilling the savings habit amongthe people of Sri Lanka remainsa fundamental tenet that is burieddeep into the roots of NSB.Therefore communicating thismessage comprehensively and withclarity is imperative. Marketing andcommunications are competenciesthat are rooted to the fundamentals ofthe Bank, where values and traditionform the bedrock upon which we buildand develop a modern technologicallyadvanced banking culture that has overthe years gained a reputation of beingfriendly, exible, accessible and foundedon good values.Our marketing initiatives therefore aredeep-rooted within these rudimentswhich are deemed very important to us.This is amply evidenced by the initiativeswe continue to infuse, especially inensuring that the depiction of ourcorporate identity is unambiguous,unvarying, consistent, clear and instillsevery feature the Bank is proud to boastof. This uniformity was extended to alladvertising, marketing and promotionalcampaigns as well. We remain verycognizant of the need to infuse andcomply with ethical banking concepts.NSB directed that all media advertisingmust communicate the web URL, CallCenter Number and Credit Rating,NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

47HOW WE PERFORMED IN 2012OPERATIONAL REVIEWdepicted clearly with the corporate logoand name of the Bank. The latter isdepicted on afrmed brand guidelineswhich is communicated to all agenciesresponsible for creatives.Promoting Our BranchesA comprehensive advertising campaignaccompanied the opening of newbranches during the year. There aretargeted campaigns for school bankingunits which form the foundation forencouraging the savings habit amongstudents. The success of these bankingunits, well supported by penetrativemarketing campaigns has seen thelaunch of a further 793 units in schoolsacross the country this year.Innovations and Value AdditionsOur extensive product portfolio isrmly rooted on building on innovationand are all ably supported by incisivemarketing campaigns, promoting theproducts’ value additions.The Hapan Children’s Savings Accountis applicable for children upto 16 yearsof age, giving account holders aninterest rate of 1% more with rewardsof an attractive gift scheme andscholarships for Year Five Achievers.Sthree, an account conceptualisedspecically for women, entitles accountholders to an NSB Shopping Cardwith Master/VISA card facilities andinterest above market rates.Ithuru Mithuru aimed at empoweringyouth to those in their mid-30s todevelop themselves and their familiesvia loans, lucky draws and credit cardspresent numerous benets aligned to theproduct fundamentals; and PrarthanaChildren’s Savings Certicate, aimedat children, is a long term depositscheme carrying an attractive interest.Certicates mature when the childturns sixteen and hold an assurancefrom NSB on the face value at time ofmaturity.The value additions comprise higherinterest rates, gifts, competitions anddraws. These were well supported bymega media campaigns and belowthe line advertising as well, seen inthe Avurudu Wasana, Smile, Win WinThegi Warusa and Hapan Year FiveScholarship promotions.Value Additions to OurCorporate BrandWe also strengthened our corporatebrand, communicating our brandimage, promise and values at branchlevel, to convey NSB’s contemporarymores which remain fundamentallyintertwined and rooted with ourheritage and tradition. These areavenues in which NSB ingratiates itselfinto the hearts and minds of the people.Our participation in the ConstructionExpo and proactive stance takenat the Deyata Kirula Exhbition inAnuradhapura where the NSB brandand products were communicatedthrough a comprehensive postal andmarketing campaign are two examplesin point. Given the platform ofinnovation, NSB also launches seasonalor milestone campaigns which this yearencompassed New Year celebrations inApril.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

48HOW WE PERFORMED IN 2012OPERATIONAL REVIEWFueled by regional campaignsthat added further impetus to themarketing and promotional drives,there was a tangible growth in both thequantitative and qualitative indicators,which evidences the success of thesecampaigns.Using IT as a Marketing ToolSocial media and mobiletelecommunication are constantlyin use, promoting our products andservices via SMS, e-yers and newspublications in all e-papers. Similarly,our technology based products also gainimmense publicity through targetedmedia campaigns in complimentarypublications or social media platforms.Dialogue with Our StakeholdersIn addition, it is imperative that NSBremains fortied to its fundamentalsof empowering people. This we did byorganising seminars for our targetedcustomer segments, namely, holdingthirty Hapan Scholarship seminarsfor Year Five scholarship examinationprospects, 52, seminars GCE O/Lunder the banner of TharunayataHetak and seminars held in partnershipwith the famed Nawayugaya magazine.The Added Value of ResearchBeing a bank that has always drawn onour roots for lessons learned and for theway forward, we declared a strategicmove this year in integrating theResearch Division into the MarketingDivision. This has proved undoubtedlythat the analysis of various studiesconducted has been a very helpfulin ensuring that our marketing andpromotional initiatives are targeted tothe apt stakeholder group. The researchis also valuable in analysing levels ofcustomer service, which enables NSBto map a SWOT analysis, bridge gapsand take preventive or corrective actionwherever necessary. A customer servicesurvey, a product awareness surveyencompassing Year Five students,research on withdrawal patterns anda product-wide analysis to measureNSB product performance were crucialstudies conducted during the year.NSB Marks its 40th MilestoneOur presence in the internationalarena was certainly well foundedwhen NSB ingratiated its roots evenmore in the global savings arena. OurBank was extremely honoured to hostthe World Savings Banks Institute’s18th Asia-Pacic Regional GroupConference in Colombo marking thesignicant milestone of the Bank’s 40thanniversary celebrations.Themed on ‘The Competitivenessof Current Retail Banking of WSBIMembers’, the conference had morethan forty delegates from WSBImember institutions with input fromChief Guest Senior Minister forInternational Monetary Cooperation,Dr Sarath Amunugama, KeynoteSpeaker Governor of Central Bankof Sri Lanka Ajith Nivard Cabraal,Chairman of WSBI Asia-PacicRegional Group Adinan Maning andDirector, Training and Consultancy,WSBI – ESBG Ian Radcliffe addinglustre to this global event.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

49HOW WE PERFORMED IN 2012OPERATIONAL REVIEWWSBI has 23 member institutions from16 countries in the Asia-Pacic regionwithin its membership and works onthe platform of building relations withnational, regional and internationalinstitutions to exchange experienceswith peers from within and beyond theregion.Future Strategies for BranchDevelopmentIntent on spreading our roots tooptimise our reach, various strategiesare currently being discussed andrudiments being implemented for2013, which will assuredly reect moreintense competition but will also posenumerous opportunities. Some ofthese being worked to be set in motionnext year is an acceleration of savingsmobilisation through earmarkedproducts and campaigns. We intendintroducing a Student Card, channeloptimisation through student banksand launching SME lending throughAyojana Kawa. It is aimed that furtherpenetration into difcult rural areasusing POS transactions, augmenting“Our Bank wasextremely honoured tohost the World SavingsBanks Institute’s 18thAsia-Pacifi c RegionalGroup Conference inColombo marking thesignifi cant milestoneof the Bank’s40th anniversarycelebrations.”main branch services through theopening of supporting Savings Unitsand the most vital restructuringelement within branch operations, theintroduction of the regional system tothe branch network, will also aid NSB’sfuture path.The latter is billed to improveoverall efciency of the branchnetwork, aligned to the earmarkedexpansion, while capitalising onmarket opportunities,which will surelystrengthen our roots. This should giveus the ability to face challenges moreeffectively and efciently in the arisingcompetitive business environment. Thenew structure is aimed at minimisingwaste, optimising resources, imbuingteamwork, making timely businessdecisions that would be prudent and astuteand extending autonomy to regionalmanagers to perform their operationseffectively. This empowerment isemblematic of the characteristics beingpermeated throughout the bank, to giveidentied leaders and team players theknowledge, skills and tools to ensurethat an empowered knowledgeableand innovative team is formulated andnurtured for the long term sustainabilityof the Bank.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

50HOW WE PERFORMED IN 2012FUTURE PLANSJourneying Ahead into 2013Using the Central Bank of Sri LankaRoadmap 2013 as the blueprint, NSBhas now developed plans for the nextyear, based on the 21 point ‘To Do List’laid down by CBSL. The NSB StrategicPlan for 2011 to 2013 also forms partof the rooted focus we have in goingforward.In ensuring that our roots remain trueto our values and core fundamentals,NSB’s focus on the CBSL ‘To DoList’ brought forth the following to beintegrated rmly into the way we doour business. Diligent compliance with all CBSLregulatory directives Maintain vigilance on the Bank’scurrent capital adequacy and intothe future Training and development totake precedence in ensuring theteam is equipped both in skill andknowledge for emanating newdevelopments IT to form an integral part ofthe business to add value to theenvisaged new levels of business Improving Risk ManagementSystems, while being cognizantof local and international trendsoverall Develop a corporate planningculture which will be appliedassiduously Remain alert to NSB’s internationallinks Consider new opportunities andintroduce new services sagaciously Focus on productivity improvement Limit interest spreads and pursueavenues to improve protability Diligently retain the SME focus andintroduce effective initiatives forSMEs Grow foreign remittance business Support provinces, particularlythe northern, eastern and uvaprovinces, that are lagging behind indevelopment to develop and comeon par with the rest of the countryPlanning the FutureOur Strategic Business Plan 2011 -2013 is very aligned to the externaltransformations both locally andglobally in the economic sphere. Thisstrategic plan sees our success, failuresand deviations clearly marked andanalysed, which enables us to nowstart formulating the blueprint forthe Strategic Plan for 2014 to 2016.This new plan will form a wider andmore in depth scope in adding valueto our stakeholders, which will includea focused penetration to improvingcustomer service levels as well.Making InroadsAs detailed in both this review and theGM/CEO’s Review of Operations,strategic changes are planned in 2013in channel management. A morepenetrative autonomous RegionalManagement System will replace thecurrent Zonal Management Systemwhich will ensure that NSB retains itsmarket share due to added emphasison deposit mobilisation. This will alsoenable NSB to focus considerablyon the deposit mobilisation in ruralNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

51HOW WE PERFORMED IN 2012FUTURE PLANSareas and thus, penetrate our roots ofnancial inclusivity to underprivilegedsegments of society.Another positive envisaged fromthis change in structure would bein enabling the Bank to hone betterinter-personal relationships with theyounger generation, which will helpus strengthen our roots at grassrootlevel. School banking units, IthurumAyojana Kawa and expanding our loanportfolio through these IAKs will add tothe focus. POS mobilisation will forma primal driver in expanding our rootsand thus, our branch expansion planwill have the value addition of havingmore devices in the eld as well, to helpus reach our stakeholders.Strengthening the IT BackboneInformation Technology continuesto be the fertile feature in ensuringthat we remain rmly rooted in ourpresence, penetration, innovationand better service levels. In 2012,we already laid the groundwork foran IT enabled operational focusincluding the establishment of aTechnology Management Work Group,improving and development integratedIT solutions, while improving ITinfrastructure and emphasising onquality assurance for our IT systems.These plans will be taken further in2013.Expanding BordersWe intend increasing NSB’s marketshare in remittances as well as inNRFC and RFC foreign currencymobilisation. The processes plannedwill include establishing relationshipswith new exchange houses and banksand accessing new remittance markets.Honing Team StrengthsWe consider training as an investmentin our collective success as it has a directimpact on the quality of customerservice. This remains at the core of thetraining calender, which is very focusedon the evolving needs of the externalenvironment and the aspirations ofour team. The Training Plan for theyear is designed to develop our team’scompetencies and will encompass ahost of knowledge gaining initiativesin short term and long term trainingprogrammes, skills development and lifelong training as well as foreign trainingwhenever applicable.Widening FocusNSB will surely be spreading its rootsfurther when next year, we intend topursue investment opportunities instrategic corporate entities. This willbe further augmented through thefacilitation of more project loans indiversied industries which would inturn give good rates of return. Anotherfacet we intend working on is raisingforeign funds which would enable us toexpand our business activities.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

52NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

53CHAPTER 3ROOTED IN OUR HERITAGEGOVERNANCENATIONAL SAVINGS BANK . ANNUAL REPORT 2012

54ROOTED IN OUR HERITAGEGOVERNANCE REPORTCorporate Governance is dened asthe framework of rules and practicesby which a Board of Directors ensureaccountability, fairness, and transparencyin an institution’s relationship with allits stakeholders. Specically, modernCorporate Governance practices providedirections on the responsibilities of theBoard of Directors including that ofChairman, CEO or MD and the SeniorManagement along with the Boarddelegated Committees.Over the last two decades, CorporateGovernance advocates have alsobeen emphasising the importance oftransparency especially in light of manybusiness giants falling prey to unethicalbusiness practices and behaviours ofsenior management and staff. Therefore,NSB takes transparency as a criticalelement of Corporate Governancewhere the practices ensure a strong andbalanced economic development whileensuring that interests of stakeholdersare safeguarded. It also ensuresthat stakeholders fully exercise theirrights and that the organisation fullyrecognises their rights as stakeholders.In essence, Corporate Governanceincludes not only rules and regulators,practices and procedures but also bothsocial and institutional aspects andencourages a trustworthy, moral, as wellas ethical environment that benets theorganisation in many ways including:• Corporate success and economicgrowth,• Investor condence resulting in aninstitution’s increased ability to raisecapital efciently and effectively,• Lower capital cost,• Provide proper inducement to theBoard, Senior Management as wellas managers to achieve objectivesthat are in the best interest of thestakeholders and the organisation,• Minimise wastages, corruption, risksand mismanagement,• Help in brand formation anddevelopment,• Ensure the organisation is managedwith the best interests of allstakeholders in mind and• Minimise reputational risk.Governance at NSBNSB is built on basic, yet vitallyimportant founding qualities andattributes such as honesty, fair play,morals and ethics, legal/regulatorycompliance, transparency and optimalprociencies.In carrying out its activities, NSB placesthe value of Corporate Governanceat its highest priority starting fromthe Board of Directors and SeniorManagement down to all operationallevels staff members. The Board ofDirectors and all staff members atNSB are committed to the highestbusiness integrity and ethical valuesand are dedicated to fully-complyingwith the best Corporate GovernancePractices spelt in the NSB Act, BankingAct and Direction No. 12 of 2007 onCorporate Governance to LicensedSpecialised Banks issued by the CentralBank of Sri Lanka (CBSL) and bestbusiness practices. The guidelines andtheir amendments/updates issuedby the CBSL from time to time arewell followed by NSB for its effectivegovernance.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

55ROOTED IN OUR HERITAGEGOVERNANCE REPORTThe Bank is in compliance with all theapplicable regulatory requirements ofthe CBSL including the “Know YourCustomer (KYC)” requirements alongwith the Anti-Money Launderingprovisions issued under the FinancialTransaction Act and the Anti MoneyLaundering Act.In addition, as a State owned Bank,NSB is governed by the provisionsand the administrative regulations ofthe Ministry of Finance and Planningand the Government. The Bank tablesits Financial Statements annually inthe Parliament. This ensures that thepublic interest in the Bank’s affairsis secure. Financial Statements areaudited by the Auditor General.Further the Compliance Division hasa provision in its Action Plan to carryout a quarterly compliance audit reviewin selected branches. The Bank alsopublishes its nancial statements andother disclosures as per the regulatoryrequirements thus increasing thetransparency and reliability of theBank’s policies and processes indischarging its duties.We believe that all of the aboveenhances the Bank’s CorporateGovernance structure and strengthensthe good governance practices in thebest interests of the Bank and all itsstakeholders. The general supervision,control and administration of the affairsand the business of the Bank are vestedwith the Board of Directors which isappointed by the Ministry of Finance &Planning. The newly appointed Boardof NSB comprises of seven Directors,six of whom including the Chairman areNon-Executive Directors. The positionsof the Chairman and CEO are keptseparate. The Directors of NSB areprofessionals and eminent persons fromboth the private and public sectors whoare able to add value to the CorporateGovernance process. The Board hasalso formulated appropriate checks andbalances to ensure that the CorporateGovernance process is upheld at alltimes. The annual audited FinancialStatements along with the AnnualReport are published ahead of the datesstipulated by the Finance Act.The Governance Framework at NSBis foremostly based on the followingprinciples:• Assuming responsibility andaccountability in respect of themanagement of affairs of NSB atall levels.• Ensuring the oversight of specicresponsibility assigned to themthrough Board appointed Sub-Committees.• Determining the best structures ofmanagement for the Bank to achieveits business objectives and strikingthe balance between business andthe true spirit of ‘National Savings’and delegating Key ManagementPersonnel appropriately.• Evaluating business activity andprudent risk management policiesof the Bank thus ensuring the safetyand soundness of NSB.• Infusing and accommodating newideas and maintaining cordialrelationships at Board and SeniorManagement levels.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

56ROOTED IN OUR HERITAGEGOVERNANCE REPORT• Having an active role in discussingwith relevant regulatory bodies onthe implementation and complyingwith governance regulations.• Overseeing of internal controlsystems including internal audit,compliance and risk managementfunctions independent of thebusiness lines.• Adhering of all requirements of theNSB ACT, laws and directions ofRegulators.• Keeping social responsibility inmind when carrying out its coreactivities.The Board has also delegated some ofits functions to Board Subcommitteeskeeping in line with the Directionson Corporate Governance. TheseSub-Committees are given theauthority to make decisions and/orrecommendations to the Board onmatters under their purview. The BoardAudit Committee (BAC) and IntegratedRisk Management Committee (IRMC)assist the Board to review and makedecisions on the adequacy and integrityof internal controls, review of nancialinformation and their integrity,principal risk elements of the industryand precise risk factors and CorporateGovernance of the Bank. The Boardhas also retained the critical areas ofoperations under its purview withoutdelegating it to operational levels as perCorporate Governance practices.The Corporate GovernanceOrganisational ChartThe Board of Directors at NSBwho oversees and assumes overallresponsibility and accountabilityof the Bank by setting high levelstrategic directions, overseeing the riskmanagement function etc has delegatedthe implementation of strategies to theCEO who exercises executive authoritythrough the corporate managementteam which he heads and to which heprovides leadership and direction.The BoardBoard Sub - CommitteesCEOBACIRMC NC HRRCCorporateManagementBM Div.HR Div.Crd Div.F&P. Div.AM Div.Admin Div.IT Div.IB DivMkt. DivLegal Div.AuditInvestigationsComplianceRiskNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

57ROOTED IN OUR HERITAGEGOVERNANCE REPORTThe Compliance framework of the Bank is guided by the Compliance Charter. The Compliance Charter was reviewed andapproved by the IRMC in December 2012 (Board approved in January 2013). The salient features included at the reviewcomprises of introduction of an Executive Compliance Committee (ECC), role and responsibilities of Head of Risk &Compliance, strengthened role of Compliance Ofcer, additional responsibilities of Senior Management etc.The Management CommitteesThe Management Committee Structure of the Bank is given below.Board of DirectorsIRMCBAC HRRC NCGM/CEOMC ALCO IC CC OPRC ITS MrC ERMC ECCTNIC EC PDC ORMCIRMC - Integrated Risk Management Committee MrC - Marketing CommitteeBAC - Board Audit Committee ERMC - Executive Risk Management CommitteeHRRC - Human Resource Remuneration Committee ECC - Executive Compliance CommitteeNC - Nominations Committee TNIC - Tender and New Investment CommitteeMC - Management Committee EC - Equity CommitteeALCO - Asset and Liability Management Committee PDC - Product Development CommitteeIC - Investment Committee ORMC - Operational Risk Management CommitteeCC - Credit Committee ITS - IT Steering CommitteeOPRC - Operational Performance Review CommitteeNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

58ROOTED IN OUR HERITAGEGOVERNANCE REPORTThe Committees stated in the previouspage provide effective managementpractices while complying withCorporate Governance procedures. TheBoard Sub Committees are headed byBoard member approved and appointedChairmen (enlisted) while the functionsare carried out by the committeeapproved Secretaries who are the Headsof the respective Divisions.The General Manager/CEO heads alloperational committees. All committeesare operated as per charters approvedby the Board of Directors. The BoardSub-Committees meet quarterly whileoperational committees meets as perthe respective Charters. All committeesadhered to their delegated authoritiesduring the year except for “The FinanceShare Transaction” which took placewithout following the sound investmentapproval process functioning at theBank. The impact of this incident wasof reputational loss although there wasno direct nancial loss.Attendance of the Board Members for Board Meetings during the Year 2012Name of DirectorDate Appointed Eligible to Attend AttendedPresent DirectorsMr. Sunil S. Sirisena - Chairman 06.08.2012 08 08Mr. S.T. Abeygunawardana, Working DirectorRe-appointed on08 0806.08.2012Mr. P.A. AbeysekaraRe-appointed on06 0622.08.2012Mr. D.L.P.R. Abeyaratne 09.02.201208 07Acting Chairman from23.05.2012 to 05.08.2012Mr. Lionel P. Fernando 06.08.2012 08 08Mr. Sumith Wijesinghe 06.08.2012 08 06Mr. Priyantha Jayawardena 06.08.2012 08 07Directors who were on the previous BoardDate Resigned Eligible to Attend AttendedName of DirectorMr. P.G.S. Kariyawasam - Chairman 21.05.2012 09 09Mr. S.T. Abeygunawardana,18.05.201209 08Working DirectorRe-appointed on 06.08.2012Mr. P.A. Abeysekara Re-appointed on 22.08.2012 09 09Mr. M.K.B. Dissanayake 08.02.2012 02 01Mr. H. Madiwela 18.05.2012 09 09Mr. R.A.P. Ranawake 10.08.2012 09 08Mr. S. Shan. Shanmuganathen 10.08.2012 09 08NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

59ROOTED IN OUR HERITAGEGOVERNANCE REPORTBoard Sub CommitteesScope, functions and attendanceof committee meetings during theyear 2012 are given below for theBoard appointed sub-committees inaccordance with the Banking ActDirection No. 12 of 2007.1. Board Audit Committee (BAC)Scope of the Board Audit Committee(BAC)The scope of the Board AuditCommittee is principally to assist theBoard of Directors in fullling itsoversight responsibilities. To maintainthe integrity of the Bank’s FinancialStatements, BAC reviews nancialinformation of the Bank in its AnnualReport, quarterly reports publishedreviews signicant nancial reportingjudgments contained in them, andreviews all processes leading to them.In reviewing the Bank’s Annual Reportand accounts and quarterly reportsbefore submission to the Board, theCommittee focuses their attentionparticularly on major judgmental areas,any changes in accounting policies andpractices, signicant adjustments arisingfrom the audit, the going concernassumption and the compliance withrelevant accounting standards andother legal requirements.The Committee also assists the Boardin assessing the risk managementsystem of the Bank thus ensuring thatthe Bank has a comprehensive policyon risk management; and monitoringthe effectiveness of the Bank’s riskmanagement system.It would also assess the Bank’s compliancewith legal and regulatory requirementsby reviewing the effectiveness of thesystem of monitoring compliance withlaws and regulations and the results ofmanagement’s investigation and followupof any instances of non-compliance.The Board Audit Committee Report isgiven on page 96.2. Human Resources andRemuneration Committee(HRRC)Scope of the HRRCThe Human Resources andRemuneration Committee (HRRC)formed under the Banking ActDirection No. 12 of 2007 is responsiblefor determining the remuneration policyincluding salaries, allowances and othernancial payments relating to Directors,Chief Executive Ofcer and KeyManagement Personnel of the Bank,other than the remuneration determinedby the Collective Agreement.The Committee sets goals and targetsfor the Directors, CEO and the KeyManagement Personnel and evaluatesthe performance of same againstthe set targets and goals periodicallyand determines the basis for revisingremuneration, benets and otherpayments of performance basedincentives. Developing and reviewingHR development strategies on behalfof the Bank and maintaining aconsultative role with the other BoardSub-Committees and operationalcommittees on all human resourceissues, including matters relatingto all staff, are among the primaryresponsibilities vested in the HRRC.The Human Resources & RemunerationCommittee Report is given onpage 98.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

60ROOTED IN OUR HERITAGEGOVERNANCE REPORT3. Nomination Committee (NC)Scope of the Nomination CommitteeThe Nomination Committee reports tothe Board in respect of its activities anddecisions and the Committee shouldcomprise at least three IndependentDirectors as members.The Committee sets the criteria suchas qualications, experience and keyattributes required for eligibility tobe considered for appointment orpromotion to the post of CEO and thekey management positions.The Nomination Committee is alsoresponsible for providing generaloversight of policies and processesthat ensure the Bank’s compliancewith appointments and nominationsrequired by regulators in addition tomonitoring, evaluating and makingdecisions on behalf of the Board withrespect to policies and strategic mattersrelated to nominating staff members.The Nomination Committee Report isgiven on page 101.4. Integrated Risk ManagementCommittee (IRMC)Scope of the Integrated RiskManagement CommitteeThe IRMC assesses all risks, i.e.credit, market, liquidity, operationaland strategic to the Bank throughappropriate risk indicators andmanagement information.The committee is responsible forensuring that the Integrated RiskManagement framework for the Bankis implemented according to plan andassess all aspects of risk managementincluding the updating of businesscontinuity plans.The IRMC reviews the adequacy andeffectiveness of all management levelcommittees such as the credit committeeand the asset-liability committee toaddress specic risks and to managethose risks within quantitative andqualitative risk limits as specied by thecommittee.The committee takes prompt correctiveaction to mitigate the effects of specicrisks when such risks are at levels beyondthe prudent levels decided by thecommittee on the basis of the Bank’spolicies and regulatory and supervisoryrequirements.The committee also takes appropriateactions against the ofcers responsiblefor failure to identify specic risksand take prompt corrective actions asrecommended by the committee, and/or as directed by the Director of BankSupervision of CBSL.The IRMC ensures submission of a riskassessment report to the Board seekingthe Board’s views, concurrences and/orspecic directions on a regular basis.The committee has established acompliance function to assess the Bank’scompliance with laws, regulations,regulatory guidelines, internal controlsand approved policies on all areasof business operations. A dedicatedCompliance Ofcer is selected from keymanagement personnel to carry out theCompliance function and report to thecommittee periodically.The Integrated Risk ManagementCommittee Report is given onpage 100.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

61ROOTED IN OUR HERITAGEGOVERNANCE REPORTBoard Appointed Committee AttendanceThe number of meetings of the Board appointed committees and individual attendance out of the number of eligible meetingsof each director for the year 2012 are shown below:Names Directorship Status Board AuditCommitteeAs per statutory requirements Totalminimum Number of Meetings tobe held during the yearTotal No. of Meetings held duringthe year.Mr. Sunil. S.Sirisena - Chairman(from 06.08.2012)Mr. S.T. Abeygunawardana(Re-appointed on 06-08-2012)Mr. P.A. Abeysekera(Re-appointed on 22-08-2012)Mr. D.L.P.R. Abeyaratne(from 23-02-2012)Mr. Lionel P. Fernando(from 17-08-2012)Mr. Sumith Wijesinghe(from 17-08-2012)Mr. Priyantha Jaywardena(from 17-08-2012)Mr. Pradeep KariyawasamMr. Hema Madiwela (Former Board)(upto 18-05-2012)Mr. S. Shan Shanmuganathen(Former Board-Former ChairmanBAC) (upto 10-08-2012)Mr. R.A.P. Ranawake (Former Board)(upto 10-08-2012)ChairmanNon-IndependentNon-ExecutiveChairman HRRCWorking DirectorNon-IndependentIndependentNon-Executive DirectorChairman NCNon-IndependentNon-Executive DirectorChairman IRMCNon-IndependentNon-Executive DirectorChairman BACIndependentNon-Executive DirectorIndependentNon-Executive DirectorChairmanNon-IndependentNon-ExecutiveIndependentNon-Executive DirectorIndependentNon-Executive DirectorNon-IndependentNon-Executive DirectorNominationCommitteeIntegrated RiskManagementCommitteeHuman ResourceRemunerationCommittee04 02 04 0405 Not held 04 02N/A N/A N/A 01N/A - N/A 0103 - N/A 01N/A N/A 04 N/A03 N/A 03 N/A03 - N/A N/AN/A N/A 01 01N/A N/A N/A -02 - N/A N/A02 N/A 01 N/A02 N/A 01 N/ANA = Not Applicable 0 = Required to be present but not attended - = Member but there were no meetings to attendedNot Held= The Nomination Committee was not held as per the direction in its charter.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

62ROOTED IN OUR HERITAGEGOVERNANCE REPORTThe Board of Directors for the periodfrom 26th April 2012 to 16th August2012 was not in place except Mr.D.L.P.R. Abeyratne (Director), whowas appointed as Acting Chairman.Therefore there was no board meetingheld during the above period.Compliance at NSBNSB has an effective process toensure compliance with applicablelaws and regulations pertaining to thebanking industry, including BankingAct Direction No. 12 of 2007 onCorporate Governance for LicensedSpecialised Banks. The Board ofDirectors approved the CompliancePolicy of the Bank in 2010 where thesalient features were aligned with theBasel Principles on compliance functionand also identied the need of havingan independent Internal ComplianceFunction. In 2012 the Bank reviewedthe Compliance Policy and introducednew areas and updated existing areasaccording to the CBSL guidelines anddirections which was approved by theIRMC and submitted to the Board ofDirectors for its approval (approved on10th January 2013).The Head of Risk and Compliancereports to the Integrated RiskManagement Committee and to theBoard of Directors. Reports are alsosubmitted to the Audit Committeeconrming compliance with the Bank’sCompliance requirements.The Bank has obtained ExternalAuditors’ Report on Internal Controlover Financial Reporting and a reporton the Bank’s compliance with theCorporate Governance Directionsissued by the CBSL for the year 2012.This further strengthened the Bank’sCorporate Governance approach.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

63ROOTED IN OUR HERITAGEGOVERNANCE REPORTAnnual Corporate Governance Report Published in terms of Banking Act Direction No. 12 of 2007 andSubsequent Amendments for Annual Report 2012.3 (1) The Responsibilities of the Board3 (1) (i) The Board shall strengthen the safety andsoundness of the Bank, by ensuring the following:3 (1) (i) (a) Approve and oversee the Bank’s strategic objectivesand corporate values and ensure that these areComplied withcommunicated throughout the Bank.3 (1) (i) (b) Approve the overall business strategy of the Bank,the overall risk policy and risk managementprocedures and mechanisms with measurable goals,for at least the next three years.3 (1) (i) (c) Identify the principal risks and ensureimplementation of appropriate systems to managethe risks prudently.3 (1) (i) (d) Approve implementation of a policy ofcommunication with all stakeholders, includingdepositors, borrowers, creditors and shareholders.3 (1) (i) (e) Review the adequacy and the integrity of theBank’s internal control systems and managementinformation systems.The Board approved three year strategic plan (2011-2013) is being implemented. This covers business strategy,directions and measurable goals.The Integrated Risk Management (IRM) Policyapproved by the BOD outlines strategic, credit, marketand operational risks measures for risk identication,measurement and mitigating procedure.Complied withIn addition to the IRM Policy, the policies for operations(Treasury, Investments, Outsourcing, HR, Compliance,Audit Charter etc), and other risk identication measures(Stress Tests, KPI&KRI, Risk Reports etc) introducedto ensure identication of principal risks a nd risks atoperational levels.Complied withCustomer charter is in place.Review of internal controls process has been commencedand is an ongoing process. The Bank during the year hasexamined controls in respect of POS and other activities.In addition the Bank has taken measures to improveIT controls. The Internal Audit Division reviews andmonitors controls at operational levels.Complied withNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

64ROOTED IN OUR HERITAGEGOVERNANCE REPORT3 (1) The Responsibilities of the Board3 (1) (i) (f) Identify and designate Key Management Personnel,as dened in the International AccountingStandards.3 (1) (i) (g) Dene the areas of authority and keyresponsibilities for Directors themselves and for KeyManagement Personnel (KMP).3 (1) (i) (h) Ensure that there is appropriate oversight of theaffairs of the Bank by Key Management Personnel(KMP) that is consistent with Board policy.3 (1) (i) (i) Periodically assess the effectiveness of the Boardof Directors’ own governance practices, including:the selection, nomination and election of Directorsand Key Management Personnel; the managementof conicts of interests; and the determination ofweaknesses and implementation of changes, wherenecessary.3 (1) (i) (j) Ensure that the Bank has an appropriate successionplan for Key Management Personnel.3 (1) (i) (k) Meet regularly, on a need basis, with the KeyManagement Personnel to review policies, establishcommunication lines and monitor progress towardscorporate objectives.Complied withArea of authority and responsibility of the Directors arestated in the Act. By the Section 7 (1) of the NSB Act theChairman and the Board of Directors are vested withgeneral supervision, control and administration of theaffairs and the business of the Bank. As per Section 7 (2)the Board may exercise all or any of the powers of theBank. By Section 26 (A) (1) the Board may delegate tothe General Manager or any other ofcer of the Bankany of its functions, activities. The Board approved jobdescriptions dene the authority & responsibility ofKMPs.Complied withThe affairs of the KMPs are overseen throughintroduction of policies, operational committee chartersand regular review and reporting to the Board.The Bank is wholly owned by the Government of SriLanka and the Directors are appointed by the Minister incharge of Finance and Planning. Annual declarations inrespect of related parties and their interests are obtainedfrom Directors to monitor conict, if any. This processis expected to be strengthened and applied to KMPs aswell.Complied withComplied withThe Board meets KMPs on review of policies, progressreview meetings, and important matters on case by casebasis at Board meetings.Complied withNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

65ROOTED IN OUR HERITAGEGOVERNANCE REPORT3 (1) The Responsibilities of the Board3 (1) (i) (l) Understand the regulatory environment and ensurethat the Bank maintains an effective relationshipwith regulators.3 (1) (i) (m) Exercise due diligence in the hiring and oversightof External Auditors.3 (1) (ii) The Board shall appoint the Chairman and theChief Executive Ofcer and dene and approvethe functions and responsibilities of the Chairmanand the Chief Executive Ofcer in line withDirection 3 (5) of these Directions.3 (1) (iii) The Board shall meet regularly and Boardmeetings shall be held at least twelve times a yearat approximately monthly intervals. Such regularBoard meetings shall normally involve activeparticipation in person of a majority of Directorsentitled to be present. Obtaining the Board’s consentthrough the circulation of written resolutions/papersshall be Avoided as far as possible.3 (1) (iv) The Board shall ensure that arrangements are inplace to enable all Directors to include matters andproposals in the agenda for regular Board meetingswhere such matters and proposals relate to thepromotion of business and the management ofrisks of the Bank.3 (1) (v) The Board procedures shall ensure that notice of atleast 7 days is given of a regular Board meeting toprovide all Directors an opportunity to attend. Forall other Board meetings, reasonable notice may begiven.Bank submits compliance reports and progress reports onannual reviews as specied by CBSL regularly.Complied withBy law, the Auditor General is the External Auditor ofthe Bank. External Auditors attend all BAC meetings byinvitation.Complied withThe Chairman is appointed by the Finance Ministerwhile the Chief Executive Ofcer is appointed by theBoard. The functions of CEO were approved by theIRMC and then circulated to the Board for its approval.The Board has held 17 meetings during the year on thefollowing basis.8 meetings with the new Board appointed from 06-08-2012.9 meeting from 1st January 2012 to 24th April 2012(No Board meetings were held during the period of26.04.2012-16.08.2012 due to resignation of all Directorsexcept one Director).The procedures to include matters relating to thepromotion of business and management of risk wasapproved by IRMC and circulated to the Board and wasapproved by the Board.Complied withNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

66ROOTED IN OUR HERITAGEGOVERNANCE REPORT3 (1) The Responsibilities of the Board3 (1) (vi) The Board procedures shall ensure that a Director,who has not attended at least two-thirds of themeetings in the period of 12 months immediatelypreceding or has not attended the immediatelypreceding three consecutive meetings held, shallcease to be a Director.3 (1) (vii) The Board shall appoint a Company Secretary whosatises the provisions of Section 43 of the BankingAct No. 30 of 1988.3 (1) (viii) All Directors shall have access to advice andservices of the Company Secretary with a view toensuring that Board procedures and all applicablerules and regulations are followed.3 (1) (ix) The Company Secretary shall maintain theminutes of Board meetings and such minutes shallbe open for inspection at any reasonable time, onreasonable notice by any Director.3 (1) (x) Minutes of Board meetings shall be recorded insufcient detail so that it is possible to gather fromthe minutes, as to whether the Board acted withdue care and prudence in performing its duties.The minutes shall also serve as a reference forregulatory and supervisory authorities to assess thedepth of deliberations at the Board meetings.The NSB Act species the procedure for appointmentand removal of a Director. During the year, howeverthere has not been any such non-attendance as speciedby the Direction. The Board Secretary maintains anattendance register to ensure compliance.Complied withThe position of the Board Secretary was held by anAttorney-at-Law who was a senior legal ofcer withinthe permanent cadre of the Bank. The said ofcer waspromoted to the Assistant General Manager-BoardSecretary.The procedure for the Directors to have access to theBoard Secretary for advice and services was approved byIRMC and circulated to the Board for its approval.The Board Secretary maintains the minutes.The procedure for this was approved by IRMC andcirculated to the Board for approval.Complied withNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

67ROOTED IN OUR HERITAGEGOVERNANCE REPORT3 (1) The Responsibilities of the Board3 (1) (xi) There shall be a procedure agreed by the Board toenable Directors, upon reasonable request, to seekindependent professional advice in appropriatecircumstances, at the Bank’s expense.The procedure for this was approved by IRMC andcirculated to the Board for approval.Complied withThe Board shall resolve to provide separateindependent professional advice to Directors toassist the relevant Director or Directors to dischargehis/her/ their duties to the Bank.3 (1) (xii) Directors shall avoid conicts of interests, or the Complied withappearance of conicts of interest, in their activitieswith, and commitments to, other organisations orrelated parties.3 (1) (xiii) The Board shall have a formal schedule of matters Complied withspecically reserved to it for decision to ensurethat the direction and control of the Bank is rmlyunder its authority.3 (1) (xiv) The Board shall, if it considers that the Bank is, or No such situation has arisen during the year.is likely to be, unable to meet its obligations or isabout to become insolvent or is about to suspendpayments due to depositors and other creditors,forthwith inform the Director of Bank Supervisionof CBSL of the situation of the Bank prior totaking any decision or action.3 (1) (xv) The Board shall ensure that the Bank is capitalised Complied withat levels as required by the Monetary Board interms of the capital adequacy ratio and otherprudential grounds.3 (1) (xvi) The Board shall publish in the Bank’s AnnualReport, an annual corporate governance reportsetting out the compliance with Direction 3 ofthese Directions.Complied with3 (1) (xvii) The Board shall adopt a scheme of self-assessmentto be undertaken by each Director annually, andmaintain records of such assessments.Corporate Governance Report is given on page 54 in theAnnual Report.Complied withNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

68ROOTED IN OUR HERITAGEGOVERNANCE REPORT3 (2) Board’s Composition3 (2) (i) The number of Directors on the Board shall not beless than 7 and not more than 13.3 (2) (ii) (A) The total period of service of a Director otherthan a Director who holds the position of ChiefExecutive Ofcer shall not exceed nine years.3 (2) (ii) (B) A Director who has completed nine years as at1st January 2008, or who completes such termat any time prior to 31st December 2008, maycontinue for a further maximum period of 3 yearscommencing 1st January 2009.3 (2) (iii) An employee of a bank may be appointed, electedor nominated as a director of the Bank (hereinafterreferred to as an ‘Executive Director’) provided thatthe number of Executive Directors shall not exceedone third of the number of directors of the Board.In such an event, one of the Executive Directorsshall be the Chief Executive Ofcer of the Bank.3 (2) (iv) The Board shall have at least three IndependentNon-Executive Directors or one third of the totalnumber of Directors, whichever is higher.3 (2) (v) In the event an alternate Director is appointed torepresent an Independent Director, the person soappointed shall also meet the criteria that apply tothe Independent Director.3 (2) (vi) Non-Executive Directors shall be persons withcredible track records and/or have necessary skillsand experience to bring an independent judgmentto bear on issues of strategy, performance andresources.Complied withComplied withNot applicableAs per the NSB Act, the Minister selects ve out of sevenDirectors. The other two Directors according to theNSB Act are Treasury Secretary or his Nominee andPostmaster General or his Nominee. Therefore, no suchsituation arises.Complied withDirectors are appointed by the Minister in terms of theNSB Act. Out of seven Directors, three are Independentand six are Non-Executive. Please refer to Directorsdetails on page 190 of Annual Report of Board ofDirectors.Complied withThe NSB Act does not refer provisions to appointalternate Directors.Complied withAll Directors appointed by the Minister are from variousdisciplines such as Accountancy, Law, Marketing andBusiness Administration and professionals with necessaryexperiences.Complied withNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

69ROOTED IN OUR HERITAGEGOVERNANCE REPORT3 (2) Board’s Composition3 (2) (vii) A meeting of the Board shall not be dulyconstituted, although the number of Directorsrequired to constitute the quorum at such meetingis present, unless more than one-half of thenumber of Directors present at such meeting areNon-Executive Directors.3 (2) (viii) The Independent Non-Executive Directors shallbe expressly identied as such in all corporatecommunications that disclose the names ofDirectors of the Bank.3 (2) (ix) There shall be a formal, considered andtransparent procedure for the appointment ofnew Directors to the Board. There shall also beprocedures in place for the orderly succession ofappointments to the Board.3 (2) (x) All Directors appointed to ll a casual vacancy shallbe subject to election by shareholders at the rstgeneral meeting after their appointment.As per the NSB Act the quorum of the Board is 4 whichis more than one-half of the Directors and 6 of theDirectors are Non-Executive Directors.Complied withPlease refer page 61.Appointments of Directors are done by the Minister ofFinance as per the NSB Act. No provision in the NSBAct to appoint and ll casual vacancies in the Board.Appointments of Directors are done by the Minister ofFinance as per the NSB Act.3 (2) (xi) If a director resigns or is removed from ofce, theBoard shall: announce the Director’s resignationor removal and the reasons for such removal orresignation; and issue a statement conrmingwhether or not there are any matters that need tobe brought to the attention of shareholders.Appointment and removal of Directors are done by theMinister of Finance as per the NSB Act.3 (2) (xii) A director or an employee of a bank shall notbe appointed, elected or nominated as a directorof another bank except where such bank is asubsidiary company or an associate company of therst mentioned bank.Senior Deputy General Manager, an employee of theBank is a Director of RDB (Regional Development Bank)representing the shareholding of the NSB.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

70ROOTED IN OUR HERITAGEGOVERNANCE REPORT3 (3) Criteria to Assess the Fitness and Propriety of Directors3 (3) (i) A,&B The age of a person who serves as a director shallnot exceed 70 years.All Directors are below the age of 70.Complied with3 (3) (ii) A person shall not hold ofce as a director of more No Director holds such directorshipsthan 20 companies/entities/institutions inclusive of Complied withSubsidiaries or associate companies of the Bank.3 (4) Management Functions Delegated by the Board3 (4) (i) The Directors shall carefully study and clearlyunderstand the delegation arrangements in place.Please refer 3 (1) (i) gComplied with3 (4) (ii) The Board shall not delegate any matters toa Board Committee, Chief Executive Ofcer,Executive Directors or Key ManagementPersonnel, to an extent that such delegation wouldsignicantly hinder or reduce the ability of theBoard as a whole to discharge its functions.Complied with3 (4) (iii) The Board shall review the delegation processes inplace on a periodic basis to ensure that they remainrelevant to the needs of the Bank.3 (5) The Chairman and Chief Executive Officer3 (5) (i) The roles of Chairman and Chief ExecutiveOfcer shall be separated and shall not beperformed by the same individual.3 (5) (ii) The Chairman shall be a Non-Executive Directorand preferably an Independent Director as well.3 (5) (iii) The Board shall disclose in its corporategovernance report, the identity of the Chairmanand the Chief Executive Ofcer and the nature ofany relationshipThe Board has not delegated such authority whichhinders or reduces the ability of the Board as a whole todischarge its functions.Delegation arrangements currently in place and reviewedby the Board on a need basis/ on requests made by themanagement.The roles of Chairman and the CEO are performed bytwo separate individuals.Complied withChairman is a Non-Executive Director. Chairman is notindependent since Chairman is in the Board of the NSBFund Management Ltd, a fully owned subsidiary of NSB.There is no any relationship between the Chairman andCEO and among members of the Board.Prole of the Board and CEO are available on pages 86to 89.Complied withNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

71ROOTED IN OUR HERITAGEGOVERNANCE REPORT3 (5) The Chairman and Chief Executive Officer3 (5) (iv) The Chairman shall: provide leadership to theBoard; ensure that the Board works effectively anddischarges its responsibilities; and ensure that allkey and appropriate issues are discussed by theBoard in a timely manner.3 (5) (v) The Chairman shall be primarily responsible fordrawing up and approving the agenda for eachBoard meeting,3 (5) (vi) The Chairman shall ensure that all Directors areproperly briefed on issues arising at board meetingsand also ensure that directors receive adequateinformation in a timely manner.3 (5) (vii) The Chairman shall encourage all Directorsthrough self evaluation process to make a full andactive contribution to the Board’s affairs and takethe lead to ensure that the Board acts in the bestinterests of the Bank.3 (5) (viii) The Chairman shall facilitate the effectivecontribution of Non-Executive Directors inparticular and ensure constructive relationsbetween Executive and Non-Executive Directors.3 (5) (ix) The Chairman shall not engage in activitiesinvolving direct supervision of Key ManagementPersonnel or any other executive duties whatsoever.Evaluation of the role of the Chairman is incorporatedin the Director’s Self-evaluation Process.Complied withThe Secretary to the Board, under the guidance ofChairman draws up the agenda and the papers aresubmitted by the management through the GeneralManager/CEO.Complied withComplied withEvaluation of the role of the Chairman and the overallassessment of the Board’s performance are incorporatedin the Director’s Self-evaluation Process.Evaluation of the role of the Chairman is incorporatedin the Director’s Self-evaluation Process.Complied withChairman is Non-Executive and does not directlysupervise KMPs and is not engaged in executivefunctions.Complied withNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

72ROOTED IN OUR HERITAGEGOVERNANCE REPORT3 (5) The Chairman and Chief Executive Officer3 (5) (x) The Chairman shall ensure that appropriate stepsare taken to maintain effective communication withshareholders and that the views of shareholders arecommunicated to the Board.3 (5) (xi)The Chief Executive Ofcer shall function asthe apex executive-in-charge of the day-to-daymanagement of the Bank’s operations and business.3 (6) Board Appointed Committees3 (6) (i) Each bank shall have at least four boardcommittees as set out in Directions 3 (6) (ii), 3 (6)(iii), 3 (6) (iv) and 3 (6) (v) of these Directions. Eachcommittee shall report directly to the Board. Allcommittees shall appoint a secretary.3 (6) (ii)(a)(b)The following rules shall apply in relation to theAudit Committee:The Chairman of the Committee shall be anIndependent Non-Executive Director who possessesqualications and experience in accountancy and/or audit.All members of the Committee shall be Non-Executive Directors.The shareholder is being represented at the Board by thenominee of Treasury Secretary who is appointed as adirector.The Chairman communicates with the share holders(Treasury) through discussion on policy matters, annualreviews and other important operational matters andbrief the Board of Directors.Complied withAll four Committees are in place. Secretaries have beenappointed. Board Audit Committee and the IntegratedRisk Management Committee directly submit reports tothe Board.Complied withBoard Audit Committee Chairman is Non Executive butNon-Independent due to his appointment as a Directorof the NSB Fund Management Company (Pvt) Ltda fully owned subsidiary of the Bank. He is a FellowMember of The Institute of Chartered Accountants ofSri Lanka, who has experience in the banking sector.All members are Non-Executive Directors.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

73ROOTED IN OUR HERITAGEGOVERNANCE REPORT3 (6) Board Appointed Committees(c) The Committee shall make recommendations onmatters in connection with:(i).the appointment of the external auditor for auditservices to be provided in compliance with therelevant statutes;(ii) the implementation of the Central Bankguidelines issued to auditors from time to time;(iii) the application of the relevant accountingstandards; and(iv) the service period, audit fee and any resignation (iv) Not Applicable.or dismissal of the auditor; provided that theengagement of the Audit partner shall not exceedve years, and that the particular Audit partner isnot re-engaged for the audit before the expiry ofthree years from the date of the completion of theprevious term.(d) The Committee shall review and monitor theExternal Auditor’s independence and objectivityand the effectiveness of the audit processes inaccordance with applicable standards and bestpractices.Audit Committee meetings.(e) The Committee shall develop and implement apolicy on the engagement of an External Auditorto provide non-audit services.during the year.(f)The Committee shall, before the audit commences,discuss and nalise with the External Auditors thenature and scope of the audit.(g)The Committee shall review the nancialinformation of the Bank, in order to monitor theintegrity of the Financial Statements of the Bank,its Annual Report, accounts and quarterly reportsprepared for disclosure, and the signicant nancialreporting judgments contained therein.(i), (ii) and (iii) By statutes the Auditor General is theExternal Auditor of the Bank.Since the Auditor General is the External Auditorthe independence and objectivity are maintained.Effectiveness of the audit process is discussed with theSuperintendent of the Government Audit at the BoardNot relevant as the Auditor General is appointed as perthe Constitution. No such service has been obtainedThe Auditor General has a permanent ofce at theBank and the Superintendent of the Government Auditattends Board Audit Committee meetings regularly andparticipates in deciding the scope of the Audit Committee.Complied withComplied withNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

74ROOTED IN OUR HERITAGEGOVERNANCE REPORT3 (6) Board Appointed Committees(h) The Committee shall discuss issues, problems andreservations arising from the interim and nalaudits, and any matters the Auditor may wish to Complied withdiscuss including those matters.(i)The Committee shall review the External Auditor’smanagement letter and the management’s responsethereto.Complied with(j)The Committee shall take the following steps withregard to the internal audit function of the Bank:i Review the adequacy of the scope, functions andresources of the internal audit department, andsatisfy itself that the department has the necessaryauthority to carry out its work;ii Review the internal audit program and resultsof the internal audit process and, where necessary,ensure that appropriate actions are taken on therecommendations of the internal audit department;iii Review any appraisal or assessment of theperformance of the Head and senior staff membersof the internal audit department;iv Recommend any appointment or terminationof the Head, senior staff members and outsourcedservice providers to the internal audit function;v, Ensure that the committee is appraised ofresignations of senior staff members of the InternalAudit Department;The committee has met the representative of AuditorGeneral in the absence of executive management.Reviewed the Auditor General’s Report for the year 2011issued under the section 13(7) (a) and the managementresponse thereon.The Committee has reviewed the scope & functionsunder Audit Plan. Actions have been taken to increasestaff strength and other resource requirement of theAudit division. Please refer the Committee Report onpage 95.The Committee has reviewed audit program and resultsand actions on recommendations. Please refer theCommittee Report on page 95.The performance of Head of Audit (DGM Audit) for theyear 2011 and 2012 is to be carried out during the year2013. Performance of the Senior Staff members of AuditDivision is assessed by the Head of Internal Audit andreports to the BAC for review.No such situation has arisen during the year.No outsourced service providersNo such situation has arisen during the year.Head of Internal Audit is a Fellow Member of ICASLand the staff is well-experienced and conversant withbanking operations. Head of Internal Audit reports tothe BAC directly.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

75ROOTED IN OUR HERITAGEGOVERNANCE REPORT3 (6) Board Appointed Committeesvi Ensure that the Internal Audit function isindependent of the activities it audits and that it isperformed with impartiality, prociency and dueprofessional care;(k) The Committee shall consider the major ndingsof internal investigations and management’sresponses thereto;(l)The Chief Finance Ofcer, the Chief InternalAuditor and a representative of the ExternalAuditors may normally attend meetings.(m) The committee shall have:i Explicit authority to investigate into any matterwithin its terms of reference;ii The resources which it need to do so;iii Full access to information; andiv Authority to obtain external professional adviceand to invite outsiders with relevant experience to(n)(o)(p)attend, if necessary.The Committee shall meet regularly, with duenotice of issues to be discussed and shall recordits conclusions in discharging its duties andresponsibilitiesThe Board shall disclose in an informative way:i details of the activities of the Audit Committee;ii the number of audit committee meetings held inthe year; andiii details of attendance of each individual directorat such meetings.The Secretary of the committee shall record andkeep detailed minutes of the committee meetingsDuring the year, the Internal Audit functionindependently performed impartial procient and dueprofessional care except, in the action relation to TheFinance Share transaction matter.The Committee has reviewed major ndings andmanagement responses thereto. Please refer theCommittee Report on page 95.Complied withAs per the BAC Charter the committee has beenempowered to investigate any matter, access toinformation, authority to obtain professional advice,resources to carry out its functions etc.Refer the Committee Report on page 95.Complied withCommittee has met 5 times during the year and decisionsare recorded.Complied withPlease refer, Scope of Board Audit Committee is given inpage 95.Dates of meetings held during the year are given inpage 95.Details of attendance of Directors are given in page 95.Complied withDGM Audit acts as Secretary and detailed minutes aremaintained.Complied withNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

76ROOTED IN OUR HERITAGEGOVERNANCE REPORT3 (6) Board Appointed Committees(q) The Committee shall review arrangements bywhich employees of the Bank may, in condence,raise concerns about possible improprieties innancial reporting, internal control or othermatters. Accordingly, the committee shall ensurethat proper arrangements are in place for the fairand independent investigation of such matters andfor appropriate follow-up action and to act as thekey representative body for overseeing the Bank’srelations with the External Auditor.3 (6) (iii) The following rules shall apply in relation to theHuman Resources and Remuneration Committee:(a) The Committee shall determine the remunerationpolicy (salaries, allowances and other nancialpayments) relating to Directors, Chief ExecutiveOfcer (CEO) and Key Management Personnel ofthe Bank.(b) The Committee shall set goals and targets forthe Directors, CEO and the Key ManagementPersonnel.(c)(d)The Committee shall evaluate the performance ofthe CEO and Key Management Personnel againstthe set targets and goals periodically and determinethe basis for revising remuneration, benets andother payments of performance-based incentives.The CEO shall be present at all meetings of theCommittee, except when matters relating to theCEO are being discussed.3 (6) (iv) The following rules shall apply in relation to theNomination Committee:The existing Whistle-Blower Policy is being reviewed byDGM Audit and is expected to submit the same to BAC.A process for investigation /deals with improprieties innancial reporting /frauds by Internal Audit and reportsto Human Resources Division (HRD) for disciplinaryactions and nally report to BAC.Remuneration of the Directors is decided by the Ministry.Remuneration of the GM / CEO and KMPs aredetermined based on the collective agreement. Thecommittee would get involved in the process in the future.The goals for Directors are not documented as they areappointed by the Minister.Goals & targets for KMPs are documented through theAction plan for achieving targets for their respectiveDivisions.Evaluation of performance of GM / CEO is handled byChairman while GM/CEO evaluates performance ofKMPs.The term of reference approved by the Board states thatGM / CEO shall not be present when matters relating tothe GM / CEO are discussed.Complied withNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

77ROOTED IN OUR HERITAGEGOVERNANCE REPORT3 (6) Board Appointed Committees(a) The Committee shall implement a procedureto select/appoint new Directors, CEO and KeyManagement Personnel.(b)(c)(d)(e)(f)The Committee shall consider and recommend(or not recommend) the re-election of currentDirectors.The Committee shall set the criteria for eligibility tobe considered for appointment or promotion to thepost of CEO and the key management positions.The Committee shall ensure that Directors, CEOand Key Management Personnel are t andproper persons to hold ofce as specied in thecriteria given in Direction 3 (3) and as set out in thestatutes.The Committee shall consider and recommendfrom time to time, the requirements of additional/new expertise and the succession arrangements forretiring Directors and Key Management Personnel.The Committee shall be chaired by anIndependent Director. The CEO may be present atmeetings by invitation.The directors are appointed by the subject Minister asper the NSB Act.Section 11 - The Minster shall nominate one of theDirectors of the Board to be its Chairman.Section 26 - The Board shall appoint a t and properperson to be the General Manager of the Bank who shallbe the Chief Executive Ofcer of the Bank.Appointment of KMPs is made by the Board ofDirectors.As per 3 (6) (iv) (a) above.The criteria eligibility to be considered for GM / CEO andKMPs are as per the approval of the Board of Directors.The Committee would set nominations in the process inthe future.Declaration from Directors, GM / CEO and KMPS hasbeen submitted to Director Bank Supervision.The declarations will be obtained through the committeein the future.Directors are appointed by the subject minister asmentioned previously. The general practice is that aSenior DGM is considered as the successor for the postof GM / CEO.The committee would get involved in the process in thefuture.An Independent Director has been appointed as theChairman of the Committee.Complied withNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

78ROOTED IN OUR HERITAGEGOVERNANCE REPORT3 (6) Board Appointed Committees3 (6) (v) The following rules shall apply in relation to theIntegrated Risk Management Committee:(a) The committee shall consist of at least three Non-Executive Directors, Chief Executive Ofcer andKey Management Personnel supervising broad riskcategories,The Committee shall assess all risks, i.e., credit,(b) market, liquidity, operational and strategic risks tothe Bank on a monthly basis.(c)(d)(e)(f)(g)The Committee shall review the adequacy andeffectiveness of all management level committees.The Committee shall take prompt corrective actionto mitigate the effects of specic risks.The Committee shall meet at least quarterly toassess all aspects of risk management includingupdated Business Continuity Plans (BCP).The Committee shall take appropriate actionsagainst the ofcers responsible for failure to identifyspecic risks and take prompt corrective actionsas recommended by the committee, and/or asdirected by the Director of Bank Supervision.The Committee shall submit a risk assessmentreport within a week of each meeting to the Boardseeking the Board’s views, concurrence and/orspecic directions.Complied withRisk Management Division (RMD) assesses the credit,market, operational risks and submits reports to theCommittee on a quarterly basis. RMD review riskthrough product & sectors, Stress Testing, LiquidityRatios, KPI, KRI, Loss Event data etc and report toIRMC/Board periodically.The Executive Risk Management Committee wasreviewed while the Monthly Compliance Meeting wasreviewed and established as Executive ComplianceCommittee and approved by IRMC. The Operationallevel committees were approved during the year 2010 and2011 and expected to be reviewed during the year 2013.The risk indicators have shown that no specic risk hasreached the alarming level.The Committee had met four times during the year.Complied withPresently all disciplinary actions are handled by theHuman Resources and Development Division. Nonecessities have arisen during the year.The RMD submits risk review reports of IRMC directlyto the Board meeting held subsequently.Complied withNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

79ROOTED IN OUR HERITAGEGOVERNANCE REPORT3 (6) Board Appointed Committees(h)(7) (i) &(ii)The Committee shall establish a compliancefunction to assess the Bank’s compliance withlaws, regulations, regulatory guidelines, internalcontrols and approved policies on all areas ofbusiness operations. A dedicated compliance ofcerselected from Key Management Personnel shallcarry out the compliance function and report to thecommittee periodically.The Board shall take the necessary steps to avoidany conicts of interest that may arise from anytransaction of the Bank with any person,3 (7) Related Party Transactions3 (7) (iii) The Board shall ensure that the Bank does notengage in transactions with related parties asdened in Direction 3 (7) (i) above, in a mannerthat would grant such parties ‘more favorabletreatment’ than that accorded to other constituentsof the Bank carrying on the same business.3 (7) (iv) A bank shall not grant any accommodation toany of its Directors or to a close relation of suchdirector unless such accommodation is sanctionedat a meeting of its Board of Directors, with not lessthan two-thirds of the number of directors otherthan the director concerned, voting in favour ofsuch accommodation.Compliance function has been established and theChief Risk Ofcer has been appointed as ComplianceOfcer (Re-designated as Head of Risk & Compliance-HRC), until a Compliance Ofcer is appointed andHRC submits reports on compliance to the monthlycompliance meeting and to IRMC on a quarterly basis.Complied withTransactions (if any) carried out with Related Parties inthe normal course of business and disclosed in Note 39 tothe Financial Statements ‘Related Party Disclosures’ onpage 242.Complied withAccommodations granted to the Directors are governedby the NSB Act and Section 20 of the Banking Act.The Bank has not granted any accommodations toDirectors as per the disclosures made at Board meeting.Complied withNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

80ROOTED IN OUR HERITAGEGOVERNANCE REPORT3 (7) Related Party Transactions3 (7) (v) (a) Where any accommodation has been grantedby a bank to a person or a close relation of aperson or to any concern in which the person has asubstantial interest, and such person is subsequentlyappointed as a Director of the Bank, steps shallbe taken by the Bank to obtain the necessarysecurity as may be approved for that purpose by theMonetary Board, within one year from the date ofappointment of the person as a director.3 (7) (vi) A bank shall not grant any accommodation or‘more favorable treatment’ other than on the basisof a scheme applicable to the employees of suchbank.3 (7) (vii) No accommodation granted by a bank underDirection 3 (7) (v) and 3 (7) (vi) above, nor anypart of such accommodation, nor any interestdue thereon shall be remitted without the priorapproval of the Monetary Board and any remissionwithout such approval shall be void and of noeffect.3 (8) Disclosures3 (8) (i) The Board shall ensure that:(a) annual audited Financial Statements andquarterly Financial Statements are preparedand published in accordance with the formatsprescribed by the supervisory and regulatoryauthorities and applicable accounting standards,and that,(b) such statements are published in the newspapersin an abridged form, in Sinhala, Tamil and English.3 (8) (ii) The Board shall ensure that the following minimumdisclosures are made in the Annual Report:Complied withThere is no accommodation or treatment granted underfavorable basis other than the general scheme applicableto all employees.Complied withComplied withComplied withComplied withNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

81ROOTED IN OUR HERITAGEGOVERNANCE REPORT3 (8) Disclosures(a) A statement to the effect that the AnnualAudited Financial Statements have been preparedin line with applicable accounting standards andregulatory requirements, inclusive of specicdisclosures.(b) A report by the Board on the Bank’s internalcontrol mechanism that conrms that the nancialreporting system has been designed to providereasonable assurance regarding the reliability ofnancial reporting, and that the preparation ofFinancial Statements for external purposes hasbeen done in accordance with relevant accountingprinciples and regulatory requirements.(c) The External Auditor’s certication on theeffectiveness of the internal control mechanismreferred to in Direction 3 (8) (ii) (b) above, in respectof any statements prepared or published after 31stDecember 2008.Refer page 185 on Annual Report of Board of Directors.Complied withRefer page 185 on Annual Report of Board of Directors.Refer Directors’ Statement on Internal Control onpage 197.Complied withRefer Independent Assurance Report on page 200.Complied with(d) Details of directors:Proles of the Directors are given on page 86.including names, tness and propriety,Refer Note 39 to the Financial Statements on page 242.(ii) transactions with the Bank, andComplied with(iii) the total of fees/remuneration paid by the Bank.(e) Total net accommodation as dened in 3 (7) The net accommodations granted as a percentage of(iii) granted to each category of related parties. Bank’s regulatory capital are given in Note 39 (d) to theThe net accommodation granted to each category Financial Statements on page 243.of related parties shall also be disclosed as a Complied withpercentage of the Bank’s regulatory capital.(f) The aggregate values of remuneration paid bythe Bank to its Key Management Personnel and theaggregate values of the transactions of the Bankwith its Key Management Personnel, set out bybroad categories such as remuneration.Details are given in Note 39 (c) to the FinancialStatements on page 242.Complied withNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

82ROOTED IN OUR HERITAGEGOVERNANCE REPORT3 (8) Disclosures(g) The External Auditor’s certication of thecompliance with these Directions in the annualcorporate governance report.(h) A report setting out details of the compliancewith(i) prudential requirements, regulations, laws (ii)internal controls and (iii) measures taken to rectifyany material non-compliances.(i) A statement of the regulatory and supervisoryconcerns on lapses in the Bank’s risk management,or non-compliance with these Directions thathave been pointed out by the Director of BankSupervision of CBSL if so directed by theMonetary Board to be disclosed to the public,together with the measures taken by the Bank toaddress such concerns.External Auditor’s certication was obtained.Complied withPlease refer Statement on Directors’ Responsibility fornancial reporting on page 195.Complied withMonetary Board has not directed any disclosures to bemade public during the year.3 (9) Transitional and other general provisions The Bank has complied with the transitional provisions.Complied withNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

83ROOTED IN OUR HERITAGEGOVERNANCE REPORTCompliance Requirement of the Corporate Governance Direction No. 12 of 2007The Auditor General has performed procedures in accordance with the principles set out in Sri Lanka Standards on RelatedServices 4400 applicable to agreed upon procedures engagements issued by the Institute of Chartered Accountants of SriLanka, to meet the compliance requirement of the Direction No. 12 of 2007 on Corporate Governance issued by the CentralBank of SrI Lanka. His ndings given in his report dated 3 April 2013, were not materially different to the matters disclosedabove and did not identify any signicant inconsistencies to those reported above by the Board.Y F DeenSecretary to the BoardSunil S SirisenaChairmanColombo28 March 2013NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

84ROOTED IN OUR HERITAGEBOARD OF DIRECTORS1231. MR SUNIL S SIRISENA – Chairman2. MR S T ABEYGUNAWARDANA – Working Director3. MR D L P R ABEYARATNE – DirectorNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

85ROOTED IN OUR HERITAGEBOARD OF DIRECTORS4 56 74. MR LIONEL P FERNANDO – Director5. MR SUMITH WIJESINGHE – Director6. MR PRIYANTHA JAYAWARDENA – Director7. MR R M P RATHNAYAKE – DirectorNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

86ROOTED IN OUR HERITAGEBOARD OF DIRECTORSMr Sunil S SirisenaChairmanMr Sirisena was appointed as theChairman of NSB on 06 August 2012.He is also the Chairman of the NSBFund Management Company.Mr Sirisena has previously servedas the Additional Secretary to theMinistry of Defense as well as stints asSecretary to the Ministries of ForeignEmployment and Welfare, Ministry ofEducation and Ministry of Cooperativeand Internal Trade. He was one of theformer Chairmen of the National FilmCorporation.An Economics graduate of theUniversity of Peradeniya, Mr Sirisenaalso holds a Diploma in Statisticsfrom the university of Colombo and aHigher Diploma in Management fromSLIDA. He was a member of the SriLanka Administrative ServiceMr S T AbeygunawardanaWorking DirectorMr Abeygunawardana was reappointedto the Board on 06 August 2012,having previously served two stints asa Director from August 2007 to May2010 and from June 2010 to May 2012.A businessman with four decades ofexperience, he also serves as a Directorof NSB Fund Management Company,as the Managing Director of JanasethaJothisa Seveya and as a Director of theCooperative Hospital, Galle. He alsofunctions as an Advisor on Religiousand Cultural affairs to the IndependentTelevision Network.Mr P A AbeysekeraDirector – Ex officioMr Abeysekera, who was reappointed tothe Board on 22 August 2012, is a seniormember of the Sri Lanka AdministrativeService since 1980.He served as Deputy Secretary to theTreasury at the Ministry of Finance andPlanning. He was a Council Memberof the University Grants Commission;a Director/Member of the Council ofthe Institute of Indigenous Medicine,Colombo University; a Board Memberof the Institute of Policy Studies (IPS);a member of the Governing Council ofthe Sri Lanka Institute of DevelopmentAdministration and also was a memberof Advisory Committee of Sri LankaTransport Board.His wealth of experience includesserving as Assistant Commissioner ofCo-operative Department (Rural Banks)for six years; being District Secretary/GA of Gampaha and functioningas Secretary to the Commissionerof Investigations of Bribery andCorruption to investigate Allegationsof Bribery and Corruption. He retiredfrom the post on 28 February 2013.Mr D L P R AbeyaratneDirector – Ex officioMr Abeyaratne was appointed to theBoard on 09 February 2012 and wasappointed as the Acting Chairman forthe period from 23 May 2012 to 05August 2012. He is also a Director ofNSB Fund Management Company.Mr Abeyratne is the Post MasterGeneral of Sri Lanka. His 16 yearsof previous experience in Class 1 ofthe Sri Lanka Administrative Servicehave included services as DivisionalNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

87ROOTED IN OUR HERITAGEBOARD OF DIRECTORSSecretary, Minuwangoda from 2005 –2008; Director General, National Gem& Jewellery Authority from 2008 - 2009and Senior Assistant Secretary, Ministryof Economic Development in 2010.Mr Abeyaratne has a Bachelor ofCommerce (Honours) Degree anda Master of Arts in Sociology at theUniversity of Kelaniya in 1991 and2010 respectively.Mr Lionel P FernandoDirectorMr Fernando, an experienced CharteredAccountant, was appointed to the Boardon 06 August 2012. He is also a Directorof NSB Fund Management Company.He holds a Bachelor of Commerce(Special) Degree and is a FellowMember of the Institute of CharteredAccountants of Sri Lanka (FCA),Fellow Member of Society of CertiedManagement Accountants (FCMA) anda Senior Accounting Technician (SAT).Mr Fernando sits on the Boards ofmany Companies including Benjarong(Pvt) Limited; L M ManagementServices (Pvt) Limited; Kelani UniInsurance Brokers (Pvt) Limited;Amerasian Travels (Pvt) Limited;Sundance Property Developers (Pvt)Limited; Amerasian EngineeringConsultants (Pvt) Limited; PeerapatCleaning Technology (Pvt) Limited andFriendshio (Pvt) Limited.Mr Sumith WijesingheDirectorMr Wijesinghe was appointed to theBoard on 06 August 2012. A practicinglawyer, he qualied as an Attorneyat Law and holds an LLB degree. MrWijesinghe currently serves as Secretaryto the Leader of the House and is alsoa Director of the Export DevelopmentBoard.He sat on the Boards of manyinstitutions, including Sri LankaTelecom PLC, Mobitel Pvt Ltd,National Development Trust Fund(Gar) Ltd and National DevelopmentTrust Fund Company (all from 2007 -2010) and Lankaputra DevelopmentBank (2011 - 2012).His previous experience has includedcoordinating programme activitiesof an Integrated Poverty AlleviationProgramme (including Savings andCredit Programme) supported byNDTF/World Bank (1993 - 1997) andplanning and implementing a FishingCommunity Programme.Mr Priyantha JayawardenaDirectorMr Jayawardane, President’s Counsel,was appointed to the Board on 06August 2012.An Attorney-at-Law of the SupremeCourt, Mr Jayawardane obtained aMaster’s Degree in Commercial Lawfromthe University of AberdeenScotland, UK in 1993. He completedthe Qualied Lawyers ‘TransferTest’ at the College of Law Londonin 1993 and enrolled as Solicitor inEngland and Wales in 1996. He alsocompleted studies in CommercialLaw at the National University ofSingapore in 1999. In October 2012,Mr Jayawardane was appointed as aPresident’s Counsel.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

88ROOTED IN OUR HERITAGEBOARD OF DIRECTORSHe is a legal consultant to manyinstitutions such as Sri Lanka Insurance(2003 - 2008); National EngineeringResearch and Development Centre(2004 - 2011); National Institute ofBusiness Management (2006 - 2010);Sri Lanka Institute of Architects(2003 - 2007); Sri Lanka Institute ofInformation Technology (2000 - 2003)and Lanka Ceramics Company Ltd(2003 todate).Mr Jayawardane has engaged in privatepractice and has also been employed atthe Attorney General’s Department,where he served as a State Counsel.He has also been a Consultant tothe Ministry of Food, Internal andInternational Trade and Commerce andhas participated in drafting legislation.He was a Member of the AdvisoryCommission on Intellectual PropertyLaw in Sri Lanka and Member of theSecurities and Exchange Commissionof Sri Lanka (2009 - 2012). He has alsobeen a Visiting Lecturer and Examinerat the Department of BuildingEconomics, University of Moratuwa(2000 - 2004) and a visiting lecturerat Sri Lanka Institute of Tourism andHotel Management.Mr R M P RatnayakeDirector-Ex OfficioMr. Ratnayake who is the Director,Department of External Resources inthe Ministry of Finance and Planninghas been in the Public Service for over19 years appointed to the Board ofNSB on 4th March 2013. He holds aBSc (Special) Degree in AgriculturalEconomics from the Universityof Peradeniya and obtained theMasters and Postgraduate Diplomain Agriculture and Natural ResourcesManagement from AgriculturalUniversity, Norway. He is a life memberof Sri Lanka Economic Association.Mr. Rathnayake was an AssistantDirector at the Department of NationalPlanning, Deputy Director andDirector - in – Charge in the HumanDevelopment Cluster and Director - in– Charge of Asian Development BankDivision of the External ResourcesDepartment. He served in the capacityof Director in the Boards of StatePharmaceutical Corporation andMahaweli Authority and a memberof the Advisory Board of Science andTechnology Policy Research Divisionof the of National Science Foundation.A visiting Consultant and a Lecturer inthe Institute of Sri Lanka DevelopmentAdministration (SLIDA) and a memberin the Sri Lanka Council for AgriculturalResearch Policy (CAARP), Board ofManagement of Post Graduate Instituteof Medicine, University of Colomboand Board of Directors of NationalAquaculture Development Authority ofSri lanka.Ms. Y F DeenSecretary to the Board,Yasmin Fathima Deen is an Attorney–at Law & Notary Public with 28 yearsexperience in the Bank as a LegalOfcer and worked as the CompanySecretary for NSB Fund ManagementCompany from the time of itsincorporation in 1999. Covered up theduties of the secretary to the Boardfrom 15 May 2012 to 31 January 2013.She was appointed as the Secretaryto the Board of Directors of the Bankwith effect from 01 February 2013.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

89ROOTED IN OUR HERITAGEGENERAL MANAGER/CEOMr H M Hennayake BandaraGeneral Manager/CEOThe General Manager/CEO of theBank has extensive experience inbanking and nancial sector. He isthe immediate past President of theAssociation of Professional Bankers SriLanka (APB) and is a Director of theSri Lanka Banks’ Association. He isalso a Board Member of the Instituteof Bankers of Sri Lanka (IBSL), aDirector of the Financial OmbudsmanSri Lanka and a Director of NSB FundManagement Co. Ltd. Mr. Hennayke isa member of the Board of Directors ofWorld Savings Banks Institute (WSBI).He has been a Council Member of theInstitute of Chartered Accountants ofSri Lanka and Sri Lanka Institute ofAdvanced Technological Education(SLIATE), Board Member of Sri LankaAccounting and Auditing StandardsMonitoring Board and TechnicalAdvisor and Committee Member ofProfessional Accountants in Business ofSouth Asian Federation of Accountants(SAFA). He is also a past president of theAssociation of Accounting Techniciansof Sri Lanka (AATSL).He was a member of the Expert Groupappointed by the Central Bank of SriLanka to provide expertise to RegisteredFinance Companies (RFC) andSpecialised Leasing Companies (SLC)in respect of the implementation of the‘Stimulus Package for Banking, Finance& Leasing Industry’. He was a recipientof the Award for ‘Excellence in BusinessManagement’ awarded by CMA SriLanka.Mr. Hennayake holds a B.ComSpecial Degree from University ofSri Jayewardenepura, and is a FellowMember of the Institute of CharteredAccountants of Sri Lanka, Institute ofCertied Management Accountantsof Sri Lanka and Association ofAccounting Technicians of Sri Lanka.He also holds a Higher NationalDiploma in Accountancy from theTechnical College, Sri Lanka.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

90ROOTED IN OUR HERITAGECORPORATE MANAGEMENT TEAM125671. H M HENNAYAKE BANDARA – General Manager/CEO2. T M K BANDARA – Additional General Manager (Human Resources & Administration)3. S D N PERERA – Senior Deputy General Manager (Operations, Credit & Information Technology)4. K RAVEENDRAN – Deputy General Manager (Audit)5. J K GAMANAYAKE – Deputy General Manager (Marketing & Deposit Mobilization)NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

91ROOTED IN OUR HERITAGECORPORATE MANAGEMENT TEAM3 4986. MRS T M SAMARASINGHE – Deputy General Manager (Legal)7. K B WIJEYARATNE – Deputy General Manager (Finance & Planning)8. MRS A JAYASINGHE – Deputy General Manager (Branch Administration)9. R M GUNATHILAKA – Head of Risk & ComplianceNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

92ROOTED IN OUR HERITAGEEXECUTIVE MANAGEMENT TEAM12561. R C GOONERATNE – Assistant General Manager (Security)2. MS.C S JESUDIAN – Assistant General Manager (Project Finance & Credit Management)3. MRS.B P J GUNASEKERA – Assistant General Manager (Asset Management)4. E M M G EKANAYAKE – Assistant General Manager (Operations)5. A C GAMAGE – Assistant General Manager (Credit)NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

93ROOTED IN OUR HERITAGEEXECUTIVE MANAGEMENT TEAM3 48796. M P A W PEIRIS –Assistant General Manager (International Banking)7. MS. G V A D D SILVA – Assistant General Manager (Finance)8. P A ABEYSOORIYA – Assistant General Manager (IT)9. MS. Y F DEEN – Secretary to the BoardNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

94ROOTED IN OUR HERITAGESENIOR MANAGERSRegional ManagersOperationsU.L. Rafeek - EasternT.L.A. Wijerathna - SabaragamuwaJ.M. Senevirathna Banda - North WesternP. Wattuhewa - Western 1V. Arulanantham - NorthernMrs. H.R. Silva - Western 3K.K.V.L.W. Karunathilake - CentralS.N.B.M. Gunawardena - SouthernMrs. E.D. Seetha - Western 2Mrs. M. Gawrawawansa - North CentralM.T.A.J.F. Gomis - UvaS.H.M. Mubarak - Manager - CityT.M.D.G.D. de Alwis - Manager - KalutaraMrs. K.P.D.M. de Silva - Manager - Postal AdministrationP.H. Andrahennadi - Manager - MataraV .V. Craison - Manager - BatticoloaMs. M.S.S. Fernando - Manager - Head Offi ceJ.A.U. Gamage - Manager - KurunegalaMrs. W.A.S. Gunasekara - Manager - NugegodaA.L.A. Haleem - Manager - KirulaponeMrs. B.K.G.B.M. Karunarathne - Manager - Kandy 2Mrs. G.P. Nanayakkara - Manager - HomagamaM.A.M. Navaz - Manager - GalleP.T.A. Perera - Manager - WellawattaMrs.P. Punchibandara - Manager - KandyR.P.J. Rajapaksha - Manager - AnuradhapuraMrs. R.A.N.N. Wijesinghe - Branch Administration DivisionIT and Support ServicesK.M.W.M. Karunarathna - PremisesP.S. Wasanthatillake - Information TechnologyJ.A.A.S.L. Somarathna - Information TechnologyG.M.S.P. Fernando - Information TechnologyMrs. W.P.U.A. De Silva - Card CentreInternational and CreditAuditMrs. S.W. Gunasekara - CreditMrs. D.G.P. Senevirathna - RecoveriesH.M.G.P. J Herath - International BankingMrs. S.R.Liyanage - CreditW. Piyarathna - AuditD.N.J.K. Gamage - AuditHuman Resource DevelopmentMrs. M.Y. Gunasekera - Human ResourcesK.S. Weerasena - TrainingMrs. A.P. Samaranayake - Human ResourcesMs. Fernando M.N.A. - Human ResourcesFinance and PlanningMrs. S.A.B.M. Bandaranayake - SuperannuationMrs. M.A. Gomes - PlanningNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

95ROOTED IN OUR HERITAGEREPORT OF THE BOARD AUDIT COMMITTEEThe Board Audit Committee (BAC) of the Bank wasconstituted in accordance with the provisions of the PublicEnterprises Guidelines for Good Governance. Central Bankof Sri Lanka (CBSL) under the Banking Act DirectionNo. 12 of 2007 on “Corporate Governance for LicensedSpecialized Banks” has also directed each Bank to form fourBoard appointed Committees including the Board AuditCommittee and has stipulated the rules applicable to BoardAudit Committee under Section 3 (6) (ii) of the said Direction.The Committee comprises of three non executive Directorsof the Bank. The following directors served on the Committeeduring the year 2012:1) Mr. Lionel P Fernando- Chairman of the Committee (from 17/08/2012)2) Mr. P.A. Abeysekera- Member (from 22/08/2012, retired on 28/02/2013)3) Mr. R.M.P. Ratnayake- Member (from 04.03.2013)4) Mr. Sumith Wijesinghe- Member (from 17/08/2012)5) Mr. Shan Shanmuganathan- Chairman of the Committee (up to 10/08/2012)6) Mr. Hema Madiwela- Member (up to 18/05/2012)7) Mr. R.A.P. Ranawaka- Member (up to 10/08/2012)MeetingsDuring the nancial year ended 31st December 2012, veCommittee meetings were held. The details of which are asfollows:The Attendance of the Committee MembersDateMr. S. ShanShanmuganathanMr. HemaMadiwelaMr. R.A.P.Ranawaka27th January 2012 24th February 2012 Mr. Lionel P.FernandoMr. P.A.AbeysekeraMr. SumithWijesinghe25th September 2012 09th October 2012 22nd November 2012 AttendedThe Deputy General Manager (Audit) functioned as theSecretary to the Committee. The members of the seniormanagement who were invited also attended the Committeemeetings. The Superintendent of the Government Auditattended to the meetings regularly, as an observer.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

96ROOTED IN OUR HERITAGEREPORT OF THE BOARD AUDIT COMMITTEEBoard Audit Committee CharterThe Committee functioned withinthe terms of reference stipulated inthe Board Audit Committee Charter.In terms of the Charter, the scope ofthe Committee was to assist the Boardof Directors in fullling its oversightresponsibilities for:a) The integrity of the Bank’snancial statements;b) The effectiveness of the Bank’s riskmanagement function;c) The performance of the Bank’sexternal audit function;d) The performance of the Bank’sinternal audit function.The Charter also stipulates the functionsand responsibilities, and the authorityof the Committee. A Charter Checklistwas introduced to assist the Committeeto assess its compliance to the Charter inperforming the Committee’s functionsand discharging its responsibilities:Internal Audit CharterThe Internal Audit Charter is usedin order to assist the internal auditto discharge its duties effectively andindependently. The Charter includesthe scope, functions, responsibilities,authorities, reporting procedure andindependence and objectivity of theinternal audit.Activities during the YearThe Committee attended to thefollowing activities during the year2012:1) Approved the Audit Plan forthe year 2012 and 2013 at themeetings held in January 2012 andNovember 2012 respectively.2) Reviewed the Charter Checklistto assess the compliance to theCharter in performing Committee’sfunctions and discharging itsresponsibilities in the year 2011.3) Discussed and completed the SelfAssessment Guide for 2011.4) Reviewed the nancial statementsof the Bank for the year ended 31stDecember 2011, and the quarterended 30th September 2012 andrecommended to submit the sameto the Board of Directors.5) Reviewed the performance of theAudit & Vigilance Division.6) Reviewed the progress of the RiskManagement function of the Bank.7) Approved the report on the BoardAudit Committee activities to beincluded in the Annual Report of2011.8) Reviewed and discussed the natureand the scope of the Governmentaudit for the year 2012.9) Reviewed the performanceappraisal of senior audit staffmembers of the Audit and &Vigilance Division.10) Reviewed the internal auditndings. The Committeeconsidered the internal auditNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

97ROOTED IN OUR HERITAGEREPORT OF THE BOARD AUDIT COMMITTEEreports, the deciencies observedtherein, responses by the Headsof Divisions and branches andcorrective actions taken to rectifythe deciencies observed.11) Reviewed the summary of internalinvestigations on the fraudulentand irregular activities andmanagement action thereon.12) Followed up on the outsourcing ofInformation System Audit.13) Reviewed the manpowerrequirement and the staff mattersof the Audit & Vigilance Division.Committee ensured the provision of allinformation and documents requiredby the external auditor for the purposeof audit.ReportingThe Committee directly reported to theBoard of Directors about its activitiesalong with the minutes of the meetings.The Committee is of the view that theterms of reference of the Committeewere complied with in all materialaspects.External AuditBy statute, the Auditor General is theexternal auditor of the Bank. TheSuperintendent of Government Auditis invited to attend to the Committeemeetings as an observer. The Committeereviewed and discussed the nature andscope of the external audit in 2012. Theexternal auditor was invited to discussthe ndings of the external auditorduring the Committee meetings. TheLionel P. FernandoChairman – Board Audit CommitteeColombo28 March 2013NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

98ROOTED IN OUR HERITAGEREPORT OF THE HUMAN RESOURCES & REMUNERATION COMMITTEEThe Human Resources andRemuneration Committee appointedby and responsible to the Boardof Directors consists of three NonExecutive Directors (includingChairman), two of whom areIndependent Directors.The following Directors have served onthe committee during the year 2012.1. Mr. Sunil S Sirisena- Chairman – NIND/NED (From17/08/2012)2. Mr. P A Abeysekera- Member –IND/NED(Reappointed on 22/08/2012 andretired on 28/02/2013)3. Mr. R M P RatnayakeMember – IND / NED (From04/03/2013)4. Mr. Priyantha Jayawardena -Member – IND / NED (From17/08/2012)5. Mr. P G S Kariyawasam -Chairman - NIND/NED (Up to21/05/2012)6. Mr. S T Abeygunawardana -Member – IND / WD (Up to18/05/2012)NIND: Non Independent Director,IND:Independent Director, NED:NonExecutive Director, WD: WorkingDirectorScopeThe Committee is responsible fordetermining the remuneration policyrelating to the Directors and theKey Management Personnel of theBank other than the remunerationsdetermined by the CollectiveAgreements.The Committee reviews all signicantHuman Resource policies andinitiatives, salary structures andterms and conditions relating tostaff at senior executive level. In thisprocess, necessary information andrecommendations are obtained fromthe GM/CEO and the AdditionalGeneral Manager.Committee MeetingsDuring the nancial year ended 31December 2012, two HRRC meetingswere held. The HRRC attended to thefollowing during the year under review:1. Reviewed proposals forwardedby ve employee unions for theCollective Agreement 2012 – 20142. Reviewed the analysis in respect ofthe Managers and Second Ofcersof the entire branch sector of theBank with a special focus on theage and date of retirement.3. Appointed a sub-committee toformulate a succession plan for thebranch sector of the BankNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

99ROOTED IN OUR HERITAGEREPORT OF THE HUMAN RESOURCES & REMUNERATION COMMITTEE4. Reviewed the matters relating tothe absorption of Sales Ofcers into the permanent cadre5. Granted promotions to the Postof Condential Secretary Class I(Sinhala/English)6. Reviewed and discussed theproposed cadre for the year 2012.Sunil S SirisenaChairman – Board Human Resources& Remuneration CommitteeColombo28 March 2013NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

100ROOTED IN OUR HERITAGEREPORT OF THE INTEGRATED RISK MANAGEMENT COMMITTEEComposition of the IntegratedRisk Management Committee ofthe BankThe Integrated Risk ManagementCommittee (IRMC) of NSB consists of 3Non-Executive Directors and membersof the Corporate Management andthe Compliance Ofcer. The Headof Risk & Compliance functions asthe Secretary to the Committee. Thedetails of the members are given in thepage 61 of the Annual Report.The terms of reference set out bythe Board of Directors, includes thefollowing: Advise the Board of Directors infullling its responsibilities relatingto risk management. Implement the Integrated RiskManagement Policy approved bythe Board and periodic updatingof the Bank wide risk managementframework. Ensure that all credit, market,operational and strategic risks facedby the Bank are identied, monitored,and adequately managed; Work with key managementpersonnel very closely and makerecommendation to the boardwithin the framework of theauthority and responsibility assignedto the committee.Charter and the Responsibilitiesof the Risk ManagementDivision.The Risk & Compliance Divisionprepares and collates the materialnecessary for the IRMC to deliberateand recommend the decisions onmatters falling within its mandate forapproval of Board of Directors. Thesepapers are circulated to members inadvance. The process through whichrisks were managed is explained indetail in the Risk Management sectionof this Annual Report.IRMC Meetings of the yearIRMC meets on a quarterly basis.During the year, NSB convened fourIRMC meetings. The attendance ofmembers in the Committee is details ofon page 61 of the Annual Report. Theminutes of the meetings and risk reportswere submitted to the Board regularly.The committee reviewed the RiskManagement Charter and the StressTest policy, risk management structure& future actions, examination ofinternal controls etc and risk reviewsthrough Stress Test, Key Risk Indicatorsand Key Performance Indicators andperformance comparison. Further theCompliance Policy review, CorporateGovernance & Regulatory Framework,KYC compliance status, review ofstatutory examination progress etc.were taken up at these meetings andwas satised that the actions taken inrespect of managing risks of Bank.D L P R AbeyaratneChairmanBoard Integrated Risk Management CommitteeColombo28 March 2013NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

101ROOTED IN OUR HERITAGEREPORT OF THE NOMINATION COMMITTEEThe Nomination Committee comprisesthree Independent Directors appointedby the Board of Directors of the Bank.The following Directors serve on theNomination Committee. Mr. P. A. Abeysekera - Chairman(IND/NED)(Up to 28-2-2013) Mr. R M P Ratnayake - Chairman(IND / NED) (From 04/03/2013) Mr. H. Madiwela - (IND/NED) (Upto 18-5-2012) Mr. S. T. Abeygunawardana(NIND/WD) Mr. Sumith Wijesinghe(IND/NED) (From 17-08-2012)The Dy. General Manager (HRD),functions as the Secretary to theCommittee.IND - Independent Director, NED -Non-Executive Director, WD - WorkingDirectorThe Committee sets the criteria(qualication, experience, etc.)required for eligibility for appointmentor promotion to the posts of CEOand Key-Management Personneland ensures that CEO and the KeyManagement Personnel are t andproper to hold ofce. In addition, theCommittee considers and recommendsto the Board of Directors from time totime, the requirements for additionaland/or new expertise and thesuccession arrangements for retiringKey Management Personnel.The Nomination Committee has notmet during the year under review asthere have been no signicant matterscoming under the committee purview.S T Abeygunawardanafor Chairman - Nomination CommitteeColombo28 March 2013NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

102NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

103CHAPTER 4ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

104ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTRisk Management requires anintegrated approach that interacts witha number of factors such as strategy,structure, policies and procedures,functions etc since all activities areinterrelated and interconnected inachieving the organisation’s goals. Acohesive approach of management,development of an atmosphere forpositive cultural and organisationalchanges, policy & structure based systemsand procedures, risk identication andreporting etc are the pillars of achievingthe establishment of an Integrated RiskManagement (IRM) framework in theBank. Further, assessment of potentialrisks for an organisation at every leveland then aggregating the results at thecorporate level to facilitate prioritysetting and improved decision-makingare fundamental for IRM. Integratedrisk management should focus onoptimisation of corporate goals at anacceptable risk level through supportactivities that foster innovation, optimaloperating results and stability to sustainduring turbulent times. Integratedrisk management should also enablethe regulators to identify an entity asa responsible organisation focusingon long term system stability andcompliance with national interests.Board of DirectorsRisk Management StructureThe Bank has been improving itseffort for establishing a cohesive riskmanagement structure to ensureadequate oversight due to the natureand complexity of and risk inherent inthe Bank’s operations. The principalresponsibilities set out below extendthroughout the Bank.IRMC - Integrated RiskManagement CommitteeBAC - Board Audit CommitteeERMC - Executive RiskManagement CommitteeAMD - Asset Management DivisionRMD - Risk Management DivisionORM/Rep - Operational ManagementRepresentativeMO - Middle OfceCRMU - Credit Risk ManagementUnitIRMCBACGM/CEOERMCOtherDivisionsAMD Credit RMDComplianceUnitAuditDivisionORM/Rep MO CRMUStrategicRiskCreditRiskMarketRiskOperationalRiskNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

105ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTRisk Identification,Measurement, Mitigation,Monitoring and ReportingThe Bank, with the approval of theBoard of Directors has established basicrisk identication and measurementtechniques; such as Key PerformanceIndicators (KPIs), Key Risk Indicators(KRIs), Stress Tests, ManagementInformation System (MIS), Riskreview, Competitor Analysis, ControlExamination, improvement ofStructures etc during the period underreview. The ndings were used asyard sticks for risk measurement andmitigating measures.The Board approved stress test policywas reviewed during the year to representregulatory and market risk. The policyties over ten stress test conditionscovering protability (interest incomeand expenditure), credit (Adverseshifts of Non Performing Loans (NPL)categories, transfer of Performing Loans(PL) into NPL, impact of increasingprovisions etc), interest and liquidity(change of interest rates of governmentsecurities, deposit and lending rates,change of maturity prole of assets andliabilities etc) and adverse impacts onchange of overheads.KPIs cover protability, performanceefciency, and asset quality. KRIshighlights possible risk areas includingimpact on interest rate risk, margin,assets and liability structure, marketpositioning, overheads etc. The ndingsare reported to the respective operationalcommittee (i.e. ALCO, ERMC, IRMC)and to the Board on a quarterly basis.An MIS is being developed as a tool forrisk identication, monitoring processand feedback process at the operationallevel and results are discussed withinthe representative managementcommittees. The Bank is also takingactions to formulate a comprehensiveretail credit policy and the draft is beingreviewed by the Senior Management.STRATEGIC RISKStrategic Risk is dened as the possibilityof losses arising from adverse businessdecisions, lack of responsiveness toindustry changes, negative impact oncurrent and/or prospective earningsor capital, lack of concentration onstrategic direction and critical factorswhich may arise due to a weak strategicplanning process.The Bank identies Strategic Riskthrough environmental scanning by theBoard and the Corporate Managementteam in achieving the Strategic Goalsand Objectives. The guidelines of theBoard approved Policies, Charters, RiskReview Reports, Risk Tolerance Limitsetc, are used to identify strategic risk byusing tools such as Scenario Analysisand Stress Testing.Board approved Integrated RiskManagement Policy (IRM Policy),Treasury and Asset and LiabilityManagement Policy, Investment Policy,HR Policy, Code of Conduct forDealers, Training Policy, OutsourcingPolicy and Charters for All OperationalLevel Committees are in place in orderto minimise strategic risk.Note: All the fi gures, data tables and graphs inthe risk management report are based on the SriLanka Accounting Standards (SLAS) unlessotherwise mentioned specifi cally.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

106ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTComposition of Assets0%1%the Banking Act No. 30 of 1988 asamended by the Banking Act No. 33 of1995.2%3%31%Placements with banksOther nancial assets held for tradingLoans and receivables to banksLoans and receivables to other customersThe capital base and the risk weightedamount under each category of risk aregiven in the following table.Financial investments - Available for sale62%Financial investments - Held to matuarity1%OtherThe composition of assets mainlycomprise of Financial Investmentswhich is 62% of total assets.Capital AllocationThe Capital Adequacy Ratio (CAR)also known as “Capital to Risk WeightedAssets Ratio” (CRAR), measures theBank’s ability to absorb reasonableamount of losses before insolvency. Theassets are weighed according to the levelof riskiness which arises from credit,market and operational risks based onthe regulatory guidelines.The capital adequacy ratios serve toprotect depositors and promote thestability and efciency of the nancialsystem.The Asset and Liability ManagementCommittee (ALCO) headed by theGeneral Manager/CEO and theCorporate Management team reviewsand decides assets allocation, pricing,liquidity, strategic investments etc.The Bank regularly measures andmaintains its capital adequacy asrequired by the Section 76 j (1) ofNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

107ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTItem Rs.Mn Rs.MnPaid up Share Capital/ Common Stock 3,200.0Statutory Reserve Fund 1,626.5General and Other Reserves 17,766.2Less: Deductions (Tier I) (2,466.6)Core Capital (Tier I) 20,126.1Supplementary Capital (Tier II) 1,286.1Less: Deductions (Tier II) (1,180.5)Tier III Capital 0.0Capital Base 18,945.7Minimum Capital Charge for Credit Risk 5,394.3Minimum Capital Charge for Market Risk 1,392.8Minimum Capital Charge for Operational Risk 2,403.8Risk Weighted Amount for Credit Risk 53,942.7Risk Weighted Amount for Market Risk 13,927.9Risk Weighted Amount for Operational Risk 24,038.3Total Risk Weighted Amount 91,909.0Core Capital (Tier I) Ratio (Minimum Requirement 5%) 21.90Total Capital (Tier II) Ratio (Minimum Requirement 10%) 20.61(%)30.0025.00Trend of the Capital Adequacy Ratio of Bank20.0015.0010.005.00-20082009 2010 2011 2012YearTier IStatutory Ratio (Tier I)Tier IIStatutory Ratio (Tier II)NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

108ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTStrength of the Capital AdequacyFurther, the sensitivity to the stress condition of the CAR hasbeen examined periodically to ascertain the buffer to absorbrisk shocks. Both the Tier I and Tier II Capital AdequacyRatios are well above the minimum regulatory requirementseven under the serious scenarios calculated under stress testsas approved by the Board. Stress conditions are given in thetable below.Risk TypeCredit RiskStress ScenarioIncrease in the Non-Performing Loans(NPLs) and the respective provisioningMarket Risk- Interest Rate Impact of Change in the DifferenceRiskbetween Average Yield of GovernmentSecurities and average rate of less than 12months FDs and Savings- Liquidity Risk Impact of Liquidating Interest EarningAssets to pay 3 Months LiabilitiesOperational Risk Risk Weighted Assets under TheStandardised Approach (TSA)The table below summarises the impact on the Bank’sCapital Adequacy Ratio in a situation of combined stressesOccurrence.Stress Test Results and Capital CushionRisk TypeCapitalRequiredUnderNormalDirectionPossibleCapitalErosiononAccountof StressScenarioRiskWeightedAssetsafter theCapitalErosionCredit Risk (Rs. Mn) 53,943 7,132 61,074Market Risk (Rs. Mn) 13,928 3,182 17,110Operational Risk (Rs.Mn) 24,038 5,442 29,480Liquidity Risk (Rs.Mn) 1,423 1,423Total (Rs. Mn) 91,909 17,179 109,088Capital FundsAvailable (Rs. Mn) 18,946 - 18,946CAR (%) - Tier II 20.61 - 17.37Impact on CAR (%) 3.25 NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

109ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTCREDIT RISKCredit risk is the possibility of lossesarising from the diminution in the creditquality of borrowers or counterpartieswhich could materialise from thebanking book and the trading book andboth on or off balance sheet.For a bank’s stability and continuingprotability, it is crucial that every bankhas a sound credit risk managementsystem integrated into the overall riskmanagement framework. The creditrisk management aims to maximise abank’s risk-adjusted rate of return bymaintaining credit risk exposure withinacceptable parameters. Banks shouldhave a keen awareness to identifymeasure, monitor and control creditrisk and should have adequate capitalto absorb these risks.Ensuring lending staff complies with theset policies, procedures and guidelinesof the Bank and ensuring the existenceof Board approved policies to limit ormanage other areas of credit risk arethe main steps in managing credit risk.As part of the annual planning process,the Board and Management set targetsfor the NSB’s loan portfolio mix andreviews on an ongoing basis to ensurethat the performance meets the Board’sexpectations and the level of risk remainswithin the acceptable limits. Adaptationof standardised lending procedureswhich reduces risk of transactional errorand ensures compliance with regulatoryrequirements are the high priority inBank’s credit process. The Bank appliesKey Performance Indicators (KPIs),Key Risk Indicators (KRIs), StressTesting, Portfolio Review, InternalControl Assessment, Yield Assessmentetc. to monitor the quality of the CreditPortfolio on a quarterly basis.Credit Risk AppetiteThe Bank manages and controls creditrisk by setting limits on the amountof risk it is willing to accept and bymonitoring exposures in relation tosuch limits. The risk appetite of theBank is set by the Board of Directorsand contains a set of credit portfoliomonitoring measures which includetolerable risk levels.Credit Risk ManagementStructureThe Bank has initiated a structure tothe credit risk management process tooptimise the credit risk managementfunctions and identies, assesses,quanties, prices, monitors andmanages credit risk continuously.The Risk & Compliance Divisionconducts two key functions of CreditRisk Management and Credit RiskReview. The functions covered bythe Credit Risk Management are;involvement in assessment of preapprovalstage on large and high riskcredits as per the Integrated RiskManagement Policy, evaluate andcomment on new lending products froma risk perspective, monitor Key CreditRisk Indicators including NPL, monitorand report to the Board of Directorsand Operational Level Committeessuch as Credit Committee (CC), Asset& Liability Management Committee(ALCO) etc. Credit Risk ReviewFunction covers evaluating the portfoliosof different loan categories, evaluatingthe credit process and adequacy ofNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

110ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTinternal controls and reporting thendings with recommendations to therelevant Board and Operational LevelCommittees.The CC, ALCO, Executive RiskManagement Committee (ERMC)and the Integrated Risk ManagementCommittee (IRMC) review the creditrisk assessments.In order to carry-out credit riskmanagement activities at operationallevel the Bank has strengthenedand streamlined the Credit RiskManagement Unit (CRMU) within theCredit Division under the supervisionof Risk & Compliance Division.Credit Risk Exposures of theBankThe total Credit Exposure which is33.1% of the Bank’s total assets is theBank’s second major line of business(The investment in risk free securities is62.0% of total assets-based on SLFRS).Hence the magnitude of credit risk iscomparatively low to the Bank, albeitthe fact that the Bank considers creditrisk as a major type of risk.The credit exposure of the Bank iscreated from two main categories i.e.‘lending to banks’ and ‘lending toother customers’ such as corporateand retail borrowers, Government andGovernment Institutions.NSB’s Credit risk mainly arises from‘lending to other customers’ whichis 92% of the total Credit Exposurecreated by the conventional On-Balance Sheet items i.e Term Loans,Debentures, Trust Certicates andSecuritisation and Off-Balance Sheetitems such as Guarantees and Bonds.Credit risk which is created through thewholesale lending or ‘lending to banks’i.e. funding short-term and mediumtermfund requirements of the Banksvia short-term loans, Debentures,Securitised Instruments, Trust Receiptsetc. represents 8% of the total CreditExposure.Credit Exposure is based on the level ofsecurity depicted that 90% representssecured loans and 10% representsunsecured loans. Loans which arebacked by property represents the largestportion (35%) of the secured categoryof Loans and Advances and pawningCredit Exposure - Based on Loan Category (based on SLFRS)92%8%Loans and Receivables to BanksLoans and Receivables to Other CustomersNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

111ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTwhich is backed by gold represents thesecond largest portion (34%). The cashbacked credit represents 13% of thesecured loan portfolio.Credit Exposure - Based on Level of Security (based on SLFRS)10%Management of the CreditPortfolio• Portfolio AnalysisThe credit portfolio analysis enablesthe Bank to monitor the credit riskattached to different loan categoriesas well as to the entire credit portfolio.Comprehensive reports are submittedto the Risk Management Committeessetting-out detailed risk evaluation aswell as suggested mitigation actions.The risk evaluation of retail exposuresare mainly based on rate-wise / size-wiseloan portfolio analysis, computation ofWeighted Average Rate of each retailloan category, NPL analysis, marketvalue based analysis, insurance coverand industry analysis.90%Secured Loans and Advances14% 4%13%34%35%SecuredUnsecuredCashPropertyGoldSovereign GuaranteeOtherNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

112ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENT(%)90.0080.0070.0060.0050.0040.0030.0020.0010.00-Tenor-wise Breakdown of Credit ExposureLess than 7 days 7-30 days 1-3 months 3-6 months 6-12 months 1-3 years 3-5 years Over 5 yearsperiodFinancial & Non-Financial InstitutionsDevelopment Finance LoansLoans Granted out of Investment Fund AccountHouse & Property LoansLoans against DepositsPawningPersonalAuto LoansOthers• Concentration of the Credit PortfolioConcentration of exposures in creditportfolios is an important aspect ofcredit risk. Concentration risk mayarise from two types of imperfectdiversication. The rst type; the ‘nameconcentration risk’ can arise fromuneven distribution of exposures (orloans) to its borrowers. The second type;the ‘sector concentration risk’ arisesfrom uneven distribution of exposures toparticular sectors, regions, industries orproducts. Name concentration implies(%)90.0080.0070.0060.0050.0040.0030.0020.0010.00-Region wise Credit ConcentrationCentralHousing &PropertyEasternNorthernNorth CentralNorth WesternPawningSouthernSabaragamuwaLoans AgainstDepositsUvaWesternYearOther LoansNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

113ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENT32.6%Loans and Advances Industry-wise Exposure 20125.5%4.6%8.4%0.1%18%0.0%0.1%30.8%less than perfect granularity of theportfolio, while sectoral concentrationimplies that risk may be driven by morethan one systematic component (factor).The Bank analyses the maximumexposure to credit risk by geography ofcounterparty and by industry before theeffect of mitigation is applied throughthe use of collateral agreements.The geographical analysis of Loansand Advances of the Bank depicts thatthe Western province has deployed thehighest percentage of mobilised fundsin every category of loans.Agriculture and FishingTourismConstructionTradersNew EconomyFinancial and business ServicesInfrastructureOther Services (Education, Health, Media)Other Customers (Pawning etc)The Bank has deployed the mobilisedfunds in the respective provincesthrough loans and the ratios are in linewith the Bank’s loans to deposit ratio.Industry Analysis of Loans andAdvancesThe Industry-wise classicationof credit exposure indicates thatConstruction represents the majorsector in the year 2012 (30.8% as perthe SLAS categorisation and 25.5% asper the SLFRS categorisation) amongthe sectors nanced by the Bank.Herfindahl and Hirschman Index(HHI)Concentration is a key driver of aportfolio credit risk and the HHI isa reliable standard for measuringconcentration risk. HHI measures thesize of rms in relation to the industryor a sector in relation to the totalportfolio.The Bank applied the HHI Measureof sector exposure to the total Loansand Advances portfolio. The results ofHHI can range from 0 to 1.0, movingfrom a few sectors to a larger numberof sectors where the minimum valueof HHI Index generally indicates alow concentration and low level ofcompetition in the market place andvice versa.The index shows a decrease inconcentration risk from 2011 to 2012indicating the Bank’s credit portfolio ison the low end of credit concentrationrisk. The concentration risk impact onthe overall portfolio too is low, sinceconcentration risk on account of thegrowing products such as housing loansand pawning are distributed over largeNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

114ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTIndustry wise Credit Exposures 2012 (based on SLFRS)56.2%0.4%0.1%7.9%25.5%5.5%4.4%number of customers and backed bymarketable securities.Credit QualityThe Bank has established a creditquality review process to provide earlyidentication of possible changes inthe credit worthiness of counterparties,including regular collateral revisions.Establishing industry acceptablecriteria for assessment of risk prole ofthe borrower and the facility helps tomonitor the overall quality of the totalcredit portfolio and mitigate any creditrisk.Agriculture and FishingTransportConstructionTradersNew EconomyBanksOthersAn analysis of the behaviour of NPLcategories shows a shift in portfoliocomposition evident of the efciencyand effectiveness of recovery actionstaken during the year for ‘Doubtful’ and‘Loss’ accounts.Stress TestingAn important element of maintainingcredit quality is analysing what couldpotentially go wrong with individualcredits and the overall credit portfolioif conditions/environment in whichborrowers operate change signicantly.Accordingly, the Risk & ComplianceDivision has stressed tested NPLS toidentify the deviations from the risktolerance under assumed scenarios.Such stress tests can reveal previouslyundetected areas of potential creditrisk exposure that could arise in timesof crisis.The results of this analysis should thenbe factored into the assessment of theLoan CategoryHHI HHI2011 2012Housing and Property Loans 0.15899 0.10165Loans against Deposits 0.02459 0.02446Loans to Government 0.00000 0.00210Loans to Government Institutions 0.00000 0.00052Development Finance Loans 0.00454 0.00268Pawning 0.12083 0.13069Personal 0.00030 0.00060Loans Granted Out of Investment Fund Account 0.00000 0.00007Others 0.00015 0.000090.30939 0.26288NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

115ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTNPLRs.Mn (%)40002.03500300025001.9200015001.81000500-2010 2011 2012 Q1 2012 Q2 2012 Q3 2012 Q41.7Gross NPLNPL - NetNPL & Provision for NPL (%)(%)3230282624222018161412108642-2010 2011 2012 Q1 2012 Q2 2012 Q3 2012 Q4NPL (%)Provision / NPLNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

116ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTadequacy of provisioning and capitalof the Bank. The Senior managementregularly reviews the results of stresstests. The results are taken as animportant input into a review of creditrisk management framework to makerecommendations on setting limits andprovisioning levels for the Bank.NPL Categories 20125.9% 10.6%25.1%58.4%Special MentionSub standardDoubtfulLossNPL Categories 201112.4%10.8%15.9%Special MentionSub standardDoubtfulLoss60.9%NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

117ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTThe scenarios that the Bank is currently carrying out stress testing for credit portfolio include:I) A shifting of performing loans by 10% to NPL plus moving of NPL categories to adversestages by, (a) 50 %, (b) 80 %, and (c) 100%Actual 2012 Scenario 1 Scenario 2Scenario 3100%50%80%PBT (Rs.Million) 6,719 4,559 4,266 4,131P/L Impact (%) 100 68 64 62Interest Cost/ Interest Income (%) 79 83 84 84Margin (%) 3.09 2.62 2.55 2.52Gearing (%) 5.09 5.05 5.03 5.02II) Increasing in NPL up to (a) 10%, (b) 15% and (c) 20% and provisioning by 50%Actual 2012 Scenario 150%Scenario 280%Scenario 3100%PBT (Rs.Million) 6,719 1,532 (329) (4,050)P/L Impact (%) 100 23 (7) (88)Interest Cost/ Interest Income (%) 79 81 81 83Margin (%) 3.09 2.91 2.82 2.65Gearing (%) 5.09 4.95 4.68 3.95Shifting of performing loans by 10% into non-performing categories and moving of NPL categories have a lesser impacton the protability than increasing of NPL by different percentages and provisioning by 50% on the protability. However,occurrences of these stresses are very remote due to practicing of secured lending guidelines and procedures.III) In the event of market value of the pawning portfolio dropping by15% and 10% there will be no serious impact to the Capital Adequacy of the Bank.RatioActualMarket Value Drop to;201285% 90%CAR % (Tier I) 21.90 19.16 21.01CAR % (Tier II) 20.61 17.87 19.72NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

118ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTCollateral and Other CreditEnhancementsAn assessment of the credit risk of thecounterparty determines the amountand type of collateral required. Theloans to banks and nancial institutionsare based on their credit rating while,either property mortgages, treasuryguarantees and corporate guaranteesare obtained as collateral for commerciallending and mortgages over residentialproperties, personnel guarantees,gold and cash were obtained for retaillending.The Management monitors the marketvalue and the forced sale value of thecollateral and assesses the adequacy ofthe allowance for impairment losses. Itis the Bank’s policy to take the decisionof disposing repossessed properties inan orderly manner and the proceedsare used to recover the outstandingclaims. As a general rule, the Bank doesnot occupy repossessed properties forbusiness use.Loan Review Mechanism (LRM)LRM is an effective tool for constantlyevaluating the quality of the loanbook and to bring about qualitativeimprovements in the credit process. TheRisk & Compliance Division therefore,Credit Exposure to Banks & Financial Institutions(based on Ratings)7.1%0.4%61.7%4.4%26.4%AAAA-A-BB+BBB+has drafted a Loan Review Mechanismfor all types of credit with responsibilitiesassigned to various areas such as,evaluating the effectiveness of the loanprocess, maintaining the integrity ofcredit grading process, assessing theloan loss provision, portfolio review etcand intend to implement LRM duringthe next year.Credit Risk IndicatorsThe credit risk along with the riskprole of the Bank are assessed mainlythrough, Key Risk Indicators (KRIs)and Key Performance Indicators (KPIs)such as NPLs, provision for NPLs,monitoring of interest in suspense,market share based analysis, portfoliogrowth, asset allocation and then arereported to the Board and OperationalLevel Committees. The Risk andCompliance Division has developed aMIS to monitor and manage credit riskand submit the data / information tothe relevant divisions to report the creditdata to the relevant Board Committeesand Operational Level Committees.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

119ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTCredit Risk Monitoring,Mitigation and ControlCredit risk monitoring refers tocontinual monitoring of individualcredits inclusive of Off-Balance sheetexposures to obligors as well as theoverall credit portfolio of the Bank. Aproper credit monitoring system enablesto monitor quality of the credit portfolioon day-to-day basis and will providethe basis for taking prompt correctiveactions when warning signs point-out todeterioration in the nancial health ofa borrower.The credit discipline, credit riskmanagement and control processare being implemented in the Bank.Streamlining of the credit processis being carried-out through theCredit Committee via continuousrevision of procedures and monitoringperformance.The Bank has taken action to strengthenand streamline the Credit RiskManagement Unit (CRMU) under thesupervision of the Risk & ComplianceDivision in order to carry-out creditrisk management functions such as;credit limit setting, credit exceptions,security valuation, exposures etc.The Risk & Compliance Division willinitially be involved in the assessmentof pre-approval stage on large and highrisk credits as per the Integrated RiskManagement Policy.MARKET RISKMarket risk to the Bank stems frommovements in market prices, inparticular, changes in interest rates,foreign exchange rates and equityprices. Market risk is often propagatedby other forms of nancial risk such ascredit and market-liquidity risks. Therisk of losses would arise from On-Balance sheet as well as Off-Balancesheet activities.A bank is required to develop a soundand well informed strategy to manageits market risk. The strategy should rstdetermine the level of market risk theinstitution is prepared to assume. Thislevel should be set with considerationgiven to, among other factors, theamount of market risk capital set asideby the institution.Once its market risk tolerance isdetermined, the Bank needs to developa strategy that balances its businessgoals with its market risk appetite. TheBank will consider the following factorswhen developing such strategies: Economic and market conditionsand their impact on market risk Whether the Bank has the expertiseto prot in specic markets and isable to identify, monitor and controlthe market risk in those markets The Bank’s portfolio mix and howit would be affected if more marketrisk is assumedThe Bank has taken actions toestablish a market risk managementframework with the objective ofoptimising the rewards during theyear 2012. This is facilitated throughBoard approved policies, guidelinesas well as risk parameters and limits.The Risk Management Division ofthe Bank is responsible for the overallrisk management of the Bank and theNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

120ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTevaluated risks are reported to the Assetsand Liability Management Committee(ALCO), Executive Risk ManagementCommittee (ERMC) and IntegratedRisk Management (IRMC) periodically.Initial steps were taken to establish anindependent Treasury Middle Ofcein order to improve the effectiveness ofmarket risk management. The marketrisk management framework of theBank is as follows.Interest Rate RiskInterest rate Risk is the risk that aninvestment’s value will change due to achange in the absolute level of interestrates, in the spread between two rates,CommodityRiskLiquidityRiskin the shape of the yield curve or inany other interest rate relationship.The Bank’s major source of fundingInterestRate RiskMarket RiskManagementFrameworkEquityRiskForeignExchange Riskis deposits which represent 94% oftotal on balance sheet liabilities. Ofthis, 24% represents savings depositsComposition of Liabilities5% 1%22%Composition of Total Deposits24%SavingsFDsFDsSavingsRepoOther Liabilities72%76%NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

121ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTwhere 76% represents Fixed Deposits(FDs). On the other hand, the majorityof investments in the Bank representinvestment in government securities inshort to medium term which represents62% of total on balance sheet assets.Hence the Bank is subject to interestrate risk to a greater extent.subjected to re-pricing risk to a greaterextent. Therefore, the Bank gives dueconsideration in managing interestrate risk. ALCO has been constantlymonitoring the market risk factors andmanaging the interest rate risk in arising interest rate scenario.Rate sensitive gap that is preparedbased on rate sensitive assets and ratesensitive liabilities is a major tool usedin forecasting and managing interestrate risk of the Bank. Based on the gapand re-pricing risk faced, decisions arebeing taken by the ALCO to managethe interest rate risk to the optimal level.The composition of FDs amongst thetotal liabilities is on the increasing trendeven though the rate of growth hasreduced from 2011 to 2012. This causesthe Bank to have a high interest costwhich in turn results in reducing netinterest margin. The Savings depositsare also on the increasing trend eventhough at a slower rate. However, theposition of other liabilities and the repoborrowings remains almost same.Measurement of Interest RateRisk and Interest Rate RiskIndicatorsThe Banking Book constitutes 61%of the total balance sheet assets. Onthe other hand the deposits consistof 86% of the total on balance sheetliabilities and equity. Hence, the Bank isRate Sensitive GapItemUp to1 month1 - 3months3 - 6months6 - 12months1 - 3years(Rs.Millions)3 - 5yearsOver 5yearsRate SensitiveAssets 24,814 36,169 56,050 120,410 154,447 57,176 39,416Rate SensitiveLiabilities 86,225 156,124 61,217 131,126 27,965 360 1,619Gap (61,411) (119,955) (5,167) (10,716) 126,482 56,816 37,797Gap as a % ofTotal Liabilities (71) (77) (8) (8) 452 15,782 2,335Rs. Mn400,000350,000300,000250,000200,000150,000100,00050,000-Trend of Liabilities20082009 2010 2011 2012YearSavingsFDsRepoOther LiabilitiesNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

122ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTMaturities of assets and liabilities, KeyRisk and Key Performance Indicators(KRIs/KPIs) are also used as tools inmanaging the interest rate risk of theBank. Interest margin and WeightedAverage Deposit Rate (AWDR) areused as major Key Risk Indicators inmonitoring the behaviour of the depositrates and measuring interest rate riskof the Bank. The ratios indicate thatthe Bank has been able to manage itsNet Interest Income, even though theInterest Margin of the Bank is on adeclining trend.The diversication of assets is based onthe margins and yields that are received.As such a higher proportion of assetsare allocated to sectors that generatehigher margins.The investment in loans and advancesgives the highest margin. Though it ison a decreasing trend, the decrease inmargin from loans and advances is verymarginal. Interest margin from loans tobanks and other nancial institutionshas increased from 2011 to 2012 whilemargin from Government Investments(%)12.010.08.06.04.02.00.0(%)76543210AWDR & Interest Margin2010 2011 2012 Q1 2012 Q2 2012 Q3 2012 Q4Interest Margins2011 2012 Q1 2012 Q2 2012 Q3 2012 Q4has decreased. However, margin fromall the categories show a slight reductionin the fourth quarter of 2012 comparedto the third quarter.AWDRInterest MarginGvt. InvementsLoans and AdvancesLoans to Banksand other nancialinstitutionsStress tests are another tool used to assessand forecast the future interest raterisks faced by the Bank and to analysethe ability of the institution to faceNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

123ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTidiosyncratic situations. These stress testsare reviewed periodically to representcurrent market conditions as per theBoard approved Stress Test Policy.The following scenario summary oninterest rate risk indicates that the Bankis still able to maintain the protabilityeven if the FD rate on all xed depositsincreased by 0.5% and 1% whileTreasury Bill and Treasury Bond ratesremain unchanged. These types ofstress tests are very much helpful in aninterest rate rising scenario.Foreign Exchange RiskForeign exchange risk (also known asexchange rate risk or currency risk) is anancial risk posed by an exposure tounanticipated changes in the exchangerate between two currencies. In termsof foreign currency (FC) operations,the Bank is only engaged in acceptingsavings and xed deposits in majorcurrencies, accepting remittances fromcustomers and investing in more orless in the same tenure. Further, theBank selects the investing banks basedon their rating and the selected bankscurrently are in higher notches ofrating. Hence, the foreign exchange riskfaced by the Bank is at a minimum andthe mismatch of the foreign currencyassets and liabilities is at a manageablelevel.Item Actual 2012 Scenario 10.5%Scenario 21%PBT (Rs.Million) 6,719 3,762 2,292P/L Impact (%) 100 56 34Interest Cost/ Interest Income (%) 79 86 89Margin (%) 3.1 2.4 2.1Gearing (%) 5.1 4.7 4.5Foreign Currency Investments in Banks28%AA (Government)AA (Private)2%AA- (Private)70%NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

124ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTMaturities of Foreign Currency Assets and Liabilities (Rs.Millions)Item Upto 1 Month 1- 3 Months 3-6 Months 6-9 Months 9- 12 MonthsAssetsInvestments (Net of provisions) 412 1,212 1,475 1,456 1,375LiabilitiesDeposits 2,007 264 338 2,401 600Gap (1,595) 949 1,137 (945) 775Cumulative Gap (1,595) (646) 491 (454) 320Actual 2012 25% Drop of the portfolio and 1% Discount of AssetsPBT (Rs.Million) 6,719 6,450P/L Impact (%) 100 97Interest Cost/ Interest Income (%) 79 79Margin (%) 3.1 3.1Gearing (%) 5.1 5.0A stress test was carried out to measurethe impact on the balance sheet and theincome statement when a prematurewithdrawal is made of the entire (100%)FC deposits during the period of 0 to91 days in rst day of the period while25% of the deposits matured thereafter(0 - 91 days, 90 - 120 days and 121 -364 days maturity buckets) is withdrawnduring the rst maturity bucket on thesame day. The impact of loss is assessedby 1% drop of the interest rates due todiscounting of foreign currency assets tomeet withdrawals. It indicates that theBank is unaffected since the exposure isminimal.Equity Price RiskEquity risk is the risk that one’sinvestments will depreciate because ofstock market dynamics causing one tolose money.The measure of risk used in equitymarkets is typically the standarddeviation of a security’s price overa number of periods. The standarddeviation will delineate the normaluctuations one can expect in thatparticular security above and belowthe mean, or average. However, sincemost investors would not consideructuations above the average returnas “risk”, some economists prefer othermeans of measuring it.The Bank is conscious of systematicand un-systematic risks of the equityportfolio and encourages portfoliodiversication and therefore selectNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

125ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTfundamentally sound stocks inmitigating associated risks.The investments in equity represent1.6% of the total assets while investmentsin quoted and unquoted equity are1.36% and 0.25% respectively. Hence,the Bank does not have a major exposureto equity risk. However, the adversemovements in the stock market affectedthe yield on equity investments. Theinvestments in non-quoted companiesare made due to policy decisions onmarket and economic development andstrategic reasons.The yield from the equity investmentsof the Bank showed a slight reductiondue to the fact of downturn in the stockmarket. As a result, the total marketvalue of the shares held by the Bankin ASPI and MPI companies havedeclined.Liquidity RiskLiquidity risk is the risk that a givensecurity or asset cannot be tradedquickly enough in the market to preventa loss (or make the required prot).Rs.Mn4500Composition of Investments in Equity2%49%4000350030002500200015001000500Movement of the Market Value of the Shares heldby the Bank in ASPI & MPI Companies-12%37%31/03/2012 30/06/2012 30/09/2012 31/12/2012Milanka Index CompaniesLiquidity risk would occur in a situationwhere the Bank would not be able toMilanka Index CompaniesNon Milanaka Index CompaniesUnit TrustsUnquotedNon Milanaka Index Companiesfulll its obligations promptly due toinadequate cushions maintained.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

126ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTLiquidity management involves theBank implementing strategies of “selfinsurance” or “purchased insurance”against shortfalls of cash requiredto meet current and forthcomingobligations in a variety of ways. Theoptimal mix will reect the relative costsincurred in using each approach andthe risks associated with each.Concentration of Liquid AssetsThe Bank’s regulatory requirement toinvest 60% of its deposits in GovernmentSecurities forces the Bank to maintaina high Statutory Liquid Asset Ratio.Currently, the Bank maintains the ratioat 69% which is well above the statutoryrequirement of 20%. The investment ingovernment securities represents 79%from the total liquid assets of the Bank.Concentration of Liquid Assets0.2% 0.6%42.0%57.2%(%)250,000200,000150,000100,000Stability of FundingCash & cash equivalentsGovernment Securities Less than 12 MonthsGovernment Securities More than 12 MonthsOthersInstitutionalIndividualFurther, the Bank’s off-balance sheetexposure is limited and therefore a veryminimal risk of unforeseen liquidityissues would arise. The ability of theBank to access the Inter-bank market isalso not difcult in a situation of liquidityproblems due to its large investments inT. Bills and T. Bonds, reputation in themarket and the Government afliation.50,000-3 months 6 months 12 months 24 months 36 months 60 monthsOn the other hand majority of the xeddeposits of the Bank includes individualxed deposits which represent 76% ofthe total FDs and only the balance 24%represents the institutional deposits.This re-emphasises the stability of thefunding as well as the liquidity positionof the Bank.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

127ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTMeasurement of Liquidity Risk and Liquidity Risk IndicatorsTo measure and monitor the liquidity risk of the Bank, liquidity risk indicators such as Loans to Customer Deposits, LiquidAssets to Short term Liabilities, Purchased Funds to Total Assets are calculated and they are monitored on a regular basis andreported to the ALCO and the Board. The liquidity risk indicators were reviewed in 2012 in order to be in line with CBSLrequirements and the Basel II guidelines.Movement of Some Liquidity Risk IndicatorsMonth /Ratio (%) 31/03/2012 30/06/2012 30/09/2012 31/12/2012Loans to Deposits 30.1 31.8 32.1 33.1Loan to Adjusted Deposit32.0 34.5 34.6 35.3(Less than 12 Months Deposits) RatioLiquid Asset to Total Deposits 70.6 68.8 68.3 67.5Liquid Asset to Total Assets 62.3 59.9 59.8 58.5Net Loans to Total Assets 26.4 27.5 27.9 28.5Liquid Assets to Short term Liabilities 69.0 67.1 67.4 66.4Large Liabilities (Minus) Temporary Investments to(14.3) (14.3) (19.7) (18.0)Earning Assets (Minus) Temporary InvestmentsPurchased Funds to Total Assets 16.7 18.3 18.1 20.5Commitments to Total Loans 1.2 1.1 1.1 1.6Core deposits to Total Deposits 9.9 12.2 12.7 12.6Loans + Fixed Assets to Total Assets 27.7 28.8 29.2 29.7Loans + Fixed Assets to Core Deposits 255.5 270.9 262.7 271.0Temporary Investments to Volatile Liabilities 25.6 26.0 30.1 30.3Volatile Liabilities to Total Assets 91.2 91.1 91.0 91.1As shown in the above table, the Bank’sLoans to Deposit Ratio is on theincreasing trend which compares theloans and advances to customers as apercentage of deposits. The Bank hasroom to increase the ratio much furthersince it is below the industry averages.In accordance with the Board approvedstress test policy, liquidity levelsare assessed under stress scenariosperiodically to monitor the soundnessof the liquidity of the Bank. The Loansto Deposits Ratio and the Net Loansto Total Assets Ratio are around 30%.The industry average of the Loans toDeposits ratio is around 90% whichNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

128ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTindicates that the Bank is much belowthe industry averages. However, thisimplies that the Bank is sound in termsof liquidity since lesser funds are tied upin least liquid assets, though the Bankhas room for further improvements inthe ratio. As such, the Bank is capableof maintaining the liquidity levels wellabove the statutory requirement of 20%even in extreme stress conditions.The graph below indicates the impacton the Liquid Asset Ratio when theliquid liabilities are reduced by 10%,20% and 30% respectively while settlingthose liabilities through liquid assets.Apart from the liquidity ratios, the Bankuses maturity gap analysis to managethe liquidity risk, depending on thecontractual maturities of assets andliabilities. The maturity gap analysisshows that the Bank is exposed to there-pricing risk which is inherent in theBanking industry. The majority of theliabilities fall within less than 12 monthsmaturity buckets which are re-pricedin shorter intervals and the assets thatare residing at more than 12 monthsmaturity buckets are re-priced at longerintervals. Therefore, the Bank tries tomanage liquidity risk through managingthe mismatches in maturities.(%)80757065605550Impact on Stress Test to LARJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecActual10%20%30%NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

129ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTMaturities of Assets and Liabilities (MAL) Rs.MillionsItemUp to1 month1 - 3months3 - 6months6 - 12months1 - 3years3 - 5yearsOver 5yearsAssetsCash on hand 446 - - - - - -Deposits with CBSL - - - - - - -Balances due from Other Banks 2,833 1,274 1,560 2,768 - - -Investments (Net of provisions) 16,135 21,012 33,841 80,943 122,324 40,626 23,887Loans and Advances 5,847 13,883 20,649 36,699 32,123 16,550 15,529NPLs - - - - - - 2,589Other Assets - - - - - - 5,250Other 2,993 5,323 2,513 1,351 307 34 636Total (a) 28,253 41,492 58,563 121,761 154,753 57,211 47,890LiabilitiesDeposits 74,802 148,596 60,265 128,536 27,965 360 1,619Borrowings 11,423 7,528 952 2,590 - - -Other Liabilities 3,406 3,569 3,996 4,109 3,859 55 375Total Capital Fund - - - - - - 25,919Total (b) 89,631 159,693 65,212 135,235 31,824 415 27,913Gap = (a) - (b) (61,378) (118,200) (6,650) (13,474) 122,930 56,796 19,977Cumulative Gap (61,378) (179,579) (186,228) (199,702) (76,773) (19,977) 0OPERATIONAL RISKThe Basel Committee on BankingSupervision denes operational riskas “the risk of loss resulting frominadequate or failed internal processes,people and systems or from externalevents”. This denition includeslegal risk but excludes strategic andreputational risk.The Regulators of nancial institutionsand banks are demanding a far greaterlevel of insight and awareness bydirectors about the risks they manage,and the effectiveness of the controlsthey have in place to mitigate theserisks. Further they have emphasisedthe importance of having a soundoperational risk management practicein place, especially when dealing withInternal Capital Adequacy AssessmentProcess (ICAAP).Operational Risk ManagementFrameworkThe Bank’s Operational RiskManagement framework provides amechanism for improving the overallNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

130ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTrisk culture and behaviour towardsoperational risk management andunderstanding the Bank’s inherentrisks through the operational riskmanagement process which leads tomaking sound decisions in order toachieve the objectives of the Bank.Further the Bank’s Operational RiskManagement Function is guided bythe Board approved Integrated RiskManagement Policy of the Bank.Internal Audit, Risk Management andCompliance function for provisionof exchanging relevant information,identifying and the reporting of theoperational risks. The audit concernson risk & compliance is taken up at theBoard Audit Committees (BAC).Data CollectionOperational Risk Reporting & Monitoring StructureRisk Identification / Assessment /MeasuringReporting /Decision MakingEstablishing an operational riskmanagement process and monitoringare the responsibilities of the RiskManagement Division (RMD) whilethe Compliance and Audit Divisionsare responsible for overlooking theoperational risks in the Bank.The Bank accepts the fact thatInternal Audit, Risk Managementand Compliance functions shouldhave a formal status within the Bankto give them the appropriate standing,authority and independence whilesharing the management of operationalrisk jointly. A close co-operationhas already been established amongOperationalDivisionsOperationalDivisionsincludingCompliance &RMDRMD• Internal Control Design and Assessment• Loss event data tracking and analysis• Issue Management and Remediation• Scenario Analysis• Capital Charge calculation• Identication of duties andresponsibilities of operations• Development of Organisation Structure• Operational improvementsCompliance• Corporate Governance• KYC and Due Diligence• Transaction Monitoring• Regulatory Reporting(CBSL, STR, FTR etc)• Compliance AuditInternal AuditRisk based internal auditingInvestigation, IT system audit, Head OfceAudit - Branch Audit, Functional Audit,Transaction Audit, etcERMCECCBACIRMCIRMCBoard ofDirectorsBoard ofDirectorsBoard of DirectorsNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

131ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTOperational Risk GoverningStructureThe Bank has taken action forestablishment of a suitable OrganisationStructure to manage operationalrisk under the IRM Frameworkby establishing independent unitswithin the main operational divisionsnamely Asset Management, Creditand Branch Management. Actions toestablish a Middle Ofce was takenfor asset management function toensure independence of the activities.Supervision of Credit GL, Structureof Credit Process and conductingcollateral examination of retail loansare functions established under the headofce and the branches initial functionscome under the purview of the CreditRisk Management Unit and wouldexpand in the future. The ExecutiveCompliance Committee (ECC) underthe Compliance Policy review wasestablished to take compliance mattersto the management directly.Actions were initiated during the year2012 to establish an independentunit within the Branch ManagementOperational Unit Middle Office Credit RiskManagement UnitBranch ManagementDivisionBranchesLORCsDivision to carry out independentreporting of Branch MIS, BranchEvaluations, recording of lossevent data and coordination of riskmanagement & compliance matters inthe Branch network. Also formalisedappointment of Liaison Ofcers forRisk & Compliance in branches andother operational divisions of the HeadOfce were made.Loss/Risk Event ReportingA basic structure for incident reportingmechanism is in place to streamline theloss reporting mechanism which alsoenhances the loss database covering alltypes of losses and near miss incidentsRisk & Compliance DivisionOperational Risk Management FunctionAsset ManagementDivisionCreditDivisionCreditDivisionOther DivisionsLORCsLORCs - Liaison Ofcer for Risk & Compliancethat have taken place in business linesas per Basel guidelines. Loss events ofbranches are collected and reported toRMD by the Branch Operational Unit.Other loss events are reported directlyto RMD from other divisions. TheInternal and External loss event dataare obtained from the Internal AuditDivision through their reported events.Effective reporting of these loss eventsby the operational divisions facilitatesto identify risks and respond to thempromptly in the best possible manner.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

132ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTThe status of the risk events encountered under the Basel II-Loss/Risk Events for the year 2012 is given below.Type of Risk/ Loss Event Nature of reported loss events RemarksInternal FraudsFraudulent Withdrawals, Intentional Accounting Impact and the severity are insignicant.Irregularities, Cash Frauds, Manipulations of Actions are taken to improve the internal controls.Accounts, Intentional Cash ShortagesExternal Frauds Third party fraudulent withdrawals, card frauds Impact and the severity are insignicant.Employment Practices andWork Place SafetyDisciplinary InquiriesDisciplinary Inquires and LT cases have beenmonitored and no nancial risk or unethical practicesencountered.Court cases are been monitored and no new legalclaims were made.Client, Product and Business NILPracticesDamages to Physical Assets Damages to Physical Assets Covered under Insurance PoliciesIrrecoverable amount is insignicant.Business Disruption and ATM Failures, Failures of System modules, Impact and the severity are insignicant andSystem FailuresPower outage, Telecommunication outage, monitored closely.Execution, Delivery andProcess ManagementHardware FailuresAccounting Irregularities, Counter transactionCash shortages/excess, ATM cash shortages,Losses due to ATM errors, card losses, Misposting of entries, Non compliance of executionof trading transactionSignicant reputational loss was occurred due to 'TheFinance Transaction' though the policies and practicesare in place.The impact and the severity of other events areinsignicant.Internal Control AssessmentsPeriodic assessments on adequacy andeffectiveness of the Bank’s internalcontrols are a part of the operationalrisk management process to ensurethat systems have adequate controlsthat would minimise the operationalrisk. RMD has already commenced theprocess of reviewing the strength ofinternal controls of existing operationsby mapping the ow charts of currentprocesses.The process and controls of theoperations of deposit collection viapoint of sales device, the credit process,card center operations and, internalcontrols of asset management functionhave been reviewed and improvementsto be made to the process andadditional controls have been identiedand introduced in consultation with theInternal Audit Division. The operationallevel requirements which have arisenfrom the risk register and internalcontrol examination ndings arecommunicated to senior managementthrough risk committees such asERMC, IRMC and the Board. Thisincludes the actions such as reviewingof the existing process/procedureand/or introducing of new systems,procedures and processes. This willlead to establishing a Risk and ControlSelf Assessment (RCSA) process underoperational risk management.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

133ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTProcess/System ImprovementsAs process/system improvements,credit modules and the branch moduleswere updated to comply with the CBSLdirections and Basel II requirements.Requirements regarding KYC datacapturing and KYC monitoring,implementation of the IT modulesfor developing of a comprehensivePawning MIS and a system to facilitatethe implementation of credit scoringmodel were also introduced during theyear.Improvements towards the ITInfrastructureIn order to keep up with advancedtechnology approaches, the Bank isfocusing on the development and reviewof IT systems. Mitigation actions relatedto IT risks are taken by enhancing theInformation Security System and otherinternal development environmentswith the use of Quality Assuranceand other professional practices.Operational Risk Management processis in place for implementations of suchdevelopments or changes to the systems.Key Risk Indicators (KRI)During the year, the Risk ManagementDivision developed KRIS for Bank’soperational risks that reect risks oftechnical and non technical mattersrelated to key business areas/businesslines. Since internal loss events reportinghas become an effective source forprocess improvements, KRIS relatingto operational risk such as numberof internal frauds reported, externalfrauds reported, Operational LossEvents (beyond the CBSL threshold),Suspicious Transactions reported toFIU etc are included in the quarterlyrisk review report.Operational Loss EventsExecution, Delivery and process manegementBusiness disruption and system failureDamage of physical assetsClient products and business practicesEmployment Practices and workplace safetyExternal FraudsInternal FraudsEvent TypeThese KRIs are updated quarterlyand the trends are communicatedto operational divisions through riskmanagement committees to initiaterisk mitigating measures. OperationalRisk based on reported loss eventsare monitored by RMD and reportedto the Executive Risk ManagementCommittee (ERMC), Integrated RiskManagement Committee (IRMC) andthe Board. The loss events which exceedthe threshold as per the Regulator arereported quarterly.0 20 40 60 80 100frequency of the event as a % of total events20122011NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

134ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTAs experienced in previous years, highfrequency of loss events of the Bank werereported with Execution, Delivery andProcess Management mainly consistingof losses relating to cash operationsaccounting for the highest numberof loss events. However the nancialimpact to the Bank was minimal.There were no incidents reported onClient Product and Business Practices,Employment Practices and work placesafety and External Frauds.Minimum Capital RequirementThe Bank is currently applying theBasic Indicator Approach (BIA) forCapital Allocation for OperationalRisk. The magnitude of operationalrisk is as follows.Risk MitigationThe Bank has established PolicyFramework, Committee Structures,organisation set up, Control Measuresetc as risk mitigation measures underthe operational risk managementframework. Also the system andprocedure improvements are beingcarried out to streamline the operationalrisk management process.Business Continuity Planning,Insurance upgrading and outsourcingare also strategies for risk mitigationsof the Bank. The Bank is currentlyinvolved in the implementation andreview of the salient features underthe Business Continuity Plan (BCP)and Disaster Recovery Plan (DRP).Year 2012 2011 2010Total Risk Weighted Amount (Rs.Millions) 91,641 89,407 73,865Risk Weighted Amount for Operational Risk (Rs.Millions) 24,038 23,770 20,138Level of Operational Risk as a % 26% 27% 27%Insurance policies have been reviewedto identify any uncovered areas, andthe respective business units have beenprovided with recommendations forimprovements. The outsourcing policyaddresses the criteria for selection ofareas for outsourcing, selection ofservice providers, periodic reviews onoutsourced activities, and executionand monitoring of Service LevelAgreements.TrainingA number of training programs havebeen conducted on Risk Management,Compliance and Operational risk areasand internal controls during the yearwith a view to developing a culture ofrisk awareness culture and improvingthe risk management process at theBank.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

135ASSESSING AND MANAGING OUR RISK FACTORSRISK MANAGEMENTCONCLUSIONThe objective of risk management isto enhance the awareness of risk in itsactivities and ensure that the risks areconsciously taken with full knowledge,clear purpose and understanding,so that risks can be measured andmitigated systematically.The Bank would take actions forconsolidation of its risk managementmeasures in the future too particularlyin respect of Regulatory and Baselcompliances to the maximum extentso that the Bank can take consciousproactive risk measures in its futureendeavours.The Bank has been continuouslyengaging in establishing policies,organisational setups, systems andprocedures and other operationalsupport services in managing alltypes of risks. As a result, identifying,measuring, monitoring, reporting andmanaging risk have been improving andgradually spreading to the operationallevels. The Bank has taken and willcontinue to take effective actions toimprove the Management InformationSystem, Data Warehousing Solution,Existing IT Applications and SystemSecurities and, establishment ofcontrols to create a better environmentfor risk management.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

136NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

137CHAPTER 5BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

138BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWSTRATEGY AND ANALYSISA Message from the ChairmanFor years, NSB has been a trustedcustodian of the people of Sri Lankaand today, more than ever, we haveinvested in upholding this trust bycontinually improving our services forthe public of Sri Lanka and by ensuringthat our business operations aresustainable in the long term. I believethat long term sustainability of a largescale public nancial institution, suchas ours, is a key requirement for theoverall economic and social stability ofthe country as a whole. Therefore, wecontinued our quest to improve as asocially and environmentally sustainableinstitution, so that we continue to addvalue to our services to the nation.Given the wide impact of our activitieson Sri Lankan society, we remainedmindful of not only the quality ofour service delivery, but also of ourinvestments, lending and other projects,to minimise risks and ensure maximumbenets to the overall economyand society. More than 90% of ourinvestment portfolio is in government“I am happy to announcethat some of our newlyconstructed branches areequipped with rainwaterharvesting facilities as onesuch expression of thiscommitment to conserveour natural resources.”securities and we continued to supportnational infrastructure developmentprojects, because infrastructuredevelopment is extremely importantfor the country to move ahead in themodern world.As part of our contribution to the nationaldevelopment drive, we continued tolook at helping low income groups,rural communities and also people inthe war recovering North and East byproviding housing loans, personal loans,agricultural loans and pawning, and alsothrough project nancing.While catering to the needs of ruralpeople, we have also updated ourtechnologies aligned to global trends.Our internet banking and SMSbanking facilities have introducedmodern conveniences to peopleand our bill payment facilities, byconnecting with major utility suppliers,telecom providers and major insurancecompanies, provide a one-stop-shopconvenience for consumers.I believe our employees are a vitalelement in achieving our operationaland strategic goals and I strongly believethat employee satisfaction, results inhigher productivity that contributesdirectly to the bottom-line. Therefore,during the year we continued to trainand develop the skills of our employees.This has ensured the highest standardof service for our customers and alsocontributed towards improving thecompetitiveness of the bank.As a public institution, we are alsoacutely conscious of the need toconserve the environment for futuregenerations. Therefore, we continued toinvest in conserving natural resourcesand to mitigate environmental impactsthrough our activities. I am happyNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

139BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWto announce that some of our newlyconstructed branches are equipped withrainwater harvesting facilities as onesuch expression of this commitment is toconserve our natural resources. As partof this commitment towards protectingthe environment, we also help ourcustomers develop methods of reducingthe environmental impact through theirindividual business activities.Throughout the year, we also supportedmany worthy causes, to encouragesuch activities and to ensure widerbenets to society. You may read moreabout these activities and our approachtowards achieving a balanced andsustainable business culture in thepages of this sustainability report. Wehope to continue our journey towardssustainability and long term shareholdervalue during 2013 and beyond.Sunil S SirisenaChairmanColombo, Sri Lanka28 March 2013PreambleSustainability necessitates people tolook inward, not only collectively butalso individually. It prompts questionsas to what we can do, as a person, tomake ourselves achieve more withoutharming those around us; how we canempower our communities to betterthemselves; how we work on initiativesthat will reduce our carbon footprint;what impacts do our actions have onthose around us? These are not easyanswers to respond to, but it certainlyencourages a thought process that isbuilt on long term sustainability.For NSB, being rooted means we havebeen around a long time and hence, havea responsibility for the sustainability ofthe planet and all those living beingson it. It also means that we have toeconomically empower people, whileensuring that the environment is notharmed, preservaing nature’s resources.It is also our responsibility to instil bestpractices, values and ethics that willencourage better compliance whereinwe will be regarded as a responsiblecorporate steward that must beemulated. And this also makes us focuson the macro picture that contains ourstakeholders; shareholders, customers,valued business partners, communities,our people and the environment – thatwe have a responsibility to ensure theirsustainability.REPORT PARAMETERSScope of ReportThis report, the fourth of its kind,reviews the sustainability of NSBsoperations for the year ended 31December 2012. The report isgrounded on principals of materiality,stakeholder inclusiveness, sustainabilitycontext and completeness and has beenguided by triple bottom line reporting,based on the GRI reporting framework.We have attempted to ensure thereliability of the information statedin this report through a systematic,ongoing, data collection process, andby keeping in mind the principles ofbalance, accuracy, timeliness, clarityand reliability, in reporting.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

140BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWFor further information, and for anyother inquiries regarding our operations,please address your queried to;The Finance and Planning DivisionNational Savings BankSavings House255, Galle Road,Colombo 3, Sri Lanka.E-mail: nsbgen@nsb.lkReport BoundaryThis report focuses on the functions andactivities of NSB within Sri Lanka andexcludes NSB’s subsidiary, i.e the NSBFund Management Company, becausewe assume that operations of thesubsidiary are immaterial to the report.Specific Limitations on ScopeThe report covers only NSB’s operationswithin Sri Lanka.Data Measurement and Base ofCalculationThe information for the compilation ofthis report was drawn from a numberof sources. Financial information wasextracted from the Audited FinancialStatements and accompanying notes.Information relevant to employees wasobtained from the Human ResourcesDevelopment Division and trainingdetails of employees from the TrainingDivision. Products and services, productresponsibility details and CSR activitieswere provided by the MarketingDivision. Operational details wereprovided by the Branch ManagementDivision, Asset Management Division,International Banking Division, PostalBanking Division, Retail LendingDivision and Project Finance Division.Changes in ReportingThe Financial Statements for theprevious year was prepared inaccordance to the Sri Lanka AccountingStandards (SLAS). However, this year, inline with new regulatory requirements,the Financial Statements have beenprepared in accordance with revised SriLanka Accounting Standards (LKAS)and Sri Lanka Financial ReportingStandards (SLFRS). Other than this,there is no deviation from the previousreporting period with regard to scope,boundary or measurement techniques.Table Identifying the Location ofthe Standard Disclosures in theReport.Please refer the GRI Index in page 172.Key Impacts, Risks andOpportunitiesOur operations in the Sri Lankanmarket are impacted by a number ofelements. One key element is the risingcompetition due to the establishmentof new banks and nancial companies,and the diversied products offered bycompetitors. The continuous evolutionand rapid changes to technologyrequires that we are always mindful ofthe need to upgrade our existing systemsto ensure the latest facilities and servicesare made available to our customers.The lack of opportunities for expansionis another factor that affects ouroperations and regulatory restrictionssuch as the credit ceiling imposed by theCentral Bank of Sri Lanka(CBSL) also,has direct impacts on our activities.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

141BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWAs a business entity, we face a numberof risks in our daily operations thathave direct and indirect impacts onour bottom line. A key risk factoris uctuations in interest rates andexchange rates. These volatile situationsaffect our bottom line through impactson interest income, foreign exchangeincome and cost. Technologiesbecoming outdated is another risk weface, which can make us uncompetitivein the highly competitive nancial sectorin Sri Lanka, as consumers may switchto competitors that offer more efcientservices through the use of technologies.In addition, market volatility adds tounpredictability of operations, makingit difcult to steer a steady coursethrough the year based on pre-denedplans and goals. Meanwhile, regulatoryconstraints and changes also introducea risk that affects our revenues, costsand protability.However, despite these risks, we haveidentied a number of opportunitiesfor NSB’s future growth. For instance,the build up of condence among thegeneral public, with regards to the“A key risk factor isfl uctuations in interestrates and exchangerates. These volatilesituations affect ourbottom line throughimpacts on interestincome, foreignexchange income andcost.”nancial services sector, has ensuredgreater growth opportunities across thecountry, among new, potential consumergroups. Another opportunity we see onthe horizon is in contributing towardsoverall national development throughinvestments in government securities.Such investments will have an overallsocial and economic impact on theentire population, while also generatingreturns for the Bank. The Governmentguarantee on deposits has also openedup the opportunity to expand ourmarket share and operations.ORGANISATIONAL PROFILECorporate Information, Productsand ServicesEssential information about NSBand its subsidiary can be found in theCorporate Information Section, onpage 272 of this Annual Report. Fora full description of our products andservices, please see page 257.Operational Structure of theOrganisationNSB’s operational structure comprisesoperational divisions, support services,other divisions and subsidiary. Ouroperational divisions comprise theBranch Management, Credit, ProjectFinance, International Operations,Postal Banking and TreasuryOperations divisions, while our supportservices comprise the services providedby the Legal, IT, Finance & Planning,Human Resources Development,Training and Marketing divisions of theBank. In addition to these, the Bank’sstructure includes specic aspects thatcan be listed under ‘other sectors’which includes Risk ManagementNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

142BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWand Compliance and Internal Auditactivities. Our Subsidiary is theNSB Fund Management Co. Ltd,which is located at the organisation’sheadquarters.Location of Organisation’sHeadquartersThe location is stated in the CorporateInformation sectionNature of Ownership and LegalFormNature of ownership and legal formis stated in the Corporate Informationsection.Countries in which NSB OperatesIn addition to domestic activities, whichextends through a network of 641 PostOfces and 3,412 Sub-Post Ofces and219 NSB branches, NSB is active inForeign Currency remitting activitiesin most Middle East countries, toserve the needs of Sri Lanka’s migrantworker community. Sri Lankans inItaly, Germany, UK, USA, Australia,Switzerland, France, Ireland, Sweden,“As a public bank, webelieve the provision ofhousing is a key elementfor the uplifting of thequality of life of thepeople of Sri Lanka.”Netherlands, Russia, and the Asiancountries of Hong Kong, Malaysia andthe Korea Republic get the facility ofremitting money through NSB.Markets ServedNSB serves a diverse range of marketsthrough a comprehensive range ofnancial products designed to meetthe requirements of these differentmarket segments. Our main productsare deposits and retail lending products,which are offered to a diverse, islandwide customer base.Accepting DepositsWe have number of products in the formof savings and time deposits. We offera range of products under the abovesectors based on interest rate, age, genderand maturity period. These deposits areaccompanied by ATM cards, debit cards,the easy card, internet banking and SMSbanking, for customer convenience.Retail Lending OperationsWe provide four main types of loansunder the retail lending category ashousing loans, pawning, personal loansand auto loans.Our retail lending operations are mainlyinvolved with the provision of housingloan facilities. As a public bank, we believethe provision of housing is a key elementfor the upliftment of the quality of life ofthe people of Sri Lanka. Therefore, weare proud to be involved in the provisionof affordable housing loans that enableshelter for the people. We facilitategovernment assisted housing loanschemes for government employees.Pawning advances are granted at alower interest rate. However, the Bankpays a comparatively higher rate persovereign than the other banks.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

143BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWPersonal loans are granted as perrequirement of customers on personalguarantees, or on securities.Expatriate products which are availablefor migrant workers, including adebit card introduced this year incollaboration with the Sri LankaForeign Employment Bureau. NRFC,RFC, Savings Accounts and FixedDeposits are other products offered bythe Bank.The auto loan facility is available tomake the dream of owning a vehiclewith convenient repayment options.We also provide corporate loans andproject loans for large scale projects.Scale of the OrganisationAs at 31 December 2012, NSB employed3,128 full time staff, comprising 2,647permanent employees and 481 ascontact employees.As at end December 2012, NSB had219 branches across the country, mostlocated in rural areas where thereare fewer facilities for savings andinvestments. Through NSB branches,rural communities were rescuedfrom the clutches of illegal nancialorganisations, renowned to prey on themost vulnerable and the most gullible.Most of the branches are equipped withAutomated Teller Machines (ATM)which provides 24 hour accessibility tobanking.In addition, 22 off-site ATM machineswere installed islandwide. Currently,231 ATM machines are available withinthe NSB network. POS mobilisationscontinue to grow, as the devices in theeld grew in parallel with the expansionof the branch network. POS bankinghas proved to be an immense successin providing banking solutions toencourage savings at schools, weeklyand weekend fairs, and factories.The following gures, have beenextracted from the 2012 Statementof Financial Position to indicate thenancial scale of the Bank:2012Rs.MillionTotal Assets 509,694Total Equity 24,336Income 53,045Net Interest Income 13,531Prot after Tax 4,331Significant Changes during theReporting PeriodA new Chairman and Board Memberswere appointed, following the resignationof the previous Board Members.We continued expanding our servicesduring the year under review andopened nine new branches and 793new School Banking Units.We established new relationships withforeign exchange houses in Bahrain andSouth Korea, to support the Sri Lanka’sgrowing migrant worker populations inthese countries, by facilitating secureinward remittances. In Bahrain, wehave established a relationship withBaharain Financing Company andNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

144BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWin South Korea we have establishedlinkages with the Woori Bank.We established a new business partnershipwith Visa International and launched theNSB Visa Debit Card that will add to theconvenience of banking with NSB.Changes and improvements to ourinternal systems and procedurescontinued during the year. TheInformation System Reviews wereregularised, increasing efciency of theinformation systems, while the branchdata base cleanup process continued withthe assistance of university aspirants.We implemented a system of selectinga ‘star branch’ from among our branchnetwork to recognise outstandingperformance and to motivate employees.Awards and RecognitionWe are proud to announce that FitchRating awarded the Bank with an AAA(lka) rating for the 10th consecutiveyear. Our Annual Report continued toreceive many accolades during the year.NSB’s Annual Report for 2011, receivedrecognition from a number of differentsources in 2012. This is an indication ofthe quality of our reporting and level oftransparency. Our list of awards is givenbelow.1. Awards received for our AnnualReport League American CommunicationProfessionals Vision AwardCeremony• The Bank’s AR 2011 was amongthe top 50 Annual Reports ofthe Asia Pacic Region• Gold for Banks-Thrift andMortgage Finance Category International ARC Awards• Grand award for Sri Lanka’sBest Annual Report.• Gold for the Non TraditionalAnnual Report• Honors for the Chairman’sreview Annual Report Awards of Instituteof Chartered Accountants of SriLanka• 1st runner up for Award forManagement Commentary• Silver Award for FinancialInstitute Category• Certicate of Merit in thecategory of Public SectorBanking Institutions at SAFAbest presented Annual ReportsAwards.The Bank also won the award for theBest T+0 Contributor in SLIPS, atthe 10th Anniversary Celebrations ofLanka Clear (Pvt) Ltd. This award isan outstanding achievement by NSBas there were 27 participants, includingCommercial Banks, vying for the award.GOVERNANCE,COMMITMENTS ANDENGAGEMENTWe are Sri Lanka’s leading specialisedSavings Bank with a 100% governmentguarantee. As a public institution, NSBhas a responsibility towards the publicof Sri Lanka and is accountable to thepeople of Sri Lanka. As such, we believeour governance systems and internalprocedures should be oriented towardsmaximum accountability, complianceand transparency. Therefore, the BankNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

145BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWstrictly adheres to all relevant rules andregulation issued by the Government,Treasury and CBSL.Governance StructureThe Board of Directors is the highestgoverning body of the Bank. Otherthan two ex ofcio members allBoard members are appointed by theMinister of Finance and Planning.Responsibility for achieving the Bank’smandate through policy, strategy, actionand review, is vested in the Boardof Directors. Directors are chosenfor their probity, varied but relevantdisciplinary backgrounds and broadComposition of Main Boardexperience. The Board comprises anumber of professionals with differentcompetencies.For the most part, the Board exercisesoversight through a number ofcommittees. There are four BoardSub Committees. They are theBoard Audit Committee (BAC), theHuman Resources and RemunerationCommittee (HRRC), the NominationCommittee (NC) and the IntegratedRisk Management Committee (IRMC).They are constituted and mandated inaccordance with guidelines issued bythe CBSL and members are appointedby the Board of Directors. Eachcommittee is governed by a foundingcharter. Board Committees meetquarterly, or at intervals specied bytheir specic charters.The CEO/GM is the highest executiveofcer and he reports directly tothe Chairman and the Board. Thenext level of authority is the Bank’sCorporate Management and ExecutiveManagement.Please refer the Corporate Governanceand Risk Management sections in pages54 to 135 of this Annual Report formore information on NSB’s governancestructure.Non-ExecutiveMembersWorkingDirectorIndependentDirectorsNonIndependentDirectorsGenderAgeMale Female Below 60 Above 60 yrsyrsMain Board1 Mr Sunil S Sirisena M 2 Mr S T Abeygunawardana M 3 Mr P A Abeysekera (Upto 28.02.2013) M 4 Mr R M P Ratnayaka M 5 Mr D L P R Abeyaratne M 6 Mr Lionel P Fernando M 7 Mr Priyantha Jayawardena M 8 Mr Sumith Wijesinghe M NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

146BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWCommunicating with the BoardShareholdersAs a public institution, the Governmentof Sri Lanka is the shareholder ofNSB. On behalf of the government,the Treasury maintains ongoingcommunications with the Bank. Arepresentative from the Ministry ofFinance and Planning is an ex-ofciomember of the Board who serves toensure that there is a dialogue betweenthe Treasury and the Bank. The Banksubmits periodic reports to the Treasuryand also complies with requests for adhoc reports and updates. In addition,the Board of Directors and topmanagement maintain a continuousdialogue with ofcials of the Treasury.EmployeesThe Bank maintains open communicationlines with employees to ensure smoothoperations. In addition, the Bankalso provides specic mechanisms ofcommunications between employeesand Board. To ensure smooth ow ofcommunications, the General Managerrepresents all employees at the Board andparticipates at Board meetings on behalfof employees, while Additional GeneralManager, Senior Deputy GeneralManger and all other DGMs have accessto the Board on matters under theirpurview. For the purpose of expressingemployees’ views on operational andother matters, managers’ conferencesare held within reasonable intervalsand all Board members participate atthese meetings. The Bank has ve tradeunions representing employees and theseunions can meet the Chairman andBoard members on request regardingmatters of concern. Employees also havea conduit of communication through theWorking Director, who is available at theBank at most timesLinkage in CompensationThe Bank’s governance body andCorporate Management are notsubjected to individual targets.However, the Bank’s annual targets arespecied in the Strategic Business Plan,Annual Budget and Annual ActionPlan. Therefore, bonuses are decidedon the overall achievement of the Bankand its performance.Conflict of InterestProcedures to avoid conict of interestin the dealings of the Board of Directorsand key management personnel weredeveloped and approved in 2011, andrevised in 2012. In addition, all relatedparty transactions are monitored bythe Board Secretary during Boardproceedings and transactions aredisclosed. A Compliance Ofcer hasalso been designated to review andensure the compliance requirements ofstatutory bodies.Eligibility of Board MembersAs required by the NSB Act, ve ofthe seven Directors of the Bank areappointed by the Minister of Financeand Planning. Appointees must haveexcelled in various disciplines such asaccountancy, law and marketing. Thesixth and seventh members of theBoard are appointed by the Secretary tothe Treasury (or his nominee) and thePostmaster General (or his nominee),respectively.The conduct of the Board is governed bythe Corporate Governance DirectionsNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

147BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWissued by the Central Bank of SriLanka and all employees are boundby an internal code of conduct and aGovernment oath.Vision, Mission, Values andObjectivesThe vision and mission statements ofthe Bank has been given on pages 4 and5 of this Annual Report. They reectour commitment to the core valuesand operating principles that drive andsustain us.At all times, we strive to: Deliver satisfaction to our customers,clients and partners: We are drivenby a passion to satisfy the nancialneeds of the Government, as well asour individual and corporate clients.We believe that disciplined executionwill lead to sustainable, long-termperformance Trust our team: We work togetheraround the country to meet theexpectations of all our stakeholders,striving always to be consistent andstraightforward in our interactions Embrace the power of our people:We value our differences andunderstand that diversity andinclusion are good for business andmake the Bank stronger Act responsibly : We are aware thatour decisions and actions often haveprofound effects on people’s lives,we hold ourselves accountable fordisciplined risk management andalways doing the right thing Promote opportunity: We arecommitted to helping each otherachieve our potential, to build abetter future for ourselves, customers,clients, communities and the countrywe serveManagement of Economic,Environmental, and SocialPerformanceProcedures have been establishedfor the Board to oversee the Bank’sidentication and management ofeconomic, environmental, and socialperformances, including relevant risksand opportunities, and compliance.These internal procedures includea code of conduct for dealers of theBank, an internal compliance policy,an internal risk management policy aninternal credit policy and a charter forperformance reviews of Committees.A Board approved HR policy andTraining and Development policy arealso available to strengthen humanresource management and training ofemployees.External processes include thepreparation of nancial statements inaccordance with SLAS & SLFRS anddirections and regulations of the CBSL.In addition, the Bank has obtained ISO9001:2008 certications for the CreditDivision.Processes for Evaluating BoardPerformanceThe Bank has clearly dened its vision,mission, code of conduct and rules andregulations for its operations. In addition,the economic, social and environmentalperformance of the Bank is reviewedperiodically by Board Sub Committeessuch as the BAC and IRMC and alsoNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

148BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWby high level operational committeessuch as the ALCO, InvestmentCommittee, Marketing Committee, ITSteering Committee and ManagementCommittee. The outcomes of thesereviews are reported to the Board. TheStrategic Business Plan, Annual ActionPlan and Annual Budget set out anumber of performance indicators andthese are periodically reviewed.Precautionary ApproachInternal audits are conducted to apre determined plan, after assessingassociated operational risks by theInternal Audit Division, which is headedby a DGM. A separate Risk ManagementDivision has also been established withinthe Bank. The methods of mitigatingrisk are explained in detail in the RiskManagement Report in page 104.The Compliance Division monitorsthe regulatory compliance of the Bankand corrective measurements are takenas a precautionary approach. TheBusiness Continuity Plan and DisasterRecovery Plan have been developed asa precautionary approach.External Initiatives Applicableto NSBNSB adheres to a number of externalrules and codes set by regulatory andstandard setting institutions. Theleading of these are the guidelines anddirections issued by the Central Bankof Sri Lanka, which is the nancialsector regulator of Sri Lanka. NSBis also subject to directions of theMinistry of Finance and Planning asthe sole shareholder of the Bank andthe government representative. TheBank adheres to LKAS & SLFRSguidelines and standards in preparationof Financial Statements. Our internalaudits are conducted according to thestandards set by the Internal AuditorsAssociation and in conducting systemaudits, we adhere to the requirementsof the Institute of System Audit Controland Assurance standards. In the area ofrisk management, we comply with Basel11 guidelines and generally acceptedrisk management principles. In additionour Credit Division has obtained ISO9001:2008 certication and adheres tothe ISO standards.Bribery & CorruptionNSB has always maintained a zerotolerance on bribery and corruption.We will not condone or knowinglyparticipate in any such acts that construebribery and corruption in any way.Corruption Risk AnalysisThe associated risk of branchesare evaluated according to the preestablished parameters and previousexperiences. Accordingly, branchesare assigned a high, moderate or lowrisk rating. The Annual Audit Planis developed accordingly, to mitigateassigned risks. Every branch is auditedonce in two years. The audit reportsare forwarded to the BAC. Follow upactions are being taken by the InternalAudit Division.Responses to CorruptionIn instances of fraud or corruptionan investigation is conducted and thendings are handed over to the HumanResources Division for disciplinaryaction.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

149BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWPublic Policy ParticipationThe Bank submits its proposalson the preparation of the nationalbudget. The Bank also contributedtowards the development of the IFRSimplementation road map of the CBSL.Political ContributionsThe Bank made no politicalcontributions during the year underreviewAnti-Competitive BehaviourThere were no cases of legal actions foranticompetitive behaviourComplianceThere were no nes or non-monetarysanctions imposed on the Bankfor noncompliance with laws andregulations apart from the restrictionsimposed as a result of TFC transaction.Membership in AssociationsNSB is an active member of severalassociations that advocate or helpshape public policy. In 2012, the Bankretained membership in the followingorganisations: The National Chamber ofCommerce of Sri Lanka Society for Worldwide InterbankFinancial Telecommunication Eurogiro Global PaymentCommunity Lanka Clear (Pvt) Ltd The Lanka Swift User Group World Savings Banks Institute (WSBI)Stakeholder EngagementAs a public entity, NSB engages dailywith diverse stakeholder groups. Thetable following lists the Bank’s formalstakeholders and the Bank’s method ofengagement with each group.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

150BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWStakeholder Topics discussed Method of ResponseShareholder: the - Contribution towards the Consolidated Fund- Annual ReportGovernment of Sri Lanka,represented by the Ministryof Finance and Planning- Ensuring compliance in Regulatory Reporting- Ensuring maintenance of Statutory Ratios (CapitalAdequacy, Liquid Assets etc.)- Assuring feasibility of network expansion- Annual Budget- Annual Action Plan- Media statements- Publications- Plans to launch and re-launch new products and existing - Interim Financial Statementsproducts.- Periodic updates- Strategies to maintain low NPLs- Ensuring compliance with laws and regulations- Preparation of Strategic Business PlanCustomersSuppliers- Satisfaction on rendered services- Facility of making utility payments- Due respect and recognition in receiving service.- Accessibility to relevant and reliable banking information(interest rates, lending rates)- Awareness on promotional activities- Facilitates for branchless banking- Registration of suppliers- Procurement opportunities- Delivery of contractual obligations- Branches- Ithurum Ayojana Kawa- School Banking Units- ATMs- Internet Banking- Mobile Banking- POS- Call Centre- Surveys on Customersatisfaction- Corporate Website- Procurement Procedures- Meetings- Site inspections.- Product demonstrationsNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

151BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWStakeholder Topics discussed Method of ResponseEmployees, Trade Unionsand Executive AssociationsNSB has ve trades unionsand a special committeeattends to employeegrievances and reports tothe Board.Regulators and StatutoryBodies- Central Bank ofSri Lanka- Department of InlandRevenue- Other Governmentorganisations- External Auditors- Professional organisationsand business community- Collective Agreements.- Remuneration- Performance Bonus- Staff welfare activities- Future plans and strategic plans- Dened benet and contribution plans- Training and other facilities- Disciplinary actions- Special appraisals- CBSL regulations and directives- Basel II implementation- IRD tax regulations- Sri Lanka Accounting Standards and Sri Lanka FinancialReporting Standards by ICASL- Banking license fees- Labour regulations- Marketing and promotional campaigns- Awards and accolades- Negotiate collective agreements- Performance appraisals- Internal news letter- Special Announcementsthrough public address system- Circulars published in theIntranet- Training programmes- Ad hoc meetings- Periodical returns- Review meetings- Special Events- Annual Report- Directions and Circulars- Interim Financial Statements- Periodical returns toregulatory bodies.- Interviews and meetings- Specialist opinions- Participation in competitions- Corporate websiteNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

152BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWStakeholder Topics discussed Method of ResponseOther interested parties - Operational Performance of the Bank- Financial performance of the Bank- Recruitment from communities- Launching and re-launching products and services- Scholarships granted by Banks- Social responsibility activities carried out by the Bank.- Annual Report- Promotional advertisements- Sponsorships- Media statements- Public relations activities- Recruitment advertisementsECONOMIC PERFORMANCEINDICATORSEconomic ResponsibilityAs a public nancial institution dedicatedto sustainable business operations, wetake our economic responsibilities veryseriously. Our economic goals, over thelong term and short term, are dened inour Corporate Business Plan, StrategicBusiness Plan, Budget and Action Planand these goals are communicated toour staff through meetings.We have not only focused on domesticsavings, but have also supportedinward remittances and NRFC & RFCdeposits for Sri Lankans wherever theyare at work. As a trusted, guardian ofincomes of migrant workers, NSBhas established a network of globalrelationships with over 35 prominentexchange houses around the world,including Money Gram International &the Eurogiro fraternity.NSB effectively manages its loans andadvances portfolio while concentratingon the requirements of rural areas andNorth & Eastern Provinces. HousingLoans, Personal Loans, AgriculturalLoans, Pawning and Project Financingare the main categories of this portfolio.Despite the complex nature, thedevelopment of infrastructure isextremely important to a developingthe country. Thus, to move ahead inthe modern world, and to enable rapiddevelopment and provide better accessto essential services for the people, NSBprovided nance for infrastructureprojects, through corporate lending.The Bank provides nancial products tounder-served populations in rural andremote areas and offers accessible andaffordable services to cater to the needsof low income population.The Bank is very close to the people’sheart and the undeniable truth is thatalmost all Sri Lankans have learnedtheir ABCs of savings from NSB.While catering to the needs of ruralpeople, the Bank has taken measuresto be updated with the highly volatiletechnological advancements of theworld. Our internet Banking and SMSBanking facilities added contemporaryNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

153BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWconvenience for people able to, orwishing to, manage their bankingtransactions on the move, or at home.We have also introduced bill paymentfacilities, building one-stop-shopconvenience through our network. Weare connected to major utility suppliers,telecom providers and major insurancecompanies.We conducted research on productsoffered by us to re-design the products inorder to maximise customer satisfaction.As part of our economic responsibilities,we contribute to government incomethrough Income Tax, VAT andcontributions to the Consolidated Fundin the form of dividends. Over 90%of our investment portfolio representsinvestment in government securitiesand we ensure the availability of fundsfor national development initiatives.NSB also supports the national economythrough equity investments in differenteconomic sectors such as banks andnancial institutions, power and energy,“Over 90% of ourinvestment portfoliorepresents investment ingovernment securitiesand we ensure theavailability of funds fornational developmentinitiatives.”telecommunications and constructionand engineering.In making our banking services availableto the public, we pay special attention torural areas and the North and East.Direct Economic Value Generatedand DistributedThe following table shows economicvalue added through the activities ofthe Bank in 2012.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

154BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWECONOMIC VALUE ADDED STATEMENT2012 2011Rs. ‘000 Rs. ‘000Invested EquityShareholders’ Funds 24,335,791 23,052,483Add : Cumulative Loan Loss Provision/ Provision for Impairment 625,773 495,46224,961,564 23,547,945EarningsProt after Taxation 4,331,342 6,061,862Add : Loan Losses and Provisions 130,935 142,6324,462,277 6,204,494Cost of Equity based on 12 months Weighted AverageTreasury Bill Rate plus 1.8% for the Risk Premium 13.90% 9.43%Cost of Average Equity 3,469,657 3,983,923Economic Value Added 992,620 2,220,571NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

155BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWSOURCES AND DISTRIBUTION OF INCOME2012 2011Rs. ‘000 Rs. ‘000Source of IncomeInterest 52,673,261 47,095,745Fee & Commission 221,709 240,768Other Income 150,089 (791,869)Total 53,045,059 46,544,644Utilisation of IncomeEmployees - Salaries and Other Payments to Staff 4,077,501 4,139,657Depositors Interest 39,166,973 29,322,652Impairment for loans and other losses 130,935 142,632Other Expenses 2,261,322 2,120,54145,636,731 35,725,482Net Income before Government Taxes and Levies 7,408,328 10,819,162GovernmentVAT and Income Taxes 3,076,986 4,757,300Consolidated Fund 2,823,245 3,212,6715,900,231 7,969,971To Reserves 1,508,097 2,849,191Total 53,045,059 46,544,644NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

156BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWVALUE ADDITION AND DISTRIBUTION2012 2011Rs. ‘000 Rs. ‘000Value AdditionIncome from Banking Services 52,673,261 47,095,745Cost of Services (39,142,492) (29,296,099)Value Added by Banking Services 13,530,769 17,799,646Non-Banking Income 347,317 (577,654)(Provisions) / Reversal 130,935 142,63214,009,021 17,364,624Distribution to EmployeesPersonnel Costs 4,077,501 4,139,657To Government :Income Tax 1,837,917 3,192,819Value Added Tax 1,239,069 1,564,481Contribution to the Consolidated Fund 2,823,245 3,212,6715,900,231 7,969,971Retained for Expansion and Growth :Earnings 3,674,396 4,840,496Depreciation 356,893 414,5004,031,289 5,254,99614,009,021 17,364,624NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

157BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWClimate Change ImpactsThe Bank is not directly exposed toeconomic impacts arising from climatechange. However, the Bank extendsfunding facilities towards agriculturalloans and pawning advances foragricultural purposes which may beaffected by climate changes.Government AssistanceThe Bank did not receive any nancialassistance from the Government duringthe year.However, the Bank has a loan schemefor Government employees, to purchaseproperty and construct houses, atconcessionary rates. The interest ratedifference between the existing rate andconcessionary rate, is reimbursed byGovernment.Hiring from the Local CommunityAll employees are recruited from citizensof the country and when appointingagents in foreign countries, priority isgiven to Sri Lankans who are residingin those countries.Supporting Locally-BasedSuppliersThe procurement procedure of theBank is governed by the GovernmentProcurement Mannual. The Bankrecognises the local suppliers bysourcing from locally based suppliers asits maximum possibility.INDIRECT ECONOMICIMPACTSNSB, through its activities has anindirect economic impact on variousstakeholder segments, in additionto direct economic impacts. Theseare explained in detail under SocialCommunity Care on page 165.Extent of Indirect EconomicImpactsNSB‘s CSR activities have wide indirectimpacts on society and particularlythe younger generation. One of ourmain aims is uplifting the educationand knowledge of the next generationand many of our CSR projects havebeen conducted with this in mind. Inaddition, the Bank also supports thewelfare of vulnerable groups such as theelderly and war heroes, and religiousevents that have wide social impacts.ENVIRONMENTALPERFORMANCE INDICATORSEnvironmental ResponsibilityNSB’s operations do not have directadverse impacts on the environment.However, as a responsible public entity,we are conscious of the need to preservethe environment and natural resources,for future generations. Therefore,NSB has been actively involved inresource conservation by using lessprinting of paper, reducing wastageof paper, using teleconferencing andtelecommunicating whenever possible,online training and developing moreenergy efcient ofce spaces.Waste paper is collected and handedover to the Paper Corporationfor recycling. Some of our newlyconstructed branches are equippedwith rainwater harvesting facilities.Trees are grown at NSB branchesto conserve greenery and create anNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

158BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWattractive atmosphere. We emphasiseenvironmental regulatory complianceand minimum environmental impactwhen constructing NSB branches.Maximum efforts are taken to avoiddestruction of the natural environment,by avoiding the cutting of trees andother types of environmental damages.In addition the Bank obtains legalclearances from local authorities beforegranting housing loans.Energy SavingsWe use CFL energy saving lights to saveenergy and VRV type A/C systemshave been introduced to new branchesto save energy while ensuring thecomfort of staff and customers. We havetaken a decision to limit the use of airconditioning to normal banking hours,to reduce electricity consumption andwe have restricted our working hoursduring holidays also to save resourcessuch as water, fuel and electricity Weuse only CFC-free air conditioningunits in all our ofces to avoid adverseenvironmental impacts.“We have conqueredhorizons and brokenboundaries and all dueto a team that remainshighly motivated.”Water UseThe average consumption of waterat our Head Ofce is 1,650 units permonth and we are focused on conservingwater by reducing wastage whereverpossible. We have also ensured that ourwaste water disposal is done in a propermanner to avoid any possible harmfulenvironmental impacts. Our stormwater disposal system is connected tothe public storm water drainage system,while our waste water is disposedthrough standard soakage pits insidethe premises. These measures ensurethe proper disposal of waste water.Mitigating the EnvironmentalImpact of Products and ServicesAs a bank, our products and serviceshave no direct impact on theenvironment. We produce no goodsthat need to be transported exceptstationery, xed assets and promotionalmaterials for marketing campaigns,and the environmental impact of this isnegligible. Our business premises, also,are always selected and constructed inorder to minimise their impact on theenvironment.Retail lending is also subject to similarenvironmental considerations. TheBank’s vehicle loan scheme is conguredto favour the purchase of vehicles lessthan three years old, since such vehiclesproduce lower emissions and are moreenergy efcient. Housing loans, too,are only approved after the affect ofthe building and its construction on theenvironment, have passed assessment.Finally, the Bank provides supportthrough philanthropic and commercialcommunity-based activities, for effortsto make houses and buildings moreenergy-efcient.Impact of TransportationOur xed assets and promotionalmaterials are for the most part,directly transported to the branches byNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

159BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWsuppliers. Stationery and employees aretransported from the Head Ofce to thebranches for ofcial visits. Other thanthis, employees using their own modesof transport.Fines and SanctionsThe Bank did not face any nes ornon-monetary sanctions for noncompliancewith environmental lawsand regulations.OUR TEAMThe backbone to our success, no task istoo big, too small or too impossible. Wehave conquered horizons and brokenboundaries and all due to a team thatremains highly motivated. In recognisingthat the team must be nurtured andstrengthened, equipped with tools, skillsand knowledge to meet the growing andemerging challenges that are boundto ensue in the marketplace, our teamphilosophy is multi-faceted. Throughfocused training and developmentworked through on-the-job, off-the-job,internal and external programmes, inaddition to identifying leaders, specialistareas and expert competencies andhoning these, our team has proved thatit is truly dynamic team.LABOUR PRACTICESAND DECENT WORKPERFORMANCE INDICATORSCreating a Conducive WorkEnvironmentThe Bank’s HR Policy provides Bankemployees with guidelines on the culture,work ethics, acceptable/unacceptablebehaviour, norms and standardprocedures of the Bank, ensuringoperational efciency, addressing the HRmission and thereby assisting the Bank inachieving its strategic objectives.The HR vision is to build a work forcefocused on individual and business needsto achieve organisational excellence forsustainable competitive advantage. TheHR mission is to proactively supportNSB’s business strategy through arelentless focus on organisationalexcellence, providing and retaining theright people at the right place to meetthe business needs.The HR objectives of the Bank are; To comply with rules and regulationsand guidelines of the regulatorybodies of NSB To develop the Bank’s humanresources to gain a competitive edgein the banking industry To ensure effective utilisationand maximum development ofhuman resources while aligning theindividual goals of the employeeswith the Bank’s strategic objectives. To achieve and maintain highmorale of employees and improvetheir working conditions and jobsatisfaction To be ethically and sociallyresponsive to the needs of societyTo meet these objectives, NSB hires staffwith the right attitude and professionalskills and helps them develop a longterm relationship with the Bank. Everynew recruit that joins NSB is considereda member of the NSB team and acomponent in achieving the Bank’soverall goals.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

160BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWTotal Work ForceWe believe our workforce is our strengthand we invest in our workforce in manydifferent forms to ensure their growthand development and the Bank’scompetitiveness. Currently we havea full time workforce of 3,128 and anoutsourced cadre of 945 that are thebulwark of the Bank.Employment TypeNo. ofEmployeesFull Time 3,128Outsourced 945Employment TypeOur workforce can also be consideredin terms of permanent employees andcontract employees. As at end December2012, the Bank had a permanentemployee cadre of 2,647 and contractemployees numbering 481.Employees by Bank branchOur branch network has beenclassied into seven zones for easeof administration respectively. Ouremployees are distributed within thisbranch network as shown in the tablebelow for optimum level of efciencyand productivity.ZoneNo. ofBranchesNo. ofEmployeesCentral 31 255Colombo 33 441Wayamba 37 380Eastern 27 192North 28 211Southern 33 306Kalutara 30 295However the zonal system has beenchanged to a regional system fromJanuary 2013.management team of 9 represents0.30% of our total workforce, whileour executive and middle managementrepresents 0.31% and 4.26% of theworkforce, respectively. A majority ofour employees (50.92%) fall within thecategory of Banking Assistants.CategoryNo. ofEmployeesPercentageCorporateManagement 9 0.30%ExecutiveManagement 9 0.31%MiddleManagement 114 4.26%JuniorManagement 447 16.88%Supervisors 581 21.94%BankingAssistants 1,825 50.92%Others 145 5.36%Total 3,128Employment TypeNo. ofEmployeesPermanent Employees 2,647Contract Employees 481Employees by EmploymentCategoryOur dedicated workforce pulls togetheras a team to ensure the success of theBank at all times. The Bank’s corporateEmployee TurnoverLabour turnover during the year wasinsignicant.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

161BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWEmployee BenefitsWe believe employee satisfaction isan integral element of corporatesustainability. Therefore, we ensuremany welfare benets for our employeeswhile also focusing on attracting thebest talent and skills.Non Financial Benefits Grantedto EmployeesPermanent employees enjoy a range ofbenets from the Bank. These include astaff medical scheme, loan schemes atconcessionary rates, overseas and localtraining opportunities and the use ofholiday bungalows at concessionaryrates.The Bank also recognises the academicand sports achievements of the childrenof employees. On Annual AchieversDay, children with the best results in theGrade 5 Scholarship Examination, GCE(O/L), GCE (A/L) and outstandingperformance in sports and other areasare recognised and rewarded. Further,at this event, long serving employeesare recognised. To strengthen employeerelations, the Bank hosts an annual“Employees benefi tfrom a strong medicalwelfare scheme thatcontributes to ahealthier workforce.”sports day and special events like VesakBhakthi Gee and Christmas carols.Medical FacilitiesEmployees benet from a strongmedical welfare scheme that contributesto a healthier workforce. An EmployeesMedical Assistance scheme is availableat NSB where employees and theirfamilies can obtain medical assistance.The scheme covers a wide range ofsituations and includes routine medicalexpenses, specialist charges, dental care,eye care, hospital charges, continuedmedication for critical illnesses andspecial treatment for critical areas.Compensation Benefit Scheme forPersonal Accidents and DeathsNSB maintains a highly advantageouscompensation scheme for employeesand their dependents to be used inthe case of accidents, illness or naturalcauses, that may result in bodily injuryor death. To get the compensationunder this scheme it is not necessary forthe victim to be at work at the time ofthe accident.Labour RelationsAt NSB, we believe in mutualcooperation between employees andmanagement for sustainable and smoothday-to-day operations. Therefore,we adhere to International LabourStandards (ILS) in our operations. ILSembraces numerous aspects of labourmarkets, ranging from minimum wagesand equal pay, to health and safetyregulations. These standards can beclassied into six main categories.a. Respect for fundamental humanrightsb. Protection of wagesc. Employment securityd. Working conditionse. Labour market and social policiesf. Industrial relationsNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

162BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWThe International Labour Organisation(ILO) which is the internationalorganisation responsible for drawingup and overseeing internationallabour standards, brings togetherthe representatives of governments,employers and workers to jointlyshare policies and programmespromoting decent work for all. NSB,as a Government entity, is responsiblein complying with the Conventions ofthe ILO that are ratied by Sri Lanka.NSB complies with the InternationalLabour Standards in relation to forcedlabour, freedom of association andright to organise, collective bargaining,equal remuneration, discriminationin employment, minimum age foremployment and hours of work,maternity protection, workmencompensation etc. and has consideredthem in its policies and procedures.Employees Covered by CollectiveBargaining AgreementsAll permanent employees, comprising90% of all staff, are covered by collectiveagreements.“NSB’s trainingprogrammes promotediversity and inclusion,facilitate careerdevelopment and pointthe way to better worklifebalance.”Minimum Notice Period(s)Regarding Operational ChangesThe collective agreement does not, coverminimum notice periods regardingoperational changes. However, tradeunion ofcials have the opportunity ofdiscussing about the changes with themanagement.Health and SafetyThere is no specic threat to employees’health and safety at NSB.An in-house medical centre is availablewithin the head ofce premises which isoperated by a leading private hospitalfrom which employees can obtainfree medical treatment. Two MedicalSpecialists are also available in thismedical centre.Injuries and FatalitiesThere were no injuries, occupationaldiseases or fatalities at NSB during theyear. We have maintained a Zero LostWorkday Case environment in NSB.Education About Serious DiseasesIn addition, the in-house mobilemedical clinics conducted by leadingprivate hospitals were organised foremployees during the year. Awarenesscampaigns have been conducted toprevent from dengue.Health and Safety in CollectiveAgreementsAs described earlier employees arefacilitated with medical assistancescheme by which the terms areprescribed in collective agreement.Recruitment and RemunerationWe maintain transparent recruitmentprocedures and work on reputedNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

163BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWguidelines culled from renowned HRorganisations. While, all positions areadvertised and every applicant given anequitable chance of gaining employmentwith NSB, we also headhunt for positionsrequiring specialist competencies andskills, within the marketplace andbeyond. Remuneration is based on laiddown guidelines and on par with marketparameters and we do not condone inany form, favouritism or discriminationin our recruitment or remunerationpolicy. It must be noted that wages aredecided through collective agreementssigned with the Bank’s trade unions.These wages are in line with the mainGovernment banks. The collectiveagreements are revised every three years.Lifelong LearningThe Bank’s training programmesare continually updated to meet thechanging needs of the workforce andthe market. NSB’s training programmespromote diversity and inclusion,facilitate career development and pointthe way to better work-life balance.During the year, as a part of the Bank’sphilosophy of life long learning, theBank conducted a number of trainingprogrammes in line with the Bank’shuman resource development policiesand training needs. In-house trainingand regional training were provided formany employees. Foreign training wasprovided where necessary for otherswho required specialised training.In addition, many employees arealso following long-term educationalcourses including diplomas, and degreecourses, such as M.Sc. and MBAs,while working at the Bank. The Bankencourages such academic pursuits aswe believe education is part of lifelonglearning and it is never too late toexpand an individual’s knowledge andskills. In addition, a number of shortterm training programmes, seminarsand workshops were conducted duringthe year.Performance ReviewsAll employees receive regularperformance and career developmentreviews as a means of furtheringindividual career aspirations andaligning them with the Bank’s vision,mission and goals.Salary DifferencesNSB prides itself on being an equalopportunity employer and maintainsremuneration and benets at the samelevels for both men and women.Coverage of Defined BenefitPlansThe dened benet plan for NSBemployees consists of a retirementgratuity and pension scheme. Anactuarial valuation of the plan iscarried out once every three years. Thedened contribution plan, in keepingwith standard Sri Lankan businesspractice, involves contributions to theEmployees’ Provident Fund (EPF) andEmployees’ Trust Fund (ETF). For moreinformation on these plans, please seethe Statement of the Bank’s AccountingPolicies on page 216. Employees pension schemeThe Bank established a noncontributorypension schemein 1980. This is an approvedscheme for pension payments forpermanent employees who joinedNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

164BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWbefore 1 October 1995. The Bank’scontribution to the pension fundis made monthly at the rate of20% on gross salary. In total, 974employees are entitled to the scheme.Employees who joined the Bank after1st October 1995 and opted to bethe members of the contributorypension scheme must contribute tothe fund at the rate of 13.5% of theirgross salary, every month. In total,seven employees are entitled to this. GratuityThe Bank has made provisions forgratuity payments for employees whojoined the Bank after 1st October1995 and did not want to join thecontributory pension scheme.The Bank conducted an actuarialvaluation on these retirementobligations at the end of 2012.Defined Contribution PlansThe dened contribution schemesare the EPF and ETF. The Bankcontributes to the ETF on the basis ofgross salaries of employees. For furtherinformation please refer Note no. 2.6 ofthe Financial Statements on page 216.HUMAN RIGHTS AND EQUALOPPORTUNITYSafeguarding Human RightsNSB provides equal employmentopportunities for all persons regardlessof race, color, religion, age, gendermarital status, national origin ordisability. Recruitment, hiring,compensation, benets, transfers,training and development, educationalassistance, recreational programmes,and promotion of individuals in alljob classications are conductedwithout discriminating on race, colour,religion, nationality, age, gender andphysical disability, except where abona de occupational qualicationexists. Employment and promotionaldecisions are made in such a manneras to further the principle of equalemployment opportunity, based uponselection criteria that is job related.The Bank is committed to providing awork and learning environment that isfree of any kind of harassment. NSBconsiders harassment in all formsto be a serious offence. Vendors,visitors, customers and guests too,are prohibited from harassing otherindividuals while in the Bank’spremises. NSB will not make a decisionabout hiring, promotion, discharge,compensation, benets, training orany other aspects of employment,based on an individual’s disability, ifthe concerned individual is qualiedfor the job. The Bank is committed toprovide a safe and healthy work placefor all employees. Management andall employees working in the Bankshare the responsibility for the successof the safety and health procedures attheir respective branches/ divisions.In addition, as a responsible employer,NSB adheres to the InternationalLabour Organisation’s conventionon upholding the right to freedom ofassociation of all NSB employees.Human Rights TrainingDuring the year, six employees who aremembers in trade unions, participated inNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

165BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWa training programme on national andinternational labour law compliance.Cases of DiscriminationThere were no reported incidents ofdiscrimination during the year.Risks to Freedom of AssociationFreedom of association and collectivebargaining is fully facilitated and werenot under threat during the year.The following unions are recognisedand active in the Bank; Ceylon Bank Employees’ Union Sri Lanka Nidahas SevakaSangamaya Jathika Sevaka Sangamaya Executive Ofcers’ Association All Ceylon Bank Employees’ UnionChild LabourThe Bank eschews child labour or anyfeature relating to such practices anddoes not recruit employees under theage of 18 years.“We believe thateliminating corruptionis a social responsibilityand as such, we haveimplemented stringentinternal controls toprevent bribery andcorruption.”Forced and Compulsory LabourAll employees work voluntarily andthere are no operations with signicantrisk of forced labour.SOCIAL AND COMMUNITYCAREResponsibility to SocietyAs one of largest publicly ownednancial institutions in the country,we believe strongly in eliminating anyavenues for corruption and irregularitiesat our organisation. We believe thateliminating corruption is a socialresponsibility and as such, we haveimplemented stringent internal controlsto prevent bribery and corruption.Our risk management mechanisms areaimed at minimising the risk of bribery,corruption and fraud and we haveestablished operational risk monitoringmechanisms and Liaison Ofcers havebeen appointed in all Branches andDivisions, reporting directly to theHead of Risk and Compliance (HRC)in respect of risk and compliance.As a public institution, we believe inproviding as much benets as possibleto the public of Sri Lanka. Therefore,we have developed a variety of productsto serve the needs of many differentsocial groups ranging from infants tosenior citizens.Our Ithurum Ayojana Kawa savingsscheme for instance, is aimed at helpingthe low income segment enter the formalbanking systems and to encouragethem to save. A concessionary housingloan scheme has been introduced bythe Bank for academic as well as nonacademic staff at universities.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

166BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWHowever, it must be noted that whileour products and services are alwaysfocused on ensuring sustainability ofour various stakeholders, we are verymuch aligned to maintaining our CSRplatforms on Developing Education,Women and Health, Uplifting WarHeroes, Assistance to the Elderly andNational Unity. Given below are thenotable initiatives implemented underthese ve platforms for 2012.Developing EducationOptimising Potential : Each year, NSBconducts Hapan Scholarship seminarsfor Grade Five students, throughout thecountry. The free seminars are focusedon Government examinations and arefacilitated by well-known personalitiesto help school children develop theiracademic skills, personality andattitudes. During the year, thirtyseminars were conducted.As has been done continually from2008, we also conducted 52 GradeFive Scholarship seminars under theMathulowa Dinumata Nena GunaWadamu programme, organised andconducted by “Tharunyata Hetak,”held islandwide, including the Northand East, South, Central and Westernregions, in Sinhala and Tamil media.In addition, NSB continued its IthuruMithuru seminar series for Ordinarylevel Examination students this year too.The popular Navayugaya Magazineand NSB held seminars islandwide,utilising the expertise of experiencedresource personnel as a means ofknowledge enhancement.Rewarding High Achievers :Recognising the academic potential ofstudents who are high achievers at theGrade Five scholarship examination,the top ten performers in each districtare rewarded. The ceremony was heldat Temple Trees, while other studentswith merit results were recognised atspecial ceremonies at the NSB branches.A scholarship fund was establishedin memory of the renowned Sinhalascholar, Kumarathunga Munidasa,to recognise the best performer at theG.C.E. Ordinary Level examination’sSinhala language exam. The studentis awarded a laptop and a depositof Rs.100,000.00 in aid of highereducation. The Bank awarded thedeposit for the said purpose.Financial Assistance to FurtherKnowledge : The Ithru MithuruEgenuma loan scheme was introducedto provide nancial assistance tostudents for further education andteachers for educational purposes.Students who have enrolled for higherstudies in a recognised local or foreignuniversity, college, academy or aneducational/professional institutionare eligible for loans under this scheme.Loans are granted for academic or/andprofessional higher studies, researchstudies and any studies for innovativeexperiments either in Sri Lanka oranother country. The Bank contributedRs.100,000 towards the Dehiwala andRatmalana Development Foundationfor its an annual donation of exercisebooks for under privileged children.Promoting the reading habit : Underthe guidance of H.E. the President, theNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

167BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWmembers of the President’s staff haveinitiated a voluntary project to promotereading among schoolchildren. As manyschools lack libraries, or the existing onesare ill-equipped, each school was donated250-300 books of educational andliterary value, suitable for children up to14 years of age. The donation enabledschools to either start new librariesor supplement the existing resources.The Bank spent Rs.1,000,000.00 onsupporting this initiative.Women and HealthGiven the long distances that midwivestravel most often in difcult terrain,NSB extended loans to GovernmentMidwives to purchase motorcycles andscooters, under a personal loans scheme.The Bank extended a sponsorship ofRs.100,000.00 towards developmentprogrammes to uplift rural women,organised by the Empowerment ofRural Women Development Fund,aligned to the Mahinda Chinthanavision for future.“Recognising the selfl essservice rendered by SriLanka’s war heroes,NSB established aWar Heroes ParentsProtection PassbookProgramme.”With our Hapan Children’s SavingsAccount as the title of the project, werenovated the children’s ward at theMedirigiya Base Hospital as a CSRinitiative.The visually impaired were alsosupported by NSB as it nancially fundedan awareness newspaper supplement onEye Donation Day organised by the SriLanka Eye Donation Society.Uplifting War HeroesRecognising the seless servicerendered by Sri Lanka’s war heroes,NSB established a War Heroes ParentsProtection Passbook Programme,while also contributing Rs.1 Millionto a fellowship event organised by theArmy Benevolent Fund, in aid of theRanawiru Abhimansala. This eventraised funds for the care and upkeepof disabled war heroes and to providehousing for them.Assistance to the ElderlyIn collaboration with Helpage SriLanka, an approved charity, NSBsponsored seven mobile medical campsconducted for the elderly persons in SriLanka, residing mainly in rural areas.The seven camps held in Batticaloa,Mahiyanganaya, Monaragala,Badulla, Kantale, Trincomalee andKahatagasdigiliya involved a totalinvestment of nearly Rs.500,000 andextended to identication of cataractsand donation of spectacles.National UnityWe strongly believe that Sri Lanka’sstrong foundations are built uponits multi-cultural multi-ethnic multireligiousidentity and strive to ensurethat these identities are preserved,while making them a tool that couldencourage national unity. NSB donatedNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

168BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWRs.1 Million towards the BuddhaRashmi Vesak celebrations, organisedby the President’s Ofce at theHunupitiya Gangarama Temple.This national unity philosophy wasfurther extended when NSB extendeda sponsorship of Rs.100,000 towards afund established by the Sama Viharayawhich aims to instigate projects aimedtowards cultural unity and communitydevelopment.CUSTOMERS – OUR PARTNERSBeing a savings bank that remainsvery cognizant of its responsibility ofinculcating the savings culture amongthe people of Sri Lanka, our customershave truly been the tangible exampleof our success. With a customer baseof 17.4 Millions comprising all socialstrata, multiple demographics, cultural,religious and ethnic backgrounds, ourcustomers have embraced the NationalSavings Bank as a lifelong partner. We,in turn, must be conscious and sensitiveto this loyalty and condence and have,in our very long history, ensured thatour products reect our customers’“...we make sure thatall our product andservice brochures are inavailable in all threelanguages of Sinhala,Tamil and English.”aspirations. We have developed productsthat give them the impetus to grow;to nurture their lifestyles; to ventureinto entrepreneurship and to improvetheir accomplishments. We have addedcustomer service excellence into thevery core of our customer interactionsand thus, what you see today is a Bankthat not only thrives on being thesavings partner for Sri Lankans, but alsoone that is exible, efcient, responsiveand very proactive.Our extensive product portfolio hasample examples of the customer ethoswe espouse, from infants, to youngpeople, to senior citizens; to migrantworkers and women; from housingloans, auto loans, agricultural loansto project loans; to infusing IT intothe very heart of the banking process,our products, coupled with exemplaryservice is the key to our success.NSB 24/7 Call Center enablescustomers to contact us more easily,have quicker replies to their queries,gain valuable feedback and be used as amarketing tool to give more informationof our products and services to callers.Please refer to page 257 for informationof our products and services.PRODUCT RESPONSIBILITYPERFORMANCE INDICATORSNSB conforms to all relevantregulations with regards to the provisionof products and services to customersand also follows high ethical standardsin ensuring that customers get themaximum benets of our productsand services. We do not resort tounethical advertising and/or marketingpractices, and we ensure customers arewell informed about our products andservices at the point of transaction. Tofurther enhance our ability to meet ourNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

169BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWcustomer expectations, we conductsurveys and research on customerbehaviour and customer opinions. Thisinformation is used to improve ourproducts and services.Product and Service LabellingWith the view of ensuring that all SriLankan citizens, regardless of ethnicgroup, are able fully understand andaccess our products and services wemake sure that all our product andservice brochures are in available in allthree languages of Sinhala, Tamil andEnglish. This includes information onproducts, interest rates, maturity periodand contact details.ComplianceThe Bank did not face any instancesof incidents of non-compliance withregulations and voluntary codesconcerning product and serviceinformation and labelling.Practices on CustomerSatisfactionThe Bank conducted surveys on customersatisfaction, customer behaviour andproduct awareness during the year.During the year we conducted aCustomer Satisfaction Survey ascustomer satisfaction is an importantindicator of how a customer feelsabout our Bank and an interpreter ofwork behaviour, such as organisationalcitizenship. Therefore, a customersatisfaction survey was carried out toidentify the level of customer satisfactionwith NSB service. This information willbe used to improve our customer services.The Research Division carried out anexternal Product Awareness research toidentify the level of awareness of NSBproducts among people. The survey wasconducted at the Maharagama YouthCenter, by targeting the seminar heldfor grade ve students on 16th August2012. A customer behaviour study wasconducted which examined the reasonsfor customers withdraw their savingsfrom savings accounts. The study wasconducted at selected branches, duringthe months of August and September.The objective was to reduce savingsextractions by understanding thereasons for withdrawing savings. Aproduct analyses was conducted tomeasure NSB’s product performances.This information will be used to furtherenhance the quality of our productsand services.Other initiatives aimed at customersatisfaction included a study on NSBAccounts Circulation, the Win WinThegi Warusa Campaign, the HapanDeposit Expansion and the NSBAurudu Wasana programmes. Studieswere also done on the performance ofHapan, the children’s savings accountand Sthree, the savings accounttargeting women. A situation reportwas developed on the Hapan accounts.Marketing CommunicationsNSB applies ethical Banking conceptsin all marketing communications andthe following information is alwayspresented in all English, Sinhala andTamil advertisements:NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

170BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEW Name of the Bank Fitch Rating Web URL Call Centre numberBusiness Promotion & ImageBuildingThe Bank conducted a wide rangingseries of business promotions and brandbuilding activities during the year. Tofurther augment our market presence,we also participated in exhibitions andconducted seminars.Participation in exhibitions has beena highly effective method to reachmany consumers and interact withthem. We are happy to report that ourparticipation in the Construction Exporesulted in over 200 loan inquiries. Wealso used the Deyata Kirula Exhibitionas a venue to increase consumerawareness about our products andservices.As part of our overall promotionaland marketing drive, we successfullyintroduced a New Year campaignfrom 16th March onwards, in linewith the festivities of the traditionalSinhala-Tamil New Year. To furthermobilise savings, we introduced luckydraws, rewards programmes andadded incentives during the year.This included the seasonal campaign“Avurudu Wasana” and a campaignduring International Women’s Month,to promote our savings accounts forwomen Sthree. Other promotionalcampaigns applied to Smile, Win WinThegi Warusa and the Hapan Year FiveScholarship promotions.As a historic milestone to celebrateour 40th anniversary, NSB hostedthe World Savings Banks Institute’s(WSBI) 18th Asia-Pacic RegionalGroup Conference on the theme,‘The Competitiveness of CurrentRetail Banking of WSBI Members’.Forty delegates, from the 23 WSBImember institutions, from 16 countries,participated in the event. As part ofthe celebrations, a commemorativeplaque was presented to His Excellency,President Mahinda Rajapakse, atTemple Trees. The grand nale ofthe anniversary celebrations was amusical extravaganza titled, ‘Siw MahaDashaka Gettha Wansa Kathawa,’which featured popular singers fromSri Lanka.Technology Based MarketingCommunicationsAs a bank with a progressive approachto all our activities, we have leveragedmodern communications systems topromote our Bank. We have successfullyutilised the Internet and mobileplatforms as a means of communicatingwith our busy, tech savvy customers.During the year, we conducted SMSand e-mail campaigns to directlycommunicate with our customers.We promoted our technology basedproducts in magazines, and InternetBanking, and technology based bankingservices were advertised in LMD,Business Today and Medaperadiga, toraise awareness among consumers aboutour range of technology based servicesand facilities. We also developed webbased news publications for all e-papersand conducted E-yer campaigns. Wepromote all our technology based ITNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

171BRANCHING OUT INTO NEW VENTURESSUSTAINABILITY REVIEWand NRFC products both internally aswell as externally.Establishing Logo IdentityThe logo was nalised and wasendorsed by the Chairman, GM/CEOand Senior Management.Customer Touchpoints EnhancedNo. of branches at theend of the year : 219No. of new ATMs at theend of the year : 231No. of new school bankingunits at the end of the year : 1,185Post Ofces : 641Subpost Ofces : 3,412Compliance in MarketingThere were no instances of noncompliancewith regulations andvoluntary codes concerning marketingcommunicationsComplaints on Customer PrivacyThere were no complaints regardingbreaches of customer privacy and/orloss of customer data.FinesThe Bank did not face any nes for noncomplianceof laws and regulationsNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

172BRANCHING OUT INTO NEW VENTURESGRI COMPLIANCE INDEXReport Section Page/s1. STRATEGY & ANALYSIS1.1 Statement from the most senior decision maker of the organisation Sustainability Review 1381.2 Descriptions of key impacts risks and opportunities Sustainability Review 1402. ORGANIZATIONAL PROFILE2.1 Name of the organisation Corporate Information 2722.2 Products, and/or services Our Products and Services 2572.3 Operational structure of the organisation, including main divisions, Governance Report 54operating companies, subsidiaries, and joint ventures2.4 Location of organisation’s headquarters Corporate Information 2722.5 Number of countries where the organisation operates Sustainability Review 1422.6 Nature of ownership and legal form Corporate Information 2722.7 Markets served - Information required based on geographic breakdown, Sustainability Review 142sectors served, and types of customers/ beneciaries.2.8 Scale of the reporting organisation- Update required on No. of Sustainability Review 143employees, Net sales, Total capitalisation broken down in terms of debtand equity.2.9 Signicant changes during the reporting period regarding size structure Sustainability Review 143or ownership- Update on Branch openings, Changes in share capitalstructure and other capital formation, Maintenance and alterationoperations2.10 Awards received in the reporting period Sustainability Review 1443. REPORT PARAMETERS3.1 Reporting period for information provided. Sustainability Review 1393.2 Date of most recent previous report (if any). Sustainability Review 1393.3 Reporting cycle (annual, biennial, etc.) Sustainability Review 1393.4 Contact point for questions regarding the report Sustainability Review 1403.5 Process for dening report content Sustainability Review 1403.6 Boundary of the report- Example: Countries, divisions, subsidiaries, Sustainability Review 140leased facilities, joint ventures, suppliers3.7 Specic limitations on the scope or boundary of the report Sustainability Review 140NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

173BRANCHING OUT INTO NEW VENTURESGRI COMPLIANCE INDEX3.8 Basis for reporting on joint ventures, subsidiaries, leased facilities,outsourced operations, and other entities that can signicantly affectcomparability from period to period and/or between organisations.3.9 Data measurement techniques and the bases of calculations, includingassumptions and techniques underlying estimations applied to thecompilation of the Indicators and other information in the report.3.10 Explanation of the effect of any re-statements of information providedin earlier reports, and the reasons for such re-statement.3.11 Signicant changes from previous reporting periods in the scope,boundary, or measurement methods applied in the report.Report SectionN/APage/sSustainability Review 140Sustainability Review 140Sustainability Review 1403.12 Table identifying the location of the Standard Disclosures in the report. Sustainability Review 1723.13 Policy and current practice with regard to seeking external assurance for N/Athe report.4. GOVERNANCE, COMMITMENTS AND ENGAGEMENT:4.1 Governance structure of the organisation, including committees underthe highest governance body responsible for specic tasks, such as settingstrategy or organisational oversight.Corporate Governance 564.2 Indicate whether the Chair of the highest governance body is also anexecutive ofcer.4.3 For organisations that have a unitary board structure, state the numberof members of the highest governance body that are independent and/or non executive members4.4 Mechanisms for shareholders and employees to providerecommendations or direction to the highest governance body4.5 Linkage between compensation for members of the highestgovernance body, senior managers, and executives (including departurearrangements), and the organisations’ performance (including social andenvironmental performance).4.6 Processes in place for the highest governance body to ensure conicts ofinterest are avoided.Annual report of Board ofDirectorsAnnual report of Board ofDirectors190190Sustainability Review 146Sustainability Review 146Sustainability Review 146NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

174BRANCHING OUT INTO NEW VENTURESGRI COMPLIANCE INDEXReport Section Page/s4.7 Process of determining the qualications and expertise of the members Sustainability Review 146of the highest governance body for guiding the organisation’s strategyon economic, environmental and social topics.4.8 Internally developed statements of mission or values, codes of conduct, Sustainability Review 147and principles relevant to economic, environmental, and socialperformance and the status of their implementation.4.9 Procedures of the highest governance body for overseeing the Sustainability Review 147organisation’s identication and management of economic,environmental, and social performance, including relevant risks andopportunities, and adherence or compliance with internationally agreedstandards, codes of conduct, and principles.4.10 Processes for evaluating the highest governance body’s ownSustainability Review 147performance, particularly with respect to economic, environmental, andsocial performance.4.11 Explanation of whether and how the precautionary approach or Sustainability Review 148principle is addressed by the organisation.4.12 Externally developed economic, environmental, and social charters, Sustainability Review 148principles, or other initiatives to which the organisation subscribes orendorses.4.13 Memberships in associations (such as industry associations) and/or Sustainability Review 149national/international advocacy organisations in which the organisationhas memberships.4.14 List of stakeholder groups engaged by the organisation. Sustainability Review 150 - 1524.15 Basis for identication and selection of stakeholders with whom to engage. Sustainability Review 150 - 1524.16 Approaches to stakeholder engagement, including frequency of Sustainability Review 150 - 152engagement by type and by stakeholder group.4.17 Key topics and concerns that have been raised through stakeholderengagement, and how the organisation has responded to those keytopics and concerns, including through its reporting.Sustainability Review 150 - 152NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

175BRANCHING OUT INTO NEW VENTURESGRI COMPLIANCE INDEXReport Section Page/sEconomic Performance IndicatorsAspect: Economic PerformanceEC1. Direct economic value generated and distributed, including revenues, Sustainability Review 154 - 156operating costs, employee compensation, donations and othercommunity investments, retained earnings, and payments to capitalproviders and governmentsEC2. Financial implications and other risks and opportunities for the Sustainability Review 157organisation’s activities due to climate changeEC3. Coverage of the organisation’s dened benet plan obligations Sustainability Review 163EC4. Signicant nancial assistance received from government Sustainability Review 157Aspect: Market PresenceEC5. Range of ratios of standard entry level wage compared to local Sustainability Review 157minimum wage at signicant locations of operationEC6. Policy, practices, and proportion of spending on locally-based suppliers Sustainability Review 157at signicant locations of operationEC7. Procedures for local hiring and proportion of senior management hired Sustainability Review 157from the local community at locations of signicant operationAspect: Indirect Economic ImpactsEC8. Development and impact of infrastructure investments and services Sustainability Review 165provided primarily for public benet through commercial, in-kind, orpro bono engagementEC9. Understanding and describing signicant indirect economic impacts, Sustainability Review 157including the extent of impactsEnvironmental Performance IndicatorsAspect: EnergyEN 1. Materials used by weight or volume Sustainability Review 158EN2. Percentage of materials used that are recycled input materials N/AEN3. Direct energy consumption by primary energy sourceN/AEN4. Indirect energy consumption by primary sourceN/AEN5. Energy saved due to conservation and efciency improvements Sustainability Review 158EN6. Initiatives to provide energy-efcient or renewable energy basedproducts and services, and reductions in energy requirements as a resultof these initiativesSustainability Review 158NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

176BRANCHING OUT INTO NEW VENTURESGRI COMPLIANCE INDEXReport Section Page/sEN7. Initiatives to reduce indirect energy consumption and reductions achieved Sustainability Review 158Aspect: WaterEN 8. Total water withdrawal by source Sustainability Review 158EN 9. Water sources signicantly affected by withdrawal of water Sustainability Review 158EN10. Percentage and total volume of water recycled and reusedN/REN 11.Location and size of land owned, leased, managed in, or adjacent to, N/Rprotected areas and areas of high biodiversity value outside protectedareasEN12. Description of signicant impacts of activities, products, and services N/Aon biodiversity in protected areas and areas of high biodiversity valueoutside protected areasEN13. Habitats protected or restoredN/AEN14. Strategies, current action & future plans for managing biodiversity N/AEN15. Number of IUCN Red List Species & National Conservation List N/ASpecies with habitats in areas affected by operationsEN16. Total direct and indirect greenhouse gas emissions by weightN/AEN17. Other relevant indirect greenhouse gas emissions by weightN/AEN18. Initiatives to reduce greenhouse gas emissions and reductions achieved N/AEN19. Emissions of ozone-depleting substances by weightN/AEN20. NO, SO, and other signicant air emissions by type and weight N/AEN21. Total water discharge by quality and destinationN/AEN22. Total weight of waste by type and disposal method Sustainability Review 158EN23. Total Number of & Volume of signicant spills Sustainability Review 158EN24. Weight of transported, imported, exported, or treated waste deemed Sustainability Review 158hazardous under the terms of the Basel Convention Annexures I, II, III,and VIII, and percentage of transported waste shipped internationallyEN25. Identity, size, protected status, and biodiversity value of water bodies N/Aand related habitats signicantly affected by the reporting organisation’sdischarges of water and runoffNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

177BRANCHING OUT INTO NEW VENTURESGRI COMPLIANCE INDEXReport Section Page/sAspect: Products and ServicesEN26. Initiatives to mitigate environmental impacts of products and services, Sustainability Review 158and extent of impact mitigationEN27. Percentage of products sold and their packaging materials that are N/Areclaimed by categoryAspect: ComplianceEN28. Monetary value of signicant nes and total number of non-monetary Sustainability Review 159sanctions for noncompliance with environmental laws and regulationsAspect: TransportEN29. Signicant environmental impacts of transporting products and Sustainability Review 158other goods and materials used for the organisation’s operations, andtransporting members of the workforceAspect: OverallEN30. Total environmental protection expenditures and investments by type N/RLabour Practices and Decent Work Performance IndicatorsAspect: EmploymentLA1. Total workforce by employment type, employment contract, and region Sustainability Review 160LA2. Total number and rate of employee turnover by age group, gender, and Sustainability Review 160regionLA3. Benets provided to full-time employees that are not provided to Sustainability Review 161temporary or part-time employees, by major operationsAspect: Labour/Management RelationsLA4. Percentage of employees covered by collective bargaining agreements Sustainability Review 162LA5. Minimum notice period(s) regarding operational changes, including Sustainability Review 162whether it is specied in collective agreementsLA6. Percentage of total workforce represented in formal joint management– Sustainability Review 162worker health and safety committees that help monitor and advice onoccupational health and safety programsLA7. Rates of injury, occupational diseases, lost days, and absenteeism, andnumber of work related fatalities by regionSustainability Review 162NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

178BRANCHING OUT INTO NEW VENTURESGRI COMPLIANCE INDEXLA8. Education, training, counseling, prevention, and risk-control programsin place to assist workforce members, their families, or communitymembers regarding serious diseasesReport Section Page/sSustainability Review 162LA9. Health and safety topics covered in formal agreements with trade unions Sustainability Review 162LA10. Average hours of training per year per employee by employee category Sustainability Review 163LA11. Programs for skills management and lifelong learning that support thecontinued employability of employees and assist them in managingcareer endingsSustainability Review 163LA12. Percentage of employees receiving regular performance and careerdevelopment reviewsLA13. Composition of governance bodies and breakdown of employees percategory according to gender, age group, minority group membership,and other indicators of diversitySustainability Review 163Sustainability Review 145LA14. Ratio of basic salary of men to women by employee category Sustainability Review 145Human Rights Performance IndicatorsAspect: Investment and Procurement PracticesHR1. Percentage and total number of signicant investment agreements that Sustainability Review 164include human rights clauses or that have undergone human rightsscreeningHR2. Percentage of signicant suppliers and contractors that have undergone Sustainability Review 164screening on human rights and actions takenHR3. Total hours of employee training on policies and procedures concerning Sustainability Review 164aspects of human rights that are relevant to operations, including thepercentage of employees trained.Aspect: Non-discriminationHR4. Total number of incidents of discrimination and actions taken Sustainability Review 165Aspect: Freedom of Association and Collective BargainingHR5. Operations identied in which the right to exercise freedom ofassociation and collective bargaining may be at signicant risk, andactions taken to support these rights.Sustainability Review 165NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

179BRANCHING OUT INTO NEW VENTURESGRI COMPLIANCE INDEXReport Section Page/sAspect: Child LabourHR6. Operations identied as having signicant risk for incidents of child Sustainability Review 165labor, and measures taken to contribute to the elimination of childlabourAspect: Forced and Compulsory LabourHR7. Operations identied as having signicant risk for incidents of forced or Sustainability Review 165compulsory labour, and measures taken to contribute to the eliminationof forced or compulsory labourAspect: Security PracticesHR8. Percentage of security personnel trained in the organisation’s policies N/Ror procedures concerning aspects of human rights that are relevant tooperationsAspect: Indigenous RightsHR9. Total number of incidents of violations involving rights of indigenous N/Apeople and actions takenSociety Performance IndicatorsAspect: CommunitySO1. Nature, scope, and effectiveness of any programs and practices that Sustainability Review 165assess and manage the impacts of operations on communities, includingentering, operating, and exitingAspect: CorruptionSO2. Percentage and total number of business units analysed for risks related Sustainability Review 148to corruptionSO3. Percentage of employees trained in organisation’s anti-corruption Sustainability Review 148policies and proceduresSO4. Actions taken in response to incidents of corruption Sustainability Review 148Aspect: Public PolicySO5. Public policy positions and participation in public policy developmentand lobbyingSustainability Review 149NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

180BRANCHING OUT INTO NEW VENTURESGRI COMPLIANCE INDEXSO6. Total value of nancial and in-kind contributions to political parties,politicians, and related institutions by countryAspect: Anti-Competitive BehaviourSO7. Total number of legal actions for anticompetitive behaviour, anti-trust,and monopoly practices and their outcomesAspect: ComplianceSO8. Monetary value of signicant nes and total number of non-monetarysanctions for noncompliance with laws and regulationsProduct Responsibility Performance IndicatorsAspect: Customer Health and SafetyPR1. Life cycle stages in which health and safety impacts of products andservices are assessed for improvement, and percentage of signicantproducts and services categories subject to such proceduresPR2. Total number of incidents of non-compliance with regulations andvoluntary codes concerning health and safety impacts of products andservices, by type of outcomesAspect: Product and service labelingPR3. Type of product and service information required by proceduresand percentage of signicant products and services subject to suchinformation requirementPR4 Total number of incidents of non-compliance with regulations andvoluntary codes concerning product and service information andlabeling, by type of outcomesPR5: Practices related to customer satisfaction, including results of surveysmeasuring customer satisfaction.Aspect: Marketing CommunicationsPR6. Programs for adherence to laws, standards, and voluntary codes relatedto marketing communications, including advertising, promotion, andsponsorshipPR7. Total number of incidents of non-compliance with regulations andvoluntary codes concerning marketing communications, includingadvertising, promotion, and sponsorship by type of outcomesReport Section Page/sSustainability Review 149Sustainability Review 149Sustainability Review 149Sustainability Review 168Sustainability Review 168Sustainability Review 169Sustainability Review 169Sustainability Review 169Sustainability Review 169Sustainability Review 169NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

181BRANCHING OUT INTO NEW VENTURESGRI COMPLIANCE INDEXAspect: Customer PrivacyPR8. Total number of substantiated complaints regarding breaches ofcustomer privacy and losses of customer dataAspect: CompliancePR9. Monetary value of signicant nes for noncompliance with laws andregulations concerning the provision and use of products and servicesReport Section Page/sSustainability Review 169Sustainability Review 169N/A - Not ApplicableN/R - Not Reported2002In AccordanceC C B B A AOptional MandatorySelfDeclaredThird PartyCheckedGRICheckedReport Externally AssuredReport Externally AssuredReport Externally AssuredNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

182NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

183CHAPTER 6THE RESULTS OF A CHALLENGING YEARFINANCIAL REPORTSNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

184THE RESULTS OF A CHALLENGING YEARFINANCIAL CALENDARFinancial Calendar 20121st Quarter Interim Results Released on 31 May 20122nd Quarter Interim Results Released on 30 August 20123rd Quarter Interim Results Released on 28 November 20124th Quarter Interim Results Released on 29 March 2013Proposed Financial Calendar 20131st Quarter Interim Results will be released on 20 May 20132nd Quarter Interim Results will be released on 19 August 20133rd Quarter Interim Results will be released on 20 November 20134th Quarter Interim Results will be released on 21 February 2014NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

185THE RESULTS OF A CHALLENGING YEARANNUAL REPORT OF BOARD OF DIRECTORSGeneralThe Directors of the National SavingsBank have pleasure in presentingtheir Annual Report on the affairs ofthe Bank together with the auditedFinancial Statements of the Bank andConsolidated Financial Statements forthe year ended 31 December 2012. Thedraft Financial Statements togetherwith the Annual Report were approvedby the Board of Directors at the BoardMeeting held on 28 February 2013 andsubmitted to the Auditor General on 28February 2013. The audited FinancialStatements were authorised to be issuedon 28 March 2013. The Report alsoincludes certain disclosures requiredto be made under the Banking ActDirection No.12 of 2007 on CorporateGovernance. The Annual Report andFinancial Statements, together withthe Auditor General’s Report will besubmitted to the Ministry of Finance& Planning, on or before 31 May 2013as per Circular No. PE D/27 of 27January 2005, issued by the DirectorGeneral of the Department of PublicEnterprises to be placed before theParliament of Sri Lanka.National Savings Bank is incorporatedin Sri Lanka by National Savings BankAct No 30 of 1971 and was granted thestatus of Licensed Specialised Bank interms of Banking Act No. 30 of 1988.The Bank has been assigned AAA(lka)long term credit rating by the FitchRating Lanks (Pvt) Ltd.Review of BusinessPrincipal ActivitiesBankThe principal activity of the NationalSavings Bank is to promote savingsamong the people of Sri Lanka and tomake protable investments of savingsso mobilised.SubsidiaryThe principal activity of NSB FundManagement Company Ltd. is dealingin Government Securities as a primarydealer authorised by the Central Bankof Sri Lanka. Details are given in Note26 to the Financial Statements.There were no signicant changes inthe nature of the principal activitiesof the Bank and the Group during theyear.Vision, Mission and ValuesThe Bank’s Vision, Mission and Valuesare given on pages 4 and 5 of thisAnnual Report. The Bank maintainshigh ethical standards in its activitieswhilst pursuing the objectives statedunder ‘Vision’ and ‘Mission’. Allpermanent employees are made awareabout the Code of Conduct of Bankand are abide by it to reach the Vision& Mission of the Bank.Going ConcernThe Board of Directors have reviewedand satised that the Bank hasadequate resources to continue itsoperations in the foreseeable future.Therefore, we continue to adopt thegoing concern basis in preparing theFinancial Statements in compliancewith Sri Lanka Accounting Standards,LKAS & Sri Lanka Financial ReportingStandards (SLFRS) and in conformityNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

186THE RESULTS OF A CHALLENGING YEARANNUAL REPORT OF BOARD OF DIRECTORSwith the Generally AcceptedAccounting Principles (GAAP) appliedconsistently.Review of Business PerformanceThe Bank’s performance for thenancial year 2012 and its nancialposition were reviewed in the Messagefrom the Chairman (page 15), a reviewby General Manager/CEO (page 19)and Management Discussions andAnalysis (page 26). These reports forman integral part of the Annual Report.New Accounting Standards(SLFRS/LKAS)Sri Lanka converged fully withInternational Accounting Standards(IAS) and International FinancialReporting Standards (IFRS) with effectfrom January 2012. These Sri LankaAccounting Standards comprise of SriLanka Accounting Standards (LKAS)and Sri Lanka Financial ReportingStandards (SLFRS). Application ofLKAS & SLFRS for the rst time shallbe deemed to be an adoption of SLFRS.As required by these standards the Bankprepared its opening Statement ofFinancial Position (previously termedas Balance Sheet) as at 1 January 2011with the assumption that the Bank hadapplied these standards retrospectivelywith all the adjustments to equity beingrecognised directly on the statement ofchanges in equity.Significant Accounting PoliciesAccounting Policies have been revisedwith the adoption of LKAS/ SLFRSSignicant Accounting Policiesadopted in the preparation of FinancialStatements which are given on pages211 to 218.Directors’ Responsibilities forFinancial ReportingThe Directors are responsible for thepreparation of the Financial Statementsthat will reect a true and fair view ofthe state of affairs of the Bank. TheDirectors are of the view that Statementof Comprehensive Income, Statementof Financial Position, Statement ofChanges in equity, Cash Flow Statement,Signicant Accounting Policies andNotes there to have been prepared inconformity with the requirements ofthe Sri Lanka Accounting Standards(LKAS) and the Banking Act No. 30of 1988 and its amendments. TheDirectors’ Responsibility Statementappearing on page 195 of this AnnualReport describes in detail the Directors’Responsibilities in relation to FinancialStatements, which forms an integralpart of the Annual Report of theDirectors.Financial StatementsThe Financial Statements of the Bankand the Group have been prepared inaccordance with Sri Lanka AccountingStandards (LKAS & SLFRS) laiddown by the Institute of CharteredAccountants of Sri Lanka.The Financial Statements for the yearended 31 December 2012 are therst prepared under LKAS/SLFRS.The comparatives to these FinancialStatements were previously reportedunder SLAS and the reconciliation ofSLAS. Balance Sheet as at 31 December2011 and 01 January 2011 and SLASNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

187THE RESULTS OF A CHALLENGING YEARANNUAL REPORT OF BOARD OF DIRECTORSIncome Statement for the year ended 31December 2011 with the comparativesreported under LKAS/SLFRS is givenin Note 45 to the Financial Statements.The Financial Statements of the Bankand the Group for the year ended 31December 2012 duly signed by theDeputy General Manager - Finance& Planing, General Manager/ChiefExecutive Ofcer, Chairman and oneDirectors of the Bank are given on pages205 to 250, which form an integral partof the Annual Report of the Bank.Auditors’ ReportThe Auditor General carried out theaudit of the Bank in 2012. The auditwas carried out through out the year.Issues identied in their reports weresubmitted to the management regularlyfor prompt action. Having conrmedthe accuracy of the nancial reporting,the Financial Statements, together withthe necessary data and informationwere made available to the AuditorGeneral for examination. The AuditorGeneral’s opinion on the FinancialStatements appears on page 203 of thisAnnual Report.As a regulatory supervisory body, theCentral Bank of Sri Lanka carried outa periodic examination of the recordsand affairs of the Bank to ascertaincompliance with directives issued bythe Central Bank of Sri Lanka. It alsodetermines whether required nancialindicators are being maintained at therequired level so that the interests of thestakeholders, particularly depositors aresafeguarded.Details of Prot Relating to the Bank are given in the following Table:2012 2011Rs.’000 Rs.’000Prot for the year after payment of all expenses andproviding for depreciation, Impairment Losses andcontingencies before VAT and Tax 7,408,328 10,819,162Less: VAT on Financial Services 1,239,069 1,564,481Prot before income tax 6,169,259 9,254,681Less. Taxation 1,837,917 3,192,819Net Prot after Taxation 4,331,342 6,061,862Other Comprehensive Income net of Income Tax (210,840) (1,239,521)Total Comprehensive Income for the year 4,120,502 4,822,341Attributable to:AppropriationsReserve Fund 86,627 287,957Other Reserves 1,407,521 759,607NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

188THE RESULTS OF A CHALLENGING YEARANNUAL REPORT OF BOARD OF DIRECTORSFinancial ResultsInterest IncomeThe interest income of the Bank for 2012was Rs.52,673 Million (2011 - Rs.47,096Million) while the Group’s interestincome was Rs.53,780 Million (2011 -Rs.48,083 Million). Details are given inNote 4(a) to the nancial statements.Net ProfitThe Bank has recorded 33% declinein prot before income tax and 29%.decline of prot after tax in 2012. TheGroup’s prot before tax and prot aftertax for the year recorded a decline of34% and 29% respectively.Provision for TaxationThe Income Tax rate applicable for theBank on its operation is 28% and theBank’s operation are liable for ValueAdded Tax on Financial Services at therate of 12%.The Bank provided differed tax on allknown temporary differences underthe liability method. Information ofIncome Tax expenditure and DifferedTaxation are given in Note No13. inpage 222.Contribution to the GovernmentThe Bank contributed Rs.5,900 Millionby way of taxes and levies to theGovernment in 2012. (2011 - Rs.7,970Million). This consisted of Rs.1,838Million of Income Tax (2011 - Rs.3,193Million), Rs.1,239 Million of ValueAdded Tax (2011 - Rs.1,564 Million)& Rs.2,823 Million of contribution tothe Consolidated Fund (2011 - Rs.3,213Million).Service Charges to PostmasterGeneral (PMG)Service charges to the PMG for 2012amounting to Rs.111 Million has beenprovided for on the same basis as in2011.Stated CapitalThe authorised share capital of theBank is Rs.10 Billion divided into 1Billion ordinary shares of Rs.10/- each.The issued share capital of the Bank asat 31 December 2012 stood at Rs.3.2Billion. The Secretary to the Treasuryin his ofcial capacity holds the entiretyof the issued share capital.ShareholdingThe Government of Sri Lanka isthe sole shareholder of the NationalSavings Bank.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

189THE RESULTS OF A CHALLENGING YEARANNUAL REPORT OF BOARD OF DIRECTORSReserves2012 2011Rs.’000 Rs.’000Reserve Fund 1,713,127 1,626,500Revaluation Reserve 1,583,340 1,583,340Other Reserves 17,704,205 16,296,684Available for sale Reserve 135,119 345,959Information on changes of reserves isgiven in the Statement of Changes inEquity in pages 208 and 209.Pension FundA sum of Rs.705 Million (2011 -Rs.865 Million) has been provided forin the accounts on account of 2,437employees who are eligible for theNon-Contributory Pension Scheme(including retired employees).Property, Plant & Equipment,Leasehold Property andIntangible Assets.The total capital expenditure incurredby the Bank on the acquisitionof Property, Plant & Equipment,leasehold property and intangible assets(Including Capital Work In Progress)during the year amounted to Rs.826Million (2011 - Rs.826 Million) andGroup amounted to Rs.826 Million(2011 - Rs.826 Million), the details ofwhich are given in Notes 27 and 28 tothe Financial Statements on pages 235and 236 of this Annual Report.Market Value of Free HoldPropertyIn accordance with Bank’s policy torevalue its free hold Land & Buildingsin every 3 years, the Bank revaluedits Free Hold Land & Buildings on31st December 2010 by professionallyqualied independent valuers andbrought in to Financial Statements.Events after the Balance SheetDateNo circumstances have arisen sincethe Balance Sheet date which wouldrequire adjustments to, or disclosure in,the accounts.Outstanding LitigationIn the opinion of the Directors and theBank’s lawyers, outstanding litigationagainst the Bank disclosed in Note 44 ofthe Financial Statements will not have amaterial impact on the nancial positionof the Bank or its future operations.Board of DirectorsThe Board of Directors comprises sevenDirectors including the Chairman andtwo Ex Ofcio Members representingthe Ministry of Finance and Planningand the Postmaster General. TheMinister of Finance appoints theChairman and other four Directors.The Directors during the year is givenon the following page and their briefproles appear on page 86 of thisAnnual Report.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

190THE RESULTS OF A CHALLENGING YEARANNUAL REPORT OF BOARD OF DIRECTORSName of the DirectorSunil S SirisenaS.T. AbeygunawardanaP.A. Abeysekera (up to 28/02/2013)R.M.P. RatnayakeD.L.P.R. AbeyaratneLionel P. FernandoPriyantha JayawardenaSumith WijesingheStatusNIND/NEDNIND/WDIND/NEDIND/NEDNIND/NEDNIND/NEDIND/NEDIND/NEDNIND - Non-Independent, IND - Independent,NED - Non-Executive Director, WD - Working DirectorNew Appointments, Resignation & RetirementsFollowing new appointments were made during the year.Sunil S Sirisena - Appointed as the Chairman on 06-08-2012.S.T. Abeygunawardana - Re appointed on 6-08-2012P.A. Abeysekera - Re-appointed on 22-08-2012D.L.P.R. Abeyaratne - Appointed on 09-02-2012.Acting Chairman from 23-5-2012 to 05-8-2012Lionel P. Fernando - Appointed on 06-8-2012Priyantha Jayewardena - Appointed on 06-08-2012Sumith Wijesinghe - Appointed on 06-08-2012R.M.P. Ratnayake - Appointed on 04-03-2013NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

191THE RESULTS OF A CHALLENGING YEARANNUAL REPORT OF BOARD OF DIRECTORSFollowing Directors have resigned and retired during the yearP.G.S. Kariyawasam - Resigned on 21-5-2012Hema Madiwela - Resigned on 18-5-2012R.A.P. Ranawaka - Resigned on 10-6-2012S. Shan Shanmuganathan - Resigned on 10-8-2012M.K.B. Dissanayake - Resigned on 08-02-2012P.A. Abeysekara - Retired on 28-02-2013Directors’ Remuneration & OtherBenefitsDetails of Directors’ emoluments andother benets in respect of the Bankand Group for the Financial year 2012are given in Note 39 to the FinancialStatements.Directors’ MeetingsThe number of Directors’ meetingswhich comprise Board Meetings, AuditCommittee Meetings, NominationCommittee Meetings and IntegratedRisk Management Committee Meetingsand the attendance of Directors atthese meetings are given in CorporateGovernance Report on pages 58 to 59of this Annual Report.Directors’ Interests in ContractsDirectors’ interests in contracts withthe Bank, both direct and indirect arereferred to in Note 39 to the FinancialStatements. These interests have beendeclared at the Board Meetings. TheDirectors do not have any direct orindirect interest in other contracts orproposed contracts with the Bank.Chief Executive Officer (CEO)The General Manager is the ChiefExecutive Ofcer of the Bank and isappointed by the Board of Directors.The General Manager has the right tobe present at, and to participate in themeetings of the Board.Board CommitteesThe Board while assuming the overallresponsibility and accountability hasalso appointed the following BoardSub-Committees to ensure conformitywith Corporate Governance Standardsof the Central Bank and other statutorycompliances.The composition of mandatory SubCommittees as at 31 December 2012was as follows.Board Audit CommitteeLionel P Fernando - ChairmanP.A. Abeysekera - Member(upto 28-2-2013)R.M.P. Ratnayake - Member(from 04-03-2013)Sumith Wijesinghe - MemberThe Report of the Board AuditCommittee is given on page 95.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

192THE RESULTS OF A CHALLENGING YEARANNUAL REPORT OF BOARD OF DIRECTORSBoard Human Resources andRemuneration CommitteesSunil S Sirisena - ChairmanP.A. Abeysekera - Member(upto 28-2-2013)R.M.P. Ratnayake - Member(from 04-03-2013)Priyantha Jayawardena - MemberThe Report of the Board HumanResources and RemunerationCommittee is given on page 98.Board Nomination CommitteeP.A. Abeysekera - Chairman(upto 28-2-2013)R.M.P. Ratnayake - Chairman(from 04-03-2013)S.T. Abeygunawardana - MemberSumith Wijesinghe - MemberThe Report of the Board NominationCommittee is given on page 101.Board Integrated RiskManagement CommitteeD.L.P.R. Abeyaratne - ChairmanLionel P. Fernando - MemberPriyantha Jayawardena - MemberThe Report of the Board IntegratedRisk Management Committee is givenon page 100.Review of OperationsBranch Expansion andDevelopmentsThe Bank extended its services throughthe addition of 9 new branches duringthe period under review. At the end ofthe year the Bank has 219 Branchesin its network. The ATM network wasfurther expanded enhancing customerconvenience. The Bank installed 10ATMs during the year across theisland bringing the total ATMs to 231excluding peer banks’ ATMs throughwhich customers of NSB can transact.Human ResourcesThe Bank continued to developand maintain dedicated and highlymotivated employees who arecommitted to create sustainable valuethrough high quality service. Signicantinvestments have been made in thedevelopment of quality of HumanCapital of the Bank. The policies andprocedures adopted by the Bank toupgrade Human Capital is describe inSustainability Report on page 160.Environmental ProtectionThe Bank has taken initiatives tosafeguard and enhance the environmentwhich are vital for sustainabledevelopment and growth of the Bank.The Bank and the Group have notengaged in any activity that is harmfulor hazardous to environment.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

193THE RESULTS OF A CHALLENGING YEARANNUAL REPORT OF BOARD OF DIRECTORSStatutory PaymentsThe Directors, to the best of theirknowledge and belief, are satisedthat all statutory payments due to theGovernment and in relation to theemployees have been made in time.Risk Management, InternalControls and ManagementInformation SystemsThe Board of Directors assumes overallresponsibility for managing risk. For thispurpose, the Board of Directors haveinstituted and implemented an effectiveand comprehensive system of internalcontrols and management informationsystems in the Bank. Internal controlsystems have been redesigned to mitigatethe risks to which the Bank is exposed,to provide reasonable assurance againstmaterial misstatements or loss. Thereis an ongoing process for identifyingevaluating and managing the risks thatare faced by the Bank. The specicmeasures taken by the Bank inmitigating the risk are detailed on pages104 to 135 of this Report.Corporate GovernanceIn the management of the Bank, theDirectors have placed emphasis onconforming with, the best corporategovernance practices and procedures.Accordingly, systems and structureshave been introduced/improvedfrom time to time to enhance riskmanagement measures and to improveaccountability and transparency.Related Party TransactionsThe Directors have also disclosedthe transactions if any, that could beclassied as related party transactionsin terms of LKAS No. 24 - ‘RelatedParty Disclosures’ which is adoptedin the preparation of the FinancialStatements. Those transactionsdisclosed by the Directors are given inNote no. 39 to the Financial Statementsforming part of the Annual Report ofthe Board.Strategic Business PlanThe Bank has formulated a StrategicBusiness Plan for 2011 up to 2013.The Bank strived to operate within theparameters set out in the new BusinessPlan, which will help to accelerate thefuture momentum of NSB.Compliance with Laws,Regulations and PrudentialRequirementsThe Bank has at all times ensuredthat it complied with National SavingsBank Act and all other applicable laws,regulations and prudential requirementsapart from the TFC share transaction.Corporate Sustainability andResponsibilityThe programmes carried out underCorporate Social Responsibility aredetailed on pages 165 to 168 in theSustainability Report.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

194THE RESULTS OF A CHALLENGING YEARANNUAL REPORT OF BOARD OF DIRECTORSFuture PerformanceAn overview of the future developmentsof the Bank is given in the message fromthe chairman (page 15), a review byGeneral Manager/ CEO (page 19) andManagement Discussion & Analysis(page 26).Government GuaranteeThe Government of Sri Lankaguarantees the repayment of the moniesdeposited with the Bank together withinterest thereon.AuditorsThe Auditor General carried out theaudit of the Financial Statements ofthe Bank for the nancial year ended 31December 2012.For and on behalf of the Board ofDirectors,Suni S SirisenaChairmanY F DeenSecretary to the BoardColombo28 March 2013NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

195THE RESULTS OF A CHALLENGING YEARSTATEMENT OF DIRECTOR’S RESPONSIBILITY ON FINANCIAL REPORTINGThe responsibility of the Directorstowards the Financial Statementsof the National Savings Bank andConsolidated Financial Statements ofthe Group is set out in this statement.The responsibility of the ExternalAuditors in relation to the FinancialStatements is set out in the AuditorsReport in page 203.The Directors of the Bank areresponsible for ensuring that the Bankand the Group keep proper booksof account of all the transactionsand prepare Financial Statements inaccordance with Generally AcceptedAccounting Principles, Sri LankaAccounting Standards & Sri LankaFinancial Reporting Standards that givea true and fair view of the state of affairsof the Bank and the Group at the end ofeach nancial year in compliance withstatutory requirements. The FinancialStatements comprise of Statement ofComprehensive Income, Statementof Financial Position, Statement ofChanges in Equity, Statement of CashFlows, Signicant Accounting Policiesand Notes thereto.The Directors have ensured followingin preparation of the FinancialStatements:1. The accounting policies adopted toprepare the Financial Statementswere appropriate, consistentlyapplied and adequately disclosed.2. Reasonable and prudent judgmentshave been made where necessarywhen preparing the FinancialStatements.3. All applicable accounting standardsas relevant have been followed.As per the provisions of the Finance ActNo. 38 of 1971, the Banking Act No. 30of 1988 and Section 7 (i) of NSB ActNo. 30 of 1971 the Board of Directorsis required to control and administerthe affairs and the business of theBank. The Board of Directors are alsoresponsible for ensuring that properaccounting records which correctlyrecord and explain the Bank’s nancialposition, with reasonable accuracyat any point of time is determined bythe Bank, enabling preparation of theFinancial Statements.The Board of Directors accepts theresponsibility for the integrity andobjectivity of the Financial Statementspresented in this Annual Report.The Financial Statements for the year2012 prepared and presented in thisAnnual Report are consistent with theunderlying books of accounts and areconformity with the requirements ofSri Lanka Accounting Standards, SriLanka Financial Reporting Standards,Sri Lanka Accounting and AuditingStandards Act, Baking Act andDirections of Central Bank of Sri Lanka.The Board of Directors has beenresponsible for taking reasonablemeasures and care to safeguardthe Bank’s and Group’s assets andalso has instituted an effective andcomprehensive system of internalcontrols. This comprises internal check,internal audit and whole system ofnancial and other controls requiredto carry on the business of the Bank inan orderly manner, safeguard its assets,prevent and detect frauds and otherirregularities.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

196THE RESULTS OF A CHALLENGING YEARSTATEMENT OF DIRECTOR’S RESPONSIBILITY ON FINANCIAL REPORTINGThe Directors ensure that the internalcontrols were reviewed by them directlyat their regular meetings and alsothrough the Board Audit Committee.The results of such reviews carried outduring the year ended 31st December2012 is given on pages 197 to 199 of theAnnual Report, “Directors Statementon Internal Control”. The ExternalAuditors’ Assurance Report on theInternal Control is given on page 200of the Annual Report. The Board ofDirectors approves the interim FinancialStatements prior to release, following areview and recommendation by BoardAudit Committee.The Board appointed Audit Committeeconsists of 3 Directors of the Bank. TheCommittee has made an independentassessment of the Financial Reportingsystem of the Bank and conrmed thatto the best of its knowledge and beliefthe Financial Reporting system of theBank has been designed to providereasonable assurance on the reliabilityof Financial Statements.The Directors conrm to the bestof their knowledge and belief thatall statutory payments relating toemployees, the Government and theother relevant regulatory and statutoryauthorities which were due and payableby the Bank and its Subsidiary as atthe Statement of Financial Positiondate have been paid or where relevantprovided for. Further, the Directors haveconrmed that after considering thenancial position, operating conditionsand regulatory factors required to beincluded in the Corporate GovernanceCode issued by the Central Bank ofSri Lanka, the Bank and its Subsidiaryhave adequate resources to continue inoperation to justify the application ofthe going concern basis in preparingthese Financial Statements and theBoard has taken all necessary measuresto comply with the directives issued bythe Central Bank of Sri Lanka.The Auditor General carries out theaudit of the Bank. In 2012, the auditwas carried out throughout the year.Issues identied in their reports weresubmitted to the management regularlyfor prompt action. Having conrmedthe accuracy of the nancial reporting,the Financial Statements, together withthe necessary data and informationwere made available to the AuditorGeneral for examination. The AuditorGeneral’s opinion on the FinancialStatements appears on page 203 of thisAnnual Report.By Order of the Board,Y F DeenSecretary to the BoardColombo28 March 2013NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

197THE RESULTS OF A CHALLENGING YEARDIRECTORS’ STATEMENT ON INTERNAL CONTROLSThis report has been issued in line withthe Banking Act Direction No. 11 of2007, Section 3 (8) (11) (b), and preparedbased on the guidelines issued by TheInstitute of Chartered Accountants ofSri Lanka.The Board of Directors is responsiblefor ensuring that an adequate andeffective system of internal controlis established and maintained in theNational Savings Bank. However,such a system is designed to managethe Bank’s signicant risk areas withinacceptable risk parameters, ratherthan eliminating the risk of failure toachieve business objectives of the Bank.Accordingly, the system of internalcontrols can only provide reasonablebut not absolute assurance againstmaterial misstatement of managementand nancial information and recordsor against nancial losses or frauds.The Board of Directors has establishedan ongoing process for identifying,evaluating and managing the signicantrisks faced by the Bank and this processincludes enhancing the system ofinternal controls as and when there arechanges to the business environmentor regulatory requirements and otherguidelines. The process is regularlyreviewed by the Board and conrmthe compliance with the Guidance forDirectors issued by The Institute ofChartered Accountants of Sri Lankaon the Directors Statement on InternalControls of this Annual Report. TheBoard has assessed the internal controlsystem taking into principles for theassessment of internal control system asgiven in that guidance.The Board of Directors is of the viewthat the system of internal controls inplace is sound and adequate to providereasonable assurance regarding thereliability of Financial Reporting,and the preparation of FinancialStatements for external purposes and isin accordance with relevant accountingprinciples and regulatory requirements.The management assists the Boardin the implementation of the Board’spolicies and procedures on risk andcontrol by identifying and assessingthe risks faced by the Bank, and in thedesign, operation and monitoring ofsuitable internal controls to mitigateand control these risks.The Board has put in place thesystem of reviewing the design andthe effectiveness of system of internalcontrol periodically. The key processes,among other things include thefollowing: The Board Sub-Committees havebeen established with dened scopesand functions to assist the Board inensuring the effectiveness of theBank’s operations and that theBank’s operations are in accordancewith the corporate objectives,strategies, and policies and businessdirections that have been approved. The Board Audit Committee (BAC)reviews periodically the internalcontrol issues identied by theInternal Audit Division of the Bank,the External Auditors, RegulatoryAuthorities and corrective actionstaken to rectify the decienciesNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

198THE RESULTS OF A CHALLENGING YEARDIRECTORS’ STATEMENT ON INTERNAL CONTROLSobserved. The Auditor Generalcarries out the external audit ofthe Bank. The Superintendent ofthe Government Audit is generallyinvited to BAC meetings. The BAC reviews the internal auditfunction with particular emphasison the scope of audits and qualityof the same. The activities attendedto by the BAC during the year2012 are set out in the Board AuditCommittee Report appearing onpage 95 of this Annual Report.The Internal Audit Division ofthe Bank carries out audits ofbranches, divisions and other unitsas per the Annual Audit Plan. Thefrequency of audit is determined bythe level of risk assessed. The AuditPlan is approved by the BAC forimplementation. The Internal AuditDivision carries out audit checks toensure compliance with policies andprocedures and the effectivenessof the internal control systems andreports its ndings in respect of anynon-compliance. Audits are carriedout to provide an independent andobjective report on operational andmanagement activities. The ndingsof the audits are submitted to theBAC for review at their periodicmeetings. The activities of theBAC, along with minutes of theCommittee meetings are submittedfor information of the Board on aperiodic basis. The Board Integrated RiskManagement Committee (BIRMC)has been established by the Boardto assist the Board to oversee theoverall management of principalareas of risk of the Bank. TheExecutive Risk ManagementCommittee (ERMC) which includesrepresentation from all key businessand operating units of the Bankassists with the implementation ofpolicies advocated at the BIRMC.The Board has also establishedan independent Compliance Unitwhich ensures Bank’s activitiesare conducted in accordance withapplicable laws, regulations andregulatory directives and any issuesof non-compliance are reported toBIRMC periodically. The report onthe Risk Assessment is submittedby the BIRMC to the Boardperiodically. Management level Committeeshave also been functioning withappropriate empowerment toensure effective management andsupervision of Bank’s core areas inthe day-to-day business operations.The assessment covered only theprocess applied by the Bank and didnot include the processes carried outby its Subsidiary.The ndings of the GovernmentAudit are reported to the managementperiodically and the managementensures that they are rectied andresponded promptly. The commentsmade by the Auditor General inconnection with the audit on internalcontrol system appeas on page 200.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

199THE RESULTS OF A CHALLENGING YEARDIRECTORS’ STATEMENT ON INTERNAL CONTROLSConfirmationBased on the above processes, theBoard conrms that the nancialreporting system of the Bank hasbeen designed to provide reasonableassurance regarding the reliability ofnancial reporting and the preparationof Financial Statements for externalpurposes has been done in accordancewith Sri Lanka Accounting Standards,Sri Lanka Financial Reporting Standarsand regulatory requirements of theCentral Bank of Sri Lanka.adopted by the Board in the reviewof the design and effectiveness of theinternal control system of the Bank.By Order of the Board,Sunil S SirisenaChairmanReview of the Statement by theExternal AuditorsThe External Auditors have reviewedthe above Directors’ Statement onInternal Controls for the year ended31st December 2012 and reportedto the Board that nothing has cometo their attention that causes them tobelieve that the statement is inconsistentwith their understanding of the processS.T. AbeygunawardanaWorking DirectorLionel P FernandoDirectorChairman - Board Audit Committee28 March 2013NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

200THE RESULTS OF A CHALLENGING YEARINDEPENDENT ASSURANCE REPORT ON INTERNAL CONTROLSAssurance Report of the AuditorGeneral to the Board of Directorson the Directors’ Statement onInternal Control of NationalSavings Bank.IntroductionThis report is to provide assurance on theDirectors’ Statement on Internal Control(“Statement”) of National Savings Bankincluded in the annual report for the yearended 31 December 2012.Management’s responsibilityManagement is responsible for thepreparation and presentation of theStatement in accordance with the“Guidance for Directors of Banks onthe Directors’ statement on InternalControl” issued in compliance with thesection 3(8)(ii)(b) of the Banking ActDirection No.11 of 2007, by the Instituteof Chartered Accountants of Sri Lanka.My responsibility andcompliance with SLSAE 3050My responsibility is to issue a report tothe Board of Directors on the Statementbased on the work performed.I conducted my engagement inaccordance with Sri Lanka Standardon Assurance Engagements SLSAE3050 - Assurance Report for Banks onDirectors’ Statement on Internal Controlissued by Chartered Accountants of SriLanka.Summary of work performedThis engagement has been conductedto assess whether the Statement isboth supported by the documentationprepared by or for Directors andappropriately reects the process theDirectors have adopted in reviewing thesystem of internal control for the Bank.The procedures performed are limitedprimarily to inquiries of bank personneland the existence of documentation ona sample basis that supports the processadopted by the Board of Directors.SLSAE 3050 does not require me toconsider whether the Statement coversall risks and controls, or to from anopinion on the effectiveness of theBank’s risk and control procedures.SLSAE 3050 also does not requireme to consider whether the processesdescribed to deal with material internalcontrol aspects of any signicantproblems disclosed in the annual reportwill, in fact, remedy the problems.ConclusionBased on the procedures performed,nothing has come to my attention thatcauses me to believe that the Statementincluded in the annual report isinconsistent with my understanding ofthe process the Board of Directors hasadopted in the review of the design andeffectiveness of internal control of theBankH A S SamaraweeraAuditor GeneralNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

201THE RESULTS OF A CHALLENGING YEARGENERAL MANAGER / CEO’S AND DEPUTY GENERAL MANAGER’S(FINANCE & PLANNING) STATEMENT OF RESPONSIBILITYThe Financial Statements of theNational Savings Bank and theConsolidated Financial Statements ofthe Bank and its Subsidiary (Group)as at 31 December 2012 are preparedand presented in conformity with therequirements of the following: National Savings Bank Act No. 30of 1971 and amendments thereto. Finance Act No. 38 of 1971. Sri Lanka Accounting Standardsand Sri Lanka Financial ReportingStandards issued by The Instituteof Chartered Accountants of SriLanka. Sri Lanka Accounting and AuditingStandards Act No. 15 of 1995. Banking Act No. 30 of 1988 andamendments thereto and Directionsand Guidelines issued by CentralBank of Sri Lanka.The formats used in the preparation ofthe Financial Statements and disclosuresmade comply with the formatsprescribed by the Central Bank of SriLanka which are also in compliancewith the disclosure requirements ofthe Sri Lanka Accounting Standards 1(LKAS 1) – Presentation of FinancialStatements.The Group presents the nancial resultsto its users on a quarterly basis.The Bank and the Group have takenappropriate actions to design systemsand procedures to meet the requirementof convergence with new Sri LankaAccounting Standards and Sri LankaFinancial Reporting Standards witheffect from 01 January 2012. With thisadoption Accounting Policies have beenchanged accordingly. For the purposeof comparison, Financial Resultsand Financial Position of previousyear (2011) have been restated in theFinancial Statements.Signicant Accounting Policies andestimates that involved a high degreeof judgment and complexity werediscussed with the Bank’s ExternalAuditors and the Board AuditCommittee, comparative informationhas been reclassied wherevernecessary to comply with the currentpresentation and material departures, ifany, have been disclosed and explained.We conrm that to the best of ourknowledge, the Financial Statements,Signicant Accounting Policies andother nancial information includedin this Annual Report, fairly presentin all material aspects of the nancialposition, results of the operations andthe cash ows of the Group during theperiod under review. We also conrmthat the Group has adequate resourcesto continue in operation and has appliedthe going concern basis in preparingthese Financial Statements.We are responsible for establishing,implementing and maintainingInternal Controls and Proceduresof the Bank and its Subsidiary. Weensure that effective Internal Controlsand Procedures are in place ensuringmaterial information relating tothe Group is made known to us forsafeguarding assets, preventing anddetecting fraud and/or error as well asother irregularities, which are reviewed,evaluated and updated on an ongoingNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

202THE RESULTS OF A CHALLENGING YEARGENERAL MANAGER / CEO’S AND DEPUTY GENERAL MANAGER’S(FINANCE & PLANNING) STATEMENT OF RESPONSIBILITYbasis. We are satised that there were nosignicant deciencies and weaknessesin the design or operation of theInternal Controls and Procedures, tothe best of our knowledge. We conrm,based on our evaluations that therewere no signicant deciencies andmaterial weaknesses in the design oroperation of internal controls and fraudthat involved management or otheremployees.The Bank’s Internal Audit Division alsoconducts periodic reviews to ensure thatthe Internal Controls and Proceduresare consistently followed.The Financial Statements of the Bankand its Subsidiary were audited by theAuditor General and Messrs KPMGFord Rhodes and Thornton CharteredAccountants. The Auditor General’sReport on the Bank’s ConsolidatedFinancial Statements is given on pages205 to 250 of this Annual Report.The Bank’s Board Audit Committee,inter alia, reviewed all the InternalAudit and Inspection Programmes, theefciency of Internal Control Systemsand Procedures and also reviewedthe Signicant Accounting Policiesand their adherence to statutory andregulatory requirements, the detailsof which are given in the Board AuditCommittee Report on page 95 of thisAnnual Report. To ensure completeindependence, the Auditor Generaland the Internal Auditors have fulland free access to the members of theBoard Audit Committee to discuss anymatter of substance. However, thereare inherent limitations that should berecognised in weighing the assurancesprovided by any system of internalcontrol and accounting. We conrmthat to the best of our knowledge The Bank and Group havecomplied with all applicable lawsand regulations and guidelines andthere are no material litigationsagainst the Group other than thosedisclosed in Note 44 on page 244 ofthe Financial Statements. All taxes, duties, levies and allstatutory payments by the Bank andthe Group and all contributions,levies and taxes payable on behalfof and in respect of the employeesof the Bank and the Group as at theBalance Sheet date have been paid,or where relevant provided for.K.B. WijeyaratneDeputy General Manager(Finance & Planning)H.M. Hennayake BandaraGeneral Manager/CEOColombo28 March 2013NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

203THE RESULTS OF A CHALLENGING YEARREPORT OF THE AUDITOR GENERALThe ChairmanNational Savings BankReport of the Auditor General onthe Financial Statements of theNational Savings Bank and itssubsidiaries for the year ended 31December 2012The audit of the nancial statements ofthe National Savings Bank (Bank) andthe consolidated nancial statementsof the Bank and its subsidiary (Group)for the year ended 31 December 2012comprising the Statement of FinancialPosition as at 31 December 2012, theStatement of Income, Statement ofComprehensive Income, Statementof Changes in Equity and Cash FlowStatement for the year then ended, anda summary of signicant accountingpolicies and other explanatoryinformation, was carried out under mydirection I pursuance of provisions inArticle 154(1) of the Constitution ofthe Democratic Socialist Republic ofSri Lanka. The nancial statements ofthe subsidiary was audited by a rmof Chartered Accountants in publicpractice appointed by the members ofthe respective subsidiary.Management’s Responsibility forthe financial statementsManagement is responsible for thepreparation and fair presentationof these nancial statements inaccordance with Sri Lanka AccountingStandards and for such internal controlas Management determines is necessaryto enable the preparation of nancialstatements that are free from materialmisstatements, whether due to fraud orerror.Auditor’s ResponsibilityMy responsibility is to express anopinion on these nancial statementsbased on my audit. I conducted my auditin accordance with Sri Lanka AuditingStandards. Those Standards require thatI comply with ethical requirements andplan and perform the audit to obtainreasonable assurance about whetherthe nancial statements are free frommaterial misstatements. An auditinvolves performing procedures to obtainaudit evidence about the amounts anddisclosures in the nancial statements.The procedures selected depend onthe auditor’s judgment, including theassessment of the risk of materialmisstatement of the nancial statements,whether due to fraud or error. In makingthose risk assessments, the auditorconsiders internal control relevantto the Bank’s preparation and fairpresentation of the nancial statementsin order to design audit procedures thatare appropriate in the circumstances,but not for the purpose of expressingan opinion on the effectiveness of theBank’s internal control. An audit alsoincludes evaluating the appropriatenessof Accounting Policies used and thereasonableness of accounting estimatesmade by management, as well asevaluating the overall presentation ofthe nancial statements.I believe that the audit evidence I haveobtained is sufcient and appropriate toprovide a basis for my audit opinion.Opinion - BankIn my opinion, the nancial statementsgive a true and fair view of the nancialposition of the Bank as at 31 December2012 and its nancial performance andits cash ows for the year then ended inaccordance with Sri Lanka AccountingStandards.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

204THE RESULTS OF A CHALLENGING YEARREPORT OF THE AUDITOR GENERALOpinion - GroupIn my opinion, the consolidated nancialstatements give a true and fair view ofthe nancial position of the Bank andits subsidiary as at 31 December 2012and its nancial performance and itscash ows for the year then ended inaccordance with Sri Lanka AccountingStandards.Report on Other Legal andRegulatory RequirementThese nancial statements had beenpresented the information required bythe Banking Act, No.30 of 1988 andsubsequent amendments.Report to ParliamentMy report to Parliament in pursuanceof provisions in Article 154 (6) of theconstitution will be tabled in due course.H A S SamaraweeraAuditor GeneralNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

205THE RESULTS OF A CHALLENGING YEARSTATEMENT OF COMPREHENSIVE INCOMEBankFor the year ended 31st December 2012 2011 Change 2012 2011 ChangeNote Rs. ‘000 Rs. ‘000 % Rs. ‘000 Rs. ‘000 %Gross income 3 53,045,059 46,544,644 13.97 54,152,229 47,532,290 13.93Interest income 52,673,261 47,095,745 11.84 53,780,431 48,083,391 11.85Less: Interest expenses 39,142,492 29,296,099 33.61 40,065,973 29,979,305 33.65Net interest income 4 13,530,769 17,799,646 (23.98) 13,714,458 18,104,086 (24.25)Fee and commission income 221,709 240,768 (7.92) 221,709 240,768 (7.92)Less: Fee and commission expenses 24,481 26,553 (7.80) 27,705 33,239 (16.65)Net fee and commission income 5 197,228 214,215 (7.93) 194,004 207,529 (6.52)Net gain/(loss) from trading 6 69,939 (859,727) 108.13 69,939 (859,727) 108.13Net gain/(loss) from financial instrumentsdesignated at fair value through profit or loss 7 - - - (138,710) (135,889) 2.08Net gain / (loss) from financial investments 8 5,481 4,111 33.33 5,481 4,111 33.33Other operating income (net) 9 74,669 63,747 17.13 74,669 63,747 17.13Total operating income 13,878,086 17,221,992 (19.42) 13,919,841 17,383,857 (19.93)Less: Impairment charge for loans and other losses 10 130,935 142,632 (8.20) 130,935 142,632 (8.20)Net operating income 13,747,151 17,079,360 (19.51) 13,788,906 17,241,225 (20.02)Less: ExpensesPersonnel expenses 11 4,077,501 4,139,657 (1.50) 4,091,835 4,153,912 (1.49)Other expenses 12 2,261,322 2,120,541 6.64 2,227,664 2,092,482 6.46Operating profit before value added tax (VAT) 7,408,328 10,819,162 (31.53) 7,469,407 10,994,831 (32.06)Less: Value added tax (VAT) on financial services 1,239,069 1,564,481 (20.80) 1,248,121 1,583,762 (21.19)Operating profit after value added tax (VAT) 6,169,259 9,254,681 (33.34) 6,221,286 9,411,069 (33.89)Profit Before Income Tax 6,169,259 9,254,681 (33.34) 6,221,286 9,411,069 (33.89)Less: Income tax expenses 13 1,837,917 3,192,819 (42.44) 1,880,607 3,306,669 (43.13)Profit for the year 4,331,342 6,061,862 (28.55) 4,340,679 6,104,400 (28.89)GroupProfit attributable to:Equity holders of the Bank 4,331,342 6,061,862 (28.55) 4,340,679 6,104,400 (28.89)Profit for the year 4,331,342 6,061,862 (28.55) 4,340,679 6,104,400 (28.89)Earnings per share on profitBasic earnings per ordinary share (Rs) 14 13.54 18.94 (28.55) 12.96 18.22 (28.89)Diluted earnings per ordinary share (Rs) 13.54 18.94 (28.55) 12.96 18.22 (28.89)Profit for the year 4,331,342 6,061,862 (28.55) 4,340,679 6,104,400 (28.89)Other comprehensive income, net of taxNet gains/(losses) on re-measuring available-for-salefinancial assets (210,840) (1,239,521) (82.99) (210,840) (1,239,521) (82.99)Other comprehensive income for theyear, net of taxes (210,840) (1,239,521) (82.99) (210,840) (1,239,521) (82.99)Total comprehensive income for the year 4,120,502 4,822,341 (14.55) 4,129,839 4,864,879 (15.11)Attributable to:Equity holders of the Bank 4,120,502 4,822,341 (14.55) 4,129,839 4,864,879 (15.11)Total comprehensive income for the year 4,120,502 4,822,341 (14.55) 4,129,839 4,864,879 (15.11)NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

206THE RESULTS OF A CHALLENGING YEARSTATEMENT OF FINANCIAL POSITIONBankAs at 31st December 2012 2011 Change 2012 2011 ChangeNote Rs. ‘000 Rs. ‘000 % Rs. ‘000 Rs. ‘000 %AssetsCash and cash equivalents 16 1,465,542 1,398,413 4.80 1,467,042 1,399,897 4.80Balances with Central Bank 17 - - - 242 117 106.84Placements with banks 18 5,973,585 5,280,528 13.12 5,973,585 5,280,528 13.12Derivative financial instruments 19 9,401 34,458 (72.72) 9,401 34,458 (72.72)Other financial assets held-for-trading 20 10,823,874 11,589,525 (6.61) 10,823,874 11,589,525 (6.61)Financial assets designated at fair value throughprofit or loss 21 - - - 5,488,970 8,599,007 (36.17)Loans and receivables to banks 22 13,374,007 21,222,723 (36.98) 14,091,299 23,829,757 (40.87)Loans and receivables to other customers 23 155,245,236 116,217,344 33.58 155,249,483 116,228,559 33.57Financial investments - Available-for-sale 24 2,978,800 3,284,099 (9.30) 2,979,800 3,285,099 (9.29)Financial investments - Held to maturity 25 309,595,845 298,134,819 3.84 313,063,745 300,916,743 4.04Investments in subsidiaries 26 150,000 150,000 - - - -Property, plant and equipment 27 5,151,512 5,124,327 0.53 5,152,416 5,125,312 0.53Intangible assets 28 112,101 122,782 (8.70) 112,264 123,024 (8.75)Deferred tax assets 29 - - - 313 221 41.63Other assets 30 4,814,290 3,415,416 40.96 4,857,794 3,468,834 40.04Total assets 509,694,193 465,974,434 9.38 519,270,228 479,881,081 8.21GroupLiabilitiesDue to banks 31 337,014 128,948 161.36 5,603,182 8,962,642 (37.48)Due to other customers 32 457,650,387 421,849,063 8.49 457,650,387 421,849,063 8.49Other borrowings 33 22,620,945 16,141,529 40.14 25,628,549 19,923,444 28.64Current tax liabilities - - - 38,859 47,967 (18.99)Deferred tax liabilities 29 123,338 95,615 28.99 123,338 95,615 28.99Other liabilities 34 4,626,718 4,706,796 (1.70) 4,640,398 4,709,479 (1.47)Total liabilities 485,358,402 442,921,951 9.58 493,684,713 455,588,210 8.36EquityStated capital 35 3,200,000 3,200,000 - 3,200,000 3,200,000 -Statutory reserve fund 36 1,713,127 1,626,500 5.33 1,713,127 1,626,500 5.33Other reserves 37 19,422,664 18,225,983 6.57 20,672,388 19,466,371 6.20Total equity of the owners of the parent 24,335,791 23,052,483 5.57 25,585,515 24,292,871 5.32Total equity 24,335,791 23,052,483 5.57 25,585,515 24,292,871 5.32Total equity and liabilities 509,694,193 465,974,434 9.38 519,270,228 479,881,081 8.21Contingent liabilities and commitments 38 6,845,410 1,730,018 295.68 6,845,410 1,730,018 295.68NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

207THE RESULTS OF A CHALLENGING YEARSTATEMENT OF FINANCIAL POSITIONSignificant Accounting Policies and Notes to the Financial Statements disclosed on pages 211 to 250 are integral part of these FinancialStatements.CertificationI certify that the above Financial Statements give a true and fair view of the state of affairs as at 31st December 2012 and its profit for theyear ended 31st December 2012K.B. WijeyaratneDeputy General Manager (Finance & Planning)The Board of Directors is responsible for the preparation and presentation of these Financial Statements.Approved and signed for and on behalf of the Board.Sunil S. Sirisena S.T. Abeygunawardana H.M. Hennayaka BandaraChairman Working Director General Manager / CEO27th March 2013Colombo, Sri LankaNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

208THE RESULTS OF A CHALLENGING YEARSTATEMENT OF CHANGES IN EQUITY - BANKStated capitalStatutoryReserve fundRevaluationreserveAvailable forsale reserveOther reservesRetainedearningsTotal equityRs. '000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Balance as at 01.01.2011 3,200,000 1,338,543 1,583,340 - 15,545,927 - 21,667,810Impact of adopting SLFRS - - - 1,585,480 - (1,801,627) (216,147)SLFRS Balance 01.01.2011 3,200,000 1,338,543 1,583,340 1,585,480 15,545,927 (1,801,627) 21,451,663Net profit for the year 2011 - - - - - 6,061,862 6,061,862Other comprehensive income - - - (1,239,521) - - (1,239,521)Unclaimed deposit reserve - - - - (8,850) - (8,850)Contribution to consolidated fund - - - - - (3,212,671) (3,212,671)Transfers during year 2011 - 287,957 - - 759,607 (1,047,564) -Balance as at 31.12.2011 3,200,000 1,626,500 1,583,340 345,959 16,296,684 - 23,052,483Profit for the year 2012 - - - - - 4,331,342 4,331,342Other comprehensive income (net of tax) - - - (210,840) - - (210,840)Total comprehensive income for the year - - - (210,840) - 4,331,342 4,120,502Transaction with equity holders,recognized directly in equityTransfers to reserves during the period - 86,627 - - 1,421,469 (1,508,096) -Contribution to consolidated fund - - - - - (2,823,245) (2,823,245)Unclaimed deposit reserve - - - - (13,948) - (13,948)Total transactions with equity holders - 86,627 - - 1,407,521 (4,331,342) (2,837,194)Balance as at 31.12.2012 3,200,000 1,713,127 1,583,340 135,119 17,704,205 - 24,335,791NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

209THE RESULTS OF A CHALLENGING YEARSTATEMENT OF CHANGES IN EQUITY - GROUPStated capitalStatutoryReserve fundRevaluationreserveAvailable forsale reserveOtherreservesRetainedearningsTotal equityRs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Balance as at 01.01.2011 3,200,000 1,338,543 1,583,340 - 16,751,679 - 22,873,562Impact of adopting SLFRS - - - 1,585,480 - (1,809,528) (224,048)SLFRS Balance 01.01.2011 3,200,000 1,338,543 1,583,340 1,585,480 16,751,679 (1,809,528) 22,649,514Net profit for the year 2011 - - - - - 6,104,400 6,104,400Other comprehensive income - - - (1,239,521) - - (1,239,521)Unclaimed deposit reserve - - - - (8,850) - (8,850)Contribution to consolidated fund - - - - - (3,212,671) (3,212,671)Transfers during year 2011 - 287,957 - - 794,243 (1,082,200) -Balance as at 31.12.2011 3,200,000 1,626,500 1,583,340 345,959 17,537,072 - 24,292,871Profit for the year 2012 - - - - - 4,340,679 4,340,679Other comprehensive income (net of tax) - - - (210,840) - - (210,840)Total comprehensive income for the year - - - (210,840) - 4,340,679 4,129,839Transaction with equity holders,recognized directly in equityTransfers to reserves during the period - 86,627 - - 1,430,805 (1,517,432) -Contribution to consolidated fund - - - - - (2,823,245) (2,823,245)Unclaimed deposit reserve - - - - (13,948) - (13,948)Total transactions with equity holders - 86,627 - - 1,416,857 (4,340,679) (2,837,195)Balance as at 31.12.2012 3,200,000 1,713,127 1,583,340 135,119 18,953,929 - 25,585,515NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

210THE RESULTS OF A CHALLENGING YEARSTATEMENT OF CASH FLOWSBankGroupFor the year ended 31st December 2012 2011 2012 2011Note Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Cash flow from operating activitiesProfit before tax 6,169,259 9,254,681 6,221,286 9,411,069Adjustment for:Non-cash items included in profit before tax 41 487,828 557,132 488,233 557,583Change in operating assets 42 (44,144,956) (64,579,569) (42,934,983) (67,793,455)Change in operating liabilities 43 36,594,698 57,636,218 33,037,640 61,970,487Net gains from investing activities - - - -Others balances with banks (693,057) (1,344,536) (693,057) (1,344,536)Contribution paid to defined benefit plans (873,449) (854,257) (873,449) (854,257)Tax paid (1,810,194) (3,777,513) (1,850,879) (4,036,538)Net cash used in operating activities (4,269,871) (3,107,844) (6,605,209) (2,089,647)Cash flows from investing activitiesPurchase of property, plant and equipment (353,729) (665,666) (353,975) (742,133)Proceeds from the sale of property, plant and equipment - - - -Purchase of financial investment 305,299 (3,717) 305,299 (3,717)Proceeds from the sale and maturity of financial investments 765,650 4,524,104 3,956,193 4,524,104Net purchase of intangible assets (19,667) (24,701) (19,666) (24,701)Contribution to Consolidated fund (3,048,035) (5,512,013) (3,060,968) (5,512,013)Net cash (used in)/from investing activities (2,350,482) (1,681,993) 826,883 (1,758,460)Cash flow from financing activitiesOther Borrowings 6,479,416 4,827,426 5,705,106 4,827,426Net cash from financial activities 6,479,416 4,827,426 5,705,106 4,827,426Net increase/(decrease) in cash & equivalents (140,937) 37,589 (73,220) 979,319Cash and cash equivalents at the beginning of the year 1,269,465 1,231,876 2,213,227 1,233,908Cash and cash equivalents at the end of the year 1,128,528 1,269,465 2,140,007 2,213,227NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

211THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS1. Corporate InformationReporting EntityNational Savings Bank (NSB) is a saving Bankincorporated in Sri Lanka. The registeredoffice of the Bank is located at No. 255,‘Saving House’, Galle Road, Colombo - 03,Sri Lanka. The ‘Group’ Financial Statementsfor the year ended 31 December 2012comprise of the Bank (parent) and its fullyownedSubsidiary, NSB Fund ManagementCompany Ltd. The Bank prepares financialstatements of the ‘Bank’ and the ‘Group’for the twelve months period ended31 December each year to be tabled in theParliament.The staff strength of the Bank as at31 December 2012 was 3,128 (2011-3,275).The Financial Statements for the year ended31 December 2012 were authorized forissue on 28th March 2013, by a resolutionof the Board of Directors.The Bank possesses 219 Branches,1,185 school Bank units and 231 ATMsof its service outlets and 641 Post officesand 3,412 sub-post offices as its agencynetwork.2. Main Accounting Policies2.1 Basis of PreparationThe Consolidated Financial Statements havebeen prepared on a historical cost basis,except for available-for-sale investments,derivative financial instruments, otherfinancial assets and liabilities held fortrading, financial assets and liabilitiesdesignated at fair value through profit orloss, which have all been measured atfair value. The Consolidated FinancialStatements are presented in Sri LankanRupees (Rs.) and all values are rounded tothe nearest thousand rupees, except whenotherwise indicated.2.1.1 Statement of complianceThe Financial Statements of the Bank andGroup are prepared in accordance withSri Lanka Accounting Standards (LKASsand SLFRSs) as issued by the Institute ofChartered Accountants of Sri Lanka.2.1.2 Presentation of financial statementsThe Bank and Group presents its statementof financial position broadly in order ofliquidity.2.1.3 Offsetting financial instrumentsFinancial assets and financial liabilities areoffset and the net amount reported in thestatement of financial position if and onlywhen there is a legally enforceable right tooffset the recognised amounts and thereis an intention to settle on a net basis, orto realise the assets and settle the liabilitysimultaneously. Income and expensesare not offset in the income statementunless required or permitted by anyaccounting standard or interpretation, andas specifically disclosed in the accountingpolicies of the Bank.2.1.4 Basis of consolidationThe Financial Statements of the Bank andGroup comprise the financial statementsof the Bank and its Subsidiary for the yearended 31 December 2012. The financialstatements of the Bank’s Subsidiary for thepurpose of consolidation are prepared forthe same reporting year as that of NationalSavings Bank, using consistent accountingpolicies.All intra–group balances, transactions,income and expenses are eliminated in full.Subsidiary are fully consolidated from thedate on which control is transferred to theBank. Control is achieved where the Bankhas the power to govern the financial andoperating policies of an entity so as toobtain benefits from its activities.2.2 Significant Accounting Judgments,Estimates and AssumptionsIn the process of applying the Bank’saccounting policies, management hasexercised judgement and estimates indetermining the amounts recognised in thefinancial statements. The most significantuses of judgements and estimates are asfollows:2.2.1 Going concernThe Bank’s management has made anassessment of its ability to continue as agoing concern and is satisfied that it hasthe resources to continue in businessfor the foreseeable future. Furthermore,management is not aware of any materialuncertainties that may cast significantdoubt upon the Bank’s ability to continueas a going concern. Therefore, the financialstatements continue to be prepared on thegoing concern basis.2.2.2 Fair value of financial instrumentsWhere the fair values of financial assets andfinancial liabilities recorded on the statementNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

212THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTSof financial position cannot be derived fromactive markets, they are determined usingvaluation techniques that include the use ofmathematical models. The inputs to thesemodels are derived from observable marketdata where possible, but where observablemarket data are not available, judgment isrequired to establish fair values.2.2.3 Impairment losses on loans andadvancesThe Bank reviews its individually significantloans and advances at each statement offinancial position date to assess whetheran impairment loss should be recordedin the Income Statement. In particular,management judgment is required in theestimation of the amount and timing offuture cash flows when determining theimpairment loss. These estimates arebased on assumptions about a numberof factors and actual results may differ,resulting in future changes to the allowance.Loans and advances that have beenassessed individually and found not to beimpaired and all individually insignificantloans and advances are then assessedcollectively, in groups of assets with similarrisk characteristics, to determine whetherprovision should be made due to incurredloss events for which there is objectiveevidence but whose effects are not yetevident. The collective assessment takesaccount of data from the loan portfolio(such as levels of arrears, credit utilization,loan to collateral ratios, etc.) and judgmentsto the effect of concentrations of risksand economic data (including levels ofunemployment, real estate prices indices,country risk and the performance ofdifferent individual groups).2.3. Financial Instruments2.3.1 Financial instruments - Initialrecognition and subsequentmeasurementi. Date of recognitionAll financial assets and liabilities are initiallyrecognized on the trade date, i.e. the datethat the Bank becomes a party to thecontractual provisions of the instrument.Note: In maintaining the General Ledger,Government Securities are recognized onthe settlement date which falls due afterthree days from the date of trade. Theposition is rectified in preparation of theFinancial Statements.ii. Initial measurement of financialinstrumentsThe classification of financial instruments atinitial recognition depends on the purposeand the management’s intention for whichthe financial instruments were acquiredand their characteristics. All financialinstruments are measured initially at theirfair value plus transaction costs, except inthe case of financial assets and financialliabilities recorded at fair value throughprofit or loss.iii. Derivatives recorded at fair valuethrough profit or lossThe Bank uses derivatives such as interestrate swaps. Derivatives are recorded at fairvalue and carried as assets when their fairvalue is positive and as liabilities when theirfair value is negative. Changes in the fairvalue of derivatives are included in ‘Nettrading income’.iv. Financial assets or financial liabilitiesheld-for-tradingFinancial assets or financial liabilities heldfor-tradingare recorded in the Statementof Financial Position at fair value. Changesin fair value are recognized in ‘Net tradingincome’. Dividend income or expense isrecorded in ‘Net trading income’ accordingto the terms of the contract, or when theright to the payment has been established.Included in this classification areGovernment Securities held for trading anddealing securities.v. Financial assets and financial liabilitiesdesignated at fair value through profitor loss (FVTPL)Financial assets and financial liabilitiesclassified in this category are those thathave been designated by managementon initial recognition, and designation isdetermined on an instrument by instrumentbasis.Financial assets and financial liabilities atfair value through profit or loss are recordedin the statement of financial position at fairvalue. Changes in fair value are recordedin ‘Net gain or loss on financial assets andliabilities designated at fair value throughprofit or loss’. Interest is earned or incurredis accrued in ‘Interest income’ or ‘Interestexpense’, respectively using the effectiveinterest rate (EIR), while dividend incomeis recorded in ‘Other operating income’when the right to the payment has beenestablished.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

213THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTSvi. Available-for-sale financial investmentsAvailable-for-sale investments includeequity and debt securities. Equityinvestments classified as available-for-saleare those which are neither classified asheld-for-trading nor designated at fair valuethrough profit or loss. Debt securities in thiscategory are those which are intended tobe held for an indefinite period of time andwhich may be sold in response to needs forliquidity or in response to changes in themarket conditions.Note: The Bank has not designated anyloans or receivables as available-for-saleAfter initial measurement, available-for-salefinancial investments are subsequentlymeasured at fair value. Equity investmentsunder AFS that do not have quoted marketprice and whose fair value cannot be reliablymeasured shall be measured at cost.Unrealised gains and losses are recognizeddirectly in equity (Other ComprehensiveIncome) in the ‘Available-for-sale reserve’.When the investment is disposed of,the cumulative gain or loss previouslyrecognized in equity is recognized in theIncome Statement in ‘Other operatingincome’. Where the bank holds more thanone investment in the same security they aredeemed to be disposed of on a first-in firstoutbasis. Interest earned whilst holdingavailable-for-sale financial investmentsis required as interest income using theEIR. Dividends earned whilst holdingavailable-for-sale financial investments arerecognized in the Income Statement as‘Other operating income’ when the rightof the payment has been established.The losses arising from impairment ofsuch investments are recognized in theincome statement in ‘Impairment losses onfinancial investments’ and removed fromthe ‘Available-for-sale reserve’.vii. Held-to-maturity financial investmentsHeld-to-maturity financial investmentsare non-derivative financial assets withfixed or determinable payments and fixedmaturities, which the Bank has the intentionand ability to hold to maturity. After initialmeasurement, held-to-maturity financialinvestments are subsequently measuredat amortised cost using the EIR, lessimpairment. Amortised cost is calculatedby taking into account any discount orpremium on acquisition and fees that are anintegral part of the EIR. The amortization isincluded in ‘Interest and similar income’ inthe income statement. The losses arisingfrom impairment of such investments arerecognized in the Income Statement line‘Credit loss expense’.If the Bank were to sell or reclassify morethan an insignificant amount of held-tomaturityinvestments before maturity (otherthan in certain specific circumstances), theentire category would be tainted and wouldhave to be reclassified as available-for-sale.Furthermore, the Bank would be prohibitedfrom classifying any financial asset as heldto maturity during the following two years.viii. Due from banks and loans andadvances to customersDue from banks’ and ‘Loans and advancesto customers’, include non-derivativefinancial assets with fixed or determinablepayments that are not quoted in an activemarket.After initial measurement, amounts ‘Duefrom banks’ and ‘loans and advances tocustomers’ are subsequently measuredat amortized cost using the EIR, lessallowance for impairment. Amortized costis calculated by taking into account anydiscount or premium on acquisition andfees and costs that are an integral partof the EIR. The amortization is includedin ‘Interest and similar income’ in theIncome Statement. The losses arising fromimpairment are recognized in the IncomeStatement in ‘Credit loss expense’.ix. Repurchase and reverse repurchaseagreementsSecurities sold under agreements torepurchase at a specified future date arenot derecognised from the Statementof Financial Position as the bank retainssubstantially all the risks and rewardsof ownership. The corresponding cashreceived is recognized in the ConsolidatedStatement of Financial Position as an assetwith a corresponding obligation to returnit, including accrued interest as a liabilitywithin ‘Cash collateral on securities lentand repurchase agreements’, reflectingthe transaction’s economic substance as aloan to the Bank. The difference betweenthe sale and repurchase prices is treated asinterest expenses and is accrued over thelife of agreement using the EIR.Conversely, securities purchased underagreements to resell at a specified futuredate are not recognized in the Statement ofFinancial Position. The consideration paid,including accrued interest, is recorded inthe Statement of Financial Position, within‘Cash collateral on securities borrowed andreverse repurchase agreements’, reflectingNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

214THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTSthe transaction’s economic substance as aloan by the Bank. The difference betweenthe purchase and resale prices is recordedin ‘Net interest income’ and is accrued overthe life of the agreement using the EIR.2.3.2 Impairment of Financial Instrumentsi. Impairment of financial assetsThe Bank assesses at each statement offinancial position date whether there is anyobjective evidence that a financial asset ora group of financial assets is impaired. Afinancial asset or a group of financial assetsis deemed to be impaired if, and only if,there is objective evidence of impairmentas a result of one or more events that hasoccurred after the initial recognition of theasset (an incurred ‘loss event’) and thatloss event (or events) has a impact on theestimated future cash flows of the financialasset or the group of financial assets thatcan be reliably estimated.Evidence of impairment may includeindications that the borrower or a groupof borrowers is experiencing significantfinancial difficulty, the probability that theywill enter bankruptcy or other financialreorganization, default or delinquency ininterest or principal payments and whereobservable data indicates that there is ameasurable decrease in the estimatedfuture cash flows, such as changesin arrears or economic conditions thatcorrelate with defaults.ii. Financial assets carried at amortizedcostFor financial assets carried at amortizedcost (such as amounts due from banks,loans and advances to customers as wellas held-to-maturity investments), the Bankfirst assesses individually whether objectiveevidence of impairment exists for financialassets that are individually significant, orcollectively for financial assets that arenot individually significant. If the Bankdetermines that no objective evidenceof impairment exists for an individuallyassessed financial asset, it includes theasset in a group of financial assets withsimilar credit risk characteristics andcollectively assesses them for impairment.Assets that are individually assessed forimpairment and for which an impairmentloss is, or continues to be, recognized arenot included in a collective assessment ofimpairment.If there is objective evidence that animpairment loss has been incurred, theamount of the loss is measured as thedifference between the asset’s carryingamount and the present value of estimatedfuture cash flows (excluding futureexpected credit losses that have not yetbeen incurred). The carrying amount ofthe asset is reduced through the use ofan allowance account and the amountof the loss is recognized in the IncomeStatement. Interest income continues tobe accrued on the reduced carrying amountand is accrued using the rate of interestused to discount the future cash flows forthe purpose of measuring the impairmentloss. The interest income is recorded aspart of ‘Interest and similar income’. Loanstogether with the associated allowanceare written off when there is no realisticprospect of future recovery and all collateralhas been realized or has been transferredto the Bank. If, in a subsequent year, theamount of the estimated impairment lossincreased or decreased because of anevent occurring after the impairment wasrecognized, the previously recognizedimpairment loss is increased or reduced byadjusting the allowance account. If a futurewrite-off is later recovered, the recovery iscredited to the ‘Credit loss expense’.The present value of the estimated futurecash flows is discounted at the financialasset’s original EIR. If a loan has a variableinterest rate, the discount rate for measuringany impairment loss is the current EIR. Ifthe Bank has reclassified trading assetsto loans and advances, the discount ratefor measuring any impairment loss is thenew EIR determined at the reclassificationdate. The calculation of the present valueof the estimated future cash flows of acollateralised financial asset reflects thecash flows that may result from foreclosureless costs for obtaining and selling thecollateral, whether or not foreclosure isprobable.For the purpose of a collective evaluationof impairment, financial assets are groupedon the basis of the Bank’s internal creditgrading system, that considers credit riskcharacteristics such as asset type industry,geographical location, collateral type, pastduestatus and other relevant factors.Future cash flows on a group of financialassets that are collectively evaluated forimpairment are estimated on the basis ofhistorical loss experience for assets withcredit risk characteristics similar to thosein the group. Historical loss experience isadjusted on the basis of current observabledate to reflect the effect of currentNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

215THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTSconditions on which the historical lossexperience is based and to remove theeffect of conditions in the historical periodthat do not exist currently. Estimates ofchanges in future cash flows reflect, andare directionally consistent with, changesin related observable data from year toyear (such as changes in unemploymentrates, property prices, commodity prices,payment status, or other factors that areindicative of incurred losses in the groupand their magnitude). The methodologyand assumptions used for estimating futurecash flows are reviewed regularly to reduceany differences between loss estimatesand actual loss experience.iii. Available-for-sale financial investmentsFor available-for-sale financial investmentsincluding debt securities, the Bank assessesat each Statement of Financial Position datewhether there is objective evidence that aninvestment is impaired.In the case of debt instruments classifiedas available-for-sale, the Bank assessesindividually whether there is objectiveevidence of impairment based on thesame criteria as financial asset carried atamortized cost. However, the amountrecorded for impairment is the cumulativeloss measured as the difference betweenthe amortized cost and the current fairvalue, less any impairment loss on thatinvestment previously recognized in theIncome Statement. Future interest incomeis based on the reduced carrying amountand is accrued using the rate of interestused to discount the future cash flows forthe purpose of measuring the impairmentloss. The interest income is recorded aspart of ‘Interest and similar income’. If,in a subsequent period, the fair value of adebt instrument increased and the increasecan be objectively related to a credit eventoccurring after the impairment loss wasrecognized in the Income Statement, theimpairment loss is reversed through theIncome Statement.In the case of equity investments classified asavailable-for-sale, objective evidence wouldalso include a ‘significant’ or ‘prolonged’decline in the fair value of the investmentbelow its cost. The Bank treats ‘significant’generally as 20% and ‘prolonged’ generallyas greater than six months. Where thereis evidence of impairment, the cumulativeloss measured as the difference betweenthe acquisition cost and the current fairvalue, less any impairment loss on thatinvestment previously recognized in theIncome Statement is removed from equityand recognized in the Income Statement.Impairment losses on equity investmentsare not reversed through the IncomeStatement; increases in the fair valueafter impairment are recognized in othercomprehensive income.iv. Renegotiated loansWhere possible, the Bank seeks torestructure loans rather than to takepossession of collateral. This may involveextending the payment arrangements andthe agreement of new loan conditions.Once the terms have been renegotiated anyimpairment is measured using the originalEIR as calculated before the modification ofterms and the loan is no longer consideredpast due. Management continually reviewsrenegotiated loans to ensure that all criteriaare met and that future payments are likelyto occur. The loans continue to be subjectto an individual or collective impairmentassessment, calculated using the loan’soriginal EIR.2.3.3 Recognition of income and expensesfor financial instrumentsRevenue is recognized to the extent that itis probable that the economic benefits willflow to the Bank and the revenue can bereliably measured. The following specificrecognition criteria must also be met beforerevenue is recognized.i. Interest and similar income andexpenseFor all financial instruments measured atamortized cost, interest bearing financialassets classified as available-for-sale andfinancial instruments designated at fairvalue through profit or loss, interest incomeor expense is recorded using the EIR, whichis the rate that exactly discounts estimatedfuture cash payments or receipts throughthe expected life of the financial instrumentor a shorter period, where appropriate, tothe net carrying amount of the financialasset or financial liability. The calculationtakes into account all contractual termsof the financial instrument (for example,prepayment options) and includes anyfees or incremental costs that are directlyattributable to the instrument and are anintegral part of the EIR, but not future creditlosses.The carrying amount of the financial assetor financial liability is adjusted if the Bankrevises its estimates of payments orreceipts. The adjusted carrying amount isNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

216THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTScalculated based on the original EIR andthe change in carrying amount is recordedas ‘Other operating income’. However,for a reclassified financial asset for whichthe Bank subsequently increases itsestimates of future cash receipts as aresult of increased recoverability of thosecash receipts, the effect of that increaseare recognised as an adjustment to the EIRfrom the date of the change in estimate.Once the recorded value of a financial assetor a group of similar financial assets hasbeen reduced due to an impairment loss,interest income continues to be recognizedusing the rate of interest used to discountthe future cash flows for the purpose ofmeasuring the impairment loss.Cash and cash equivalents as referred to inthe cash flow statement comprises cash inhand, non-restricted current accounts withCentral Banks and amounts due from bankson demand or with an original maturity ofthree months or less.ii. Fee and commission incomeFees earned for the provision of servicesand credit related fees are recognized in theyear in which the income is received.2.4. Property, Plant and EquipmentProperty, Plant and Equipment is statedat cost or valuation excluding the costs ofday–to–day servicing, less accumulateddepreciation and accumulated impairmentin value. Changes in the expecteduseful life are accounted for by changingthe depreciation period or method, asappropriate, and treated as changes inaccounting estimates.Depreciation is calculated using thestraight–line method to write down the costof property and equipment to their residualvalues over their estimated useful lives.Land is not depreciated. The estimateduseful lives are as follows:Category of AssetPeriod ofDepreciationLeasehold Propertyover theperiod of leaseFreehold Buildings2.5% p.a.Office & Sundry Equipments 10% p.a.Motor Vehicles20% p.a.Computer Hardware & Software 25% p.a.Furniture and Fittings 10% p.a.The group provide depreciation on assetsfrom the date on which they are availablefor use to the date disposal.Property, Plant and Equipment isderecognised on disposal or when nofuture economic benefits are expectedfrom its use. Any gain or loss arising onderecognition of the asset (calculated asthe difference between the net disposalproceeds and the carrying amount of theasset) is recognised in ‘Other operatingincome’ in the Income Statement in theyear the asset is derecognised.2.5 Intangible AssetsThe Bank’s other intangible assets includethe value of computer software. Anintangible asset is recognised only whenits cost can be measured reliably and it isprobable that the expected future economicbenefits that are attributable to it will flowto the Bank.Intangible assets acquired separately aremeasured on initial recognition at cost.The cost of intangible assets acquired in abusiness combination is their fair value asat the date of acquisition. Following initialrecognition, intangible assets are carried atcost less any accumulated amortisation andany accumulated impairment losses.The useful lives of intangible assets areassessed to be either finite or indefinite.Intangible assets with finite lives areamortised over the useful economiclife. The amortisation period and theamortisation method for an intangible assetwith a finite useful life are reviewed at leastat each financial year–end. Changes in theexpected useful life or the expected patternof consumption of future economic benefitsembodied in the asset are accountedfor by changing the amortisation periodor method, as appropriate, and they aretreated as changes in accounting estimates.The amortisation expense on intangibleassets with finite lives is recognised inthe Income Statement in the expensecategory consistent with the function of theintangible asset.2.6 Pension Benefits2.6.1 Defined benefit pension planThe Bank operates a defined benefit pensionplan, for the permanent staff members whohave joined the Bank prior to 1st October1995, which requires contributions to bemade to a separately administered fund. Thecost of providing benefits under the definedbenefit plan is determined separately usingthe projected benefit actuarial valuationmethod. Actuarial gains and losses are fullyNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

217THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTSrecognised as income or expense in therespective financial year.The defined benefit asset or liabilitycomprises the present value of the definedbenefit obligation less past service costsnot yet recognised and less the fair value ofplanned assets out of which the obligationsare to be settled directly, less actuariallosses not yet recognised. The value ofany asset is restricted to the sum of anyactuarial losses and past service cost notyet recognised and the present value of anyeconomic benefits available in the form ofrefunds from the plan or reductions in thefuture contributions to the plan.The latest actuarial valuation was carriedout as of 31 December 2012, by PiyalS. Gunatilleke F.S.A.(USA), Member ofthe American Academy of Actuaries andConsulting Actuaries.The principal financial assumptions usedin the valuation as at 31.12.2012 are asfollows:1. Interest/ Discount Rate 12.5 % p.a.2. Increase in Cost of LivingAllowances5 % p.a.3. Increase in AverageBasic Salary5% p.a.The Accounts of the Pension Fund aremaintained separately and are subjectto annual audit by Independent ExternalAuditors. The Statement of Accounts aswell as the Auditor’s Report are tabled andreviewed by the Board of Trustees. Thesestatements of Accounts and Auditor’sReport are also submitted for review of thedisclosure of the Bank, as the Bank has anobligation of ensuring that funding is madeat optimum levels. Pension is payablemonthly as long as the participant is alive.Un-Funded pension Liability.The results of the acturial valuation indicate( as at 31-12-2010) a past service deficit ofRs.2,025 Mn, and this has been provided infull by adjusting the retained earning asat 31-12-2011. The details for Un-FundedPension Liability are given in Note No-34(a).The amount recognised as expense forthe current year is Rs. 705 Million. (Rs.865Million in 2011)2.6.2 GratuityThe employees who joined the Bank onor after 1st January 1996 will be eligiblefor gratuity under the Payment of GratuityAct No. 12 of 1983, as they are not eligibleto join the Pension Scheme described asabove.Other employees whose services areterminated other than by retirement areeligible to receive the terminal gratuityunder the Payment of Gratuity Act No. 12of 1983 at the rate of one half of the GrossSalary applicable to the last month of thefinancial year in which the employment isterminated, for each year of continuousservice, for those who have served inexcess of 5 years.The Bank makes a monthly provisiontowards such Gratuity Payment Liabilitiesand this value is reflected in the FinancialPosition of the Bank. The provision isbased on the Actuarial valuation. The lastActuarial valuation was carried out as of 31December 2011.2.6.3 Post employment medical benefitsThe Bank expenses post employmentmedical benefits as an annual contributionbased on the annual actual expenditure andthe balance of the fund made out of theBank’s contribution at the year end.The amount recognised as expense for thecurrent year is Rs. 25 Million. (Rs.25 Millionin 2011)2.6.4 Defined contribution planThe Bank also operates a definedcontribution plan. The contribution payableto a defined contribution plan is in proportionto the services rendered to the Bank by theemployees and is recorded as an expenseunder ‘Personnel expenses’. Unpaidcontributions are recorded as a liability. TheBank contributes to the following definedcontribution plans:i. Employees’ Provident FundThe Bank and employees contribute 12%and 8% respectively of the employee’smonthly gross salary (excluding overtime)to the Provident Fund. The Bank’s ProvidentFund is an approved fund under theEmployees’ Provident Fund Act.ii. Employees’ Trust FundThe Bank contributes 3% of the employee’smonthly gross salary excluding overtime tothe Employees’ Trust Fund maintained bythe Employees Trust Fund Board.2.7 TaxationCurrent TaxationCurrent tax assets and liabilities consists ofamounts expected to be recovered from orNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

218THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTSpaid to the Commissioner General of InlandRevenue in respect of the current as well asprior years. The tax rates and tax laws usedto compute the amount are those that areenacted or subsequently enacted by the dateof Financial Position. Accordingly, provisionfor taxation is made on the basis of the profitfor the year as adjusted for taxation purposein accordance with the provision of theInland Revenue Act No. 10 of 2006 and theamendment thereto, at the rates specified inNote 13 to the Financial Statements.Deferred TaxationDeferred tax is provided using the liabilitymethod on temporary differences at theReporting date between the tax basesof assets and liabilities and their carryingamounts for financial reporting purpose.Deferred tax assets are recognized for alldeductible differences. Carry forward ofunused tax credits and unused tax losses,to the extent that it is probable that taxableprofits will be available against which thedeductible temporary differences and thecarry forward of unused tax credits andunused tax losses can be utilized.The carrying amount of a deferred tax assetis reviewed at each Reporting date andreduced to the extent it is no longer probablethat sufficient taxable profit will be availableto allow all or part of the deferred tax assetto be utilized. Unrecognised deferred taxasset are re-assessed at each Reportingdate and are recognize to the extent that isprobable that future taxable profit will allowthe deferred tax asset to be recovered.Deferred tax assets and liabilities aremeasured at the tax rate that are expectedto apply in the year when the assets arerealised or the liabilities are settled, basedon tax rates and tax laws that have beenenacted or subsequently enacted at the dateof Financial Position.Value Added Tax on Financial Services (VAT)Bank’s total value addition was subjected toa 12% Value Added Tax as per section 25A ofthe Value Added Tax Act. No. 14 of 2002 andamendments thereto.2.8 ProvisionsProvisions are recognized when the Bank hasa present obligation (legal or constructive) asa result of a past event, and it is probablethat an outflow of resources embodyingeconomic benefits will be required to settlethe obligation and a reliable estimate canbe made of the amount of the obligation.The expenses relating to any provision ispresented in the Income Statement net ofany reimbursement2.9 Contingent LiabilitiesWhere, as a result of past events, there maybe an outflow of resources embodying futureeconomic benefits in settlement of a presentobligation or a possible obligation whoseexistence is confirmed only by occurrence/non occurrence of one or more uncertainfuture events, a provision is made if there isa present obligation that probably requires anoutflow of resources.2.10 Events after the Reporting PeriodThe Bank updates disclosures relating toany event occurred between the end ofthe reporting period and the date when thefinancial statements are authorized for issueand provide evidence of the conditions thatexisted at the end of the reporting period.2.11 Foreign Currency TransactionsForeign currency transactions are translatedinto the functional currency, which isSri Lankan Rupees, using the exchange ratesprevailing at the dates of the transactions.Monetary assets and liabilities denominatedin foreign currencies at the Reporting dateare retranslated to Sri Lankan Rupees at thefunctional currency rate at the Reportingdate. All exchange differences arising onthe settlement of monetary items or ontranslating monetary items at rates differentto those at which they are initially recordedare recognized in the Income Statement inthe period in which they arise.Non-monetary items that are measured interms of historical cost in a foreign currencyare translated using the exchange rates atthe dates of the initial transactions. Nonmonetaryitems measured at fair value ina foreign currency are translated using theexchange rates at the date when the fairvalue was determined.The Income Statement and the FinancialPosition of Foreign Currency Banking Unitis translated to Sri Lankan Rupees at themiddle rate of exchange prevailed during theperiod.2.12 Statement of Cash FlowsThe statement of cash flows has beenprepared by using the “Indirect Method” ofpreparing cash flows in accordance with theLKAS 7.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

219THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS03. Gross IncomeBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Interest Income 52,673,261 47,095,745 53,780,431 48,083,391Fee and commission income 221,709 240,768 221,709 240,768Net gain / (loss) from trading 69,939 (859,727) 69,939 (859,727)Net gain / (loss) from financial investments 5,481 4,111 5,481 4,111Other operating income (net) 74,669 63,747 74,669 63,747Gross Income 53,045,059 46,544,644 54,152,229 47,532,29004. Net Interest Income04.a. Interest IncomeBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Interest incomeCash and cash equivalents 7,880 7,246 7,880 7,246Placements with banks 298,335 232,255 298,335 232,255Derivative financial instruments 12,939 19,438 12,939 19,438Other financial assets held-for-trading 669,215 735,190 1,605,351 1,664,919Loans and receivables to banks 2,324,441 851,698 2,494,627 907,327Loans and receivables to other customers 15,740,531 11,820,478 15,741,379 11,822,766Financial investments - Held-to-maturity 33,619,920 33,429,440 33,619,920 33,429,440Financial investments - Available-for-sale - - - -Total Interest Income 52,673,261 47,095,745 53,780,431 48,083,39104.b. Interest expensesBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Due to other customers 37,049,747 28,129,050 37,922,696 28,747,481Other borrowings 1,708,887 806,736 1,759,419 871,511Others 383,858 360,313 383,858 360,313Total interest expenses 39,142,492 29,296,099 40,065,973 29,979,305Net Interest Income 13,530,769 17,799,646 13,714,458 18,104,086NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

220THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS04.c. Net Interest Income from Sri Lanka Government SecuritiesBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Interest Income 34,289,135 34,164,629 35,396,305 35,152,274(Less) : Interest expenses - - 923,481 683,206Net interest income 34,289,135 34,164,629 34,472,824 34,469,06805. Net Fee and Commission IncomeBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Fee and commission income 221,709 240,768 221,709 240,768Fee and commission expenses (24,481) (26,553) (27,705) (33,239)Net fee and commission income 197,228 214,215 194,004 207,529Earned fromLoans 170,633 197,863 170,633 197,863Cards 108 (16,143) 108 (16,143)Others 26,487 32,495 23,263 25,809Net fee and commission income 197,228 214,215 194,004 207,52906. Net Gain/(Loss) from TradingBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Foreign exchangeFrom other customers 77,215 41,929 77,215 41,929Interest rates - Net mark to market gain / (loss) 65,179 235,839 65,179 235,839Equities - Net mark to market gain / (loss) 23,364 (875,495) 23,364 (875,495)Others (95,819) (262,000) (95,819) (262,000)Total 69,939 (859,727) 69,939 (859,727)07. Net Gain/(Loss) from Financial Instruments Designated at Fair Value Through Profit or LossBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Losses on financial assets designated at fair value through Profit or loss - - (138,710) (135,889)Total - - (138,710) (135,889)NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

221THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS08. Net Gain/(Loss) from Financial InvestmentsBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Assets available-for-saleEquities - Dividend income 5,481 4,111 5,481 4,111Others - - - -Total 5,481 4,111 5,481 4,11109. Other Operating Income (net)BankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Gain on sale of property, plant and equipment 359 11,465 359 11,465Gain/(Loss) on revaluation of foreign exchange 23,361 (1,167) 23,361 (1,167)Others 50,949 53,449 50,949 53,449Other Operating Income (net) 74,669 63,747 74,669 63,74710. Impairment for Loans and other LossesBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Loans and receivablesTo Other customers (Refer Note 23(d)) 130,935 142,632 130,935 142,632Total 130,935 142,632 130,935 142,63211. Personnel ExpensesBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Salary and bonus 3,119,962 2,685,523 3,131,800 2,697,043Contributions to defined contribution/benefit plans 878,108 1,110,093 878,863 1,110,828Others 79,431 344,041 81,172 346,041Total 4,077,501 4,139,657 4,091,835 4,153,912NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

222THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS12. Other ExpensesBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Directors' emoluments 1,008 958 1,118 1,075Auditors' remunerations 3,336 3,184 3,803 3,375Professional and legal expenses 4,335 5,351 4,335 5,351Depreciation of property, plant and equipment 319,316 339,921 319,643 340,294Amortization of leasehold property 7,228 7,228 7,228 7,228Amortization of intangible assets 30,349 67,351 30,427 67,429Office administration and establishment expenses 1,208,576 1,025,117 1,212,035 1,028,660Others 687,174 671,431 649,075 639,070Total 2,261,322 2,120,541 2,227,664 2,092,48213. Income Tax ExpensesBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Current tax expensesCurrent year tax expenses 1,810,195 3,025,186 1,851,454 3,134,091Prior years' (Over)/Under provision - 99,017 1,523 104,011Deferred tax expensesTemporary differences (Refer Note 13(b)) 27,722 68,616 27,630 68,567Total 1,837,917 3,192,819 1,880,607 3,306,66913. a. Reconciliation of Tax ExpensesBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Profit before tax 6,169,259 9,254,681 6,221,286 9,411,069IFRS Adjustments - 302,722 - 331,938Adjusted profit for SLFRS 6,169,259 8,951,959 6,221,286 9,079,131Income tax for the period (Accounting profit @ 28%) 1,727,392 2,506,549 1,737,466 2,542,157Add: Tax effect of expenses that are not deductible for tax purposes 235,749 704,324 267,391 779,104(Less): Tax effect of expenses that are deductible for tax purposes 152,946 185,687 153,403 187,170Tax expense for the period 1,810,195 3,025,186 1,851,454 3,134,091NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

223THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS13. b. The deferred tax charge in the income statement comprise of the following.BankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Deferred tax assets (5,294) 11,711 (5,202) 11,760Deferred tax liabilities 22,428 80,327 22,428 80,327Differed tax (credit)/charge to income statement 27,722 68,616 27,630 68,56714. Earning Per Share (EPS)BankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Net profit attributable to ordinary equity holders 4,331,342 6,061,862 4,340,679 6,104,400Adjustment for the effect of dilution - - - -Net profit attributable to ordinary equity holders adjusted for the effect of dilution 4,331,342 6,061,862 4,340,679 6,104,400Weighted average number of ordinary share for basic earnings per share 320,000 320,000 335,000 335,000Weighted average number of ordinary shares adjusted for the effect of dilution 320,000 320,000 335,000 335,000Basic earnings per ordinary shares (Rs) 13.54 18.94 12.96 18.22Diluted earnings per ordinary share (Rs) 13.54 18.94 12.96 18.22NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

224THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS15. Analysis of Financial Instruments by Measurement Basis15. a. Bank - 2012HFT HTM AmortisedAFS FVTPL Hedging TotalcostRs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000ASSETSCash and cash equivalents - - 1,465,542 - - - 1,465,542Balances with central banks - - - - - - -Placement with banks - - 5,973,585 - - - 5,973,585Derivative financial instruments - - - - - 9,401 9,401Other financial assets held for trading 10,823,874 - - - - - 10,823,874Other financial assets at fair valuethrough profit or loss - - - - - - -Loans and receivable to banks - - 13,374,007 - - - 13,374,007Loans and receivable to other customers - - 155,245,236 - - - 155,245,236Financial investments - 309,595,845 - 2,978,800 - - 312,574,645Total financial assets 10,823,874 309,595,845 176,058,369 2,978,800 - 9,401 499,466,289HFT Designated atFair valueAmortizedcostFVTPL Hedging TotalRs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000LIABILITIESDue to banks - - 337,014 - - 337,014Derivative financial instruments - - - - - -Other financial liabilities at fair valuethrough profit or loss - - - - - -Due to other customers - - 457,650,387 - - 457,650,387Other borrowings - - 22,620,945 - - 22,620,945Debt securities issued - - - - - -Total financial liabilities - - 480,608,345 - - 480,608,345Held for trading - HFTDesignated at fair value through profit or loss - Designated at fair value - FVTPLLoans and receivables/deposits at amortized cost - Amortized costHeld-to-maturity - HTMAvailable-for-sale - AFSInstruments of fair value and cash flow hedging - HedgingNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

225THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS15. b. Bank - 2011HFT HTM AmortisedAFS FVTPL Hedging TotalcostRs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000ASSETSCash and cash equivalents - - 1,398,413 - - - 1,398,413Balances with central banks - - - - - - -Placement with banks - - 5,280,528 - - - 5,280,528Derivative financial instruments - - - - - 34,458 34,458Other financial assets held for trading 11,589,525 - - - - - 11,589,525Other financial assets at fair valuethrough profit or loss - - - - - - -Loans and receivable to banks - - 21,222,723 - - - 21,222,723Loans and receivable to other customers - - 116,217,344 - - - 116,217,344Financial investments - 298,134,819 - 3,284,099 - - 301,418,918Total financial assets 11,589,525 298,134,819 144,119,008 3,284,099 - 34,458 457,161,909HFT Designated atFair valueAmortizedcostFVTPL Hedging TotalRs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000LIABILITIESDue to banks - - 128,948 - - 128,948Derivative financial instruments - - - - - -Other financial liabilities at fair valuethrough profit or loss - - - - - -Due to other customers - - 421,849,063 - - 421,849,063Other borrowings 16,141,529 - - 16,141,529Debt securities issued - - - - - -Total financial liabilities - - 438,119,540 - - 438,119,540NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

226THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS15. c. Group - 2012HFT HTM AmortisedAFS FVTPL Hedging TotalcostRs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000ASSETSCash and cash equivalents - - 1,467,042 - - - 1,467,042Balances with central banks - - 242 - - - 242Placement with banks - - 5,973,585 - - - 5,973,585Derivative financial instruments - - - - - 9,401 9,401Other financial assets held for trading 10,823,874 - - - - - 10,823,874Other financial assets at fair valuethrough profit or loss - - - - 5,488,970 - 5,488,970Loans and receivable to banks - - 14,091,299 - - - 14,091,299Loans and receivable to other customers - - 155,249,483 - - - 155,249,483Financial investments - 313,063,745 - 2,979,800 - - 316,043,545Total financial assets 10,823,874 313,063,745 176,781,650 2,979,800 5,488,970 9,401 509,147,440HFTDesignated atFair valueAmortizedcostFVTPL Hedging TotalRs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000LIABILITIESDue to banks - - 5,603,182 - - 5,603,182Derivative financial instruments - - - - - -Other financial liabilities at fair value through profit or loss - - - - - -Due to other customers - - 457,650,387 - - 457,650,387Other borrowings - - 25,628,549 - - 25,628,549Debt securities issued - - - - - -Total financial liabilities - - 488,882,117 - - 488,882,117NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

227THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS15. d. Group - 2011HFT HTM AmortisedAFS FVTPL Hedging TotalcostRs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000ASSETSCash and cash equivalents - - 1,399,897 - - - 1,399,897Balances with central banks - - 117 - - - 117Placement with banks - - 5,280,528 - - - 5,280,528Derivative financial instruments - - - - - 34,458 34,458Other financial assets held for trading 11,589,525 - - - - - 11,589,525Other financial assets at fair valuethrough profit or loss - - - - 8,599,007 - 8,599,007Loans and receivable to banks - - 23,829,757 - - - 23,829,757Loans and receivable to other customers - - 116,228,559 - - - 116,228,559Financial investments - 300,916,743 - 3,285,099 - - 304,201,842Total financial assets 11,589,525 300,916,743 146,738,858 3,285,099 8,599,007 34,458 471,163,690HFTDesignated atFair valueAmortizedcostFVTPL Hedging TotalRs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000LIABILITIESDue to banks - - 8,962,642 - - 8,962,642Derivative financial instruments - - - - - -Other financial liabilities at fair value through profit or loss - - - - - -Due to other customers - - 421,849,063 - - 421,849,063Other borrowings - - 19,923,444 - - 19,923,444Debt securities issued - - - - - -Total financial liabilities - - 450,735,149 - - 450,735,149NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

228THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS16. Cash and Cash EquivalentsBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Cash in hand 445,465 428,142 445,470 428,147Balances with banks 994,789 950,289 996,284 951,768Money at call and short notice 25,288 19,982 25,288 19,982Total 1,465,542 1,398,413 1,467,042 1,399,89717. Balances with Central BanksBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Statutory balances with Central Bank of Sri Lanka - - 242 117Total balances with Central Bank - - 242 11718. Placement with BanksBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Placement with Banks - Sri Lanka 5,973,585 5,280,528 5,973,585 5,280,528Total 5,973,585 5,280,528 5,973,585 5,280,52819. Derivative Financial InstrumentsBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Interest rate derivativesInterest rate swaps 9,401 34,458 9,401 34,458Total 9,401 34,458 9,401 34,458NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

229THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS20. Other Financial Assets Held For TradingBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Held for tradingSri Lanka Government SecuritiesTreasury Bill 1,746,470 390,998 1,746,470 390,998Treasury Bond 4,624,652 6,108,538 4,624,652 6,108,538Equity securities (Refer - Note 20 (a)) 4,452,752 5,089,989 4,452,752 5,089,989Total 10,823,874 11,589,525 10,823,874 11,589,52520.(a) Equity Securities (Quoted) - Bank & Group31-12-2012 31-12-2011 01-01-2011No. ofSharesMarket No. ofMarket No. ofMarketCost Value Shares Cost Value Shares Cost ValueRs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘0001. Banks, Finance & InsuranceCommercial Bank of Ceylon PLC 1,729,591 152,916 176,153 1,699,424 152,916 168,209 788,000 142,626 202,790DFCC Bank 1,342,024 194,396 149,950 1,342,024 194,396 149,969 1,092,124 146,510 215,656HNB Assurance PLC 105,332 6,556 5,103 105,332 6,556 5,943 768,600 55,778 59,339Hatton National Bank PLC (NV) 1,103,175 138,244 122,717 1,072,500 138,244 91,082 650,000 126,593 137,938Janashakthi Insurance Company PLC 1,699,500 26,322 17,813 1,699,500 26,322 25,569 1,538,400 23,833 24,516National Development Bank PLC 1,554,882 169,806 212,170 1,662,000 181,505 230,307 831,000 181,505 287,472Nations Trust Bank PLC 355,200 27,962 19,668 355,200 27,962 20,040 330,200 26,040 27,290Pan Asia Banking Corporation PLC 570,200 16,269 10,712 570,200 16,269 14,110 285,100 16,269 14,674Seylan Bank PLC (NV) 1,496,666 59,466 51,797 1,496,666 59,466 45,331 1,122,500 46,370 54,219Lanka Orix Leasing Company PLC 606,900 68,594 32,406 606,900 68,594 50,099 - - -Lanka Orix Finance PLC 4,550,000 50,340 17,096 4,550,000 50,340 37,380 - - -People's Finance PLC 142,504 8,392 4,861 142,504 8,392 5,036 - - -Ceylinco Insurance - - - - - - 276,700 117,225 104,074Hatton National Bank PLC - - - - - - 5,578,200 1,118,183 2,207,969Lanka Ventures - - - - - - 308,700 11,265 9,564Singer Finance - - - - - - 26,200 393 389919,263 820,448 930,962 843,073 2,012,590 3,345,8902. Beverage, Food & TobaccoCargills (ceylon) PLC 543,800 106,584 78,237 543,800 106,584 109,265 1,000,000 195,999 193,011Lanka Milk Foods (CWE) PLC 311,300 39,457 30,781 311,300 39,457 32,969 221,000 19,160 24,718146,041 109,018 146,041 142,235 215,159 217,7293. Chemical & PharmaceuticalsCIC Holdings PLC (NV) 183,700 17,302 10,027 183,700 17,302 14,001 469,500 42,972 45,123Haycarb PLC 502,800 93,793 85,066 502,800 93,793 77,139 405,800 77,350 67,680111,096 95,092 111,095 91,140 120,322 112,803NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

230THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTSNo. ofShares31-12-2012 31-12-2011 01-01-2011Market No. ofMarket No. ofMarketCost Value Shares Cost Value Shares Cost ValueRs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘0004. Construction & EngineeringColombo Dockyard PLC 642,075 162,381 142,722 611,500 162,381 144,416 380,400 100,503 103,543162,381 142,722 162,381 144,416 100,503 103,5435. Diversified HoldingsAitken Spence PLC 450,700 77,044 53,478 450,700 77,044 55,763 150,000 25,457 25,420C T Holdings PLC 440,400 83,598 53,998 440,400 83,598 78,028 284,200 53,934 51,197Hemas Holdings PLC 1,112,300 53,158 29,696 1,112,300 53,158 36,772 1,112,300 53,158 48,882John Keells Holdings PLC 3,659,056 723,824 795,615 4,259,056 842,515 720,870 1,612,642 383,525 475,825Sunshine Holdings PLC 318,200 15,038 8,810 318,200 15,038 9,134 232,100 11,989 10,499Browns Investments PLC 93,606,200 468,031 370,231 93,606,200 468,031 389,136 - - -Expolanka Holdings PLC 4,318,800 57,379 30,320 4,318,800 57,379 37,190 - - -Free Lanka Capital Holdings PLC 2,900,000 13,279 7,169 2,900,000 13,279 9,185 - - -Richard Pieris & Company PLC 5,323,900 63,909 41,588 5,323,900 63,909 47,426 - - -1,555,260 1,485,363 1,673,951 1,383,504 528,063 611,8236. Footware & TextileHeyleys MGT Knitting Mills PLC 1,202,700 21,321 13,795 400,900 14,104 11,309 375,700 13,316 11,90021,321 13,795 14,104 11,309 13,316 11,9007. Health Care -Asiri Hospitals PLC - - - 880,400 8,021 7,494 1,100,000 10,021 9,581Nawaloka Hospitals PLC 17,789,400 79,421 52,770 17,789,400 79,421 68,671 1,630,000 6,184 5,80879,421 52,770 87,442 76,165 16,205 15,3898. Hotels & TravelsEden Hotels Lanka PLC 477,900 25,837 17,012 477,900 25,837 17,975 371,000 21,422 21,152Ceylon Hotels Corporation PLC 3,304,900 116,264 74,508 3,304,900 116,264 90,285 3,599,400 126,625 131,107Hotel Services (Ceylon) PLC 2,707,100 74,428 45,773 2,707,100 74,428 54,929 1,748,900 52,609 45,008John Keells Hotels PLC 3,473,800 72,296 47,402 3,473,800 72,296 46,074 3,473,800 72,296 68,767Lighthouse Hotels PLC 1,900,000 115,539 103,330 1,900,000 115,539 100,613 1,900,000 115,539 118,749Mahaweli Reach Hotels PLC 133,300 4,884 2,807 133,300 4,884 3,694 343,100 12,571 12,395Marawila Resorts PLC 702,750 9,413 5,073 702,750 9,413 6,956 562,200 8,007 8,236Asian Hotels & Properties PLC 441,000 42,526 33,097 441,000 42,526 34,789 - - -Aitken Spence Hotel Holdings PLC 1,613,400 153,681 117,735 1,613,400 153,681 110,988 - - -Confifi Hotels - - - - - - 54,600 11,604 13,138Riverina Hotels - - - - - - 58,700 5,944 6,118614,869 446,736 614,868 466,304 426,617 424,6709. Investment TrustsRenuka Holdings PLC 2,678,073 178,838 94,272 2,678,073 178,838 144,466 - - -Renuka Holdings PLC (NV) 148,406 5,789 3,537 148,406 5,789 4,847 - - -184,626 97,808 184,627 149,314 - -NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

231THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTSNo. ofShares31-12-2012 31-12-2011 01-01-2011Market No. ofMarket No. ofMarketCost Value Shares Cost Value Shares Cost ValueRs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘00010. Land & PropertyOverseas Reality (Ceylon) PLC 5,591,100 105,684 79,057 5,591,100 105,684 78,030 5,591,100 105,684 84,671105,684 79,057 105,684 78,030 105,684 84,67111. ManufacturingACL Cables PLC 1,275,200 116,643 84,986 1,275,200 116,643 93,402 1,270,000 116,253 107,050Dipped Products PLC 1,000,000 124,636 108,768 1,000,000 124,636 105,414 1,000,000 124,636 118,776Chevron Lubricants PLC - - - 1,276,200 219,801 214,741 1,276,200 219,801 201,478Tokyo Cement Company (Lanka) PLC 1,213,200 68,723 34,669 1,213,200 68,723 52,836 - - -Lanka Ceramic PLC 446,000 60,350 27,342 446,000 60,350 37,523 - - -Lanka Walltile PLC 619,700 68,290 36,766 619,700 68,290 57,964 - - -Royal Ceramics Lanka PLC 747,700 119,581 73,193 747,700 119,581 103,610 - - -Tokyo Cement Company (Lanka)PLC(NV) 2,335,000 99,706 44,561 2,335,000 99,706 70,491 830,200 42,988 45,606Lanka Tiles - - - - - - 100,250 10,733 14,388657,929 410,285 877,730 735,982 514,411 487,29812. PlantationWatawala Plantation PLC 419,500 11,250 4,895 419,500 11,250 5,855 - - -Horana Plantation - - - - - - 595,900 18,539 21,823Kegalle Plantation - - - - - - 285,100 42,547 45,15111,250 4,895 11,250 5,855 61,086 66,97413. Power & EnergyLanka IOC PLC 15,365,100 567,966 294,744 15,365,100 567,966 281,355 15,365,100 567,966 287,438Laugfs Gas PLC 154,900 5,801 3,906 154,900 5,801 5,811 634,700 15,021 16,397Hemas Power PLC 424,800 15,605 9,367 424,800 15,605 11,353 - - -Laugfs Gas (NV) - - - - - - 523,100 7,972 9,527Panasian Power - - - - - - 1,413,300 4,240 4,197589,371 308,017 589,372 298,518 595,199 317,55914. TelecommunicationDialog Telecom Ltd. - - - - - - 6,790,960 168,982 79,988Sri Lanka Telecom - - - - - - 13,158,700 445,643 625,175Dialog Axiata PLC 6,790,960 168,982 55,734 6,790,960 168,982 53,101 - - -168,982 55,734 168,982 53,101 614,625 705,16315. Trading -Browns & Company PLC 1,000,000 319,948 122,611 1,000,000 319,948 232,405 - - -319,948 122,611 319,948 232,405 - -16. Unit TrustCom Trust Equity Fund 556,793 10,000 10,089 556,793 10,000 11,684 556,793 10,000 15,123Ceybank Unit Trust 7,455,661 81,382 198,312 6,880,297 67,622 212,464 6,880,297 67,622 271,290Pyramid - - - 1,573,620 15,000 49,498 1,573,620 15,000 56,808NAMAL - - - 3,961,965 50,000 104,992 3,961,965 50,000 124,76291,382 208,401 142,622 378,638 142,622 467,983Total 5,738,826 4,452,752 6,141,059 5,089,989 5,466,402 6,973,395NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

232THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS21. Financial Assets Designated at Fair Value Through Profit or LossBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Sri Lanka Government securitiresTreasury Bills - - 1,009,739 942,162Treasury Bonds - - 4,772,781 7,863,271Less: Increase/(decrease) in falling value of securities - - (293,550) (206,426)Sub total - - 5,488,970 8,599,00722. Loans and Receivables to BanksBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Gross loans and receivables 13,374,007 21,222,723 14,091,299 23,829,757(Less): Individual impairment - - - -Net loans and receivables 13,374,007 21,222,723 14,091,299 23,829,75722. (a) Analysis by productsBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Loans and advancesShort-term loans 3,390,319 5,379,973 3,390,319 5,379,973Long-term loans 9,983,688 15,842,750 9,983,688 15,842,750Securities purchased under resale agreements - - 717,292 2,607,034Gross total 13,374,007 21,222,723 14,091,299 23,829,75722. (b) All loan and receivable to Banks are in Sri Lankan Rupees.23. Loans and Receivables to other CustomersBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Gross loans and receivables 155,871,009 116,712,806 155,875,256 116,724,021(Less): Individual impairment - - - -Collective Impairment (Refer 23 (d)) 625,773 495,462 625,773 495,462Net Loans and receivables 155,245,236 116,217,344 155,249,483 116,228,559NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

233THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS23. a. Analysis by productBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Loans and advancesTrade finance 9,224,151 6,905,245 9,224,151 6,905,245Pawning 51,797,586 38,775,926 51,797,586 38,775,926Staff loans 2,578,573 1,930,332 2,578,573 1,930,332Term loansShort-term 24,967,583 18,690,855 24,971,830 18,702,070Long-term 52,266,089 39,126,650 52,266,089 39,126,650Securities purchased under resale agreements 980,930 734,329 980,930 734,329OthersSri Lanka Government Securities 7,057,898 5,283,577 7,057,898 5,283,577Administrative Borrowings 6,141,815 4,597,793 6,141,815 4,597,793Others 230,611 172,637 230,611 172,637Gross total 155,245,236 116,217,344 155,249,483 116,228,55923. b. Analysis by industryBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Agriculture and fishing 756,004 565,948 756,004 565,948Transport 146,146 109,406 146,146 109,406Construction 42,968,115 32,166,142 42,968,115 32,166,142Traders 9,224,151 6,905,245 9,228,398 6,916,460New economy 7,451,931 5,578,552 7,451,931 5,578,552Others 94,698,889 70,892,051 94,698,889 70,892,051Gross total 155,245,236 116,217,344 155,249,483 116,228,55923. (c) All Loan and receivable to other customers are in Sri Lankan Rupees.23. (d) Movements in Collective Impairment Charges during the YearBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Collective impairmentOpening balance 495,462 352,830 495,462 352,830Charge to income statement 130,935 142,632 130,935 142,632Net write-off during the year (624) - (624) -Closing balance 625,773 495,462 625,773 495,462NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

234THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS24. Financial Investments-Available-for-SaleBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Equity securities 2,978,800 3,284,099 2,979,800 3,285,099(Less) : Impairment - - - -Net Available-for-sale Investments 2,978,800 3,284,099 2,979,800 3,285,099(a) There were no Financial investments-Available-for-sale pledged as collateral.25. Financial Investments-Held-to-MaturityBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Sri Lanka Government SecuritiesTreasury Bill 58,239,257 57,267,114 58,239,257 57,267,114Treasury Bond 251,356,478 240,867,705 254,824,378 243,649,629Debt securities - - - -Others 110 110 -(Less): Impairment - - - -Net Held-to-Maturity Investments 309,595,845 298,134,819 313,063,745 300,916,74326. Investments in SubsidiariesHoldingBankFor the year ended 31st December 2012 2011 2012 2011CostDirectors’Valuation CostDirectors’Valuation% % Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Unquoted equity shareNSB Fund Management Company Ltd.(15,000,000 Ordinary Shares) 100% 100% 150,000 150,000 150,000 150,000(Less): Impairment - - - -Net total 150,000 150,000 150,000 150,000NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

235THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS27. Property, Plant and Equipment27. a. Property, Plant and Equipment - BankLand andBuildingsLeaseholdpropertiesComputerHardwareOfficeEquipment,furniture andfittingsRs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Bank 2012Cost/ValuationOpening balance at 01.01.2012 3,765,766 475,549 1,560,272 1,100,156 185,728 7,087,471Additions 583,918 - 35,813 171,770 14,568 806,069Disposals (444,426) - (17,803) (7,347) (717) (470,293)Adjustments - - (39) (7,295) - (7,334)Closing balance at 31.12.2012 3,905,258 475,549 1,578,243 1,257,284 199,579 7,415,913(Less): Accumulated depreciationOpening balance at 01.01.2012 31,756 30,248 1,221,533 550,555 129,050 1,963,142Charge for the year 39,780 7,228 172,871 91,840 15,451 327,170Additions - - - - - -Disposals - - (17,729) (6,843) (713) (25,285)Adjustments - - (21) (605) - (626)Closing balance at 31.12.2012 71,536 37,476 1,376,654 634,947 143,788 2,264,401(Less): Impairment - - - - - -Net book value at 31.12.2012 3,833,722 438,073 201,589 622,337 55,791 5,151,512OthersTotalBank 2011Cost/ValuationOpening balance at 01.01.2011 3,585,463 475,549 1,495,928 947,989 139,741 6,644,670Additions 473,795 - 107,550 160,843 58,773 800,961Disposals (135,063) - (43,206) (8,676) (12,786) (199,731)Adjustments (158,429) - - - - (158,429)Closing balance at 31.12.2011 3,765,766 475,549 1,560,272 1,100,156 185,728 7,087,471(Less): Accumulated depreciationOpening balance at 01.01.2011 158,429 23,020 1,060,166 472,390 124,854 1,838,859Charge for the year 31,756 7,228 204,573 86,609 16,983 347,149Additions - - - - - -Disposals - - (43,206) (8,444) (12,787) (64,437)Adjustments (158,429) - - - - (158,429)Closing balance at 31.12.2011 31,756 30,248 1,221,533 550,555 129,050 1,963,142(Less): Impairment - - - - - -Net book value at 31.12.2011 3,734,010 445,301 338,739 549,601 56,678 5,124,327NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

236THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS27. b. Property, Plant and Equipment - GroupLand andBuildingsLeaseholdpropertiesComputerHardwareOfficeEquipment,furniture andfittingsRs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Group 2012Cost/ValuationOpening balance at 01.01.2012 3,765,766 475,549 1,562,234 1,101,477 185,728 7,090,754Additions 583,918 - 36,058 171,770 14,568 806,314Disposals (444,426) - (17,998) (7,347) (717) (470,488)Adjustments - - (39) (7,295) - (7,334)Closing balance at 31.12.2012 3,905,258 475,549 1,580,255 1,258,605 199,579 7,419,246(Less): Accumulated depreciationOpening balance at 01.01.2012 31,756 30,248 1,223,197 551,190 129,050 1,965,441Charge for the year 39,780 7,228 173,198 91,840 15,451 327,497Additions - - - - - -Disposals - - (17,926) (6,843) (713) (25,482)Adjustments - - (21) (605) - (626)Closing balance at 31.12.2012 71,536 37,476 1,378,448 635,582 143,788 2,266,830(Less): Impairment - - - - - -Net book value at 31.12.2012 3,833,722 438,073 201,805 623,023 55,791 5,152,416OthersTotalGroup 2011Cost/ValuationOpening balance at 01.01.2011 3,585,463 475,549 1,497,885 949,015 139,741 6,647,653Additions 473,795 - 107,555 161,138 58,773 801,261Disposals (135,063) - (43,206) (8,676) (12,786) (199,731)Adjustments (158,429) - - - - (158,429)Closing balance at 31.12.2011 3,765,766 475,549 1,562,234 1,101,477 185,728 7,090,754(Less): Accumulated depreciationOpening balance at 01.01.2011 158,429 23,020 1,061,547 472,935 124,854 1,840,785Charge for the year 31,756 7,228 204,856 86,699 16,983 347,522Additions - - - - - -Disposals - - (43,206) (8,444) (12,787) (64,437)Adjustments (158,429) - - - - (158,429)Closing balance at 31.12.2011 31,756 30,248 1,223,197 551,190 129,050 1,965,441(Less): Impairment - - - - - -Net book value at 31.12.2011 3,734,010 445,301 339,037 550,287 56,678 5,125,312NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

237THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS28. Intangible AssetsBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Cost/ValuationOpening balance 416,307 391,606 418,277 393,576Additions 19,668 24,701 19,667 24,701Disposals - - - -Closing balance 435,975 416,307 437,944 418,277(Less): Accumulated AmortisationOpening balance 293,525 226,174 295,253 227,824Charge for the Year 30,349 67,351 30,427 67,429Disposals - - - -Closing balance 323,874 293,525 325,680 295,253Net book value 112,101 122,782 112,264 123,02429. Deffered Tax Assets/LiabilitiesBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘00029.(a) Differed tax assetsDeffered Tax Assets - - 221 172Income Statement - - 92 49Deffered Tax Assets - - 313 22129.(b) Deffered Tax LiabilitiesDiffered tax liabilities 95,615 26,999 95,615 26,999Income statement 27,722 68,616 27,722 68,616Net Deffered Tax Liabilities 123,338 95,615 123,338 95,61530. Other AssetBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Receivables 3,134,283 2,223,563 3,152,532 2,253,016Deposits and Prepayments 87,180 61,849 113,151 87,059Sundry debtors 16,113 11,431 16,113 11,431Other 1,576,714 1,118,573 1,575,998 1,117,328Total 4,814,290 3,415,416 4,857,794 3,468,834NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

238THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS31. Due to BanksBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Securities sold under repurchase (repo) agreements - - 5,266,168 8,833,694Other facility 337,014 128,948 337,014 128,948Total 337,014 128,948 5,603,182 8,962,64232. Due to Other CustomersBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Amount due to other customers 457,650,387 421,849,063 457,650,387 421,849,063Total 457,650,387 421,849,063 457,650,387 421,849,063BankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘00032. (a) Analysis by productSavings deposits 108,139,999 106,026,686 108,139,999 106,026,686Fixed deposits 349,510,388 315,822,377 349,510,388 315,822,377Total 457,650,387 421,849,063 457,650,387 421,849,06332. (b) Analysis by CurrencySri Lankan Rupee 451,970,975 416,677,115 451,970,975 416,677,115United States Dollar 2,816,044 2,570,586 2,816,044 2,570,586Great Britain Pound 1,034,042 938,167 1,034,042 938,167Others 1,829,326 1,663,195 1,829,326 1,663,195Total 457,650,387 421,849,063 457,650,387 421,849,06333. Other BorrowingsBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Securities sold under repurchase (repo) agreements 22,620,945 16,141,529 25,628,549 19,923,444Total 22,620,945 16,141,529 25,628,549 19,923,444NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

239THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS34. Other LiabilitiesBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Sundry creditors 272,194 276,906 272,194 277,048Interest payable 125,822 128,000 125,822 128,000Other payables (Refer Note 34.(a)) 4,228,702 4,301,890 4,242,382 4,304,431Total 4,626,718 4,706,796 4,640,398 4,709,47934 (a) Provision for Un-Funded Pension SchemeBankGroupAs at 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Opening balance 2,025,553 - 2,025,553 -Amount Recognised in the Income Statement (126,935) 2,025,553 (126,935) 2,025,553Closing balance 1,898,618 2,025,553 1,898,618 2,025,55335. Stated Capital/Assigned CapitalBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Authorised1 Billion Ordinary Shares of Rs.10/= each 10,000,000 10,000,000 10,000,000 10,000,000Issued and fully Paid320 Million Ordinary Shares of Rs.10/= each 3,200,000 3,200,000 3,200,000 3,200,000Total 3,200,000 3,200,000 3,200,000 3,200,00036. Statutory Reserve FundBankGroup2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Opening balance 1,626,500 1,338,543 1,626,500 1,338,543Transfer during the period 86,627 287,957 86,627 287,957Closing balance 1,713,127 1,626,500 1,713,127 1,626,500NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

240THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS37. Other Reserves37. a. Bank 2012Opening balance at01-01-2012Movement/TransfersClosing balance at31-12-2012Rs. ‘000 Rs. ‘000 Rs. ‘000General reserve 14,474,432 272,968 14,747,400Revaluation reserve 1,583,340 - 1,583,340Available-for-sale reserve 345,959 (210,840) 135,119Others (Refer Note 01) 1,822,252 1,134,553 2,956,805Total 18,225,983 1,196,681 19,422,66437. b. Bank 2011Opening balance at01-01-2011Movement/TransfersClosing balance at31-12-2011Rs. ‘000 Rs. ‘000 Rs. ‘000General reserve 13,608,293 866,139 14,474,432Revaluation reserve 1,583,340 - 1,583,340Available-for-sale reserve 834,824 (488,865) 345,959Others (Refer Note 01) 1,822,252 - 1,822,252Total 17,848,709 377,274 18,225,98337. c. Group - 2012Opening balance at01-01-2012Movement/TransfersClosing balance at31-12-2012Rs. ‘000 Rs. ‘000 Rs. ‘000General reserve 15,419,489 279,970 15,699,459Revaluation reserve 1,583,340 - 1,583,340Available-for-sale reserve 345,959 (210,840) 135,119Others (Refer Note 01) 2,117,583 1,136,887 3,254,470Total 19,466,371 1,206,017 20,672,38837. d. Group - 2011Opening balance at01-01-2011Movement/TransfersClosing balance at31-12-2011Rs. ‘000 Rs. ‘000 Rs. ‘000General reserve 14,521,447 898,042 15,419,489Revaluation reserve 1,583,340 - 1,583,340Available-for-sale reserve 834,824 (488,865) 345,959Others (Refer Note 01) 2,106,947 10,635 2,117,583Total 19,046,558 419,812 19,466,371NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

241THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS37 - Note - 01 Investment Fund ReserveFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Opening balance 1,581,572 - 1,581,572 -Add: Transferred during the year 1,248,427 1,581,572 1,248,427 1,581,572Closing balance 2,829,999 1,581,572 2,829,999 1,581,572As required by the Government Budget 2011 and subsequent direction from Central Bank of Sri Lanka,with effect from January 1, 2011 thebank is required to transfer an mount equivalent to 8% of the VAT on Financial services and 5% of the Income Tax to an Investment FundAccount.Investment made under Investment Fund AccountBankGroupFor the year ended 31st December Interest Tenure 2012 2011 2012 2011Rate Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Loan - Road Development Authority 9.0% 14.5 Years 384,250 - 384,250 -Long - Term Agriculture Loan 10.5% 5 Years 3,270 4,300 3,270 4,300Long - Term Government Bonds 1 7.5% 7 Years 8,024 193,600 8,024 193,600Long - Term Government Bonds 2 7.0% 12 Years 539,650 353,400 539,650 353,400Short - Term Government Securities - - 1,746,470 559,893 1,746,470 559,893Total Investment 2,681,664 1,111,193 2,681,664 1,111,193BankGroup38. Contingent Liabilities and CommitmentsBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Guarantees 293,060 266,298 293,060 266,298Other contingent items 163,200 178,000 163,200 178,000Undrawn loan commitments 6,389,150 1,285,720 6,389,150 1,285,720Total 6,845,410 1,730,018 6,845,410 1,730,018NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

242THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS39. Related Party Disclosures39. a Transactions with State and State Controlled EntitiesBankFor the year ended 31st December 2012 2011Rs. ‘000 Rs. ‘000AssetsLoans to Government 13,199,713 9,168,000Investments made on Government Securities 315,966,000 304,955,942Investments on State and State Controlled Entities 18,115,000 16,144,008Security bought under Resale Agreements 980,506 3,794,296Tax Receivable 1,469,022 128,137Postmaster-General’s Current Account 155,990 253,075349,886,231 334,443,458LiabilitiesSecurities sold under Repurchase Agreements 22,620,945 16,042,215Taxes paidIncome Tax 1,837,917 3,192,819Value Added Tax 1,239,069 1,564,481Contribution to Consolidated Fund 2,823,245 3,212,6715,900,231 7,969,97139. b Transactions with Subsidiary Company (NSB Fund Management Company Ltd.)The Bank has contributed Rs.150 Mn towards the share capital of the Company. The Company invested its funds in Treasury Bills, Bonds andRepo during the year on a regular basis. All investment in Treasury Bills and Treasury Bonds of the Bank are being made through the NSBFund Management Co. Ltd. on which a service charge of Rs. 40 Mn has been made (Rs. 33 Mn. in 2011).39. c Transactions with Key Managerial Persons(i) Key managerial persons include members of the Board of Directors of the Bank and key employees of the Bank holding directorships insubsidiary, NSB Fund Management Company of the Bank.(ii) Loans and advances in the names of key managerial persons are given below:For the year ended 31st December 2012 2011Rs. ‘000 Rs. ‘000Loans & Advances 204 468(iii) Chairman’s, Directors’ and G.M.’s /CEO’s emoluments and fees amounted to Rs. 7.965 Mn in 2012 (Rs.8.092 Mn in 2011).NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

243THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS39. d Net Accommodation Granted to Related Parties(Disclosure under rule 3 (8) (ii) (e) of the Governance Direction of No. 12 of 2007 issued by the Central Bank of Sri Lanka.)BankFor the year ended 31st December 2012 2011Rs. ‘000 Rs. ‘000Key Managerial PersonsLoan & Advances 204 468Total net accommodation 204 468Regulatory Capital 17,683,326 15,824,323Net accommodation as a % of the Bank’s Regulatory Capital 0.001% 0.003%40. Net Assets Value per Ordinary ShareBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Amount used as the numeratorShare holders Funds 24,335,791 23,052,483 25,585,515 24,292,871Number of Ordinary Shares used as the denominatorTotal Number of shares 320,000 320,000 335,000 335,000Rs. Rs. Rs. Rs.Net Assets Value per Ordinary Share 76.04 72.03 76.37 72.5141. Non-Cash Items Included in Profit Before TaxBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Depreciation of property, plant and equipment 319,316 339,921 319,643 340,294Amortization of leasehold property 7,228 7,228 7,228 7,228Amortization of intangible assets 30,349 67,351 30,427 67,429Impairment losses on loans and advances 130,935 142,632 130,935 142,632Total 487,828 557,132 488,233 557,583NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

244THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS42. Change in Operating AssetsFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Change in derivative financial instruments 25,057 12,672 25,057 12,672Net increase in debt securities, treasury bills & bonds andequity shares held at fair value through profit or loss (11,461,026) (38,531,002) (12,147,002) (38,531,002)Net increase in loans and advances to banks 7,717,781 (17,039,655) 9,607,523 (17,039,655)Net increase in loans and advances to customers (39,027,894) (8,339,239) (39,020,926) (7,251,239)Change in other assets (1,398,874) (682,345) (1,399,635) (4,984,231)Total (44,144,956) (64,579,569) (42,934,983) (67,793,455)BankGroup43. Change in Operating LiabilitiesBankGroupFor the year ended 31st December 2012 2011 2012 2011Rs. ‘000 Rs. ‘000 Rs. ‘000 Rs. ‘000Change in deposits from banks, customers and debt securities issued 35,801,324 57,419,070 32,233,798 57,419,070Change in other liabilities 793,374 217,148 803,842 4,551,417Total 36,594,698 57,636,218 33,037,640 61,970,48744. Litigation Against the BankLitigation is a common occurrence in the banking industry due to the nature of the business. The Bank has an established protocol fordealing with such legal claims. Once professional advice has been obtained on the certainty of the outcome and the amount of damagesreasonably estimated, the bank makes adjustments to account for any adverse effects which the claims may have on its financial standing.The unresolved court cases against the Bank as at the year end for which adjustments to the Financial Statements have not been made dueto the uncertainty of its outcome are as follows.For the year ended 31st December 2012 2011Rs. ‘000 Rs. ‘000Tribunal / CourtLabour Tribunal 8 9District Court 16 17Commercial High Court 11 10Court of Appeal 0 1Supreme Court 1 1Magistrate's Court 3 3NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

245THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS45. Explanation of Transition to New Sri Lanka Accounting Standards (SLFRS and LKAS)As Stated in Accounting policies the Bank’s first Financial Statements prepared in accordance with new Sri Lanka Accounting Standardsprefixed both SLFRS (corresponding to IFRS) and LKAS (corresponding to IAS), promulgated by the Institute of Chartered Accountants of SriLanka (ICASL).The Accounting Policies set out in Note 2.1 to 2.3.3 have been applied in preparing the Financial Statements for the year ended December31, 2012 the comparative information presented in these Financial Statements for the year ended December 31, 2011 and in the preparationof an opening Statement of Financial Position as at January 1, 2011 (the Bank’s date of transition).In preparing its opening new SLFRS/LKAS Statement of Financial Position, the Bank has adjusted amounts reported previously in FinancialStatements prepared in accordance with previous SLAS. An explanation of how the transition from previous SLASs has affected the Bank’sFinancial Position and financial performance is set out in the following tables and notes that accompany the tables.45.1. Reconciliation of Equity - BankNotes SLAS Reclassifi-cationsJanuary 01, 2011 December 31, 2011Remeasu-rementsSLFRS SLAS Reclassifi-cationsRemeasu-rementsRs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000AssetsCash and cash equivalents 1,354,733 - - 1,354,733 1,398,413 - - 1,398,413Balances with central bank - - - - - - - -Government securities held for Trading 11,608,618 (11,608,618) - - 6,302,255 (6,302,255) - -Placements with banks - 3,935,992 - 3,935,992 - 5,280,528 - 5,280,528Government securities bought underResale Agreement 6,981,347 (6,981,347) - - 3,794,296 (3,794,296) - -Derivative financial instruments 1 - 47,130 47,130 47,130 - 34,458 34,458 34,458Dealing Securities 5,466,402 (5,466,402) - - 7,776,419 (7,776,419) -Other financial assets held-for-trading 2 - 15,886,036 227,212 16,113,248 - 11,359,901 229,624 11,589,525Financial assets designated at fair valuethrough profit or loss - - - - - - - -Loans and receivables to banks - 4,325,700 - 4,325,700 - 21,222,723 - 21,222,723Placement with and Loans to Banks andFinancial Institutions 12,373,050 (12,373,050) - - 33,222,070 (33,222,070) - -Loans and Advances 81,477,833 (81,477,833) - - 93,060,080 (93,060,080) - -Loans and receivables to othercustomers 3 - 108,379,863 (502,381) 107,877,482 - 117,083,056 (865,712) 116,217,344Rupee Loans 12,168,000 (12,168,000) - - 9,168,000 (9,168,000) - -Financial investments - Available-for-sale 4 - 2,831,402 448,980 3,280,382 - 4,190,021 (905,922) 3,284,099Treasury Bills held to Maturity 48,647,272 (48,647,272) - - 55,580,567 (55,580,567) - -Treasury Bonds held to Maturity 202,690,744 (202,690,744) - - 233,905,120 (233,905,120) - -Financial investments - Held to maturity 5 - 260,401,592 (797,775) 259,603,817 298,621,786 (486,967) 298,134,819Investment Securities 1,677,266 (1,677,266) - - 1,791,657 (1,791,657) - -Investments in subsidiaries 150,000 - - 150,000 150,000 - - 150,000Interest Receivable 12,670,054 (12,670,054) - - 13,157,554 (13,157,554) - -Investments in associates and jointventures - - - - - - - -Property, plant and equipment 4,612,632 193,178 - 4,805,810 4,935,037 189,290 - 5,124,327SLFRSNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

246THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS45.1. Reconciliation of Equity - BankNotes SLAS Reclassifi-cationsJanuary 01, 2011 December 31, 2011Remeasu-rementsSLFRS SLAS Reclassifi-cationsRemeasu-rementsRs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000Leasehold Property 193,178 (193,178) - - 189,290 (189,290) - -Investments properties - - - - - - - -Goodwill and intangible assets 165,432 - - 165,432 122,782 - - 122,782Deferred tax assets - - - - - - - -Other assets 6 1,742,742 - 990,329 2,733,071 2,080,996 - 1,334,420 3,415,416Total assets 403,979,303 47,130 413,495 404,392,798 466,634,532 34,458 (660,099) 465,974,434SLFRSLiabilitiesDue to banks - 122,857 - 122,857 - 128,948 - 128,948Due to other customers 7 - 364,671,398 (241,405) 364,429,993 - 422,154,301 (305,238) 421,849,063Deposits 355,364,179 (355,364,179) - - 411,012,699 (411,012,699) - -Government Securities Sold under- - - - - - - -Repurchase Agreements11,164,103 (11,164,103) - - 16,042,515 (16,042,515) - -Other borrowings - 11,314,103 - 11,314,103 - 16,141,529 - 16,141,529Debt securities issued - - - - - - - -Current tax liabilities 653,310 - - 653,310 - - - -Deferred tax liabilities 26,999 - - 26,999 95,615 - - 95,615Other provisions - - - - - - - -Other liabilities 8 15,102,902 (9,580,076) (179,924) 5,342,902 15,278,274 (11,369,563) 798,085 4,706,796Due to subsidiaries - - - - - - - -Subordinated term debts - - - - - - - -Total liabilities 382,311,493 - (421,329) 381,890,164 442,429,103 - 492,847 442,921,951EquityStated capital / Assigned capital 3,200,000 - - 3,200,000 3,200,000 - - 3,200,000Statutory reserve fund 1,338,543 - - 1,338,543 1,626,500 - - 1,626,500Other reserves 17,129,267 - 834,824 17,694,091 19,378,929 - (1,152,946) 18,225,983Total shareholders’ equity 21,667,810 - 834,824 22,502,634 24,205,429 - (1,152,946) 23,052,483Non-controlling interests - - - - - - - -Total Equity 21,667,810 - 834,824 22,502,634 24,205,429 - (1,152,946) 23,052,483Total equity and liabilities 403,979,303 - 413,495 404,392,798 466,634,532 - (660,099) 465,974,434NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

247THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS45.2. Reconciliation of Equity - GroupNotes SLAS Reclassifi-cationsJanuary 01, 2011 December 31, 2011Remeasu-rementsSLFRS SLAS Reclassifi-cationsRemeasu-rementsRs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000AssetsCash and cash equivalents 1,356,765 - - 1,356,765 1,400,013 (117) - 1,399,897Balances with central bank - - - - - 117 - 117Government securities held for trading 12,634,374 (12,634,374) - - 8,896,527 (8,896,527) - -Placements with banks - 3,935,992 - 3,935,992 - 5,280,528 - 5,280,528Government securities bought underResale Agreement 16,398,397 (16,398,397) - - 14,842,869 (14,842,869) - -Derivative financial instruments 1 - 47,130 47,130 47,130 - 34,458 34,458 34,458Dealing Securities 5,466,402 (5,466,402) - - 7,776,419 (7,776,419) - -Other financial assets held-for-trading 2 - 15,886,036 227,212 16,113,248 - 11,359,901 229,624 11,589,525Financial assets designated at fair valuethrough profit or loss - 7,999,023 (74,038) 7,924,985 - 8,800,736 (201,730) 8,599,007Loans and receivables to banks - 5,354,602 (33) 5,354,569 - 23,829,757 - 23,829,757Placement with and Loans to Banks andFinancial Institutions 12,373,050 (12,373,050) - - 33,222,070 (33,222,070) - -Loans and Advances 81,477,833 (81,477,833) - - 93,060,096 (93,060,096) - -Loans and receivables to othercustomers 3 - 108,379,863 (502,381) 107,877,482 - 117,083,056 (854,497) 116,228,559Rupee Loans 12,168,000 (12,168,000) - - 9,168,000 (9,168,000) - -Financial investments - Available-for-sale 4 - 2,832,402 448,980 3,281,382 - 4,190,021 (904,922) 3,285,099Treasury Bills held to maturity 48,647,272 (48,647,272) - - 55,580,567 (55,580,567) - -Treasury Bonds held to maturity 202,690,744 (202,690,744) - - 233,905,120 (233,905,120) - -Financial investments - held to maturity 5 - 262,156,293 (735,620) 261,420,673 - 301,227,053 (310,310) 300,916,743Investment Securities 1,678,266 (1,678,266) - - 1,792,657 (1,792,657) - -Investments in subsidiaries - - - - - - - -Interest Receivable 13,009,874 (13,009,874) - - 13,526,730 (13,526,730) - -Property, plant and equipment 4,613,691 193,178 - 4,806,869 4,936,022 189,290 - 5,125,312Leasehold Property 193,178 (193,178) - - 189,290 (189,290) - -Investments properties - - - - - - - -Goodwill and intangible assets 165,752 - - 165,752 123,024 - - 123,024Deferred tax assets - - - - - - 221 221Other assets 6 1,748,240 - 1,023,836 2,772,076 2,106,190 - 1,362,644 3,468,834Total assets 414,621,836 47,130 435,086 415,056,924 480,525,591 34,458 (643,489) 479,881,081SLFRSNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

248THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS45.2. Reconciliation of Equity - GroupNotes SLAS Reclassifi-cationsJanuary 01, 2011 December 31, 2011Remeasu-rementsSLFRS SLAS Reclassifi-cationsRemeasu-rementsRs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000LiabilitiesDue to banks - 122,857 - 122,857 - 8,962,642 - 8,962,642Due to other customers 7 - 364,671,398 (241,405) 364,429,993 - 422,154,301 (305,238) 421,849,063Deposits 355,364,179 (355,364,179) - - 411,012,699 (411,012,699) - -Government Securities Sold underRepurchase Agreements 20,284,835 (20,284,835) - - 28,508,153 (28,508,153) - -Other borrowings - 20,543,403 (2,366) 20,541,037 - 19,926,499 (3,055) 19,923,444Debt securities issued - - - - - - - -Current tax liabilities 847,805 - 33,507 881,312 18,514 - 29,453 47,967Deferred tax liabilities 26,827 - - 26,827 95,394 221 95,615Other provisions - - - - - - - -Other liabilities 8 15,222,979 (9,688,642) (179,924) 5,354,413 15,435,228 (11,523,834) 798,085 4,709,479Due to subsidiaries - - - - - - - -Subordinated term debts - - - - - - - -Total liabilities 391,746,625 - (390,188) 391,356,439 455,069,988 - 519,245 455,588,210SLFRSEquityStated capital / Assigned capital 3,200,000 - - 3,200,000 3,200,000 - - 3,200,000Statutory reserve fund 1,338,543 - - 1,338,543 1,626,500 - - 1,626,500Other reserves 18,336,668 - 825,274 19,161,942 20,629,103 - (1,162,732) 19,466,371Total shareholders' equity 22,875,211 - 825,274 23,700,485 25,455,603 - (1,162,732) 24,292,871Non-controlling interests - - - - - - - -Total Equity 22,875,211 - 825,274 23,700,485 25,455,603 - (1,162,732) 24,292,871Total equity and liabilities 414,621,836 - 435,086 415,056,924 480,525,591 - (643,489) 479,881,081NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

249THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS45.3. Reconciliation of Comprehensive Income for the year ended 31st December 2011BankGroupNotes SLAS Reclassifi Remeasu SLFRS SLAS Reclassifi Remeasu SLFRS-cations -rements-cations -rementsRs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000 Rs.’000Interest income 5 46,376,790 19,498 699,457 47,095,745 47,330,576 19,498 733,317 48,083,391Interest expenses 7 (29,434,417) - 138,318 (29,296,099) (30,118,312) - 139,007 (29,979,305)Net interest income 16,942,373 19,498 837,776 17,799,646 17,212,264 19,498 872,325 18,104,086Fee and commission income - 240,768 - 240,768 - 240,768 - 240,768Fee and commission expenses - (26,553) - (26,553) - (33,239) - (33,239)Net fee and commission income - 214,215 - 214,215 - 207,529 - 207,529Net gain/(loss) from trading 2 - (734,187) (125,540) (859,727) - (734,187) (125,540) (859,727)Net gain / (loss) from financial instrumentsdesignated at fair value through profit orloss - - - - - - (135,889) (135,889)Net gain / (loss) from financialInvestments - 4,111 - 4,111 - 4,111 - 4,111Other operating income (net) 766,850 (703,103) - 63,747 634,560 (570,813) - 63,747Total operating income 17,709,223 (1,199,466) 712,235 17,221,992 17,846,824 (1,073,862) 610,895 17,383,857Provision for Loan Losses 78,272 (78,272) - - 78,272 (78,272) - -Impairment for loans and other losses 3 - - 142,632 142,632 - - 142,632 142,632Net operating income 17,630,951 (1,121,194) 569,603 17,079,360 17,768,552 (995,590) 468,263 17,241,225Personnel expenses 2,930,665 (2,930,665) - - 2,944,482 (2,944,482) - -Personnel expenses 6 - 3,795,616 344,041 4,139,657 - 3,795,616 358,296 4,153,912Provision for Staff Retirement Benefits 864,951 (864,951) - - 865,389 (865,389) - -Premises, Equipment and Expenses 1,383,703 (1,383,703) - - 1,385,840 (1,385,840) - -Fee & Commission 453,316 (453,316) - - 427,620 (427,620) - -Provision/(Reversal) for fall in value inDealing Securities 1,170,706 (1,170,706) - - 1,170,706 (1,170,706) - -Other Overheads 311,171 (311,171) - - 311,623 (311,623) - -Other expenses - 2,120,541 - 2,120,541 - 2,092,482 - 2,092,482Operating profit/(loss) before valueadded tax (VAT) 10,516,440 77,161 225,563 10,819,162 10,662,892 221,972 109,968 10,994,831Value added tax (VAT) on financial services (1,564,481) - - (1,564,481) (1,583,762) - - (1,583,762)Operating profit/(loss) after valueadded tax (VAT) 8,951,959 - - 9,254,681 9,079,130 - 331,939 9,411,069Profit/(loss) before tax 8,951,959 - - 9,254,681 9,079,130 - 331,939 9,411,069Tax expenses (3,192,819) - - (3,192,819) (3,277,216) - (29,453) (3,306,669)Profit/(loss) for the year 5,759,140 - - 6,061,862 5,801,914 - 302,486 6,104,400NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

250THE RESULTS OF A CHALLENGING YEARNOTES TO THE FINANCIAL STATEMENTS45.4 - Notes to the reconciliationNote 01.Derivative financial instrumentsUnder SLFRS/LKAS derivative financial instruments are recorded on the statement of financial position at fair value. Derivatives with apositive fair value are recorded as assets, the effect of reclassification of derivative assets are as follows.01 January 2011 31 December 2011Rs. ‘000 Rs. ‘000Increase in derivative assets 47,130 34,458Note 02Other financial assets held-for-tradingImpact of fair value change in dealing securities which are quoted in Colombo Stock Exchange were stated at lower of cost or market value, underSLAS are now being re-measured at marked to mark valuation.Note 03Loans and receivables to other customers/Impairment allowancesSpecific & general provisions for bad debt were previously recognized under SLAS. The impairment approach under SLFRS differs to SLAS, asgeneral provision is no longer permitted and impairment losses can only be provided for when there is objective evidence of an incurred loss.Note 04Financial investments - Available-for-sale (AFS)The Impact of fair value change in AFS securities are recognitioned under shareholders equity.Note 05Financial investments - Held to maturityFinancial assets where the Bank has the ability and intention to hold to maturity were classified as Held-to-Maturity & measured at amortized costusing the Effective Interest Rate method.Note 06Other assetsImpact of recognition of day one difference on staff loan given at concessionary rates are re-measured to determine the difference between theoutstanding loan balance and the present value of the total repayment, discounted at market interest rates.Note 07Due to other customersThe interest expense recognized under straight line basis as long term Fixed Deposit (maturity over one year) is now accounted by applyingEffective Interest Rate method.Note 08Other liabilitiesImpact of derecognition of contingency losses on pawning/provision and recognition of liability.46. Events After the Reporting PeriodNo circumstances have arisen since the reporting date which would require adjustments to or disclosure in the Financial Statements.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

251CHAPTER 7ANNEXURESNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

252STATEMENT OF COMPREHENSIVE INCOME IN US DOLLARSBankFor the year ended 31st December 2012 2011 Change 2012 2011 ChangeUS$ ‘000 US$ ‘000 % US$ ‘000 US$ ‘000 %Gross income 424,191 411,900 2.98 433,045 420,640 2.95Interest income 421,218 416,777 1.07 430,071 425,517 1.07Less: Interest expenses 313,015 259,258 20.74 320,400 265,304 20.77Net interest income 108,203 157,519 (31.31) 109,672 160,213 (31.55)Fee and commission income 1,773 2,131 (16.79) 1,773 2,131 (16.79)Less: Fee and commission expenses 196 235 (16.69) 222 294 (24.68)Net fee and commission income 1,577 1,896 (16.80) 1,551 1,837 (15.53)Net gain/(loss) from trading 559 (7,608) 107.35 559 (7,608) 107.35Net gain / ( loss ) from financial instrumentsdesignated at fair value through profit or loss - - - (1,109) (1,203) (7.76)Net gain / (loss) from financial investments 44 36 20.48 44 36 20.48Other operating income (net) 597 564 5.85 597 564 5.85Total operating income 110,980 152,407 (27.18) 111,314 153,839 (27.64)Impairment change for loans and other losses 1,047 1,262 (17.05) 1,047 1,262 (17.05)Net operating income 109,933 151,145 (27.27) 110,267 152,577 (27.73)Personnel expenses 32,607 36,634 (10.99) 32,722 36,760 (10.99)Other expenses 18,083 18,766 (3.64) 17,814 18,518 (3.80)Operating profit before value added tax (VAT) 59,243 95,745 (38.12) 59,731 97,299 (38.61)Value added tax (VAT) on financial services 9,909 13,845 (28.43) 9,981 14,016 (28.79)Operating profit after value added tax (VAT) 49,334 81,900 (39.76) 49,750 83,284 (40.26)Profit before tax 49,334 81,900 (39.76) 49,750 83,284 (40.26)Tax expenses 14,697 28,255 (47.98) 15,039 29,263 (48.61)Profit for the year 34,637 53,645 (35.43) 34,712 54,021 (35.74)GroupProfit attributable to:Equity holders of the Bank 34,637 53,645 (35.43) 34,712 54,021 (35.74)Profit for the year 34,637 53,645 (35.43) 34,712 54,021 (35.74)Earnings per share on profitBasic earnings per ordinary share 13.54 18.94 (28.55) 12.96 18.22 (28.89)Diluted earnings per ordinary share 13.54 18.94 (28.55) 12.96 18.22 (28.89)Profit/(loss) for the year 34,637 53,645 (35.43) 34,712 54,021 (35.74)Other comprehensive income, net of taxLess: Gains and losses on re-measuringavailable-for-sale financial assets (1,686) (10,969) (84.63) (1,686) (10,969) (84.63)Other comprehensive income for theyear, net of taxes (1,686) (10,969) (84.63) (1,686) (10,969) (84.63)Total comprehensive income for the year 32,951 42,676 (22.79) 33,026 43,052 (23.29)Attributable to:Equity holders of the Bank 32,951 42,676 (22.79) 33,026 43,052 (23.29)Total comprehensive income for the year 32,951 42,676 (22.79) 33,026 43,052 (23.29)US Dollar Conversion Rate (Rs) 125.05NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

253STATEMENT OF FINANCIAL POSITION IN US DOLLARSBankAs at 31st December 2012 2011 Change 2012 2011 ChangeUS$ ‘000 US$ ‘000 % US$ ‘000 US$ ‘000 %AssetsCash and cash equivalents 11,720 12,375 (5.30) 11,732 12,388 (5.30)Balances with central bank - - - 2 1 86.91Placements with bank 47,770 46,730 2.22 47,770 46,730 2.22Derivative financial instruments 75 305 (75.35) 75 305 (75.35)Other financial assets held-for-trading 86,556 102,562 (15.61) 86,556 102,562 (15.61)Financial assets designated at fair valuethrough profit or loss - - 43,894 76,097 (42.32)Loans and receivables to banks 106,949 187,812 (43.06) 112,685 210,883 (46.56)Loans and receivables to other customers 1,241,465 1,028,472 20.71 1,241,499 1,028,571 20.70Financial investments - Available-for-sale 23,821 29,063 (18.04) 23,829 29,072 (18.03)Financial investments - Held to maturity 2,475,776 2,638,361 (6.16) 2,503,509 2,662,980 (5.99)Investments in subsidiaries 1,200 1,327 (9.64) - -Property, plant and equipment 41,196 45,348 (9.16) 41,203 45,357 (9.16)Intangible assets 896 1,087 (17.50) 898 1,089 (17.54)Deferred tax assets - - - 3 2 27.98Other assets 38,499 30,225 27.37 38,847 30,698 26.55Total assets 4,075,923 4,123,668 (1.16) 4,152,501 4,246,735 (2.22)GroupLiabilitiesDue to banks 2,695 1,141 136.17 44,808 79,315 (43.51)Due to other customers 3,659,739 3,733,178 (1.97) 3,659,739 3,733,178 (1.97)Other borrowings 180,895 142,845 26.64 204,946 176,314 16.24Current tax liabilities - - - 311 424 (26.79)Deferred tax liabilities 986 846 16.56 986 846 16.56Other liabilities 36,999 41,653 (11.17) 37,108 41,677 (10.96)Total liabilities 3,881,315 3,919,663 (0.98) 3,947,899 4,031,754 (2.08)EquityState capital 25,590 28,319 (9.64) 25,590 28,319 (9.64)Statutory reserve fund 13,700 14,394 (4.82) 13,700 14,394 (4.82)Other reserves 155,319 161,292 (3.70) 165,313 172,269 (4.04)Total equity of the owners of the parent 194,608 204,004 (4.61) 204,602 214,981 (4.83)Total equity 194,608 204,004 (4.61) 204,602 214,981 (4.83)Total equity and liabilities 4,075,923 4,123,668 (1.16) 4,152,501 4,246,735 (2.22)Contingent liabilities and commitments 54,741 15,310 257.56 54,741 15,310 257.56US Dollar Conversion Rate (Rs) 125.05 113.00 125.05 113.00NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

254TEN YEARS AT A GLANCE(Rs Mn)Year Ended December 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Operating ResultsGross Income 12,597 15,862 17,746 19,948 19,347 21,213 24,439 30,830 41,247 49,803 50,070 46,545 53,045Interest Income 12,428 15,594 16,839 19,287 19,046 20,196 23,956 30,370 40,834 49,046 48,142 47,096 52,673Interest Expenses 9,692 13,349 13,191 12,587 11,333 13,480 16,536 22,188 31,190 36,067 31,487 29,296 39,142Net Interest Income 2,736 2,245 3,648 6,700 7,713 6,716 7,420 8,182 9,643 12,979 16,655 17,800 13,531Other Income 169 268 907 661 301 1,017 483 460 413 757 1,929 (577) 347Operating Expenses,provisions & VAT 1,654 1,537 2,171 3,215 3,897 4,276 4,402 5,340 6,956 6,792 8,807 7,968 7,709Profit before Tax 1,251 976 2,384 4,146 4,117 3,457 3,501 3,302 3,100 6,943 9,777 9,255 6,169IncomeTax 455 301 817 612 1,002 1,351 1,616 1,729 2,041 3,229 4,386 3,193 1,838Profit after Tax 796 675 1,567 3,534 3,115 2,106 1,885 1,573 1,059 3,714 5,391 6,062 4,331Contribution to the Government 1,449 1,532 1,735 2,280 3,235 3,100 3,573 3,974 4,287 7,277 10,107 7,970 5,900AssetsCash & Short Term Funds 749 1,896 591 498 950 861 480 533 1,146 855 1,355 1,398 1,466Loans & Investments 109,322 121,871 141,113 168,960 188,849 212,116 224,642 256,705 277,157 335,520 395,334 455,914 498,151Property,Plant & Equipment/Lease holdProperty/Intangible Assets 595 682 756 1,382 1,470 1,564 1,934 2,513 3,006 3,584 4,971 5,247 5,264Other Assets 4,442 6,139 6,313 6,608 6,945 7,574 8,522 10,453 13,010 14,463 2,733 3,415 4,814Total 115,108 130,588 148,773 177,448 198,214 222,115 235,578 270,204 294,319 354,422 404,393 465,974 509,694Liabilities & Shareholder’s FundsTotal Deposits 105,131 118,809 134,555 161,162 180,156 202,424 212,233 235,304 259,562 313,007 364,430 421,849 457,650Repo/Borrowings - - - - 22 2,075 10,789 6,205 8,730 11,436 16,270 22,958Differed Taxation 55 44 46 46 32 16 29 56 84 27 96 123Other Liabilities 5,623 6,570 7,383 6,450 6,603 7,116 8,274 10,819 13,497 14,841 5,997 4,707 4,627Shareholders’ Funds 4,354 5,154 6,790 9,791 11,409 12,521 12,979 13,263 15,000 17,760 22,503 23,052 24,336Total 115,108 130,588 148,773 177,448 198,214 222,115 235,578 270,204 294,319 354,422 404,393 465,974 509,694NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

255TEN YEARS AT A GLANCE(Rs Mn)Year Ended December 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012RatiosIncome Growth 12.32 25.92 11.88 12.41 (3.01) 9.64 15.21 26.15 33.79 20.74 0.54 (7.04) 13.96Interest Margin 1.7 2.6 4.1 4.1 3.2 3.2 3.2 3.4 4.0 4.4 4.1 2.8NIM/Gross Income 14.2 20.6 33.6 39.9 31.7 30.4 26.5 23.4 26.1 33.3 38.2 25.5Personnel Cost/Gross Income 6.9 9.2 10.3 11.5 10.5 11.2 8.8 7.5 6.9 7.4 8.9 7.7Overheads (Excluding Prov.)/Gross Income 9.7 12.2 13.6 15.7 14.4 15.1 12.6 11.2 10.7 12.0 13.5 12.0Profit Before Tax/Gross Income 6.2 13.4 20.8 21.3 16.3 14.3 10.7 7.5 13.9 19.5 19.9 11.6Contribution to theGOSL/Gross Income 9.7 9.8 11.4 16.7 14.6 14.6 12.9 10.4 14.6 20.2 17.1 11.1Cost to Deposits 1.4 1.7 2.2 2.2 2.0 2.3 2.2 2.4 2.7 2.7 2.0 1.7Cost to Income with VAT 61.2 47.7 43.5 47.0 50.4 59.4 56.5 58.5 55.5 48.9 45.4 54.6Cost to Income without VAT 61.2 47.7 36.9 37.9 39.4 46.7 44.9 46.1 38.8 32.4 36.4 45.7Return on averageSharehlder’s Funds (ROE) 14.2 26.2 42.6 29.4 17.6 14.8 12.0 7.5 22.7 27.3 26.61 18.28Return on average Assets (ROA) 1.2 0.8 1.7 2.5 2.2 1.6 1.5 1.3 1.1 2.1 2.6 2.13 1.26Deposits as % of Assets 91.3 91.0 90.4 90.8 90.9 91.1 90.1 87.1 88.2 88.3 88.0 90.5 89.8Profit per Employee (Rs. ’000) 456 359 893 1,545 1,551 1,196 1,207 1,152 1,077 2,382 3,205 2,826 1,972Deposit per Employee (Rs. ’000) 38,341 43,728 50,395 60,068 67,855 70,043 73,184 82,073 90,157 107,378 116,513 128,809 146,308Other InformationNo of Employees 2,742 2,717 2,670 2,683 2,655 2,890 2,900 2,867 2,879 2,915 3,050 3,275 3,128No of Branches 100 11 116 119 128 128 130 130 137 157 186 210 219Post Offices/Sub Post Offices 3 4042 4049 4045 4056 4043 4048 4042 4,045 4,055 4,053 4,058 4,053Account Holders (Million) 12.9 13.1 13.5 13.7 14.2 14.6 15.1 15.5 15.6 16.3 16.7 17.0 17.4* Note: Highlighted information is based on LKAS/SLFRSNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

256ANALYSIS OF DEPOSITS2008 2009 2010 2011 2012Rs Mn Rs Mn Rs Mn Rs Mn Rs MnLocal Currency DepositsSavings 71,667 79,280 94,118 105,108 106,177Time 185,755 230,147 266,007 311,569 345,794257,422 309,427 360,125 416,677 451,971Growth % (99.9%) 20.2% 13.5% 15.7% 8.5%Foreign Currency DepositsSavings 826 1,255 1,517 1,750 1,963Time 1,314 2,325 2,788 3,422 3,7172,140 3,580 4,305 5,172 5,679Growth % (99.8%) 67.3% 20.3% 20.1% 9.8%Total Deposits 259,562 313,007 364,430 421,849 457,650Growth % (99.9%) 20.6% 13.5% 15.8% 8.5%* Note: Highlighted information is based on LKAS/SLFRSNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

257OUR PRODUCTS AND SERVICESSAVINGS ACCOUNTSindividually or jointly. Accompaniedprizes are available for this accounts.01. Ordinary Savings AccountAny person over 7 years of age canopen these accounts with an initialminimum deposit of Rs. 100/-.Ordinary savings accounts can beopened on behalf of individuals/special funds/social organisations/bank guarantees/legal compensations,and as joint accounts. Using PostOffice passbook savings accountsdepositors can deposit or withdrawmoney through any Post Office or Sub-Post Office situated island-wide andNSB branch network.03. Ithuru Mithuru Savings AccountThe account caters to the needs of anyyoung person between 16 and 30 yearsof age and can continue the accountuntil the age of 35. Interest rate onthis product is 0.5% higher thanthe interest rate on ordinary savingsaccounts.07. Gift TokensThis is a way available to givegifts which are available in variousdenominations and easy to purchaseand encash whenever needed.LONG TERM DEPOSITSCHEMES02. Hapan Children’s SavingsAccountThe ‘Hapan’ account is meant for kidsbetween 7 years and 16 years of age.The minors can open and operate‘Hapan’ accounts by themselves,whereas ‘Punchi Hapan’ accounts arefor infants below 7 years of age andcan be maintained by the parents/guardians.04. Sthree Savings AccountThis is a scheme exclusivelydesigned for ladies over 16 years ofage. Reduced rates of interests areapplicable on personal loans andpawning advances to the accountholders.05. NSB Pension + AccountA contributory retirement benefitscheme with a higher rate of returnalong with a free life Insurance coverup to Rs. 1 Million and a medicalcover up to Rs. 1 Million.06. Smile Savings AccountSri Lankan citizen above the age of16 years and can operate the account08. NSB Fixed DepositIndividuals can open a fixed depositat NSB whom are over 16 years ofage/minors below 16 years of age incare of their parents/guardians or asjointaccounts/special funds/on behalfof social organizations can open a fixeddeposits at NSB.09. Triple A Fixed - Fixed DepositTriple A Fixed Deposits are 3 year or5 year long-term deposits with highinterest. Loans against the deposits orcredits through NSB Easy Card areaccompanied facilities.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

258OUR PRODUCTS AND SERVICES10. Gaurawa Fixed DepositSenior citizens over 55 years of age canopen Gaurawa Fixed Deposit Accountsthat pay a monthly interest, whichwill always be 1.5% more than that ofnormal monthly Fixed Deposits.13. Ridee Rekha Premium SavingsCertificateSavings Certificates which can bepurchased at the values of Rs. 50/-,Rs. 100/-, Rs. 250/-, Rs. 500/-, Rs.1,000/- and Rs. 5,000. As long asthe ‘Ridee Rekha’ Premium SavingsCertificate is not encashed it is entitledfor quarterly draws to win a prize.income earners aged between 18 yearsand 55 years. After opening IthurumNivasa Housing Loan Savings Accountand depositing a monthly sum a loancan be obtained based on deposit valueand repayment capacity.16. NSB Auto LoansAuto Loans are granted up to 75% ofthe purchasing price of unregisteredvehicles and up to 60% of thepurchasing price of registered vehiclesfor personal use.11. Prarthana Children’s SavingsCertificateA long-term deposit scheme for kidswith attractive interest rates paid inupfront. The ‘Prarthana’ SavingsCertificate matures when the accountholder reaches 16 years of age.CREDIT SERVICES14. Mihindu Sevana Housing LoansA loan scheme that provides facilities toconstruct, renovate, purchase or repairhouses, purchase bare land or redeeman existing housing loan obtained froma reputed financial organization.17. Speed LoansLoans up to 90% of your deposits inthe Bank could be obtained against thesecurity of such deposits.SAVINGS CERTIFICATES12. NSB National SavingsCertificateNational Savings Certificate pays ahigh interest upfront and is availablefor periods from 3 months to 4 years.Anyone over 7 years can purchaseNSB National Savings Certificates invalues of Rs. 500/=, Rs. 1,000/=,Rs. 5,000/=, Rs. 10,000/= and Rs.25,000/=.15. Ithurum Nivasa Housing LoansIthurum Nivasa Housing Loan is forthe self-employed and for seasonal18. Personal LoansA loan for personal needs can beobtained against the security of theprimary mortgage of immovableproperty, surrender value of LifePolicies, Government Securities andalso on Personal Guarantors.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

259OUR PRODUCTS AND SERVICES19. Ran Sahana Pawning ServiceAn instant loans for short-term creditneeds at comparatively low ratesof interest, against the security ofjewellery.20. Project LoansLoans are granted for infrastructureand other development projects for thepurposes of Direct lending to FinancialInstitutions, Loan Syndication andProject Lending. Prospective clientscan meet our Senior Management todiscuss the facilities expected.E-CARD FACILITIES21. NSB Easy CardNSB Easy is a Master / Visa CardCredit Facility which will be issuedagainst your fixed deposit at a lowannual interest rate of only 2.5 %above the FD rate.22. Shopping CardAnytime anywhere money: NSBenables to make use of the ATMfacility 24 hours a day, 7 days a weekwith Master / Visa Card facility. Youcan withdraw up to Rs. 40,000/= froma Shopping Card and Rs. 80,000/=from a Platinum Card or purchasegoods from any merchant with Master/ Visa Card International Network upto Rs. 100,000/= within 24 hours.FOREIGN CURRENCYPRODUCTS23. NSB Ranmasu Non-ResidentForeign Currency Account(NRFC)Sri Lankan nationals employed abroadand those who hold foreign passportsare eligible to open NRFC accountswith NSB in the form of Savings orFixed Deposits for periods of 1, 3, 6 or12 months in US Dollars (USD), Euros(EUR), Sterling Pounds (GBP) andAustralian Dollars (AUD).24. NSB Ranmasu Resident ForeignCurrency Account (RFC)Sri Lankan nationals residing inSri Lanka who are in possessionof foreign currency or who receiveremittances in foreign currency areeligible to open RFC Accounts in theform of Savings and Fixed Deposits forperiods of 1, 3, 6 and 12 months in USDollars (USD), Euros (EUR), SterlingPounds (GBP) and Australian Dollars(AUD).25. Special Foreign InvestmentDeposit Account (SFIDA)Special Foreign Investment DepositAccount could be opened as Savingsand Fixed Deposit Account in thecurrencies of USD, EUR, GBP andAUD or Sri Lanka Rupees by citizensof foreign states, Sri Lankan citizensresident abroad, corporate bodiesincorporated outside Sri Lanka andForeign Institutional Investors suchas Country funds, Mutual funds andRegional funds. Minimum InitialDeposit is USD 10,000 or equal.26. Loans against NRFC/RFC/SFIDA DepositsNRFC/RFC/SFIDA Accountholders are entitled to Rupee Loansup to 80% of the Rupee Value of theNRFC/RFC Fixed Deposits & SFIDAagainst the security of the deposit atconcessionary rates.27. Treasury Bill / Treasury BondInvestment External RupeeAccount (Formerly TIERA-D)Non-resident Sri Lankans andSri Lankan citizens with DualCitizenship can invest in GovernmentguaranteedTreasury Bills and Bondsand contribute to the economicdevelopment of the country.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

260OUR PRODUCTS AND SERVICES28. Travelers’ Cheques and ForeignCurrency NotesTravelers’ Cheques and ForeignCurrency Notes are accepted asdeposits to Rupee Accounts atattractive foreign exchange rates.29. Foreign Inward RemittancesSri Lankan nationals living/employedabroad could remit funds to their ownfamily members’ and relatives’ LKR/NRFC/RFC Accounts at NSB or toany other account with any other Bankin Sri Lanka via Exchange Houses andBanks with whom the NSB has alreadyestablished the relationship for fundtransfer.30. EurogiroNSB joined the Eurogiro Network inearly 2008 and prides itself of beingthe sole Eurogiro Member inSri Lanka. Eurogiro is a low costelectronic money transfer systempioneered by the Western PostalOrganizations and Banks. Under theEurogiro, funds could be transferredthrough Deutsche Postbank(Germany), Korea Post (Korea), IsraelPost (Israel), Poste Italiane (Italy), ThaiPost Bank (Thailand) and La BanquePostale (France).31. Web-based RemittancesWe are also agents in Sri Lanka forglobal money transfer channels suchas “INSTANT CASH”, “XPRESSMONEY”, “UNIStream”, “EzRemit”,and “Transfast”.32. Money Changing BusinessThe Bank commenced moneychanging business in selected branchesto encash foreign currency as well as toissue foreign currency.OTHER SERVICES33. Speed CashNSB Speed cash is a secured and fastover-the-counter fund transfer servicewhich facilitates transfer of fundsbetween any two parties.34. Investments in GovernmentSecuritiesInvestment in Treasury Bills andTreasury Bonds as facilitated atany NSB branch or NSB FundManagement Company.35. Standing OrdersStanding Orders authorize the Bankto make a series of payment on behalfof the customers to a named payeeor benefiting by debiting there Savingaccount or fixed payment account.36. Mail Transfer OrdersIt is authorize the bank to transferfunds even one branch to anotherbranch of the Bank.37. Safety Deposit LockersNSB provides a safe and trusted placefor safekeeping valued belongings.38. Gratuity Payment SchemeNSB also offers a Gratuity PaymentScheme up to Rs. One Million wherepayments are made at the death ofaccount holders to their nominee/sor heir/s. On the basis of the balancein their accounts, any active accountholder aged between 18 to 70 yearswith a minimum balance of Rs.15,000/= will be entitled to this facility.39. GuaranteesThis is an instrument, which amountsto an unconditional undertaking bythe Bank, to discharge the liability ofa depositor; in the event of his / herfailing to discharge the obligation.40. Utility Bill PaymentsUtility Bill Payment Services areavailable at NSB and you can payutility bills at any of our branches. Billswill be updated online as soon as youpay your bill.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

261OUR PRODUCTS AND SERVICESOUR EXTENDEDCHANNEL NETWORK41. 24 / 7 NSB Call CentreNSB Call Centre is to facilitatecustomers who contact the Bank forenquiries related to their bankingactivities. Customers could obtaininformation related to Bank Productsand Services by contacting the CallCentre by telephone, e-mail, Skype orWeb chat.42. Post Office SavingsThe facility of depositing money atNSB through any Post Office / SubPost Office. is available customer canopen Thepal Hapan Children’s SavingsAccounts, Sthree Thepal SavingsAccounts, Ordinary Savings Accounts,and Fixed Deposits Accounts andpurchase Ridhee Rekha PremiumSavings Certificates at Post / Sub PostOffices. is also available Ran Sahanapawning facility at selected Post Offices/ Sub Post Offices.as transfer of funds among savingsaccounts are accompanied in thisfacility.44. SMS BankingViewing of Account balance atanytime from mobile phone isprovided. The SMS Banking isavailable for Savings Accounts holdersand payment of Utility Bills andtransfer funds among Savings Accountsare additional features.45. Mobile BankingPoint of Sale Banking (POS) or DoorStep Banking is open with the latesttechnology. Facilitated the moneydeposing with NSB while being athome, school or workplace.46. School BanksNSB was involved in establishingSchool Banks, where school childrenlearn the habit of savings and get usedto the leadership role within the school.43. Virtual NSB - Internet BankingNSB customers can view your accountbalance and past transactions atanytime anywhere using InternetBanking. Easy Card and paymentof bills online at anytime as wellNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

262BRANCH NETWORKNORTHERN1712NORTH CENTRALEASTERN1420NORTH WESTERN73WESTERNCENTRAL2120SABARAGAMUWASOUTHERNUVA3210NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

263BRANCH NETWORKCentral Province1. Dambulla2. Digana3. Galewela4. Gampola5. Hatton6. Kandy7. Kandy City Centre8. Kandy 29. Kandy 310. Katugastota11. Matale12. Mulgampola13. Nawalapitiya14. Nuwara-Eliya15. Naula16. Pilimatalawa17. Pundaluoya18. Pussellawa19. Rikillagaskada20. Talawakelle21. WattegamaEastern Province22. Akkaraipattu23. Ampara24. Ampara 225. Arayampathy26. Batticaloa27. Chenkaladi28. Kalawanchikudi29. Kalmunai30. Kantale31. Palugamam32. Pothuvil33. Sammanthurai34. Trincomalee35. ValaichchenaiNorthern Province36. Atchuvely37. Chankanai38. Chavakachcheri39. Chunnakam40. Jaffna41. Jaffna 242. Karainagar43. Kayts44. Kilinochchi45. Manipay46. Mannar47. Nelliady48. Point Pedro49. Thirunalveli50. Vavuniya51. Vankalai52. MallaviNorth Western Province53. Alawwa54. Anamaduwa55. Chilaw56. Galgamuwa57. Hettipola58. Ibbagamuwa59. Kuliyapitiya60. Kurunegala61. Kurunegala 262. Madampe63. Marawila64. Mawathagama65. Melsiripura66. Narammala67. Nattandiya68. Nikaweratiya69. Polgahawela70. Puttalam71. Wariyapola72. WennappuwaNorth Central Province73. Anuradhapura74. Anuradhapura 275. Galnewa76. Hingurakgoda77. Kaduruwela78. Kahatagasdigiliya79. Kebithigollewa80. Kekirawa81. Medawachchiya82. Medirigiriya83. Nochchiyagama84. TambuttegamaSabaragamuwa Province85. Aranayake86. Balangoda87. Bulathkohupitiya88. Deraniyagala89. Eheliyagoda90. Embilipitiya91. Kahawatta92. Kalawana93. Kegalle94. Kegalle 295. Kiriella96. Kuruwita97. Mawanella98. Nivithigala99. Pelmadulla100. Rambukkana101. Ratnapura102. Ruwanwella103. Warakapola104. YatiyantotaSouthern Province105. Akuressa106. Ambalangoda107. Ambalantota108. Angunakolapelessa109. Baddegama110. Beliatte111. Deniyaya112. Devinuwara113. Dickwella114. Elpitiya115. Galle116. Galle 2117. Habaraduwa118. Hakmana119. HambanthotaNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

264BRANCH NETWORK120. Hikkaduwa121. Imaduwa122. Kamburupitiya123. Karapitiya124. Kekanadura125. Matara126. Matara 2127. Middeniya128. Morawaka129. Neluwa130. Sooriyawewa131. Tangalle132. Tissamaharamaya133. Uragasmanhandiya134. Walasmulla135. Weeraketiya136. WeligamaUva Province137. Badulla138. Bandarawela139. Bibile140. Buttala141. Haliela142. Mahiyanganaya143. Moneragala144. Passara145. Welimada146. WellawayaWestern Province147. Aluthgama148. Athurugiriya149. Avissawella150. Bambalapitiya151. Bandaragama152. Battaramulla153. Beruwala154. Boralesgamuwa155. Borella156. Bulathsinhala157. City158. Dehiwela159. Delgoda160. Delkanda161. Divulapitiya162. Gampaha163. Gampaha 2164. Ganemulla165. Hanwella166. Head Office167. Homagama168. Horana169. Ingiriya170. Ja-Ela171. Kadawatha172. Kaduwela173. Kahathuduwa174. Kalubowila175. Kalutara176. Kalutara 2177. Katubedda178. Katunayake179. Kelaniya180. Kiribathgoda181. Kirindiwela182. Kirulapone183. Kochchikade184. Kollupitiya 2185. Kotahena186. Kottawa187. Mahabage188. Maharagama189. Malabe190. Maligawatta191. Matugama192. Meegoda193. Minuwangoda194. Mirigama195. Moratumulla196. Moratuwa197. Mt. Lavinia198. Mulleriyawa199. Mutwal200. Narahenpita201. Nawala202. Negombo203. Nittambuwa204. Nugegoda205. Panadura206. Peliyagoda207. Pettah208. Piliyandala209. Puwakaramba210. Raddolugama211. Ragama212. Rajagiriya213. Veyangoda214. Wadduwa215. Wattala216. Wellampitiya217. Wellawatta218. World Trade Center219. YakkalaNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

265CORRESPONDENT BANKSCiti Bank NA,Wall Street, New York,NY 10005, USA.Tel: 12125591000www.citibank.comSWIFT: CITIUS33Deutsche Bank Trust CompanyAmericas,No 60 Wall Street,New York, NY 10005,USA.Tel: 1 212 2502500Tel: 1 2127970291www.deutsche-bank.comSWIFT: BKTRUS33Deutsche Bank AGP.O.B60202Frankfurt am Main Germany.Tel: 496991000Tel: 49 6991034225www.deutsche-bank.cemSWIFT: DEUTDEFFNational Australia Bank330, Collins StreetMelbourne, VIC 3000.Australia.Tel: 61386413500www.national.com.auSWIFT: CTBAAU2SCommonwealth BankSydney, NSW 2001.AustraliaGPO Box 5227,Tel: 61 293782000www.commbank.com.auSWIFT: CTBAAU2SDeutsche PostbankAG.,Friedrich-Ebert-Allee53113 Bonn,Germany.Tel: 114-126, 492289200www.postbank.deSWIFT: PBNKDEFFBank of CeylonNo 01,Devonshire Squre LondonEC2M4WDTel: 0207 377 1888Tel: 44 2073775430www.info@bankofceylon.co.ukSWIFT: BCEYGB2LBanca Popolari Di SondrioPiazza Garibaldi 1623100,Sondrlom SO,ItalyTel: 390 342 528.111Tel: 390 342 528 204www.info@popso.itSWIFT: POSOIT22Unicredito SPAEstero F.S.D.-Via Volta 1, 20093 CoI09nOMonzese, MI, ItalyTel: 390288621Tel: 39 02 88623340WNW. unicreditgroup.e’USWIFT: UNCRITMMWoori Bank1-203, Hoehyeon-don9, Jun9-9u, SeoulTel: 82 - 2 -21252001www.wooribank.comSWIFT: HVBK KR SENATIONAL SAVINGS BANK . ANNUAL REPORT 2012

266EXCHANGE COMPANIESAl Ahalia ExchangeP.O. Box 2419,Abu Dhabi, U.A.E.Tel: 97126269341www.alahaliamoneyexchange.comAl Ansari ExchangeP. O. Box 325,Abu Dhabi, U.A.E.Tel: 97126108 888www.alansariexchange.cominfo@alansari.aeAl Dar For Exchange WorksP.O.Box 24048,Doha State of QatarTel: 9744550455Al Fardan Exchange-Abu DhabiP.O.Box 498, Amin Khourl Building, LiwaStreet, Abu Dhabi, U.A.E.Tel: 971026223222exchange@alfardangroup.comfarhaj.ali@alfardanexchange.comAl Fardan Exchange-QatarAlfardan Centre, Grand Hamad Avenue,P.O.Box 339, Doha, Qatar.Tel: 97444408408afx@alfardan.com.qaAl Mulla InternationalAl Mulla Group Head Office,Free Trade Zone,Shuwaikh, KuwaitTel: 96522250888Al Rajhi BankP.O.Box 28,Riyadh 11411,Kingdom of Saudi Arabia.Tel: 96612116000www.alrajhibank.com.saAl Rostamani International ExchangeAl Rostamani International Exchange,P.O.Box 10072, Dubai, U. A. E.Tel: 97146098152www.alrostamaniexchange.comariemgt@alrostamanigroup.aeArabian Exchange Co.P.O.Box 3535,Doha-Qatar.Tel: 9744438200www.arabianex.comarabianex@qatar.net.qaAsia Express ExchangeP.O. Box 881-RUWI,PC 112,Muscat,Sulanate of Oman.Tel: 96824781727slankaex@omantel.net.comBaharain ExchangeP.O. Box 29149,Safat 13152, Kuwait.Tel: 965824000www.bec.com.kwbaexco@bec.com.kwBaharain Finance Co.P.O. Box 243, ManamaKingdom of BaharainBank Al BiladP.O.Box 140,Riyadh-11411, Saudi Arabia.Tel: 96614798888www.bankalbilad.com.saCB Unistream Bank20, Verhnyaya Maslovka str,bldg. 2, 127083,Moscow, RussiaTel: 74957445555www.unistream.comrelations@unistream.comCiti Global RemittanceBaharan Financing Co.P.O.Box 243, ManemoKingdom of BaharainCity International ExchangeAbdullah Dashti Building,Abdullah Mubarak Street,P.O.Box 21804,Safar 13079, KuwaitTel: 9652448507citex@qualitynet.netColombo InternationalMoney TransferColombo Money Transfer Services PtyLtd,3 Clow st, Dandenong,Victoria 3175,Australia.Tel: (03)97923065info@colombomoneytransfer.com.auDalil ExchangeP.O.Box 20404,Manama,Kingdom Of Bahrain.Tel: 17223464www.dalil.com.bhdalilint@batelco.com.bhDollarco ExchangeP.O.Box 26270,Safat 13123, Kuwait.9652412767dollarco@qualitynet.netEmirates International ExchangeP.O. Box 7190,Dubai, U.A.E.Tel: 600522248www.emiratesexchange.aeHabib Exchange-Abu DhabiCentral Office, Hamdan Street,P.O.Box 2370,Abu Dhabi, U.A.E.Tel: 6272316www.habibexchange.comhecoad@emirates.net.aeNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

267EXCHANGE COMPANIESHabib Qatar International ExchangeP.O.Box 1188, Mushirib Street,Doha Qatar.Tel: 974424373www.habibqatar.comhabib@qatar.net.qaIME ( M ) SDN.BHDGround Floor,No 22, Jalan Medan Pasar 50050,Kuala Lampur, Malaysia.Tel: 03-20727260www.ime-txnremit.comInstant Cash ExchangeEast Wing, Building 2,Office No.203,DAFZA,P.O. Box 3014, Dubai, U. A. E.Tel: 97143602288www.instantcashworldwide.comrahat@instantcashworldwide.comKapruka (PVT) Ltd1/1324, Centre Road,Clayton, VIC 3168, Australia.Tel: 610395445060www.kapruka.com.auKuwait AsianInternational ExchangeKuwait Asian International Exchange,Qaiseria No.1, Shop Number 48,Fahaheel, Kuwait.Tel: 96523910522kuaiew@yahoo.comMajan ExchangeP.O.Box 583, Postal Code :117,Sultanate of OmanTel: 24794017majanech@omantel.net.omMoney Gram1550, Utica Avenue South,Minneapolis, MN 555416, U.S.A.Tel: 9525913000National Exchange Co.Via Ferruccio, 3000185,Roma, Italy.Tel: 390644341221www.nationalexchange.itnec@nationalexchange.itNational Money ExchangeP.O.Box 29760, Safat 13158 Kuwait, StateOf Kuwait.Tel: 2462680nmekwt@qualitynet.netOman & UAE Exchange CentreP.O.Box 1116, Postal Code: 131, AlHamriyah, Sultante of Oman.Tel: 96824796533omanuaex@omantel.net.omSamba Financial GroupKing Abdulaziz Road, P.O.Box 833,Riyadh 11421, Saudi Arabia.Tel: 96614774770www.samba.com.saTrans Fast Remittence LLCAmmus, Paptamali Road, Irianjala Kuda,Trichur District, Kerala, India.Tel: 919946000780UAE Exchange Centre-Abu DhabiP.O.Box 170, Level 02,Al Sayegh Center, Sheikh Hamdan Street,Abu Dhabi, U.A.E.Tel: 97126105555www.uaeexchange.comhq@uaeexchange.comUAE Exchange Centre-KuwaitP.O.Box 26155, Safat 13122, Kuwait.Tel: 9652459417www.uaeexchangekuwait.comkuwait.ho@uaeexchange.com.kwValuTrans SPAVia Melchiorre Gioia 168, Milano, Italia.Tel: 390291431300www.valutrans.itWallstreet ExchangeP.O.Box 3014, Dubai U. A. E.Tel: 97142284889www.wallstreet.corp.cominfo@wallstreet.aeXpress Money Exchange3rd Floor,Al Sayegh Building,Hamdan Street,P.O.Box 170,Abu Dhabi,U.A.E.Tel: 97126105691www.expressmoney.comNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

268GLOSSARYAccounting PoliciesThe specific principles, bases, conventions,rules and practices adopted by an entityin preparing and presenting FinancialStatements.Accrual BasisRecognising the effects of transactionsand other events when they occur withoutwaiting for receipt or payment of cash or itsequivalent.AmortisationThe systematic allocation of the depreciableamount of an intangible asset over its usefullife.Amortised CostAmount at which the financial asset orfinancial liability is measured at initialrecognition, minus principal repayments,plus or minus the cumulative amortizationusing the effective interest method of anydifference between that initial amountand the maturity amount and minusany reduction for impairment or uncollectability.Available for Sale Financial AssetsAvailable for sale financial Assets are thosenon derivative financial assets that aredesignated as available for sale or are notclassified as loans and receivables, held tomaturity investments or financial assets atfair value through profit or loss.Bills Sent for CollectionA bill of exchange drawn by an exporterusually at a term, on an importer overseasand brought by the exporter to his bank witha request to collect the proceeds.Capital Adequacy RatiosThe relationship between capital and riskweightedassets as defined in the frameworkdeveloped by the Bank for InternationalSettlements (BIS) and as modified by theCentral Bank of Sri Lanka to suit localrequirements.Capital ExpenditureTotal of additions to property andequipment.Capital ReservesReserves identified for specific purposes andconsidered not available for distribution.Cash EquivalentsHigh liquid investments which are readilyconvertible to cash with no significant lossin value.Collective AgreementA tripartite agreement entered into amongthe NSB, Ministry of Finance and TradeUnions.Collectively Assessed loanimpairment ProvisionsAlso known as portfolio provisions,Impairment assessment on a collective basisfor homogeneous groups of loans that arenot considered individually significant and tocover losses that has been incurred but hasnot yet been identified at the reporting date.Loans and advances are assessed on portfolio basis.Commercial PaperShort-term instrument issued in the openmarket by creditworthy entities with thestandby credit facility.CommitmentsCredit facilities approved but not yet utilisedby the clients as at the Balance Sheet date.Compounded Annual Growth Rate(CAGR)The rate at which it would have grown if itgrew at an even rate compounded annually.ContingenciesA condition or situation existing at BalanceSheet date where the outcome will beconfirmed only by occurrence or nonoccurrenceof one or more future events.Contractual MaturityContractual maturity refers to the finalpayment date of a loan or other financialinstrument , at which point all the remainingoutstanding principal will be re paid andinterest is due to be paid.Corporate GovernanceThe process by which corporate entitiesare governed. It is concerned with theway in which power is exercised overthe management and direction of entity,the supervision of executive actions andaccountability to owners and others.Correspondent BankA bank in a foreign country that offersbanking facilities to the customers of a bankin another country.Cost/Income RatioOperating expenses excluding loan lossprovision and provisioning for fall in valuein dealing securities as a percentage of netincome.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

269GLOSSARYCredit RatingsAn evaluation of a corporate’s ability torepay its obligation or the likelihood of notdefaulting, carried out by an independentrating agency.Credit RiskCredit risk or default risk is most simplydefined as the potential that a borrower orcounterparty will fail to meet its obligationsin accordance with agreed terms andconditions.Dealing SecuritiesMarketable securities that are acquired andheld with the intention of reselling them inthe short term.DebentureA medium-term debt instrument issued by aCorporate entity.Deferred TaxationSum set aside for tax in the FinancialStatements that will become payable ina financial year other than the currentfinancial year.DerivativeFinancial contract of which the value isderived from the value of underlined assets.De recognitionRemoval of previously recognized financialassets or financial liability from an entity’sstatement of financial position.DepreciationThe systematic allocation of the depreciableamount of an asset over its useful life.Economic Value AddedA measure of productivity which takes intoconsideration cost of total invested equityEffective Interest RateRate that exactly discounts estimated futurecash payments or receipts through theexpected life of the financial instruments orwhen appropriate a shorter period to the netcarrying amount of the financial asset orfinancial liabilityEquity MethodThe equity method is a method ofaccounting whereby the investment isinitially recognized at cost and adjustedthereafter for the post-acquisition changesin the investor’s share of net assets of theinvestee. The profit or loss of the investorincludes the investor’s share of the profit orloss of the investee.Effective Tax RateProvision for taxation excluding deferred taxdivided by the profit before taxation.Fair ValueThe amount for which an asset could beexchanged or a liability settled, betweenknowledgeable, willing parties in an arm’slength transaction.Financial Asset or FinancialLiability at Fair Value throughProfit or LossFinancial asset or financial liability that isheld for trading or upon initial recognitiondesignated by the entity as ‘at fair valuethrough profit or loss’.Financial InstrumentFinancial Instrument is any contract thatgives rise to a financial asset of one entityand a financial liability or equity instrumentof another entity.Foreclosed PropertiesProperties acquired in full or partial;satisfaction of debts.Foreign Exchange ProfitProfit earned on foreign currencytransactions arising from the differencein foreign exchange rates between thetransaction/ last Balance Sheet date and thesettlement/Balance Sheet date.General ProvisionsThese are provisions made on loans andadvances for anticipated losses on aggregateexposures where credit losses cannot yet bedetermined on an individual facility basis.GroupA group is a parent and all its subsidiaries.GuaranteesThree party agreement involving a promiseby one party (the guarantor) to fulfil theobligations of a person owing a debt if thatperson fails to perform.Held to Maturity InvestmentsNon derivative financial assets with fixed ordeterminable payments and fixed maturitythat an entity has the positive intention andability to hold to maturity.ImpairmentThis occurs when recoverable amount of anasset is less than its carrying amount.Impaired assets portfolioImpaired Assets Portfolio is the total of theindividually significant impaired loans andNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

270GLOSSARYindividually insignificant loans which areoverdue above 180 days.Impairment AllowancesImpairment allowances are provisions heldon the Statement of Financial Position asa result of the raising of a charge againstprofit for the incurred loss. An impairmentallowance may either be identified orunidentified and individual (specific) orcollective (portfolio).Intangible AssetAn intangible asset is an identifiable nonmonetaryasset without a physical substance.Interest in SuspenseInterest suspended on nonperforming loansand advances.Interest MarginNet interest income expressed as apercentage of average interest earning assets.Interest Rate SwapAn interest rate Swap is a derivative in whichone party exchanges a stream of interestpayments for another party’s stream of cashflows.Interest SpreadRepresents the difference between theaverage interest rate earned and the averageinterest rate paid on interest earning assetsand interest bearing liabilities, respectively.variables such as interest rates, exchangerates, credit spreads and other asset prices.Investment SecuritiesSecurities acquired and held for yield orcapital growth purposes and are usually heldfor maturity.Key Management PersonnelKey management personnel are thosepersons having authority and responsibilityfor planning, directing and controlling theactivities of the entity, directly or indirectly,including any Director.Liquid AssetsAssets that are held in cash or in a form thatcan be converted to cash readily, such asdeposits with other banks, bills of exchangeand treasury bills.Loans and ReceivablesNon derivative financial assets with fixed ordeterminable payments that are not quotedin an active market other than those intendsto sell immediately or in the near term anddesignated as fair value through profit or lossor available for sale on initial recognition.Loss Given Default (LGD)LGD is the percentage of an exposure thata lender expects to loose in the event ofobligor default.Market RiskThis refers to the possibility of loss arisingfrom changes in the value of a financialinstrument as a result of changes in marketvariables such as interest rates, exchangerates, credit spreads and other asset prices.MaterialityThe relative significance of a transaction oran event, the omission or misstatement ofwhich could influence the decisions of usersof Financial Statements.Net Interest IncomeThe difference between the interest incomefrom investment portfolio and the interestpaid on deposits.Non-Performing Loans (NPL)The loans which are in default for more thanthree months.NPL RatioTotal non-performing loans and advances(net of Interest in Suspense) divided by totalloans and advances portfolio (net of Interestin Suspense).Off Balance Sheet TransactionsTransactions that are not recognised as assetsor liabilities in the Statement of FinancialPosition, but which give rise to contingenciesand commitments.Operational RiskThis refers to the risk of loss resulting frominadequate or failed internal processes,people and systems, or from external events.ParentA parent is an entity that has one or moresubsidiaries.PortfolioA pool of investments including investmentin Government Securities, loans andadvances, equities, etc.Promissory NoteA short-term instrument whereby theborrower promises to pay the borrowedmoney on the production of the instrument.Probability of Default (PD)PD is an internal estimate for each borrowergrade of the likelihood that an obligor willdefault on an obligationNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

271GLOSSARYReturn on Average Assets (ROAA)Net income expressed as a percentage ofaverage total assets, used along with ROE, asa measure of profitability and as a basis ofintra-industry performance comparison.Return on Average Equity (ROAE)Net income, less preferred share dividendsif any, expressed as a percentage of averageordinary shareholders’ equity.Related PartiesParties where one party has the ability tocontrol the other party or exercise significantinfluence over the other party in makingfinancial and operating decisions, directly orindirectly as per the Sri Lanka AccountingStandard No. 30 on ‘Related PartyDisclosures’.REPOsRepurchase agreements. Securities sold tolenders with the commitment to buy back ona later date at a fixed price plus interest.Revenue ReserveReserves set aside for future distribution andinvestment.Rupee LoanRupee securities issued by Central Bank ofSri Lanka on behalf of the Government ofSri Lanka.Risk-Weighted AssetsUsed in the calculation of risk-based capitalratios. The face amount of lower risk assetsis discounted using risk weighting factors inorder to reflect a comparable risk per rupeeamong all types of assets. The risk inherentin off –balance sheet instruments is alsorecognised, first by adjusting notional valuesto balance sheet (or credit) equivalents andthen by applying appropriate risk weightingfactors.Shareholders’ FundsA Capital Reserve created as per theprovisions of the Banking Act No. 30 of1988.Single Borrower Limit33% of the regulatory capital base.Statutory Reserve FundA capital reserve created as per theprovisions of the Banking Act No. 30 of1988.SubsidiaryAn entity, including an unincorporated entitysuch as a partnership, which is controlled byanother entity known as the parent.Tier I CapitalConsists of the sum total of ordinary sharecapital, statutory reserve fund and generalreserves.Tier II CapitalSupplementary capital representing 50%of the revaluation reserve and generalprovisions.Total CapitalThe sum of Tier I and Tier II Capital.Treasury BillA short-term debt instrument issued onauction basis by the Central Bank ofSri Lanka on behalf of the Government ofSri Lanka.Treasury BondA long-term debt instrument issued onauction basis by the Central Bank ofSri Lanka on behalf of the Government ofSri Lanka, which carries an interest coupon.Unit TrustAn undertaking formed to invest in securitiesunder the terms of a trust deed.Value AddedValue added wealth created by providing theservices to customers, less the cost of suchservices. The value so added is distributedamong the employees, Government by wayof taxes and levies and the balance retainedfor expansion and growth.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

272CORPORATE INFORMATIONNAME OF THE BANKNational Savings BankLEGAL FORMA Government-owned Bank incorporated in Sri Lankaby the National Savings Bank Act No.30 of 1971 andwas granted the status of the Licensed Specialized Bankin terms of the Banking Act No. 30 of 1988.REGISTERED OFFICE AND HEAD OFFICE‘Savings House’,No. 255, Galle Road,Colombo 03, Sri Lanka.Tel: 94-11-2573008-15Fax: 94-11-2573178E-mail: nsbgen@nsb.lkWebsite: www.nsb.lkSwift Code: NSBALKLXSERVICE OUTLETS219 Branches1185 School Bank Units231 ATMsAGENCY NETWORK641 Post Offices3,412 Sub-Post Offices throughout the island.CREDIT RATINGThe Bank has been assigned AAA (lka) long-term creditrating by the Fitch Rating Lanka (Pvt) Ltd.INTERNATIONAL MEMBERSHIPWorld Savings Bank’s Institute (WSBI)International Union for Housing FinanceSociety for Worldwide Interbank FinancialTelecommunication (SWIFT)Eurogiro Global Payment CommunityBOARD OF DIRECTORSSunil S Sirisena - ChairmanS T Abeygunawardana - Working DirectorD L P R Abeyaratne - DirectorP A Abeysekera - Director (up to 28.02.2013)R M P Ratnayake - Director (from 04.03.2013)Lionel P Fernando - DirectorPriyantha Jayawardena - DirectorSumith Wijesinghe - DirectorGENERAL MANAGER/CEOH M Hennayake BandaraBOARD SECRETARYMs. Y F DeenBOARD AUDIT COMMITTEELionel P Fernando - ChairmanP A Abeysekera (up to 28.02.2013)R M P Ratnayake (from 4.3.2013)Sumith WijesingheHUMAN RESOURCES &REMUNERATION COMMITTEESunil S Sirisena - ChairmanP A Abeysekera (up to 28.02.2013)R M P Rathnayake (from 04.03.2013)Priyantha JayawardaneBOARD NOMINATION COMMITTEEP A Abeysekera - Chairman (up to 28.02.2013)R M P Ratnayake - Chairman (from 04.03.2013)S T AbeygunawardanaSumith WijesingheBOARD INTEGRATED RISK MANAGEMENTCOMMITTEED L P R Abeyaratne - ChairmanLionel P FernandoPriyantha JayawardenaNATIONAL SAVINGS BANK . ANNUAL REPORT 2012

273CORPORATE INFORMATIONCOMPLIANCE OFFICERR M GunathilakaAUDITORSAuditor GeneralSUBSIDIARYNSB Fund Management Co. Ltd.REGISTERED OFFICE AND HEAD OFFICE1st Floor, ‘Savings House’ National Savings Bank,No. 255, Galle Road, Colombo 03, Sri Lanka.Tel: 94-11-2564601, 2467731Fax: 94-11-2564706E-mail: nsbfmc@nsb.lkSwift Code: NSBFLKLXXXXBOARD OF DIRECTORSSunil S Sirisena - ChairmanS T AbeygunawardanaD L P R AbeyaratneLionel P FernandoH M Hennayake BandaraCHIEF EXECUTIVE OFFICERN K DahanayakeAUDITORSKPMGCOMPANY SECRETARYMs. Y F DeenDesigned and produced by emagewisePhotography by Wildlight Private Limited & Dimitri CruszDigital plates and printing by Aitken Spence Printing & Packaging (Pvt) Ltd.NATIONAL SAVINGS BANK . ANNUAL REPORT 2012

National Savings BankSavings HouseNo. 255, Galle Road,Colombo 03,Sri LankaTel: +94 (11) 257 3008-15Fax: +94 (11) 257 3178nsbgen@nsb.lkwww.nsb.lk