Foreign Currency Borrowings by Licensed Banks

30 November 2018 MONETARY BOARI) CENTRAL BANK OF SRI LANKA BANKING ACT DIRECTIONS No.11 of2018 FOREIGN CURRENCY BORROWINGS BY LICENSED BANKS Foreign currency borrowings are an important source of funding for banks. However, excessive and unregulated foreign capital flows are likely to cause unwarranted macroeconomic and financial stability concerns in a country. The Monetary Board introduces a policy framework for foreign curency borrowings of licensed banks with the objectives of addressing the high dependence on foreign cumency borrowings and the resulting exposure of licensed banks to foreign exchange risk and minimising the pressure on the reserves and exchange rate of the country arising from large borrowings in foreign currency. Accordingly, the Monetary Board issues Directions to licensed commercial banks (LCBs) and licensed specialised banks (LSBs) as follows:

1. Empowerment under the Banking Act
2. Applicability 2.1
3. Tenure
4. Limits on Foreign Currency Borrowings 1.1 In terms of Sections 46(1) and 76J(l) of the Banking Act No. 30 of 1988, in order to ensure the soundness of the banking system, the Monetary Board is empowered to issue Directions to all or any LCB and LSB, respectively, regarding the manner in which any aspect of the business ofsuch bank or banks is to be conducted. These Directions shall be applicable to all foreign cuffency borrowings made from local and foreign sources by LCBs and LSBs, hereinafter referred to as licensed banks, covering Domestic Banking Units and Off-Shore Banking Units. Foreign cumency borrowings with a remaining maturity of: (i) 1 year or less will be considered as short-term borrowings; and (ii) more than 1 year will be considered as long-term borrowings. The maximum outstanding amount of foreign cuffency borrowings obtained by a licensed bank shall be determined as a percentage of total assets as per the latest annual audited accounts or interim accounts certified by the Extemal Auditor of the licensed bank. 3.1 4.1

30 November 2018 MONETARY BOARI) CENTRAL BANK OF SRI LANKA BANKING ACT DIRECTIONS No. 11 of2018 5. 5.1 5.2 Approval of the Monetary Board 4.2 The percentage of foreign currency borrowings of a licensed bank shall be based on the sum of scores assigned for each licensed bank based on the external long-term credit rating and the total capital adequacy ratio of the bank as given in Tables I and2 below: Table 1 - Calculation of the Score Bank's Credit Rating Bank's Total Capital Adequacy Ratio Score Assigned to Each Cell AAA to AA- or equivalent >14.jYo a J A+ to A- or equivalent 13.6% - t4.0% 2 BBB+ to BBB- or equivalent r2.5% - 13.s% Below BBB- <12.5Yo 0 Table 2 - Borrowing Limits as a Percentage of Total Assets Sum of Score Short-Term Total t-2 t5% 5.0% 3-4 2.0% 7.5% 5-6 25% t0.0% Any foreign currency bonowings in excess of limits specified in Direction 4 above shall be undertaken with the prior written approval of the Monetary Board, under exceptional circumstances of national interest. The Monetary Board may grant such approval to exceed the applicable limits of foreign cuffency bonowings of a licensed bank by 5% of assets, on a case-by-case basis, subject to terms and conditions it may deem fit, taking into consideration of the macroprudential aspects. 5.3 Borrowings approved by the Monetary Board under the Direction 5.2 above shall be undertaken within 3 months from the date of the approval of the Monetary Board.

30 November 2018 MONETARY BOARI) CENTRAL BANK OF SRI LANKA BANKING ACT DIRECTIONS No.11 of2018 6. General Terms 6.1 and Conditions 7. Eligible Foreign Currency Borrowings 6.2 6.3 6.4 6.5 6.6 (i) All foreign currency borrowings of a licensed bank shall be approved by the Board of Directors of the licensed bank or the regional monitoring office or the management committee operating under delegated authority of the Board of Directors of foreign banks. (ii) The Board of Directors or the relevant authority as specified above, may establish a pre-approved limit for foreign currency borrowings as an altemative to approving each borrowing. Licensed banks shall comply with all prudential requirements at all times, including, but not limited to, minimum capital adequacy ratio under Basel III, Statutory Liquid Assets Ratio, Liquidity Coverage Ratio, Net Stable Funding Ratio, and Net Open Position. Licensed banks shall hedge interest rate and foreign exchange risks and manage the maturity mismatch arising from foreign currency borrowings. Hedging with an international counterparty is encouraged where the foreign cuffency borrowed is converted to another foreign currency. Licensed banks shall put in place intemal policies and procedures approved by the Board of Directors for management of foreign crurency assets and liabilities along with appropriate foreign currency maturity mismatch limits. Licensed banks shall prove their ability to service repayments of foreign currency borrowing in a timely manner. 7.1 Lender should have a good track record as a stable financial institution. Possible lenders are: (i) Multilateraldevelopmentbanks, (ii) Lending institutions with intemational repute, (iii) Foreign Govemment owned or affiliated agencies, (iv) Head Office and branches of foreign banks, (v) Licensed banks in Sri Lanka.

30 November 2018 CENTRAL BANK OF SRI LANKA BANKING ACT DIRECTIONS No. 11 of2018 8. Utilisation of long-term Foreign Currency Borrowings 9. Application to be submitted l0.Exclusion from the maximum limits 7 .2 Interest rates (inclusive of all related costs) of the borrowing shall be competitive. 7.3 Borrowings shall not be settled prior to the initial specified date of settlement unless the loan agreement provides for an accelerated prepayment mechanism. 7.4 Licensed banks shall mitigate the impact of bunching effect. 7.5 Borrowings shall not result in excessive credit growth. 8.1 Long-term foreign currency borrowings shall be utilised for lending/investment purposes to : (D fund exports, import substitution, infrastructure, govemment development projects and small and medium enterprises; (ii) settle or retire current foreign currency loans; (iii) invest in Sovereign Debt of the Government of Sri Lanka and fund the Government of Sri Lanka for activities of national importance; (iv) fund viable overseas business expansions of local corporates; and (v) fund viable projects or businesses of overseas entities in Sri Lanka or overseas. 9.1 Licensed banks may submit a written request with the following details to obtain the Monetary Board approval under Direction 5 above: (i) Profile of the Lender, (ii) Features of the Loan, (iii) Specifi c purpose/objectives with targets, (iv) Performance status of existing foreign currency loans, (v) Proposed risk management mechanism. 10.1 Foreign curency borrowings from the Head Office or its branches operating outside Sri Lanka of an LCB incorporated outside Sri Lanka will be exempted from the limits specified in Direction $ above, provided the proceeds are used for the intended purpose the

30 November 2018 MONETARY BOARD CENTRAL BANK OF SRI LANKA BANKING ACT DIRECTIONS No. I1 of2018 I 1. Interpretations l2.Implementation l3.Transitional Arrangement l4.Revocation borrowing is obtained. 10.2 Bonowings utilised for investments Government of Sri Lanka. 1 1.1 Total assets shall be the amount as accounts or interim accounts certified licensed baxk. in Securities issued by the per the latest annual audited by the External Auditor of the Dr. Indrajit Coomaraswamy Chairman of the Monetary Board and Governor of the Central Bank of Sri Lanka 1 1.2 Foreign currency shall mean any designated foreign currency. 12.1 These Directions shall come into effect from the date of issue of these Directions. 13.1 Any licensed bank which has obtained foreign currency borrowings in excess of the maximum limit specified under Direction 4 above shall not be permitted to borrow further, until such time the outstanding amount of foreign currency borrowings falls below the maximum limit. 14.1 The following Direction and Circular are hereby revoked. (i) Banking Act Direction No. 7 of 2017 on Foreign Currency Borrowings by Licensed Banks. (ii) The Circular No. BD/FX1196 dated 13 January 1997 issued by the Chief Accountant. Ltgtv"'(