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21st June 1998

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Behind the balance sheet - by KalQlus

Sampath: increases all round

A healthy 177 percent increase in long term lending seems like the bank has won over some of its competitor's prey.

Market share of long term lending has jumped from 7.3% in '96 to 20.7 in '97. Although the bank's overall lending has increased by 30% it is still conservative on long term lending over a recovery period of 5 years, a negative 16% over the previsions year.

The bank's market share of term loans and advances too have increased from 4.7% in '96 to 6.3% in '97.

This is commendable, considering the slight downward turn in national terms. All advances by commercial banks have reduced by 0.7 % in '97 - from 12.8% to 12.1%. This growth is more significant, in the light of the Chairman's statement that the bank did not market this sector vigorously.

This increase in term lending will generate a higher level of income during the ensuing year. (Even though the interest rates have shown a downward trend during the recent past). Coupled with the increase in deposits the bank would be in a better position to earn high profits.

The bank has been able to maintain a steady growth in this sector over the past 4 years. The increase in 1995, 1996 and 1997 respectively over the year 1994 was 36%, 101% and 170%. The periodical growth over the previous year during the said period was 36%, 47% and 35%.

Savings and call deposits have shown a steady growth over the said period ie. by 17.2%, 18.4% and 26%. In 1997 5.55% of all domestic savings has been with the Sampath Bank.

The bank has improved its network through three new branches. The deposits in the current accounts which do not incur interest cost - free funds, have shown a positive growth of 27% in 1997.

In rupee terms this is Rs. 269 mn. earning an average interest income of Rs. 32.3 mn. Foreign currency component too bears another noticeable increase in its deposits.

The quantum of written off debts have reduced by 81% over the previous period. Either the bank has been more stringent in its lending or there had been a good debt recovery system - the latter is more appropriate since the long term lending has increased considerably.

The bank maintains a healthy liquid ratio between its assets and liabilities a 1.55: 1 ratio taking into consideration the investments in Treasury Bills which is now a part of the liquid assets of a bank.

Another positive growth is indicated in the additions to the fixed assets of the bank, totalling Rs. 199.8 mn. 26% of this computer equipment.

In spite of all the favourable developments mentioned above Sampath Bank will have to match the maturities of its liablities with the maturities of its assets since 94% of its liabilities are falling due in 1998, whereas only 58% of its assests are maturing during the same period.

Hence the gap in this mismatch is nearly Rs. 4 billion. 40% of its advances are maturing after the end of the said period.

Is the bank hoping to close the gap by short-term funding, specially during a period where short term funding is more expensive than that of long term funding.The growth in other income apart from the core business of the bank is marginal in '97 over the increase in 1996, which is not very satisfactory especially in a highly competitive field of business where all the players in the market are after the same prey. Even though the core business is lending, it has to find more space in niches such as value added products, fee based activities, diversifications and customer tailored products and services.

Analysis of the only available information in the annual report to evaluate the 'productivity' area - the national theme during current period - reflects fluctuations during the period 1994 to 1997.Operational income in 1997 has increased by 18.2% against an increase of 22% in operating expenses. During 1996 while the operating expenses increased by 20% the operating income increased only by 9.7%. During 1995 the increase in operating income is 46.6% as against 36% increase in operating expenses.

In 1997 the bank also introduced its debit card. This would definitely have a wider circulation, being owned by all set card holders. Debit cards unlike credit cards have no other inbuilt charges.

DFCC now plays on a level field

Corporate Profile

By Company Watcher

DFCC Bank will seek to strengthen its areas of competitive advantage and adopt strategies that are appropriate in a market economy. The Bank feels that a re-examination of the means of meeting the funding requirements may be in order.

Commenting on development banking in a market economy, DFCC Bank Chairman C A Cooray says that it is clear that concessionary lines of credit from the World Bank and Asian Development Bank are being phased out along with the onset of the market economy. "Together with financial reforms, policies are being implemented to have a level playing field common to all financial institutions. "These institutions have criss-crossed each other's boundaries so often in other parts of the world that there is hardly any distinction any more between them. This however, does not mean that efforts at development have been laid aside. "Clearly, development whether defined in terms of economic growth or expansion of welfare, involves the provision of a broad variety of financial and advisory services. There will be growing demands to be fulfilled as well as new opportunities to be exploited.

"Any financial institution, banking or non-banking, which effectively fulfils one or more observable financial need provides a development service to the community", he points out in his annual review to shareholders.

Referring to the amendments made to the DFCC Act in August last year, he says that the Bank is now on a level playing field with its competitors which opens up a whole new market segment for its operations. In an environment where the Government has embarked on a programme of public sector reform and divestiture of state enterprises, the Bank sees new opportunities which were hitherto denied, such as playing an active role in the divestiture of some of the regional plantation companies.

Looking at the foreign scene, he identifies excessive short term overseas borrowing, implicit Government guarantees given to financial intermediaries which encouraged excessive risk taking especially in the property market, and poor regulations as the main causes for the dramatic melt down of the Tiger economies, particularly those of Thailand, Indonesia, Malaysia and South Korea. "It is indeed saddening to witness this debacle hitting the very countries that Sri Lanka looked to draw lessons from in our march towards reaching what seems now to be the forgotten definition of a newly industrialised country.

"The role model we had is now made out to be something that failed. However, it is difficult to believe in this outright condemnation as these very countries in the past two decades showed rapid growth and expansion. Yet, lessons have to be drawn either way from this experience", he stresses.

Chief Executive M R Prelis, in his review, points out that the momentum the economy had gathered over the first half of the year (1997) slowed considerably and although lending rates fell and funds became more accessible, the anticipated credit expansion did not occur. As such, financial institutions were left with excess liquidity towards the end of the year.

In such a scenario, he is happy that DFCC Bank ended the financial year on a positive note reversing the decline in profit of the last two years. The Bank's post-tax profit of Rs 614 million represents a growth of 30% and its pre-tax profit of Rs 896 million, a growth of 38%. Profit after tax including associate companies was Rs 652 million, an increase of 56%.

Mr Prelis views the strategic alliance with Commercial Bank as a partnership or marriage "as it promises to be a win-win deal which will enhance shareholder value for both Commercial Bank and DFCC Bank".

The alliance helps expand DFCC Bank's core business of project finance, provides an access to an extensive branch network which it lacks and enhances DFCC Bank's profitability.

"The global trend today is against fragmentation and proliferation of small financial institutions. Instead, the tendency is towards consolidation and mergers. This is even more important in small economies like Sri Lanka.

"Apart from the synergies that consolidations and mergers release, they give local companies the enhanced capacity to cope with pressures of global competition. This then is a longer term justification for the alliance", he stresses.

Last year, the DFCC Bank launched five new products for the development of medium and small enterprises, which are a key vehicle in any country's development strategy. The Bank has made the medium and small industries a priority in its lending policy and has achieved the position of being the largest direct lender to this sector.


Who is a Probationer?

A probationer has no right for automatic confirmation on the expiry of the probationary period.

Probation is a period where the employer assesses the conduct and suitability of an employee for permanent employment. Similarly for the employee it is an opportunity to assesses the suitability of conditions of service offered to him. A probationer is a monthly paid employee entitled for leave etc.

The period of probation is strictly relevant only to the question of termination in the event of his being unsatisfactory. It is an accepted fact that the employer is considered as the best judge to decide whether an employee's period of probation has been satisfactory or not.

On the other hand many people ask whether an employer can dismiss an employee during the probation period without giving a valid reason. The answer will be -Yes.

The reason is that an employer is not obliged to give reasons to the employee when terminating a probationer's appointment.

Normally an employer will take into account whether the probationer had put in satisfactory service during his probation period and his behaviour before he terminates a probationer's appointment.

Having said that an employee may ask whether he can claim an automatic confirmation after the expiry of his probation period. It has to be made clear the probationer has no right for automatic confirmation on the expiry of the probationary period.

But in certain instances , provided the employer has given the employee in writing, the employer is bound to give permanent employment to the probationer.

Exceptions are.

• The employer has given the letter of appointment for such automatic confirmation.
• The probationary period has elapsed and the probationer continued to work satisfactorily

Besides some employers have a habit of placing confirmed employees again on a second probation period.

When a employee accepted the new probationary employment by signing the appointment letter containing the probation clause, the employee is deemed to have accepted the probationary clause that is a second probation period.


*. Can an employer dismiss an employee for continuously absenting from work on the grounds of sickness?

Dismissing an employee is normally allowed for misconduct. However, absence due to sickness cannot be considered as misconduct, because it is an act of not coming within the employee's control. Disciplinary action is appropriate where absence is unauthorised. When the employee is absent on the grounds of sickness, supported by the Medical Certificates and the employer is unable to dispute the claim of sickness there is no possibility to take disciplinary action against such employee. The only remedy available for the employer in such a situation is to apply to the Commissioner of Labour for a non-disciplinary termination of the employee concerned.

Provident Fund Contributions

*What are the payments that attract Employees' Provident Fund contributions?

According to the provisions of the Employees' Provident Fund Act, the employer is required to contribute 12% of the total earnings' of each month to the Provident Fund and the employee will contribute 8% of the total earnings. The total earnings include the following payments:

• Basic Salary/Wages.
• Cost of living allowance, Special living allowance or any other allowance paid as remuneration for the work performed or to compensate Cost of living.
• Payment for holidays (weekly, annual, casual and public holidays).
•Value of meals or uncooked food provided including meal money or meal allowance.
• Incentive payment tied to production and piece rate earnings.
• Commissions paid for any services by employee.
• Any fees paid to employees for the services rendered by them. The payments which will not attract contributions to Provident Fund includes Traveling allowances, Entertainment allowances, Rent allowances, Children's allowances, NRG overtime payments, Bonus and Service charges.

Change of Designation

*Can an employer change the designation of the employee without consent of the employee.?

A contract of employment contains the terms and conditions agreed upon by the two parties involved in the contract, namely the Employer and Employee. Therefore any new term or condition introduced to change a term or condition already existing in the contract is not valid without the written consent of the employee.

It may amount to unilateral variation of a contract. Any unilateral variation of a contract on a fundamental matter is considered as a constructive termination. However introduction of an additional term or condition, not contrary to existing terms and conditions can be considered as valid if it is fair and reasonable.

Disciplinary Inquiries

*Is it compulsory to hold a Disciplinary Inquiry before dismissal of an employee for misconduct?

It is not compulsory in Sri Lanka to hold a Disciplinary Inquiry before dismissing an employee for misconduct like in India. However, it is advisable to hold such an Inquiry for the following reasons:

(1) Punishment without an Inquiry implies that the order is an arbitrary one made without examining facts of the case and it may influence a Labour Tribunal.

(2) The principles of Natural Justice require the person to be informed of charges and give him an opportunity to explain.

(3) At the Inquiry all evidence will be recorded and it will prevent a witness taking up a different position at the Labour Tribunal.

(4) Recorded evidence at the Inquiry can be used before a Labour Tribunal to a certain extent when the witness is no longer living or out of the Island.

(5) Dismissing employees without an Inquiry will create labour unrest and dissatisfaction among other workers.

Maternity Leave

*Is there any difference in granting of Maternity leave to shop and office employees and Wages Board employees?

Yes. The employees covered by the Shop and Office Employees' Act enjoy 84 working days as Maternity leave for the 1st and 2nd child and 42 working days for the third and subsequent child. The employees covered by the Wages Board Ordinance are entitled for 84 days (including non-working days) of Maternity leave for 1st and 2nd child and 42 days (including non-working days) for the third and subsequent child. However, these Wages Board employees are entitled for an extra facility of nursing intervals under the Maternity Benefits Ordinance.

Accordingly they should be granted two nursing intervals until the child completes one year of age and each interval shall not be less than one hour if no suitable place of nursing is provided at the working premises. If a suitable place is provided for nursing, each nursing interval will be half an hour.

Six ways to build a top staff

• Be friendly to staff members but don't treat them like close personal friends. They want you to be the boss, and they want to be employees. It works better that way.

• Tell them everything. And expect them to tell you the same. Shared knowledge builds loyalty and trust.

• Practice Pulitzer Prize plagiarism: Steal only from the best . If you need help, reach out to your professional community. Someone, somewhere, somehow will know how to help you.

• Invest heavily in loyalty. If staff members know that you' re always loyal to them, they will give you the same in return.

• Realize that fairness-not cleanliness –is next to godliness.

• Never be too busy to laugh. Nothing gets people through a crisis like a good laugh- and a manager who is willing to enjoy it with them.

Managing Humans

Treat Mistakes as "Miss-Takes"

When you empower employees it's important to build their self -confidence during training. One way to do this is by treating mistakes as "miss-takes", advises Communication Briefings.

When shooting a film, directors simply ask for another take when there's a "miss-take". They fix the method , not the blame . Use this same approach when training employees . And understand that most "miss-takes" come from poorly trained people or misunderstood goals.

World Executive's Digest.

'Kotmale' diversifies its products for home and abroad

imageNestled in the hills of upper Kotmale, Kotmale Swiss Cheese Company's Bogahawatte Factory may be cited as a good example of how a small dairy producer has made it big by its grassroots approach.

Kotmale commenced operations in 1977 with just 100 litres of milk per day and today processes 12,000 litres of milk daily for the commercial production of milk packets, ice cream, cream and cheese.

In 1978, the company embarked on cheese production and since then there has been no looking back.

Kotmale Cheese, as well as its other products are among the country's leading dairy brands.

Kotmale's average daily production today is 20,000 packets of milk, 2000 litres of ice cream and 500 imagekgs of cheese.

The company maintains 1500 registered dairy farmers while another 1000 farmers also supply the company regularly.

According to Production Director Jonathan Joseph, the company's emphasis on reaching out to the grassroots level has paid off in its competition with rival dairy farms like Nestle.

Whereas in 1977, when the factory commenced operations, only about 100 litres of milk could be obtained per day in the Kotmale valley region, the company is today able to procure 3500 litres of milk daily as a result of its extension policy, thus indicating the success of the grassroots approach.

The factory procures fresh milk from Bogahawatte and other upper Kotmale areas like Dimbulla, Watawala, Mt. Vernon Estate, Mayfield Estate, Barcaple Estate and Queensbury Estate.

Milk is also obtained from lower Kotmale areas like Ravanagoda, Maldeniya, Kalapitiya and Vijayabahu Kanda.

imageServices provided to dairy farmers by the factory includes the delivery of cattle feed and medicine on a credit basis and artificial insemination.

The factory's inseminator handles about 100 inseminations per month.

Mr. Joseph is also keen on promoting locally made cattle feed sold under brand names like Prima, Gold Coins and Nutria in preference to Poonac, a residual matter from the extraction of coconut oil.

Cattle feed which comprises an essential mix of various substances designed to improve milk yield which usually costs Rs. 500 per 50 kg bag is today provided at a subsidised rate of Rs. 250 to farmers under an Agent subsidy scheme.

According to Mr. Joseph, Poonac prices fluctuate considerably throughout the year (Rs. 300-Rs. 800 per 50 kg bag).

As a result, when prices are high, farmers avoid feeding the cattle, thus resulting in poor yields and irregular supply.

The subsidy scheme, which commenced in 1997 is due to come to an end within the next few months.

It has however achieved the desired aim of popularizing the product. The company is also engaged in a joint dairy development project undertaken by the Faculty of Animal Science and Veterinary Science of the University of Peradeniya and AgEnt to introduce high milk -yielding grasses.

A number of improved varieties of grasses such as Sogharm Alrum and Rhodes have been introduced as a result.

Kotmale has also embarked on Research and Development activities and is planning to introduce a number of innovative products to the market shortly.

In 1994, the company pioneered the introduction of ripple ice creams including chocolate, mango and strawberry.According to Riaz Ahamadeen, a young graduate from Ruhunu University in charge of the entire processing operation (production and quality control), Kotmale plans to introduce a number of exotic varieties of cheese such as quarch cheese, cream cheese and blue cheese shortly.

He observed that blue cheese which is manufactured by adding a variety of fungus is a nutritious imageproduct with a high protein content and will be aimed at the export market.

He noted that the company has already embarked on trials for canning processed cheese and will be introducing the product to the market shortly.

He observed that canned cheese which has a longer shelf life is likely to have a good market potential locally.

The types of cheese presently manufactured by Kotmale includes processed cheese, Swiss cheese, cottage cheese, Mozerella cheese, Edam type ball cheese and four varieties of spiced ball cheese, viz garlic, chilli, cummin and mustard and pepper.

Trials have also begun on another variety of ball cheese containing essence of chicken.

The company has also begun trials on a number of up-market, value-added products like low-fat cheese, low-fat milk and skimmed milk and is on the way to introducing these to the market soon.Kotmale has also undertaken a comprehensive restructuring of its production process under the able direction of Mr. Ahamadeen.

This includes the use of microbial-based Halal Rennet imported from France and Denmark.Unlike the conventional Rennet (Rennin) which is an enzyme obtained from the stomachs of seven day-old calves, Hala Rennet is derived from a fungus of the mucor species.

Hala Rennet is more economical and also performs better activity-wise.

Another innovative product expected to have a good market potential is a high-energy drinking yoghurt to be produced with whey and supplemented with vitamins and minerals.

According to Mr. Ahamadeen, whey, a by-product of cheese manufacture, could be made good use of in countries like Denmark and Holland where whey products are widely consumed, instead of supplying it to piggeries as is the case today.The product to be named Energy-Plus has a shelf life of 14 days and will be marketed shortly at a very affordable price.

Other consumer products Kotmale produces today includes kitul treacle and ghee, which also generate substantial employment.

The production of kitul treacle alone is said to generate about 150 jobs in the area.

According to Kotmale Brand Manager Rohan Kaluhendiwela, the company usually sells about 20,000 packets of milk, 1000 units of cheese and 2000 litres of ice cream daily.

Kotmale today has 15 distributors catering to 4500 outlets.

This is a far cry from 1993 when the company covered only 500 outlets. In 1993 Kotmale embarked on streamlining its marketing operations.

This resulted in an extensive promotion campaign and paved the way for the creation of an effective distribution network.In 1994, shortly after the streamlining, sales showed a growth of 60 per cent.

In 1995 and 1996, the company recorded a sales growth of 20.6 per cent and 9 per cent respectively while last year sales increased by a further 22 percent.

The company also exports its ice cream and cheese products to the Maldives.

Dartonfield from the dumps to ISO heights

By Dr. L.M.K Tillekeratne Director, Rubber Research Institute of Sri Lanka

Dartonfield crepe rubber factory which is under the management of the Rubber Research Board of Sri Lanka, is the first latex crepe factory out of over 150 crepe factories in the country to obtain ISO 9002 certification from the Sri Lanka Standards Institution.

Dr. Srilal de Silva, Director, Certification of the SLSI after conducting the final auditing on June 3 and 4 admitted Dartonfield factory to this highest quality certification scheme.

This crepe factory was under consideration for privatization in the early nineties as it was losing over Rs 2 1/2 million a year of the Rubber Research cess money due to many problems.

But when scientists took over the management in 1993, losses were converted to profits by minimizing the cost of production of the rubber produced by cutting down unwanted expenditure and by improving the quality of the latex crepe produced.

Wastage at all levels of processing including tapping, collection and fractionation of latex down to the level of packing and transporting the end product was minimized.

Under the management of the scientists, this factory was manufacturing only unfractioned and unbleached latex crepe rubber (UFUB) thereby gaining an additional profit of Rs 4-5 a kg of rubber produced.

From this exercise of manufacturing unfractioned and unbleached crepe rubber the factory was able to minimize the production of yellow fraction rubber, which is usually sold as grade 4 crepe rubber.

Further, in the processing of UFUB rubber, the cost of the bleaching agent which is over Rs.1.50 a kg. was also saved fully while saving tremendously on overtime and electricity wastage during the removal of the yellow fraction of the rubber latex by fractional coagulation. Depending on the quality of latex, fractionation operation is sometimes continued till late in the night.

Off grades of latex crepe rubbers No. IX and I and even the unfractioned and unbleached grade of crepe rubber are marketed locally for white shoe sole manufacture and for rubber thread manufacture.

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