Directions, Determinations, and Circulars issued to ...

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Directions, Determinations, and Circulars issued to

Licensed Specialised Banks

(Inclusive of amendments made up to 30 November 2013)

Bank Supervision Department Central Bank of Sri Lanka

DISCLAIMER This updated edition contains of Directions, Determinations, and Circulars issued by the Central Bank of Sri Lanka to Licensed Specialised Banks up to 30th November 2013. Please note that this edition is issued only for the purpose of convenience, and although every effort has been made to ensure the accuracy of the text, the Central Bank of Sri Lanka does not hold itself responsible for any errors, omissions or inadvertent alterations, in any manner.

Printed at Central Bank Printing Press, 58, Sri Jayawardenepura Mw., Rajagiriya, Sri Lanka. Published by Bank Supervision Department

Central Bank of Sri Lanka, 30, Janadhipathi Mawatha, Colombo 01, Sri Lanka.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks

iii

Governor's Statement

Sri Lankan economy has now entered into an accelerated growth path of achieving Rs. 100 billion economy with USD 4,000 per capita income by 2016. In this scenario, Sri Lankan banking sector which holds more than 55% of the financial sector assets of the country is destined to play a pivotal role in supporting the growth momentum of the economy. Improved resilience to face external and internal shocks, innovative and futuristic banking products, expanded access to finance and consumer protection are some of the key drivers to promote a strong and dynamic banking sector through business excellence.

Despite the global financial crisis, Sri Lanka's banking sector has remained resilient with the existing prudential regulatory initiatives and reforms that have ensured the financial system stability. A strong regulatory framework that promotes risk management of banks is a key component of the safety net to ensure systemic stability. Thus, the earlier regulatory initiatives on improving risk management, corporate governance and capital requirements have continued with reforms in 2013 too. Compliance with these new regulatory reforms has enabled the Banks to improve their governance structure, risk management framework and capital requirements. It is expected that the consolidation between banks and the financial institutions would further strengthen the resilience in the financial sector.

At the same time, the Directors of Banks are expected to play a major role in setting strategic directions to ensure a sound and resilient banking sector in the country by adopting prudent policies in line with new financial reforms. In that context, the Central Bank expects all Directors, Senior Management and Other Staff of the banks to be fully conversant with the Directions, Determinations, and Circulars issued time to time by the Central Bank, thereby ensure compliance. In order to facilitate such task, this volume containing "Directions, Determinations, and Circulars issued to Licensed Specialised Banks", incorporating the changes and amendments up to 30 November 2013, is being issued.

It is hoped that this new volume will create greater awareness of and compliance therewith, so that more effective inputs will contribute to ensure improved risk management, corporate governance, efficiency and resilience in the Banking Sector.

Ajith Nivard Cabraal Governor Central Bank of Sri Lanka

02 December 2013

iv

Directions, Determinations, and Circulars issued to Licensed Specialised Banks

Directions, Determinations, and Circulars issued to Licensed Specialised Banks

Contents

v

Page No.

1. Licensing of Banks

Determinations

1.1 Determination No. 02 of 2011 ? Annual Licence Fee

1

Circulars

1.2 Establishment of Bank Branches

2

1.3 Classification of Banking Outlets

3

2. Capital Adequacy

2.1 The Adoption of the Basel II Capital Adequacy Framework Beginning 2008

4

Directions

2.2 Direction No. 10 of 2007 ? Maintenance of Capital Adequacy Ratio

6

2.3 Direction No. 10 of 2011 ? Amendment to Directions on

Maintenance of Capital Adequacy Ratio

68

2.4 Direction No. 05 of 2013 ? Supervisory Review Process (Pillar 2 of Basel II)

for Licensed Commercial Banks and Licensed Specialised Banks

69

2.5 Direction No. 02 of 2009 ? Amendment to Directions on Ownership

of Issued Capital Carrying Voting Rights

83

2.6 Direction No. 02 of 2007 ? Ownership of Issued Capital Carrying Voting Rights

84

2.7 Reserve Fund

87

Circulars

2.8 ICRA Lanka Limited ? Recognition as an External Credit Assessment Institution

88

2.9 Criteria for Selection of Valuers Undertaking the Revaluation of

Fixed Assets for the Computation of the Capital Adequacy Ratio

90

2.10 Enhancement of Minimum Capital Requirement of Banks

92

2.11 Interpretation of Capital Funds

96

2.12 Shipping Guarantees Issued by Banks

97

3. Credit Risk Management

Directions

3.1 Conditions for Grant of Accommodation

98

3.2 Investments in Equity

99

3.3 Direction No. 04 of 2010 ? Amendments to Directions on Classification of

Loans and Advances, Income Recognition and Provisioning

101

3.4 Direction No. 04 of 2008 ? Classification of Loans and Advances,

Income Recognition and Provisioning

102

3.5 Direction No. 08 of 2007 ? Maximum Amount of Accommodation

114

3.6 Accommodation to Directors and Related Companies

120

3.7 Direction No. 04 of 2009 ? Leased Backed Trust Certificates / Lease Receivables

as Approved Security for Accommodation to Any Director

124

3.8 Direction No. 01 of 2013 ? Exposure to Stock Market

by Licensed Commercial Banks and Licensed Specialised Banks

125

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