Project Number: 41947 Loan Number: 2370 October 2013

Loan Commercial Leasing Company Limited (Sri Lanka)

This is an abbreviated version of the XARR which excludes commercially sensitive and confidential business information that is subject to exceptions to disclosure set forth in ADB's Public Communications Policy 2011.

Extended Annual Review Report

CURRENCY EQUIVALENTS

Currency unit – Sri Lanka rupee/s (SLRe/SLRs)

At Appraisal At Project Completion 18 September 2007 30 June 2013 SLRe1.00 – $0.0088 $0.0077

$1.00 – SLRs113.55 130.70

ABBREVIATIONS

ADB – Asian Development Bank CAGR – compound annual growth rate CLC – Commercial Leasing Company Limited EMS – environmental management system EROIC – economic return on invested capital IFI – international financial institution LFC – licensed finance company LOLC – Lanka ORIX Leasing Company LIBOR – London interbank offered rate PLC – People's Leasing Company ROIC – return on invested capital SMEs

SLC – –

small and medium-sized enterprises specialized leasing company

NOTES

(i) The fiscal year (FY) of Commercial Leasing Company Limited ends on 31 March.

FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2013 ends on 31 March 2013.

(ii) In this report, “$” refers to US dollars.

Vice-President L. Venkatachalam, Private Sector and Cofinancing Operations Director General T. Freeland, Private Sector Operations Department (PSOD) Director C. Engstrom, Private Sector Financial Institutions Division, PSOD Team leader M. Hermans, Investment Specialist, PSOD Team members I. Chua, Senior Investment Officer, PSOD

S. Hruschka, Principal Investment Specialist, PSOD

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

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CONTENTS

Page

BASIC DATA i EXECUTIVE SUMMARY ii

I. THE PROJECT 1

A. Project Background 1 B. Key Project Features 1 C. Progress Highlights 2

II. EVALUATION 2

A. Project Rationale and Objectives 2 B. Development Impact and Outcome 3 C. ADB Investment Profitability 9 D. ADB Work Quality 10 E. ADB’s Additionality 11 F. Overall Evaluation 12

III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS 12

APPENDIXES 1. Private Sector Development Indicators and Ratings: Financial Intermediaries 11 2. Industry and Operations Review 15 3. Comparative Financial Statements 17

BASIC DATA

Commercial Leasing Company Limited (2370 – Sri Lanka)

Key Project Data

As per ADB Loan Documents ($ million)

Actual ($ million)

Total project cost ADB investment

Loan: Committed Disbursed

7.5

7.5 7.5

7.5

7.5 7.5

ADB = Asian Development Bank.

Key Dates Expected Actual

Concept clearance approval Board approval Loan agreement Loan effectiveness Disbursements

2007 2007 2008 2009 2009

16 August 2007 23 November 2007

6 February 2009 6 February 2009

9 March 2009 2 June 2009

Financial and Economic Internal Rates of Return on Invested Capital (%)

Appraisal XARR

Return on invested capital (real) Economic return on invested capital (real)

N/A = not applicable, XARR = extended annual review report.

Project Administration and Monitoring No. of Missions No. of Person-Days

Fact-finding 1 18 person-days Appraisal 1 6 person-days Project administration 1 8 person-days XARR mission 1 2 person-days

XARR = extended annual review report.

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EXECUTIVE SUMMARY

Leasing allows clients the use of equipment and machinery without the need to accumulate capital (or bank debt), thus providing a suitable alternative source of credit for small enterprises that lack equity or access to formal sources of finance. In turn, non-bank leasing companies as providers of this service often suffer a shortage of long-term credit due to risk-averse and collateral-based banking practices. This holds true for the majority of the Sri Lankan non-bank leasing companies. Usually excluded from taking customer deposits, they rely heavily on commercial paper and short-term borrowings from commercial banks to fund lease portfolios of much longer maturities. This funding profile results in maturity mismatches of assets and liabilities and leads to inefficiencies, higher cost, and higher risks for these leasing companies. In support of access to finance for both leasing companies in the region and leasing companies’ small and medium-sized enterprise (SME) clients, the Asian Development Bank (ADB) had previously approved loans to two leasing companies in Sri Lanka and one in the Maldives. In February 2009, ADB signed a facility agreement with Commercial Leasing Company Limited (CLC) amounting to $7.5 million for a senior secured loan with a tenor of 5 years (1-year grace period) payable at a floating rate of 6-month London interbank offered rate (LIBOR) plus a credit margin. The loan, which will mature in March 2014, is collateralized by security over a portfolio of lease receivables.

Development impact and outcome are rated excellent overall, as evaluated on (i) private sector development; (ii) business success; (iii) economic sustainability; and (iv) environmental, social, health, and safety performance. As for beyond-company impact, ADB’s financing has helped CLC become part of a significant increase in country-wide leasing volume—of almost 17% annually over the past 5 years—and has helped meet the needs of the provinces hardest hit in the civil war through CLC’s business expansion in these regions. CLC successes that were directly impacted by ADB (to the degree that one lender can take credit) are its significant expansion of leasing volume—funded in part by ADB and its peers, and providing finance to a large number of SME clients annually on a sustained basis—and its transition to becoming a deposit-taking institution. Other CLC achievements are its listing on the stock exchange, attracting financing from other international financial institutions (IFIs) on the strength of a business model catering to the compliance and safeguard needs of IFIs, and ultimately becoming part of the multifinance conglomerate of Lanka ORIX Leasing Company (LOLC). To the degree that the success of a company’s business model becomes a paradigm for its peers, CLC’s achievements go beyond its own success and have an impact on the Sri Lankan leasing sector as a whole. CLC’s business success as measured by its return on invested capital and contribution to economic development (approximated by the economic return on invested capital) warrant excellent ratings under applicable guidelines. Contribution to economic development is further supported by CLC’s opening of 11 new branches in the civil-war-affected Northern and Eastern provinces since the end of that war, and by an average 16,000 new leasing transactions annually between 2009 and 2013, at an average size of below $5,000 (equivalent) per lease, demonstrating CLC’s continued focus on small-ticket leases and the lower end of the SME segment, which traditionally has had limited access to commercial funding. CLC has an environmental management system and requires all prospective borrowers to submit clearance from the local environmental authorities, and an environmental assessment report to ascertain that they have not engaged in any hazardous activities, and this requirement

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is included in ADB’s loan agreement. To date, CLC has not reported any noncompliance with ADB’s environmental or social safeguard requirements. This category is rated satisfactory. ADB’s investment profitability is assessed by drawing comparisons from similar transactions made during the time of project approval, and from government-issued bonds during the same period. ADB was able to achieve an adequate loan margin, qualifying for an excellent rating under the ADB guidelines. ADB's work quality is rated satisfactory, evaluated on screening, appraisal, and structuring of the project; monitoring and supervision; and ADB’s role and contribution. The loan was conceived after several ADB missions to Sri Lanka to assess the country’s finance sector and after extensive due diligence and consultations with several potential clients. CLC was selected as one of the top leasing companies, having a long operating history, a track record of good financial performance, and a sizable regional outreach. Transaction structures, particularly security arrangements and covenants, were fully satisfactory. ADB’s project administration unit achieved the required level of credit monitoring and consistently met the internal requirements of annual reviews. Some untimely follow-up on safeguards reporting was noted and reflected in the rating. ADB provided additionality in working with CLC to perform reporting at international standards, thereby helping it attract funding from other IFIs—e.g., German Investment and Development Cooperation (DEG), Netherlands Entrepreneurial Development Bank (FMO), and Triodos—subsequent to ADB’s loan to CLC. Overall, ADB’s additionality is rated excellent. Prior to ADB’s loan disbursement in 2009, CLC’s only sources of long-term funding were local commercials banks, which depressed its net interest margin due to the high cost of funding. The ADB loan paved the way for CLC’s improved funding mix and eased the downward pressure on margins. This was further helped by other IFIs’ loans to CLC subsequent to the ADB loan. The ADB loan came at an opportune time, when CLC had limited access to attractive long-term funding and was, as a specialized leasing company, not yet able to mobilize customer deposits. With its loan, ADB became part of CLC's transformation in the years that ensued. Thanks to funding from ADB and other IFIs, CLC was able to achieve significant portfolio growth for the benefit of its clients. ADB required the introduction of an environmental management system and ADB’s requirements for financial covenants and corporate governance helped CLC adjust its operations to a business model attractive to IFIs, one of the few sources of attractive long-term funding in the market at the time. The partnerships with IFIs have encouraged CLC to use international best practices in important areas such as corporate governance and risk management. Becoming a deposit-taking institution, issuing bonds, and listing on Sri Lanka’s stock market are incremental steps in a progression that has transformed CLC’s funding and operations, and helped it become part of Sri Lanka’s leading multi-finance conglomerate. While this report does not claim more than an incremental role, ADB has been part of a remarkable success story from transaction approval in 2007 to today. This report evaluates the transaction overall as successful.

I. THE PROJECT A. Project Background 1. The Asian Development Bank (ADB) has actively promoted the leasing industry in Asia as an effective means of deepening and diversifying the finance sector and enhancing access to finance for small and medium-sized enterprises (SMEs) in various Asian countries.1 2. In Sri Lanka, leasing companies fill a financing gap for SMEs that is created by the conservative and collateral-based bank lending prevalent in the country. However, non-bank leasing companies have to rely heavily on commercial paper and short-term borrowings from commercial banks to fund their long-dated lease portfolios. The resulting maturity mismatch increases operational risks and decreases efficient use of funds. Moreover, it constrains leasing companies’ ability to serve SMEs, which account for 80%–90% of all enterprises and 75% of employment in Sri Lanka.2 3. In May 2006, ADB conducted a comprehensive review of the Sri Lankan finance sector and met with several private domestic banks and leasing companies. This led to ADB’s initial intervention in Sri Lanka’s leasing industry in the form of a loan of up to $10 million to Lanka ORIX Leasing Company (LOLC), the first specialized leasing company in Sri Lanka.3 Thereafter, other ADB missions explored opportunities for cooperation. In June 2007, Commercial Leasing Company Limited (CLC), the third-largest specialized leasing company in Sri Lanka, conveyed interest in obtaining financial assistance from ADB.4 On 23 November 2007, as a follow-on intervention in Sri Lanka’s leasing industry, ADB’s Board of Directors approved two direct loans to CLC and People’s Leasing Company (PLC).5 B. Key Project Features

4. On 6 February 2009, ADB signed a facility agreement with CLC for a $7.5 million senior secured loan payable in 5 years (1-year grace period) at a floating rate of 6-month London interbank offered rate (LIBOR) plus a credit margin. The loan is secured by a portfolio of specific lease receivables, and will mature on 9 March 2014.

C. Progress Highlights 5. In May 2008, LOLC acquired a 97% stake in CLC following the purchase of shares held by Commercial Bank of Ceylon (30%), Chemanex (37%), and Singer Sri Lanka (30%). LOLC acquired the remainder in 2009 and de-listed CLC from the Colombo Stock Exchange. Since the acquisition, CLC’s core operations (such as treasury and some back-office functions)

1 As of the date of this report ADB Private Sector Operations Department’s most recent transactions were with

Lanka ORIX Leasing Company and People’s Leasing Company (both Sri Lanka), Maldives Finance Leasing Company (Maldives), and Saigon Thuong Tin Bank (Sacombank, Viet Nam).

2 ADB. 2007. Report and Recommendation of the President to the Board of Directors: Proposed Loans. Democratic

Socialist Republic of Sri Lanka: People’s Leasing Company Limited and Commercial Leasing Company Limited. Manila.

3 ADB. 2007. Report and Recommendation of the President to the Board of Directors: Proposed Secured Loans.

Republic of the Maldives and Democratic Socialist Republic of Sri Lanka: South Asian SME Leasing Facility. Manila.

4 Footnote 3, p. 12, para. 54.

5 The People’s Leasing Company transaction was executed by ADB’s South Asia Department and is not the subject

of the report. The South Asia Department has prepared an Extended Annual Review Report for the transaction.

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have been integrated in LOLC. 6 However, CLC operates as a separate legal entity and is managed independently by an experienced and competent management team. 6. In December 2011, CLC obtained approval from the Central Bank to operate as a licensed finance company and was renamed Commercial Leasing & Finance Limited. It has since been allowed to take deposits from customers.7 Deposit collection took off quickly and has become a cost-effective diversification of CLC’s funding sources, accounting for 15% of its liabilities as of March 2013. As a licensed finance company, CLC is required to be listed and went public on 5 June 2012 by listing its shares on the Colombo Stock Exchange, in the banks, finance, and insurance sector. CLC floated 10% of its total shares to the public, which diluted LOLC’s ownership to 90%. 7. In 2012, LOLC received Central Bank consent to relinquish its leasing license and become the holding company of the LOLC multifinance conglomerate, thereby becoming CLC’s parent company. Given the cost synergies, this was a favorable development and was backed by LOLC’s largest shareholder, ORIX Corporation (Japan), which owns 30% of LOLC.8 During the transition, LOLC’s remaining lease portfolio was transferred to Lanka ORIX Finance Company for administration. CLC is now the sole originator of leases within the LOLC group.

II. EVALUATION

A. Project Rationale and Objectives 8. The majority of Sri Lankan SMEs have limited access to finance due to the risk-averse and collateral-based banking practice, and concentration of SME lending in urbanized areas. Leasing allows the use of equipment and machinery without the need to accumulate capital (or bank debt), thus providing an alternative source of credit. Leasing companies, on the other hand, are constrained by limited access to long-term funding (a typical lease has a maturity of 48 months) and have to rely heavily on short-term commercial bank funding, which is inefficient and riskier due to the maturity mismatch of asset and liabilities. 9. ADB’s 5-year loan to CLC was structured to support CLC’s long-term leasing portfolio. By providing leasing companies with access to long-term funds, ADB hoped to strengthen the leasing industry as a provider of alternative and competitive financing to SMEs. Given CLC’s focus on small-ticket leases suitable for SMEs and the company’s regional coverage beyond urbanized provinces, the transaction’s goal was to improve availability of funding to SMEs and to support their role in job creation and development.

10. As a secondary goal, by strengthening the leasing sector, ADB also hoped to boost development of capital markets in Sri Lanka once leasing companies have established an operating history and can tap the equity and debt markets.

6 The execution of the facility agreement was delayed due to the change in CLC’s shareholder structure in 2008.

7 As a licensed finance company, CLC is allowed to mobilize deposits, thereby better serving the needs of its

customers and helping diversify the company’s funding sources. 8 CLC’s cost–income ratio dropped from 62.7% in 2011 to 56.7% in 2012 thanks to lower administrative expenses

through cost sharing with LOLC.

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B. Development Impact and Outcome 11. The development impact and outcome is rated excellent when evaluated along the following criteria: (i) private sector development; (ii) business success; (iii) economic sustainability; and (iv) environmental, social, health, and safety performance.

1. Private Sector Development

a. Beyond Company Impact 12. Strengthened leasing industry. The leasing industry of Sri Lanka is composed of commercial banks, licensed finance companies (LFCs) and specialized leasing companies (SLCs), which are licensed to provide lease facilities. 9 The low degree of finance sector development in Sri Lanka has created difficulties in accessing finance, particularly longer-term finance. This has led to maturity mismatches on borrowers’ balance sheets and made long-term funds for leasing companies expensive. During 2007–2012, the leasing industry of Sri Lanka has grown stronger as an alternative source of financing—total lease volume grew at a compound annual growth rate (CAGR) of 16.7%. Table 1 shows the volume of leases provided by companies licensed to do so (the decline in 2009 reflects the impact of the civil war).

Table 1: Lease Volume, 2007–2012 (SLRs million)

Registered Finance Leasing Establishments 2007 2008 2009 2010 2011 2012

Commercial banks 61,058 54,530 42,866 51,292 95,389 117,505

Leasing companiesa

79,886 79,257 64,477 87,503 166,051 214,866

Total 140,944 133,787 107,343 138,795 261,440 332,371 a Data pertains to the licensed finance companies and specialized leasing companies.

Source: Central Bank of Sri Lanka: Economic and Social Statistics 2011, Annual Report 2010. 13. In September 2012, the LFCs, to which CLC belongs, recorded an asset growth of 29% to SLRs564 billion year on year. The increase was primarily due to significant growth in new leases, which increased by 26.6% year on year. Nineteen of the 59 leasing companies in Sri Lanka showed asset growth of over 100%.10 14. In 2011, CLC introduced factoring in the rural areas as one of its pioneering products. It allowed clients to tap factoring facilities for their working capital requirements and was viewed as a sound alternative to bank overdrafts.11 CLC currently has two branches dedicated to factoring and enjoys the first-mover advantage in this niche market. The factoring business, which constituted 11% of CLC’s total portfolio, contributed about 15% of revenue in fiscal year (FY) 2012. It provided CLC’s SME clients with an alternative option for financing their working capital and short-term requirements.

9 Lease facilities extended are mainly finance leases and operating leases. In operating leases, ownership of the

leased asset remains with the lessor during the life of the transaction. Finance leases resemble an installment purchase agreement and the lessee becomes owner of the leased object at the end of the transaction.

10 There are 45 licensed finance companies and 13 specialized leasing companies.

11 Table 2 shows the growth in factoring funds.

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15. CLC was one of the drivers of industry growth as it evolved from a medium-sized leasing company to a leading leasing player in the lower end of the SME and urban micro segments. CLC’s strength and role in the industry was acknowledged when it received approval to become an LFC in December 2011, which enabled it to broaden its business sphere and to become a licensed deposit-taking enterprise, which had not been possible for it as an SLC. Furthermore, CLC’s strong financial performance helped raise public confidence in leasing companies. A testament to the public’s high level of confidence in CLC was the SLRs385.3 million in customer deposits that were raised within 3 months of receiving a license in 2011. Deposits reached 15% of CLC’s liabilities as of March 2013. 16. Apart from strengthening the industry through a higher lease volume, CLC enhanced leasing companies’ public image by advocating commitment to ethics, social responsibility, and exemplary management principles with its continuing membership in the United Nations Global Compact and its charter on sustainability practices.

17. Promoted capital markets development. ADB’s loan also aimed to support CLC’s operations and enhance its track record of financial performance, thereby enabling it to tap equity and debt markets. In 2011, CLC was able to issue SLRs700 million worth of debentures. These debentures were rated A–(lka) by Fitch Ratings, indicating the high credit quality and strong payment capacity of CLC. The issuance made a contribution to stimulating activity in the corporate bond market.

18. In June 2012, CLC floated 10% of its shares on the Colombo Stock Exchange, which made it a publicly listed company. This contributed to additional trading supply in the capital market, which in turn contributed to market liquidity. The small float also provided an opportunity for retail investors to own shares in the company, allowing a diversified group of owners.

b. Direct Company Impact

19. Promoted small and medium-sized enterprise growth. CLC’s core area of business is the SME segment. The substantial expansion in its portfolio size reflects the impact it has had on SMEs. Since the ADB loan in 2009, CLC’s new business origination has expanded by a CAGR of 50.9% (Table 2). Table 2 also shows that new leases extended during 2009–2012 averaged 15,593 per year, for an average amount of less than SLRs630,000 (currently below $5,000). This demonstrates CLC's continued focus on a segment that traditionally has limited access to commercial funding.

Table 2: New Business Origination, 2009–2012 (SLRs million)

Item 2009 2010 2011 2012 2013

New lease executions 4,436 5,675 12,926 15,262 11,232

Factoring funds in use 759 1,437 2,954 3,005 2,859

Portfolio balance 8,334 9,764 18,339 24,101 24,985

No. of leases executed 7,930 16,390 19,989 16,176 17,480

Average size of new leases (SLRs)

559,395 346,248 646,656 943,497 642,563

Source: Commercial Leasing Company Limited. 2012. Annual Report. Colombo.

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20. One of CLC’s key success factors for promoting SME growth has been its nationwide presence and accessibility. The continued geographic expansion enabled it to serve SME borrowers, in particular those residing in the previously war-torn Northern and Eastern provinces, who do not have access to mainstream financial institutions. Since the end of the civil war, CLC has opened 11 new branches in the Northern and Eastern provinces. For the years 2009 to 2011, provincial data are not available. CLC has also intensified its focus on the agriculture sector, a thrust area of economic growth as defined by the government. CLC has more than doubled its network of branches in the past 5 years—from 22 in 2008, to 40 in 2011, to 54 in 2013. Advanced information and communication technology systems link the entire branch network, enabling services to reach even rural customers. Moreover, branch operations are backed by a round-the-clock customer service hotline.

c. Overall Assessment of Private Sector Development

21. The expansion of CLC’s lease portfolio reflects its contribution to the strengthening of the leasing industry through promoting and supporting SMEs’ growth and development with an alternative form of financing that allows an increase in business activity. In this regard, the contribution of ADB assistance to private sector development is rated excellent.

2. Business Success 22. Financial performance. CLC’s selected financial indicators are shown in Table 3. 23. Profitability. CLC has consistently shown strong profitability. Net income during 2009–2012 grew at a CAGR of 91.6%. However, it is worth noting that profit after tax of SLRs2.9 billion during FY2012 grew by a remarkable 340% over the previous year. Strong portfolio growth and lower funding costs, which resulted in wider net interest margins, were the primary drivers of this success. CLC’s core business of lease and hire-purchase facilities contributed to about 67% of revenues in FY2012. The debt factoring business progressively expanded and has increased contribution to revenue from 10% in 2009 to an expected 15% by fiscal year end 2012. Improved cost structures have lowered the cost–income ratio from 82.3% in 2009 to 56.7% in 2012. As a result of its robust earnings and greater cost efficiency, CLC continued to be the significant contributor to LOLC’s group profit, accounting for 18% of the overall operating profit for FY2012. 24. Asset quality. Despite the rapid lease portfolio growth at a CAGR of 42.5% from 2009 to 2012, asset quality has remained strong.12 Nonperforming loans increased to 2.8% in FY2012, from 1.7% in FY2011, but remained significantly below the industry’s nonperforming loan ratio of 5.9%, showing that the portfolio increase was realized without compromising the quality of the assets. This can be attributed to CLC’s strong credit culture and to staff with extensive experience in the industry.

25. Liquidity. Similar to other LFCs, CLC’s primary source of funding has been from external borrowings, a significant portion of which came from IFIs with long tenors at competitive rates, helping improve CLC’s maturity profile. Parent LOLC’s access to longer-term and attractively priced funds was due to its business focus on inclusive finance, which appealed to IFIs, and CLC was able to tap these sources of funding too. From predominantly short-term borrowings (62.6%) in 2009, CLC was able to move to largely long-term borrowings in 2012 (Appendix 5, Table A5.1). With the granting of a license to operate as an LFC in December

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This growth is justified by significant catch-up demand from the civil war.

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2011, CLC’s funding base was further strengthened, as it made deposit taking a significant part of its funding mix.

Table 3: Commercial Leasing Company Limited – Selected Financial Indicators, 2009–2012

(SLRs million, except as otherwise indicated)

31 March 31 March 31 March 31 March Item 2009 2010 2011 2012

Net lending portfolio 8,430 9,765 18,371 24,104 Total assets 9,451 12,535 21,409 26,381 Total borrowings 5,821 9,231 15,833 17,649 Total liabilities 7,776 10,505 17,725 19,778

Equity 1,675 2,030 3,684 6,603 Gross income 1,211 1,239 2,255 3,239 Net income 415 354 664 2,920 Debt to equity (times) 3.5 4.6 4.3 2.7 NPL ratio (%) 1.1 0.9 0.8 2.8 Short-term debt to total liabilities (%)

62.6 47.7 42.2 29.4

CAR (%) 19.1 17.5 17.8 25.3 ROA (%) 3.8 3.2 3.9 3.7 ROE (%) 22.4 19.1 23.3 56.8

CAR = capital adequacy ratio, NPL = nonperforming loan, ROA = return on assets, ROE = return on equity. Source: Audited financial statements, 2009–2012, of Commercial Leasing Company Limited.

26. Capital position. CLC is well capitalized. In 2010, the company received SLRs1 billion in new capital from LOLC, and during FY 2012 shareholders’ equity rose by an additional SLRs2.8 billion to SLRs6.6 billion, up 80%, as a result of capital gains earned from the divestment of CLC’s investment in Diriya Investment Company. The total capital adequacy ratio increased to 25.5%, making the company one of the best capitalized finance companies in Sri Lanka with a debt–equity ratio of 1:2.7x.

27. Return on invested capital. The time-adjusted real financial return on invested capital (ROIC) was used to derive the financial internal rate of return of CLC. The resulting rate adjusted for inflation is significantly greater than the hurdle rate proxied by CLC’s weighted average cost of capital. Business success thus merits an excellent rating.13 The high ROIC was due to CLC’s solid financial performance underpinned by strong profitability.

3. Economic Sustainability 28. Economic return on invested capital. The economic return on invested capital (EROIC) was used as a proxy because ADB's loan was not targeted at a specific capital investment project, and cost and benefit cannot be clearly identified. EROIC was calculated by adjusting the nominal ROIC to include tax payments. The real EROIC after adjusting for inflation was above the maximum hurdle rate specified in the guidelines for preparation of extended annual reviews.14 ADB’s loan to CLC is rated excellent for economic sustainability.

29. CLC has contributed to economic development by expanding financing to SMEs through almost 78,000 small-ticket leases between 2009 and 2013, which may be assumed to have

13

ADB. 2007. Guidelines for Preparing Performance Evaluation Reports on Nonsovereign Operations. Manila. 14

Footnote 13

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contributed to job creation, employment, and reconstruction of the economy after the civil war. CLC has also made a positive contribution to the economy by paying corporate income taxes totaling SLRs750.6 million during FY2009–FY2012. The sustainability of business growth was significantly aided by availability of long-term funding from ADB and other IFIs, in turn creating the opportunity for the LOLC merger, bond issuance, and access to the stock market.

4. Environmental, Social, Health, and Safety Performance

30. Environment. ADB’s loan to CLC was classified as category FI (financial intermediary). 15 The report and recommendation of the President (footnote 2) provided environmental management system (EMS) guidelines, and the facility agreement required an environmental screening, classification, and assessment system as one of the components of the EMS, and an environmental impact assessment if CLC were to finance lessee activities with potentially adverse environmental impacts. The facility agreement also requires annual reporting on the EMS. 31. During loan implementation, ADB's Private Sector Operations Department monitored CLC’s activities under the ADB loan. CLC has an EMS (it adopted LOLC’s EMS), has implemented screening procedures of potential subprojects against a prohibited investment activity list, and conducts due diligence or facilities inspection before final approval.16 CLC also requires, as part of its due diligence, that all prospective borrowers submit a clearance from the local environmental authorities before loan approval. CLC has reviewed the environmental implications of the ADB loan’s subprojects and confirmed in its annual EMS report that CLC has not provided ADB loan proceeds to lessee activities that could have potentially adverse environmental impacts.17 32. Social safeguards and other social dimensions. The project was categorized as C for involuntary resettlement and indigenous peoples. No involuntary resettlement or impacts on indigenous peoples were observed as a result of CLC’s leasing activities. 33. As a member of the United Nations Global Compact, the LOLC group of companies, including CLC, embraced a charter on sustainability in practice. LOLC reports to the Global Compact in its annual Communication on Progress reports, on specific commitments to human rights, labor rights, environmental protection, and action against corruption. The Communication on Progress reports and the LOLC annual reports, disclosed on the LOLC website, document the group’s compliance with core labor standards and the national labor laws of Sri Lanka. 34. The LOLC group, through LOLC Care, carries out corporate social responsibility initiatives in rural areas targeting the poor and vulnerable sections. Some of these initiatives are (i) partnering with the National Council for Child and Youth Welfare to sponsor the renovation and maintenance works of schools and hostels; (ii) social and community relation projects in rural areas, including infrastructure development and support to farmers’ associations;

15

Categorization was approved in a memo dated 27 September 2007. 16

CLC, as a wholly owned subsidiary of LOLC, has adopted the EMS developed by its parent. In 2008, LOLC became a signatory to the United Nations Global Compact’s strategic policy initiative, which seeks to promote sustainable and responsible businesses throughout the world. As part of its membership criteria, the LOLC group, along with over 8,700 members, was committed to aligning its business operations and strategies with 10 universally accepted principles in the areas of human rights, labor, environment, and anticorruption.

17 CLC also stopped financing two-stroke three-wheelers once these vehicles were identified as contributors to air pollution.

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(iii) educational assistance to children of economically impoverished communities in rural areas; and (iv) improving financial literacy of migrant workers and their family members in Sri Lanka.

35. CLC’s compliance with regard to safeguard standards is rated satisfactory. C. ADB Investment Profitability 36. ADB’s senior secured loan to CLC was priced at 6-month LIBOR plus a credit margin, with a 1-year grace period. The loan has a security cover against specific lease receivables. ADB’s investment profitability is assessed by drawing comparisons from similar transactions made during the time of project approval, and from government-issued bonds during the same period. ADB’s margin multiple has an equivalent rating of excellent under the ADB guidelines. D. ADB Work Quality 37. ADB's work quality is rated satisfactory based on screening, appraisal, and structuring of the project; monitoring and supervision; and its role and contribution.

1. Screening, Appraisal, and Structuring of the Project 38. The loan to CLC was aligned with the country and strategy program for Sri Lanka, which acknowledged the importance of private sector development as a key to accelerating gross domestic product growth, creating jobs, raising efficiency and productivity in all sectors, and supporting the Sri Lankan government’s strategy to stimulate the private sector.

39. Several assessment missions to Sri Lanka met with various banks and leasing companies, and extensive due diligence was carried out. CLC was selected since it was one of the top leasing companies, with a long operating history, a track record of good financial performance, sizable outreach, and a good basis for achieving desired project outcomes.18

40. The assistance to both PLC and CLC was structured with a charge over a portfolio of lease receivables. Loan collateralization improved the facility risk rating and provided the best possible pricing under the circumstances. The tenor of both loans was 5 years (with principal amortization), aimed to provide long term funds to contribute to alleviating the borrowers’ asset-liability mismatch. The proceeds of the loan were specifically earmarked for SME finance. 41. ADB's screening, appraisal, and structuring of its assistance is rated satisfactory.

2. Monitoring and Supervision 42. The dealing officer and project administration unit of ADB’s Operations Department regularly monitored CLC’s overall business and financial performance in annual and semi-annual reports. CLC submits unaudited quarterly financial statements and audited yearly financial statements, together with the required compliance certificates. ADB performed the required level of internal monitoring and supervision, and CLC has always been in compliance with all loan covenants throughout the life of the loan. 43. In preparing this report it was found that while CLC submitted its board’s endorsement for the establishment of an EMS as part of conditions precedent, receipt of the actual document

18

PLC was selected for similar reasons, with the difference that PLC is the subsidiary of a state-owned bank.

9

was not documented prior to drawdown. It was also found that the environmental reporting required under the facility agreement has only been provided since November 2011. CLC has an EMS and has confirmed to ADB that it has not provided the ADB loan proceeds to lessee activities that could have potentially adverse environmental impacts. 19 While this review is satisfied with the substance of CLC’s EMS, monitoring follow-up on the missing documents was found lacking. Monitoring and supervision is therefore rated partly satisfactory.

3. ADB's Role and Contribution 44. In addition to providing much-needed long-term funding for the expansion of CLC’s operations, ADB approved the transaction without requiring CLC to hedge proceeds using the expensive and ineffective structure available at the time (CLC would have had to deposit US dollar proceeds with a local bank in return for a local currency loan). ADB took slightly higher credit risk but made the transaction significantly more cost-effective for CLC.20 45. ADB’s inclusion in the facility of an EMS requirement helped CLC adjust to standard IFI requirements, paving the way for further IFI transactions. This in turn provided a good fit for the subsequent merger with LOLC, the benefits of which are discussed in ADB’s Additionality below. The quality of ADB screening and selection is borne out by CLC’s growth since 2007 as part of Sri Lanka’s premier multi-finance conglomerate. ADB's role and contribution is rated satisfactory. E. ADB’s Additionality 46. Prior to ADB’s loan disbursement in 2009, CLC’s only sources of long-term funding were local commercials banks, depressing net interest margins due to the high cost of funding. The ADB loan paved the way for CLC to improve its funding mix and eased the downward pressure on margins.21 This was further helped by other IFI loans to CLC subsequent to ADB’s loan. 47. The ADB loan came at an opportune time, when CLC had limited access to attractive long-term funding and was, as an SLC, not yet able to mobilize customer deposits. With its loan, ADB was able to become part of the transformation of CLC in the years that ensued. Thanks to funding from ADB and other IFIs—such as German Investment and Development Cooperation (DEG), Netherlands Entrepreneurial Development Bank (FMO), and Triodos—CLC was able to achieve significant portfolio growth for the benefit of its clients. ADB’s facility agreement required CLC to introduce an EMS and the financial covenants and corporate governance requirements in ADB’s transaction helped CLC adjust its operations to a business model attractive to IFIs, one of the few sources of attractive long-term funding at the time. The partnerships with IFIs have allowed CLC to use international best practices in important areas such as corporate governance and risk management. Becoming a deposit-taking institution, issuing bonds, and listing on Sri Lanka’s stock market were incremental steps in a progression that has transformed CLC’s funding and operations, and has helped it become part of Sri Lanka’s leading multi-finance conglomerate. While this report does not claim more than an incremental role for ADB, ADB has been part of a remarkable success story from transaction approval in 2007 to today. ADB’s additionality is rated excellent.

19

This is covered in CLC’s annual EMS reports and additionally in a letter from CLC, dated 13 September 2013. 20

The depreciation of the Sri Lanka rupee was not significant, moving from $1 = SLRe114 in 2009 to $1 = SLRe126 in 2013. A hedge with a local bank would have been more expensive, if available at all.

21 Net interest margin increased by 3% from the time of ADB’s loan disbursement to March 2012.

10

F. Overall Evaluation 48. Overall, ADB’s loan to CLC is rated successful (Table 4).

Table 4: Evaluation of ADB's Loan to Commercial Leasing Company Limited

Item Unsatisfactory Partly

Satisfactory Satisfactory Excellent

A. Development Impact √

1. Private sector development √ 2. Business success √ 3. Economic sustainability √ 4. Environmental, social, health, safety √ B. ADB Investment Profitability √ C. ADB Work Quality √ 1. Screening, appraisal, and structuring √ 2. Monitoring and supervision √ 3. ADB's role and contribution √ D. ADB's Additionality √

Overall Rating Successful

ADB = Asian Development Bank. Source: Asian Development Bank.

III. ISSUES, LESSONS, AND RECOMMENDED FOLLOW-UP ACTIONS

49. The post-civil-war landscape has opened up many areas that require access to finance. Non-bank financing institutions, particularly microfinance companies, can play a pivotal role in helping rebuild the previously war-torn provinces by providing long-term loans and investments. However, it is proposed that in future transactions ADB should consider providing local currency loans instead of US dollar loans in countries where hedging or derivatives such as cross currency swap transactions or forward contracts are not readily available.

Appendix 1 11

PRIVATE SECTOR DEVELOPMENT INDICATORS AND RATINGS: FINANCIAL INTERMEDIARIES

Indicator Rating

a Justifications

1. Beyond Intermediary and Sub-Borrower Impacts

1.1. Private sector expansion and institutional impact

1.1.1. Contribution to an increased private sector share and role in the economy, and to sustainable jobs or self-employment

Satisfactory The ADB loan to CLC provided medium-term funds to support lease advances to SMEs, which constitute about 80%-90% of the private business establishments in Sri Lanka. The enhanced business activities are assumed to have naturally led to employment creation and income generation. Aside from contributing to employment through financing support for SMEs, CLC increasingly provided direct employment through its staffing pool. CLC employee numbers increased from 276 in 2009 to 511 in 2012. The direct and indirect job creation facilitated by CLC contributed to Sri Lanka’s overall reduction in unemployment from 6.0% in 2007 to 4.9% in 2010.

1.1.2. Contribution to expanded SME lending with good portfolio and sub-borrower performance

Satisfactory CLC’s lease finance is focused on SMEs. That portfolio grew from SLRs8 billion in 2009 to SLRs25 billion in 2013 (a CAGR of 50.9%). New disbursements rose from SLRs 4.4 billion in 2009 to SLRs24.9 billion in 2013. Average lease size of below $5,000 equivalent speaks for SME focus. Tables 2 and 3 in the main text show CLC’s low rate of nonperforming sub-borrowers.

1.1.3. Contribution to institutional change by

(i) improving supply and access to formal credit and banking service for SMEs; and

(ii) influencing an enabling

environment for SMEs via lobby activity, policy dialogue, or otherwise

Excellent Expansion of the branch network is the primary strategy by which CLC ensured access to leasing facilities by SMEs. CLC’s branch network has significantly grown from 12 full branches in 2007 to 53 branches (40 full branches, 9 post office service centers, and 4 factoring branches). CLC has expanded into the less urbanized provinces, providing access to finance to the greater population of Sri Lanka. As of 2012, 72% of CLC’s branches are located outside the Western Province, and CLC has opened 11 new branches in the Northern and Eastern provinces since the end of the civil war. Advanced information and communication technology systems link the entire branch network, enabling services to reach even rural customers. Moreover, branch operations are backed by a round-the-clock customer service hotline.

1.2. Competition. Contribution to

new competition for SME business among local banks (including new product and service offerings and local currency products) and/or to increased competition in key sub-borrower markets

Satisfactory

Currently there are 58 companies providing leasing services in Sri Lanka. The competition is quite intense, but it is fair to assume that CLC as the leasing arm of the LOLC group is seen as one of the “players to beat” in the competitive process and is being emulated by its peers. Since CLC’s business is predominantly focused on small-ticket and SME leases, it is fair to assume that CLC is one of the drivers of competition in the SME leasing market.

12 Appendix 1

Indicator Ratinga Justifications

1.3. Innovation. Contribution to

new ways of offering effective banking services to clients (including new products, services, and technologies) in ways that are replicated by other banks and in the financial system (item 2.2)

Excellent CLC, along with the other leasing companies in Sri Lanka, offered a diverse product mix ranging from asset financing to group loans. LOLC Microcredit, a subsidiary of CLC, is offering micro insurance, a first of its kind in the industry. If this product proves successful, CLC may offer the same product as well. CLC pioneered the introduction of factoring services to Sri Lanka’s remote locations. Most factoring operations were restricted to the urban and semi-urban areas of Colombo and the Western Province. CLC thus created an opportunity for small and micro enterprises to tap funding. CLC introduced the “Speed Draft” in 2010, a first for CLC and a first for non-bank finance institutions, thereby catching up to the banking industry, which already employed the product. The product is for short-term bridge finance up to an approved limit.

1.4. Links. Contribution to local

saving and deposit mobilization via networks of participating bank(s), and/or relative to size of subportfolios, and contributes to notable upstream or downstream link effects to sub-borrowers’ businesses in their industries or the economy

Satisfactory In December 2011, CLC became a licensed finance company (LFC) and thus obtained a license to mobilize deposits. Within 1 month, CLC rolled out a fixed-deposit product and mobilized SLRs385 million by end FY2012, reaching 15% of total liabilities by March 2013. Leveraging on its strong brand, CLC’s expects to increase the share of deposits in its funding mix overtime.

1.5. Catalytic element.

Contribution to mobilization of other local or international financing to SMEs and to positive demonstration to market providers of debt and risk capital to SMEs

Satisfactory Prior to the ADB loan, CLC sourced long-term funding from local banks such as Bank of Ceylon, People’s Bank, Hatton National. Once the ADB loan was acquired, CLC obtained long-term funding from other international financial institutions such as DEG, FMO, and Triodos. Given the lower funding costs of IFI loans compared with those of local commercial banks, CLC’s net interest margin improved by 3% from March 2009 to March 2012.

1.6. Affected laws, frameworks, and/or regulation. Contribution to

improved laws, regulation, and inspection affecting formal SME banks and banking services to SMEs in the local financial system

Satisfactory /

limited relevance

In December 2012, the government decided to put on hold the issuance of new finance company licenses for the next 2–3 years so as to force weaker companies to consolidate with larger and stronger ones. This regulatory reform is intended to improve corporate governance and the public’s confidence in the industry. The government has been taking steps to improve laws and regulations in the leasing industry. While it is difficult to pinpoint CLC’s role in improving such laws and regulations, it can still be said that the leasing companies in their small ways have lobbied for better regulation of the leasing industry.

1.7. Wider demonstration of new standards. Contribution to raised

standards in the finance sector or in sub-borrower industries and sectors in corporate governance, transparency, and stakeholder relations

Satisfactory CLC’s association with the leading IFIs is testimony to its compliance with good governance. The relationship has likewise compelled CLC to adopt international best practices. Some of the measures practiced at CLC to ensure collective rather than individual decision making to facilitate greater transparency includes setting up several board committees, such as audit committee, asset liability management committee, risk management committee, and steering committee.

Appendix 1 13

Indicator Ratinga Justifications

2. Participant Banks and Sub-Borrower Impacts

2.1. Skills with wider impact potential. Contribution

(i) to improve SME credit

approach at all stages in the participant bank(s) in ways that will be replicated by other providers of SME finance and banking service; and

(i) via the participating bank(s)

to improved sub-borrower skills in operating their businesses, e.g., via good appraisal, and monitoring by the bank(s)

Satisfactory

To manage the negative impacts of the economic crisis and difficult operating environment, CLC implemented strict credit evaluation policies, shifted its focus from executions to collections, and put much effort into active recoveries. This helped the company manage nonperforming loans within acceptable levels.

2.2. Demonstration and new standards-setting potential.

Demonstrates potential through improved and achieved standards in corporate governance, transparency, stakeholder relations, and ESHS spheres

Satisfactory The ADB loan helped improve standards of corporate governance at CLC. ADB’s enforcement of the facility agreement, including financial covenants, has encouraged CLC to comply with contractual obligations and to adhere to covenants strictly. CLC has not violated any covenants in the agreement with ADB. CLC has been in compliance with all prudential requirements, regulations, and laws.

Overall Rating Satisfactory

ADB = Asian Development Bank, CAGR = compound annual growth rate, CLC = Commercial Leasing Company Limited, DEG = Deutsche Investitions- und Entwicklungsgesellschaft, ESHS = environmental sustainability, health and safety, FMO = Financieringsmaatschappij voor Ontwikkelingslanden N.V., LOLC = Lanka ORIX Leasing Company, SMEs = small and medium enterprises. a

Ratings scale: excellent, satisfactory, partly satisfactory, and unsatisfactory. The rating is not an arithmetic mean of the individual indicator ratings, which have no fixed weights. Consider already manifest actual impact (positive or negative) and the potential impact and risk to its realization.

Appendix 2 14

INDUSTRY AND OPERATIONS REVIEW

Specialized Leasing Companies’ Industry Performance (%)

Item 2007 2008 2009 2010a 2011

a 2012

a

2012 September

1. Capital Adequacy

1.1 Capital funds to total assets 16.7 16.6 17.4 19.1 18.1 23.4 23.6

1.2 Total borrowings to capital funds (Gearing)

4.2 4.2 4.0 3.5 3.8 2.9 3.5

2. Asset Quality

2.1 NPAs to total accommodation 4.3 4.8 5.2 6.0 3.8 2.5 2.4

2.2 Provisions to NPAs 58.9 60.2 61.5 63.9 87.9 66.5 82.5

2.3 Total advances to total assets 81.5 80.5 80.7 74.3 74.4 87.5 88.5

2.4 Total advances to total borrowings 116.3 114.1 116.1 111.4 109.6 130.8 135.9

2.5 Provision made against total advances 2.5 2.5 3.2 3.8 3.3 1.7 1.9

3. Earnings and Profitability

3.1 Net profits before tax to total assets (ROA)

35 2.7 2.4 3.8 5.3 6.9 5.3

3.2 Operating profit before provision to total assets

4.4 3.1 3.1 5.0 5.7 6.1 3.0

3.3 Profit after tax to capital funds (ROE) 15.2 10.5 7.6 11.8 20.5 21.4 16.1

3.4 Interest income to interest expenses 156.7 140.3 137.5 158.8 205.6 212.2 183.1

3.5 Net interest income to gross income 30.4 24.5 23.1 29.4 39.9 45.6 39.5

3.6 Net interest income to total assets 5.5 5.0 4.9 5.8 6.7 7.8 7.5

3.7 Net interest income to net profit before tax

156.1 190.6 203.8 154.9 127.1 112.5 142.2

3.8 Operating cost to net interest income 73.2 94.0 102.6 83.1 71.3 51.8 53.8

4. Liquidity

4.1 Net loans to total borrowings 113.4 111.2 111.5 105.8 104.7 127.9 132.7

4.2 Liquid assets to total assets 6.0 7.5 5.3 10.2 4.2 2.6 2.9

4.3 Liquid assets to total borrowings 8.6 10.6 7.6 15.3 6.1 3.9 4.5

5. Assets / Funding Structure

5.1 Bank borrowings 70.1 70.1 69.5 66.7 67.9 66.9 65.1

5.2 Investments 3.4 4.9 4.1 6.7 11.5 3.3 3.4

NPA = nonperforming asset, ROA = return on assets, ROE = return on equity. a As at end of the financial year (March)

Source: Central Bank of Sri Lanka data, 2012.

Appendix 2 15

1. The finance companies and the leasing companies in the non-banking sector have been vital elements in the Sri Lanka financial landscape and complement mainstream banking. Although accounting for only 6.4% of the finance sector, the leasing business is deeply rooted in Sri Lanka, concentrating mainly on collateralized lending based on movable assets. In addition, it offers traditional products such as finance leasing, hire–purchase, and pawning. The non-bank financial institutions comprise 45 licensed finance companies (LFCs) and 13 specialized leasing companies (SLCs).

2. The leasing industry caters to a specific segment of the population that includes those who do not have or are reluctant to access the banking sector due to lack of documentation and additional collaterals to secure credit. This is why the leasing industry has proven to be the leading source of financing for small and medium-sized enterprises (SMEs) in Sri Lanka to fund their fixed-asset requirements. Leasing serves the underserved and encourages financial inclusion.

3. Based on expectations of economic growth and business expansion, competition is expected to intensify significantly, particularly as the banking sector is also expected to extend its services to SMEs to capture growth. Given that banks are in a better position to offer attractive rates to new customers due to their lower borrowing costs, leasing companies need to consolidate and merge to retain and expand their market share and remain competitive. This is in essence what the government is pushing for by ruling out the provision of new leasing licenses in the short term.

4. To effectively compete with the banking sector, leasing companies have to reshape their business model by diversifying into products and services that are not offered by the banks. This will help them attract new customers and expand the industry’s market share.

5. The leasing industry remained resilient despite the challenging global and domestic market conditions. Despite the high interest rates in the market, which raised deep concern on the possible deterioration of asset quality of the banking and non-banking sectors, the gross nonperforming asset (NPA) ratio remained at 5% as at the end of September 2012. When factoring in loan-loss provision, the net NPA ratio was reported at 1.6% as at the end of September 2012, compared with a net NPA ratio of 1.9% a year earlier.

6. The robust credit growth of the leasing industry in 2012 had a favorable impact on earnings. Net interest margin improved to 7.1% for the 12 months ending September 2012, compared with 6.6% year on year in 2011. However, net income after tax declined to SLRs12 billion during the 9 months ending September 2012 due to fiscal policy measures that increased the duty on vehicle imports and an increase in fuel prices. Return on assets remained modest at 4%, as did return on equity at 19%.

7. The total asset base of the leasing industry increased by 15% to SLRs564 billion during the first 9 months of 2012. Growth in the lease portfolio was the main driver for the expansion of total assets, while the investment portfolio remained constant. Deposits continued to be the major source of funding for LFCs at 41% of the sector’s total liabilities, while short-term borrowings were the major source of funding for the SLCs, accounting for 30% of sector liabilities. Total deposits grew by 25% to SLRs232 billion, while borrowings remained static during the first 9 months of 2012. Higher interest rates and the change in status of several SLCs to LFCs enabled them to mobilize public deposits instead of borrowings, which is the main reason for the lack of growth in borrowings in the sector.

16 Appendix 2

8. The leasing industry’s capitalization increased by a healthy 19% as of the end of September 2012. Sustained profitability and the recovery of distressed assets were instrumental in the strengthening of capital funds in the sector. The tier 1 capital adequacy ratio (CAR) increased to 17%, significantly above the 5% minimum prudential requirement. Total CAR, where the required minimum is 10%, increased to 17% as well, ensuring a good cushion to absorb losses in case of need.

Appendix 3

17

COMPARATIVE FINANCIAL STATEMENTS

Table A3.1: Comparative Balance Sheets of Commercial Leasing Company Limited, 2009–2012

(SLRs million)

Balance Sheet 2009 2010 2011 2012

Assets Cash and cash equivalents 85 127 416 448 Marketable securities 3 5 12 5 Rentals receivable on leased and hire-purchase 7,461 7,481 13,291 16,949 Loans and advances 847 2,127 4,472 Factoring receivables 759 1,437 2,954 2,683 Amount due from related company 252 4 3 Other receivables 426 922 1348 Other current assets 209 Investment securities 0 0 0 100 Bank deposit – US dollar deposit 573 801 270 Investment in equity-accounted investee 49 51 53 59 Investment in subsidiaries 828 1081 Property, plants, and equipment 311 280 279 315 Total Assets 9,451 12,535 21,409 26,381

Liabilities Bank overdraft 634 806 914 626 Interest-bearing loans and borrowings – current

4,250 5,014 7,488 5,811

Loans obtained from related companies – current

216 216 448

Deposits from customers 385 Current tax liabilities / income tax payable

27 29 85 152

Other payables 621 940 1,509 1,234 Interest-bearing loans and borrowings – noncurrent

1,571 832 4,362 8,410

Loans obtained from related companies – noncurrent

558 2,443 1,038

Amounts due to related companies 321 1,804 410 1,316 Deferred tax liabilities 339 290 283 340 Retirement benefit obligations 13 15 15 18 Total Liabilities 7,776 10,505 17,725 19,778

Equity Stated capital 418 418 1,426 1,426 Revaluation reserve 77 76 57 57 Statutory reserve fund 103 110 123 289 General reserve 288 288 288 288 Investment fund 17 108 Retained earnings 789 1,138 1,772 4,435

Total Equity 1,675 2,030 3,684 6,603

Total Liabilities and Equity 9,451 12,535 21,409 26,381

.

Appendix 3 18

Table A3.2: Comparative Income Statements

of Commercial Leasing Company Limited, 2009–2012 (SLRs million)

Income Statement 2009 2010 2011 2012

Interest income 2,824 2,496 3,402 5,245 Interest expense (1,640) (1,363) (1,309) (2,167) Net interest income 1,183 1,133 2,093 3,077 Other operating income 31 113 175 2,191 Expenses Personnel cost (215) (253) (382) (406) Premises, equipment, and

establishment expenses (79) (109) (141) (152)

Depreciation on property, plants, and equipment

(66) (53) (44) (47)

Provision for bad or doubtful debts (80) (85) (115) (260) Other operating expenses (149) (278) (706) (1,143) VAT on financial services (119) (109) (141) (85) Profit from operations 505 359 738 3,175 Share of profit of equity-accounted investee (net of tax)

8 3 3 7

Profit before tax 514 362 738 3,175

Income tax expense (99) (8) (77) (263) Profit for the year 415 354 664 2,920

( ) = negative, VAT = value-added tax.

Appendix 3

19

Table A3.3: Comparative Balance Sheets of Lanka ORIX Leasing Company, 2008–2012

(SLRs Million)

Balance Sheet 2008 2009 2010 2011 2012

Assets Cash and cash equivalents 606 553 420 392 250 Short-term investments 179 13 22 54 32 Investment in term deposits 4,240 2,281 1,174 222 149 Other investment securities 365 295 4,718 3,564 3,520 Rentals receivable on lease assets, hire-purchase, and operating leases

9,984 6,498 3,383 1,713 28

Advances and other loans 6,742 8,670 6,897 8,555 5,616 Installment sales 2,955 2,168 766 157 Factoring receivables 1,109 Premium receivables Inventories 9 2 Trade and other current assets 1,771 3,637 3,362 1,817 11,819 Prepaid lease rentals Investment properties 71 242 248 413 Real estate stocks 39 3 Timber and rubber stocks Mature and immature plantations Investment in joint-venture companies

100 10 136 14

Investment in equity-accounted investees

278 278 555 1,211 1,545

Investment in subsidiary companies

911 2,997 3,478 8,944 9,978

Deferred tax assets 562 539 431 185 146 Goodwill on acquisition Other intangible assets 41 65 61 48 Property, plants, and equipment 2,108 2,493 2,813 3,283 2,947 Total Assets 28,996 31,335 29,738 31,153 36,662

Liabilities Bank overdraft 787 1,910 1,351 2,094 1,604 Deposits from customers Short-term borrowings 7,556 Interest-bearing borrowings 22,940 21,736 20,285 22,290 Insurance provision – Life Insurance provision – General Finance lease liabilities 961 Provision for taxation 9 48 57 72 30 Long-term borrowings – current 3,868 Trade and other payables 1,909 1,284 1,099 1,173 902 Long term borrowings – noncurrent 9,102 Deferred tax liabilities Deferred income Retirement benefit obligations 43 52 66 80 86 Total Liabilities 24,234 26,233 24,309 23,704 24,912

Appendix 3 20

Balance Sheet 2008 2009 2010 2011 2012

Equity Stated capital 475 475 475 475 475 Reserves 494 529 552 1,096 1,078 Retained earnings 3,793 4,097 4,401 5,877 10,196 Equity attributable to equity holders of the company

4,762 5,102 5,429 7,449 11,750

Minority interest

Total Equity 4,762 5,102 5,429 7,449 11,750

Total Liabilities and Equity 28,996 31,335 29,738 31,153 36,662

Appendix 3 21

Table A3.4: Comparative Income Statements of Lanka ORIX Leasing Company, 2008–2012

(SLRs million)

Income Statement 2008 2009 2010 2011 2012

Gross income 5,222 9,691 6,774 6,344 8,710 Revenue 3,496 1,200 Less: Cost of sales (2,993) (1,030) Gross Profit 503 170 Income 4,961 6,124 4,552 3,512 3,030 Other income (expenses) 261 71 1,022 2,833 5,679 Net finance cost (2,972) (4,205) (3,091) (2,384) (2,543) Profit before operating expenses 2,250 2,492 2,654 3,960 6,167 Operating expenses Direct expenses excluding finance cost

(174) (315) (226) (267) (198)

Provision for bad and doubtful debts

(115) (200) (447) (100) (23)

Personnel costs (361) (359) (245) (341) (268) Depreciation and amortization (298) (410) (589) (685) (603) Other operating expenses (461) (626) (655) (674) (651) Change in fair value of investment properties

5

Results from operating activities 841 582 491 1,898 4,423 Gains on bargain purchase (negative goodwill)

Loss on disposal of subsidiaries and associates

Profit before income tax expense 841 582 491 1,898 4,423 Taxation 218 (77) (164) (375) (122) Profit for the year 1,059 506 327 1,523 4,301

Attributable to:

Owners of the company 1,059 506 327 1,523 4,301

Minority interest

1,059 506 327 1,523 4,301

( ) = negative.