Directions, Determinations and Circulars Issued to Licensed Specialised Banks up to 30 November 2013

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

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. 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.

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 v Contents
Page No.

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
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
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

vi Directions, Determinations, and Circulars issued to Licensed Specialised Banks Circulars
3.9 Accounting for Properties Acquired by Foreclosure of
Collateral / Part Settlement of Debt 128
3.10 Establishment of a Revolving Fund to Grant Loans to
Acquire Property to the State Sector Employees 129
3.11 Concessions Granted to Tourism Industry 130
3.12 Granting Credit Facilities to Private Sector 131
Orders
3.13 Order No. 01 of 2012 – Ceiling on Credit Growth of Licensed Banks 132
Guidelines
3.14 Guidelines on the Grant of Facilities for the Issue of
Commercial Paper and Other Forms of Promissory Notes 133
4. Liquidity Risk Management
Directions
4.1 Direction on Liquid Assets – State Mortgage and Investment Bank 137
4.2 Liquid Assets 138
Circulars
4.3 Definition of Liquid Assets Under Section 76J (l) of the
Banking Act, No. 30 of 1988, as Amended 140
5. Market Risk Management
Directions
5.1 Prudential Norms for Classification, Valuation and
Operation of the Bank’s Investment Portfolio 142
6. Operational Risk Management
Directions
6.1 Direction No. 02 of 2012 – Outsourcing of Business Operations of
a Licensed Commercial Bank and Licensed Specialized Bank 145 Circulars
6.2 Acceptance of Certificates of Deposit 151
6.3 Conduct of Non-Government Organizations (NGO) Accounts by Licensed Banks 154
6.4 Customer Due Diligence – ‘Know Your Customer’ Procedures 158
6.5 Prevention of Frauds Using Electronic Cards 162
6.6 Use of Banking System by Institutions and Persons not Authorised to Accept Deposits 164
6.7 Regulations Made Under the Public Security Ordinance 165
7. Corporate Governance for Banks
Directions
7.1 Direction No. 04 of 2013 – Amendments to Direction on
Corporate Governance Issued to Licensed Specialised Banks in Sri Lanka 168
7.2 Direction No. 08 of 2008 – Amendments to Directions on Corporate Governance 169
7.3 Direction No. 06 of 2008 – Amendments to Directions on Corporate Governance 170
7.4 Direction No. 12 of 2007 – Corporate Governance 171
7.5 Direction No. 07 of 2011 – Integrated Risk Management Framework 188

Directions, Determinations, and Circulars issued to Licensed Specialised Banks vii
7.6 Disqualification for Appointment as Manager, Secretary or Other Official 218
7.7 Disqualification for being Appointed or Elected Director 219
7.8 Secretary of a Licensed Specialised Bank 220
Determinations
7.9 Determination No. 04 of 2010 – Assessment of Fitness and Propriety of
Officers Performing Executive Functions 221
Circulars
7.10 Appointment of Directors of Banks 228
7.11 Requirements Under the Corporate Governance Direction 242
7.12 Assessment of Fitness and Propriety of Chief Executive Officers 243
7.13 Special Payments/Benefits to Directors at their Retirement 252
7.14 Disclosures in Annual Reports – Banking Act Direction on Corporate Governance 253
Explanatory Notes
7.15 Explanatory Note 1/2012 – Authority of the Monetary Board to Issue
Directions to Licensed Banks Reaffirmed by the Court of Appeal 254
8. Abandoned Property
Guidelines
8.1 Implementation of the Provisions of Part IX (Sections 72 to 76)
of the Banking Act on Abandoned Property 255
9. Disclosures
Circulars
9.1 List of Qualified Auditors 261
9.2 Display of Interest Rates, Exchange Rates, Service Charges, Fees and Commissions 263
9.3 Inadequate / Incorrect Disclosures / Press Statements by Banks 268
9.4 Publication of Audited Financial Statements of Banks in the Press 269
9.5 Public Disclosure by Publication of Quarterly Financial Statements of Banks in the Press 270
9.6 Prescribed Accounting Format for the Publication of Annual Audited Accounts 284
9.7 Preparation, Presentation and Publication of Annual Audited Accounts of Banks 285
9.8 Publication of Capital Adequacy Statement in the Annual Report 321
9.9 Publication of Financial Statements and Other Disclosures on the Websites 322
Guidelines
9.9 Guidelines for External Auditors relating to their Statutory Duties 323
10. Reporting of Data to Central Bank
Circulars
10.1 Implementation of the New Web-based Off-site Surveillance System 333
10.2 Submission of the Monthly & Quarterly Compliance Reports 339
10.3 Submission of Statutory Returns 340
11. General Banking Practices
Directions
11.1 Licensed Specialised Banks (Deposits) Directions 342
11.2 Regional Development Banks (Pawning) Directions 1998 344
11.3 Secrecy of Banking Transactions 354
11.4 Direction No. 08 of 2011 – Customer Charter of Licensed Banks 355

viii Directions, Determinations, and Circulars issued to Licensed Specialised Banks Circulars
11.5 Cap on Penal Interest Rates charged by Licensed Banks on Loans and Advances 360
11.6 Interest Rates on Credit Cards and Housing Loans 361
11.7 Interest Rates on Credit Cards and Other Loans and Advances 362
11.8 Extending / Restricting of Banking Hours by the Banks 363
11.9 Introduction of Products based on Islamic Principles 364
11.10 Threshold Age of Senior Citizens for Banking Transactions 365
12. Sri Lanka Deposit Insurance Scheme
Directions
12.1 Direction No. 06 of 2010 – Insurance of Deposit Liabilities 366
Gazette Notifications
12.2 Amendment to Sri Lanka Deposit Insurance Scheme Regulations, No. 02 of 2011 367
12.3 Amendment to Sri Lanka Deposit Insurance Scheme Regulations, No. 01 of 2011 368
12.4 Sri Lanka Deposit Insurance Scheme Regulations, No. 01 of 2010 369
Circulars
12.5 Sri Lanka Deposit Insurance Scheme – Operating Instructions, No. 01 of 2011 374
12.6 Sri Lanka Deposit Insurance Scheme – Operating Instructions, No. 02 of 2010 375
12.7 Sri Lanka Deposit Insurance Scheme
– Premium to be Levied on Insured Deposit, No. 01 of 2010 377
13. Other Directions, Circulars and Guidelines
Directions
13.1 Direction No. 02 of 2013 – Restriction on Sale, Transfer, Assign
or Disposal of Immovable Assets of Licensed Specialised Banks 379
13.2 Acquisition of Immovable Property 380
13.3 Restriction in the Sale, Transfer of Immovable Assets 381
13.4 Alteration of Memorandum and Articles of Association 382
13.5 Directions Issued to National Savings Bank 383
13.6 Payment of Dividends 384
13.7 Prior Approval of the Central Bank to carry on Certain Transactions 385
Circulars
13.8 Stimulus Package Approved by the Government for the
Finance and Leasing Industry 386
13.9 Appointment of Compliance Officers 387
13.10 Enhancing Lending to Agriculture Sector 389
13.11 Mandatory Lending to Agriculture Sector 390
13.12 Payment of Taxes by the Banking and Financial Sector 396
13.13 Misleading and Unethical Advertisements 397
13.14 Registration of Secured Interest Over Movable Properties
with the Secured Transaction Registry 399
Guidelines
13.15 Guidelines for Employment of Expatriate Staff in Banks 400
13.16 Guidelines on Credit Rating of Banking Institutions 403
13.17 Guidelines on the Operation of the Investment Fund Account 404

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 1 Annual licence fee for the period 2012 – 2014. Determination made by the Monetary Board of the Central Bank of Sri Lanka under Section 76D(6) of the Banking Act, No. 30 of 1988, as amended. Nivard Ajith Leslie Cabraal Chairman of the Monetary Board and Governor of the Central Bank of Sri Lanka Colombo 29 September 2011 BANKING ACT DETERMINATION NO. 2 OF 2011 ANNUAL LICENCE FEE OF LICENSED SPECIALISED BANKS

In terms of Section 76D(6) of the Banking Act, the Monetary Board has
determined that the licence fee that shall be paid by a licensed specialised bank for the period 2012 to 2014 shall be based on the total assets as follows:
Total assets as at end of the previous year Licence fee Above Rs. 200 bn Rs. 20 mn Rs. 125 bn to Rs. 200 bn Rs. 15 mn Rs. 75 bn to Rs. 125 bn Rs. 10 mn Rs. 25 bn to Rs. 75 bn Rs. 5 mn Less than Rs. 25 bn Rs. 2 mn
Every licensed specialised bank shall pay the licence fee to the Central Bank of
Sri Lanka on or before 31st day of January of the respective year.
Licence fee shall be paid on calendar year basis.
Payment of licence fee.

2 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Bank Supervision Department 26 May 2008 To : CEOs of Licensed Commercial Banks and CEOs of Licensed Specialised Banks Dear Sir/Madam, ESTABLISHMENT OF BANK BRANCHES The Central Bank currently approves the opening of bank branches and other outlets by licensed banks considering the feasibility and suitability of the proposed expansion. At present, nearly 40 per cent of the bank branches in the country are concentrated in the Western Province resulting in a banking density (bank branches for 100,000 persons) of 11.9 in the Western Province as against a range of 5.3 to
8.4 in the other provinces.
There is a need to accelerate economic development in areas of the country outside the Western Province to achieve balance regional development in the country. Establishing more branches and banking outlets outside the Western Province is expected to enhance access to finance and promote the savings habits, thereby increasing economic activity in those regions. To facilitate this, the Monetary Board has decided that banks shall establish a minimum of two branches outside the Western Province for each new branch established in the Western Province. This new criteria will be applicable for all future requests made to the Central Bank for opening of branches. Yours faithfully, Sgd, B.D.W.A. Silva Director of Bank Supervision

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 3 Our Ref. : 02/17 / 500/0554/ 001 Bank Supervision Department 29 November 2012 To : CEOs of all Licensed Commercial Banks and Licensed Specialised Banks Dear Sir / Madam, CLASSIFICATION OF BANKING OUTLETS As intimated to you at the periodic meeting of the CEOs of licensed banks held on 26th January 2012, the current classification of banking outlets system for licensed banks has been reviewed with a view to streamline and rationalize the branch approval procedures.
2. Accordingly, the Monetary Board has granted approval for licensed banks to:
a. reclassify the banking outlets into two categories, namely branches and student savings units and seek future approvals under these two outlet categories ; b. upgrade all existing banking outlets except student savings units to branches with effect from
01.01.2013 ; and
c. conspicuously display the list of activities for the information of the customers in the premises
of a branch when such branch is extending only selected banking services.
3. Circular issued under Ref. No. 02/08/005/0002/002 dated May 03, 2006 on the above subject is
hereby rescinded.
Yours faithfully,
(Mrs.) T M J Y P Fernando
Director of Bank Supervision

4 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Bank Supervision Department 26 December 2007 To : The CEOs of all Licensed Commercial Banks and Licensed Specialised Banks Dear Sir/Madam, THE ADOPTION OF BASEL II CAPITAL ADEQUACY FRAMEWORK BEGINNING 2008 As announced in the “Road Map: Monetary and Financial Sector Policies for 2007 and beyond”, released by the Central Bank on January 2, 2007, the Monetary Board of the Central Bank of Sri Lanka has issued the Directions on the maintenance of capital adequacy ratios under the BASEL II for Licensed Commercial Banks (LCBs) and Licensed Specialised Banks (LSBs), in terms of the provisions under
Section 46(1) and 76J(1), of the Banking Act, No. 30 of 1988, respectively , which will be effective from
January 1, 2008. These Directions have been prepared on the basis of the “International Convergence of Capital Measurement and Capital Standards – a Revised Framework”, widely known as Basel II, issued by the Basel Committee on Banking Supervision of the Bank for International Settlements (BIS) in June 2004 and revised thereafter in June 2006.
2. The Adoption of the Basel II
As you are aware, Basel II provides a “three pillar” approach, i.e., (1) Minimum Capital Requirements; (2) Supervisory Review Process; and (3) Market Discipline, for the implementation of this framework. However, as announced at the Bank Managers’ Meeting held on November 22, 2007, the Central Bank has decided to adopt Pillar I, i.e., “Minimum Capital Requirements” effective from 01 January 2008 and to adopt the other two pillars in the medium term. The approach for adoption of Basel II is as follows.
2.1 The Adoption of Pillar I: Minimum Capital Requirements
The Basel II framework provides several options for the implementation of the Pillar I, based on the level of sophistication and development of the banking system. Accordingly, all LCBs and all LSBs are required to apply the Standardised Approach for credit risk, the Standardised Measurement Method for market risk and the Basic Indicator Approach for operational risk, in computing the capital requirements, commencing January 1, 2008. For this purpose, the following documents are attached herewith. (i) Banking Act, Directions No.9 (for LCBs) and No.10 (for LSBs) dated 26.12.2007 issued by the Monetary Board. (ii) Guidelines on computation of capital adequacy ratio (Schedule I).* (iii) Return to be submitted on capital adequacy ratio (Schedule II).*
2.2 Migration to Advanced Approaches
The Central Bank has decided to move to adopting the internal ratings based (IRB) advanced approaches beginning 2013. Once the Central Bank is satisfied that the banks have the appropriate models and risk management systems capacities, permission will be granted for

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 5 them to proceed with the IRB approaches. Separate guidelines in this regard will be issued later, specifying the pre-requisites and procedures for seeking the Central Bank’s prior approval for such migration.
2.3 Resource Requirements: Data, IT Needs and Training
Data and IT Needs: Banks should begin preparing a comprehensive data capturing system to identify, measure and report all material risks and to assess and allocate capital against these risks in a systematic and objective manner to meet the requirements under the simplified approaches and to move to advanced approaches in the future. Accordingly, banks are required to implement changes, especially plan for systems integration, modifications to internal systems and use of new software for appropriate data collection, to move to the advanced approaches. In this regard, Banks are expected to have in place, or be actively developing, a data “warehouse”, that is, a process that enables a bank to collect, store and draw upon loss statistics in an efficient manner over time. Guidelines in this regard are given in Annex I.* Training: Upgrading skills in the areas of credit risk models and capital assessment strategies, credit risk mitigation techniques and measuring market and operational risks will be critical to the successful implementation of Basel II.
2.4 Adoption of the other two Pillars
2.4.1 The Pillar II: Supervisory Review Process (SRP)
The objective of SRP is to ensure that banks have adequate capital to support all material risks in their business and also encourage them to adopt more sophisticated risk management techniques for monitoring and managing all risks. For this purpose, banks are required to establish well-defined internal assessment processes within themselves in order to determine the additional capital requirement for all material risks, internally, and which would also be able to assure the Central Bank that adequate capital is actually held towards all their material risk exposures. However, considering the current level of internal systems of the banks, it has been decided to adopt the Pillar II from 2010.
2.4.2 The Pillar III: Market Discipline
The introduction of disclosure requirements for banks, based on the revised framework, will be initiated along with the adoption of new international accounting standards, i.e., the International Financial Reporting Standards (IFRS 7). Accordingly, banks are advised to continue with the current disclosure requirements until the adoption of the Pillar III. Yours faithfully, Sgd, B D W A Silva Actg. Director of Bank Supervision Copy To : Secretary General / SLBA

The schedule I and II and Annex I are available at www.cbsl.gov.lk

6 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 76j(1) of the Banking Act, No.30 of 1988, as amended. Nivard Ajith Leslie Cabraal Governor Colombo 26th December 2007 DIRECTIONS BANKING ACT DIRECTION NO. 10 OF 2007 MAINTENANCE OF CAPITAL ADEQUACY RATIO WHEREAS in terms of the powers conferred by Section 76j(1) of the Banking Act, No.30 of 1988 as amended, the Monetary Board has arrived at a determination with regard to the guidelines in respect of the maintenance of capital adequacy ratio of licensed specialised banks having regard to the guidelines for capital adequacy set out by the Bank for International Settlements in Basle; and WHEREAS in the exercise of powers conferred by Section 76j(1) of the Banking Act, No.30 of 1988 as amended, the Monetary Board hereby issues the following directions. Minimum Capital Adequacy Ratio. 1 (1) Commencing from 01 January 2008, all licensed specialised banks shall, at all times, maintain a capital adequacy ratio of not less than 10 per cent in relation to total risk weighted assets with core capital constituting not less than 5 per cent in relation to total risk weighted assets. 1 (2) The capital adequacy ratios referred to in Direction 1(1) above shall be computed as per guidelines given in Schedule I hereto prepared in accordance with the Basel II Capital Accord “International Convergence of Capital Measurement and Capital Standards - A Revised Framework” recommended by the Basle Committee on Banking Supervision at the Bank for International Settlements. 2 Licensed specialised banks shall use the format at Schedule II attached hereto for reporting of capital adequacy ratios on a periodic basis as specified in Schedule I. 3 Where a licensed specialised bank has failed to comply with these Directions, such licensed specialised bank shall not pay dividends or repatriate profits until such compliance is effected and confirmed by the Director of Bank Supervision. 4 Every licensed specialised bank which is required by these directions to augment its capital may apply to the Monetary Board for an extension of time to comply with such requirement which extension shall not exceed a period of twelve months or such longer period as may be determined by the Monetary Board. 5 (1) All previous Determinations, Directions and Guidelines that have been issued to licensed specialised banks by the Monetary Board in relation to maintenance of capital adequacy ratio in terms of Section 76j of the Banking Act are hereby revoked. 5 (2) Notwithstanding the revocation referred to in Direction 5(1) above, licensed specialised banks granted time by the Monetary Board in term of Direction 4 above shall comply with the requirements contained in such previous Determinations, Directions and Guidelines until the expiration of the time so granted. Reporting Format. Steps to secure compliance with Directions. Transitional
Arrangements. Revocation of previous Determinations.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 7
Schedule I
Guidelines on
Computation of Capital Adequacy Ratio
(Revised Framework – Basel II)
CONTENTS

Introduction
1.1 Approaches to Implementation of the Basel II Framework
1.2 An initial step towards adopting Basel II
Scope of Application
Minimum Capital Ratio
Reporting Format
Submission dates
Instructions for Completion the Return
6.1 Part I – Computation of Capital Adequacy Ratio
6.2 Part II (a) – Computation of Total Capital Base (Regulatory Capital)
6.3 Part II (b) – Computation of Eligible Tier III for Market Risk
6.4 Part III (a) – Computation of Risk-weighted Amount for Credit Risk
6.5 Part III (b) – Computation of Credit Equivalent Amount of Off-Balance Sheet Items
6.6 Part III (c) – Exposures Recognized under Credit Risk Mitigation (CRM)
6.7 Part IV – Computation of Risk-weighted Amount for Market Risk
6.8 Part V – Computation of Risk-weighted Amount for Operational Risk

8 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Abbreviations AMA – Advanced Measurement Approaches BIA – Basic Indicator Approach BIS – Bank for International Settlements BCBS – Basel Committee on Banking Supervision CAR – Capital Adequacy Ratio CBSL – Central Bank of Sri Lanka CCR – Counterparty Credit Risk CIPC – Cash Items in the Process of Collection CRM – Credit Risk Mitigation ECAI – External Credit Assessment Institution GOSL – Government of Sri Lanka IMF – International Monetary Fund LKR – Sri Lanka Rupee MDB – Multilateral Development Bank NPA – Non Performing Assets PSE – Public Sector Entities SA – Standardised Approach SLECIC – Sri Lanka Export Credit Insurance Corporation SME – Small and Medium Enterprise SMM – Standardised Measurement Method LCB – Licensed Commercial Bank LSB – Licensed Specialised Bank

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 9

Introduction
1.1 Approach to Implementation of the Basel II Framework: As announced by the Central Bank of Sri
Lanka (CBSL) in March 2006, the “International Convergence of Capital Measurement and Capital Standards – a Revised Framework”, widely known as Basel II, issued by the Basel Committee on Banking Supervision of the Bank for International Settlements in June 2004 and as amended to framework in June 2006, will be the basis for the computation of the Capital Adequacy Ratio effective from 1st January 2008.
1.2 As an initial step towards adopting Basel II, all licensed commercial banks (LCBs) and licensed
specialized banks (LSBs) are required to apply the following approaches in computing the capital adequacy ratio.
1.2.1 The Standardised Approach for credit risk
1.2.2 The Standardised Measurement Method for market risk
1.2.3 The Basic Indicator Approach for operational risk.
Scope of Application
2.1 The revised capital adequacy norms will be applicable, in the case of all LCBs and LSBs incorporated
in Sri Lanka:
2.1.1 on the solo basis - All positions of the bank and its local and overseas branches/offices.
2.1.2 on the consolidated basis – All position of the bank (including its local and overseas branches/
offices) and its subsidiary companies.
2.2 In the case of LCBs incorporated outside Sri Lanka, the revised capital adequacy norms will be applicable
to the branch operations in Sri Lanka and subsidiaries in Sri Lanka, established with the assigned capital of the branch, if any.
2.3 All LCBs and LSBs are required to use the attached reporting format (Schedule II) for reporting capital
adequacy, commencing 2008.
Minimum Capital Ratio
All LCBs and LSBs shall at all times maintain the capital adequacy ratios determined by the Monetary Board in term of Sections 19(7)(a) and 76J(1)(a) of the Banking Act, commencing from 01 January 2008.
Reporting Format
4.1 The attached reporting format (Schedule II) collects information on the capital adequacy position of
licensed banks. The return comprises 5 major parts.
4.1.1 Part 1 – Computation of capital adequacy ratio.
4.1.2 Part 1I – (a) Computation of total capital base.
(b) Computation of eligible Tier III capital for market risk.
4.1.3 Part III – (a) Computation of risk-weighted amount for credit risk.
(b) Credit equivalent of off-balance sheet items.
(c) Exposures recognized under credit risk mitigation (CRM).
4.1.4 Part IV – Computation of risk-weighted amount for market risk.
4.1.5 Part V – Computation of risk-weighted amount for operational risk.
Submission dates
5.1 The return should show the position as at the last calendar day of each quarter/each financial year,
and should be submitted through the web-based system as follows. Regional Developments Banks are required to submit the attached return (Schedule II) in the manual form.

10 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
5.1.1 Quarterly return/s – within 1 month after the end of each quarter.
5.1.2 Annual audited return/s – within 6 months after the end of the financial year of the respective
bank.
5.1.3 If the submission deadline falls on a bank holiday, it will be deferred to the next working day.
5.2 The Statement of Certification on the information submitted in the above return/s and the capital
adequacy ratio should be forwarded to Bank Supervision Department in manual form. For this purpose, banks may use the existing format (copy attached), which was issued under the implementation of the new web-based returns in July 2006.
6. Instructions for Completion the Return
The instructions for completion of the capital adequacy return are divided into eight parts. The details/ definitions of each element in these eight parts are described with the web-based return code (WBRC).
6.1 Part 1 – Computation of Capital Adequacy Ratio
The values of the items in this form are updated automatically on the web-based return.
6.1.1 Eligible Core Capital (Eligible Tier I)
(WBRC 11.1.1.0.0.0)
The amount must agree with item 6.2.2.1 of Part II (a) Computation of total capital base below. [= WBRC 11.2.1.1.0.0 of Part II (a)]
6.1.2 Capital Base (Regulatory Capital)
(WBRC 11.1.2.0.0.0)
The amount must agree with item 6.2.2.9 of Part II (a) Computation of total capital base below. [= WBRC 11.2.1.5.0.0 of Part II (a)]
6.1.3 Total Risk-Weighted Amount
(WBRC 11.1.3.0.0.0)
Total risk-weighted assets are determined by adding the resulting figures to the sum of riskweighted assets for credit risk, market risk and operational risk. Total of risk-weighted amount for credit risk (6.1.3.1), market risk (6.1.3.2) and operational risk (6.1.3.3). (WBRC 11.1.3.1.0.0 + 11.1.3.2.0.0 + 11.1.3.3.0.0)
6.1.3.1 Risk-Weighted Amount for Credit Risk
(WBRC 11.1.3.1.0.0)
The amount must agree with item 6.4.3.1 of Part III (a) Computation of risk-weighted amount for credit risk below. [=WBRC11.3.1.0.0.0 of Part III (a)]
6.1.3.2 Risk-Weighted Amount for Market Risk
(WBRC 11.1.3.2.0.0)
The amount must agree with item 6.7.8.2 of Part IV Computation of risk-weighted amount for market risk below. [= WBRC 11.4.2.0.0.0 of Part IV]
6.1.3.3 Risk-Weighted Amount for Operational Risk
(WBRC 11.1.3.3.0.0)
The amount must agree with item 6.8.2.3 of Part III (a) Computation of risk-weighted amount for operational risk below. [= WBRC 11.5.3.0.0.0 of Part V]

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 11
6.1.4 Core Capital (Tier I) Ratio, %
(WBRC 11.1.4.0.0.0)
Eligible core capital (6.1.1) divided by Total risk-weighted amount (6.1.3) (WBRC 11.1.1.0.0.0/11.1.3.0.0.0)*100
6.1.5 Total Capital Ratio, %
(WBRC 11.1.5.0.0.0)
Total capital base (6.1.2) divided by Total risk-weighted amount (6.1.3) (WBRC 11.1.2.0.0.0/11.1.3.0.0.0)*100
6.2 Part II (a) – Computation of Total Capital Base (Regulatory Capital)
6.2.1 Constituents of Capital Base
Capital base consists of eligible core capital (Tier I), eligible supplementary capital (Tier II) and eligible short term subordinated debt covering market risk (Tier III).
6.2.2 Specific instructions for elements of Capital
6.2.2.1 Eligible Core Capital (Eligible Tier I)
(WBRC 11.2.1.1.0.0)
The Eligible Core Capital shall be the total core capital less total amount of deductions/ adjustments to core capital. Total eligible core capital should represent at least half of total capital base, i.e., the sum total of eligible supplementary capital plus eligible Tier III capital should not exceed total eligible core capital. The amount must agree with core capital (6.2.2.2) less Tier I adjustments (6.2.2.3). (WBRC 11.2.1.1.1.0 - 11.2.1.1.2.0)
6.2.2.2 Core Capital (Tier I)
(WBRC 11.2.1.1.1.0)
Core capital includes only permanent shareholders’ equity (issued and fully paid ordinary shares/common stock and perpetual non-cumulative preference shares), assigned capital and disclosed reserves (created or increased by appropriations of retained earnings or other surplus, e.g., share premiums, retained profit, general reserves and statutory reserves). The amount must agree with the sum of the following elements from 6.2.2.2.1 to 6.2.2.2.10 (WBRC 11.2.1.1.1.1 to 11.2.1.1.1.10)
6.2.2.2.1 Paid-up Ordinary Shares/Assigned Capital
(WBRC 11.2.1.1.1.1)
In the case of LCBs and LSBs incorporated in Sri Lanka: Issued and fully paid ordinary shares in terms of the Banking Act. For the computation only the paid up portion of partly paid shares should be counted as capital (will be revised in terms of the Companies Act, No.7 of 2007). LCB incorporated or established outside Sri Lanka: Equity capital that shall be assigned by the Head Office of a LCB incorporated or established outside Sri Lanka.
6.2.2.2.2 Non-cumulative, Non-redeemable Preference Shares
(WBRC 11.2.1.1.1.2)
Issued and fully paid non-cumulative, non-redeemable preference shares where the payment of dividend could be reduced or waived permanently in the event of profitability being inadequate to support such payment in part or full.

12 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
6.2.2.2.3 Share Premium
(WBRC 11.2.1.1.1.3)
The excess of issue price over the par value of the ordinary shares or common stock or non-cumulative, non-redeemable preference shares (will be revised in terms of the Companies Act, No.7 of 2007).
6.2.2.2.4 Statutory Reserve Fund
(WBRC 11.2.1.1.1.4)
Balance in the Reserve Fund as per last audited statement of accounts and set up by banks in terms of the Banking Act.
6.2.2.2.5 Published Retained Profits/(Accumulated Losses)
(WBRC 11.2.1.1.1.5)
Balance in the profit and loss account brought forward from the previous financial years and as reported in the last audited statement of accounts. Accumulated losses should be reported in parenthesis and deducted from the other capital constituents.
6.2.2.2.6 General and Other Reserves
(WBRC 11.2.1.1.1.6)
Disclosed reserves in the form of general or other reserves created or increased by appropriation of retained earnings, share premium or other surplus as per last audited financial statements.
6.2.2.2.7 Gain/(Loss) After Tax Arising from the Sale of Fixed and Long-term
Investments
(WBRC 11.2.1.1.1.7)
Any gain/(loss) after tax arising from the sale of fixed and long-term investments since the closing date of the last audited accounts. Net loss arising from the sale of fixed and long-term investments should be reported in parenthesis and deducted from the other capital constituents.
6.2.2.2.8 Unpublished Current Year’s Profit/(Loss)
(WBRC 11.2.1.1.1.8)
Current year profit (excluding any profit/ (loss) after tax arising from the sale of fixed and long term investments) earned/incurred since the closing date of the last audited accounts and subject to certification by the institution’s external auditor. Current year loss should be reported in parenthesis and deducted from the other capital constituents. For this purpose, the banks are required obtain the audit certificate based on the Sri Lanka Auditing Practice Statements 1 (SLAPs 1) “The Auditor’s Report on Special Purpose Audit Engagements”
6.2.2.2.9 Minority Interests (consistent with the above capital constituents)
(WBRC 11.2.1.1.1.9)
Minority interests on consolidation of capital items.
6.2.2.2.10 Perpetual Debt Capital Instruments
(WBRC 11.2.1.1.1.10)
Perpetual debt capital instruments that satisfy the following conditions:
(i) Prior written approval of the CBSL has been obtained.
(ii) Such instruments shall have no maturity.
(iii) Unsecured, fully paid up and subordinated to the interests of creditors (iv) The perpetual debt capital instruments should contain a clause that the issuing bank shall not be liable to pay interest, if:

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 13 a. The bank’s CAR is below the minimum regulatory requirement in terms of the Direction on CAR, or b. The impact of such payment results in the bank’s CAR falling below the minimum CAR, and
c. Such interest not paid shall not be cumulative or accrued for
payment in the future.
(v) Such instruments may contain a call option, which may be exercised in 10 years from the date of issue, provided that the prior approval of CBSL has been obtained to exercise such option. (vi) Total perpetual debt approved as core capital shall not exceed 15 per cent of the total non-innovative core capital after adjustments and deductions. (vii) Any other conditions stipulated by CBSL on prudential grounds.
6.2.2.3 Deductions/Adjustments – Core Capital (Tier I)
(WBRC 11.2.1.1.2.0)
The amount must agree with the sum of the following items from 6.2.2.3.1 to 6.2.2.3.9 (WBRC 11.2.1.1.2.1 to 11.2.1.1.2.9)
6.2.2.3.1 Goodwill
(WBRC 11.2.1.1.2.1)
Report the amount of goodwill as shown in the balance sheet.
6.2.2.3.2 Net Deferred Tax
(WBRC 11.2.1.1.2.2)
Net debit balance of deferred tax.
6.2.2.3.3 Other Intangible Assets
(WBRC 11.2.1.1.2.3)
Intangible assets and losses in the current period and those brought forward from previous periods should be deducted from core capital.
6.2.2.3.4 Advances granted to employees of the bank for the purchase of shares of
the bank under a share ownership plan.
(WBRC 11.2.1.1.2.4)
6.2.2.3.5 Amount due from head office & branches outside Sri Lanka in Sri Lanka
Rupees (applicable only to branches of foreign banks).
(WBRC 11.2.1.1.2.5)
Debit balances in VOSTRO current accounts in Sri Lanka Rupees held by Head Office and branches outside Sri Lanka in Sri Lanka Rupees.
6.2.2.3.6 Amount due to head office & branches outside Sri Lanka in Sri Lanka
Rupees (-) (applicable only to branches of foreign banks) (WBRC 11.2.1.1.2.6) Credit balances in VOSTRO current accounts in Sri Lanka Rupees held by Head Office and branches outside Sri Lanka in Sri Lanka Rupees. Report with negative (-) sign.
6.2.2.3.7 Amount due from head office & branches outside Sri Lanka in Foreign
Currency (net) (applicable only to branches of foreign banks) (WBRC 11.2.1.1.2.7) Net Debit balances (after netting of credit balances) in NOSTRO current accounts in foreign currency held with Head Office and branches outside Sri Lanka and the net amount of fixed and other deposits placed with and amounts

14 Directions, Determinations, and Circulars issued to Licensed Specialised Banks lent to Head Office and branches outside Sri Lanka (after netting of fixed and other deposits and amounts borrowed from Head Office and branches outside Sri Lanka) in foreign currency. Ignore any net credit balance.
6.2.2.3.8 50 per cent of Investments in Unconsolidated Banking and Financial
Subsidiary Companies
(WBRC 11.2.1.1.2.8)
50 per cent of investments in capital by way of shares, perpetual/hybrid capital instruments or subordinated term debt in unconsolidated banking and financial subsidiary companies.
6.2.2.3.9 50 per cent of Investments in the Capital of Other Banks and Financial
Institutions
(WBRC 11.2.1.1.2.9)
50 per cent of investments in capital by way of shares, perpetual/hybrid capital instruments or subordinated term debt in other banks and financial institutions.
6.2.2.4 Supplementary Capital (Tier II)
(WBRC 11.2.1.2.1.0)
The amount must agree to sum of following items from 6.2.2.4.1 to 6.2.2.4.5 (WBRC 11.2.1.2.1.1 to 11.2.1.2.1.5)
6.2.2.4.1 Revaluation Reserves (approved by CBSL)
(WBRC 11.2.1.2.1.1)
Revaluation reserves may be included within Tier II Supplementary Capital provided that such revaluation is prudently valued reflecting fully the possibility of price fluctuations and forced sale, with prior approval of CBSL, subject to a discount of 50 per cent. Revaluation surplus may be included in Tier II capital not more than once in 7 years.
6.2.2.4.2 General Provisions
(WBRC 11.2.1.2.1.2)
General provisions or general loan loss reserves created against the possibility of future losses. Where they are not ascribed to particular assets and do not reflect deduction in the valuation of particular assets, they qualify for inclusion in Supplementary Capital (Tier II). General provisions should not exceed 1.25 per cent of the sum of risk-weighted assets.
6.2.2.4.3 Hybrid Capital Instruments (Debt/Equity)
(WBRC 11.2.1.2.1.3)
Capital instruments which combine certain characteristics of equity capital and debt. i.e., cumulative redeemable preference shares, etc. and satisfy the following characteristics :
(i) Prior written approval of CBSL has been obtained for inclusion of such items in the capital. (ii) Unsecured, fully paid up and subordinated to the interests of creditors. (iii) Not redeemable in less than 5 years or without the prior approval of CBSL. (iv) Available to participate in losses without the Bank being obliged to cease trading. (v) Obligation to pay interest can be deferred where the profitability of the Bank would not support such payment. (vi) Any other condition stipulated by CBSL on prudential grounds.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 15
6.2.2.4.4 Minority Interests arising from Preference Shares
(WBRC 11.2.1.2.1.4)
Minority interests arising from the consolidation of preference shares.
6.2.2.4.5 Approved Subordinated Term Debt
(WBRC 11.2.1.2.1.5)
Subordinated term debt that satisfies the following conditions:
(i) The prior written approval of CBSL has been obtained for inclusion as Tier II capital. (ii) Unsecured and subordinated to the interests of creditors, at fully paid up value in the case of coupon bonds or paid up value plus accrued interest in the case of zero coupon bonds. (iii) A minimum original maturity of 5 years. (iv) Early repayment or redemption shall not be made without the prior consent of CBSL. (v) The amount counted as capital should be discounted by 1/5th each year during the four years preceding maturity. (vi) The total approved subordinated term debt should not exceed 50 per cent of total Tier 1 capital. (vii) Any other conditions stipulated by CBSL on prudential grounds.
6.2.2.4.6 Actual Amount of Approved Subordinated Term Debts
(WBRC 0.0.0.0.0.0)
Report total actual amount of approved subordinated term debts.
6.2.2.5 Deductions – Tier II
(WBRC 11.2.1.2.2.0)
The amount must agree to sum of following items from 6.2.2.5.1 to 6.2.2.5.2 (WBRC 11.2.1.2.2.1 to 11.2.1.2.2.2)
6.2.2.5.1 50 per cent of Investments in Unconsolidated Banking and Financial
Subsidiary Companies
(WBRC 11.2.1.2.2.1)
50 per cent of investments in capital by way of shares, perpetual/hybrid capital instruments or subordinated term debt in unconsolidated banking and financial subsidiary companies.
6.2.2.5.2 50 per cent of Investments in the Capital of Other Banks and Financial
Institutions
(WBRC 11.2.1.2.2.2)
50 per cent of investments in capital by way of shares, perpetual/hybrid capital instruments or subordinated term debt in other banks and financial institutions.
6.2.2.6 Total Supplementary Capital
(WBRC 11.2.1.2.0.0)
The amount must agree to Supplementary Capital (Tier II) (6.2.2.4) less Tier II deductions (6.2.2.5). (11.2.1.2.1.0 - 11.2.1.2.2.0)
6.2.2.7 Eligible Supplementary Capital
(WBRC 11.2.1.3.0.0)
Eligible supplementary capital (Eligible Tier II) will be restricted to 100 per cent of Total Core Capital (6.2.2.1) (After deductions/adjustments).

16 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
6.2.2.8 Short Term Subordinated Debt (Tier III)
(WBRC 11.2.1.4.0.0)
Short term subordinated debt may be used for the sole purpose of meeting a proportion of the capital requirements for market risk. For short-term subordinated debt to be eligible as supplementary capital, it needs, if circumstances demand, to be capable of becoming
part of a bank's permanent capital and thus be available to absorb losses in the event of
insolvency. It must, therefore, at a minimum:
(i) be unsecured, subordinated and fully paid up (ii) have an original maturity of at least two years (iii) not be repayable before the agreed repayment date unless the prior consent of CBSL is obtained (iv) be subject to a lock-in clause which stipulates that neither interest nor principal may be paid (even at maturity) if such payment means that the bank falls below or remains below its minimum capital requirement.
6.2.2.8.1 Approved Short Term Subordinated Debt
(WBRC 11.2.1.4.1.0)
Total amount of approved short-term subordinated debts under above conditions.
6.2.2.8.2 Eligible Supplementary Capital (Eligible Tier III) - Utilised
(WBRC 11.2.1.4.2.0)
The amount must agree with item 6.3.3.6.1 of Part II (b) subject to the following conditions. [=WBRC 11.2.2.6.1.0 of Part II (b)] (i) A minimum of about 28½ per cent of market risk needs to be supported by eligible core capital that is available to support market risk. (ii) Tier III capital will be limited to 250 per cent of a bank’s eligible core capital that is available to support market risk after meeting credit risk and operational risk.
6.2.2.9 Capital Base
(WBRC 11.2.1.5.0.0)
The amount must agree with the sum of items of eligible core capital (6.2.2.1), eligible supplementary capital (6.2.2.7) and eligible tier III capital (6.2.2.8.2). (WBRC 11.2.1.1.0.0 + 11.2.1.3.0.0 + 11.2.1.4.2.0)
6.2.3 An indicative list of institutions which may be deemed to be financial subsidiaries/institutions for
the purposes of items 6.2.2.3.8, 6.2.2.3.9, 6.2.2.5.1 and 6.2.2.5.2 above is as under:
(WBRC 11.2.1.1.2.8, 11.2.1.1.2.9, 11.2.1.2.2.1 and 11.2.1.2.2.2) (i) LCBs and LSBs, (ii) Insurance Companies, (iii) Registered Finance Companies, (iv) Specialised Leasing Companies, (v) Merchant Banks, (vi) Primary Dealers.
6.2.4 Subsidiary companies referred to in items 6.2.2.3.8, 6.2.2.3.9, 6.2.2.5.1 and 6.2.2.5.2 above will
be as defined in the Banking Act.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 17
6.3 Part II (b) - Computation of Eligible Tier III for Market Risk
6.3.1 Rule of Short-Term Subordinated Debt Covering Market Risk (Tier III Capital)
For short-term subordinated debt to be eligible as Tier III capital, it needs, if circumstances demand, to be capable of becoming part of a bank's permanent capital and thus be available to absorb losses in the event of insolvency. Short-term subordinated debt may be used for the sole purpose of meeting a proportion of the capital requirements for market risk. It must, therefore, at a minimum:
(i) be unsecured, subordinated and fully paid up (ii) have an original maturity of at least two years (iii) not be repayable before the agreed repayment date unless the prior consent of CBSL is obtained (iv) be subject to a lock-in clause which stipulates that neither interest nor principal may be paid (even at maturity) if such payment means that the bank falls below or remains below its minimum capital requirement.
6.3.2 Eligible Tier III capital
(i) Tier III capital will be limited to 250 per cent of a bank’s eligible core capital that is available to support market risk after meeting credit risk and operational risk. (ii) The minimum of about 28½ per cent of market risk needs to be supported by eligible core capital that is available to support market risk. (iii) Tier 2 elements may be substituted for Tier III up to the same limit of 250 per cent so far as the overall limits stated in paragraphs 6.2.2.4.5 and 6.2.2.7 are not breached, i.e., eligible supplementary capital may not exceed eligible core capital, and long-term subordinated debt may not exceed 50 per cent of core capital. (iv) In addition, eligible core capital should represent at least half of total capital base, i.e., the sum total of supplementary capital plus Tier III capital should not exceed eligible core capital. (v) In determining the level of eligible core capital for the purposes of determining eligible Tier III capital, all adjustments required in arriving at the total capital base (as stated in 6.2.2.3 and 6.2.2.5) should be taken into consideration.
6.3.3 Specific instructions for Computation of eligible Tier III for market risk
The values of the items in this form are updated automatically, except item 6.3.3.5.1 below. (WBRC 11.2.2.5.1.0)
6.3.3.1 Total Risk Weighted Assets (RWA)
(WBRC 11.2.2.1.0.0)
The amount must agree with the sum of the following items from 6.3.3.1.1 to 6.3.3.1.2 (WBRC 11.2.2.1.1.0 to 11.2.2.1.2.0)
6.3.3.1.1 Total Risk Weighted Assets for Credit and Operational Risks
(WBRC 11.2.2.1.1.0)
The amount must agree with the sum of item 6.4.3.1 of Part III (a) Computation of risk-weighted amount for credit risk and item 6.8.2.3 of
Part V Computation of risk-weighted amount for operational risk below.
(WBRC 11.3.1.0.0.0 of Part III (a) and 1.5.3.0.0.0 of Part V)
6.3.3.1.2 Total Risk Weighted Assets for Market Risk
(WBRC 11.2.2.1.2.0)
The amount must agree to item 6.7.8.2 of Part IV Computation of risk-weighted amount for market risk. (WBRC 11.4.2.0.0.0 of Part IV)

18 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
6.3.3.2 Minimum Capital Charge
(WBRC 11.2.2.2.0.0)
The amount must agree with the sum of the following items from 6.3.3.2.1 to 6.3.3.2.2 (WBRC 11.2.2.2.1.0 to 11.2.2.2.2.0)
6.3.3.2.1 Capital charge for Credit and Operational Risk
(WBRC 11.2.2.2.1.0)
The amount must agree with 10 per cent of the total risk weighted assets for credit and operational risks item 6.3.3.1.1 above. (10% of WBRC11.2.2.1.1.0)
6.3.3.2.2 Capital Charge for Market Risk
(WBRC 11.2.2.2.2.0)
The amount must agree with 10 per cent of total risk weighted assets for market risk item 6.3.3.1.2 (10% WBRC 11.2.2.1.2.0)
6.3.3.3 Total Capital Available to Meet the Capital Charge for Credit and Operational
Risks
(WBRC 11.2.2.3.0.0)
The amount must agree with the sum of total core capital (6.2.2.1) and eligible supplementary capital (6.2.2.7) of Part II (a) Computation of total capital base above. [WBRC11.2.1.1.0.0 and 11.2.1.3.0.0 of Part II (a)]
6.3.3.4 Total Capital Base Available to meet Market Risk
(WBRC 11.2.2.4.0.0)
Total capital available to meet the capital charge for credit and operational risks (6.3.3.3) less capital charge for credit and operational risks (6.3.3.2.1) (WBRC 11.2.2.3.0.0 - 11.2.2.2.1.0)
6.3.3.5 Total Available Tier III Capital
(WBRC 11.2.2.5.0.0)
6.3.3.5.1 Approved Short-term Subordinated Debt
(WBRC 11.2.2.5.1.0)
Report total amount of approved short-term subordinated debts under the conditions are stated at item 6.2.2.8. (as per WBRC 11.2.1.4.0.0)
6.3.3.5.2 Minimum of 28.5 per cent of Capital Charge for Market Risk to be met
by eligible core capital that is not Required for Credit Risk (WBRC 11.2.2.5.2.0) A minimum of about 28½ per cent of market risk needs to be supported by eligible core capital that is available to support market risk. (i) Limit (WBRC 11.2.2.5.2.1) Limit is computed under condition at 6.2.2.8.2 (i) above. The amount must agree to item 6.3.3.2.2 28.5% (WBRC 11.2.2.2.2.028.5%) (ii) Amount Utilised (WBRC 11.2.2.5.2.2) Minimum utilised amount should be equal to above limit.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 19
6.3.3.5.3 Maximum of 250 per cent of eligible core capital that is not Required for
Credit and Operational Risks
(WBRC 11.2.2.5.3.0)
Tier III capital will be limited to 250 per cent of a bank's eligible core capital that is available to support market risk after meeting credit risk and operational risk. (i) Limit (WBRC 11.2.2.5.3.1) Limit is computed under condition at 6.2.2.8.2 (ii) above. The amount must agree to item 6.3.3.4 250% (WBRC 11.2.2.4.0.0250%) (ii) Amount Utilised (WBRC 11.2.2.5.3.2) The utilized amount is computed automatically.
6.3.3.6 Eligible Tier III Capital
(WBRC 11.2.2.6.0.0)
Eligible Tier III capital for market risk is computed as follows.
6.3.3.6.1 Eligible Tier III Capital utilised
(WBRC 11.2.2.6.1.0)
Total capital charge for market risk (6.3.3.2.2) less eligible core capital utilized for market risk [6.3.3.5.2 (ii)] (WBRC 11.2.2.2.2.0 - 11.2.2.5.2.2)
6.3.3.6.2 Eligible but Unutilized Tier III Capital
The approved short-term subordinated debt (6.3.3.5.1) less eligible Tier III capital utilized (6.3.3.6.1). (11.2.2.5.1.0 - 11.2.2.6.1.0)
6.4 Part III (a) – Computation of Risk-weighted Amount for Credit Risk
6.4.1 General Rules for Measuring Credit Risk Based on the Standardised Approach (SA)
6.4.1.1 Under the SA, the rating assigned by the eligible external credit assessment institutions
(ECAIs) will largely support the measure of credit risk. Banks may rely upon the ratings assigned by the ECAIs recognised by CBSL (See paragraph 6.4.2) for assigning risk weights for capital adequacy purposes as per the mapping furnished in these guidelines.
6.4.1.2 The risk weighting of claims will be as described in paragraphs 6.4.3 (under specific
rules for measuring credit risk).
6.4.1.3 Claims (exposures) on a counterpart would include placements with banks, investments,
loans and advances or any other credit exposure.
6.4.1.4 On-balance sheet claims (exposures) would be risk weighted applying the risk weight as
given in paragraphs 6.4.3 while off-balance sheet items would continue to be converted to credit equivalents using the credit conversion factors given in paragraph 6.5 and thereafter risk weighted according to the risk weight applicable to the counterpart.
6.4.1.5 All exposures should be risk-weighted net of specific provisions and interest in suspense
that has been charged to the respective customer account.

20 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
6.4.2 External Credit Assessments
6.4.2.1 Recognition of Eligible Credit Rating Agencies
6.4.2.1.1 The Revised Capital Adequacy Framework requires recognizing ECAIs and
developing a mapping process to assign the ratings issued by eligible credit rating agencies to the risk weights available under the Standardised Approach. In accordance with the principles laid down in the revised framework, CBSL has identified the following two credit rating agencies operating in Sri Lanka for the purposes of risk weighting claims by banks for capital adequacy purposes:
(i) Fitch Ratings Lanka Ltd. and
(ii) Lanka Rating Agency Ltd.
6.4.2.1.2 The following internationally recognized credit ratings agencies are also
accepted as ECAIs.
(i) Moody’s
(ii) Standard and Poor’s and
(iii) Fitch Ratings
6.4.2.1.3 Banks are required to obtain the prior approval of CBSL for the use of other
ECAIs.
6.4.2.2 Scope of Application of External Ratings
6.4.2.2.1 Banks should use the chosen ECAIs and their ratings consistently for each
type of claim, for both risk weighting and risk management purposes. Banks will not be allowed to “cherry pick” the assessments provided by different ECAIs.
6.4.2.2.2 Banks shall not use one ECAI’s rating for one exposure, while using another
ECAI’s rating for another exposure to the same counterpart, unless the respective exposures are rated by only one of the chosen ECAIs, whose ratings the bank has decided to use. External assessments for one entity within a corporate group cannot be used to risk weight other entities within the same group.
6.4.2.3 Mapping Process
6.4.2.3.1 The ratings issued by the eligible ECAIs have been mapped to the appropriate
risk weights applicable as per the Standardised Approach under the Revised Framework. The rating risk weight - mapping furnished in the tables below shall be adopted by all banks:
Table 1
Mapping of Notations of the Credit Rating Agencies in Sri Lanka Fitch Ratings Lanka Lanka Rating Agency Rating Scale of CAR AA(sri) AAA AAA AA+(sri) AA1 AA+ AA(sri) AA2 AA AA-(sri) AA3 AAA+(sri) A1 A+ A(sri) A2 A A-(sri) A3 A- (Contd. on next page)

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 21 Fitch Ratings Lanka Lanka Rating Agency Rating Scale of CAR BBB+(sri) BBB1 BBB+ BBB(sri) BBB2 BBB BBB-(sri) BBB3 BBBBB+(sri) BB1 BB+ BB(sri) BB2 BB BB-(sri) BB3 BBB+(sri) B1 B+ B(sri) B2 B B-(sri) & Lower B3 & Lower B- & Lower
Table 2
Mapping of Notations of the International Credit Rating Agencies Standard and Poor’s Moody’s Fitch Ratings Rating Scale of CAR AAA Aaa AAA AAA AA+ Aa1 AA+ AA+ AA Aa2 AA- Aa3 AA- AAA+ A1 A+ A+ A A2 A- A3 A- ABBB+ Baa1 BBB+ BBB+ BBB Baa2 BBB- Baa3 BBB- BBBBB+ Ba1 BB+ BB+ BB Ba2 BB- Ba3 BB- BBB+ B1 B+ B+ B B2 B- & Lower B3 & Lower B- & Lower B- & Lower
Table 3
Mapping of Short Term Ratings
Short term ratings Risk weights Lanka Rating
Agency
Standard and
Poor’s Moody’s Fitch Ratings
L - 1 A - 1+/A - 1 P - 1 F1+/ F1 20%
L - 2 A - 2+/A - 2 P - 2 F2 50%
L - 3 A - 3+/A - 3 P - 3 F3 100%
NP Below A - 3 NP Below F3 150%
(Contd. on last page)

22 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
6.4.2.4 Short-Term Ratings
6.4.2.4.1 Short-term assessments may only be used for short-term claims against banks
and corporates.
6.4.2.4.2 For risk-weighting purposes, short-term ratings are deemed to be issue
specific. They can only be used to derive risk weights for claims arising from the rated facility. They cannot be generalised to other short-term claims. In no event can a short-term rating be used to support a risk weight for an unrated long-term claim.
6.4.2.4.3 If a short-term rated facility attracts a 50 per cent risk weight, unrated
short-term claims cannot attract a risk weight lower than 100 per cent. If an issuer has a short-term facility with an assessment that warrants a risk weight of 150 per cent, all unrated claims, whether long term or short term, should also receive a 150 per cent risk weight, unless the bank uses recognized CRM techniques for such claims.
6.4.2.4.4 The above risk weight mapping of both long term and short-term ratings of
the chosen domestic rating agencies would be reviewed annually by CBSL.
6.4.2.5 Use of Unsolicited Ratings
A rating would be treated as solicited only if the issuer of the instrument has requested the credit rating agency for the rating and has accepted the rating assigned by the agency. As a general rule, banks should use only solicited rating from the chosen ECAIs. No ratings issued by the credit rating agencies on an unsolicited basis should be considered for risk weight Computation as per the Standardised Approach.
6.4.2.6 Issuer versus Issues Assessment
Where a bank’s exposure is to a particular issue that has an issue-specific assessment, the risk weight of the claim will be based on this assessment.
6.4.2.7 Use of Multiple Rating Assessments
Banks shall be guided by the following in respect of exposures/obligors having multiple ratings from the eligible ECAIs chosen by the bank for the purpose of risk weight Computation:
6.4.2.7.1 If there is only one rating by an eligible credit rating agency for a particular
claim, that rating would be used to determine the risk weight of the claim.
6.4.2.7.2 If there are two ratings accorded by eligible credit rating agencies, which map
into different risk weights, the higher risk weight should be applied.
6.4.2.7.3 If there are three or more ratings accorded by eligible credit rating agencies
with different risk weights, the ratings corresponding to the two lowest risk weights should be referred to and the higher of those two risk weights should be applied, i.e., the second lowest risk weight.
6.4.3 Specific Rules for Measuring Credit Risk Based on the Standardised Approach (SA)
6.4.3.1 Total Risk-weighted amount for Credit Risk
(WBRC 11.3.1.0.0.0)
The amount must agree to sum of total amount of on-balance sheet items and total amount of credit equivalent items (from 6.4.3.1.1 to 6.4.3.1.14) after applying the specific risk weight assigned. (WBRC 11.3.1.1.0.0 to11.3.1.14.0.0)
6.4.3.1.1 Claims on Government of Sri Lanka and Central Bank of Sri Lanka
(WBRC 11.3.1.1.0.0)
All claims on Government of Sri Lanka and Central Bank of Sri Lanka are

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 23 risk-weighted at zero per cent. The amount must agree to sum of items (i) and (ii) (WBRC 11.3.1.1.1.0 to 11.3.1.1.2.0) (i) Claims on Government of Sri Lanka (WBRC 11.3.1.1.1.0) All claims on Government of Sri Lanka are risk-weighted at 0%. (ii) Claims on Central Bank of Sri Lanka (WBRC 11.3.1.1.2.0) All claims on Central Bank of Sri Lanka are risk-weighted at 0%.
6.4.3.1.2 Claims on Foreign Sovereigns and their Central Banks
(WBRC 11.3.1.2.0.0)
Exposures on foreign sovereigns and their central banks will attract risk weights as per the rating assigned to those sovereigns/sovereign exposures by international rating agencies as given in the table below. The amount must agree to sum of following items from (i) to (vi). (WBRC 11.3.1.2.1.0 to 11.3.1.2.6.0)
Table 4
Item WBRC Credit Assessment Risk Weight
(i) 11.3.1.2.1.0 AAA to AA- 0%
(ii) 11.3.1.2.2.0 A+ to A- 20%
(iii) 11.3.1.2.3.0 BBB+ to BBB- 50%
(iv) 11.3.1.2.4.0 BB+ to B 100%
(v) 11.3.1.2.5.0 Below B- 150%
(vi) 11.3.1.2.6.0 Unrated 100%
6.4.3.1.3 Claims on Public Sector Entities (PSEs)
(WBRC 11.3.1.3.0.0)
All performing claims on domestic public sector entities (including public corporations, statutory boards, provincial authorities, local government bodies, etc.) and claims on foreign PSEs will be risk weighted in a manner similar to claims on corporates as given in the table below. The amount must agree to sum of following items from (i) to (v). (WBRC 11.3.1.3.1.0 to 11.3.1.2.5.0)
Table 5
Item WBRC Credit Assessment Risk Weight
(i) 11.3.1.3.1.0 AAA to AA 20%
(ii) 11.3.1.3.2.0 A+ to A- 50%
(iii) 11.3.1.3.3.0 BBB+ to BB- 100%
(iv) 11.3.1.3.4.0 Below BB- 150%
(v) 11.3.1.3.5.0 Unrated 100%

24 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
6.4.3.1.4 Claims on Official Entities and Multilateral Development Banks (MDBs)
(WBRC 11.3.1.4.0.0)
The amount must agree with the sum of the following items from (i) to (iii). (WBRC 11.3.1.4.1.0 to 11.3.1.4.6.0) (i) Exposures on following official entities will be assigned zero risk weight:
(a) Bank for International Settlements (BIS)
(b) International Monetary Fund (IMF)
(c) European Central Bank (ECB)
(d) European Community (EC)
(ii) The following Eligible MDBs will be assigned a zero risk weight:
(a) The World Bank Group comprising of the International Bank for Reconstruction and Development (IBRD) and the International Finance Corporation (IFC) (b) The Asian Development Bank (ADB) (c) The African Development Bank (AFDB) (d) The European Bank for Reconstruction and Development (EBRD) (e) The Inter-American Development Bank (IADB) (f) The European Investment Bank (EIB) (g) The European Investment Fund (EIF) (h) The Nordic Investment Bank (NIB) (i) The Caribbean Development Bank (CDB) (j) The Islamic Development Bank (IDB) (k) The Council of Europe Development Bank (CEDB) (l) The International Finance Facility for Immunization (IFFIm) (iii) The risk weight applicable to claims on other MDBs will depend on the external rating assigned for each MDBs as follows:
Table 6
Item WBRC Credit Assessment Risk Weight
(i) 11.3.1.4.1.0 BIS,IMF and MDBs 0%
(ii) 11.3.1.4.2.0 AAA to AA- 20%
(iii) 11.3.1.4.3.0 A+ to BBB- 50%
(iv) 11.3.1.4.4.0 BB+ to B- 100%
(v) 11.3.1.4.5.0 Below B- 150%
(vi) 11.3.1.4.6.0 Unrated 100%
6.4.3.1.5 Claims on Banks
(WBRC 11.3.1.5.0.0)
Total performing claims on banks denominated in LKR and foreign currency. The amount must agree to sum of total rupee claims and foreign currency claims. (WBRC 11.3.1.5.1.0 + 11.3.1.5.2.0 + 11.3.1.5.3.0) Short-Term Claims: In order to qualify for the preferential treatment for short-term claims, they should have an original contractual maturity of 3 months or less, and should not be rolled over.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 25 Branches of banks incorporated abroad: The rating applicable to the Head Office may be used as the rating applicable to the particular branch, if the branch is not rated locally. (i) Claims on Banks: Rupee Exposures less than 3 months (WBRC 11.3.1.5.1.0) All performing claims on all banks (short-term) including LCBs and LSBs, excluding investment in equity shares and other instruments eligible for capital status, denominated in LKR would be risk weighted based on their external credit assessment as follows:
The amount must agree with the sum of the following items from (i) to (iv). (WBRC 11.3.1.5.1.1 to 11.3.1.5.1.4)
Table 7
Item WBRC Credit Assessment Risk Weight
(i) 11.3.1.5.1.1 AAA to BBB- 20%
(ii) 11.3.1.5.1.2 BB+ to B- 50%
(iii) 11.3.1.5.1.3 Below B- 150%
(iv) 11.3.1.5.1.4 Unrated 100%
(ii) Claims on Banks: Foreign Currency Exposures less than 3 months (WBRC 11.3.1.5.2.0) All performing claims denominated in foreign currency on banks (short-term) will be risk weighted based on their external credit assessment as given in the table below. The amount must agree with the sum of the following items from (i) to (v). (WBRC 11.3.1.5.2.1 to 11.3.1.5.2.5)
Table 8
Item WBRC Credit Assessment Risk Weight
(i) 11.3.1.5.2.1 AAA to A- 20%
(ii) 11.3.1.5.2.2 BBB+ to BBB- 50%
(iii) 11.3.1.5.2.3 BB+ to B- 100%
(iv) 11.3.1.5.2.4 Below B- 150%
(v) 11.3.1.5.2.5 Unrated 100%
(iii) Claims on Banks: Rupee and Foreign Currency Exposures more than 3 months (WBRC 11.3.1.5.3.0) All performing claims denominated in rupee and foreign currency on banks (more than 3 months) will be risk weighted based on their external credit assessment as given in the table below. The amount must agree with the sum of the following items from (i) to (v). (WBRC 11.3.1.5.3.1 to 11.3.1.5.3.5)

26 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Table 9
Item WBRC Credit Assessment Risk Weight
(i) 11.3.1.5.3.1 AAA to AA- 20%
(ii) 11.3.1.5.3.2 A+ to BBB- 50%
(iii) 11.3.1.5.3.3 BB+ to B- 100%
(iv) 11.3.1.5.3.4 Below B- 150%
(v) 11.3.1.5.3.5 Unrated 100%
6.4.3.1.6 Claims on Financial Institutions
(WBRC 11.3.1.6.0.0)
Total performing claims on non-bank financial institutions. However, investment in equity shares and other instruments eligible for capital status in the financial institutions are stated in paragraph 6.2.3 and 6.2.4 should be excluded from here. (WBRC 11.3.1.6.1.0 + 11.3.1.6.2.0) (i) Claims on Primary Dealers/Finance Companies/Specialised Leasing Companies (WBRC 11.3.1.6.1.0) All performing claims on following institutions. Primary Dealers: Registered under the Local Treasury Bills Ordinance (Primary Dealers), Regulations No.1 of 2002. Finance Companies: Registered under the Finance Companies Act, No.78 of 1988, as amended. Specialised Leasing Companies: Registered under the Finance Leasing Act, No.56 of 2000. The amount must agree with the sum of the following items from (i) to (v). (WBRC 11.3.1.6.1.1 to 11.3.1.6.1.5)
Table 10
Item WBRC Credit Assessment Risk Weight
(i) 11.3.1.6.1.1 AAA to AA- 20%
(ii) 11.3.1.6.1.2 A+ to BBB- 50%
(iii) 11.3.1.6.1.3 BB+ to B- 100%
(iv) 11.3.1.6.1.4 Below B- 150%
(v) 11.3.1.6.1.5 Unrated 100%
(ii) Claims on Other Financial Institutions
(WBRC 11.3.1.6.2.0)
All performing claims on other financial institutions.
The amount must agree with the sum of the following items from (i) to (v). (WBRC 11.3.1.6.2.1 to 11.3.1.6.2.5)

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 27
Table 11
Item WBRC Credit Assessment Risk Weight
(i) 11.3.1.6.2.1 AAA to AA- 20%
(ii) 11.3.1.6.2.2 A+ to A- 50%
(iii) 11.3.1.6.2.3 BBB+ to BB- 100%
(iv) 11.3.1.6.2.4 Below BB- 150%
(v) 11.3.1.6.2.5 Unrated 100%
6.4.3.1.7 Claims on Corporates
(WBRC 11.3.1.7.0.0)
All performing claims on corporates shall be risk weighted as per the ratings assigned. Banks can, with prior approval of CBSL, exercise the option to rate all corporate customers at 100 per cent. Once decided and approved by CBSL the banks should apply a single consistent approach. The amount must agree with the sum of the following items from (i) to (v). (WBRC 11.3.1.7.1.0 to 11.3.1.7.5.0)
Table 12
Item WBRC Credit Assessment Risk Weight
(i) 11.3.1.7.1.0 AAA to AA- 20%
(ii) 11.3.1.7.2.0 A+ to A- 50%
(iii) 11.3.1.7.3.0 BBB+ to BB- 100%
(iv) 11.3.1.7.4.0 Below BB- 150%
(v) 11.3.1.7.5.0 Unrated 100%
6.4.3.1.8 Retail Claims
(WBRC 11.3.1.8.0.0)
All performing retail claims include: Retail claims that qualify for regulatory capital purposes and retail claims that do not qualify for regulatory capital purposes. However, the following shall be excluded from the retail portfolio:
(a) Investments in securities such as bonds and equities (to be treated as investments). (b) Residential housing loans secured by mortgages over the residential property that qualify for inclusion as claims secured by residential property (refer WBRC 1.3.1.9.0.0). The amount must agree with the sum of the retail claims that qualify for regulatory capital purposes and retail claims that do not qualify for regulatory capital purposes. (WBRC 11.3.1.8.1.0 to 11.3.1.8.2.0)

28 Directions, Determinations, and Circulars issued to Licensed Specialised Banks (i) Retail claims that qualify for regulatory capital purposes (WBRC 11.3.1.8.1.0) Performing claims that meet the criteria given below qualify for inclusion in the regulatory retail portfolio. All such exposures qualify for a 75 per cent risk weight. The qualifying criteria for the Regulatory Retail Portfolio (applicable to both the retail and SME portfolios):
(a) Orientation Criterion – The exposure should be to an individual person or persons or to a SME. (b) Product Criterion – The exposure should be of one of the following product types. Both fund based and non-fund based facilities to be included:

Revolving credit and lines of credit including overdrafts and
credit cards
Personal term loans and leases (e.g., instalment loans, vehicle
loans and leases, student and educational loans, personal finance)
SME facilities.
(c) Granularity Criterion – The regulatory retail portfolio must be sufficiently diversified to a degree that reduces the risks in the portfolio. In order to meet this criterion,
No aggregate exposure without considering CRM, to one
counterpart should exceed 0.2 per cent of the overall retail portfolio (excluding any non-performing retail/SME claims).
“To one counterpart” means one or several entities that
constitute a single beneficiary, e.g.: in the case of a small business affiliated to another small business, the limit would apply to the bank’s aggregate exposure on both businesses. (d) Low value of Individual Exposures –
Individual Exposures: The maximum aggregate retail exposure
(not taking any CRM into account) to one counterpart cannot exceed:
– the lower of 0.4 per cent of capital base (as included in the computation as at the reporting date) or Rs.10 million at the time of first granting. – This criterion will be applicable for a period of 3 years from adoption. – From 01.01.2011, the criterion would be the lower of 0.2 per cent or Rs.10 million.
SME Exposures:
– The maximum exposure in the case of SME loans would be Rs.35 million at the time of first granting. – In order to qualify as an SME, the firm’s annual turnover should not be more than Rs.140 million. – The annual turnover should be based on the latest available audited financial statements at the time of granting the facilities. – If audited financial statements are not available, the draft accounts may be used. However, the audited financial statements should be obtained during the year.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 29 – The qualifying criteria is given above should be reviewed in respect of each financial year. (ii) Retail claims that do not qualify for regulatory capital purposes (WBRC 11.3.1.8.2.0) Claims that not qualify for inclusion in the regulatory retail portfolio:
Performing claims that do not meet the criteria given above do not qualify for inclusion in the regulatory retail portfolio. All such exposures qualify for a 100 per cent risk weight.
6.4.3.1.9 Claims Secured by Residential Property
(WBRC 11.3.1.9.0.0)
All performing claims secured by residential property include: Claims that qualify for regulatory capital purposes and claims that do not qualify for regulatory capital purposes. However, the exposures secured by mortgages on commercial real estates shall be excluded from here. The amount must agree with the sum of the claims secured by residential property that qualify for regulatory capital purposes and claims secured by residential property that do not qualify for regulatory capital purposes. (WBRC 11.3.1.9.1.0 to 11.3.1.9.2.0) (i) Claims that qualify for regulatory capital purposes (WBRC 11.3.1.9.1.0) (a) Subject to conditions below, residential housing loans fully secured by a primary mortgage over such residential property that is or will be occupied by the borrower, or rented, qualify for a risk weight of 50 per cent. The claims should strictly meet the following qualifying criteria to be able to use the preferential risk weight – A margin of at least 25 per cent on the value of the property based on the latest valuation report – Valuation of property: valuation of property is carried out by an external independent valuer or current internal assessment of the value of the properties subject to the conditions stated in the Directions on Classification of Advances and Specific Provisions issued under Banking Act. (b) Mortgages other than primary mortgages will qualify for the same risk weight, subject to the above conditions, if:
– The mortgage is with the same bank
– The purpose of the loan is for residential purposes.
(ii) Claims that do not qualify for regulatory capital purposes (WBRC 11.3.1.9.2.0) Performing claims that do not meet the criteria given above do not qualify for inclusion in the regulatory residential portfolio. All such exposures qualify for a 100 per cent risk weight.
6.4.3.1.10 Claims Secured by Commercial Real Estate
(WBRC 11.3.1.10.0.0)
Commercial real estate exposure is defined as exposures secured by mortgages on commercial real estate (office buildings, multi-purpose or multi-tenanted commercial premises, multi-family residential buildings,

30 Directions, Determinations, and Circulars issued to Licensed Specialised Banks industrial or warehouse space, hotels, land acquisition, land development and construction). Commercial real estate exposures, as defined above will attract a risk weight of 100 per cent.
6.4.3.1.11 Non-Performing Assets (NPAs)
(WBRC 11.3.1.11.0.0)
The unsecured portion of NPAs, other than a qualifying residential mortgage loan which is addressed in item 6.4.2.1.12, net of specific provision will be risk weighted as items (i) and (ii) below. For the purpose of computing the level of specific provisions of NPAs for deciding the risk-weighting, all funded NPA exposures of a single counterparty (without netting the value of the eligible collateral under CRM) should be reckoned in the denominator. For the purpose of defining the secured portion of the NPA, eligible collateral will be the same as recognised for credit risk mitigation purposes. Hence, other forms of collateral like land, buildings, plant, machinery, current assets, etc., will not be reckoned while computing the secured portion of NPAs for capital adequacy purposes. The amount must agree with the sum of the following items (i) and (ii). (WBRC 11.3.1.11.1.0 + 11.3.1.11.2.0) (i) Specific provisions are equal or more than 20 per cent (WBRC 11.3.1.11.1.0) 100 per cent risk weight when specific provisions are equal or more than 20 per cent of the outstanding amount of the NPA. (ii) Specific provisions are less than 20 per cent (WBRC 11.3.1.11.2.0) 150 per cent risk weight when specific provisions are less than 20 per cent of the outstanding amount of the NPA.
6.4.3.1.12 Non-Performing Assets Secured by Residential property
(WBRC 11.3.1.12.0.0)
The unsecured of portion NPAs (without netting the value of property mortgage), net of specific provision will be risk weighted as items (i) and (ii):
For the purpose of computing the level of specific provisions in NPAs for deciding the risk-weighting, all funded NPA exposures of a single counterparty (without netting the value of property mortgage) should be reckoned in the denominator. The amount must agree with the sum of the following items (i) and (ii). (WBRC 11.3.1.12.1.0 + 11.3.1.12.2.0) (i) Specific provisions are equal or more than 20 per cent (WBRC 11.3.1.12.1.0) 50 per cent risk weight when specific provisions are equal or more than 20 per cent of the outstanding amount of the NPA. (ii) Specific provisions are less than 20 per cent (WBRC 11.3.1.12.2.0) 100 per cent risk weight when specific provisions are less than 20 per cent of the outstanding amount of the NPA.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 31
6.4.3.1.13 Higher-Risk Categories
(WBRC 11.3.1.13.0.0)
Exposures to the following segments, which are considered as high-risk exposures, will attract a higher risk weight of 150 per cent:
(i) Venture capital funds/companies
(ii) Private equity investments
6.4.3.1.14 Cash Items and Other Assets
(WBRC 11.3.1.14.0.0)
The amount must agree with the sum of cash items (i) and Other Assets (ii) (WBRC 11.3.1.14.1.0 to 11.3.1.14.2.0) (i) Cash Items (WBRC 11.3.1.14.1.0) Total of cash items from (a) to (c) (a) Notes and Coins (WBRC 11.3.1.14.1.1) Local currency notes and coins held by tellers, in ATMs, in vault and petty cash. Risk weight is 0 per cent (b) Gold and Bullion held in own vault (WBRC 11.3.1.14.1.2) Gold and bullion held in the bank’s vaults. Gold items held in safe custody should be excluded. Risk weight is 0 per cent (c) Cash Items in the process of Collection (WBRC 11.3.1.14.1.3) Cheques, drafts and other cash items, such as money orders, postal orders drawn on banks and other authorized institutions and paid immediately on presentation. Trade bills, such as import bills and export bills, in the process of collection should be excluded from this item and considered as loans and advances. Risk weight is 20 per cent. (ii) Other Assets (WBRC 11.3.1.14.2.0) Total of items (a) and (b) below. (a) Fixed Assets (WBRC 11.3.1.14.2.1) The item includes bank premises, immovable property, machinery and equipment, motor vehicles, furniture and fittings and other fixed assets, reported at cost or at revalued amount, net of accumulated depreciation will attract a risk weight of 100 per cent. (b) Other Assets/Exposures (WBRC 11.3.1.14.2.2) All other assets/exposures which are not specified elsewhere will attract a uniform risk weight of 100 per cent.

32 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
6.5 Part III (b) – Computation of Credit Equivalent Amount of Off-Balance Sheet Items
6.5.1 General Instructions
6.5.1.1 The risk-weighted amount of an off-balance sheet item that gives rise to credit exposure
is generally calculated by means of a two-step process:
6.5.1.1.1 The notional amount of the transaction is converted into a credit equivalent
amount, by multiplying the amount by the specified credit conversion factor or by applying the current exposure method, and
6.5.1.1.2 The resulting credit equivalent amount is multiplied by the risk weight
applicable to the counterpart or type of asset.
6.5.1.2 Where the off-balance sheet item is secured by eligible collateral or guarantee, the CRM
guidelines detailed in paragraph 6.6 may be applied.
6.5.2 The credit conversion factors to be used will be as follows:
6.5.2.1 Off-Balance Sheet Items:
(WBRC 11.3.2.0.0.0)
The exposure on off-balance sheet items is to be included in the computation of the risk weighted capital ratio. The conversion of the credit risk inherent in each off-balance sheet item would be converted into an on-balance sheet credit equivalent by multiplying the principal amount by a credit conversion factor. The credit equivalent amount would then be weighted according to the corresponding asset item. The amount must agree with the sum of the principal amount of off-balance sheet items and credit equivalent of off-balance sheet items from 6.5.2.1.1 to 6.5.2.1.10. (WBRC 11.3.2.1.0.0 to11.3.2.10.0.0)
6.5.2.1.1 Direct Credit Substitutes
(WBRC 11.3.2.1.0.0)
Total direct credit substitutes of the following items from (i) to (iv). Conversion Factor 100 per cent (WBRC 11.3.2.1.1.0 to 11.3.2.1.4.0) (i) General Guarantees of Indebtedness (WBRC 11.3.2.1.1.0) General guarantees of indebtedness where the risk of loss in the transaction may crystallise into a direct liability and become a direct claim on the counterparty. These include Guarantees in respect of counterparties like insurance agents, sales agents, etc., to cover any non-payment by them of premium, sales proceeds, etc. to their beneficiaries. Bank Guarantees in favour of customs would cover any non-payment of customs duties by their counterparties. (ii) Stand-by LCs serving as Financial Guarantees (WBRC 11.3.2.1.2.0) Stand-by Letters of Credit, which are direct, credit substitutes where the risk of loss in the transaction is equivalent to that of a direct claim on the counterparty. This includes stand-by Letters of Credit serving as financial guarantees for loans, securities and other financial liabilities. (iii) Bank Acceptances (WBRC 11.3.2.1.3.0) Liabilities arising from acceptances on accommodation of bills but excludes bills that have been discounted by the bank itself. Risk

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 33 participation and other similar commitments undertaken to repay the financial obligation of a customer, on his failure to do so, should be included. (iv) Others (WBRC 11.3.2.1.4.0) Any other obligation which carries the same risk of loss in the transaction and is equivalent to that of a direct claim on the counterparty.
6.5.2.1.2 Transaction-Related Contingencies
(WBRC 11.3.2.2.0.0)
Total transaction-related contingencies of following items from (i) to (iii). Conversion Factor 50 per cent (WBRC 11.3.2.2.1.0 to 11.3.2.2.3.0) (i) Performance Bonds, Bid Bonds & Warranties (WBRC 11.3.2.2.1.0) Transaction-related contingent items such as Performance Bonds, Bid Bonds and Warranties, where the risk of loss arises from an irrevocable obligation to pay a third party, the non-financial obligation of the customer upon his failure to fulfil obligations under a contract or a transaction. Such contingencies would crystallise into actual liabilities dependent upon the occurrence or non-occurrence of an event other than that of a default in payment by the counterparty. (ii) Stand-by LCs related to particular transactions (WBRC 11.3.2.2.2.0) Contingent liabilities relating to particular transactions. Here too, there is a likelihood of the contingencies crystallizing into actual liabilities depending upon the occurrence or non-occurrence of an event other than that of a default in payment by a counterparty. (iii) Others (WBRC 11.3.2.2.3.0) Other contingent liabilities arising from an irrevocable obligation to pay a third party, the non-financial obligation of a customer upon his failure to fulfil such obligation or terms under contract or transaction.
6.5.2.1.3 Short-Term Self Liquidating Trade-Related Contingencies
(WBRC 11.3.2.3.0.0)
Total short-term self liquidating trade-related contingencies of following items from (i) to (iv). Conversion Factor 20 per cent (WBRC 11.3.2.3.1.0 to 11.3.2.3.4.0) (i) Shipping Guarantees (WBRC 11.3.2.3.1.0) Guarantees issued by the reporting institution to customers where the reporting institution agrees to indemnify fully, to a named shipping agent, against all liabilities arising from the release of goods without production of Bills of Lading and/or other shipping documents by the receiving party.

34 Directions, Determinations, and Circulars issued to Licensed Specialised Banks (ii) Documentary Letters of Credit (WBRC 11.3.2.3.2.0) Documentary credits collateralised by the underlying shipments which are short-term self-liquidating and trade-related transactions. (iii) Trade-Related Acceptances (WBRC 11.3.2.3.3.0) Liabilities arising from acceptances that are based on a specific trade transaction either domestic or foreign e.g.: Letters of Credit. (iv) Others (WBRC 11.3.2.3.4.0) Contingent liabilities arising from short-term self-liquidating trade related obligations.
6.5.2.1.4 Sale and Repurchase agreements and Assets sale with recourse where the
credit risk remains with the bank
(WBRC 11.3.2.4.0.0)
Total of following items from (i) to (vi).
Conversion Factor 100 per cent
(WBRC 11.3.2.4.1.0 to 11.3.2.4.6.0)
( ) Sale and Repurchase Agreements
(WBRC 11.3.2.4.1.0)
Sale and Repurchase Agreement (REPO) is an agreement whereby a bank sells an asset to a third party with a commitment to repurchase it at an agreed price on an agreed future date. Purchase and Resale Agreements (Reverse REPOS) should be considered as collateralised loans. The risk is to be measured as an exposure to the counterparty unless the underlying asset has been reported as an on-balance sheet item where the risk weight appropriate to the underlying asset should be used. (ii) Housing Loans Sold with Recourse (WBRC 11.3.2.4.2.0) The amount of housing loans sold to a counterparty with recourse where the credit risk remains with the Bank. (iii) Other Assets Sold with Recourse (WBRC 11.3.2.4.3.0) Assets sold with recourse where the credit risk remains with the reporting institution. The holder of the asset is entitled to put the assets back to the reporting institution within an agreed period or under certain prescribed circumstances – e.g.: deterioration in the value or credit quality of the asset concerned. (iv) Forward Assets Purchases (WBRC 11.3.2.4.4.0) Commitment to purchase, at a specified future date and/or on pre-arranged terms, a loan, security or other asset from another party. (v) Partly-Paid Shares/Securities (WBRC 11.3.2.4.5.0) Unpaid amounts on partly-paid shares and securities where the issuer may call upon the bank to pay at a pre-determined or unspecified date in the future.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 35 (vi) Others (WBRC 11.3.2.4.6.0) Placements of forward deposits and other commitments with certain drawdown. A forward deposit is an agreement between two parties whereby one will place and the other will receive, at a pre-determined future date, a deposit, at an agreed rate of interest. A commitment to place a forward deposit should be reported under this item and weighted according to the risk-weight appropriate to the counterparty.
6.5.2.1.5 Obligations under an On-going Underwriting Agreement
(WBRC 11.3.2.5.0.0)
Total of following items from (i) to (iii).
Conversion Factor 50 per cent
(WBRC 11.3.2.5.1.0 to 11.3.2.5.3.0)
(i) Underwriting of Shares/Securities Issue
(WBRC 11.3.2.5.1.0)
Obligations due to underwriting of shares and securities, net of the amount sub-underwritten by another institution. (ii) Note Issuance Facilities and Revolving Underwriting Facilities (WBRC 11.3.2.5.2.0) Arrangements where a borrower may draw funds up to a prescribed limit over a pre-defined period through the issue of notes which the reporting bank has committed to underwrite. (iii) Others (WBRC 11.3.2.5.3.0) Other obligations due to on-going underwriting agreements.
6.5.2.1.6 Commitments with an Original maturity of up to one year or which can
be unconditionally cancelled at any time
(WBRC 11.3.2.6.0.0)
Total of following items from (i) to (iv).
Conversion Factor 0 per cent
(WBRC 11.3.2.6.1.0 to 11.3.2.6.4.0)
(i) Formal Stand-by Facilities and Credit Lines (WBRC 11.3.2.6.1.0) Commitments include the undrawn portion of any binding arrangements which obligate the reporting institution to provide funds at some future date. Such commitments would have an original maturity of less than one year or which can be unconditionally cancelled at any time by the reporting bank at its discretion. Formal stand-by facilities and credit lines for Letters of Credit, Trust Receipts, etc.; should be included under the item. (ii) Undrawn Term Loans (WBRC 11.3.2.6.2.0) Undrawn portion of a term loans with an original maturity of less than one year or which can be unconditionally cancelled at any time by the reporting bank.

36 Directions, Determinations, and Circulars issued to Licensed Specialised Banks (iii) Undrawn Overdraft Facilities/Unused Credit Card Lines (WBRC 11.3.2.6.3.0) The undrawn portion of overdraft facilities and credit card lines with an original maturity of less than one year or which can be unconditionally cancelled at any time by the reporting bank. (iv) Others (WBRC 11.3.2.6.4.0) Any other commitment with an original maturity up to one year or which can be unconditionally cancelled at any time.
6.5.2.1.7 Other Commitments with an Original maturity of up to one year
(WBRC 11.3.2.7.0.0)
Total of following items from (i) to (iii).
Conversion Factor 20 per cent
(WBRC 11.3.2.7.1.0 to 11.3.2.7.3.0)
(i) Formal Stand-by Facilities and Credit Lines (WBRC 11.3.2.7.1.0) The commitments under formal standby facilities and credit lines with an original maturity is up to one year. (ii) Undrawn Term Loans (WBRC 11.3.2.7.2.0) The undrawn portion of term loans where the original maturity is up to one year. (iii) Others (WBRC 11.3.2.7.3.0) Any other commitment with an original maturity up to one year.
6.5.2.1.8 Other Commitments with an Original maturity of over one year
(WBRC 11.3.2.8.0.0)
Total of following items from (i) to (iii).
Conversion Factor 50 per cent
(WBRC 11.3.2.8.1.0 to 11.3.2.8.3.0)
(i) Formal Stand-by Facilities and Credit Lines (WBRC 11.3.2.8.1.0) The commitments under formal standby facilities and credit lines with an original maturity is over one year. (ii) Undrawn Term Loans (WBRC 11.3.2.8.2.0) The undrawn portion of term loans where the original maturity is over one year. (iii) Others (WBRC 11.3.2.8.3.0) Any other commitment with an original maturity over one year.
6.5.2.1.9 Exchange Rate Contracts
(WBRC 11.3.2.9.0.0)
Exchange rate contracts shall include the following items (a to e), but exclude

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 37 exchange rate contracts which have an original maturity of 14 calendar days or less. (a) Forward foreign exchange contracts (b) Currency futures (c) Currency options purchased (d) Cross currency FX swaps (e) Other similar instruments To arrive at the credit equivalent amounts of exchange rate contracts, applying the original exposure method, a bank will have to apply one of the conversion factors as given in the table below to the notional principal amounts of each instrument according to the nature of the instrument and its maturity.
Table 13
Item WBRC Original Maturity Conversion
Factor
(i) 11.3.2.9.1.0 Less than one year 2%
(ii) 11.3.2.9.2.0 One year and less than two years 5% (iii) 11.3.2.9.3.0 For each additional year 3%
6.5.2.1.10 Interest Rate Contracts
(WBRC 11.3.2.10.0.0)
Interest rate contracts shall include,
(a) Single currency interest rate swaps
(b) Basis swaps
(c) Forward rate agreements
(d) Interest rate futures
(e) Interest rate options purchased, and
(f) Other similar instruments
To arrive at the credit equivalent amounts of interest rate contracts, applying the original exposure method, a bank will have to apply one of the conversion factors as given in the table below to the notional principal amounts of each instrument according to the nature of the instrument and its maturity.
Table 14
Item WBRC Original Maturity Conversion
Factor
(i) 11.3.2.10.1.0 Less than one year 0.5%
(ii) 11.3.2.10.2.0 One year and less than two years 1.0% (iii) 11.3.2.10.3.0 For each additional year 1.0% Note: In the case of foreign exchange and interest rate contracts above, the netting of contracts subject to novation would be permitted. Therefore, the net rather than the gross claims arising out of swaps and similar contracts (subject to novation) with the same counterparts will be weighted. In this context, novation is defined as a bilateral contract between two counterparties under which any obligation to each other to deliver a given currency on a given date is automatically amalgamated with all other obligations for the same currency and value date, legally substituting one single net amount for the previous gross obligations.

38 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
6.6 Part III (c) – Exposures Recognized under Credit Risk Mitigation (CRM)
6.6.1 Overview of CRM
6.6.1.1 Banks use a number of techniques to mitigate the credit risks to which they are exposed.
For example, exposures may be collateralised by first priority claims, in whole or in part with cash or securities, a loan exposure may be guaranteed by a third party, or a bank may buy a credit derivative to offset various forms of credit risk. Additionally, banks may agree to net loans owed to them against deposits from the same counterpart.
6.6.1.2 The revised approach to credit risk mitigation allows a wider range of credit risk
mitigants to be recognised for regulatory capital purposes than is permitted under Basel I, provided that these techniques meet the minimum conditions described below.
6.6.1.3 While the use of CRM techniques reduces or transfers credit risk, it simultaneously may
increase other risks (residual risks). Residual risks include legal, operational, liquidity and market risks. Therefore, it is imperative that banks employ robust procedures and processes to control these risks, including strategy, consideration of the underlying credit, valuation, policies and procedures, systems, control of roll-off risks and management of concentration risk arising from the bank’s use of CRM techniques and its interaction with the bank’s overall credit risk profile.
6.6.1.4 Legal Certainty: All documentation used in collateralised transactions and guarantees
must be binding on all parties and legally enforceable in all relevant jurisdictions. Banks must have conducted sufficient legal review, which should be well documented, to verify this. Such verification should have a well founded legal basis for reaching the conclusion about the binding nature and enforceability of the documents. Banks should also undertake such further review as necessary to ensure continuing enforceability.
6.6.1.5 Treatment of Pools of CRM Techniques: In case where a bank has multiple CRM
techniques covering a single exposure (e.g.: a bank has both collateral and guarantee partially covering an exposure), the bank will be required to subdivide the exposure into portions covered by each type of CRM technique (e.g.: portion covered by collateral, portion covered by guarantee) and the risk-weighted assets of each portion must be calculated separately. When credit protection provided by a single protection provider has differing maturities, they must be subdivided into separate protection as well.
6.6.2 CRM Techniques
6.6.2.1 Collateralised Transactions: A collateralised transaction is one in which:

banks have a credit exposure or potential credit exposure; and
that credit exposure or potential credit exposure is hedged in whole or in part by
collateral posted by a counterpart or by a third party on behalf of the counterpart.
6.6.2.1.1 The Simple Approach will be Followed in Computing the Effects of
CRM
(i) In the simple approach, the portions of claims collateralised by the market value of recognised collateral receive the risk weight applicable to the collateral instrument. The risk weight on the collateralised portion will be subject to a floor of 20 per cent. The remainder of the claim should be assigned to the risk weight appropriate to the counterparty. (ii) Mismatches in the maturity of the underlying exposure and collateral will not be allowed, i.e., the collateral must be pledged for at least the life of the exposure.
6.6.2.1.2 Risk Weights
(i) The 20 per cent floor for the risk weight on a collateralised transaction will not be applied and 0 per cent risk weight can be applied provided the exposure and the collateral are denominated in the same currency, and either:

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 39 (a) the collateral is cash on deposit and gold or (b) the collateral is in the form of Government securities or (c) the collateral is in the form provident fund balances.
6.6.2.1.3 Minimum Conditions
(i) Legal Certainty: as described in paragraph 6.6.1.4 (ii) Ability to Liquidate: The bank should have the right to liquidate or take legal possession of it, in a timely manner, in the event of the default, insolvency or bankruptcy (or one or more otherwise-defined credit events set out in the transaction documentation) of the counterparty (and, where applicable, of the custodian holding the collateral). Furthermore banks must take all steps necessary to fulfil those requirements under the law applicable to the bank’s interest in the collateral for obtaining and maintaining an enforceable security interest. (iii) Material Correlation: In order for collateral to provide protection, the credit quality of the counterparty and the value of the collateral must not have a material positive correlation. For example, securities issued by the counter party or by any related group entity - would provide little protection and so would be ineligible. (iv) Recovery Procedures: Banks must have clear and robust procedures for the timely liquidation of collateral to ensure that any legal conditions required for declaring the default of the counter party and liquidating the collateral are observed, and that collateral can be liquidated promptly. Where the collateral is held by a custodian, banks must take reasonable steps to ensure that the custodian segregates the collateral from its own assets.
6.6.2.1.4 Eligible Financial Collateral
The following collateral instruments are eligible for recognition in the simple approach:
(i) Cash (as well as certificates of deposit or comparable instruments, including fixed deposit receipts, issued by the lending bank) on deposit with the bank, which is incurring the counterparty exposure. (ii) Gold: Gold would include both bullion and jewellery. (iii) GOSL securities (iv) Provident fund balances (v) Debt securities rated by a recognized ECAI where these are either – At least BB- when issued by sovereigns or PSEs that have been recognized, or – At least BBB- when issued by other entities (including banks), or – At least A-3//P-3 for short-term debt instruments. (vi) Debt securities not rated by a ECAI where these are:
– Issued by a bank; and
– Listed on a recognized exchange, and
– Classified as senior debt
– Other securities, specified by the Central Bank.
(vii) Equities those are included in the Milanka index, subject to a discount of 25 per cent on the market value.

40 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
6.6.2.2 On-Balance Sheet Netting - Where a bank,
6.6.2.2.1 has a well-founded legal basis for concluding that the netting or offsetting
agreement is enforceable in each relevant jurisdiction regardless of whether the counterpart is insolvent or bankrupt;
6.6.2.2.2 is able at any time to determine those assets (loans) and liabilities (deposits)
with the same counterpart that are subject to the netting agreement;
6.6.2.2.3 monitors and controls its roll-off risks; and
6.6.2.2.4 monitors and controls the relevant exposures on a net basis
6.6.2.2.5 it may use the net exposure of loans and deposits as the basis for its capital
adequacy computation.
6.6.2.3 Guarantees
6.6.2.3.1 Guaranteed Transactions: Where guarantees are direct, explicit, irrevocable
and unconditional, banks may take account of such credit protection in calculating capital requirements.
6.6.2.3.2 Minimum Conditions
(i) A guarantee (or counter-guarantee) must represent a direct claim on the protection provider and must be explicitly referenced to specific exposures or a pool of exposures, so that the extent of the cover is clearly defined and incontrovertible. (ii) Other than non-payment by a protection purchaser of money due in respect of the credit protection contract it must be irrevocable; there must be no clause in the contract that would increase the effective cost of cover as a result of deteriorating credit quality in the hedged exposure. (iii) It must also be unconditional; there should be no clause in the protection contract outside the control of the bank that could prevent the protection provider from being obliged to pay out in a timely manner in the event that the original counterpart fails to make the payment(s) due. (iv) In addition to the legal certainty requirements above, the following conditions must also be satisfied:
– On the qualifying default or non-payment of the counterpart, the bank may in a timely manner pursue the guarantor for any monies outstanding under the documentation governing the transaction. The guarantor may make one lump sum payment of all monies under such documentation to the bank, or the guarantor may assume the future payment obligations of the counterpart covered by the guarantee. The bank must have the right to receive any such payments from the guarantor without first having to take legal actions in order to pursue the counterpart for payment. – The guarantee is an explicitly documented obligation assumed by the guarantor. – Except as noted in the following sentence, the guarantee covers all types of payments the underlying obligor is expected to make under the documentation governing the transaction, for example notional amount, margin payments, etc. – Where a guarantee covers payment of principal only, interests and other uncovered payments should be treated as an unsecured amount.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 41
6.6.2.3.3 Eligible Guarantors (counter-guarantors): Credit protection given by the
following entities will be recognised: sovereign entities, PSEs and other entities with a risk weight of 20 per cent or better and a lower risk weight than the counterpart.
6.6.2.3.4 Risk Weights
The protected portion is assigned the risk weight of the protection provider. The uncovered portion of the exposure is assigned the risk weight of the underlying counterpart. (i) A zero risk weight will be applied to that portion of loans guaranteed by GOSL and CBSL. (ii) The portion of exposures guaranteed by the Sri Lanka Export Credit Insurance Corporation (SLECIC) will receive a 50 per cent risk weight.
6.6.3 Specific Instructions for completion Part III (c)
6.6.3.1 Total CRM Exposure
(WBRC 11.3.3.0.0.0)
Total exposure of collateralised transactions and other CRM techniques. All exposures should be reported net of specific provisions and interest in suspense that has been charged to the respective counterparty account. Exposures which are reported in this
part under CRM should not be reported in the other parts of the capital adequacy return.
The amount is automatically shown on web-based return.
The amount must agree with the sum of items 6.6.3.1.1 and 6.6.3.1.2.
(WBRC 11.3.3.1.0.0 + 11.3.3.2.0.0)
6.6.3.1.1 Collateralised Transactions
(WBRC 11.3.3.1.0.0)
The sum of collateralised retail exposures and collateralised other exposures. The amount must agree to sum of items (i) and (ii). The amount is automatically shown on web-based return. (WBRC 11.3.3.1.1.0 + 11.3.3.1.2.0) (i) Retail Exposures (WBRC 11.3.3.1.1.0) The total amount of retail exposures against the collateral instruments which are eligible for recognition in the simple approach as specified in paragraph 6.6.2.1.4. The amount is automatically shown on web-based return. (WBRC 11.3.3.1.1.1 to 11.3.3.1.1.7) (ii) Other Exposures (WBRC 11.3.3.1.2.0) The total amount of other exposures against the collateral instruments which are eligible for recognition in the simple approach as specified in paragraph 6.6.2.1.4. The amount is automatically shown on web-based return. (WBRC 11.3.3.1.2.1 to 11.3.3.1.2.7)
6.6.3.1.2 Other CRM Techniques
(WBRC 11.3.3.2.0.0)
The total amount of exposures against the other CRM techniques (other

42 Directions, Determinations, and Circulars issued to Licensed Specialised Banks than collateralized transactions). The amount is automatically shown on web-based return. (WBRC 11.3.3.2.1.0 + 11.3.3.2.2.0) (i) On-Balance Sheet Netting (WBRC 11.3.3.2.1.0) The total amount of exposures against the on-balance sheet netting should be reported in line with the instructions given in the items under paragraph 6.6.2.2 above. (ii) Guarantees (WBRC 11.3.3.2.2.0) The total amount of exposures against the guarantees should be reported in line with the instructions given in the items under paragraph 6.6.2.3 above.
6.7 Part IV – Computation of Risk-weighted Amount for Market Risk
6.7.1 Capital Charge for Market Risk - Market risk is defined as the risk of losses in on-balance sheet
and off balance sheet positions arising from movements in market prices. The market risk subject to the capital charge requirements are:
6.7.1.1 The risks pertaining to interest rate related instruments in the trading book
6.7.1.2 The risks pertaining to equities in the trading book.
6.7.1.3 The risks pertaining to foreign exchange position (including gold positions) throughout
the bank.
6.7.2 Scope and Coverage of Capital Charge for Market Risks
6.7.2.1 This involves computing capital charges for interest rate related instruments in the
trading book, equities in the trading book and foreign exchange risk (including gold positions) throughout the bank. For the purpose of this section, the trading book and foreign exchange position will include the following:
6.7.2.1.1 Securities classified in the ‘Trading Account’ in terms of the direction on
Prudential Norms for Classification, Valuation and Operation of the Bank’s Investment Portfolio issued by the CBSL dated 01 March 2006.
6.7.2.1.2 Open gold positions
6.7.2.1.3 Open foreign exchange positions.
6.7.3 Measurement of Capital Charge for Interest Rate Risk
6.7.3.1 This section describes the framework for measuring the risk of holding or taking
positions in debt securities and other interest rate related instruments denominated in Sri Lanka Rupees as well as foreign currencies in the trading book.
6.7.3.2 The capital charge for interest rate related instruments would apply to the current market
value of these items in the bank’s trading book. Since banks are required to maintain capital for market risk on an ongoing basis, they are required to mark-to-market their trading positions on a daily basis. The current market value will be determined according to the Direction on Prudential Norms for Classification, Valuation and Operation of the bank’s investment portfolio issued by CBSL.
6.7.3.3 The minimum capital requirement is expressed in terms of two separately calculated
charges, “specific risk” charge for each security, which is akin to the conventional capital charge for credit risk, both for short and long positions, and “general market risk” charge for interest rate risk in the portfolio, where long and short positions in different securities or instruments can be offset.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 43
6.7.3.3.1 Specific Risk
(i) The capital charge for specific risk is designed to protect against an adverse movement in the price of an individual security owing to factors related to the individual issuer. (ii) The risk charges to be used in the Computation of specific risk will be as follows:
(iii) Specific risk charge for government securities and central banks:
(a) Government securities issued by the GOSL and securities issued by the CBSL will be subject to a risk charge of 0 per cent. (b) Securities issued by a foreign government or by a foreign central bank will be subject to a risk charge based on the credit rating as indicated in the following table:
Table 15
Specific Risk Charge for Securities Issued by Foreign Governments/Central Banks Sovereign Rate Capital Charge for Specific Risk AAA to AA- 0% A+ to BBB- 0.25% (residual term to final maturity 6 months or less) 1% (residual term to final maturity greater than 6 and up to and including 24 months) 1.60% (residual term to final maturity exceeding 24 months) All others 10.00% (iv) The ‘Qualifying’ category for Corporate entities:
(a) Corporate entities (Local) will be given a risk charge for specific market risk based on their ratings as indicated in the table below:
Table 16
Specific Risk Charge for Corporates
Sovereign Rate Capital Charge for Specific Risk AAA to AA- 0.25% A+ to BBB- 1.00% (residual term to final maturity 6 months or less) 1.60% (residual term to final maturity greater than 6 and up to and including 24 months) 10.00% (residual term to final maturity exceeding 24 months) All others 10.00% (b) The specific risk charge for foreign corporates would be one notch less favourable than the risk charge applied to the local corporates.

44 Directions, Determinations, and Circulars issued to Licensed Specialised Banks (v) ‘Public sector entities’ should be treated like corporate entities unless they are backed by an explicit Treasury guarantee, which warrants a risk charge of 0 per cent. (vi) The ‘Other’ category:
A capital charge of 10 per cent will apply to all other types of exposures. (vii) Banks may rely upon the ratings assigned by the ECAIs recognised by CBSL (See paragraph 6.4.2) for the purpose of ratings referred in the
table 15 and 16 above.
6.7.3.3.2 General Market Risk
The capital requirements for general market risk are designed to capture the risk of loss arising from changes in market interest rates. The capital charge is the sum of four components:
(i) the net short or long position in the whole trading book; (ii) a smaller proportion of the matched positions in each time-band (the “vertical disallowance”); (iii) a larger proportion of the matched positions across different timebands (the “horizontal disallowance”), and (iv) a net charge for positions in options, where appropriate. Note – Components (ii), (iii) and (iv) will not apply at present.
6.7.3.4 It has been decided to allow banks to initially adopt the Standardised Measurement
Method, as Sri Lankan banks are still at a nascent stage of developing internal risk management models. There are two principal methods of measuring market risk under the Standardised Measurement Method, i.e., a ‘maturity’ method and a ‘duration’ method. It has been decided to adopt the ‘duration’ method to arrive at the capital charge. Accordingly, banks are required to measure the general market risk charge by calculating the price sensitivity of each instrument in the trading book separately and adding the resulting price sensitivities based on a maturity ladder, subject to disallowances if any.
6.7.3.5 The steps for the computation are as follows:
6.7.3.5.1 Calculate the price sensitivity of each instrument in terms of a change in
interest rates between 1.2 and 2.0 percentage points, depending on the maturity of the instrument (see Table 17);
6.7.3.5.2 slot the resulting price sensitivities into a duration based maturity ladder with
the fifteen time bands as set out in Table 17;
6.7.3.5.3 subject long and short positions in each time band to a 5 per cent vertical
disallowance designed to capture basis risk; and
6.7.3.5.4 carry forward the net positions in each time-band for horizontal offsetting
subject to the disallowances set out in Table 18.
Note – Steps (6.7.3.5.2) to (6.7.3.5.4) are not required at present since components ii, iii and iv under paragraph 6.7.3.3.2 above are currently not applicable.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 45
Table 17
Duration Method – Time Bands and Assumed Changes in Yield Time Bands Assumed Change in Yield Maturity Zone 1 1 month or less 2.00 Over 1 month to 3 months 2.00 Over 3 months to 6 months 2.00 Over 6 months to 12 months 2.00 Maturity Zone 2 Over 1.0 year to 1.9 years 1.80 Over 1.9 years to 2.8 years 1.60 Over 2.8 years to 3.6 years 1.50 Maturity Zone 3 Over 3.6 years to 4.3 years 1.50 Over 4.3 years to 5.7 years 1.40 Over 5.7 years to 7.3 years 1.30 Over 7.3 years to 9.3 years 1.20 Over 9.3 years to 10.6 years 1.20 Over 10.6 years to 12 years 1.20 Over 12 years to 20 years 1.20 Over 20 years 1.20
Table 18
Horizontal Disallowances
Maturity Zones Time Band Within the zones
Between adjacent zones
Between zones
1 and 3
Maturity Zone 1
1 month or less
40%
40%
100% over 1 month to 3 months over 3 months to 6 months over 6 months to 12 months Maturity Zone 2 Over 1.0 year to 1.9 years Over 1.9 years to 2.8 years 30% Over 2.8 years to 3.6 years Maturity Zone 3 Over 3.6 years to 4.3 years 30% 40% Over 4.3 years to 5.7 years Over 5.7 years to 7.3 years Over 7.3 years to 9.3 years Over 9.3 years to 10.6 years Over 10.6 years to 12 years Over 12 years to 20 years Over 20 years

46 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
6.7.4 Measurement of Capital Charge for Equities
6.7.4.1 The minimum capital requirement to cover the risk of holding or taking positions in
equities in the trading book is set out below. It applies to all instruments that exhibit market behaviour similar to equities. The instruments covered include equity shares (voting and non-voting), convertible securities that behave like equities (e.g.: units of unit trusts) and commitments to buy or sell equity securities (e.g.: warrants, right issues and bonus issues).
6.7.4.2 Specific and General Market Risk
6.7.4.2.1 Specific Equity Risk
Specific risk is defined as the bank’s gross equity positions (i.e., the sum of all long equity positions and of all short equity positions). The capital charge for specific risk for equities on the Milanka Price Index will be 5 per cent, while all other equities will have a specific risk charge of 10 per cent.
6.7.4.2.2 General Equity Risk
General market risk is defined as the overall net position in an equity market (i.e., the difference between the sum of the longs and the sum of the shorts). The general market risk charge will be 10 per cent.
6.7.5 Measurement of the Capital Charge for Foreign Exchange and Gold Open Positions
6.7.5.1 This section sets out the minimum capital requirement to cover the risk of holding
or taking positions in foreign currencies, including gold. Gold is treated as a foreign exchange position rather than a commodity because its volatility is more in line with foreign currencies, and banks manage it in a similar manner.
6.7.5.2 The Off-balance sheet position, including forward contracts, will be included in
computation of the capital charge for foreign exchange risks.
6.7.5.3 Computing the capital requirement for foreign exchange risk consists of two processes.
6.7.5.3.1 Measuring the Exposure in a Single Currency Position
The bank’s net open position in each currency should be calculated by summing the net position of all on balance sheet and off-balance sheet position, including forward contracts denominated in that particular currency.
6.7.5.3.2 Measuring the Risks Inherent in a Bank’s Mix of Long and Short
Positions in Different Currencies
Banks are required to adopt the shorthand method of computation. Under the shorthand method, the nominal amount of the net position in each foreign currency and in gold is converted at spot rates into the reporting currency (i.e., LKR). The overall net open position is measured by aggregating:
(i) the sum of the net short positions or the sum of the net long positions, whichever is the greater, plus (ii) the net position (short or long) in gold, regardless of sign.
6.7.5.4 The capital charge will be 10 per cent of the overall net open position of foreign currency
and gold.
Table 19
Example of the Shorthand Measure of Foreign Exchange Risk YEN EURO GB INR US$ GOLD +50 +100 +150 -20 -180 -35 +300 -200 -35

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 47 In the above example, the capital charge would be 10 per cent of the higher of either the net long currency positions or the net short currency positions (i.e., 300) and of the net position in gold (35) = 335 x 10% = 33.5.
6.7.6 Aggregation of the Capital Charge for Market Risks
The capital charges for specific risk and general market risk are to be computed separately before aggregation.
6.7.7 Capital Charge for Interest Rate Derivatives
The capital charge for interest rate derivatives will be excluded from the capital charge for market risks at present and will be introduced shortly.
6.7.8 Specific Instruction for completion of Part IV return
(Computation of Risk-weighted amount for Market Risk)
6.7.8.1 Total Capital Charge for Market Risk
(WBRC 11.4.1.0.0.0)
The total amount of capital charge for interest rate risk (6.7.8.1.1), capital charge for equity risk (6.7.8.1.2) and capital charge for foreign exchange risk (6.7.8.1.3). The amount is automatically shown on web-based return. (WBRC 11.4.1.1.0.0 + 11.4.1.2.0.0 + 11.4.1.3.0.0)
6.7.8.1.1 Capital Charge for Interest Rate Risk
(WBRC 11.4.1.1.0.0)
The total amount of capital charge for general interest rate risk and capital charge for specific interest rate risk. The amount is automatically shown on web-based return. (WBRC 11.4.1.1.1.0 + 11.4.1.1.2.0) (i) General Interest Rate Risk (WBRC 11.4.1.1.1.0) Capital charge for general interest rate risk should be calculated in line with the specific instruction given in the paragraph 6.7.3.3.2 (ii) Specific Interest Rate Risk (WBRC 11.4.1.1.2.0) Capital charge for specific interest rate risk should be calculated in line with the specific instruction given in the paragraph 6.7.3.3.1
6.7.8.1.2 Capital Charge for Equity Risk
(WBRC 11.4.1.2.0.0)
The total amount of capital charge for general equity risk and capital charge for specific equity risk. The amount is automatically shown on web-based return. (WBRC 11.4.1.2.1.0 + 11.4.1.2.2.0) (i) General Equity Risk (WBRC 11.4.1.2.1.0) Capital charge for general equity risk should be calculated in line with the specific instruction given in the paragraph 6.7.4.2.2. (ii) Specific Equity Risk (WBRC 11.4.1.2.2.0) Capital charge for specific equity risk should be calculated in line with the specific instruction given in the paragraph 6.7.4.2.1.

48 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
6.7.8.1.3 Capital Charge for Foreign Exchange & Gold
(WBRC 11.4.1.3.0.0)
Capital charge for Foreign exchange & gold should be calculated in line with the specific instruction given in the paragraph 6.7.5.
6.7.8.2 Total Risk-weighted Amount for Market Risk
(WBRC 11.4.2.0.0.0)
The total amount of risk-weighted amount for market risk should be ten times the capital charge for market risk (6.7.8.110). The amount is automatically shown on web-based return. (WBRC 11.4.1.0.0.010)
6.8 Part V – Computation of Risk-weighted Amount for Operational Risk.
6.8.1 Capital Charge for Operational Risk
6.8.1.1 Definition of Operational Risk: Operational risk is defined as the risk of loss resulting
from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputational risk. Legal risk includes, but is not limited to, exposure to fines, penalties, or punitive damages resulting from supervisory actions, as well as private settlements.
6.8.1.2 The Basic Indicator Approach (BIA): To begin with, banks shall compute the capital
requirements for operational risk under the BIA. Under the BIA, banks must hold capital for operational risk equal to the average over the previous three years of a fixed percentage (denoted α) of positive annual gross income. Figures for any year in which annual gross income is negative or zero should be excluded from both the numerator and denominator when calculating the average.
6.8.1.3 The charge may be expressed as follows:
KBIA = [ ∑ (GI 1…n x α.
) ] / n
Where;
KBIA = the capital charge under the Basic Indicator Approach GI = annual gross income, where positive, over the previous three audited financial years n = number of the previous three financial years for which gross income is positive α = 15%, which is set by the BCBS.
6.8.1.4 Gross income is defined as “net interest income” plus “net non-interest income”. It is
intended that this measure should:
6.8.1.4.1 be gross of any provisions (e.g.: for unpaid interest),
6.8.1.4.2 be gross of operating expenses, including fees paid to outsourcing service
providers, in contrast to fees paid for services that are outsourced, fees received by banks that provide outsourcing services shall be included in the definition of gross income,
6.8.1.4.3 exclude realized profits/losses from the sale of securities in the banking book,
and
6.8.1.4.4 exclude extraordinary or irregular items.
6.8.1.5 Banks are advised to compute the capital charge for operational risk under the BIA as
follows:
6.8.1.5.1 Average of [ Gross Income x α ] for each of the last three financial years,
excluding years of negative or zero gross income

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 49
6.8.1.5.2 Gross income = Net interest income + non-interest income – items (6.8.1.4.3)
and (6.8.1.4.4) of above.
6.8.1.5.3 α = 15%
6.8.2 Specific Instruction for completion of Part V
(Computation of Risk-weighted amount for Operational Risk)
6.8.2.1 Gross Income
(WBRC 11.5.1.0.0.0)
The total gross income should be total net income (6.8.2.1.1) less total exclude items as specified in the paragraph 6.8.1.4.3 and 6.8.1.4.4. The amount is automatically shown on web-based return. (WBRC 11.5.1.1.0.0 - 11.5.1.2.0.0)
6.8.2.1.1 Net Income
(WBRC 11.5.1.1.0.0)
The total net income should be sum of total net interest income and total noninterest income. The amount is automatically shown on web-based return. (WBRC 11.5.1.1.1.0 + 11.5.1.1.2.0) (i) Net Interest Income (WBRC 11.5.1.1.1.0) The total net interest income should be the total interest income less total non-interest expenses as reported in the annual audited profit and loss statement. (ii) Non-Interest Income (WBRC 11.5.1.1.2.0) The total non-interest income should be the total income other than the interest income.
6.8.2.1.2 Less Amount
(WBRC 11.5.1.2.0.0)
The total aggregate amount of following items, as specified in the paragraph
6.8.1.4.3 and 6.8.1.4.4, which banks are required to deduct from total net
income.
6.8.2.2 Total Capital Charge for Operational Risk
(WBRC 11.5.2.0.0.0)
The total capital charge for operational risk should be 15 per cent of gross income (6.8.2.1.) above. The amount is automatically shown on web-based return. (WBRC 11.5.1.0.0.015%)
6.8.2.3 Total Risk-weighted Amount for Operational Risk
(WBRC 11.5.3.0.0.0)
The total amount of risk-weighted amount for operational risk should be ten times the capital charge for operational risk (6.8.2.210). The amount is automatically shown on web-based return. (WBRC 11.5.2.0.0.0*10)

50 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Schedule II
CAPITAL ADEQUACY RATIO OF
LICENSED COMMERCIAL / SPECIALISED BANKS
BANK ONLY (SOLO Basis) / CONSOLIDATED RETURN

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 51
Part I – Computation of Capital Adequacy Ratio (Rs. ’000)
Web-based
Return Code Item Amount
11.1.1.0.0.0 Eligible Core Capital (Eligible Tier I) = 11.2.1.1.0.0 of Part II (a)
11.1.2.0.0.0 Capital Base = 11.2.1.5.0.0 of Part II (a)
11.1.3.0.0.0 Total Risk-weighted Amount
11.1.3.1.0.0 Risk-Weighted Amount for Credit Risk = 11.3.1.0.0.0 of Part III (a)
11.1.3.2.0.0 Risk-Weighted Amount for Market Risk = 11.4.2.0.0.0 of Part IV
11.1.3.3.0.0 Risk-Weighted Amount for Operational Risk = 11.5.3.0.0.0 of Part V
11.1.4.0.0.0 Core Capital (Tier 1) Ratio, % = (11.1.1.0.0.0/11.1.3.0.0.0)*100
11.1.5.0.0.0 Total Capital Ratio, % = (11.1.2.0.0.0/11.1.3.0.0.0)*100
Part II (a) – Computation of Total Capital Base (Rs. ’000)
Web-based
Return Code Item Amount
11.2.1.1.0.0 Eligible Core Capital (Eligible Tier I)
11.2.1.1.1.0 Core Capital (Tier 1)
11.2.1.1.1.1 Paid-up Ordinary Shares/ Assigned Capital
11.2.1.1.1.2 Non-cumulative, Non-redeemable Preference Shares
11.2.1.1.1.3 Share Premium
11.2.1.1.1.4 Statutory Reserve Fund
11.2.1.1.1.5 Published Retained Profits/(Accumulated Losses) (+/-)
11.2.1.1.1.6 General and Other Reserves
11.2.1.1.1.7 Gain/(Loss) After Tax arising from the Sale of Fixed and Long-term
Investments
11.2.1.1.1.8 Unpublished Current Year’s Profit/(Loss) (+/-)
11.2.1.1.1.9 Minority Interests (consistent with the above capital constituents)
11.2.1.1.1.10 Perpetual Debt Capital Instruments
11.2.1.1.2.0 Deductions/ Adjustments-Tier 1
11.2.1.1.2.1 Goodwill
11.2.1.1.2.2 Net Deferred Tax
11.2.1.1.2.3 Other Intangible Assets
11.2.1.1.2.4 Advances granted to employees of the bank for the purchase of
shares of the bank under a share ownership plan.
11.2.1.1.2.5 Amount due from head office & branches outside Sri Lanka in Sri
Lanka Rupees
(applicable only to branches of foreign banks)
11.2.1.1.2.6 Amount due to head office & branches outside Sri Lanka in Sri Lanka
Rupees (-)
(applicable only to branches of foreign banks)

52 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Web-based Return Code Item Amount
11.2.1.1.2.7 Amount due from head office & branches outside Sri Lanka in
Foreign Currency (net)
(applicable only to branches of foreign banks)
11.2.1.1.2.8 50% of Investments in Unconsolidated Banking and Financial
Subsidiary Companies
11.2.1.1.2.9 50% of Investments in the Capital of Other Banks and Financial
Institutions
11.2.1.2.1.0 Supplementary Capital (Tier II)
11.2.1.2.1.1 Revaluation Reserves (approved by CBSL)
11.2.1.2.1.2 General Provisions
11.2.1.2.1.3 Hybrid Capital Instruments (Debt/Equity)
11.2.1.2.1.4 Minority Interests arising from Preference Shares
11.2.1.2.1.5 Approved Subordinated Term Debt
0.0.0.0.0.0 Actual Amount of Approved Subordinated Term Debts
11.2.1.2.2.0 Deductions -Tier 1I
11.2.1.2.2.1 50% of Investments in Unconsolidated Banking and Financial
Subsidiary Companies
11.2.1.2.2.2 50% of Investments in the Capital of Other Banks and Financial
Institutions
11.2.1.2.0.0 Total Supplementary Capital
(Tier II) = (Item 11.2.1.2.1.0 - 11.2.1.2.2.0)
11.2.1.3.0.0 Eligible Supplementary Capital (Eligible Tier II)
11.2.1.4.0.0 Short Term Subordinated Debt (Tier III Capital)
11.2.1.4.1.0 Approved Short Term Subordinated Debt
11.2.1.4.2.0 Eligible Tier III Capital-Utilised = (item 11.2.2.6.1.0)
11.2.1.5.0.0 Capital Base
Part I1 (b) – Computation of Eligible Tier III Capital for Market Risk (Rs. ’000)
Web-based
Return Code Item Amount
11.2.2.1.0.0 Total Risk Weighted Assets (RWA)
11.2.2.1.1.0 Total Risk Weighted Assets for Credit and Operational Risks
11.2.2.1.2.0 Total Risk Weighted Assets for Market Risk
11.2.2.2.0.0 Minimum Capital Charge
11.2.2.2.1.0 Capital Charge for Credit and Operational Risk
11.2.2.2.2.0 Capital Charge for Market Risk
11.2.2.3.0.0 Total Capital Available to Meet the Capital Charge for Credit
and Operational Risks
11.2.2.4.0.0 Total Capital Base Available to meet Market Risk
11.2.2.5.0.0 Total Available Tier III Capital
11.2.2.5.1.0 Approved Short-term Subordinated Debt

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 53 Web-based Return Code Item Amount
11.2.2.5.2.0 Minimum of 28.5% of Capital Charge for Market Risk to be met
by Tier 1 Capital that is not Required for Credit Risk
11.2.2.5.2.1 (a) Limit
11.2.2.5.2.2 (b) Amount Utilised
11.2.2.5.3.0 Maximum of 250% of Tier 1 Capital that is not Required for
Credit and Operational Risks
11.2.2.5.3.1 (a) Limit
11.2.2.5.3.2 (b) Amount Utilised
11.2.2.6.0.0 Eligible Tier III Capital
11.2.2.6.1.0 Eligible Tier III Capital Utilised
11.2.2.6.2.0 Eligible but Unutilized Tier III Capital
Part III (a) – Computation of Risk-weighted Amount for Credit Risk
(Rs. ’000)
Web-based
Return
Code
Item Amount
Credit
Equivalent of
Off-balance
Sheet Items
Total
Risk
Weight
%
Risk
Weighted
Assets
Amount
11.3.1.0.0.0 Total Risk-weighted Amount
for Credit Risk
11.3.1.1.0.0 Claims on Government of Sri
Lanka and Central Bank of Sri
Lanka
11.3.1.1.1.0 Government of Sri Lanka
11.3.1.1.2.0 Central Bank of Sri Lanka
11.3.1.2.0.0 Claims on Foreign Sovereigns
and their Central Banks
11.3.1.2.1.0 AAA to AA- 0
11.3.1.2.2.0 A+ to A- 20
11.3.1.2.3.0 BBB+ to BBB- 50
11.3.1.2.4.0 BB+ to B- 100
11.3.1.2.5.0 Below B- 150
11.3.1.2.6.0 Unrated 100
11.3.1.3.0.0 Claims on Public Sector
Entities PSEs)
11.3.1.3.1.0 AAA to AA- 20
11.3.1.3.2.0 A+ to A- 50
11.3.1.3.3.0 BBB+ to BB- 100
11.3.1.3.4.0 Below BB- 150
11.3.1.3.5.0 Unrated 100

54 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Web-based Return Code Item Amount Credit Equivalent of Off-balance Sheet Items Total Risk Weight % Risk Weighted Assets Amount
11.3.1.4.0.0 Claims on Official Entities
and Multilateral Development
Banks (MDBs)
11.3.1.4.1.0 BIS,IMF, ECB, EC and Eligible
MDBs
0
11.3.1.4.2.0 AAA to AA- 20
11.3.1.4.3.0 A+ to BBB- 50
11.3.1.4.4.0 BB+ to B- 100
11.3.1.4.5.0 Below B- 150
11.3.1.4.6.0 Unrated 100
11.3.1.5.0.0 Claims on Banks
11.3.1.5.1.0 Rupee Exposures less than 3
months
11.3.1.5.1.1 AAA to BBB- 20
11.3.1.5.1.2 BB+ to B- 50
11.3.1.5.1.3 Below B- 150
11.3.1.5.1.4 Unrated 100
11.3.1.5.2.0 Foreign Currency Exposures
less than 3 months
11.3.1.5.2.1 AAA to A- 20
11.3.1.5.2.2 BBB+ to BBB- 50
11.3.1.5.2.3 BB+ to B- 100
11.3.1.5.2.4 Below B- 150
11.3.1.5.2.5 Unrated 100
11.3.1.5.3.0 Rupee and Foreign Currency
Exposures more than 3 months
11.3.1.5.3.1 AAA to AA- 20
11.3.1.5.3.2 A+ to BBB- 50
11.3.1.5.3.3 BB+ to B- 100
11.3.1.5.3.4 Below B- 150
11.3.1.5.3.5 Unrated 100
11.3.1.6.0.0 Claims on Financial
Institutions
11.3.1.6.1.0 Claims on Primary Dealers/
Finance Companies/Specialised
Leasing Companies
11.3.1.6.1.1 AAA to AA- 20
11.3.1.6.1.2 A+ to BBB- 50
11.3.1.6.1.3 BB+ to B- 100

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 55 Web-based Return Code Item Amount Credit Equivalent of Off-balance Sheet Items Total Risk Weight % Risk Weighted Assets Amount
11.3.1.6.1.4 Below B- 150
11.3.1.6.1.5 Unrated 100
11.3.1.6.2.0 Claims on Other Financial
Institutions
11.3.1.6.2.1 AAA to AA- 20
11.3.1.6.2.2 A+ to A- 50
11.3.1.6.2.3 BBB+ to BB- 100
11.3.1.6.2.4 Below BB- 150
11.3.1.6.2.5 Unrated 100
11.3.1.7.0.0 Claims on Corporates
11.3.1.7.1.0 AAA to AA- 20
11.3.1.7.2.0 A+ to A- 50
11.3.1.7.3.0 BBB+ to BB- 100
11.3.1.7.4.0 Below BB- 150
11.3.1.7.5.0 Unrated 100
11.3.1.8.0.0 Retail Claims
11.3.1.8.1.0 Retail claims that qualify for
regulatory capital purposes
75
11.3.1.8.2.0 Retail claims that not qualify for
regulatory capital purposes
100
11.3.1.9.0.0 Claims Secured by Residential
Property
11.3.1.9.1.0 Claims that qualify for
regulatory capital purposes
50
11.3.1.9.2.0 Claims that not qualify for
regulatory capital purposes
100
11.3.1.10.0.0 Claims Secured by Commercial
Real Estate
100
11.3.1.11.0.0 Non-Performing Assets (NPAs)
11.3.1.11.1.0 Specific provisions are equal or
more than 20%
100
11.3.1.11.2.0 Specific provisions are less than
20%
150
11.3.1.12.0.0 Non-Performing Assets
Secured by Residential
Property
11.3.1.12.1.0 Specific provisions are equal or
more than 20%
50
11.3.1.12.2.0 Specific provisions are less than
20%
100

56 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Web-based Return Code Item Amount Credit Equivalent of Off-balance Sheet Items Total Risk Weight % Risk Weighted Assets Amount
11.3.1.13.0.0 Higher-Risk Categories 150
11.3.1.14.0.0 Cash Items and Other Assets
11.3.1.14.1.0 Cash Items
11.3.1.14.1.1 Notes and Coins
11.3.1.14.1.2 Gold Bullion held in own vault
11.3.1.14.1.3 Cash Items in the Process of
Collection
20
11.3.1.14.2.0 Other Assets
11.3.1.14.2.1 Fixed Assets 100
11.3.1.14.2.2 Other Assets/Exposures 100
Part III (b) – Credit equivalent of Off-Balance Sheet Items
(Rs.’000)
Web-based
Return Code Description
Principal amount of
Off-Balance
Sheet Items
Credit
Conversion
Factor
(%)
Credit equivalent of
Off-Balance
Sheet Items
11.3.2.0.0.0 Off-balance Sheet Items
11.3.2.1.0.0 Direct Credit Substitutes
11.3.2.1.1.0 General Guarantees of Indebtedness 100
11.3.2.1.2.0 Stand-by LCs serving as Financial
Guarantees
100
11.3.2.1.3.0 Bank Acceptances 100
11.3.2.1.4.0 Others (please specify) 100
11.3.2.2.0.0 Transaction-related Contingencies
11.3.2.2.1.0 Performance Bonds, Bid Bonds &
Warranties
50
11.3.2.2.2.0 Stand-by LCs related to particular
Transactions
50
11.3.2.2.3.0 Others (please specify) 50
11.3.2.3.0.0 Short-Term Self-Liquidating TradeRelated Contingencies
11.3.2.3.1.0 Shipping Guarantees 20
11.3.2.3.2.0 Documentary Letters of Credit 20
11.3.2.3.3.0 Trade related Acceptances 20
11.3.2.3.4.0 Others (please specify) 20

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 57 Web-based Return Code Description Principal amount of Off-Balance Sheet Items Credit Conversion Factor (%) Credit equivalent of Off-Balance Sheet Items
11.3.2.4.0.0 Sale and Repurchase Agreements and
Assets Sale with Recourse where the
Credit Risk remains with the Bank
11.3.2.4.1.0 Sale and Repurchase Agreements 100
11.3.2.4.2.0 Housing Loans sold with Recourse 100
11.3.2.4.3.0 Other Assets sold with Recourse 100
11.3.2.4.4.0 Forward Assets Purchase 100
11.3.2.4.5.0 Partly paid Shares/Securities 100
11.3.2.4.6.0 Others (please specify) 100
11.3.2.5.0.0 Obligations under an On-going
Underwriting Agreement
11.3.2.5.1.0 Underwriting of Shares/Securities Issue 50
11.3.2.5.2.0 Note Issuance Facilities and Revolving
Underwriting Facilities
50
11.3.2.5.3.0 Others (please specify) 50
11.3.2.6.0.0 Commitments with an Original
Maturity of up to one year or which can be unconditionally cancelled at any time
11.3.2.6.1.0 Formal Stand-by Facilities and Credit
Lines
0
11.3.2.6.2.0 Undrawn Term Loans 0
11.3.2.6.3.0 Undrawn Overdraft Facilities/Unused
Credit Card Lines
0
11.3.2.6.4.0 Others (please specify) 0
11.3.2.7.0.0 Other Commitments with an Original
Maturity up to 1 year
11.3.2.7.1.0 Formal Stand-by Facilities and Credit
Lines
20
11.3.2.7.2.0 Undrawn Term Loans 20
11.3.2.7.3.0 Others (please specify) 20
11.3.2.8.0.0 Other Commitments with an Original
Maturity of over one year
11.3.2.8.1.0 Formal Stand-by Facilities and Credit
Lines
50
11.3.2.8.2.0 Undrawn Term Loans 50
11.3.2.8.3.0 Others (please specify) 50

58 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Web-based Return Code Description Principal amount of Off-Balance Sheet Items Credit Conversion Factor (%) Credit equivalent of Off-Balance Sheet Items
11.3.2.9.0.0 Exchange Rate Contracts
11.3.2.9.1.0 Original Maturity-less than one year 2
11.3.2.9.2.0 Original Maturity-more than one year
and less than two years
5
11.3.2.9.3.0 Original Maturity-more than two years
(For each additional year)
3
(for each year)
11.3.2.10.0.0 Interest Rate Contracts
11.3.2.10.1.0 Original Maturity-less than one year 0.5
11.3.2.10.2.0 Original Maturity-more than one year
and less than two years
1
11.3.2.10.3.0 Original Maturity-more than two years
(For each additional year)
1
(for each year)
Part III (c) – Exposures Recognised under Credit Risk Mitigation (CRM)
(Rs. ’000)
Web-based
Return Code CRM techniques Principal
Amount
11.3.3.0.0.0 Total CRM Exposure
11.3.3.1.0.0 Collateralised Transactions
11.3.3.1.1.0 Retail Exposure
11.3.3.1.1.1 Cash
11.3.3.1.1.2 Gold
11.3.3.1.1.3 Government Securities
11.3.3.1.1.4 Provident Fund Balances
11.3.3.1.1.5 Debt Securities Rated by a recognised ECAIs
11.3.3.1.1.6 Debt Securities not Rated by a recognised ECAIs
11.3.3.1.1.7 Equities that are included in a Main Index.
11.3.3.1.2.0 Other Exposures
11.3.3.1.2.1 Cash
11.3.3.1.2.2 Gold
11.3.3.1.2.4 Provident Fund Balances
11.3.3.1.2.3 Government Securities
11.3.3.1.2.5 Debt Securities Rated by a recognised ECAIs
11.3.3.1.2.6 Debt Securities not Rated by a recognised ECAIs
11.3.3.1.2.7 Equities that are included in a Main Index.
11.3.3.2.0.0 Other CRM Techniques
11.3.3.2.1.0 On-balance Sheet Netting
11.3.3.2.2.0 Guarantees

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 59
Part IV – Computation of Risk-weighted Amount for Market Risk
(Rs. ’000)
Web-based
Return Code Item Capital Charge
Amount
11.4.1.0.0.0 Total Capital Charge for Market Risk
= (11.4.1.1.0.0+11.4.1.2.0.0+11.4.1.3.0.0)
11.4.1.1.0.0 Capital Charge for Interest Rate
= (11.4.1.1.1.0+11.4.1.1.2.0)
11.4.1.1.1.0 General Interest Rate Risk
11.4.1.1.1.1 i) Net Long or Short Position
11.4.1.1.1.2 ii) Horizontal Disallowance
11.4.1.1.1.3 iii) Vertical Disallowance
11.4.1.1.1.4 iv) Options
11.4.1.1.2.0 Specific Interest Rate Risk
11.4.1.2.0.0 Capital Charge for Equity = (11.4.1.2.1.0+11.4.1.2.2.0)
11.4.1.2.1.0 General Equity Risk
11.4.1.2.2.0 Specific Equity Risk
11.4.1.3.0.0 Capital Charge for Foreign Exchange & Gold
11.4.2.0.0.0 Total Risk-weighted Amount for Market Risk
= (11.4.1.0.0.010)
Part V – Computation of Risk-weighted Amount for Operational Risk
(Rs. ’000)
Web-based
Return Code Item First
Year
Second
Year
Third
Year Total Average
11.5.1.0.0.0 Gross Income
11.5.1.1.0.0 Net Income
11.5.1.1.1.0 Net Interest Income (Interest
Income-Interest Expenses)
11.5.1.1.2.0 Non-interest Income
11.5.1.2.0.0 Less
11.5.1.2.1.0 Realised Profits from the Sale of
Securities in the Banking Book
11.5.1.2.2.0 Extraordinary / Irregular Items of
Income
11.5.2.0.0.0 Total Capital Charge for
Operational Risk
= (11.5.1.0.0.015%)
11.5.3.0.0.0 Total Risk-weighted Amount for
Operational Risk
= (11.5.2.0.0.0*10)

60 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Annex I
IMPLEMENTATION OF IT INFRASTRUCTURE FOR BASEL II

Implementation of IT Architecture and Design Principles for Basel II
Important requirements for this architecture are as follows;

Create a robust, scalable & network friendly Basel II technology framework, which can
support a regional user and is extendable to new regulatory compliance requirements as the Bank increases its presence in the emerging markets.
Rationalise the technologies by choosing common platforms for common requirement across
all Pillars and common business domain across all Pillars. This will reduce total cost of ownership, maintenance overheads and will facilitate change management for the bank.
Adopt a robust and centralised data collection and consolidation approach for Basel II through
the Banking Data Warehouse (BDW) for risk analytics and Consolidated reporting
Reduce manual data capture methods for Basel II.
Design for Basel II applications should cater for high availability, proper exception handling
and proper backup/recovery to ensure that potential risk due to data loss during unforeseen circumstances is negligible.
All new core banking applications and credit related applications in all geographical regions
must be Basel II compliant.
All Basel II applications must adhere to the bank’s policies for infrastructure security, data
security, application controls and user administration.
All Basel II applications should demonstrate disaster recovery as a capability.

Requirements for a Regulatory Capital IT Solution
The following eight elements are the system level requirements that a financial services institution must meet to comply with the Basel II Accord.
2.1 Storage of Current and Historical Data in a Data Warehouse
Basel II calls for financial institutions to store a substantial quantity of data. To produce a measure of Risk Weighted Assets, the Bank for International Settlement (BIS) requires financial institutions to store a comprehensive database of operational loss incidents, financial instruments, credit losses, and general ledger data. For financial institutions that seek to calculate Pillar I capital using the Advanced IRB approach for retail or wholesale assets, seven years of default data are required to validate internal ratings models. Beyond historical data storage requirements, a Basel II compliant IT solution must also provide the ability to store and process multiple versions of data. For example, in the area of stress testing, financial institutions are required to test the assumptions of their models in a variety of economic scenarios. Given these requirements, scalable and efficient storage of current, historical, and alternative scenario data is critical.
2.2 Auditable and Flexible Risk Weighted Asset Calculations
The Basel II Capital Accord defines a large number of rules for calculating Risk Weighted Assets and minimum required capital for credit, market and operational risks. However, beyond simply performing calculations, the BIS also requires that financial institutions have the ability to easily adjust these calculations, and the categorisations on which they depend. The Accord also implicitly requires that a financial services institution be able to switch between the various Pillar I methodologies. Therefore, a regulatory capital IT solution

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 61 should not only provide all of the required calculations within the Accord, but should also allow auditors, regulators, and internal users to audit, review and revise these calculations as necessary. There are also certain areas where the Accord gives financial institutions the flexibility to optimise capital calculations such as in the case of collateral application.
2.3 Control Management with automatic workflows
The Basel II framework requires financial institutions to demonstrate that they have the appropriate procedures and controls in place to manage their risks. Therefore, a regulatory capital IT system should allow financial institutions to map controls against their risks. In such a framework, financial institutions can define automatic workflows where the system prompts employees to act based on certain defined key performance indicators (KPIs) or user-defined business events. Finally, the system should also allow financial institutions to audit and monitor their controls and procedures in order to periodically assess their risk management practices based on actual loss experience.
2.4 Sophisticated Analytical Tools
Financial institutions can implement sophisticated models to assess their risk position and optimise usage of capital. The BIS allows qualifying financial institutions to implement internal models for Probability of Default (PD), Loss Given Default (LGD), and Exposure at Default (EAD). Therefore, a regulatory capital IT solution must allow a financial institution to implement and test any model that can properly assess its risk position. These external applications would also have the ability to write information back to a central data source.
2.5 Flexible User Driven methods
The Basel II Accord defines a vast range of calculations and options. Examples of these options include whether to use the Simple or Comprehensive approach for credit risk mitigation, to use supervisory or own-estimate haircuts, and to determine the risk weighted assets based on a top-down approach. Given the range of possibilities, users must have the flexibility to easily change the methods they use to calculate risk-weighted assets and assess the potential impact of those changes. Users should also have the flexibility to specify which specific calculation components are processed in a given job submission. For example, the system should not force the user to reprocess every single statistic if all they seek to do is recalculate a subset of the organisation’s assets. Additionally, the user should have the option to generate detailed auditing output, either for a sampling of accounts or an individual transaction at their discretion.
2.6 Coordinated Process Flow
The Basel II calculations requires data that would generally originate from different processing systems, including those used to support front office, back office and risk management operations. Further, the Accord requires synchronisation of this data to perform calculations on a consistent and integrated basis. Once calculations are completed, the system may need to further process the output data through a variety of third party applications for further analysis or reporting. Given these complex data workflow requirements, a regulatory capital solution needs to consolidate each of these process flow issues without any error.
2.7 Timely reporting that meets Internal and External Requirements
Systems and data are irrelevant if they do not provide information in a timely manner. Under the Basel II regime, financial institutions need to meet highly specific and demanding external and regulatory reporting requirements. Simultaneously, internal management requires a continuous stream of information to better understand their organization’s

62 Directions, Determinations, and Circulars issued to Licensed Specialised Banks risk profile. Therefore, it is essential that a regulatory capital solution provide a sound management reporting platform. A Basel II compliant IT solution must be able to regularly and accurately produce the necessary internal and external reports for sound risk and profitability management.
2.8 Low Cost and Low Risk
Financial services management and information systems professionals do not have the time or the budget to deal with high priced or unreliable solutions. For this reason, any regulatory capital solution must maintain a low total cost of ownership and be highly reliable. The major components of the regulatory capital IT solution should be covered through a single data source so that constant reconciliation of data is avoided. Just as important, the system needs to eliminate the constant administrative management inherent to many enterprise systems. It should not have to rely on vigilant system administrators to coordinate the functioning of different applications.
3. Data Integration and the Data Warehouse
There is a need to align the data structures that drive risk and financial data. These are:

Transactional data that covers all types of transaction and links the financial results of
each transaction with the risk and financial objectives of the financial institution.
Asset data that covers all types of assets that might be linked to the transaction, the
valuation of these assets and the correlation of asset behaviour.
Customer data for all counter-parties, which includes the credit risk of the counterparty
and makes provisions when new information or circumstances changes that risk. Detailed data on customers are required to support product selection and pricing in addition to other relationship management decisions. The above risk and financial data could be broadly categorised as follows:
Instrument/Account Data – These data cover basic information about every financial instrument held by the financial institution, i.e. Data about financial instruments such as exposure (provision/allowances, outstanding balances, credit lines, etc.), maturity, asset, product and industry classifications, interest rates, and so on. Customer/Counterparty Data – This refers to the relevant data for different parties that a financial institution may deal with in a financial transaction. In addition, these data cover information such as industry classification and customer financial information that may be used in deriving PD estimates such as debt to equity ratios, current assets, net sales, retained earnings, revenues, profits, cost of goods, share price, and bond price. Financial institutions may use these data with regulatory capital data to perform customer-based profitability analysis. Ledger Data – These data cover transaction and account balance data stored in a ledger. Ledger data are used to do business unit and product based profitability analysis. Users may analyse and report on capital for market, credit, and operational risk. Risk Mitigation Data – These data cover information about collateral, insurance, netting agreements, credit derivatives, and guarantees. Among other attributes, these data include the mitigant type, mitigation value, maturity of the instrument, and the specific instrument to which the collateral maps. Insurance policy data information are relevant for the mitigation of operational risks. Incident Data – Analysis of credit and operational loss incidents depends upon having granular incident data. This data covers the essential information about loss incidents such as loss amount, business unit, loss description and risk category.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 63 Historical Data – If financial institutions opt for the Advanced Internal Ratings based approach for credit risk and the Advance Measurement approach for operational risk, they must store a substantial volume of historical data. These data will be necessary to test historical default experiences against the forecasted values generated by predictive models. These data cover both historical credit and operational loss data. Limits and Loss Provision Data – The Basel II requirement is that the financial institutions should limit their exposures for lending based on industries, geography, and specific customers. These data cover the exposure limits and the loan loss provisions. Examples of some data fields:
Borrower Legal Name, Customer Basel segment, Borrower Credit Grade, Consolidated Group Turnover, Facility Currency, Limit Amount, Committed Limit Indicator, Collateral Type/Sub Type, Country of Incorporation, Guarantor Credit Grade, Facility Type External Credit Rating, Collateral Currency, Collateral Location, Negative Pledge Indicator, Maturity Date etc. A typical Banking Data Warehouse for a financial institution could be as follows:
4. Data Governance & Management
4.1 Background
To achieve Basel II certification, the data used in all pillars must be effectively managed. This includes both data management and technology governance. IRBA data self-assessment requires a process to be in place for vetting inputs into internal rating systems. It should include an assessment of the accuracy, completeness and appropriateness of data. Establishment of standards and conducting relevant tests for accuracy, completeness, timeliness and reliability of data are essential to assess on an ongoing basis the risks arising from potential poor quality data and to ensure that appropriate risk mitigation measures have been undertaken.
4.2 Data Quality Management (DQM) framework
Data quality management is an ongoing process and it consists of the stakeholders, DQM process and DQM tools.
4.2.1 The Stakeholders
Data owners, system owners, data consumers and data services are the main stakeholders. Data owners are responsible for the process of updating data into the

64 Directions, Determinations, and Circulars issued to Licensed Specialised Banks system. They will define the data quality measurements, monitor data quality metrics, report data quality metrics to data services and resolve data quality issues. A data consumer is any stakeholder, who extracts data from another system for processing or information services. They will report data quality issues to DQ dashboard/DQ log, provide input and take part in the resolution of DQ issues and escalate DQ issues to data service in the event of non-resolution. The owner of the data management policy is Data Services. It will administer data ownership, resolve data ownership issues, administer DQ Dashboard and Issues Log, facilitate root cause analysis process and train data quality management.
4.2.2 Data Quality Management (DQM) Process
The DQM process can be elaborated under 6 steps.
Step 1 - Identification of Critical Quality Elements (CQE) E.g., CQE for Probability of Default (PD) Drivers; Detailed Drivers – Borrower PD, Guarantor PD, PD validation; Field names – CRR, Ratings, Date of Ratings etc. Step 2 – Definition of quality (CACTI)

Completeness – Are all the necessary data captured and present?
(E.g., Is this field mandatory?)
Accuracy – Do the data accurately represent reality or a verified source?
(E.g., Is there maker/checker in place?)
Consistency – Are the data elements consistently defined and understood?
(E.g., Is there a drop down list in the system?)
Timeliness – Are the data available within the required timeframe?
(E.g., What is the agreed turnaround time to complete data capture/extraction?)
Integrity - Is the structure of the data and the relationship between fields
maintained consistently?
(E.g., Is there data verification on the field?)
Step 3 – Controls and checks
The business process that support data collection, updating and maintenance should have the appropriate quality controls and checkpoints in place. This is to ensure that data fit for the purpose is produced as close to the point of entry as possible, and avoids or reduces the possibility of data errors and the need for data cleansing. Examples of a control point include a maker checker process or mandatory fields in the system. There are 3 defined stages to this step, a) Document the data process flow b) Review control and checks using the CACTI framework c) Implement additional control checkpoints if required. Step 4 – Data quality measurement
It will provide quantifiable evidence of an effective data management process.
It can be used as a toll to monitor and track the data quality level.
When combined with the data quality target, the measurement can be used as a
trigger to commence a review of the data management process.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 65
4. The standard frequency for a data quality measurement is monthly. However, this
can vary depending on the type of data or system.
% Quality level = No. of records meeting requirements X 100 Total No. of records in universe or sample
5. The data quality target level should be set at a level, which is:
– Realistic, given current knowledge of the data quality level; – Represents the next step that the data owner wants to achieve in improving data quality given incremental improvement is achievable. Step 5 – Monitoring

Monitoring is critical to ensure the sustainability of any data quality management effort.
Monitoring can be achieved through periodic data quality measurement, manual or system
error reporting
The data quality target level can be used as a tool to monitor data quality.
Step 6 – Data cleansing, problem resolution and Escalation Data owners – To ensure that data cleansing and error correction is performed in a consistent, systematic and methodical manner, a documented error correction procedure is critical. Data consumers – Data consumers may put in place a process for error correction. Data quality escalation – Within each department, ideally, there should exist an escalation path for dealing with data quality problems. These may include escalation for inaccurate or missing information, such as to the Business Unit Officer or Business Support Unit. Data Quality Management Process – Six broad Data Quality Management (DQM) Process steps to guide Data Owners and Consumers to perform data quality management Identify Critical Quality Elements Define Data Quality Requirements Document Data Flow Review Controls and checks In place Implement Additional Control checkpoints Measure Data quality level Monitor Data quality level Identifies Critical Quality elements & provides input for measurement definition Monitors data Quality as Data Owner of Downstream application Cleansing , Error Resolution Escalates data Quality issues & provide inputs on resolution
Identification 2. Measurement
Definition
Controls
& Checks
Measure
Monitoring
Escalation ,
Cleansing &
Resolution
Data Owner
&
System
Owner
Data
Comsumer
Data
Consumer

66 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
5. Technology Governance Framework
The following are the key requirements to consider from the Basel II Technology framework:

Robustness – Robustness is the resilience of the system, especially when under stress or
when confronted with invalid inputs. It is the ability of the software system to maintain function even with changes in the internal structure or external environment.
Scalability – Scalability indicates the capability of a system to increase total throughput
under increased load when resources (typically hardware) are added. A scalable system is one that can easily be altered to accommodate changes in the number of users, resources and computing entities.
Security & Controls – The management, operational, and technical controls (i.e., safeguards
or countermeasures) prescribed for an information system to protect the confidentiality, integrity, and availability of the system and its information.
System Availability – Availability means the degree to which a system, sub system or
equipment is operable and in a committable state at the start of a mission, when the mission is called for at an unknown, i.e., a random, time.
Sustainability – Sustainability is a systemic concept, relating to the continuity of commercial
and technology aspects in this context.
Reusability – Reusability is the likelihood a technology component can be used again to add
new functionalities with slight or no modification. The ability to reuse relies in an essential way on the ability to build larger things from smaller parts, and being able to identify commonalities among those parts.
Testability – An adjective meaning “the ability to be tested”
Technology Adequacy – Refers to the sufficiency of the chosen technology to address a
specific business need.
The key areas to be focussed under Basel II requirements are as follows:
The collection of data (data source and data consolidation) –

There should be a consistent and qualified process to collect and consolidate data with
proper metadata capture.
It should be well defined and automated if possible.
All processes involved should be traceable, accountable and auditable.

The storage of data and Basel II related system –

The storage should be on a robust data infrastructure that allows the financial institution
to perform backup, restore, archive, replicate, high availability, and perform load balancing when required.
The application must be designed with security as the underlying core.
The system must comply with the financial institution’s application and operational
security policies.
Further the system must be designed with proper error handling and a defined process
under adequate control to cleanup and to recover the system to normal state.
Technology used should be in line with the financial institution’s architecture direction.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 67
3. Data processing and transmission –

There must be control on all files that are exchanged between systems.
There must be proper file identification for each file that is exchanged between systems.
There should be a HASH total for each file that is exchanged between systems, to be
confirmed, if needed, as advised by regulators and internal security standards.

Analytical and reporting for end-user consumption –

Data/report download and manual manipulation is not encouraged, unless justified by
business and exception sought.
“Fit-for-purpose” reporting and analytical tools should be used in the technical solution.
There should not be any manual report distribution via e-mail or intranet.

Conclusion
Banks are free to develop, choose and purchase their IT systems and software for the Basel II programme depending on their risk modelling and data warehouse requirements. However, the Basel Committee has categorically outlined the following Supervisory expectations for the use of vendor products in IRB processes in their Newsletter No. 8 (March 2006):
Banks must be able to document and explain the role of vendor products and the extent to
which they are used within their IRB processes.
Banks must be able to demonstrate a thorough understanding of vendor products used in their
IRB processes.
Vendor products must be appropriate to the bank’s exposures and risk rating methodologies
and suitable for use within the IRB framework.
Banks must have clearly articulated strategies for regularly reviewing the performance of
vendor model results and the integrity of external data used in their IRB risk quantification processes.
Further, the supervisors/regulators will only review and assess the acceptability of estimates
based on the system behind the estimates.

68 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 76J(1) of the Banking Act, No.30 of 1988, as amended. Sgd. B D W A Silva Senior Deputy Governor Central Bank of Sri Lanka Colombo 31 October 2011 BANKING ACT DIRECTION NO. 10 OF 2011 AMENDMENT TO DIRECTIONS ON MAINTENANCE OF CAPITAL ADEQUACY RATIO The qualifying criteria for the SME exposures given in paragraph 6.4.3.1.8 (i)(d) of Schedule I in Direction 1(2) of the Banking Act, Directions No. 10 of 2007 is amended by replacing with the following paragraph:
i. The maximum credit exposure of the lending bank to an SME shall not exceed SME Exposures.
Rs. 200 million.
ii. The annual turnover of the SME shall not exceed Rs. 600 million.
iii. The annual turnover should be based on latest available audited financial
statements or certified by a Chartered Accountant or an Approved Accountant acceptable to the Department of Inland Revenue. In the case of draft financial statements, the turnover certified by a Chartered Accountant or an Approved Accountant should be obtained within the year.
iv. In the case of grant of credit facilities less than Rs. 50 million, the condition
iii above shall not be applicable and banks shall adopt their own internal mechanism to verify the SME’s annual turnover.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 69 Directions issued by the Monetary Board of the Central Bank of Sri Lanka under Sections 46(1) and 76(J)(1) of the Banking Act, No.30 of 1988, as amended. Sgd. Nivard Ajith Leslie Cabraal Chairman of the Monetary Board and Governor of the Central Bank of Sri Lanka Colombo 31 July 2013 BANKING ACT DIRECTION NO. 5 OF 2013 SUPERVISORY REVIEW PROCESS (PILLAR 2 OF BASEL II) FOR LICENSED COMMERCIAL BANKS AND LICENSED SPECIALISED BANKS In the exercise of the powers conferred by Sections 46(1) and 76(J)(1) of the Banking Act, No. 30 of 1988, last amended by the Banking Act, No. 46 of 2006, the Monetary Board hereby issues Directions No. 5 of 2013 on the implementation of Supervisory Review Process (SRP) for Licensed Commercial Banks (LCBs) and Licensed Specialised Banks (LSBs), respectively, in accordance with the Basel II Capital Accord “International Convergence of Capital Measurement and Capital Standards – A Revised Framework” issued by the Basel Committee on Banking Supervision of the Bank for International Settlements in June 2006.
1.1 In terms of Sections 19(7) and 76G(7) of the Banking Act, the Monetary Board
is empowered to determine the capital adequacy ratio to be maintained by every LCB and LSB, respectively, as far as practicable by adopting the guidelines for capital adequacy set out by the Bank for International Settlements in Basel.
1.2 In terms of Sections 46(1) and 76(J)(1) of the Banking Act, 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 of such banks is to be conducted.
2.1 Commencing from 1 January 2014, every LCB and LSB shall, at all times,
maintain adequate capital to cover its exposure to all risks, notwithstanding that it has complied with the requirements of the Banking Act, Directions No. 9 and 10 of 2007 dated 26 December 2007 issued to LCBs and LSBs, respectively.
2.2 In determining the adequate capital referred to in Direction 2.1 above, every
LCB and LSB shall consider the requirements specified in the Regulatory Framework on SRP attached hereto.
3.1 Every LCB and LSB shall develop and implement a sound Internal Capital
Adequacy Assessment Process (ICAAP) in accordance with the requirements specified in Part II of the Regulatory Framework on SRP attached hereto. Empowerment under the Banking Act. Maintain Adequate Capital above the Minimum Capital Requirement. Implement Sound Internal Capital Adequacy Assessment Process.

70 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
4.1 The Director of Bank Supervision or examiners of the Bank Supervision
Department shall review and evaluate the following, in accordance with
Part III of the Regulatory Framework on SRP attached hereto.
(a) ICAAP;
(b) compliance with the requirements set out in these Directions and the Regulatory Framework on SRP attached hereto; and (c) adequacy of capital maintained by each bank.
5.1 The Central Bank of Sri Lanka shall intervene at an early stage to prevent capital
of a bank falling below the minimum requirement, in accordance with Part IV of the Regulatory Framework on SRP attached hereto.
6.1 Every LCB and LSB shall submit a Board approved ICAAP Document to the
Director of Bank Supervision within six months from the end of its financial year. For the purposes of these Directions and the Regulatory Framework on SRP attached thereto, in the case of banks incorporated outside Sri Lanka, the “Board” shall mean the Head Office or the Regional Office that supervises the respective bank.
6.2 ICAAP Document shall be prepared in accordance with the format given in
Appendix I of the Regulatory Framework on SRP attached hereto. However, this
format shall be considered as the minimum requirement and ICAAP Document of every LCB and LSB shall be comprehensive and relative to its size, nature of the business and complexity of business activities. Supervisory Review and Evaluation Process (SREP). Supervisory Intervention. Regulatory Reporting.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 71 REGULATORY FRAMEWORK ON SUPERVISORY REVIEW PROCESS (PILLAR 2 OF BASEL II) ATTACHMENT TO THE BANKING ACT, DIRECTIONS No. 5 of 2013

72 Directions, Determinations, and Circulars issued to Licensed Specialised Banks CONTENTS
PART I – OVERVIEW

Introduction
Objectives of Supervisory Review Process (SRP)
Principles governing SRP
Scope and Applicability
PART II – INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP)
Developing and maintaining ICAAP
The Board of Directors and Senior Management Oversight
6.1 Board responsibilities for ICAAP
6.2 Senior management’s responsibilities for ICAAP
Comprehensive assessment of risks
Sound Capital Assessment
Monitoring and Reporting
Internal Controls and Independent review
PART III – SUPERVISORY REVIEW AND EVALUATION PROCESS (SREP)
Key Components
Review Methodologies
Objectives
Coverage
Qualitative Assessment
Dialogue with the bank
PART IV – SUPERVISORY INTERVENTION
Appendix I

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 73
PART I – OVERVIEW

Introduction
1.1 The Basel II capital adequacy framework, seeks to harness best practices in risk management into
the regulatory process, by providing a spectrum of approaches to measure capital adequacy of banks. The Basel II framework also seeks to provide regulatory capital requirements that are both more comprehensive and more sensitive to risk, and as such, more closely aligned to the risk appetite of banks. The Basel II framework is based on three mutually reinforcing pillars:
a. Pillar 1: Minimum capital requirements for three major components of risks that banks face:
credit, market and operational risks; b. Pillar 2: Supervisory Review Process (SRP): Banks’ own assessments of their capital adequacy and encourage banks to develop and use better risk management techniques in monitoring and managing their risks; and
c. Pillar 3: Market Discipline: materially increased disclosure requirements.
1.2 The SRP of licensed commercial banks (LCBs) and licensed specialised banks (LSBs) (hereinafter
referred to as “banks”) is conducted to assess their capital adequacy and to determine whether banks should hold additional capital to cover risks that are not covered or adequately covered by the minimum capital requirements under Pillar 1 of Basel II.
Objectives of SRP
SRP is intended to:
2.1 encourage banks to utilise better risk management techniques – the level of risks a bank is exposed
to, and the control environment that will determine the level of capital required to be maintained by banks;
2.2 enhance the risk-based supervision of banks in order to assess the capital adequacy relative to risks;
2.3 evaluate the bank’s Internal Capital Adequacy Assessment Process (ICAAP) that determines the
level of capital to be maintained against all risks and ensure that banks have adequate capital to support all risks; and
2.4 ensure that banks use ICAAP in more general business decisions and budgets, in more specific
decisions such as allocating capital to business units and when evaluating individual credit decision process.
Principles governing SRP
SRP is conducted based on the following four key principles provided in the Pillar 2 of Basel II capital framework:
a. Banks shall have a process for assessing their overall capital adequacy in relation to their risk profiles and a strategy for maintaining their capital levels (Principle 1 of Pillar 2-SRP). b. The Central Bank of Sri Lanka (CBSL) as the regulator will review and evaluate bank’s ICAAP and strategies, as well as its ability to monitor and ensure compliance with regulatory capital ratios (Principle 2 of Pillar 2-SRP).
c. CBSL expects banks to operate above the minimum regulatory capital ratios and requires banks
to hold capital in excess of the minimum (Principle 3 of Pillar 2-SRP).

74 Directions, Determinations, and Circulars issued to Licensed Specialised Banks d. CBSL will intervene at an early stage to prevent capital from falling below the minimum levels required to support the risk characteristics of a particular bank (Principle 4 of Pillar 2-SRP).
4. Scope and Applicability
This Regulatory Framework shall be applicable to banks on both standalone (“Solo”) level, as well as on the consolidated (“Group”) level.
PART II – INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP)
5. Developing and maintaining ICAAP
5.1 Every bank shall develop and maintain a rigorous and well-documented ICAAP proportional to its
operations and risk profile and consistent with prudential requirements.
5.2 ICAAP of a bank shall include the following five main features.
a. Board and senior management oversight b. Comprehensive assessment of risks
c. Sound capital assessment
d. Monitoring and reporting e. Internal controls and independent review
5.3 A bank shall design its ICAAP according to the size, complexity and business strategies of the
respective bank.
6. The Board of Directors and Senior Management Oversight
6.1 Board responsibilities for ICAAP
a. The Board shall ensure that the bank has in place a strategic plan which clearly outlines its current and future capital needs, anticipated capital expenditure, desirable capital level, and external capital sources. b. The Board shall review and approve the target level and composition of capital, and the process for setting and monitoring such targets at least, annually.
c. The Board shall ensure that the senior management:
(i) performs an analysis of the current and future capital requirements of the bank in relation to its strategic objectives; (ii) establishes frameworks for assessing the categories of risks faced by the bank and develops systems related to these risks to the capital level of the bank; (iii) establishes a method for monitoring compliance with internal policies on risk assessment and the processes related to risks to capital levels; and (iv) establishes a strong internal control culture throughout the bank. d. The Board shall approve and exercise effective oversight over the bank’s stress testing processes. e. The Board shall review ICAAP of the bank periodically, at least annually, to:
(i) assess the level and trend of material risks and their effects on capital levels; (ii) evaluate the sensitivity and reasonableness of key assumptions used in the capital assessment measurement system; (iii) determine that the bank holds adequate capital against the various risks and is in compliance with established capital adequacy goals; and

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 75 (iv) assess the bank’s future capital requirements based on its reported risk profile and make necessary adjustments to the strategic plan, accordingly. f. The Board shall ensure that public disclosures are made in the bank’s audited annual report/ audited financial statements, both qualitative and quantitative information, to assist in assessing the adequacy of bank’s capital commensurate with all material risks the bank is exposed to in relation to its current and future activities. g. The Board shall approve the annual ICAAP document.
6.2 Senior management’s responsibilities for ICAAP
The senior management shall:
a. ensure the appropriateness of ICAAP on an ongoing basis; b. have a good understanding of the design and operation of ICAAP;
c. be responsible for developing a risk management framework that is appropriate in light of the
risk profile and business strategy of a bank and integrating ICAAP with the capital planning and management processes of the bank. In this regard, senior management shall, at a minimum:
(i) establish robust policies and procedures to be approved by the Board to identify, measure and report all material risks; (ii) evaluate the level and trend of material risks and their effects on capital levels; (iii) evaluate the sensitivity and reasonableness of key assumptions used in the capital assessment and measurement system; (iv) determine if the bank holds adequate capital against the risks faced by the bank; (v) assess future capital needs based on the risk profile of the bank and propose necessary adjustments to its strategic plan; and (vi) ensure that ICAAP is subject to annual independent review for robustness and integrity. d. establish comprehensive and adequate written policies and procedures, to be approved by the Board, on its stress testing processes taking an active interest in the development and operation of stress-testing and, allocating sufficient skilled and competent resources to the modelling function. e. ensure regular reporting of bank’s ICAAP to the Board. f. prepare the annual ICAAP document in accordance with the specified format given in
Appendix I; and
g. submit the Board approved annual document of ICAAP to the Director of Bank Supervision within six months from the end of the financial year of the respective bank.
7. Comprehensive assessment of risks
7.1 Bank’s ICAAP shall identify all material risks, which are arising from both on balance sheet and
off-balance sheet exposures, faced by the bank and measure these risks that can be reliably quantified under both normal and stressed conditions. ICAAP shall, therefore, address the following risks. a. Risks captured under Pillar 1: credit, market and operational risks; b. Risks not fully captured under Pillar 1; concentration risk (credit risk), interest rate/rate of return risk in the banking book (market risk) and
c. Risk types not covered by Pillar 1: risks which are not specifically addressed under Pillar 1,
which includes liquidity risk, concentration risk, reputational risk, compliance risk, strategic and business risk, residual risk.

76 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
7.2 A bank shall be able to identify other external risk factors that may arise from the regulatory, economic
or business environment. In addition, adequate corporate governance and proper risk management including internal control arrangements constitute the foundation of an effective ICAAP.
7.3 The risk measurement systems shall be sufficiently comprehensive and rigorous to capture the
nature and magnitude of the risks faced by the bank.
7.4 The risks that are not easily quantifiable shall be evaluated using qualitative assessment and
management judgment.
7.5 When measuring risks, comprehensive and rigorous stress tests shall be performed to identify
possible events or market changes that could have serious adverse effects or significant impact on the bank’s capital and operations.
7.6 In assessing risks, banks shall also consider the applicable Directions issued under the Banking Act.
8 Sound Capital Assessment
Internal capital allocation and assessment process shall meet the following requirements.
8.1 Banks shall have an explicit Board approved capital plan which states the objectives and the time
period for achieving those objectives, and in broad terms the capital planning process and the responsibilities for that process.
8.2 The plan shall also lay out how the bank will comply with capital requirements in the future related
to the level of risk, and a general contingency plan for dealing with divergences and unexpected events such as raising additional capital, restricting business activities or using risk mitigation techniques.
8.3 The bank shall set capital targets which are consistent with their risk profile, stage of the business
cycle in which the bank is operating, and business plans.
8.4 An internal strategy for maintaining capital levels which should not only reflect the desired level of
risk coverage but also incorporate factors such as loan growth expectations, future sources and uses of funds, and dividend policy.
8.5 The amount of capital held shall reflect not only the measured amount of risks but also an additional
amount to account for potential uncertainties in risk measurement.
8.6 In assessing capital, a bank shall also evaluate the quality and capacity of its capital to absorb losses.
8.7 The bank shall demonstrate to CBSL that its capital assessment approach is conceptually sound and
that outputs and results are reasonable.
9. Monitoring and Reporting
9.1 The bank shall establish an adequate system for monitoring and reporting risk exposures and,
assessing how the bank’s changing risk profile affects the capital requirements.
9.2 The bank’s Board and the senior management shall:
a. receive reports on the bank’s risk profile and capital needs in a manner appropriate to facilitate the conduct of their responsibilities; b. evaluate the level and trend of material risks and their effects on capital levels;
c. evaluate the sensitivity and reasonableness of key assumptions used in the capital assessment
measurement system;

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 77 d. determine that the bank holds adequate capital against the risks and is in compliance with established capital adequacy goals; and e. assess its future capital requirements based on the bank’s reported risk profile and make necessary adjustments to the bank’s strategic plan, accordingly.
10. Internal Controls and Independent Review
10.1 The bank’s internal control structure is essential to the capital assessment process. Effective control
of the capital assessment process includes an independent review, and where appropriate, with the involvement of internal or external audits.
10.2 The person(s) responsible for the development or implementation of ICAAP shall not be involved
in the independent review.
10.3 The bank shall conduct periodic independent reviews of its risk management processes to ensure
their integrity, accuracy, and reasonableness. Areas that shall be reviewed include:
a. appropriateness of the bank’s capital assessment process given the nature, scope and complexity of its activities; b. identification of large exposures and risk concentrations;
c. accuracy and completeness of data inputs into the bank’s assessment process;
d. reasonableness and validity of scenarios used in the assessment process; and e. stress testing and analysis of assumptions and inputs.
PART III – SUPERVISORY REVIEW AND EVALUATION PROCESS (SREP)
11. Key Components
SREP, which consists of the following key components, shall be carried out by the Director of Bank Supervision or examiners of the Bank Supervision Department. a. Review of the bank’s ICAAP; b. Review of the bank’s risk profile;
c. Review of the levels and quality of capital held; and
d. Communication of SREP results to the bank.
12. Review Methodologies
SREP shall involve a combination of:
a. periodic examinations or inspections; b. continuous supervision;
c. discussions with the bank management;
d. review of work of internal and external auditors; and e. periodic reporting.
13. Objectives
The objective of the review is to:
a. evaluate the adequacy of bank’s internal capital adequacy assessments and strategies, as well as their ability to monitor and ensure compliance with regulatory capital ratios;

78 Directions, Determinations, and Circulars issued to Licensed Specialised Banks b. ensure that the bank operates above the minimum regulatory capital ratios and composition of capital is appropriate for the nature and scale of the bank’s business;
c. identify existing or potential problems and key risks faced by the bank, deficiencies in their
internal control and risk management frameworks, and the degree of reliance that can be placed on the outputs of ICAAP; d. intervene at an early stage to prevent capital from falling below the minimum levels required to support the risk characteristics of the bank; e. take appropriate supervisory action and regulatory measures if results of this process are not satisfactory.
14. Coverage
SREP will cover a quantitative review of bank’s Pillar 1 inherent risk exposures and Pillar 2 inherent risk exposures.
15. Qualitative Assessment
If Pillar 2 risks are not readily quantifiable, the supervisory judgment is to be used with respect to qualitative assessments of the bank’s ability to contain actual risk exposures within prudent, planned levels through effective risk governance, oversight, management and control practices.
16. Dialogue with the bank
16.1 SREP involves an active dialogue with the bank regarding ICAAP, through which CBSL seeks to:
a. gain deeper insights into the bank’s overall control and risk management framework; b. establish a closer understanding of how the bank approaches the risks that are not covered under the minimum capital requirements and the amount of internal capital allocated to them;
c. understand the mechanisms the bank has maintained for identifying, measuring, monitoring,
controlling, mitigating and reporting its risks; and d. understand whether additional capital on top of that assessed is necessary to cover the banks’ existing risk exposures, as well as future planned sources of capital.
16.2 The dialogue will provide an opportunity for the bank to make appropriate changes to its ICAAP.
16.3 Communication of SREP results:
a. After completion of the SREP, the Director of Bank Supervision may conduct discussions with the bank based on the results of the assessment, including any areas of concern which may lead to an increase in bank’s minimum CAR. b. The Director of Bank Supervision will explain the outcome of the assessment and recommend the prompt corrective actions to address the concerns of the bank, if any. If there is a proposed increase in the capital, the bank will be notified (with the opportunity to make representations) before the decision is finalised.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 79
PART IV – SUPERVISORY INTERVENTION
17. Based on the outcome of SREP, CBSL shall intervene at an early stage to:
a. prevent capital from falling below the minimum requirement of the respective bank; and b. prevent potential impact to the stability of the financial system.
18. Depending on the capital level, a range of supervisory actions including the following shall be
initiated. a. moral suasion to encourage the bank to improve their capital positions and levels; b. improve the bank’s ICAAP including risk management systems and controls;
c. require the bank to submit a capital restoration plan;
d. impose restrictions on the payment of dividends, business activities, acquisitions, investments etc.; and e. require the replacement of the Board and/or the senior management.

80 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Appendix I
SPECIFIED FORMAT FOR THE PREPARATION OF ICAAP DOCUMENT

General
1.1 The purpose of ICAAP document is to inform the Board/senior management and the CBSL of the
ongoing assessment of the bank's risks, how the bank intends to mitigate those risks and how much current and future capital is necessary having considered other mitigating factors.
1.2 Annual document of ICAAP of a bank shall be prepared in accordance with the contents given in
paragraph 2 below.
1.3 However, CBSL expects there to be a fair degree of variation in the length and format of submissions
since banks’ business and risk profiles differ from each other and ICAAP document should be proportional to the size, nature and complexity of a bank’s business.
1.4 Use of this format may, therefore, make the review process more efficient for both the bank and
CBSL.
1.5 Base period and financial data of ICAAP document shall be in accordance with the audited financial
data as at the end of the preceding financial year.
1.6 The projected financial data of ICAAP document should be at least for three financial years.
Contents
2.1 Executive Summary
2.2 Background
2.3 Board and Senior Management Oversight
2.4 Risk Governance
2.5 Sound stress testing processes
2.6 Capital Planning
2.7 Projected financial data and assessment of capital
Executive summary
This section will present an overview of ICAAP methodology and results. This overview will include:
a. The purpose of the report and the group entities which are covered by ICAAP; b. Financial forecasts, including the strategic position of the bank, its balance sheet strength, and future profitability;
c. Regulatory capital management;
d. Regulatory capital assessment - Pillar 1; e. Internal capital assessment - Pillar 2; f. Ratio management: How much and what composition of internal capital the bank considers it should hold as compared with the capital adequacy requirement under Pillar 1; g. Risk management processes and assessment; h. Descriptions of the capital and dividend plan; the manner in which the bank intends to manage capital going forward and for what purposes;
i. Stress testing approach; and
j. Details of the approval.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 81
4. Background
This section will include the relevant organization structure and business lines, group structure (legal and operations) and financial data of the bank largely including the profit, dividends, equity, capital resources held and as compared with regulatory requirements, total assets, total loan and advances, total deposits, and any conclusions that can be drawn from trends in the data which may have implications for the bank’s future.
5. Board and Senior Management Oversight
This section would provide the following information:
a. Corporate governance structure; b. Board and senior management oversight;
c. ICAAP governance structure;
d. Monitoring and controls; and e. Internal controls and independent review.
6. Risk Governance
This section will provide the following; a. Risk appetite; b. Risk management framework;
c. Regulatory risk assessment (Pillar 1);
i. Credit risk
ii. Market risk
iii. Operational risk
d. Internal risk assessment (Pillar 2);
i. Concentration risk
ii. Interest rate risk in the banking book
iii. Settlement risk
iv. Liquidity risk
v. Compliance risk
vi. Strategic/business risk, and
vii. Reputation risk
viii. Residual Risk
7. Sound stress testing processes
This section will provide the following details of bank’s stress testing practices:
a. Overview of the stress testing process b. Stress scenario/types
c. Discuss the results of stress tests and its impact to the bank capital
d. Risk mitigation or contingency plans across a range of stressed conditions

82 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
8. Capital planning
This section will provide details of bank’s capital planning and management processes, which, at a minimum, includes:
a. the bank’s short-term and long-term capital adequacy goals in relation to its risk profile, taking into account its strategic focus and business plan; b. the approved capital targets that are consistent with the bank’s overall risk profile and financial position;
c. the approach for determining the bank’s overall capital adequacy in relation to its risk profile;
and d. conclusions.
9. Projected financial position and assessment of capital
This section will explain Pillar 1 and 2 capital requirements, in respect to; a. the expected changes to the business profile of the bank, the environment in which it expects to operate, its projected business plans (by appropriate lines of business), and projected financial position for the next, three to five years; and b. given these business plans, this section would also discuss the bank’s assessment as to whether additional capital is necessary on top of that assessed to cover their existing risk exposures, as well as future planned sources of capital.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 83 Directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 76J(1) of the Banking Act, No. 30 of 1988, as amended. W A Wijewardena Senior Deputy Governor Central Bank of Sri Lanka Colombo 24 April 2009. DIRECTIONS BANKING ACT DIRECTION NO. 2 OF 2009 AMENDMENT TO DIRECTIONS ON OWNERSHIP OF ISSUED CAPITAL CARRYING VOTING RIGHTS FOR LICENSED SPECIALISED BANKS In the exercise of the powers conferred by Section 76J(1) of the Banking Act No. 30 of 1988, last amended by the Banking Act No. 46 of 2006, the Monetary Board hereby issues the following Direction amending Direction No. 2 of 2007 dated 19 January 2007, issued by the Monetary Board of the Central Bank of Sri Lanka. This Direction may be cited as the Banking Act Direction No. 2 of 2009. The following new Direction shall replace Direction No. 4 of the Banking Act Direction No. 2 of 2007:
4. Nevertheless, in the case of a licensed specialised bank which requires Exceptions.
restructuring to avoid inadequacy of capital, insolvency or potential failure, the Monetary Board may, subject to terms and conditions it may deem fit, grant permission to any of the categories of the shareholders specified in Section 76J(1)(q) to acquire or hold issued capital carrying voting rights in excess of 15 per cent in the licensed specialised bank, subject to the condition that the issued capital so acquired shall be reduced to 15 per cent within a specified period as may be determined by the Monetary Board, on a case-by-case basis.

84 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Directions issued by the Monetary Board under Section 76j(1) of the Banking Act, No.30 of 1988, as amended. Nivard Ajith Leslie Cabraal Governor Colombo 19 January 2007 DIRECTIONS BANKING ACT DIRECTIONS NO. 2 OF 2007 OWNERSHIP OF ISSUED CAPITAL CARRYING VOTING RIGHTS In exercise of the powers conferred by Section 76j(1) of the Banking Act, No.30 of 1988, last amended by the Banking Act, No.46 of 2006, the Monetary Board hereby issues Directions as follows:

These Directions may be cited as the Banking Act, Directions No.2 of 2007. The
Sections referred to in these Directions will be those of the Banking Act, No.30 of 1988, last amended by the Banking Act, No.46 of 2006.
In terms of Section 76j(1), the Monetary Board has been empowered to issue
Directions to licensed specialised banks regarding the manner in which any aspect of the business of such banks is to be conducted, including Directions pertaining to the maximum percentage of the share capital in a licensed specialised bank incorporated in Sri Lanka– (i) held by a company, an incorporated body, or an individual; (ii) held in the aggregate by— (a) a company and one or more of the following:— (aa) its subsidiaries (bb) its holding company; (cc) a subsidiary of its holding company; or (dd) a company in which such company or its subsidiary, or its holding company, or a subsidiary of its holding company has a substantial interest; or (b) an individual and one or more of the following:— (aa) his close relations; (bb) a company in which he has a substantial interest or in which his close relation has a substantial interest; (cc) the subsidiary of such company; (dd) a holding company of such company; (ee) a subsidiary of such company’s holding company; (ff) a company in which such company, or its subsidiary, or its holding company has a substantial interest; or Citation. Empowerment under Section 76J(1).

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 85 (gg) an incorporated body other than a company in which such individual or his close relation has a substantial interest; or (c) companies in each of which an individual or company as the case may be, has either directly, indirectly or beneficially a substantial interest or significant management interest.
3. (1) Any of the categories of shareholders referred to in Section 76j(1)(q) shall not,
either directly or indirectly or through a nominee or acting in concert with any other category/categories of shareholders, hold shares carrying voting rights in excess of 15 per cent of the issued capital carrying voting rights in a licensed specialised bank incorporated or established within Sri Lanka by or under any written law without the prior written approval of the Monetary Board. (2) “Acting in concert” means acting pursuant to an understanding (whether formal or informal) to actively co-operate in acquiring or holding of over 15 per cent of the issued capital carrying voting rights of a licensed specialised bank so as to obtain or consolidate control of the bank.
4. Nevertheless, in the case of a licensed specialised bank which requires restructuring
to avoid inadequacy of capital, insolvency or potential failure, the Monetary Board may, subject to terms and conditions it may deem fit, grant permission to any of the categories of the shareholders specified in Section 76j(1)(q) to acquire or hold issued capital carrying voting rights in excess of 15 per cent in the licensed specialised bank subject to the condition that the issued capital so acquired shall be reduced to 15 per cent within a specified period as may be determined by the Monetary Board on a case-by-case basis, provided also that such period shall not exceed five years from the date of granting permission.
5. (1) Any ownership of issued capital carrying voting rights previously
acquired in excess of 15 per cent of the issued capital carrying voting rights in a licensed specialised bank by any of the categories of the shareholders referred to in Section 76j(1)(q) and held at the date of these Directions shall be disposed of and/or otherwise reduced by such shareholders to a level not exceeding 15 per cent of the issued capital carrying voting rights in the licensed specialised bank. (2) Such disposal and/or reduction shall be carried out within the period as may be specified by the Monetary Board on a case-by-case basis, provided that such period shall not exceed five years from the date of stipulation. (3) In the event, any of the categories of the shareholders referred to in Section 76j(1)(q) fails to comply with the directives of the Monetary Board within the stipulated period of time, the voting rights in excess of 15 per cent attributable to the ownership of shares held by the categories of shareholders subject to this Direction shall be deemed invalid with effect from the last date of the period specified by the Monetary Board to reduce the ownership of shares carrying voting rights.
6. (1) Within two months of the date of these Directions, each licensed specialised
bank shall inform the Monetary Board of instances, if any, in its bank where the categories of shareholders referred to in Section 76j(1)(q) own share capital carrying voting rights exceeding 15 per cent of the issued capital carrying voting rights in its banks and seek a Direction from the Monetary Board as to the period within which Maximum percentage of ownership of shares. Exceptions. Provisions in relation to existing ownership. Transitional arrangements

86 Directions, Determinations, and Circulars issued to Licensed Specialised Banks the disposal and/or reduction of the issued capital carrying voting rights to the level of 15 per cent shall be carried out. (2) Within two months of receipt of such information and request, the Monetary Board will specify the period within which the disposal and/or reduction should take place as per Direction 5(2) above and inform the licensed specialised bank accordingly. (3) Immediately thereafter, the licensed specialised bank shall direct the shareholders who hold issued capital carrying voting rights in its bank over the 15 per cent limit specified in these Directions to dispose of and/or reduce the number of shares carrying voting rights in order to comply with these Directions, within the period as stipulated by the Monetary Board.
7. Subject to Directions 5 and 6 above, a licensed specialised bank shall not enter in
its register of members the name of any shareholder referred to in Section 76j(1)(q) as the holder of shares of the bank, who or which has contravened the provisions of these Directions.
8. Anything contained in these Directions shall not be construed to restrict the
ownership of issued capital carrying voting rights in– (a) Regional Development Banks established under Regional Development Banks Act, No.6 of 1997; (b) a licensed specialised bank established by a statute or under the Companies Act, No.17 of 1982 in which the ownership of a majority of the shares is held by the Government or a public corporation or a statutory body.
9. (1) The Banking Act, Directions No.3 of 1999 (Share Capital Ownership -
Licensed Specialised Banks) dated 23 November 1999 issued under Section 76j(1) are hereby revoked. (2) The effect of revocation of previous Directions shall not affect any penalty or liability incurred under those Directions prior to the revocation. Steps to secure compliance. Non-application of Directions. Revocation of previous Directions.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 87 BANKING ACT NO. 30 OF 1988 AS AMENDED BY BANKING (AMENDMENT) ACT NO. 33 OF 1995 The directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 76j(1) of the Banking Act No. 30 of 1988 as amended by the Banking (Amendment) Act, No. 33 of 1995. Sgd. A. S. Jayawardena Governor Colombo 21-11-1997. DIRECTIONS UNDER 76j(1) RESERVE FUND

Every licensed specialised bank having an equity capital as defined in the Banking Act shall –
1.1 Maintain a reserve fund.
1.2 Transfer to such reserve fund out of net profits of each year, after payment of taxes due for each
year and before the declaration of dividends or the transfer of profits elsewhere :
1.2.1 a sum equivalent to not less than five percent of such net profits until the amount of the
said reserve fund is equal to fifty percent of the equity capital of such licensed specialised bank and after such percentage is reached :–
1.2.2 a sum equivalent to not less than two percent of such net profits until the amount of the
said reserve fund is equal to the equity capital of such licensed specialised bank. Provided, however, that an amount not less than twenty five per centum of the net profits shall be utilised for setting off such intangible assets as may be determined by the Central Bank, before such profits are transferred to the reserve fund.
For the purposes of this direction “intangible assets” shall mean goodwill, preliminary expenses
including legal and other fees, all capitalized expenses and other items not represented by tangible assets.

88 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Our Ref. : 02 / 17/ 500/0086 / 001 Bank Supervision Department 07 December 2012 To : CEOs of all Licensed Commercial Banks and Licensed Specialised Banks Dear Sir / Madam, ICRA Lanka Limited – Recognition as an External Credit Assessment Institution The Monetary Board of the Central Bank of Sri Lanka (CBSL) has approved ICRA Lanka Limited as a recognised External Credit Assessment Institution, for the purpose of all regulatory requirements of CBSL applicable to Licensed Commercial Banks and Licensed Specialised Banks. Accordingly, Table 1 and Table 3 under the item No. 6.4.2.3.1 of the Guidelines on Computation of Capital Adequacy Ratio is revised as in Annex. Yours faithfully, (Mrs.) T M J Y P Fernando Director of Bank Supervision Encl.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 89
Annex
Table 1
Mapping of Notations of the Credit Rating Agencies in Sri Lanka Fitch Rating Lanka RAM Ratings (Lanka) Limited Rating of ICRA Lanka Limited Rating Scale for CAR AAA (lka) AAA (SL) AAA AAA AA+ (lka) AA+ (SL) AA+ AA+ AA (lka) AA (SL) AA- (lka) AA- (SL) AA- AAA+ (lka) A+ (SL) A+ A+ A (lka) A (SL) A- (lka) A- (SL) A- ABBB+ (lka) BBB+ (SL) BBB+ BBB+ BBB (lka) BBB (SL) BBB- (lka) BBB- (SL) BBB- BBBBB+ (lka) BB+ (SL) BB+ BB+ BB (lka) BB (SL) BB- (lka) BB- (SL) BB- BBB+ (lka) B+ (SL) B+ B+ B (lka) B (SL) B-(lka) & Lower B- & Lower (SL) B- & Lower B- & Lower
Table 3
Mapping of Short Term Ratings
Short term ratings
Risk
RAM Ratings Weights
(Lanka) Limited
Standard and
Poor’s Moody’s Fitch
Ratings
ICRA Lanka
Limited
P – 1 A – 1+ / A – 1 P – 1 F1+ / F1 (SL) A1+ / A1 20% P – 2 A – 2+ / A – 2 P – 2 F2 (SL) A2+ / A2 50% P – 3 A – 3+ / A – 3 P – 3 F3 (SL) A3+ / A3 100% NP Below A – 3 NP Below F3 (SL) Below A3 150%

90 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Ref. No. : 02 /04/003/0400/001 Bank Supervision Department 13 July 2004 To : CEOs of all Licensed Specialised Banks Dear Sirs, CLASSIFICATION OF ADVANCES AND SPECIFIC PROVISIONS / CRITERIA FOR SELECTION OF VALUERS UNDERTAKING THE REVALUATION OF FIXED ASSETS FOR THE COMPUTATION OF THE CAPITAL ADEQUACY RATIO Licensed Specialised Banks (LSBs) are required to note the following :–

Current professional valuation reports referred to in the Directions dated 22 August 1997 on
Classification of Advances and Specific Provisions issued under Section 46a of the Banking Act shall mean current professional valuation reports obtained from external Independent valuers.
For the Purpose of the Directions referred to in 1 above, the banks are exempted from the
requirement to obtain professional valuation reports in respect of loans and advances of Rs.250,000 or below, subject to the condition that a current internal assessment of the value of properties mortgaged for such loans, signed by the Assistant General Manager or such other senior officer of the bank in charge of credit, is available. Note : Current internal assessment is defined as an assessment that is not more than two years old.
Valuers referred to in the circular dated 19 April 1999 issued on “Criteria for Selection of Valuers
Undertaking the Revaluation of Fixed Assets for the Computation of the Capital Adequacy Ratio” shall mean external Independent valuers. Please acknowledge receipt of this circular. Yours faithfully, Sgd, Director of Bank Supervision

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 91 Ref. No. : BS/69/93 Bank Supervision Dept. 8th Floor, Renuka Building No. 41 Janadhipathi Mawatha Colombo 1. 19th April 1999 To : All Licensed Specialised Banks Dear Sir/Madam, CRITERIA FOR SELECTION OF VALUERS UNDERTAKING THE REVALUATION OF FIXED ASSETS FOR THE COMPUTATION OF THE CAPITAL ADEQUACY RATIO All Licensed Specialised Banks are hereby informed that in the selection of Valuers to undertake the revaluation of the Bank’s fixed assets for the purpose of including 50 per cent of such revaluation reserves in the computation of the Capital Adequacy Ratios, the following eligibility criteria would apply:– The Valuer shall be :– (a) a Chartered Valuation Surveyor; or (b) a Fellow of the Institute of Valuers (Sri Lanka) with a Degree or Diploma in Valuation and work experience of 15 years; or (c) a Licentiate of the Institute of Valuers (Sri Lanka) with work experience of over 25 years. Please acknowledge receipt of this letter. Yours faithfully, Sgd. Ms. C I Fernando Actg. Director of Bank Supervision

92 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Ref. No. : 02 / 17/402 / 0073/002 Bank Supervision Department 29 July 2010 To : CEOs of Licensed Specialised Banks Dear Sir, ENHANCEMENT OF MINIMUM CAPITAL REQUIREMENT OF BANKS We refer to our Circular No. 02/17/402/0073/001 dated 12 April 2005 on the above subject and write to inform you that as announced at the meeting held on 24 November 2009, the Monetary Board of the Central Bank of Sri Lanka has decided to require licensed specialised banks to increase their capital as follows in the interest of a strong and sound banking system:
(a) Rs. 2 bn by 31 December 2011
(b) Rs. 2.5 bn by 31 December 2013
(c) Rs. 3 bn by 31 December 2015
Capital for this purpose shall mean the Core Capital as defined in terms of item No. 6.2.2.2 in the Guidelines that were annexed as Schedule I to the Banking Act, Direction No. 10 of 2007 dated 26 December 2007 on Maintenance of Capital Adequacy Ratio. Yours faithfully, Sgd, T M J Y P Fernando Director of Bank Supervision

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 93 Ref. No. : 02 / 17/402/0073/002 Bank Supervision Department 01 January 2008 To : CEOs of Licensed Specialised Banks Dear Sir/Madam, ENHANCEMENT OF MINIMUM CAPITAL REQUIREMENT OF BANKS Further to our circular dated April 12, 2005 on the above, informing Licensed Specialised Banks (LSBs) of the decision of the Monetary Board of the Central Bank of Sri Lanka to increase the minimum capital requirement of LSBs to Rs.1,500 million. We write to inform you that ‘capital’ for the purpose of meeting the minimum capital requirement shall mean the Core Capital as defined under item No. 6.2.2.2 in the Guidelines annexed as Schedule I of the Banking Act, Direction No.10 of 2007 dated December 26, 2007 issued by the Monetary Board of the Central Bank of Sri Lanka. Yours faithfully, Sgd, B.D.W.A. Silva Actg. Director of Bank Supervision

94 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Ref. No. : 02 / 17/800 / 0002/001 Bank Supervision Department 11 December 2006 To : the CEOs of All Licensed Specialised Banks (excluding the RDBs) Dear Sirs, MINIMUM CAPITAL REQUIREMENT OF LICENSED SPECIALISED BANKS This is to inform you that considering the difficulties faced by some Licensed Specialised Banks that are in the process of infusing fresh capital to meet the increased minimum capital requirement in terms of Circular No. 02/17/402/0073/001, dated 12 April 2005, the Monetary Board of the Central Bank of Sri Lanka has decided to grant an extension of time to such banks on a case-by-case basis to meet the said requirement, on the following basis– (a) till end 2008 to infuse at least 50 per cent of the shortfall (b) till end 2009 to meet the total capital requirement of Rs.1,500 million The banks which require an extension of time may submit their requests to the Director of Bank Supervision for consideration of the Monetary Board, along with a time-bound capital infusion plan to meet the minimum capital requirement by the new dates stipulated above. The Monetary Board may grant extensions subject to such terms and conditions as it may deem necessary. Yours faithfully, Sgd, Mrs. L K Gunatilake Actg. Director of Bank Supervision

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 95 Ref. No. : 02 / 17/402/0073/001 Bank Supervision Department 12 April 2005 To : The CEOs of all Licensed Specialised Banks Dear Sirs, ENHANCEMENT OF MINIMUM CAPITAL REQUIREMENTS OF BANKS As intimated to you at the meeting held on 08.04.2005, as part of its responsibility to maintain financial system stability and in the interest of a strong and sound banking system, the Monetary Board of the Central Bank of Sri Lanka has decided to require all licensed specialised banks to increase their capital to Rs.1,500 mn. For this purpose capital shall mean the Tier I capital (Core Capital) as defined by the Directions dated 21.11.1997 issued by the Monetary Board under Section 76j(1) of the Banking Act as amended from time to time. Specialised banks that do not currently meet this requirement may enhance their capital in the following manner.

The current capital should be enhanced by at least 50% of the deficiency by the end of 2006;
and
the balance of the deficiency should be met by the end of 2007.
All specialised banks are required to meet the enhanced capital requirements within the stipulated periods. The Monetary Board has also decided that with immediate effect the required equity capital for a new specialized bank should be Rs.1,500 mn. The enhanced capital requirements will not apply to the Regional Development Banks for the time being. You are kindly requested to assess the present position of your bank vis-à-vis the enhanced capital requirements based on the audited financials for the last financial year and inform me of the position by 30 June 2005, along with a time bound plan for capital augmentation in case the level of capital is below the stipulated minimum capital requirement. Further, you are requested to be mindful of the enhanced capital requirements when deciding on declaration of dividends. Please acknowledge receipt. Yours faithfully, Sgd, Director of Bank Supervision cc – Mr. Upali De Silva Secretary-General Sri Lanka Bankers’ Association (Gte) Ltd. Level 8, Ceylinco House Colombo 01.

96 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Ref. No. : 02 / 04/002 / 0005/003 Bank Supervision Department 06 January 2004 To : All Domestic Licensed Commercial Banks and all Licensed Specialised Banks Dear Sir/Madam, INTERPRETATION OF CAPITAL FUNDS All Domestic Licensed Commercial Banks and Licensed Specialised Banks are hereby informed that the proceeds of redeemable cumulative preference shares would constitute part of Capital Funds of banks for the purpose of Banking Act, and the direction issued thereunder, relating to the basis for the computation of the Single Borrower Limit and Investments in Equity in terms of section 46 and 17 a respectively and, section 76j(1) of the Banking Act. Yours faithfully, Director of Bank Supervision

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 97 02/04/003/0400/002 Bank Supervision Department 16 December 2004 To : CEOs of Licensed Commercial Banks CEOs of Licensed Specialised Banks Panel of Approved Auditors Secretary-General / SLBA Dear Sirs, SHIPPING GUARANTEES ISSUED BY BANKS Further to the discussion of the above subject at the Meetings of the Chief Executive Officers of Licensed Commercial Banks and Licensed Specialised Banks, the amendment to the Directions on Single Borrower Limit and Risk Weighted Capital Adequacy Ratio to enable the banks to include shipping guarantees issued at the invoice value of goods, are included herewith. Please acknowledge receipt. Yours faithfully, Sgd, Director of Bank Supervision

98 Directions, Determinations, and Circulars issued to Licensed Specialised Banks BANKING ACT NO. 30 OF 1988 AS AMENDED BY BANKING (AMENDMENT) ACT NO. 33 OF 1995 The directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 76j(1) of the Banking Act, No.30 of 1988 as amended by the Banking (Amendment) Act, No.33 of 1995. Sgd. A. S. Jayawardena Governor Colombo 21-11-1997. DIRECTIONS UNDER 76j(1) CONDITIONS FOR GRANT OF ACCOMMODATION

No licensed specialised bank shall grant any accommodation -
1.1 on the security of its own shares;
1.2 on the security of the shares of any of its subsidiaries;
1.3 to purchase its own shares;
1.4 on the security of shares of a company in which a company referred to in 1.2 above has a
shareholding, in excess of ten percent of the paid up capital of the former company.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 99 BANKING ACT NO. 30 OF 1988 AS AMENDED BY BANKING (AMENDMENT) ACT NO. 33 OF 1995 The directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 76j(1) of the Banking Act, No.30 of 1988 as amended by the Banking (Amendment) Act, No.33 of 1995. Sgd. A. S. Jayawardena Governor Colombo 21-11-1997. DIRECTIONS UNDER 76j(1) INVESTMENTS IN EQUITY

Subject to paragraphs 2 and 3 below a licensed specialised bank having an equity capital as defined
in the Banking Act shall not invest in the equity of any institution other than a public company and
1.1 any shareholding acquired by such bank shall not be in excess of ten per cent of its capital
funds; and
1.2 the aggregate amount invested in the shares of public companies shall not exceed fifty per cent
of its capital funds:
Provided that such acquisition or holding of shares in terms of paragraph 1.1 above shall not exceed twenty per cent of the paid up capital of the public company:
Provided further a licensed specialised bank may, without exceeding the limits specified above, acquire shares in a company other than a public company if such acquisition becomes necessary for the purpose of rehabilitating such company to make it financially viable. 2.
2.1 A licensed specialised bank is permitted to invest in the equity of a private company subject
to sub paragraph 2.2 below of this paragraph, provided such investment does not exceed 20% of the paid up capital of the private company and 10% of the capital fund of the licensed specialised bank provided further that the aggregate amount of such investments in the private companies shall not exceed 25% of the capital funds of the licensed specialised bank and the total aggregates of its investments in private and public companies shall not exceed 75% of its capital funds.
2.2 Any equity investment in a private company by a licensed specialised bank shall be subject
to the condition that before the lapse of five years from the date of such investments or such longer period extended by the Central Bank :
2.2.1 the entire investment in the company shall be purchased by the other shareholders of
the company or
2.2.2 the private company be converted to a public company.
The provisions of paragraph 1 above shall not apply to –
3.1 investment in a subsidiary or associate company of the bank acquired or formed prior to the
issue of these directions.
3.2 investments in any other subsidiary or associate company acquired or formed with the approval
of the Central Bank of Sri Lanka.

100 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
3.3 any shareholding which the bank has acquired or might acquire in the course of the satisfaction
of any debt due to such bank, or as a consequence of the underwriting of a share issue:
Provided that, where as a result of the acquisition of these shares the total investment of the bank exceeds the percentage of capital funds as determined by the Monetary Board under paragraph 1 above, the bank shall dispose of such excess shares within two years or such longer period as may be determined by the Central Bank of Sri Lanka, from the date of this direction or the date of the acquisition whichever is later.
3.4 Any equity which the bank has acquired or might acquire consequent to a statutory provision
in an Act establishing a financial institution.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 101 Directions issued by the Monetary Board of the Central Bank of Sri Lanka in terms of Section 76J(1) of the Banking Act, No.30 of 1988, as amended. Nivard Ajith Leslie Cabraal Chairman of the Monetary Board / Governor of the Central Bank of Sri Lanka Colombo 27 September 2010 BANKING ACT DIRECTION NO. 4 OF 2010 AMENDMENTS TO DIRECTIONS ON CLASSIFICATION OF LOANS AND ADVANCES, INCOME RECOGNITION AND PROVISIONING FOR LICENSED SPECIALISED BANKS IN SRI LANKA In the exercise of the powers conferred by Section 76J(1) of the Banking Act, No. 30 of 1988, last amended by the Banking Act, No. 46 of 2006, the Monetary Board hereby issues the following Direction replacing Directions No. 6(1)(I) of the Banking Act, Direction No. 4 of 2008 dated 8 May 2008 issued by the Monetary Board. 6(1)(I) General Provisions Banks shall maintain general provisions in the following manner:
(i) Commencing 01 January 2012, 0.5% of total outstanding of on-balance sheet PLAs as referred to in Direction 3(4) above and total outstanding of special mention on-balance sheet credit facilities as referred to in Direction 4(6)(I) above net of interest in suspense that has been debited to the respective accounts. (ii) For this purpose banks shall reduce the existing general provision requirement of 1% to 0.5% at a rate of 0.1% per quarter during the five quarters commencing 01 October 2010. (iii) Banks are exempted from maintaining a general provision in respect of credit facilities secured by cash deposits, gold or Government Securities with the same bank. Banks shall, for this purpose, meet the following conditions to be eligible for the exemption:
(a) Bank shall have the right to take legal possession of such securities in the event of default, insolvency or bankruptcy of borrower. (b) All documentation used in such collateralised transactions shall be binding on all parties and be legally enforceable in all relevant jurisdictions.

102 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Directions issued by the Monetary Board of the Central Bank of Sri Lanka in terms of Section 76j(1) of the Banking Act, No.30 of 1988, as amended. Sgd. Nivard Ajith Leslie Cabraal Chairman of the Monetary Board / Governor of the Central Bank of Sri Lanka Colombo May 8, 2008. DIRECTIONS BANKING ACT, DIRECTION NO. 4 OF 2008 CLASSIFICATION OF LOANS AND ADVANCES, INCOME RECOGNITION AND PROVISIONING In the exercise of the powers conferred by Sections 76j(1) of the Banking Act, No.30 of 1988, last amended by the Banking Act, No.46 of 2006, the Monetary Board hereby issues Directions as follows:
1(1) These Directions may be cited as the Banking Act, Direction No.4 of 2008. The Section referred to in these Directions will be those of the Banking Act, No.30 of 1988, last amended by the Banking Act, No.46 of 2006. 2(1) In terms of Section 76j(1) of the Banking Act, the Monetary Board is empowered to issue Directions to licensed specialised banks regarding the manner in which any aspect of the business of such banks is to be conducted. 3(1) The following definitions shall be applicable for the purposes of these Directions. 3(2) Total credit facilities shall mean on-balance sheet credit facilities and off-balance sheet credit facilities as specified below:
3(2)(I) On-balance sheet credit facilities:
On-balance sheet credit facilities shall mean Term loans, Block loans, Packing credits, Pledge loans, Revolving loans, Bills financed, Discounting facilities, Hire purchase loans, Leasing facilities, Trust receipts, Pawning advances, Credit card facilities, Reverse repurchase facilities, Lending for debt instruments under stand by credit lines and other instruments of a similar nature. 3(2)(II) Off-balance sheet credit facilities:
Off-balance sheet credit facilities shall mean a commitment to accept contingent liabilities, and include guarantees, bonds, warranties, letters of credit and acceptances. 3(3) Borrower shall mean individuals, single companies, the Government of Sri Lanka, public corporations, statutory bodies, firms, associations of persons and any other institutions. Citation. Empowerment under Sections 76J(1) of the Banking Act. Definitions.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 103 Classification of credit facilities. 3(4) Performing loans and advances (PLA) shall mean all credit facilities other than non-performing loans and advances (NPL) classified in terms of Direction 3(5). 3(5) NPL shall mean bad and doubtful debts. For this purpose, all credit facilities, excluding exempted credit facilities referred to in Direction 4(2), are classified as non-performing on the following basis:
3(5)(I) Based on period
(i) Credit facilities repayable in monthly instalments: when 3 consecutive instalments, principal and/or interest, have not been paid. (ii) Credit facilities repayable in quarterly/half yearly instalments:
when an instalment is not paid within 90 days from the due date.
(iii) Credit facilities repayable in one instalment at the end of a specified period or on a due date (bullet payments): when the payment is not made within 90 days from the end of the agreed period or the due date. (iv) Credit cards: when the minimum payment is in arrears for 90 days from the due date. 3(5)(II) Based on potential risk In addition to the classification requirements for NPL as set out in Direction 3(5)(I), banks shall classify PLA as NPL where full recoverability in accordance with the agreed terms is in doubt due to circumstances affecting the repayment capacity. 3(6) New credit facility shall mean any credit facility granted to borrowers with the involvement of cash/fund movements. A facility granted for the capitalisation of accrued and unpaid interest or to convert an overdraft to a term loan shall not be considered as a new credit facility. 4(1) Classification of performing and non-performing credit facilities:
Banks shall classify all credit facilities granted to a borrower, for monitoring and risk mitigation purposes, into the two categories of (a) performing loans and advances and (b) non-performing loans and advances, as specified in Directions 3(4) and 3(5) above. 4(2) Exempted credit facilities:
When classifying credit facilities as NPL under Direction 4(1) above, credit facilities secured on cash deposits shall be exempted. Banks shall, for this purpose, meet the following conditions to be eligible for the exception:
(i) Banks shall have the right to take legal possession of such cash deposit, in the event of default, or insolvency or bankruptcy of borrower. (ii) All documentation used in cash collateralised transactions shall be binding on all parties and legally enforceable in all relevant jurisdictions. A duly signed lien in the bank’s favour and a letter of set-off shall be available.

104 Directions, Determinations, and Circulars issued to Licensed Specialised Banks (iii) Such cash deposit shall be set-off against the credit facilities within 3 months from the date on which the credit facilities would have otherwise been classified as non-performing. (iv) During the period referred to in Direction 4(2)(iii) above, if the outstanding exceeds the deposit, such excess shall be classified as non-performing. 4(3) The availability of security or net worth of the borrower/guarantor shall not be considered in the application of Direction 3(5) except as permitted by Direction 4(2) above. 4(4) Classification of rescheduled credit facilities:
When rescheduling occurs before a credit facility is classified as NPL, the rescheduled credit facility shall be classified as non-performing when, in aggregate, the period of time the credit facility was in arrears before rescheduling and after rescheduling exceeds the time period specified in the Direction 3(5) in respective credit facilities. In the case of capitalisation of accrued and unpaid interest, banks shall classify a credit facility created by way of capitalisation of accrued and unpaid interest as NPL in terms of Directions 3(5) and 4(5) and categorise as required by Direction 4(6). 4(5) Classification of multiple credit facilities granted to a single borrower:
(i) Banks shall classify all credit facilities extended to a borrower as NPL, when one or more credit facilities has/have been classified as NPL in terms of Direction 3(5) and if the aggregate amount outstanding of such NPL exceeds 30 per cent of the total credit facilities extended to such borrower. Banks are required to comply with this Direction commencing 01 January 2009. (ii) In the computation of the percentage threshold as specified in Direction 4(5)(i) above, banks shall exclude all accrued interest credited to an interest in suspense account from both numerator and denominator. 4(6) Categorisation of non-performing credit facilities:
Banks shall categorise NPL, which are classified in terms of Directions 3(5) and 4(5) above, into the four categories mentioned below based on (a) the period which the credit facilities have remained non-performing and (b) the potential risk of credit facilities. However, multiple credit facilities granted to a single borrower, which are classified in terms Direction 4(5), shall be categorised as follows:
(i) Facilities classified in terms of Direction 3(5), shall be categorised as per Directions 4(6)(I) to 4(6)(IV). (ii) Other facilities of such borrower shall initially be categorised into the “Special Mention” category. Subsequent categorisation of such facilities shall be in terms of Directions 4(6)(I) to 4(6)(IV). 4(6)(I) “Special Mention” credit facilities:
(i) The period which the credit facilities have remained non-performing.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 105 Facility Type Determinant Credit facilities, repayable in monthly instalments 3 instalments or more but less than 6 instalments, principal and/or interest are due and unpaid. Credit Cards The minimum payment is in arrears for 90 days or more but less than 120 days from the due date. Other credit facilities The payments are in arrears for 90 days or more but less than 180 days from the due date. 4(6)(II) Sub-standard credit facilities:
(i) The period which the credit facilities have remained non-performing. Facility Type Determinant Credit facilities, repayable in monthly instalments 6 instalments or more but less than 12 instalments, principal and/or interest are due and unpaid. Credit Cards The minimum payment is in arrears for 120 days or more but less than 180 days from the due date. Other credit facilities The payments are in arrears for 180 days or more but less than 360 days from the due date. (ii) The potential risk of credit facilities:
Where the situation of the borrower makes it uncertain that part or the entirety of the facility will be repaid and involves more than normal risk of loss due to unsatisfactory debt servicing record or financial condition of the borrower, insufficiency of collateral or any other factors which give rise to some doubts as to the ability of the borrower to comply with the present repayment terms. 4(6)(III) Doubtful credit facilities:
(i) The period which the credit facilities have remained non-performing. Facility Type Determinant Credit facilities, repayable in monthly instalments 12 instalments or more but less than 18 instalments, principal and/or interest are due and unpaid. Credit Cards The minimum payment is in arrears for 180 days or more but less than 240 days from the due date. Other credit facilities The payments are in arrears for 360 days or more but less than 540 days from the due date.

106 Directions, Determinations, and Circulars issued to Licensed Specialised Banks (ii) The potential risk of credit facilities:
Where there is a high risk of partial default or where full collection is improbable and there is a high risk of default. 4(6)(IV) Loss credit facilities:
(i) The period which the credit facilities have remained non-performing. Facility Type Determinant Credit facilities, repayable in monthly instalments 18 instalments or more principal and/or interest are due and unpaid. Credit Cards The minimum payment is in arrears for 240 days or more. Other credit facilities The payments are in arrears for 540 days or more. (ii) The potential risk of credit facilities:
Where the situation of the borrower makes it virtually certain that the facility will not be repaid, as in the following circumstances:
(a) The customer is in a weak financial position or the ability of the customer to earn income is low, which indicates that the customer may not be able to service the debt. (b) The business of the customer has become uncertain or the customer has used the funds obtained for purposes other than for which they were meant. (c) The customer is deceased and there are no assets to repay the debt. (d) The customer has ceased or dissolved his business and is in debt to other creditors with preferential rights over the whole of the customer’s assets, where the said creditors’ total claims exceed the value of the customer’s assets. (e) The customer’s business is under liquidation. (f) The bank has filed a bankruptcy suit against the customer or has applied for participation in property with other creditors who have filed for bankruptcy, where the parties have agreed to restructure the debt with approval from the Court. (g) The bank has applied for participation in property with other creditors who have sued the debtor. (h) The bank is unable to contact or find the borrower. 4(7) Reclassification of credit facilities:
4(7)(I) Re-classification of NPL as PLA:
Banks shall reclassify NPL as PLA, if interest and principal in arrears are paid by the borrower in relation to classified NPLs.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 107 4(7)(II) Re-classification of rescheduled NPL as PLA:
The NPL accounts which have been subjected to rescheduling, whether in respect of principal instalment or interest amount, would be eligible to be upgraded to the PLA category only after the specified periods in respect of following category, subject to satisfactory performance during such period. Rescheduled NPL in Upgrade to the PLA Special mention category Period of 90 days after the date when first payment of interest or of principal, whichever is earlier, falls due under the rescheduled terms. Sub-standard and Doubtful categories Period of 180 days after the date when first payment of interest or of principal, whichever is earlier, falls due under the rescheduled terms. Loss category Period of 360 days after the date when first payment of interest or of principal, whichever is earlier, falls due under the rescheduled terms. The amount of specific provision made earlier, in respective of rescheduled NPL of above categories, could also be reversed after the period specified above. 4(8) Granting of new credit facilities:
Banks shall not grant new credit facilities for repayment of NPL in the name of the same borrower or any party, unless the credit facility so created is also classified as NPL and categorised into the same category of the repaid NPL had been categorized under Direction 4(6). The reclassification of such NPL as PLA shall be subject to Directions (4)(7)(I) and 4(7)(II). 5(1) Banks shall recognise interest on an account which has been classified as NPL as income, as and when the interest is collected by the bank, if it is collected on a cash basis. 5(2) Banks shall suspense all interest accrued but uncollected from the date a credit facility is classified as NPL and credit such accrued interest to the “Interest in Suspense Account” and debit such accrued interest to the “Interest Receivable Account-NPL”. 5(3) Banks shall continue the present practice of debiting the overdraft/credit card facilities classified as NPL with interest receivable and crediting to Interest in Suspense Account. 5(4) At the time of classifying the credit facilities as NPL, bank shall reverse the accrued interest and credit the same to Interest in Suspense Account. The reversal of unearned income identified after the close of a financial year could be accounted for in the financial year in which the advances were identified as NPL. Recognition of Interest on NPL.

108 Directions, Determinations, and Circulars issued to Licensed Specialised Banks 6(1) Banks shall maintain (a) General provisions and (b) Specific provisions, for credit risk mitigation purposes. 6(1)(I) General Provisions Banks shall maintain general provisions in the following manner:
(i) 1% of total outstanding of on-balance sheet PLAs as referred to in Direction 3(4) above and total outstanding of special mention on-balance sheet credit facilities as referred to in Direction 4(6)(I) above, net of interest in suspense that has been debited to the respective accounts. (ii) Banks shall have a general provision of 0.7% of total credit facilities as specified in Direction 6(1)(I)(i) above by 30.06.2008 and, thereafter, make an incremental provision of 0.1% every quarter till 31.03.2009. In effect, banks shall meet the total requirement of 1% not later than 31.03.2009. (iii) Banks are exempted from maintaining a general provision in respect of credit facilities secured by cash deposits, gold or Government Securities with the same bank. Banks shall, for this purpose, meet the following conditions to be eligible for the exemption:
(a) Bank shall have the right to take legal possession of such securities, in the event of default, insolvency or bankruptcy of borrower. (b) All documentation used in such collateralised transactions shall be binding on all parties and be legally enforceable in all relevant jurisdictions. 6(1)(II) Specific Provisions Banks shall maintain specific provisions, as per the credit facilities categorised in accordance with Direction 4(6), on the amount outstanding, net of realisable security value as specified in Direction 7(1) and interest suspensed in the event of such interest being debited to the credit facility as per the following:
Categories of Non-performing
Credit Facilities
Minimum Specific
Provisioning Requirement
Substandard
Credit card
Others
25%
20%
Doubtful 50%
Loss 100%
6(2) In respect of any credit facilities falling within the ambit of Direction 4(8), banks shall maintain specific provisions as follows:
(i) Where credit facilities are applied for the repayment of the capital sum outstanding, provisions shall be maintained at a level not less than what would have been required to be maintained under Direction 6(1)(II) at the time of repayment of the NPL. (ii) Where credit facilities are applied for the repayment of interest, provision shall be maintained at 100% of the outstanding facility. (iii) Where credit facilities are applied for the repayment of capital and interest (e.g., in the case of an overdraft), provisions for capital and Provisions for credit facilities.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 109 interest shall be provided for in accordance with Directions 6(2)(i) and 6(2)(ii). 7(1) Valuation of security for provisioning purposes shall be as specified below. 7(1)(I) Primary Mortgage over Immovable Property (i) The value of security is based on progressive discounts on the forced sale value (FSV) of immovable property and on a current valuation report as specified below. (ii) The progressive discounts shall be as follows:
Item
% of FSV of immovable property that can be considered as the value of security Freehold Property Leasehold Property At the first time of Provisioning 75 60 Period in the Loss Section Less than 12 months 75 60 More than 12 but less than 24 months 60 50 More than 24 but less than 36 months 50 40 More than 36 but less than 48 months 40 30 More than 48 months Property should be reviewed on a regular basis, and discounted further at the discretion of the bank’s management. Nil (iii) Current external professional valuation report:
The valuation report shall meet the following conditions.
(a) Banks shall obtain a current external professional valuation report in respect of a facility/ies where the capital outstanding amount is equal to or more than Rs.5,000,000/- or 0.1% of the bank’s capital base, whichever is less. Capital base shall be the same as that appearing in the computation of the Capital Adequacy Ratio subject to certification by the bank’s External Auditor. (b) Such report shall be from an External Independent Valuer. An External Independent Valuer shall be:
(aa) A Chartered Valuation Surveyor; or
(ab) A Fellow of the Institute of Valuers of Sri Lanka (IVSL) with 5 years experience (ac) A Graduate member of IVSL with 10 years experience Valuation of Security.

110 Directions, Determinations, and Circulars issued to Licensed Specialised Banks (ad) An Associate member of IVSL with 20 years experience. (c) The period of the valuation report shall be:
(aa) In respect of credit facilities granted against residential property which is occupied by the borrower for residential purposes: a report that is not more than four years old. (ab) In respect of credit facilities granted for all other purposes: a report that is not more than three years old. (iv) Current internal valuation report:
The valuation report shall meet the following conditions.
(a) Banks shall obtain a current internal valuation report in respect of a credit facility/ies where the capital outstanding amount is less than Rs.5,000,000/- or 0.1% of the bank’s capital base, whichever is less. (b) It shall be a current internal assessment of the value of properties mortgaged for such credit facilities, carried out by an independent officer who has not been involved in the credit decision and signed by a senior officer of the bank. (c) A current internal assessment is defined as an assessment that is not more than two years old. 7(1)(II) Mortgages other than Primary Mortgages Mortgages other than primary mortgages over immovable property will qualify for the above purpose subject to complying with the conditions in Direction 7(1)(I) above and if such property is mortgaged to the same bank. 7(1)(III) Deposit of Title Deeds of Property with an Undertaking to Mortgage No value shall be assigned until a property mortgage is executed in favour of the bank. 7(1)(IV) Assignment over Life Insurance Policies 90 per cent of the surrender value shall be considered as value of security, provided confirmation of surrender value from the insurer is available and the assignment in favour of the bank is duly registered. 7(1)(V) Secured on Gold The market price of gold, subject to an adequate insurance cover. 7(1)(VI) Assignment of Shares (i) Quoted (a) 90 per cent of the latest market price

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 111 (b) If trading has been suspended (other than temporary suspension), the net realisable tangible asset value, as per the latest audited financial statements (not more than 18 months old), is to be used, provided an auditor’s certificate evidencing the value per share is available. No value shall be given if appropriate financial statements/certificates are not available and if sales are temporarily suspended. (ii) Unquoted Value may be given, provided the shares are marketable. Appropriate value may be determined on the basis of 75 per cent of the net tangible asset value per share as certified by the company’s auditors. 7(1)(VII) Mortgage over Plant, Machinery and Equipment Value based on an external valuation report or, in the absence of such valuation, the net book value calculated by using a 20 per cent depreciation rate on the straight-line basis taking into account the date of acquisition and the acquisition price shall be applicable. 7(1)(VIII)Mortgage over Motor Vehicles Based on an external valuation report or, in the absence of such valuation, the net book value calculated by using a 25 per cent depreciation rate on the straight line basis taking into account the date of original registration and the acquisition price on that date, would be applicable. 7(1)(IX) Pledge over Stocks/Goods under the Bank’s Control 50 per cent of the market value determined on a case-by-case basis may be applicable. 7(1)(X) Hypothecation of Stock-in-Trade 30 per cent of the current value of stocks provided that the level of stock-in-trade is closely monitored by the bank. 7(1)(XI) Quoted Debentures (i) 90 per cent of the latest market price (ii) If trading has been suspended (other than temporary suspension), the net realisable tangible asset value, as per the latest audited financial statements (not more than 18 months old), is to be used, provided an auditor’s certificate evidencing the value per share is available. No value shall be given if appropriate financial statements/certificates are not available and if sales are temporarily suspended. 7(1)(XII) Guarantees (i) Licensed Banks – incorporated locally or outside Sri Lanka Eligible value of guarantee is based on a rating given by an eligible

112 Directions, Determinations, and Circulars issued to Licensed Specialised Banks credit rating agency recognition under the Direction issued on maintenance of capital adequacy ratio (Basel II), as follows:
Bank’s credit rating Value of security
AAA to AA- or equivalent 80%
A+ to A- or equivalent 50%
(ii) Government Guarantee
Full value.
7(1)(XIII)Other Types of Security
As specifically approved by the Director of Bank Supervision on a case-by-case basis. 8(1) Banks incorporated or established within Sri Lanka shall have a well-designed write-off/write down policy established by the Board of Directors, delineating the approach, authority, accountability for negligence and inappropriate follow-up, independent review and audit, continuous monitoring, reporting, etc. This policy should aim at recovering maximum salvage value through enforcement of collateral / guarantees, etc. Banks, incorporated outside Sri Lanka, are required to follow write-off/write down policy duly laid down by their head office. 9(1) Banks shall segregate all credit facilities (a) classified as non-performing (b) rescheduled (c) written off/written down from other credit facilities to facilitate close follow-up action and to monitor recoveries. 10(1)Banks shall submit the information on classification of loans and advances to the Central Bank of Sri Lanka on a monthly basis, in accordance with reporting format and instructions at Annex attached hereto. The returns for a given period should be submitted to the Central Bank on or before the 15th day of the month following the month to which the information relates. 11(1)The following Directions and Circulars issued to licensed specialised banks are hereby revoked:
(i) Directions on Suspension of interest on non-performing advances and classification of bad and doubtful advances for provisioning purposes (Schedule I) and valuation of securities for provisioning purposes (Schedule II) dated 21 November 1997, issued under Section 76j(1) of the Banking Act, as amended. (ii) Circular letter dated 15 August 2003 amending Direction 11(1)(i) above. (iii) Circular letter dated 13 July 2004 on criteria for selection of Valuers. (iv) Circular letter dated 8 September 2004 on classification of bad and doubtful advances for provisioning purposes (classification of medium and long-term project loans). (v) Circular letter dated 29 March 2006 on reversal of unearned income and classification of advances as non-performing. (vi) Direction dated 6 December 2006 on the requirement to maintain a general provision for advances. Write Off / Write down of non-performing credit facilities. Segregation of non-performing credit facilities. Reporting Requirement. Revocation of Previous Directions and Circulars.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 113
Annex
Licensed Specialised Banks
Banking Act, Direction No.4 of 2008
Classification of Loans and Advances, Income Recognition and Provisioning Reporting Format Name of Bank:
As at: DD/MM/YYYY
Amount in ’000
Credit Facilities
Performing
Loans and
Advances
(PLA)
Categorisation of Non-performing
Loans and Advances (NPL) Total
NPLs
Total
Credit
Facilities Special
Mention
Substandard
Doubtful Loss
On-balance Sheet Credit Facilities
Cheques purchased
Import bills
Export bills
Credit card
Short-term loans
Medium and long-term loans
Housing loans
Staff loans
Re-scheduled loans
Lease rentals (net)
Loans against debt securities
Pawning advances
Loans to Banks and Financial
Institutions
Other credit exposures
Interest receivables
Loans and Advances (gross)
Suspended Interest (-)
Specific provisions (-)
General provisions (-)
Loans and Advances (net)
Value of Security
Off-balance Sheet Credit Facilities
Guarantees
Bonds
Letters of Credit
Acceptances
Interest Receivables
Loans and Advances (gross)
Suspended Interest (-)
Specific provisions (-)
General provisions (-)
Loans and Advances (net)
Value of Security

114 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 76j(1) of the Banking Act, No.30 of 1988, as amended. Sgd. Nivard Ajith Leslie Cabraal Governor Colombo 01 November 2007 DIRECTIONS BANKING ACT DIRECTIONS NO. 8 OF 2007 MAXIMUM AMOUNT OF ACCOMMODATION In exercise of the powers conferred by Section 76j(1) of the Banking Act, No.30 of 1988, last amended by the Banking Act, No.46 of 2006, the Monetary Board hereby issues Directions as follows:

These Directions may be cited as the Banking Act, Directions No.8 of 2007.
The Sections referred to in these Directions will be those of the Banking Act, No.30 of 1988, last amended by the Banking Act, No.46 of 2006.
In terms of Section 76j(1), the Monetary Board has been empowered to give
Directions to licensed specialised banks or to any category of licensed specialised banks regarding the manner in which any aspect of the business of such banks is to be conducted. Accordingly, the Monetary Board hereby gives Directions to licensed specialised banks pertaining to the maximum amount of accommodation as may be made by such banks– (i) to any single company, public corporation, firm, association of persons or an individual; or (ii) in the aggregate to – (a) an individual, his close relations or to a company or firm in which he has a substantial interest; (b) a company and one or more of the following:– (aa) its subsidiaries; (bb) its holding company; (cc) its associate company; (dd) a subsidiary of its holding company; or (ee) a company in which such company or its subsidiary, or its holding company, or a subsidiary of its holding company, has a substantial interest. Citation Empowerment under 76J(1)

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 115
3. The maximum amount of accommodation that may be granted by a licensed
specialised bank shall not exceed the following percentage of the capital base of the licensed specialised bank subject to the Directions 7, 8 and 9. (i) 30 per cent in respect of customers referred to in Section 2(i) above. (ii) 33 per cent in respect of customers referred to in Section 2(ii) above.
4. (1) Notwithstanding the provisions of Direction 3(ii) above, a licensed specialised
bank may grant accommodation in excess of 33 per cent of the capital base of the licensed specialised bank to customers referred to in paragraph 2(ii) above, on the basis of a sum of scores assigned for the following as determined in Direction 4(2) below. (i) The Credit Rating and Capital Adequacy Ratio of the bank granting accommodation and, (ii) The Credit Rating of the holding company of the customers referred to in paragraph 2(ii) above. In the event the relationships within the companies in respect of whom accommodation shall be aggregated in terms of paragraph 2(ii) above do not lead to a holding company, the credit ratings of each of the companies that comprise such aggregate shall be considered and the lowest credit rating assigned to any company within such aggregate shall be deemed to be the credit rating that shall be applicable for the purpose of giving effect to this Direction. (2) The scores referred to in Direction 4(1) above shall be assigned as follows. Maximum limits of accommodation to customers referred to in paragraphs 2(i) and 2(ii) above. Enhanced limits of accommodation in aggregate to customers referred to in paragraph 2(ii) above. Aggregate limit of large accommodation. Bank’s Credit Rating Customers’ Credit Rating Bank’s Capital Adequacy Ratio Score Assigned for Each Column AAA to AA- or equivalent AAA to AA- or equivalent > 12% 1 A+ to A- or equivalent A+ to A- or equivalent 11% - 12% 2 BBB+ or equivalent and below BBB+ or equivalent and below or unrated 10% - <11% 3 (3) The maximum amount of accommodation that may be granted by a licensed specialised bank under Direction 4(1) above to customers referred to in paragraph 2(ii) above shall not exceed the following percentages of the capital base of the licensed specialised bank, based upon the sum of the scores assigned for the three columns as per the Table set out in Direction 4(2) above. (i) 40 per cent if the sum of scores is between 3 and 5. (ii) 36 per cent if the sum of scores is between 6 and 8.
5. In the case of amount of accommodations granted as at any given date to any
category of customers referred to in paragraphs 2(i) and 2(ii) above excluding the Government of Sri Lanka in excess of 15 per cent of the capital base of the licensed specialised bank, the sum total of the outstanding amount of

116 Directions, Determinations, and Circulars issued to Licensed Specialised Banks accommodation granted to such customers shall not exceed 55 per cent of the total outstanding amount of accommodation granted by the licensed specialised bank to all customers excluding the Government of Sri Lanka as at the end of the immediately preceding month.
6. (1) Notwithstanding the provisions of Directions 3 and 4 above, a licensed
specialised bank may grant accommodation in excess of the maximum limits specified under Directions 3 and 4 above to the categories of customers referred to in paragraphs 2(i) and 2(ii) above, provided that the prior approval of the Monetary Board has been sought and obtained. The Monetary Board may grant such approval on a case-by-case basis, subject to terms and conditions it may deem fit, taking into consideration, inter-alia, instances of national priorities and/or national interest and the ability of the licensed specialised bank to withstand the potential risk arising from the exposure to such enhanced accommodation, provided that the assessment of risks arising out of such accommodation to the licensed specialised bank has been analysed in detail and such analysis is furnished by the licensed specialised bank to the Monetary Board when seeking approval of the Monetary Board. (2) Subject to Direction 6(1) above, a licensed specialised bank may grant accommodation to the categories of customers referred to in paragraphs 2(i) and 2(ii) above up to 50 per cent of the capital base of the licensed specialised bank for the purpose of direct funding of infrastructure projects referred to in Annex 1 hereto for the commencement or expansion of the projects, provided that, (i) the customer(s) has (have) been awarded a contract to directly engage in an infrastructure development project in Sri Lanka, and, (ii) such project is funded to the extent of at least 50 per cent by sources outside Sri Lanka or by a consortium of licensed banks excluding the bank providing the accommodation.
7. When computing the maximum amount of accommodation under Directions 3 and
4 above that may be granted to any category of customers referred to in paragraphs 2(i) and 2(ii) above, the following accommodations shall be excluded. (i) Accommodation granted against the security of cash, gold, Government Securities, Central Bank Securities, Treasury Guarantees, Central Bank Guarantees and Guarantees issued by the World Bank, the Asian Development Bank, International Development Association or any other international institution acceptable to the Director of Bank Supervision. (ii) Accommodation granted against the security of a guarantee or similar instrument Director of Bank Supervision issued by a bank incorporated within or outside Sri Lanka other than the bank granting accommodation, subject to the following:– (a) The bank that provides the guarantee having a credit rating of AAA to A- or equivalent. (b) The amount of accommodation that shall be excluded from the computation of accommodation being 80 per cent in the event the credit rating of the bank that provides the guarantee is in the rank of AAA to AA- or equivalent and 50 per cent in the event the bank’s credit rating is in the rank of A+ to A- or equivalent. Exclusions of accommodations from maximum limits under Directions 3 and 4. Monetary Board to approve accommodation in excess of the specified limits.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 117 (c) The aggregate amount of all accommodation that shall be excluded in respect of all such instances not exceeding 100 per cent of the capital base of the licensed specialised bank. (d) The licensed specialised bank being satisfied that the credit rating of the bank providing the guarantee has been obtained within 15 months of providing accommodation and the accommodation be revised immediately if there is any change in such credit rating.
8. The maximum limits of accommodation specified in these Directions shall not
apply to the following persons / institutions.
(i) The Government of Sri Lanka.
(ii) The Ceylon Petroleum Corporation and the Ceylon Electricity Board for a maximum period of two years from the date of these Directions. (iii) Other licensed banks in respect of accommodation granted with a contractual maturity of less than two years.
9. The following definitions shall be applicable for the purposes of these
Directions.
(i) Accommodations: As defined and provided for in Section 86 of the Banking Act, accommodations shall mean credit exposure and investment exposure as specified below. (a) Credit exposure shall include all on-balance sheet accommodations such as any loan, overdraft or advance inclusive of finance lease, hire purchase and reverse repurchase agreements against debt securities and all off-balance sheet accommodations such as any commitment to grant any loan, overdraft or advance or such other facility including a commitment to accept a contingent liability. (b) Investments exposure shall include all financial investments excluding investments in equity (only ordinary shares). (ii) Amount of accommodations: The amount of accommodations shall be the total of on-balance sheet accommodations and off-balance sheet accommodations. (a) Amount of on-balance sheet accommodations: The amount of on-balance sheet accommodations shall mean the total of the accommodation limits prevailing at any given time or the total outstanding amount of all accommodations, whichever is higher. In the case of fully drawn term loans, the outstanding amount of accommodations shall be reckoned as the amount of accommodations. (b) Amount of off-balance sheet accommodations: The amount of off-balance sheet accommodations shall mean the credit equivalent amount of total of the accommodation limits prevailing at any given time or the outstanding amount of accommodations, whichever is higher. (iii) Outstanding amount of accommodations: The outstanding amount of accommodations shall be the total of outstanding on-balance sheet accommodations and outstanding off-balance sheet accommodations. Definitions. Persons/ Institutions exempted from maximum limits under Directions 3 and 4.

118 Directions, Determinations, and Circulars issued to Licensed Specialised Banks (a) Outstanding on-balance sheet accommodations: The outstanding amount of on-balance sheet accommodations shall be the capital outstanding. (b) Outstanding off-balance sheet accommodations: The outstanding amount of off-balance sheet accommodations shall be the credit equivalent amount of the outstanding off-balance sheet accommodations. (iv) Credit equivalent amount of off-balance sheet accommodations: The credit equivalent amount computed using the credit conversion factors applicable to off-balance sheet accommodations in the computation of the Capital Adequacy Ratio shall be applicable. (v) Capital Base and Capital Adequacy Ratio: Capital Base and Capital Adequacy Ratio appearing in the computation of the Capital Adequacy Ratio shall be applicable, provided that those shall be as at end of the preceding financial year or immediately preceding quarter or other latest quarter preceding the applicable quarter, whichever is available, subject to certification by the licensed specialised bank’s external auditor. (vi) Credit Rating: The credit rating shall be the credit rating obtained from a credit rating agency listed in the Annex 2 hereto and shall be one that has been obtained within the past 15 months of providing accommodation. 10.(1) In instances where the accommodation granted to a customer has to be revised due to a reduction in the applicable accommodation limit, the accommodation granted shall be reduced at the next facility review date or within six months, whichever occurs earlier. (2) In the event a merger or acquisition between any institutional customers results in existing accommodations exceeding the applicable maximum limits, the licensed specialised bank shall reduce such accommodations to be within the applicable maximum limits before expiry of six months from the date of such merger or acquisition.
11. In the event the accommodation that has been granted to any category of
customers referred to in paragraphs 2(i) and 2(ii) above as at the date of these Directions exceeds the limits, i.e., maximum limits or aggregate limit, specified in these Directions, the licensed specialised bank shall reduce such accommodation to be within the respective limits before the expiry of three months from the date of these Directions. 12.Where the Monetary Board has determined that a licensed specialised bank has contravened these Directions and the determination of such contravention has been conveyed to the licensed specialised bank, such licensed specialised bank shall not pay dividends until the contravention is rectified and such rectification is confirmed by the Director of Bank Supervision. 13.The Banking Act, Direction No.4 of 2007 dated 20 February 2007 of Maximum Amount of Accommodation is hereby revoked. Review of Accommodation. Transitional Arrangements Steps to secure compliance with Directions Revocation of Previous Direction

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 119
Annex 1
DIRECTIONS
BANKING ACT DIRECTIONS NO. 8 OF 2007
MAXIMUM AMOUNT OF ACCOMMODATION
Specification of Infrastructure Projects
Any project that involves in developing or operating and maintaining or developing, operating, upgrading and maintaining any infrastructure facility listed below shall qualify for the accommodation under the Direction 6(2) of the above Directions, provided that the accommodation referred to in the Direction shall be for the purpose of meeting direct cost of the project which shall not include repayment of any accommodation already granted by other banks or financial institutions or meeting the cost of purchase of a project already in operation. (i) a road, including toll road, a bridge or a rail system; (ii) a highway project including other activities being an integral part of the highway project; (iii) a port, airport, inland waterway or inland port; (iv) a water supply project, irrigation project, water treatment system, sanitation and sewerage system or solid waste management system; (v) telecommunication services whether basic or cellular, including radio paging, network of trunking, network and internet services; (vi) an industrial park or special economic zone; (vii) generation or generation and distribution of power; (viii) transmission or distribution of power by laying a network of new transmission or distribution lines; (ix) construction relating to projects involving agro-processing and supply of inputs to agriculture; (x) construction of educational institutions and hospitals; (xi) any other infrastructure project as may be specified by the Monetary Board from time to time.
Annex 2
DIRECTIONS
BANKING ACT DIRECTIONS NO. 8 OF 2007
MAXIMUM AMOUNT OF ACCOMMODATION
List of Credit Rating Agencies Acceptable to the Monetary Board

Fitch Ratings Lanka Ltd.
Lanka Ratings Agency Ltd.
Standard & Poors
Moody’s Investors Service
Credit Rating Information Services of India (CRISIL)
Investment Information & Credit Rating Agency (ICRA)
Fitch Ratings India Ltd.
Pakistan International Credit Rating Agency
Rating Agency Malaysia
Japan Credit Rating Agency Ltd.
Any other credit rating agency as may be accepted by the Monetary Board from time to time.

120 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Bank Supervision Department 17 March 2005 To : The CEOs of Licensed Specialised Banks Dear Sirs, ACCOMMODATION TO DIRECTORS & RELATED COMPANIES As intimated to you at the Meeting of the CEOs of Licensed Commercial Banks (LCBs) and Licensed Specialised Banks (LSBs) held on 17.03.2005, the Directions to LSBs on the above subject have been amended to be consistent with the Directions issued to the LCBs in this regard. Please find enclosed the amendment to the Direction issued under Section 76J(1) of the Banking Act. Yours faithfully, Sgd, Director of Bank Supervision cc – Secretary-General/SLBA ENCL:

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 121 BANKING ACT, NO.30 OF 1988 As amended by Banking (Amendment) Act No.33 of 1995 and Act No.2 of 1995 Amendment to the Directions issued by the Monetary Board of the Central Bank of Sri Lanka under
Section 76J(1) of the Banking Act No.30 of 1988 as amended by Act No. 33 of 1995 and Act No.2 of
2005.
Sgd. Sunil Mendis
Governor
Colombo
17 March 2005.
AMENDMENT TO DIRECTIONS UNDER SECTION 76J(1)
ACCOMMODATION TO DIRECTORS AND RELATED COMPANIES Direction on Accommodation to Directors and Related Companies dated 21.11.97 issued by the Monetary Board is hereby amended as follows:

By the repeal of subsection 1.1 and substitution therefor of the following:
1.1 “any of its directors or to a close relation of such director exceeding Rupees Five Hundred
Thousand (Rs.500,000/-), and except where such accommodation is provided by the issue of a credit card, such accommodation is secured by such specified security as set out in section 7 below. Where the accommodation is provided by the issue of a credit card, the limit applicable shall be Rupees Five Hundred Thousand (Rs.500,000/-) provided that such accommodation is on the same terms and conditions as for other customers of the respective bank. However, where the accommodation is secured by the security specified at subsection 7.1 to 7.5 below, accommodation may be granted upto the limit of the security permitted in the relevant subsection.”
By the insertion of section 6.1 immediately after section 6:
6.1 “Where any accommodation is granted by a licensed specialised bank under section 1 during the
course of any financial year, such accommodation shall be disclosed in the accounts for that financial year and for each subsequent financial year till such accommodation has been repaid or settled in full.” The above amendment will be operative with immediate effect.

122 Directions, Determinations, and Circulars issued to Licensed Specialised Banks BANKING ACT NO. 30 OF 1988 AS AMENDED BY BANKING (AMENDMENT) ACT NO. 33 OF 1995 The directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 76j(1) of the Banking Act, No.30 of 1988 as amended by the Banking (Amendment) Act, No.33 of 1995. Sgd. A. S. Jayawardena Governor Colombo 21-11-1997. DIRECTIONS UNDER 76j(1) ACCOMMODATION TO DIRECTORS & RELATED COMPANIES

No licensed specialised bank shall grant accommodation to –
1.1 any director or to a close relation of such director an amount exceeding the amount of
accommodation, if any, extended to him or such close relation, outstanding on the day prior to the date of his appointment as a director or the date of this direction whichever is later or Rs.1 million, whichever is more and such accommodation is secured by such specified security referred to at paragraph 7 below.
1.2 any concern in which such director or his close relation –
1.2.1 has a shareholding in excess of 10 per cent of the paid up capital of the concern if such
concern is a company;
1.2.2 is the sole proprietor or is a partner;
unless such accommodation is secured by specified security referred at paragraph 7 below.
Any accommodation granted in accordance with paragraph 1 above shall be sanctioned at a meeting
of the Board of Directors with not less than two-thirds of the number of the directors constituting the Board of Directors of the licensed specialised bank (other than the director concerned) voting in favour of such accommodation.
Where any accommodation has been granted by a licensed specialised bank to a person or close
relation of a person or to any concern mentioned at paragraph 1.2.1 or 1.2.2 above, and if that person is a director of a licensed specialised bank on the date of this direction or appointed a director after the date of this direction, steps shall be taken to obtain such specified security referred to at paragraph 7 below within one year from the date of this direction or from the date of appointment as a director as may be applicable or such longer period as may be given by the Monetary Board.
Where such special security at paragraph 7 below has not been provided within the time period
granted or any extension granted by the Monetary Board, such director shall be deemed to have vacated office on the expiry of the period granted /extended to obtain such specified securities under paragraph 3 above.
Provisions of paragraph 3 & 4 above shall not apply if and when the director concerned vacates such
office by death, retirement, resignation or otherwise.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 123
6. No accommodation or any part thereof, granted by a licensed specialised bank to a director or a
close relation of the director or to any concern mentioned at paragraph 1.2.1 & 1.2.2 above, shall be remitted without the prior approval of the Monetary Board and any such remission without such approval shall be null and void.
7. The specified securities referred to at paragraphs 1, 3 & 4 above shall be –
7.1 Sri Lanka Government Guarantees;
7.2 Bank Guarantees;
7.3 Guarantees of International Financial Institutions;
7.4 Government or Central Bank Securities provided that the accommodation granted would not
exceed 90 per cent of the face value or market value, whichever is lower of such securities;
7.5 Cash Deposits held under lien to the order of the lending licensed specialised bank provided
that the accommodation granted would not exceed 90 per cent of such cash deposits;
7.6 Life Insurance Policies issued in Sri Lanka and assigned to the lending licensed specialised
bank provided that the accommodation granted would not exceed 75 per cent of the surrender value of such policy;
7.7 Immovable property held on a freehold basis and on which a primary mortgage has been taken
by the lending licensed specialised bank provided that the accommodation granted would not exceed 60 per cent of the value of such property;
7.8 Immovable property held on a leasehold basis provided that –
7.8.1 the lease has been granted by a statutory body;
7.8.2 the unexpired period of lease is at least 50 years;
7.8.3 there is no prohibition on the mortgage of the leasehold rights contained in the Deed of
Lease, or if the Deed of Lease requires the prior approval of the Lessor for the mortgage of the leasehold rights such approval has been obtained from the Lessor;
7.8.4 a primary mortgage has been taken on the leasehold rights by the lending licensed
specialised bank; and provided further that the accommodation granted does not exceed 60 per cent of such property.
7.9 Shares of Public Companies quoted on the Colombo Securities Exchange provided that the
accommodation granted would not exceed 50 per cent of the market value of such shares;
7.10 Mortgage of Stock-in-Trade provided that the accommodation granted would not exceed 30 per
cent of the market value of such stock-in-trade;
7.11 Pledge of non-perishable goods of a commercial nature which are readily marketable,
excluding all manufactured foods and other items with a limited shelf life, provided that the accommodation granted would not exceed 40 per cent of the market value of such goods;
7.12 Mortgage of Plant and Machinery provided that the accommodation granted shall not exceed
50% of the value of such plant and machinery as at date of accommodation.

124 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 76J(1) of the Banking Act, as amended. Nivard Ajith Leslie Cabraal Chairman of the Monetary Board and Governor of the Central Bank of Sri Lanka Colombo 2nd September 2009. BANKING ACT DIRECTION NO. 4 OF 2009 LEASED-BACKED TRUST CERTIFICATES / LEASE RECEIVABLES AS APPROVED SECURITY FOR ACCOMMODATION TO ANY DIRECTOR OR CLOSE RELATION OF A DIRECTOR OR TO ANY CONCERN IN WHICH THE DIRECTOR HAS SUBSTANTIAL INTEREST In the exercise of the powers conferred by Section 76J(1) of the Banking Act, No. 30 of 1988, last amended by the Banking Act, No. 46 of 2006, the Monetary Board hereby issues Directions to licensed specialised banks.

These Directions may be cited as the Banking Act, Direction No. 4 of 2009.
The Sections referred to in this Direction will be those of the Banking Act No. 30 of 1988, last amended by the Banking Act No. 46 of 2006.
In the exercise of the powers conferred by Section 76J(1) of the Banking Act, the
Monetary Board is empowered to issue Directions to licensed specialised banks regarding the manner in which any aspect of the business of such banks is to be conducted.
The following new Direction shall be inserted immediately after Direction
7.12 of the Directions issued in terms of Section 76J(1) of the Banking Act on
Accommodation to Directors and Related Companies issued dated 21 November 1997.
7.13 Lease-backed trust certificates/lease receivables provided that–
7.13.1 The total accommodation granted on the lease-backed trust
certificates/lease receivables shall not exceed 50 per cent of the value of such lease backed trust certificates/lease receivables.
7.13.2 The total accommodation granted on the lease-backed trust
certificates/lease receivables shall not exceed 50 per cent of the aggregate amount of the total outstanding accommodation granted to the individual company.
7.13.3 Lease-backed trust certificates/lease receivables shall be based
on the un-encumbered (performing) lease portfolio.
7.13.4 Lease-backed trust certificates/lease receivables shall be
mortgaged to the lending bank.
7.13.5 The lending bank should be a registered establishment under the
Finance Leasing Act No. 56 of 2000.
Citation.
Empowerment under Section
76J(1).
Approved Security.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 125 Directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 46(1) and 76J(1) of the Banking Act, No.30 of 1988, as amended. Sgd. Nivard Ajith Leslie Cabraal Chairman of the Monetary Board and Governor of the Central Bank of Sri Lanka Colombo 04 April 2013 BANKING ACT DIRECTION NO. 1 OF 2013 EXPOSURE TO THE STOCK MARKET BY LICENSED COMMERCIAL BANKS AND LICENSED SPECIALISED BANKS In the exercise of the powers conferred by Sections 46(1) and 76J(1) of the Banking Act, No. 30 of 1988, last amended by the Banking (Amendment) Act, No. 46 of 2006, the Monetary Board hereby issues the following Directions on Exposure to Stock Market by Licensed Commercial Banks and Licensed Specialised Banks (hereinafter referred to as Licensed Banks), having reviewed the exposures of Licensed Banks to the stock market and decided to require Licensed Banks to adopt appropriate risk management standards to mitigate any potential risks at prudent levels with a view to promoting the safety and soundness of the banking system.

These Directions may be cited as the Banking Act, Directions No. 1 of 2013.
A Licensed Bank may extend margin trading facilities on shares to customers/
investors, provided that:
(i) the Licensed Bank shall have internal limits in respect of:
(a) individual customer/investor margin trading exposure based on the market value of such customer’s/investor’s share portfolio subject to any statutory limits in place; and (b) aggregate margin trading exposures based on the total outstanding amount of loans and advances granted by a licensed bank. (ii) all shares purchased from margin trading facility shall be under pledge to the Licensed Bank providing margin trading facility.
3.1 A Licensed Bank may issue guarantees for the purpose of purchase of shares
from Initial Public Offerings not exceeding fifty percent of the value of such Initial Public Offering.
3.2 The guarantees issued against cash deposits shall be exempted from the above
limit, provided that:
(i) the cash deposit is not less than the value of the guarantee; (ii) the cash deposit is not financed from any loans from the bank; and Citation. Internal limits on Margin trading on Shares. Limit on issue of guarantees for purchase of shares.

126 Directions, Determinations, and Circulars issued to Licensed Specialised Banks (iii) the Licensed Bank has the right to take possession of such cash deposits in the event of default of commitments by the customer.
4. The Board of Directors of Licensed Banks incorporated in Sri Lanka and the
Head Office/Regional Office of the branches of banks incorporated outside Sri Lanka shall formulate a Board/Head Office/Regional Office approved risk management policy, guidelines and internal controls on their exposures to stock market activities including prudential limits for margin trading as per 2(i) above and assess risk exposures, such as credit, liquidity and concentration with appropriate risk management information on an on-going basis.
5. Every Licensed Bank shall spread margin trading facilities among a reasonable
number of customers with diversified portfolios of shares to mitigate risky concentrations.
6. Every Licensed Bank shall report to the Director of Bank Supervision details
of exposure to the stock market in accordance with the reporting format at
Annex A on or before the 15th day of the month following each quarter.
7. The following Banking Act Directions are hereby revoked:
(i) Banking Act Direction No. 5 of 2011, dated 26 August 2011 on Exposure to Stock Market and Banking Act, Direction No. 11 of 2011, dated 16 December 2011 on Amendments to Direction on Exposure to Stock Market issued to Licensed Commercial Banks; (ii) Banking Act Direction No. 6 of 2011, dated 26 August 2011 on Exposure to Stock Market and Banking Act, Direction 12 of 2011, dated 16 December 2011 on Amendments to Direction on Exposure to Stock Market issued to Licensed Specialised Banks. Role of Board of Directors. Control on Concentrations. Reporting. Revocation of Directions.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 127 To : Director of Bank Supervision, Central Bank of Sri Lanka Name of Licensed Bank : Quarter ended : Quarterly Statement of Exposure to the Stock Market A. Exposure to the Stock Market Item On Balance Sheet Exposure Off Balance Sheet Exposure Total Exposure (h) = (d + g) Margin Trading Facilities (a) Other loans granted for purchase of listed shares (b) Others (i) (c) Sub Total (d) = (a + b + c) Total value of guarantees issued (e) Under-writing and other commitments, credit lines, etc. (f) Sub Total (g) = (e + f) Amount outstanding (Rs. mn) As a % of outstanding amount of total loans and advances B. Guarantees issued for purchase of shares at IPO Name of IPO (i) Size of IPO (j) Fully cash backed guarantees (Rs. Mn) (k) Guarantees issued without cash deposits (Rs. mn) (l) Total value of guarantees issued (Rs. mn) (m) = (k + l) Total Note : (i) if any, please provide details separately. This statement should be submitted to the Bank Supervision Department by the 15th day of the month following end of each quarter. Please e-mail to banksup@cbsl.lk or fax to 2477711 Annex A

128 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Bank Supervision Department 31 December 2004 To : All Licensed Commercial Banks Licensed Specialised Banks; Approved Auditors Dear Sirs, ACCOUNTING FOR PROPERTIES ACQUIRED BY FORECLOSURE OF COLLATERAL / PART SETTLEMENT OF DEBT It has been observed that the accounting treatment adopted by some banks with respect to immovable property acquired by foreclosure of collateral from defaulting customers or which have devolved on the banks as part settlement of debt, leads to a misrepresentation of the bank’s assets and the level of non performing advances of the bank.
2. In order to create a uniform practice among the banks in accounting for such assets, and
to avoid misrepresentation of the level of non performing advances, all banks are hereby informed to adhere to the following procedure in accounting for such property;
2.1 Immovable property acquired by foreclosure of collateral from defaulting customers, or
which have devolved on the banks as part settlement of debt should not be accounted for as investment property or as part of the assets of the bank. Such property should be recorded on a memorandum basis.
2.2 The related facility should remain classified in the books of the bank until such property is
disposed of and the proceeds realized by the bank.
3. Your attention is drawn to section 48a of the Banking Act, No.30 of 1988, as amended by
Act, No.33 of 1995, which requires banks to dispose of property acquired by foreclosure of collateral from defaulting customers or which have devolved on the banks as part settlement of debt, at the earliest opportunity. Yours faithfully, Sgd, Director of Bank Supervision

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 129 Ref. No. : 02 / 17/800/008/001 Bank Supervision Department 05 January 2009 To : Chief Executive Officers of all State Banks ESTABLISHMENT OF A REVOLVING FUND TO GRANT LOANS TO ACQUIRE PROPERTY TO THE STATE SECTOR EMPLOYEES His Excellency the President, at the discussions held on 21 October 2008 with the state sector employees union, has directed the Central Bank to inform all state banks to establish a Revolving Fund for the purpose of granting loans to acquire property, to state sector employees. Accordingly, we request all state banks to accede to the above. B D W A Silva Director of Bank Supervision

130 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Ref. No. : 02 / 17/600 / 0002/001 Bank Supervision Department 30 January 2009 To : All Licensed Commercial Banks and Licensed Specialised Banks Dear Sir/Madam, CONCESSIONS GRANTED TO TOURISM INDUSTRY In view of the major setback in global economic activities and their impact on the tourism industry, the Monetary Board has requested all licensed commercial banks and licensed specialised banks to grant the following concessions to those institutions in the tourism industry, that wish to avail themselves of such concessions:
(i) Grant a moratorium of 6 months from January 2009 to June 2009, in respect of outstanding credit facilities to tourist hotel companies and the holding companies of such hotel companies, provided that the hotel companies concerned retain their employees at levels prevailing as at December 2008. (ii) Recover the capital and interest falling due during the moratorium period, from January 2010 onwards in thirty-six equal instalments and a concessionary rate of interest be charged for this facility. (iii) Waive the penal interest imposed on any defaulted credit facilities taken by the tourist hotel companies, and the holding companies of such hotel companies. (iv) Continue to maintain any non-performing loans in the same category for provisioning purposes, during the six-month moratorium period. Yours faithfully, B D W A Silva Director of Bank Supervision

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 131 Ref. No. : 02 / 17/800/007/001 Bank Supervision Department 03 March 2009 To : CEOs of Licensed Commercial Banks and Licensed Specialised Banks Dear Sir/Madam, GRANTING CREDIT FACILITIES TO PRIVATE SECTOR It has been brought to our notice that some banks have informed their customers that the Central Bank has required banks to curtail credit to their customers. The recent trends show that growth in credit to the private sector has decelerated significantly. Inflation and inflation expectations are also moderating. In view of these developments and to mitigate the negative consequences of the global financial turmoil on the domestic economy, the Central Bank has also taken several measures to ease conditions in the domestic financial markets. Accordingly, you may take appropriate measures to expand credit to the private sector, based on the evaluation of credit risk of the customers. Yours faithfully, B D W A Silva Director of Bank Supervision

132 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Order made by the Monetary Board of the Central Bank of Sri Lanka under Section 101(1) of the Monetary Law Act, No. 58 of 1949, as amended. Sgd. Nivard Ajith Leslie Cabraal Chairman of the Monetary Board and Governor of the Central Bank of Sri Lanka Colombo 12 March 2012. MONETARY LAW ACT, ORDER NO. 1 OF 2012 CEILING ON CREDIT GROWTH OF LICENSED BANKS In view of the higher than desired increase in credit extended by licensed banks and its impact on the monetary aggregates and inflation, the Monetary Board in the exercise of powers conferred by
Section 101(1) of the Monetary Law Act, No. 58 of 1949, as amended, hereby issues Orders No. 1 of
2012 as follows:

The credit growth of a licensed bank in the year 2012 shall not exceed
18 per cent of the total outstanding of credit as at end of year 2011 or Rs. 800 million, whichever is higher. Provided however, that a licensed bank may grant credit in the year 2012 in excess of 18 per cent or Rs. 800 million, up to 23 per cent of the total outstanding of credit as at end of year 2011 or Rs. 1,000 million, whichever is higher, where corresponding funds are raised from overseas sources.
The following definitions shall be applicable for the purposes of this Order.
i. “Credit” shall mean all on-balance sheet rupee credit facilities such as any
loan, overdraft or advance inclusive of finance leases, hire purchase and trade finance.
ii. “Outstanding amount of credit” shall mean:
a. In the case of overdrafts and credit card receivables, the total of outstanding amount after deducting all accrued interest of all non-performing overdrafts and credit card receivables. b. In the case of other loan and advances (other than overdrafts and credit card receivables), the total of capital outstanding amount after deducting all accrued interest on performing and non-performing loans and advances. Credit growth limits. Definitions.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 133 Ref. No. : 02/04/004/0005/001 Central Bank of Sri Lanka Bank Supervision Department To : All Licensed Commercial Banks and Licensed Specialised Banks GUIDELINES ON THE GRANT OF FACILITIES FOR THE ISSUE OF COMMERCIAL PAPER AND OTHER FORMS OF PROMISSORY NOTES All Licensed Commercial Banks (LCBs) and Licensed Specialised Banks (LSBs) are hereby required to observe the following guidelines when they provide accommodation for the issue of Commercial Paper and other forms of Promissory Notes (CP/PN) by their corporate customers by accepting, endorsing, guaranteeing, underwriting or purchasing such CP/PN, or where they support the issue of such instruments by acting as issuing/paying agents, dealers, or by authenticating signatures of the issuers.

Form of Commercial Paper/Promissory Notes – CP/PN shall take the form of a usance promissory
note negotiable by delivery or endorsement and delivery, in accordance with the Bills of Exchange Ordinance.
Eligibility Criteria – The LCBs and LSBs shall observe the following criteria when supporting the
issue of CP/PN referred to above:
2.1 The issuing corporate customers should not be LCBs, LSBs or Finance Companies.
2.2 All existing credit facilities enjoyed by the issuing company with any LCB/LSB should be
“current” in terms of the Central Bank’s Directions on Non-Performing Advances issued under
Section 46a and Section 76j(I) of the Banking Act for LCBs and LSBs, respectively.
2.3 In the case of providing accommodation, the issuing company should have an approved
stand-by credit line from the LCB/LSB supporting the issue, to the full redemption value, which should be specifically reserved for the purposes of redemption of such CP/PN. Such credit line should be for a period longer than the maturity date of CP/PN. OR An ‘investment grade rating’ by a Rating Agency approved by the Central Bank of Sri Lanka. “full redemption value” refers to the amount of the principal, interest and any other charges which is payable upon redemption of such CP/PN.
Procedures – A LCB’s/LSB’s support for the issue of CP/PN does not require the prior approval of
the Central Bank of Sri Lanka. However, in supporting the issue of these instruments, LCBs/LSBs shall ensure that:
3.1 The company intending to issue such CP/PN submits to LCBs/LSBs –
(a) A written request indicating the nature of support applied for in respect of each issue of CP/PN; (b) Comprehensive financial information which would include company profiles and financial data including a projected cash flow statement; (c) The value of CP/PN already issued and outstanding; (d) Board resolution for the issue of CP/PN concerned.

134 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
3.2 The LCBs/LSBs should also ensure that the company profiles and financial data are made
available to investors upon request.
3.3 An adequate appraisal of the financial condition of the issuer is carried out and due caution is
exercised before lending the support of the LCB/LSB. For this purpose, the LCB/LSB should, among other things, obtain a report from the Credit Information Bureau (CRIB).
3.4 The CP/PN are printed on good quality security paper incorporating adequate security features,
that necessary precautions have been taken to keep documents in safe custody, preventing access by unauthorised persons.
3.5 The issue of CP/PN is completed within a period of 14 calendar days from the date of issue.
Thus, any unsold portion of the issue after the 14 day cannot be issued.
3.6 Each single issue of CP/PN should have the same maturity date.
3.7 The issuing company should discharge the obligations on the CP/PN on the date of maturity.
No grace period shall be given to the issuer in this regard.
3.8 The CP/PN shall contain the following minimum information/features:
(a) The description of debt instrument should be clearly printed on it; (b) Name of the issuing company; (c) Serial number; (d) Place of payment (of interest and principal); (e) Date of issue; (f) Amount (in words and figures); (g) Date of maturity; (h) Names of the issuing and paying agents; (i) If the repayment of principal and payment of interest are guaranteed, name of the guarantor; (j) Signatures of authorised signatories of the issuing company (k) Where the LCB/LSB does not accept any obligation for the payment on the CP/PN, as when it only authenticates the signature, such fact should be conspicuously stated on the CP/PN; (l) The counterfoil of CP/PN should also contain the information at (a) to (k). In the case of (j), the signature/initials of the respective signatories. (m) Adequate space should be provided for endorsements on the reverse of the CP/PN.
3.9 (a) The LCB’s/LSB’s accounts in respect of CP/PN should be in conformity with
applicable/accepted accounting practices and non fund based support for CP/PN should be recorded and reported as off-balance sheet items. (b) The LCB’s/LSB’s obligations/commitments on CP/PN shall be reported in the statutory returns submitted to the Central Bank of Sri Lanka. (c) Details of the LCB/LSB support for the issue of CP/PN outstanding monthly, shall be reported to the Director of Bank Supervision in a monthly statement as in the annexed format. This statement shall be submitted by the 15th of the following month, duly certifying that the obligations of the LCB/LSB under the different categories of issue, as recorded in the General Ledger, are correctly reflected in the statement. A ‘nil’ statement should be sent if there are no outstanding balances.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 135
3.10 The LCBs/LSBs supporting the issue of CP/PN should conform to all legal requirements.
3.11 Roll-over of CP/PN should be considered as a new issue.
4. Prudential Requirements of the Central Bank
4.1 All credit facilities extended, and commitments made, by LCBs/LSBs relating to the issue of
CP/PN will be treated as accommodation granted to the issuing company and shall be subject to directions issued from time to time under the Banking Act and to all prudential guidelines issued by the Central Bank.
5. These Guidelines shall be effective from 05 January 2001.
6. Guidelines to Licensed Commercial Banks in Sri Lanka on the grant of facilities for the issue of
Commercial Paper dated 05.06.1995 are hereby rescinded.
7. Any clarifications/queries with regard to these Guidelines should be addressed to the Director of
Bank Supervision.
Sgd. P. T. Sirisena
Director of Bank Supervision
05 January 2001

136 Directions, Determinations, and Circulars issued to Licensed Specialised Banks (Amounts in Rupees Thousands) Name of Legal Status Type of Amount Amount Date of Date of Rate of Nature of Issuing Company of Issuing Promissory of the Issue Subscribed Issue Maturity Interest (%) Support Company Notes Issued (Face Value) (YY/MM/DD) (YY/MM/DD) (1) (2) (3) (4) (5) (6) (7) (8) (9) We hereby certify that this statement reflects the value of support extended to the Bank’s customers and that the statement figures tally with the General Ledger Balances as at the end of the month. Date : Name of Bank : Authorised Officer : * Column (9) Please indicate using the following Codes : Nature of Support Code Accepting AC Endorsing EN Guaranteeing GT Underwriting UN Purchasing PR Issuing Agent IA Paying Agent PA Dealer DE Authenticating AU Instructions : * Column (2) Please indicate using the following Codes : Private Company – PR Public Unquoted Company – PU Public Quoted Company – PQ Peoples Company – PC * Column (3) : Please indicate whether Commercial Paper (CP), Promissory Notes (PN), or any other form (Please specify) * This statement should reach the Director, Bank Supervision Department on or before the 15th of the following month. * A ‘nil’ statement should be submitted if there are no outstanding amounts. Monthly Statement of Commercial Paper / Promissory Notes As at ……………………… in terms of Guidelines dated 5 January 2001

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 137 Bank Supervision Department 31 December 2007 Mr. S A Weerasinghe General Manager State Mortgage and Investment Bank 269, Galle Road Colombo 3. Dear Sir, DIRECTION ON LIQUID ASSETS With a view to strengthening the safety and soundness of the State Mortgage and Investment Bank (SMIB), the Monetary Board of the Central Bank of Sri Lanka has decided to revoke the separate Direction issued to SMIB on the maintenance of the Statutory Liquid Assets on 21 November 1997 under Sections 76j(3) of the Banking Act and replace the same with the Direction issued to other Licensed Specialised Banks (LSBs), with effect from 1st January 2008. The applicable Direction issued under
Section 76j(1) of the Banking Act is attached herewith.
The Monetary Board has also decided to grant time till 31 December 2008 to comply with the requirements contained in the new Directions. If SMIB is unable to comply with the newly applicable Direction, it shall comply with requirements contained in the relevant previous Direction until the expiration of the time granted to comply with the new Direction. Yours faithfully, Sgd, B D W A Silva Actg. Director of Bank Supervision

138 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Ref. No. : BS/31/90 Vol. IV Bank Supervision Department 8th Floor, Renuka Building 41, Janadhipathi Mawatha Colombo 1. 18th May, 1998 To : Licensed Specialised Banks LIQUID ASSETS DIRECTION UNDER SECTION 76j(3) OF THE BANKING ACT, NO. 30 OF 1988 AS AMENDED BY ACT, NO. 33 OF 1995 The Monetary Board, in terms of Paragraph 3.10 of the above mentioned Directions dated 21st November 1997, has determined that Treasury Bonds issued under Section 21a of the Registered Stock and Securities Ordinance shall be liquid assets. The Licensed Specialised Banks may, therefore, take into account the Treasury Bonds they hold on their account for the purpose of complying with the provisions of the Directions issued under Section 76j(3) of the Banking Act, No.30 of 1988 as amended by Act, No.33 of 1995, relating to their obligation to maintain the required amount in liquid assets. Yours faithfully, Sgd. Y. A. Piyatissa Director of Bank Supervision NSB
Section 76j(3)
SMIB 



Directions, Determinations, and Circulars issued to Licensed Specialised Banks 139 BANKING ACT NO. 30 OF 1988 AS AMENDED BY BANKING (AMENDMENT) ACT NO. 33 OF 1995 The directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 76j(1) of the Banking Act, No.30 of 1988 as amended by the Banking (Amendment) Act, No.33 of 1995. Sgd. A. S. Jayawardena Governor Colombo 21-11-1997. DIRECTIONS UNDER 76j(1) LIQUID ASSETS

Every licensed specialised bank shall maintain minimum average monthly, liquid assets of not less
than 20 per cent of its total monthly deposit liabilities.
Every licensed specialised bank shall furnish to the Director of Bank Supervision a monthly return
in a format to be released by him, certifying the total monthly deposit liabilities and the average total monthly liquid assets as at close of business on the last working day of that month. Such return should be forwarded before the 15th day of the month following the month to which the statement relates.
Liquid Assets for purpose of this direction shall mean –
3.1 Cash in hand.
3.2 Balance in a current account in a licensed commercial bank.
3.3 Balance in a deposit account in a licensed specialised bank or a licensed commercial bank
provided such deposit account have a maturity not exceeding one year.
3.4 Money at call in Sri Lanka.
3.5 Treasury bills and securities issued or guaranteed by the Government of Sri Lanka which have
a maturity not exceeding one year.
3.6 Goods receipts.
3.7 Import and export bills.
3.8 Inland bills.
3.9 Cash items in process of collection.
3.10 Treasury Bonds issued under Section 21a of the Registered Stock and Securities Ordinance.
3.11 Such other assets as may be determined by the Monetary Board.

140 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Ref. No. : 02 / 17/500 / 0540/001 Bank Supervision Department 15 October, 2012 To : The CEOs of all Licensed Specialised Banks Definition of Liquid Assets under Section 76J(1) of the Banking Act, No. 30 of 1988, as Amended The Monetary Board has determined that Reverse Repurchase Agreements in Treasury bills and Treasury bonds shall be treated as liquid assets in terms of item 3.11 of the Liquid Assets Direction of licensed specialised banks issued under Section 76J(1) of the Banking Act, No. 30 of 1988. Licensed specialised banks may, therefore, take into account the daily outstanding amount of the Reverse Repurchase Agreements or the market value of the underlying securities held under Reverse Repurchase Agreements, whichever is less, in computing their liquid assets ratio. Licensed specialised banks are further informed that, the eligible value of the Reverse Repurchase Agreements in Treasury bills and Treasury bonds should be reported under code number 4.1.2.4.0.0 and 4.1.2.13.0.0, respectively, of the monthly web based return on Statutory Liquid Assets Ratio (BSD-MF-04-LD). Yours faithfully, (Mrs.) T M J Y P Fernando Director of Bank Supervision

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 141 Ref. No. : 02 / 17/500/0540/001 Bank Supervision Department 05 April, 2013 To : The CEOs of all Licensed Specialised Banks Definition of Liquid Assets under Section 76J(1) of the Banking Act, No. 30 of 1988, as Amended The Monetary Board has determined that investments in Gilt Unit Trusts (GUTs) by LSBs shall be treated as liquid assets in terms of item 3.11 of the Liquid Assets Direction of licensed specialised banks issued under Section 76J(1) of the Banking Act, No. 30 of 1988, subject to the following conditions. (a) GUTs should be open ended mutual funds. (b) Underlying investment portfolio of GUTs should always be Sri Lanka Government Securities (Treasury bills and Treasury bonds). (c) Only 90% of investments in GUTs should be treated as liquid assets. Licensed Specialised Banks are further informed that, the eligible value of the investments in GUTs be reported under code number 4.1.2.4.0.0 of the monthly web based return on Statutory Liquid Assets Ratio for Domestic Banking Unit (BSD-MF-04-LD). Yours faithfully, (Mrs.) T M J Y P Fernando Director of Bank Supervision

142 Directions, Determinations, and Circulars issued to Licensed Specialised Banks BANKING ACT Directions made by the Monetary Board of the Central Bank of Sri Lanka under Section 76j(1) of the Banking Act, No.30 of 1988 as amended by the Banking (Amendment) Act, No.33 of 1995 and Act, No.2 of 2005. Sgd. Sunil Mendis Governor Colombo 01-03-2006. DIRECTION ON THE PRUDENTIAL NORMS FOR CLASSIFICATION, VALUATION AND OPERATION OF THE BANK’S INVESTMENT PORTFOLIO

With effect from 31 March 2006, all Licensed Specialised Banks are required to classify their
investment portfolio under two categories: i.e., the Investment Account and the Trading Account. All banks are required to maintain two separate books of accounts for this purpose.
Banks should decide on the category of investment at the time of acquisition and the decision should
be documented. Classification is not a free choice but is based on facts and the management’s intent at the date of purchase. Transfers between categories after initial recognition are restricted.
The criteria for classifying and valuation of the bank’s investment portfolio are as provided below:
A. Investment Account
(a) All securities acquired with the positive intent and ability to hold till maturity shall be classified under the Investment Account. (i) Positive intent cannot be demonstrated if:

the bank has the intent to hold the securities for only an undefined period; or
the bank stands ready to sell the securities in response to changes in market interest
rates or risks, liquidity needs, changes in the availability of the yield on alternative investments, changes in financing sources or terms, or changes in foreign currency risk; or
the issuer has a right to settle the securities at an amount significantly below its
amortised cost.
(ii) The ability to hold the securities to maturity cannot be demonstrated if:
the bank does not have the financial resources available to continue to finance the
investment until maturity; or
the bank is subject to legal or other constraints that could frustrate its intention to
hold the securities to maturity.
(iii) When a bank’s actions cast doubt on its intent or ability to hold investments to maturity, the Central Bank of Sri Lanka shall retain the right to reclassify all or part of the Investment Account as Trading and require appropriate provisioning.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 143 (b) All unlisted securities (eg.: shares, debentures) should generally be classified under the Investment Account. However, government securities will have to be classified based on the rules specified under point A(a) above. (c) Securities in the Investment Account may be used for repurchase transactions. (d) Securities in the Investment Account shall be carried and reported at acquisition cost over the period of redemption. (i) Carrying values of interest bearing securities in the Investment Account may be adjusted to account for the accretion of discount (or depletion of premium). The adjustments should be amortised annually on a straight-line basis over the period to maturity. (ii) All other securities should be maintained at cost. Any impairment in value which is considered to be permanent should be fully provided for in the Profit & Loss Account immediately. The following conditions should be taken into consideration in deciding on whether there is an impairment of value.

Track record of dividends/returns – Non receipt of dividends/returns for a
consecutive period of three years, should be considered as an impairment and the investment should be classified as non performing.
Market prices – A continuously declining trend in market prices, with the investment
value being below cost for over three years should be considered as an impairment in value. (iii) The Central Bank of Sri Lanka will retain the flexibility to consider specific requests/ exceptions in this regard. (iv) Any impairment in value or losses on the sale of investments held in the Investment Account should be taken to the Profit & Loss Account. (e) Sale of securities classified under the Investment Account should only be an insignificant amount of the investment portfolio and should be limited to circumstances that do not taint the rest of the portfolio. These circumstances are:
if the investment was close enough to maturity or call date so that changes in the market
rate of interest could not have a significant effect on the investment's market value;
the sale is made after the entity has collected substantially all of the investment’s original
principal through scheduled payments or prepayments;
the sale was due to an isolated event that was beyond the entity's control, non-recurring
and could not have been reasonably anticipated.
B. Trading Account
(a) All securities acquired for the specific purpose of trading on a regular basis (at least every quarter), to take advantage of the short-term changes in market prices and yields, shall be classified under the Trading Account. The classification of Trading assets is based on original intention and these are not transferred to the Investment category because intention subsequently changes. (b) Securities held in the Trading Account must be revalued or marked to market on a daily basis. In the case of securities for which daily prices are not available, banks are advised to

144 Directions, Determinations, and Circulars issued to Licensed Specialised Banks mark to market at least on a weekly basis. Where two-way quotes are published (eg.: Rates for government securities), the middle rate should be adopted. (c) Any gains or losses on the sale of investments held in the Trading Account should be taken to the Profit & Loss Account.
C. Transfer of Securities
The transfer of securities between portfolios will generally not be permitted, except under specified circumstances. This is to limit the opportunities to manipulate the recognition of gains or losses or to mask changes in market value. (a) Transfer of securities between the Trading Account and the Investment Account must be justifiable, documented and authorised. (b) Portfolio transfers to or from the Investment Account shall only be undertaken rarely (preferably at the beginning of the accounting year), with the approval of the Board of Directors, the Assets and Liability Committee or the Investment Committee. The circumstances justifying such transfers are given below:
(i) A change in the statutory and regulatory requirements.
(ii) A significant increase in the capital requirements that may oblige the Bank to reduce its investment holdings. (iii) A major business occurrence that necessitates the transfer of securities to maintain the Bank’s risk profile. (iv) Exceptional circumstances such as tight liquidity conditions and extreme volatility. (c) The carrying value of securities transferred from the Trading Account into the Investment Account shall be marked to market prior to the transfer. Therefore, any gains or losses due to revaluation would have been recognised in earnings prior to the transfer. The market value of the securities at the point of transfer into the Investment Account then becomes the ‘acquisition cost’ for accounting purposes. (d) A statement on portfolio transfers, if any, shall be signed by the Chief Executive Officer of the Bank and submitted to the Bank Supervision Department of the Central Bank of Sri Lanka, on a quarterly basis. (e) The Central Bank of Sri Lanka will retain the right to review the statement of portfolio transfers and require the bank to make provisions if considered necessary.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 145 Directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 46(1) and 76(J)(1) of the Banking Act, No.30 of 1988, as amended. Sgd. Nivard Ajith Leslie Cabraal Chairman of the Monetary Board and Governor of the Central Bank of Sri Lanka Colombo 21 December 2012 BANKING ACT DIRECTION NO. 2 OF 2012 OUTSOURCING OF BUSINESS OPERATIONS OF A LICENSED COMMERCIAL BANK AND A LICENSED SPECIALISED BANK In the exercise of the powers conferred by Sections 46(1) and 76(J)(1) of the Banking Act, No. 30 of 1988, last amended by the Banking (Amendment) Act, No. 46 of 2006, the Monetary Board hereby issues the following Directions on Outsourcing of Business Operations of a Licensed Commercial Bank and a Licensed Specialised Bank, respectively (hereinafter referred to as a Licensed Bank). 1(1) These Directions may be cited as the Banking Act, Directions No. 2 of 2012. 2(1) An ‘outsourcing arrangement’ is an agreement between a licensed bank and a third party ‘service provider’, whereby the service provider performs an activity, function or process connected with the operations of a licensed bank. 2(2) ‘Service provider’ includes the Head Office, parent institution, another branch or related company of a Licensed Bank, or an unrelated institution, whether located in Sri Lanka or elsewhere. 2(3) These Directions shall not apply to outsourced arrangements that are not directly related to the provision of financial services such as Mail, Courier services, Catering of staff, Housekeeping and janitorial services, Security of premises, Printing services (e.g., Application forms, brochures etc.), Recruitments on contract and temporary basis and Communication services. 2(4) Outsourcing arrangements shall be entered into only with service providers who have specialised resources and skills to perform the related activities. 2(5) Outsourcing arrangements shall not be entered into with a service provider of which the majority of the ownership is held by employees and/or close relatives of an employee of the respective licensed bank. 2(6) Every Licensed Bank that decides to outsource its functions/operations shall comply with Directions 3 to 9 below. 3(1) A Licensed Bank may outsource its functions/operations other than the following functions/operations or activities:
Citation.
Outsourcing – definition and applicability.
Functions or activities that can be outsourced.

146 Directions, Determinations, and Circulars issued to Licensed Specialised Banks (i) Services associated with acceptance of deposits and withdrawals excluding the agency arrangements approved under the provisions of
section 12(1)(b) of the Banking Act.
(ii) Assets and Liabilities management
(iii) Compliance function
(iv) Customer due diligence and Know Your Customer (KYC) procedures (v) Treasury functions, foreign exchange trading and management (vi) Risk Management (vii) Strategic planning and decision-making (viii) Sanctioning of loans except where the basis of approval has been previously approved by the Board (ix) Internal Audit Function subject to Directions 3(2) and 3(3) below (x) Information Technology (IT) related services subject to Directions 3(4) and 3(5) below. 3(2) A Licensed Bank shall not outsource its Internal Audit Function other than in keeping with the following:
(i) A Licensed Bank may outsource its Internal Audit Function, where the size of the bank and the extent of the risks do not justify the internal audit function to operate with a full time internal audit staff. (ii) A Licensed Bank may outsource certain activities or specialised areas of its internal audit function such as branch and/or department audits, Information System (IS) audits, where the bank is in a position to justify the cost savings, improved efficiency and better management of resource constraints. 3(3) The outsourcing of the internal audit function or activities as per 3(2)(i) and 3(2)(ii) above shall be subject to the following conditions:
(i) The responsibility and control of the outsourced audit assignments in the case of 3(2)(ii) above shall continue to be with the Head of Internal Audit. (ii) The selection of audit firms or staff shall be made from the panel of external auditors approved by the Central Bank of Sri Lanka (CBSL) other than the bank’s own external auditor. (iii) Any such appointment as per 3(3)(ii) above shall be made after a “cooling off” period of 2 years if such audit firm or staff had been previously engaged in the external audit assignment of the bank. (iv) The internal audit service provider shall not perform any management function or act, directly or indirectly, in a capacity equivalent to that of a member of management or an employee of the bank. Outsourcing of Internal Audit.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 147 (v) The internal audit service provider shall not provide consultancy services to a function or activity of the bank it is expected to audit or vice versa within a period of 2 years. (vi) The Head of Internal Audit shall ensure that, whenever practicable, one or more members of the bank’s internal audit staff are also involved in the bank’s internal audit related work of the internal audit service provider with the view to gather the relevant knowledge to perform such work by themselves in the future. (vii) The Licensed Bank shall be able to provide the internal audit plan, follow-ups, reports and related working papers, etc., to CBSL as and when required. 3(4) A Licensed Bank may outsource the following IT and business processing functions:
(i) Application/Systems development, testing, maintenance and support (ii) Technology infrastructure management, maintenance and support, Help Desks (iii) Maintenance and support to data centre operations (iv) Network administration (v) Disaster recovery support services (vi) Data entry operations (vii) Database maintenance and support (viii) Data warehousing (ix) Statements printing (x) Electronic banking systems (e.g., Internet banking, Mobile banking and Tele-banking) development, maintenance and support (xi) Web hosting and maintenance (xii) Credit/Debit/ATM card printing. 3(5) A Licensed Bank shall ensure in its security policies, procedures and controls that a service provider exercises a high standard of care and diligence to protect the confidentiality and security of banks’ sensitive information especially relating to customers, hardware, operating systems and application software. 4(1) A Licensed Bank shall have a comprehensive policy to guide the assessment as to how its operations are to be outsourced. The policy shall contain at least the following:
(i) The placing of overall responsibility on the Board of Directors or the Audit Committee and senior management for the outsourcing of activities and for the formulation of policy therefor. Outsourcing of Information Technology. Outsourcing Policy.

148 Directions, Determinations, and Circulars issued to Licensed Specialised Banks (ii) A framework for identification and effective management of risks that could arise from outsourcing of activities. (iii) Cost-benefit analysis on each activity or function or process to be outsourced. (iv) Tender procedures to be followed for the procurement of outsourced services. (v) Setting up of a monitoring and control unit in the event of having several outsourcing arrangements. (vi) A framework to conduct KYC and due diligence process on the service provider. (vii) A procedure to assess the service provider’s capacity, capability and mode/basis of payment to perform the obligations under the outsourcing arrangement. (viii) A format of the legally binding contract/agreement for outsourcing arrangement which should include at least the following:
(a) Service standards,
(b) Rights, responsibilities and expectations of all parties, (c) Dispute resolution mechanism, (d) Confidentiality and security of information, (e) Termination of contract, (f) Subcontracting, if involved, and (g) Business continuity management. (ix) A specific contingency plan to bring the outsourced activity back in-house in an emergency situation which could arise due to service provider’s inability to provide, and the costs, time and resources that would be involved. (x) A framework for cross-border outsourcing, taking into account the differences in country environments. (xi) Limits on maximum exposure to a single service provider both in terms of value and the number of contracts. 5(1) A Licensed Bank shall ensure that the bank’s Business Continuity Plan (BCP) contains all relevant operations including outsourcing arrangements. 5(2) A Licensed Bank shall ensure that the service provider has a satisfactory BCP and performs regular tests on its BCP. 6(1) A Licensed Bank shall have a specifically designated unit/division at the Head Office to handle all outsourcing arrangements. A Licensed Bank incorporated outside Sri Lanka shall have the designated unit/division at the local Head Office. Business Continuity Management. Monitoring & Control.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 149 6(2) The monitoring unit shall handle complaints, maintain records of such complaints and carry out periodic supervision over outsourced activities. 6(3) A Licensed Bank shall establish an effective management information system that would on a regular basis provide information such as the type of outsourced service activity, costs, volume, deliverables and expiry or renewal dates of the contracts, the complaints, and the financial and operational conditions of the service providers. 7(1) A Licensed Bank shall be responsible for submitting transactions reports and suspicious transactions reports to the Financial Intelligence Unit (FIU) in respect of its customer transaction activities, even if such activities are under outsourced arrangements. 8(1) A Licensed Bank shall ensure that marketing and recovery personnel employed by the service providers are properly trained to handle their responsibilities with care and prudence. 9(1) A Licensed Bank shall inform the proposed outsourcing arrangements during a particular calendar year to CBSL by 31 January of that year for concurrence. 9(2) A Licensed Bank shall use the format annexed to this Direction for its reporting requirements at 9(1) above to CBSL. 10(1) The Banking Act Directions No. 7 of 2010 on Outsourcing of Business Operations of Licensed Commercial Banks and the Banking Act Directions No. 8 of 2010 on Outsourcing of Business Operations of Licensed Specialised Banks, issued on 02 November 2010 are hereby revoked. Reporting to FIU. Outsourcing arrangements relating to Marketing & Recovery. Reporting Requirements. Revocation of previous Directions

150 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Annex Business Operations that are to be Outsourced during the year ………….. Name of the Bank : ……………………………………………………………………………………………………………... Activity/Function/ Process to be Outsourced Name of the Service Provider Address Date of Commence- ment Period No. of persons involved/ authorised Deliverables/ Services Cost (per annum) 1. 2. 3. 4. …………………………………………… …………………………………………… CEO / CCO / GM Compliance Officer Date : ………………………………… Date : …………………………………

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 151 Ref. No. : 02 / 04/004/0012/001 Bank Supervision Department 23rd July 2003 To : All Licensed Commercial Banks and Licensed Specialised Banks Dear Sir/Madam, ACCEPTANCE OF CERTIFICATES OF DEPOSIT (CDs) Further to our even numbered letters dated 12 June and 16 June 2003 on the above subject, and the discussions at the monthly meeting of the Chief Executive Officers of Licensed Commercial Banks (LCBs) and Licensed Specialised Banks (LSBs). All LCBs and LSBs are hereby informed that the requirement to maintain details pertaining to customer identification of persons encashing CDs shall not apply in respect of CDs issued before 30 June 2003. Yours faithfully, Director of Bank Supervision

152 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Ref. No. : 02 / 04/004 / 0012/001 Bank Supervision Department 16th June 2003 To : All Licensed Commercial Banks and Licensed Specialised Banks Dear Sir/Madam, ACCEPTANCE OF CERTIFICATES OF DEPOSIT Further to our letter No. 02/04/004/0012/001 dated June 12, 2003 on the above subject, all licensed commercial banks and licensed specialised banks are hereby informed that they should satisfy themselves with KYC in respect of customers who invest in CDs with banks, and maintain records of adequate details pertaining to customer identification of the persons making investment in CDs with the banks, and of persons encashing the CDs from the banks at the date of maturity. The banks are requested to refrain from advertising the issue of CDs with anonymity. The operating instructions BD/13/93 dated 5/10/1993 issued by the Central Bank on the Scheme of Certificates of Deposit will remain effective. Yours faithfully, Actg. Director of Bank Supervision

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 153 Ref. No. : 02 / 04/004/0012/001 Bank Supervision Department 12th June 2003 To : All Licensed Commercial Banks and Licensed Specialised Banks Dear Sir/Madam, ACCEPTANCE OF CERTIFICATES OF DEPOSIT We refer to the discussions held at the Bank Managers’ meetings on the above subject and the need to adhere to Know-Your-Customer rules (KYC) in respect of acceptance of certificates of deposits (CDs). All licensed commercial banks and licensed specialised banks are hereby informed that they may satisfy themselves with KYC in respect of customers who invest in CDs with banks, and maintain records of adequate details pertaining to customer identification of the persons making investment in CDs with the banks, and of persons encashing the CDs from the banks at the date of maturity. The banks are requested to refrain from advertising the issue of CDs with anonymity. The operating instructions BD/13/93 dated 5/10/1993 issued by the Central Bank on the Scheme of Certificates of Deposit will remain effective. Yours faithfully, Actg. Director of Bank Supervision

154 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Bank Supervision Department 16 June 2006 To : CEOs of All Licensed Banks Dear Sirs, CONDUCT OF NON-GOVERNMENT ORGANIZATIONS (NGOs) ACCOUNTS BY LICENSED BANKS Further to our circular dated 31 May, 2006 on the above subject, the attention of all licensed banks is drawn to the following:

In order to scrutinize the legitimacy of financial transactions undertaken by NGOs who receive
funding assistance from external sources, the Ministry of Finance & Planning has requested the relevant line Ministries to establish a proper monitoring procedure and ascertain the work undertaken by them.
Accordingly all licensed banks are requested to obtain a clearance letter from the relevant line
Ministry and External Resources Department before releasing such funds to the respective NGOs, where it is evident that such NGO is operating outside its scope of activity. Copy of clearance letter may be forwarded to Central Bank of Sri Lanka. Yours faithfully, Sgd, Director of Bank Supervision

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 155 Bank Supervision Department 31 May 2006 To : All Licensed Banks Dear Sirs, CONDUCT OF NON-GOVERNMENT ORGANIZATIONS (NGO) ACCOUNTS BY LICENSED BANKS The immediate attention of all licensed banks is drawn to the need to observe strict due diligence and the “Know Your Customer” (KYC) Rules with regard to inward remittances and outward transfers or withdrawal of funds from accounts operated by NGOs. In this regard the attention of all licensed banks is drawn to the provisions of Section 15 subsection (2) of the Financial Transactions Reporting Act, No.6 of 2006 and Section 3 of the Convention on the Suppression of Terrorist Financing Act, No.25 of 2005 which are annexed for ease of reference. Sgd, Director of Bank Supervision

156 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Section 15 subsection (2) of the Financial Transactions Reporting Act, No. 6 of 2006 reads as
follows:–
15 (2) Where the Financial Intelligence Unit has reasonable grounds to suspect that a transaction or attempted transaction may— (a) involve the proceeds, which are attributable to any unlawful activity ; or (b) be connected to the commission of the money laundering offence under the Money Laundering Act, No.5 of 2006; or (c) be preparatory to the commission of an offence under the Convention on the Suppression of Terrorist Financing Act, No.25 of 2005, it may direct the Institution in writing or by telephone to be confirmed in writing within twentyfour hours, not to proceed with the carrying out of that transaction or attempted transaction or any other transaction in respect of the funds affected by that transaction or attempted transaction for a period to be determined by the Financial Intelligence Unit, which may not be more than seven days, in order to allow the Financial Intelligence Unit — (i) to make any necessary inquiries concerning the transaction or attempted transaction; and (ii) if the Financial Intelligence Unit deems it appropriate, to consult or advise the relevant law enforcement agency in the inquiries. (3) The Financial Intelligence Unit may make an ex-parte application to the High Court of the Western Province, holden in Colombo, for an extension of the period of time stipulated in subsection (2) setting out the grounds for such application. For the purposes of subsection 15 (2) (a) quote above “unlawful activity” interalia includes: – (a) . (b) any law or regulation for the time being in force relating to the prevention and suppression of terrorism Hence, in view of the above provisions of law, if there is adequate proof that funds transferred from a company to an individual would finance terrorism, it is possible for the FIU to inform the Bank concerned which holds the funds for the company which proposes to release such funds to an individual to carry out any act of terrorism, to suspend the account for a period of 7 days. Before the expiry of 7 days, the FIU should apply to the High Court of Colombo for an extension of the time if the time is insufficient to take in appropriate action to seize the funds in the account. Further, Section 3 of the Convention on the Suppression of Terrorist Financing Act, No.25 of 2005 reads as follows:–
3. (1) Any person who, by any means, directly or indirectly, unlawfully and willfully provides or
collects funds, with the intention that such funds should be used, or in the knowledge that they are to be used or having reason to believe that they are likely to be used, in full or in part, in order to commit, – (a) an act which constitutes an offence within the scope of, or within the definition of any one of the Treaties specified in Schedule I hereto; (b) any other act, intended to cause death or serious bodily injury, to civilians or to any other person not taking an active part in the hostilities, in a situation of armed conflict, and the purpose of such act, by its nature or context is to intimidate a population or to compel a government or an international organization, to do or to abstain from doing any act, shall be guilty of the offence of financing of terrorists or terrorist organizations:

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 157 Provided that, for an act to constitute the offence set out above, it shall not be necessary to show that the funds collected were actually used in the commission of an offence. (2) Any person who– (a) Attempts to commit; (b) Aids or abets the commission of; or (c) Acting with a common purpose with another person or a group of persons, contributes to the commission of, the offence of financing of terrorists or terrorist organizations, shall be guilty of an offence under this Act. In this subsection “abet” has the same meaning as in sections 100 and 101 of the Penal Code. (3) Where an offence specified in subsection (1) or subsection (2) of this section is committed by a body of persons, then, every member, Director, Manager, Secretary, officer or servant of such body of persons shall be guilty of such offence, unless it can be proved that the offence was committed without their knowledge or that they exercised all due diligence to prevent the commission of such offence. (4) A person guilty of an offence under subsection (1) or subsection (2) of this section, shall on conviction after trial on indictment by the High Court, be punished with imprisonment for a term not less than fifteen years and not exceeding twenty years, and also be liable to a fine.
4. (1) On indictment of any person in the High Court, for an offence under this Act, all funds collected
in contravention of the provisions of section 3, shall, with effect from the date of filing of such indictment – (a) if such funds are lying in an account with any Bank, be subject to an order of freezing; or (b) if such funds are in the possession or control of any person be liable to seizure; (2) The freezing or seizure of funds in terms of subsection (1) shall be in force until the conclusion of the trial. (3) On the filing of indictment, the Attorney-General shall notify the Central Bank of the freezing or seizure as the case may be. (4) The Central Bank shall thereupon take steps to give adequate publicity to the order of freezing or seizure as the case may be, as it shall think fit.

158 Directions, Determinations, and Circulars issued to Licensed Specialised Banks My No. : 02 / 04/004/0012 / 001 Bank Supervision Department 19 January 2007 To : All Licensed Commercial Banks and Licensed Specialised Banks Dear Sirs, CUSTOMER DUE DILIGENCE – ‘KNOW YOUR CUSTOMER’ PROCEDURES In view of the potential risks on the banking and financial system stability that may arise from cross-border financial transactions, all licensed banks shall conduct due diligence on all customers involved in cross-border financial transactions and ensure that all requirements under the relevant statutes including Prevention of Money Laundering Act, No.5 of 2006, financial Transactions Reporting Act, No.6 of 2006 and Convention on the Suppression of Terrorist Finance Act, No.25 of 2005 and the Exchange Control Act, No.24 of 1953 are complied with. Accordingly, the licensed banks shall report any transaction of suspicious nature to the relevant authorities in terms of the above statutes immediately. Yours faithfully, Sgd, P. Samarasiri Director of Bank Supervision

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 159 Bank Supervision Department Central Bank of Sri Lanka 3rd December, 2001 To : All Licensed Commercial Banks and Licensed Specialised Banks CUSTOMER DUE DILIGENCE – ‘KNOW YOUR CUSTOMER’ PROCEDURES Your attention is drawn to the discussion on the above subject at the Bank Managers’ Meetings held in the months of October and November 2001. Please find enclosed a Guideline on Customer Due Diligence - ‘Know Your Customer’ procedures, which set out the minimum criteria to be adopted by banks. These guidelines will be effective immediately. Yours faithfully Director of Bank Supervision

160 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Ref. No. : 02 / 04/004 / 0012/001 Bank Supervision Department Central Bank of Sri Lanka 3rd December, 2001 To : All Licensed Commercial Banks and Licensed Specialised Banks GUIDELINES ON CUSTOMER DUE DILIGENCE – ‘KNOW YOUR CUSTOMER’ PROCEDURES In order to prevent the unchecked use of the financial system for money laundering and transactions related to terrorism and subversive activities, it is recommended that all banks follow these guidelines on customer identification at the time of opening an account for a prospective customer, or before establishing a business relationship with a prospective customer, or thereafter when there is a material change in the way an account is operated. In addition to minimising the risk of use of the banking system for illicit activities, the adoption of these guidelines will provide protection against possible frauds, and enable the timely recognition of suspicious transactions and protect the bank from reputational, legal and financial risks.

All banks are encouraged to document their policies on customer acceptance, customer
identification/risk management and monitoring of high risk accounts.
In order to ‘know their customers’ the banks are expected to:
(i) Have sufficient information on the identity of the customer.
(ii) Be satisfied that a prospective customer is who he/she claims to be. If the customer is acting on behalf of another, sufficient evidence on the identity of both parties should be obtained. (iii) Ensure that information obtained in respect of a customer in the normal course of business is used effectively for the prevention of money laundering/terrorism funding.
Customer Identification
3.1 Personal Accounts
The following information should be obtained from all prospective personal customers:

Customer’s name from an original of a document issued by an official authority, preferably
bearing a photograph of the customer, such as the national identity card, passport or the driving license. The reference number of such document should be recorded by the bank.
Customer’s permanent mailing address and supporting evidence which should be
confirmed through correspondence.
The authenticity and integrity of an introducer and his own identity should be established
to the satisfaction of the bank.
Independent verification of introducer’s address should be made and filed with the
mandate.
3.2 Corporate Customers
The following documents should be obtained:
Certificate of Incorporation, Memorandum and Articles of Association or Partnership
Agreement, as appropriate, to establish the legal status of the customer

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 161

Resolution by the Board of Directors
Duly completed application form containing authorised specimen signatures
The identity of each director and those authorised to operate the account, should be
established.
For companies, businesses or partnerships registered outside Sri Lanka, similar documents
should be obtained, taking into consideration any soft regulatory system in the country of origin.
3.3 In the case of accounts operated by:
A Power of Attorney
Joint account holders
Partnerships
Trust accounts/Fiduciary accounts
The identity should be established in respect of each signatory to the account.
3.4 More stringent customer identification policies should be established in the following
circumstances:
Accounts opened by post or in any other circumstances where there is no face to face
contact with the customer.
In the case of one-off transactions for non-account holders of the bank, in particular where
such transactions involve large amounts of cash, or the receipt of unusually large foreign remittances, the customer should be asked to produce documentary evidence of identity, and copies of such documents should be retained by the bank.
Where safe custody facilities are made available to non-account holders, identification
procedure for non-account holders, as above, should be followed.
In accommodating requests for remittances of funds between accounts using electronic
payment systems, where such transactions are of a large size, the bank should establish the identity of the sender and ascertain the identity of the recipient.

In instances where the bank cannot establish the true identity of the customer to its satisfaction, it
should not commence any business relationship with such customer.
Other Recommendations
5.1 In respect of all types of accounts, returned letters and statements should be followed-up.
5.2 Where after opening an account, the features of the transactions, as known at the time of
opening of the account changes significantly, causing grounds for suspicion of criminal activity, inquiries should be made with regard to the changes in the financial position and nature of activities, which should be recorded.
5.3 Retention of records: All evidence of identification as set out above should be maintained for
a minimum period of five (05) years even after an account is closed.
5.4 Where the officer handling the account opening has reasons to believe that a new relationship
may expose the bank to significant reputational risk, he may refer such request to an officer of higher authority before opening the account.
5.5 The internal controller/auditor may be required to ensure compliance with the bank’s policies
on customer acceptance and identification.
P.T. Sirisena
Director of Bank Supervision

162 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Bank Supervision Department 13 June 2006 To : CEOs of All Licensed Banks Dear Sirs, PREVENTION OF FRAUDS USING ELECTRONIC CARDS Recent reports have highlighted the use of credit cards and ATM cards for fraudulently withdrawing large sums of money from banks in many countries, especially in the South East Asian region. The Presidential Secretariat, by its letter dated 06 June 2006 has drawn the attention of the Central Bank to the need to take precautionary measures to avert the possibility of such attempts being made even in Sri Lanka, considering the particular danger of terrorist groups using them as a means of creating a sense of insecurity in a vital sector of the economy. Accordingly, Licensed Banks that issue electronic cards to customers should, as soon as is practicable take steps to:

Introduce security features such as tamper-proof micro chips for electronic cards, and in the
interim.
Take appropriate steps to educate their customers with regard to the safety of their electronic
cards and remind them at regular intervals the steps that should be taken by them, in order to avoid being victims of fraudulent use of such cards.
Ensure that adequate provision is made annually for the necessary investment in technology.
The banks are also encouraged to introduce other relevant security measures in respect of ATM cards/machines. It is suggested that CCTV cameras be installed at all ATM outlets in order to enhance the surveillance at ATM outlets. Your views on this matter are welcome for discussion at the forthcoming monthly meeting of CEOs on the 22 June 2006. Yours faithfully, Sgd, Director of Bank Supervision

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 163 SP June 6, 2006 Deshamanya Sunil Mendis Governor Central Bank of Sri Lanka The recently reported ATM scams in Singapore (Divaina – 25.05.2006) as well as other countries such as New Zealand, indicate the likelihood of such practices spreading across the world. It seems prudent to take precautionary measures to avert the possibility of such attempts being made even in Sri Lanka, considering the particular danger of terrorist groups using them as means of creating a sense of insecurity in a vital sector of the economy. Accordingly, it may be worth taking early action to request the banks in the country to take the following measures and any other, if they have so far not taken any initiatives in this regard.

Expedite the process of introducing tamper-proof micro chip Bank cards (being done in many
countries now).
Keep the customers reminded at regular intervals the steps they should take in order to avoid
being victims of ATM robberies.
We hope you would understand that our observations and suggestions are guided by the fact that it is vital to reduce the risk of any form of instability that would affect the Banks, their customers or the country. Sincerely, Sgd. Lalith Weeratunga Secretary to the President

164 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Ref. No. : 02 / 04/004 / 0012/001 08 October 2008 To CEOs of all Licensed Banks USE OF BANKING SYSTEM BY INSTITUTIONS AND PERSONS NOT AUTHORISED TO ACCEPT DEPOSITS A number of institutions and persons, that are not authorised to accept deposits from the public, are mobilising funds from the public in the guise of offering investment products/schemes. We find that such institutions and persons have used the banking system for their operations and that some banks have accommodated these transactions without identifying the legality of these transactions or the potential risks. As you are aware, permitting these institutions and persons to use the banking system to resort to such practices can tarnish the image of your institution and thereby weaken public confidence in the banking system. In this regard, we wish to draw your attention to the Circulars on Customer Due Diligence dated 3 December 2001 and Know Your Customer Procedures dated 19 January 2007 issued by the Director Bank Supervision and Know your Customer and Customer Due Diligence Rules issued by the Director, Financial Intelligence Unit dated 18 May 2007. We wish to emphasise that special attention should be paid to strengthen Customer Due Diligence and Know Your Customer Procedures and to comply with such Circulars/Rules to ensure that sources of income and movement of funds are monitored, as required in these instructions. H A Karunaratne B D W A Silva Director of Financial Intelligence Unit Director of Bank Supervision

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 165 Ref. No. : 02 / 17/800/0007/01 Bank Supervision Department 06 November 2008 To: The CEOs of All Licensed Commercial Banks and Licensed Specialised Banks Dear Sirs, REGULATIONS MADE UNDER THE PUBLIC SECURITY ORDINANCE PROSCRIPTION OF TAMIL REHABILITATION ORGANISATION We write to inform you that His Excellency the President has promulgated Emergency (Proscription of Tamil Rehabilitation Organisation) Regulations, No. 9 of 2007 on December 26, 2007 proscribing the Tamil Rehabilitation Organisation in Sri Lanka. A copy of the relevant Extraordinary Gazette No.1529/13 dated December 26, 2007 is attached herewith for your information. In this regard, we wish to draw your special attention to Regulation 3 of these Regulations and advise you to refrain from carrying out any transactions with the above proscribed organisation. Yours faithfully, Actg. Director of Bank Supervision Encl:
cc: Secretary-General / SLBA

166 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
PART I : SECTION (I) – GENERAL
Government Notifications
CF 1/64
THE PUBLIC SECURITY ORDINANCE (CHAPTER 40)
REGULATIONS made by the President under Section 5 of the Public Security Ordinance (Chapter 40). Mahinda Rajapaksa, President. Colombo, 26th December, 2007. REGULATIONS

These regulations may be cited as the Emergency (Proscription of Tamil Rehabilitation Organization)
Regulations, No.9 of 2007.
For the purposes of ensuring public security, for the preservation of public order and for upholding
the Rule of Law, the Organization styled as the “Tamil Rehabilitation Organization” is hereby proscribed.
From and after the date of the coming into operation of these regulations, any person who,–
(a) wears any uniform, dress, symbol or other emblem, which signifies or indicates any association with, or membership of, or adherence to the “Tamil Rehabilitation Organization” (hereinafter referred to as the “proscribed organization”) ; or (b) summons or attends any meeting of the proscribed organization or participates or engages in any activity of, or any activity connected with or related to the said proscribed organization ; or

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 167 (c) supports the proscribed organization, by inviting or exhorting persons to be enrolled as members, or by contributing or collecting funds, or by furnishing information or securing any other assistance to the said proscribed organization ; or (d) harbours, conceals or in any other manner assists any member of the proscribed organization, with intention thereby to prevent, hinder or interfere with the apprehension, trial or punishment of such member ; or (e) makes, prints, distributes or is in any way connected with or concerned in the making, printing, distribution or publication of any written or printed matter, which is or which purports to be printed, by or on behalf of the proscribed organization or by any member thereof ; or (f) communicates or attempts to communicate to any other person in any manner whatsoever, any order, decision, declaration or exhortation made or purported to have been made by the proscribed organization or by any member thereof, or any information relating thereto, for the purpose of advancing the objectives of the said proscribed organization, shall be guilty of an offence and shall on conviction be liable to imprisonment for a period not exceeding fifteen years.
4. (1) Where the Minister is satisfied, after such inquiry as he thinks fit, that any person has custody
of any money, securities or credits which are being used or which are intended to be used, for the purposes of the proscribed organization, the Minister may by order in writing declare that such moneys, securities, and credits as are in the custody of such person, or any such moneys, securities and credits which may come into his custody after the making of such order and any other movable or immovable property belonging to the said proscribed organization, shall be forfeited to the State. (2) The decision of the Minister under paragraph (1) shall be conclusive and shall not be called in question in any court by way of writ or otherwise.

168 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 76J(1) of the Banking Act, No.30 of 1988, as amended. Sgd. Nivard Ajith Leslie Cabraal Chairman of the Monetary Board and Governor of the Central Bank of Sri Lanka Colombo 12 April 2013 BANKING ACT DIRECTION NO. 4 OF 2013 AMENDMENTS TO DIRECTIONS ON CORPORATE GOVERNANCE ISSUED TO LICENSED SPECIALISED BANKS IN SRI LANKA In the exercise of the powers conferred by Section 76J(1) of the Banking Act, No. 30 of 1988, last amended by the Banking (Amendment) Act, No. 46 of 2006, the Monetary Board hereby issues the following Directions amending Direction 3(3)(ii) of the Banking Act, Direction No. 12 of 2007, dated 26 December 2007 on Corporate Governance for Licensed Specialised Banks in Sri Lanka.

These Directions may be cited as the Banking Act, Direction No. 4 of 2013.
The following new Direction shall replace Direction 3(3)(ii) of the Banking Act, Direction
No. 12 of 2007, dated 26 December 2007.
3(3)(ii) A person shall not hold office as a director of more than 20 companies/entities/institutions inclusive of subsidiaries or associate companies of the bank.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 169 Directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 76J(1) of the Banking Act, No.30 of 1988, as amended. Sgd. Nivard Ajith Leslie Cabraal Chairman of the Monetary Board and Governor of the Central Bank of Sri Lanka Colombo 24 October 2008 DIRECTIONS BANKING ACT DIRECTION NO. 8 OF 2008 AMENDMENTS TO DIRECTIONS ON CORPORATE GOVERNANCE FOR LICENSED SPECIALISED BANKS IN SRI LANKA In the exercise of the powers conferred by Section 76J(1) of the Banking Act, No. 30 of 1988, last amended by the Banking Act, No. 46 of 2006 and in terms of the Supreme Court order delivered on September 1, 2008, the Monetary Board hereby issues the following Direction amending Direction No. 6 of 2008 dated August 15, 2008, issued by the Monetary Board of the Central Bank of Sri Lanka. This Direction may be cited as the Banking Act, Direction No. 8 of 2008.

The following new Direction shall replace Direction No. 5 of the Banking Act, Direction No.
6 of 2008, dated August 15, 2008.
3(9)(v) If for any reason such as ill health or any incapacity as provided in the Banking Act, the Monetary Board considers that exemptions referred to in Directions 3(2)(ii)B, 3(3) (i)A and 3(3)(ii)A should not be availed of, such ground may be notified to the person by the Monetary Board, and after a hearing, the Monetary Board may limit the period of exemption.

170 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 76J(1) of the Banking Act, No.30 of 1988 as amended. Sgd. Nivard Ajith Leslie Cabraal Chairman of the Monetary Board and Governor of the Central Bank of Sri Lanka Colombo 15 August 2008. DIRECTIONS BANKING ACT DIRECTION NO. 6 OF 2008 AMENDMENTS TO DIRECTIONS ON CORPORATE GOVERNANCE FOR LICENSED SPECIALISED BANKS IN SRI LANKA In the exercise of the powers conferred by Section 76J(1) of the Banking Act, No.30 of 1988, last amended by the Banking Act, No.46 of 2006 and in terms of the Supreme Court order delivered on July 8, 2008, the Monetary Board hereby issues the following Directions in lieu of Direction No.2 of 2008 dated April 23, 2008, issued by the Monetary Board of the Central Bank of Sri Lanka. These Directions may be cited as the Banking Act, Direction No.6 of 2008.

The Banking Act Direction No. 2 of 2008 dated April 23, 2008 described as “Provisions
regarding executive directors and transitional provisions for founding directors, incumbent chairmen and executive directors”, is hereby revoked.
The following new Direction shall replace the present Direction 3(2)(ii) (B) of the Banking Act,
Direction No.12 of 2007.
3(2)(ii) (B) In this context, the following general exemption shall apply:
A director who has completed nine years as at January 1, 2008, or who completes such term at any time prior to December 31, 2008, may continue for a further maximum period of 3 years commencing January 1, 2009.
The following new Direction shall replace Directions 3(3)(i)(A) and 3(3)(i)(B) of the Banking
Act, Direction No.12 of 2007.
3(3)(i) (A) In this context, the following general exemption shall apply:
A director who has reached the age of 70 years as at January 1, 2008 or who would reach the age of 70 years prior to December 31, 2008 may continue in office for a further maximum period of 3 years commencing January 1, 2009.
The following new Direction shall be included immediately after Direction 3(3)(ii) of the
Banking Act, Direction No.12 of 2007.
3(3)(ii) (A) In this context, the following general exemption shall apply:
If any person holds posts in excess of the limitation as above, such person shall within a maximum period of three years from 1 January 2009 comply with the above-mentioned limitation and notify the Monetary Board accordingly.
The following new Direction shall be included immediately after Direction 3(9)(iv) of the
Banking Act, Direction No.12 of 2007.
3(9)(v) If for any reason such as ill health or other incapacity, the Monetary Board considers that exemptions referred to in Directions 3(2)(ii)B, 3(3)(i)A and 3(3)(ii)A should not be availed of, such ground may be notified to the person by the Monetary Board, and after a hearing, the Monetary Board may limit the period of exemption.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 171 Directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 76j(1) of the Banking Act, No.30 of 1988, as amended. Sgd. Nivard Ajith Leslie Cabraal Governor Colombo 26 December 2007 DIRECTIONS BANKING ACT DIRECTION NO. 12 OF 2007 CORPORATE GOVERNANCE FOR LICENSED SPECIALISED BANKS IN SRI LANKA In the exercise of the powers conferred by Section 76j(1) of the Banking Act, No.30 of 1988, last amended by the Banking Act, No.46 of 2006, the Monetary Board hereby issues the following Directions on Corporate Governance for Licensed Specialised Banks in Sri Lanka. These Directions may be cited as the Banking Act, Direction No.12 of 2007. The Sections referred to in these Directions will be those of the Banking Act, No.30 of 1988, last amended by the Banking Act, No.46 of 2006.

Responsibilities and Empowerment under the Banking Act and the Monetary Law Act
1(1) In terms of Section 76j(1) of the Banking Act, No.30 of 1988 last amended by No.46 of 2006, the Monetary Board has been empowered to issue Directions to licensed specialised banks or to any category of licensed specialised banks, regarding the manner in which any aspect of the business of such banks is to be conducted. 1(2) In terms of Section 5 of the Monetary Law Act, No.58 of 1949, the Central Bank of Sri Lanka is charged with the duty of securing, as far as possible by action authorised by such Act, the two objectives, namely, (a) economic and price stability and (b) financial system stability. 1(3) In terms of Section 10(c) of the Monetary Law Act, the Monetary Board, in the exercise of its powers, duties, functions and responsibilities, is empowered to make such rules and regulations as the Monetary Board may consider necessary, in relation to any matter affecting or connected with or incidental to the exercise, discharge, or performance of the powers, functions, and duties of the Central Bank of Sri Lanka. 1(4) Under the provisions of the Monetary Law Act, No.58 of 1949, the supervision of banks has been made a duty of the Central Bank on account of specific reasons as stated in John Exter’s Report on the Monetary Law Act which states, inter-alia, as follows: “Banking is an economic activity which affects the public welfare to an unusual degree; it touches in one way or another, almost every phase of a country’s economic life. Sound banking is essential to healthy and vigorous economic development. Supervision of banks helps to protect the public against mismanagement, bank failures, and loss of confidence in the banking system. It helps to protect depositors and stock-holders against loss and frequently enables bank directors and officers to manage the affairs of their banks more wisely and intelligently.” 1(5) Accordingly, in order to enhance the overall banking sector stability which is the fundamental to financial system stability, the Monetary Board, hereby issues Directions under Section 76j(1) of the Banking Act, No. 30 of 1988 to improve and sustain the corporate governance processes and practices of the licensed specialised banks in Sri Lanka.

172 Directions, Determinations, and Circulars issued to Licensed Specialised Banks 1(6) For purposes of this Direction, Corporate Governance processes and practices shall be deemed to be the management framework that facilitates the conduct of the banking business in a responsible and accountable manner so as to promote the safety and soundness of the individual banks, thereby leading to the stability of the overall banking sector. 1(7) The rules of corporate governance as contained in Direction 3 of these Directions have, therefore, been developed on the basis of certain fundamental principles as set out in Direction 2 of these Directions with a view to facilitating the underlying supervisory responsibilities of the Central Bank and to promote safety and soundness of the banking system.
2. The Principles upon which the rules of Corporate Governance have been based upon
and developed are the following:
The principles set out in this Direction 2 should be referred to for explanatory purposes and/or for clarification purposes only, so as to understand the rationale for the rules as contained in Direction 3 hereof. Hence, strict compliance under these Directions shall only be in respect of the rules that are set out under Direction 3. 2(1) Principle: The Responsibilities of the Board 2(1)(i) The board of directors should assume the overall responsibility and accountability in respect of: (a) the management of the affairs of the bank, i.e., conduct of business and maintenance of prudent risk management mechanisms; and (b) the safety and soundness of the bank. 2(1)(ii) Towards this end, the board should: (a) determine the structure of the management of affairs of the bank; (b) delegate business operations to key management personnel led by the chief executive officer designated by the board; (c) assume policy making and risk management for the business; and (d) ensure the effective role of the key management personnel. Key management personnel shall mean such key executives of the bank as defined in the International Accounting Standards. 2(1)(iii) The overall responsibility of the board should not be construed as an obligation to undertake the inspection of day-to-day activities, but should rather be understood as an obligation to oversee and ensure that the key management personnel are carrying out the day-to-day activities of the bank in a safe and sound manner in accordance with the policies set by the board. 2(1)(iv) Directors should understand the business and risk management mechanism of the bank and take objective decisions in the interest of the bank’s depositors, creditors, shareholders and other stakeholders. Further, they should ensure that the bank does not act in a manner that is detrimental or prejudicial to the interests of, and obligations to, depositors and creditors. 2(1)(v) The board should take the responsibility for compliance with accepted rules of corporate governance. They should also ensure compliance with all regulatory and supervisory requirements. Further, they should ensure that an effective combination of professionals with practical experience in relevant subjects such as banking, finance, economics, business management, human resource management, law, marketing, information technology or any other discipline relevant or complementary to banking operations, is available in the bank to undertake its operations and discharge its responsibilities. 2(1)(vi) The directors should be aware of potential civil and criminal liabilities that may arise from their failure to discharge their duties diligently. They should also understand that they should act with due care and prudence. In addition, the directors of state owned banks should be aware of the additional liabilities that arise from the status of such

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 173 banks being state enterprises and consequently being accountable to the public. It is, therefore, necessary that directors commit sufficient time and energy to fulfilling the board’s responsibilities in managing the affairs of the bank in a prudent manner. 2(2) Principle: The Board’s composition 2(2)(i) The board should be composed of a healthy mix of executive directors and non-executive directors. Some of the non-executive directors should also be independent so that there is strong independent element brought into the decision-making process. 2(2)(ii) The board’s composition should ensure a balance of skills and experience as may be deemed appropriate and desirable for the requirements of the bank. 2(2)(iii) The banking industry worldwide is making tremendous progress and undergoing rapid change with new innovations, instruments, technologies, products, systems and processes being introduced regularly. It is vital therefore, that the directors should be persons who would: (a) be able to keep abreast with these changes, and (b) provide continuous contribution and guidance to the board decision-making process. 2(2)(iv) There should be a gradual infusion of new ideas into the board. There should also be assurance that the relationships between the directors amongst themselves as well as between the directors and the key management personnel is at a level that does not suggest the existence of excessive familiarity, undue influence or coercion. In this context, it should be noted that very long-standing relationships could sometimes impair the high sense of values, independence and objectivity that is needed in the discharge of the duties of a director of a bank. 2(3) Principle: Criteria to assess the Fitness and Propriety of Directors 2(3)(i) In addition to the principles under the board’s composition in Direction 2(2) above, directors should be fit and proper persons in order to be eligible to hold office as directors of a bank and no person should serve as a director unless such person is a fit and proper person. 2(3)(ii) There is strong need for commitment and effective contribution to the prudent management of the affairs of the bank. It is very likely that the effectiveness of such commitment and contribution would tend to decrease with advanced age of directors and more particularly, if the age of such director is well beyond the normal age of retirement, as generally accepted in the country. 2(4) Principle: Management functions delegated by the Board 2(4)(i) The board should have a formal schedule of matters specifically reserved to it for decision. The board should also give clear directions to key management personnel, as to the matters that should be approved by the board before decisions are made by key management personnel, on behalf of the bank. 2(5) Principle: The Chairman and the Chief Executive Officer 2(5)(i) There are two key aspects of the
management of every bank, viz., (a) the overall governance by the board, and (b) the day-to-day management of the bank’s business by the CEO, in line with board approved strategic objectives, corporate values, overall risk policy and risk management procedures. 2(5)(ii) There should be a clear division of these responsibilities at the board level and the executive management level to ensure a greater balance of power and authority, so that powers are not concentrated in any one individual.

174 Directions, Determinations, and Circulars issued to Licensed Specialised Banks 2(5)(iii) The board should appoint a chairman as well as a chief executive officer. The division of responsibilities between the chairman and chief executive officer should be clearly established and set out in writing. 2(6) Principle: Board appointed Committees 2(6)(i) The board should appoint separate board committees for audit, selection, remuneration, integrated risk management and such other subjects as determined by the Board to ensure its oversight and control over the affairs of the bank. 2(6)(ii) Where the board appoints a committee, it should set out the authority of the committee, and in particular, whether the committee has the authority to act on behalf of the board or simply has the authority to examine a particular issue and report back to the board with recommendations. 2(6)(iii) Each committee should be chaired by a non-executive director who has some expertise in the relevant subject, and who preferably should be independent too. The majority of the members of the board committee should consist of non-executive directors with at least one independent director in the committee. If a need arises, professionals from outside may be invited or hired to serve in a committee. Bank staff may be present at the board committees for advice or special assignments, on invitation. 2(7) Principle: Related party transactions 2(7)(i) The board should ensure that the bank does not engage in transactions with “related parties” in a manner that would grant such parties “more favourable treatment” than that accorded to other constituents of the bank carrying on the same business. 2(8) Principle: Disclosures 2(8)(i) The objective of disclosure is the transparency of information relating to affairs and risk management of banks which would help to promote market discipline of the respective banks. 2(8)(ii) Since market disclosure is the focus of the Pillar III of the risk management based capital standard known as Basel II recommended by the Basel Committee on Banking Supervision at the Bank for International Settlements, (which is the globally accepted body on introducing international standards on Bank Supervision), the extent of disclosures should be commensurate with the size, ownership structure, systemic importance, risk profile and the business model of the bank. Accordingly, it should be noted that the adequate and timely public disclosure of relevant information by banks would facilitate enhanced market discipline and lead to better and more effective corporate governance. 2(8)(iii) Disclosures by banks should generally include disclosures relating to capital adequacy, key performance indicators, business concentrations, transactions with related parties, corporate governance statements, financial statements, etc., and should be consistent with accounting standards, regulatory requirements as well as with any other information disclosed on voluntary basis.
3. The following rules of Corporate Governance shall be complied by all licensed
specialised banks in Sri Lanka and such compliance shall be as provided for in Direction 3(9)(i) hereof. 3(1) The Responsibilities of the Board 3(1)(i) The board shall strengthen the safety and soundness of the bank by ensuring the implementation of the following:

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 175 a) Approve and oversee the bank’s strategic objectives and corporate values and ensure that these are communicated throughout the bank; b) Approve the overall business strategy of the bank, including the overall risk policy and risk management procedures and mechanisms with measurable goals, for at least the next three years; c) Identify the principal risks and ensure implementation of appropriate systems to manage the risks prudently; d) Approve implementation of a policy of communication with all stakeholders, including depositors, creditors, share-holders and borrowers; e) Review the adequacy and the integrity of the bank’s internal control systems and management information systems; f) Identify and designate key management personnel, as defined in the International Accounting Standards, who are in a position to: (i) significantly influence policy; (ii) direct activities; and (iii) exercise control over business activities, operations and risk management; g) Define the areas of authority and key responsibilities for the board directors themselves and for the key management personnel; h) Ensure that there is appropriate oversight of the affairs of the bank by key management personnel, that is consistent with board policy; i) Periodically assess the effectiveness of the board directors’ own governance practices, including: (i) the selection, nomination and election of directors and key management personnel; (ii) the management of conflicts of interests; and (iii) the determination of weaknesses and implementation of changes where necessary; j) Ensure that the bank has an appropriate succession plan for key management personnel; k) Meet regularly, on a needs basis, with the key management personnel to review policies, establish communication lines and monitor progress towards corporate objectives; l) Understand the regulatory environment and ensure that the bank maintains an effective relationship with regulators; m) Exercise due diligence in the hiring and oversight of external auditors. 3(1)(ii) The board shall appoint the chairman and the chief executive officer and define and approve the functions and responsibilities of the chairman and the chief executive officer in line with Direction 3(5) of these Directions. 3(1)(iii) The board shall meet regularly and board meetings shall be held at least twelve times a year at approximately monthly intervals. Such regular board meetings shall normally involve active participation in person of a majority of directors entitled to be present. Obtaining the board’s consent through the circulation of written resolutions/papers shall be avoided as far as possible. 3(1)(iv) The board shall ensure that arrangements are in place to enable all directors to include matters and proposals in the agenda for regular board meetings where such matters and proposals relate to the promotion of business and the management of risks of the
bank. 3(1)(v) The board procedures shall ensure that notice of at least 7 days is given of a regular board meeting to provide all directors an opportunity to attend. For all other board meetings, reasonable notice may be given. 3(1)(vi) The board procedures shall ensure that a director who has not attended at least two-thirds of the meetings in the period of 12 months immediately preceding or has not

176 Directions, Determinations, and Circulars issued to Licensed Specialised Banks attended the immediately preceding three consecutive meetings held, shall cease to be a director. Participation at the directors’ meetings through an alternate director shall, however, be acceptable as attendance. 3(1)(vii) The board shall appoint a company secretary who satisfies the provisions of Section 43 read with Section 76h of the Banking Act, No. 30 of 1988, whose primary responsibilities shall be to handle the secretariat services to the board and shareholder meetings and to carry out other functions specified in the statutes and other regulations. 3(1)(viii) All directors shall have access to advice and services of the company secretary with a view to ensuring that board procedures and all applicable rules and regulations are followed. 3(1)(ix) The company secretary shall maintain the minutes of board meetings and such minutes shall be open for inspection at any reasonable time, on reasonable notice by any director. 3(1)(x) Minutes of board meetings shall be recorded in sufficient detail so that it is possible to gather from the minutes, as to whether the board acted with due care and prudence in performing its duties. The minutes shall also serve as a reference for regulatory and supervisory authorities to assess the depth of deliberations at the board meetings. Therefore, the minutes of a board meeting shall clearly contain or refer to the following:
(a) a summary of data and information used by the board in its deliberations; (b) the matters considered by the board; (c) the fact-finding discussions and the issues of contention or dissent which may illustrate whether the board was carrying out its duties with due care and prudence; (d) the testimonies and confirmations of relevant executives which indicate compliance with the board’s strategies and policies and adherence to relevant laws and regulations; (e) the board’s knowledge and understanding of the risks to which the bank is exposed and an overview of the risk management measures adopted; and (f) the decisions and board resolutions. 3(1)(xi) There shall be a procedure agreed by the board to enable directors, upon reasonable request, to seek independent professional advice in appropriate circumstances, at the bank’s expense. The board shall resolve to provide separate independent professional advice to directors to assist the relevant director or directors to discharge his/her/their duties to the bank. 3(1)(xii) Directors shall avoid conflicts of interests, or the appearance of conflicts of interest, in their activities with, and commitments to, other organisations or related parties. If a director has a conflict of interest in a matter to be considered by the board, which the board has determined to be material, the matter should be dealt with at a board meeting, where independent non-executive directors [refer to Direction 3(2)(iv) of these Directions] who have no material interest in the transaction, are present. Further, a director shall abstain from voting on any board resolution in relation to which he/she or any of his/her close relation or a concern in which a director has substantial interest, is interested and he/she shall not be counted in the quorum for the relevant agenda item at the board meeting. 3(1)(xiii) The board shall have a formal schedule of matters specifically reserved to it for decision to ensure that the direction and control of the bank is firmly under its authority. 3(1)(xiv) The board shall, if it considers that the bank is, or is likely to be, unable to meet its obligations or is about to become insolvent or is about to suspend payments due to depositors and other creditors, forthwith inform the Director of Bank Supervision of the situation of the bank prior to taking any decision or action.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 177 3(1)(xv) The board shall ensure that the bank is capitalised at levels as required by the Monetary Board in terms of the capital adequacy ratio and other prudential grounds. 3(1)(xvi) The board shall publish in the bank’s Annual Report, an annual corporate governance report setting out the compliance with Direction 3 of these Directions. 3(1)(xvii) The board shall adopt a scheme of self-assessment to be undertaken by each director annually, and maintain records of such assessments. 3(2) The Board’s Composition 3(2)(i) The number of directors on the board shall not be less than 7 and not more than 13. 3(2)(ii) (A) The total period of service of a director other than a director who holds the position of chief executive officer shall not exceed nine years, and such period in office shall be inclusive of the total period of service served by such director up to 01 January 2008. (B) In this context, the following transitional provisions shall apply:
a) In the event that there is only one director on the board who has served more than nine years as at 01 January 2008, he/she shall be deemed to have vacated the office as a director as at 31 December 2008. b) In the event that there are two or more directors on the board who have served more than nine years as at 01 January 2008, the following provisions shall apply:
I. Of those directors whose period of service has exceeded nine years, the
longest serving director, shall be deemed to have vacated office as a Director on 31 December 2008.
II. Thereafter, at the end of each succeeding year, the remaining directors
shall be deemed to have vacated office in sequence, at least one director each year, (on the basis of the longest to the shortest length of service as a director), until all directors who have served a period in excess of nine years as at 01 January 2008, have been deemed to have vacated office. Provided also, that all directors of the bank who have served more than nine years as at 01 January 2008 shall be deemed to have vacated their office by or before 31 December 2011. c) In the event there are any directors who are due to complete nine years of service between 01 January 2008 and 31 December 2010, such directors shall also be deemed to have vacated office, in sequence, at least one director each year, (on the basis of the longest to the shortest length of service as a director), after the directors as set out in Direction 3(2)(ii)(B)(b) have vacated their office as directors. Provided, however, that all such directors covered by this sub-direction (c) shall also be deemed to have vacated their office by or before 31 December 2011. 3(2)(iii) An employee of a bank may be appointed, elected or nominated as a director of the bank (hereinafter referred to as an “executive director”) provided that the number of executive directors shall not exceed one-third of the number of directors of the board. In such an event, one of the executive directors shall be the chief executive officer of the bank. 3(2)(iv) The board shall have at least three independent non-executive directors or one third of the total number of directors, whichever is higher. This sub-direction shall be applicable from 01 January 2010 onwards.

178 Directions, Determinations, and Circulars issued to Licensed Specialised Banks A non-executive director shall not be considered independent if he/she:
a) has direct and indirect shareholdings of more than 1 per cent of the bank; b) currently has or had during the period of two years immediately preceding his/her appointment as director, any business transactions with the bank as described in Direction 3(7) hereof, exceeding 10 per cent of the regulatory capital of the bank. c) has been employed by the bank during the two year period immediately preceding the appointment as director; d) has a close relation who is a director or chief executive officer or a member of key management personnel or a material shareholder of the bank or another bank. For this purpose, a “close relation” shall mean the spouse or a financially dependant child; e) represents a specific stakeholder of the bank; f) is an employee or a director or a material shareholder in a company or business organization:
I. which currently has a transaction with the bank as defined in Direction 3(7) of
these Directions, exceeding 10 per cent of the regulatory capital of the bank, or
II. in which any of the other directors of the bank are employed or are directors or
are material shareholders; or
III. in which any of the other directors of the bank have a transaction as defined
in Direction 3(7) of these Directions, exceeding 10 per cent of regulatory capital in the bank; 3(2)(v) In the event an alternate director is appointed to represent an independent director, the person so appointed shall also meet the criteria that applies to the independent director. 3(2)(vi) Non-executive directors shall be persons with credible track records and/or have necessary skills and experience to bring an independent judgment to bear on issues of strategy, performance and resources. 3(2)(vii) A meeting of the board shall not be duly constituted, although the number of directors required to constitute the quorum at such meeting is present, unless more than one half of the number of directors present at such meeting are non-executive directors. This sub-direction shall be applicable from 01 January 2010 onwards. 3(2)(viii) The independent non-executive directors shall be expressly identified as such in all corporate communications that disclose the names of directors of the bank. The bank shall disclose the composition of the board, by category of directors, including the names of the chairman, executive directors, non-executive directors and independent non-executive directors in the annual corporate governance report. 3(2)(ix) There shall be a formal, considered and transparent procedure for the appointment of new directors to the board. There shall also be procedures in place for the orderly succession of appointments to the board. 3(2)(x) All directors appointed to fill a casual vacancy shall be subject to election by shareholders at the first general meeting after their appointment. 3(2)(xi) If a director resigns or is removed from office, the board shall: (a) announce the director’s resignation or removal and the reasons for such removal or resignation including but not limited to information relating to the relevant director’s disagreement

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 179 with the bank, if any; and (b) issue a statement confirming whether or not there are any matters that need to be brought to the attention of shareholders. 3(2)(xii) A director or an employee of a bank shall not be appointed, elected or nominated as a director of another bank except where such bank is a subsidiary company or an associate company of the first mentioned bank. 3(3) Criteria to assess the fitness and propriety of directors In addition to provisions of Section 42 read with Section 76h of the Banking Act, No.30 of 1988, the criteria set out below shall apply to determine the fitness and propriety of a person who serves or wishes to serve as a director of a bank. Non-compliance with any one of the criteria as set out herein shall disqualify a person to be appointed, elected or nominated as a director or to continue as a director. 3(3)(i) The age of a person who serves as director shall not exceed 70 years. (A) Where a director who is currently serving at a bank is over 70 years of age as at 01 January 2008, the following transitional provisions shall apply, subject, however, to the provisions as set out in Direction 3(2)(ii) hereof. a) If a director is over 75 years of age as at 01 January 2008, such director may continue to serve as a director for a further period that shall not extend beyond 31 December 2008, and shall be deemed to have vacated office on 31 December 2008; b) If a director is between 70 and 75 years of age as at 01 January 2008, such director may continue to serve as a director for a further period that shall not extend beyond 31 December 2009, and shall be deemed to have vacated office on 31 December 2009. (B) Where a director who is currently serving at a bank reaches the age of 70 years, between 01 January 2008 and 31 December 2009, such director may, subject to the provisions as set out in Direction 3(2)(ii) hereof, continue to serve as a director for a further period that shall not extend beyond 31 December 2010 and shall be deemed to have vacated office on 31 December 2010. 3(3)(ii) A person shall not hold office as a director of more than 20 companies/entities/ institutions inclusive of subsidiaries or associate companies of the bank. Of such 20 companies/entities/ institutions, not more than 10 companies shall be those classified as Specified Business Entities in terms of the Sri Lanka Accounting and Auditing Standards Act, No. 15 of 1995. 3(4) Management functions delegated by the Board 3(4)(i) The directors shall carefully study and clearly understand the delegation arrangements in place. 3(4)(ii) The board shall not delegate any matters to a board committee, chief executive officer, executive directors or key management personnel, to an extent that such delegation would significantly hinder or reduce the ability of the board as a whole to discharge its functions. 3(4)(iii) The board shall review the delegation processes in
place on a periodic basis to ensure that they remain relevant to the needs of the bank. 3(5) The Chairman and Chief Executive Officer 3(5)(i) The roles of chairman and chief executive officer shall be separate and shall not be performed by the same individual.

180 Directions, Determinations, and Circulars issued to Licensed Specialised Banks 3(5)(ii) The chairman shall be a non-executive director and preferably an independent director as well. In the case where the chairman is not an independent director, the board shall designate an independent director as the Senior Director with suitably documented terms of reference to ensure a greater independent element. The designation of the Senior Director shall be disclosed in the bank’s Annual Report. 3(5)(iii) The board shall disclose in its corporate governance report, which shall be an integral
part of its Annual Report, the identity of the chairman and the chief executive officer
and the nature of any relationship [including financial, business, family or other material/relevant relationship(s)], if any, between the chairman and the chief executive officer and the relationships among members of the board. 3(5)(iv) The chairman shall: (a) provide leadership to the board; (b) ensure that the board works effectively and discharges its responsibilities; and (c) ensure that all key and appropriate issues are discussed by the board in a timely manner. 3(5)(v) The chairman shall be primarily responsible for drawing up and approving the agenda for each board meeting, taking into account where appropriate, any matters proposed by the other directors for inclusion in the agenda. The chairman may delegate the drawing up of the agenda to the company secretary. 3(5)(vi) The chairman shall ensure that all directors are properly briefed on issues arising at board meetings and also ensure that directors receive adequate information in a timely manner. 3(5)(vii) The chairman shall encourage all directors to make a full and active contribution to the board’s affairs and take the lead to ensure that the board acts in the best interests of the bank. 3(5)(viii) The chairman shall facilitate the effective contribution of non-executive directors in particular and ensure constructive relations between executive and non-executive directors. 3(5)(ix) The chairman, shall not engage in activities involving direct supervision of key management personnel or any other executive duties whatsoever. 3(5)(x) The chairman shall ensure that appropriate steps are taken to maintain effective communication with shareholders and that the views of shareholders are communicated to the board. 3(5)(xi) The chief executive officer shall function as the apex executive-in-charge of the day-to-day-management of the bank’s operations and business. 3(6) Board appointed Committees 3(6)(i) Each bank shall have at least four board committees as set out in Directions 3(6)(ii), 3(6)(iii), 3(6)(iv) and 3(6)(v) of these Directions. Each committee shall report directly to the board. All committees shall appoint a secretary to arrange the meetings and maintain minutes, records, etc., under the supervision of the chairman of the committee. The board shall present a report of the performance on each committee, on their duties and roles at the annual general meeting. 3(6)(ii) The following rules shall apply in relation to the Audit Committee:
a) The chairman of the committee shall be an independent non-executive director who possesses qualifications and experience in accountancy and/or audit. b) All members of the committee shall be non-executive directors. c) The committee shall make recommendations on matters in connection with:

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 181 (i) the appointment of the external auditor for audit services to be provided in compliance with the relevant statutes; (ii) the implementation of the Central Bank guidelines issued to auditors from time to time; (iii) the application of the relevant accounting standards; and (iv) the service period, audit fee and any resignation or dismissal of the auditor; provided that the engagement of the Audit partner shall not exceed five years, and that the particular Audit partner is not re-engaged for the audit before the expiry of three years from the date of the completion of the previous term. d) The committee shall review and monitor the external auditor’s independence and objectivity and the effectiveness of the audit processes in accordance with applicable standards and best practices. e) The committee shall develop and implement a policy on the engagement of an external auditor to provide non-audit services that are permitted under the relevant statutes, regulations, requirements and guidelines. In doing so, the committee shall ensure that the provision by an external auditor of non-audit services does not impair the external auditor’s independence or objectivity. When assessing the external auditor’s independence or objectivity in relation to the provision of non-audit services, the committee shall consider:
I. whether the skills and experience of the audit firm make it a suitable provider
of the non-audit services;
II. whether there are safeguards in place to ensure that there is no threat to the
objectivity and/or independence in the conduct of the audit resulting from the provision of such services by the external auditor; and
III. whether the nature of the non-audit services, the related fee levels and the fee
levels individually and in aggregate relative to the audit firm, pose any threat to the objectivity and/or independence of the external auditor. f) The committee shall, before the audit commences, discuss and finalise with the external auditors the nature and scope of the audit, including: (i) an assessment of the bank’s compliance with the relevant Directions in relation to corporate governance and the management’s internal controls over financial reporting; (ii) the preparation of financial statements for external purposes in accordance with relevant accounting principles and reporting obligations; and (iii) the co-ordination between firms where more than one audit firm is involved. g) The committee shall review the financial information of the bank, in order to monitor the integrity of the financial statements of the bank, its annual report, accounts and quarterly reports prepared for disclosure, and the significant financial reporting judgments contained therein. In reviewing the bank’s annual report and accounts and quarterly reports before submission to the board, the committee shall focus particularly on: (i) major judgmental areas; (ii) any changes in accounting policies and practices; (iii) significant adjustments arising from the audit; (iv) the going concern assumption; and (v) the compliance with relevant accounting standards and other legal requirements. h) The committee shall discuss issues, problems and reservations arising from the interim and final audits, and any matters the auditor may wish to discuss including those matters that may need to be discussed in the absence of key management personnel, if necessary. i) The committee shall review the external auditor’s management letter and the management’s response thereto. j) The committee shall take the following steps with regard to the internal audit function of the bank:

182 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
I. Review the adequacy of the scope, functions and resources of the internal audit
department, and satisfy itself that the department has the necessary authority to carry out its work;
II. Review the internal audit programme and results of the internal audit process
and, where necessary, ensure that appropriate actions are taken on the recommendations of the internal audit department;
III. Review any appraisal or assessment of the performance of the head and senior
staff members of the internal audit department;
IV. Recommend any appointment or termination of the head, senior staff members
and outsourced service providers to the internal audit function;
V. Ensure that the committee is appraised of resignations of senior staff members
of the internal audit department including the chief internal auditor and any outsourced service providers, and to provide an opportunity to the resigning senior staff members and outsourced service providers to submit reasons for resigning;
VI. Ensure that the internal audit function is independent of the activities it audits
and that it is performed with impartiality, proficiency and due professional care; k) The committee shall consider the major findings of internal investigations and management’s responses thereto; l) The chief finance officer, the chief internal auditor and a representative of the external auditors may normally attend meetings. Other board members and the chief executive officer may also attend meetings upon the invitation of the committee. However, at least twice a year, the committee shall meet with the external auditors without the executive directors being present. m) The committee shall have: (i) explicit authority to investigate into any matter within its terms of reference; (ii) the resources which it needs to do so; (iii) full access to information; and (iv) authority to obtain external professional advice and to invite outsiders with relevant experience to attend, if necessary. n) The committee shall meet regularly, with due notice of issues to be discussed and shall record its conclusions in discharging its duties and responsibilities. o) The board shall disclose in an informative way, (i) details of the activities of the audit committee; (ii) the number of audit committee meetings held in the year; and (iii) details of attendance of each individual director at such meetings. p) The secretary of the committee (who may be the company secretary or the head of the internal audit function) shall record and keep detailed minutes of the committee meetings. q) The committee shall review arrangements by which employees of the bank may, in confidence, raise concerns about possible improprieties in financial reporting, internal control or other matters. Accordingly, the committee shall ensure that proper arrangements are in place for the fair and independent investigation of such matters and for appropriate follow-up action and to act as the key representative body for overseeing the bank’s relations with the external auditor. 3(6)(iii) The following rules shall apply in relation to the Human Resources and Remuneration Committee:
a) The committee shall determine the remuneration policy (salaries, allowances and other financial payments) relating to directors, Chief Executive Officer (CEO) and key management personnel of the bank.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 183 b) The committee shall set goals and targets for the directors, CEO and the key management personnel. c) The committee shall evaluate the performance of the CEO and key management personnel against the set targets and goals periodically and determine the basis for revising remuneration, benefits and other payments of performance-based incentives. d) The CEO shall be present at all meetings of the committee, except when matters relating to the CEO are being discussed. 3(6)(iv) The following rules shall apply in relation to the Nomination Committee:
a) The committee shall implement a procedure to select/appoint new directors, CEO and key management personnel. b) The committee shall consider and recommend (or not recommend) the re-election of current directors, taking into account the performance and contribution made by the director concerned towards the overall discharge of the board’s responsibilities. c) The committee shall set the criteria such as qualifications, experience and key attributes required for eligibility to be considered for appointment or promotion to the post of CEO and the key management positions. d) The committee shall ensure that directors, CEO and key management personnel are fit and proper persons to hold office as specified in the criteria given in Direction 3(3) and as set out in the Statutes. e) The committee shall consider and recommend from time to time, the requirements of additional/new expertise and the succession arrangements for retiring directors and key management personnel. f) The Committee shall be chaired by an Independent Director and preferably be constituted with a majority of Independent Directors. The CEO may be present at meetings by invitation. 3(6)(v) The following rules shall apply in relation to the Integrated Risk Management Committee:
a) The committee shall consist of at least three non-executive directors, chief executive officer and key management personnel supervising broad risk categories, i.e., credit, market, liquidity, operational and strategic risks. The committee shall work with key management personnel very closely and make decisions on behalf of the board within the framework of the authority and responsibility assigned to the committee. b) The committee shall assess all risks, i.e., credit, market, liquidity, operational and strategic risks to the bank on a monthly basis through appropriate risk indicators and management information. In the case of subsidiary companies and associate companies, risk management shall be done, both on a bank basis and group basis. c) The committee shall review the adequacy and effectiveness of all management level committees such as the credit committee and the asset-liability committee to address specific risks and to manage those risks within quantitative and qualitative risk limits as specified by the committee. d) The committee shall take prompt corrective action to mitigate the effects of specific risks in the case such risks are at levels beyond the prudent levels decided by the committee on the basis of the bank’s policies and regulatory and supervisory requirements.

184 Directions, Determinations, and Circulars issued to Licensed Specialised Banks e) The committee shall meet at least quarterly to assess all aspects of risk management including updated business continuity plans. f) The committee shall take appropriate actions against the officers responsible for failure to identify specific risks and take prompt corrective actions as recommended by the committee, and/or as directed by the Director of Bank Supervision. g) The committee shall submit a risk assessment report within a week of each meeting to the board seeking the board’s views, concurrence and/or specific directions. h) The committee shall establish a compliance function to assess the bank’s compliance with laws, regulations, regulatory guidelines, internal controls and approved policies on all areas of business operations. A dedicated compliance officer selected from key management personnel shall carry out the compliance function and report to the committee periodically. 3(7) Related party transactions 3(7)(i) The board shall take the necessary steps to avoid any conflicts of interest that may arise from any transaction of the bank with any person, and particularly with the following categories of persons who shall be considered as “related parties” for the purposes of this Direction:
a) Any of the bank’s subsidiary companies; b) Any of the bank’s associate companies; c) Any of the directors of the bank; d) Any of the bank’s key management personnel; e) A close relation of any of the bank’s directors or key management personnel; f) A shareholder owning a material interest in the bank; g) A concern in which any of the bank’s directors or a close relation of any of the bank’s directors or any of its material shareholders has a substantial interest. 3(7)(ii) The type of transactions with related parties that shall be covered by this Direction shall include the following:
a) The grant of any type of accommodation, as defined in the Monetary Board’s Directions on maximum amount of accommodation, b) The creation of any liabilities of the bank in the form of deposits, borrowings and investments, c) The provision of any services of a financial or non-financial nature provided to the bank or received from the bank, d) The creation or maintenance of reporting lines and information flows between the bank and any related parties which may lead to the sharing of potentially proprietary, confidential or otherwise sensitive information that may give benefits to such related parties. 3(7)(iii) The board shall ensure that the bank does not engage in transactions with related parties as defined in Direction 3(7)(i) above, in a manner that would grant such parties “more favourable treatment” than that accorded to other constituents of the bank carrying on the same business. In this context, “more favourable treatment” shall mean and include treatment, including the:
a) Granting of “total net accommodation” to related parties, exceeding a prudent percentage of the bank’s regulatory capital, as determined by the board. For purposes of this sub-direction:

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 185
I. “Accommodation” shall mean accommodation as defined in the Banking Act,
Directions, No.8 of 2007 on Maximum Amount of Accommodation.
II. The “total net accommodation” shall be computed by deducting from the total
accommodation, the cash collateral and investments made by such related parties in the bank’s share capital and debt instruments with a maturity of 5 years or more. b) Charging of a lower rate of interest than the bank’s best lending rate or paying more than the bank’s deposit rate for a comparable transaction with an unrelated comparable counterparty; c) Providing of preferential treatment, such as favourable terms, covering trade losses and/or waiving fees/commissions, that extend beyond the terms granted in the normal course of business undertaken with unrelated parties; d) Providing services to or receiving services from a related-party without an evaluation procedure; e) Maintaining reporting lines and information flows that may lead to sharing potentially proprietary, confidential or otherwise sensitive information with related parties, except as required for the performance of legitimate duties and functions. 3(7)(iv) A bank shall not grant any accommodation to any of its directors or to a close relation of such director unless such accommodation is sanctioned at a meeting of its board of directors, with not less than two-thirds of the number of directors other than the director concerned, voting in favour of such accommodation. This accommodation shall be secured by such security as may from time to time be determined by the Monetary Board as well. 3(7)(v) a) Where any accommodation has been granted by a bank to a person or a close relation of a person or to any concern in which the person has a substantial interest, and such person is subsequently appointed as a director of the bank, steps shall be taken by the bank to obtain the necessary security as may be approved for that purpose by the Monetary Board, within one year from the date of appointment of the person as a director. b) Where such security is not provided by the period as provided in Direction 3(7)(v) (a) above, the bank shall take steps to recover any amount due on account of any accommodation, together with interest, if any, within the period specified at the time of the grant of accommodation or at the expiry of a period of eighteen months from the date of appointment of such director, whichever is earlier. c) Any director who fails to comply with the above sub-directions shall be deemed to have vacated the office of director and the bank shall disclose such fact to the public. d) This sub-direction, however, shall not apply to a director who at the time of the grant of the accommodation was an employee of the bank and the accommodation was granted under a scheme applicable to all employees of such bank. 3(7)(vi) A bank shall not grant any accommodation or “more favourable treatment” relating to the waiver of fees and/or commissions to any employee or a close relation of such employee or to any concern in which the employee or close relation has a substantial interest other than on the basis of a scheme applicable to the employees of such bank or when secured by security
as may be approved by the Monetary Board in respect of accommodation granted as per Direction 3(7)(v) above. 3(7)(vii) No accommodation granted by a bank under Direction 3(7)(v) and 3(7)(vi) above, nor any part of such accommodation, nor any interest due thereon shall be remitted without the prior approval of the Monetary Board and any remission without such approval shall be void and of no effect.

186 Directions, Determinations, and Circulars issued to Licensed Specialised Banks 3(8) Disclosures 3(8)(i) The board shall ensure that: (a) annual audited financial statements and quarterly financial statements are prepared and published in accordance with the formats prescribed by the supervisory and regulatory authorities and applicable accounting standards, and that (b) such statements are published in the newspapers in an abridged form, in Sinhala, Tamil and English. 3(8)(ii) The board shall ensure that the following minimum disclosures are made in the Annual Report:
a) A statement to the effect that the annual audited financial statements have been prepared in line with applicable accounting standards and regulatory requirements, inclusive of specific disclosures. b) A report by the board on the bank’s internal control mechanism that confirms that the financial reporting system has been designed to provide reasonable assurance regarding the reliability of financial reporting, and that the preparation of financial statements for external purposes has been done in accordance with relevant accounting principles and regulatory requirements. c) The external auditor’s certification on the effectiveness of the internal control mechanism referred to in Direction 3(8)(ii)(b) above, in respect of any statements prepared or published after 31 December 2008. d) Details of directors, including names, fitness and propriety, transactions with the bank and the total of fees/remuneration paid by the bank. e) Total net accommodation as defined in 3(7)(iii) granted to each category of related parties. The net accommodation granted to each category of related parties shall also be disclosed as a percentage of the bank’s regulatory capital. f) The aggregate values of remuneration paid by the bank to its key management personnel and the aggregate values of the transactions of the bank with its key management personnel, set out by broad categories such as remuneration paid, accommodation granted and deposits or investments made in the bank. g) The external auditor’s certification of the compliance with these Directions in the annual corporate governance reports published after 01 January 2010. h) A report setting out details of the compliance with prudential requirements, regulations, laws and internal controls and measures taken to rectify any material non-compliances. i) A statement of the regulatory and supervisory concerns on lapses in the bank’s risk management, or non-compliance with these Directions that have been pointed out by the Director of Bank Supervision, if so directed by the Monetary Board to be disclosed to the public, together with the measures taken by the bank to address such concerns. 3(9) Transitional and other general provisions 3(9)(i) Compliance with this Direction shall commence from 01 January 2008 onwards and all licensed commercial banks shall fully comply with the provisions of this Direction by or before 01 January 2009 except where extended compliance dates have been specifically provided for in this Direction. 3(9)(ii) In respect of the banks that have been incorporated by specific statutes in Sri Lanka, the boards as specified in such statutes shall continue to function in terms of the provisions of the respective statutes, provided they take steps to comply with all provisions of this Direction that are not inconsistent with the provisions of the respective statutes.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 187 3(9)(iii) This Direction shall apply to the branches of the foreign banks operating in Sri Lanka to the extent that it is not inconsistent with the regulations and laws applicable in such bank’s country of incorporation. The branch of a foreign bank shall also publish its parent bank’s annual corporate governance report together with its annual report and accounts of the branch operations in Sri Lanka. 3(9)(iv) In the event of a conflict between any of the provisions of this Direction and the Articles of Association (or Internal Rules) pertaining to any bank, the provisions of this Direction shall prevail. However, if the Articles of Association of an individual bank set a more stringent standard than that specified in this Direction, such provisions in the Articles of Association may be followed.

188 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Requirement of the Framework. Directions issued by the Monetary Board of the Central Bank of Sri Lanka in terms of Sections 46(1) and 76(J)(1) of the Banking Act, No.30 of 1988, as amended. Sgd. Nivard Ajith Leslie Cabraal Chairman of the Monetary Board and Governor of the Central Bank of Sri Lanka Colombo 05 October 2011 BANKING ACT DIRECTION NO. 7 OF 2011 INTEGRATED RISK MANAGEMENT FRAMEWORK FOR LICENSED BANKS In order to ensure the soundness of the banking system, Sections 46(1) and 76(J)(1) of the Banking Act, No. 30 of 1988, last amended by the Banking Act, No. 46 of 2006, empowers the Monetary Board to issue Directions to licensed banks regarding the manner in which any aspect of the business of such banks is to be conducted. Accordingly, the Monetary Board issues this Direction to all licensed banks on integrated risk management as management of risks on banking business operations in an integrated manner would promote the soundness of banks and the banking system.

All licensed banks shall adopt a specific Integrated Risk Management (IRM)
framework in compliance with guidelines annexed to this Direction in addition to risk management principles and rules required in regulatory and supervisory procedures and other market best practices of bank risk management.
The IRM framework which shall be documented shall cover various potential
risks, possible sources of such risks, mechanism of management information and reporting to identify and monitor such risks, effective measures to control and mitigate risks at prudent levels and relevant officers and committees responsible for such control and mitigation.
The IRM framework shall be approved by the Board of Directors (BOD) and
reviewed and updated at least annually.
Through the IRM framework, the BOD shall assess the integrated risk profile
of the bank and its management at least quarterly and be responsible for overall oversight of the orderly implementation of the IRM framework.
All banks shall implement the IRM framework within 6 months from the date
of this Direction.
In the event of any material lapses in the IRM framework in the opinion of the
Director of Bank Supervision, the fitness and propriety of those who are found to be responsible for such lapses will be re-assessed under the relevant provisions of the Banking Act. Nature of the Framework. Oversight of the Borad. Steps to secure Compliance.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 189 Annexure INTEGRATED RISK MANAGEMENT SYSTEMS IN BANKS A. Integrated Risk Management

Introduction
1.1 Banks are exposed to various risks during their business operations. Under the Basel II
framework, the major categories of risks are credit, market and operational risks. However, the banks are also facing other risks such as liquidity, interest rate, foreign exchange rate, legal, regulatory, reputational etc. All these risks are highly interdependent.
1.2 Risk management is a complex function, which requires specialised skills and expertise.
Internationally, banks have been moving towards the use of sophisticated models for measuring and managing risks in an integrated manner with a view to ensuring a comprehensive Internal Capital Adequacy Assessment Process (ICAAP) under Pillar 2 of the Basel II framework.
1.3 The capital adequacy ratio prescribed by the Central Bank of Sri Lanka (CBSL) under the Pillar
– I of the Basel II framework is the regulatory minimum level, which addresses only credit, market and operational risks on an average basis. Thus, the need for banks to have their own assessment of various integrated risk exposures and maintain adequate capital as a cushion for such risks has become an urgent necessity.
1.4 The objective of these guidelines is to encourage banks to develop integrated risk management
techniques for monitoring and managing their risks and to assure CBSL that adequate capital is held to meet various risks to which they are exposed.
Integrated Risk Management oversight
2.1 Board and Senior Management – The responsibility of understanding the risks assumed by
the bank and ensuring that the risks are appropriately managed should be vested with the Board of Directors (BOD). The Board should:
(a) Ensure that the bank has established a robust and pervasive risk culture and clear policies that define risk management as the responsibility of each bank’s senior management, subject to the oversight of the Board. (b) Establish risk limits based on risk appetite of the bank. (c) Ensure that the Senior Management of the bank:
i. establishes an integrated framework in order to assess and appropriately manage
various risk exposures of the bank;
ii. develops a system to monitor the bank’s risk exposures and to relate them to the
bank’s capital;
iii. establishes a method to monitor the bank’s compliance with internal policies,
particularly with regard to risk management; and
iv. effectively communicates all relevant policies and procedures throughout the bank.
(d) Adopt and support strong internal controls.
2.2 Integrated Risk Management Committee (IRMC) – The overall risk management should
be assigned to an independent Integrated Risk Management Committee (IRMC) of the BOD, established as per Rules 3(6)(v) of the Banking Act Directions Nos.11&12 of 2007 on Corporate Governance for Licensed Banks in Sri Lanka with the responsibilities stated therein.
2.3 Internal Audit – Integrated risk management policies and procedures as well as the
functionalities at various levels of the risk management function should be reviewed by

190 Directions, Determinations, and Circulars issued to Licensed Specialised Banks the internal audit function of banks on an on-going basis while the external audit makes an independent review at least on an annual basis.
2.4 Operational Level – Risk management in operational areas viz. front office, loan origination
function etc. should be confined to the operational procedures and guidelines set forth by the BOD and the Senior Management.
3. Integrated Risk management framework priorities and processes
3.1 Given the diversity of balance sheet profile of banks in Sri Lanka, it is neither prudent nor
desirable to adopt a uniform framework for management of risks. The architecture of an integrated risk management function should be bank-specific, dictated by the size, complexity of functions, operating environment and technical expertise of staff.
3.2 All relevant factors that present a material source of risk should be incorporated in a
well-developed integrated risk management system.
3.3 All measurements of risk incorporate both quantitative and qualitative elements, but to the
extent possible, a quantitative approach should form the foundation of a bank’s measurement framework.
3.4 Quantitative tools can include the use of large historical databases; when data are scarcer,
a bank may choose to rely more heavily on the use of stress testing and scenario analyses.
3.5 Banks should understand when measuring risks that measurement error always exists, and in
many cases the error itself is difficult to quantify. In general, an increase in uncertainty related to modelling and business complexity should result in a larger capital cushion.
3.6 Quantitative approaches that focus on most likely outcomes for budgeting, forecasting, or
performance measurement purposes may not be fully applicable for capital adequacy because the ICAAP under Pillar 2 of the Basel II framework should also take less likely events into account.
3.7 Stress testing and scenario analysis can be effective in gauging the consequences of outcomes
that have low probability of occurrence but would have a considerable impact on safety and soundness of the banks.
3.8 To the extent that risks cannot be reliably measured with quantitative tools – for example, where
measurements of risk are based on scarce data or unproven quantitative methods – qualitative tools, including experience and judgment, may be more heavily utilised.
3.9 Banks should be cognisant that qualitative approaches have their own inherent biases and
assumptions that affect risk assessment; accordingly, banks should recognise the biases and assumptions embedded in, and the limitations of the qualitative approaches used.
4. Risk aggregation and diversification effects
4.1 An effective risk management system should assess risks across the entire bank. A bank
choosing to conduct risk aggregation among various risk types or business lines should understand the challenges in such aggregation.
4.2 In addition, when aggregating risks, banks should ensure that any potential concentrations
across more than one risk dimension are addressed, recognizing that losses could arise in several risk dimensions at the same time, stemming from the same event or a common set of factors.
4.3 In considering the possible effects of diversification, management should be systematic and
rigorous in documenting decisions, and in identifying assumptions used in each level of risk aggregation.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 191
4.4 Assumptions about diversification should be supported by analysis and evidence. The bank
should have systems capable of aggregating risks based on the bank’s selected framework. For example, a bank calculating correlations within or among risk types should consider data quality and consistency, and the volatility of correlations over time and under stressed market conditions.
5. Disclosure
CBSL strongly considers that the market discipline could play an important role in maintaining financial system stability. However, market discipline could be achieved only through meaningful disclosures by licensed banks which would also provide a more meaningful picture of the extent and nature of various risks that banks are exposed to and of the efficiency of banks’ risk management practices. B. Credit Risk Management

Management Oversight
The BOD should put in place and periodically review the credit risk strategy and significant credit risk policies of the bank.
1.1 The strategy shall include:
(a) a statement of the bank’s willingness to grant loans based on the type; (b) identification of target markets and business sectors; (c) preferred levels of diversification and concentration; (d) the cost of capital in granting credit and bad debts; and (e) the cyclical aspects and the resulting shifts in the composition and quality of the loan portfolio. This strategy should be viable in the long run and across business cycles.
1.2 The credit risk policies and procedures shall be consisted with following elements, at a
minimum.
(a) Written policies that define target markets, risk acceptance criteria, credit approval authority, credit origination and maintenance procedures and guidelines for portfolio management and remedial management. (b) Proactive credit risk management practices such as annual/half yearly industry studies and single borrower reviews, periodic credit calls and customer visits that are documented, and carry out at least quarterly management reviews of troubled exposures/ weak credits. (c) Vesting accountability with the business managers for managing risk and, in conjunction with the credit risk management framework, for establishing and maintaining appropriate risk limits and risks arrangement procedures. (d) Delegation of lending powers to individual credit officers based upon a consistent set of standards of experience, judgment and ability. (e) Requirement for higher level of authority to approve credit limits as risk ratings worsen. (f) Requirement for every extension of credit, other than small value consumer/retail loans to be approved by at least two authorized credit officers, one of whom must be an officer from business and another invariably from an independent Credit Risk Management Department (CRMD).

192 Directions, Determinations, and Circulars issued to Licensed Specialised Banks (g) Requirement for every obligor and facility to be assigned a risk rating. (h) Consistent standards for the origination, documentation and maintenance of documents for extensions of credit. (i) Consistent approach towards early problem recognition, classification of problem exposures, and remedial action. (j) Emphasis on maintaining a diversified portfolio of risk assets in line with the capital desired to support such a portfolio. (k) Credit risk limits by obligor, concentration, industry or geography. (l) Responsibility of the credit function to report the comprehensive set of credit risk data into the independent risk system.
1.3 The credit risk strategy and policy should be approved and periodically reviewed by the BOD.
These documents should be effectively disseminated throughout the banking organisation. All relevant personnel should clearly understand the bank’s approach to granting credit and should be held accountable for complying with established policies and procedures.
2. Risk Management
2.1 Structure – In a well functioning integrated risk management framework, credit risk
management is vested with an independent unit and each bank should, depending on the size of the organisation or loan book, constitute a high level Credit Policy Committee (CPC) also called Credit Risk Management Committee or Credit Control Committee with the following responsibilities:
(a) The committee should be headed by the Chief Executive Officer (CEO)/General Manager (GM) and should comprise Heads of Credit Departments, including Consumer Banking, Treasury and CRMD. (b) The committee should, inter alia, formulate clear credit policies including standards on presentation of credit proposals, financial covenants, rating standards and benchmarks, delegation of credit approving powers, prudent limits on large credit exposures, assets concentrations and lending to related parties, standards for loan collateral, portfolio management, loan review mechanism, risk concentrations, risk monitoring and evaluation, pricing of loans, provisioning, regulatory/legal compliance, etc. for BOD’s approval. (c) The committee will be responsible for the setting up of CRMD which should lay down risk assessment systems, monitor quality of loan portfolio and prudential limits set by CPC, identify problems and correct deficiencies, develop management Information System (MIS) and undertake loan review/audit.
2.2 Prudential Limits – Credit risk can be mitigated to a great extent by stipulating prudential risk
limits on various risk parameters. Banks should consider stipulating:
(a) Benchmark financial ratios, with flexibility for deviation in deserving cases. The conditions subject to which deviations are permitted and the authority for permitting such deviations should be clearly spelt out in the Credit Policy. (b) Single/related party borrower limits, which could even be more stringent than the limits prescribed by CBSL, to provide a filtering mechanism. (c) Substantial exposure limit, i.e., aggregate of large exposures should not exceed a percentage of the Tier – II capital of the banks, depending upon the degree of concentration risk the bank is exposed to.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 193 (d) Maximum exposure limits to industry, regions, country, etc. There must also be systems in place to evaluate the exposure at reasonable intervals and the limits should be adjusted especially when a particular sector or industry faces a slowdown or other specific problem. (e) Maturity and currency profile of the loan book, keeping in mind the market risk inherent in the balance sheet, risk management capability, liquidity etc.
2.3 Risk Rating – Banks should develop a robust internal credit-risk grading system that serves as
a single point indicator of diverse risk factors of counterparty and for taking credit decisions in a consistent manner while communicating the default risk associated with an exposure. The risk rating, in short, should:
(a) reflect the underlying credit risk of the loan book ; and (b) be drawn up in a structured manner, incorporating both quantitative (financial ratios) and qualitative standards (industry, payment history, credit reports, management, purpose of the loan, quality of financial information, facility characteristics etc.).
2.4 Risk Pricing – Risk pricing is a fundamental tenet of credit risk management. Thus, banks
should:
(a) evolve scientific systems to price the credit risk, which should have a bearing on the expected Probability of Default (PD); and (b) establish the maximum expected loss in each product line and linking the capital to this loss, thus making it possible to compare products of different risk levels.
2.5 Portfolio Management – The need for credit portfolio management emanates from the
potential adverse impact of concentration of exposures and necessity to optimise the benefits associated with diversification. In this regard, banks should consider the following measures to maintain the portfolio quality:
(a) Stipulate quantitative ceilings on aggregate exposure in specified rating categories, i.e., certain percentage of total advances in the rating category 1 to 4 or to 6 etc. (b) Evaluate the rating-wise distribution of borrowers in various industries, business, personal segments, etc. (c) Exposure to one industry/sector should be evaluated on the basis of overall rating distribution of borrowers within the sector/group. In cases where portfolio exposure to a single industry/segment is performing badly or the concentration of borrowers is in the lower notches of ratings, the bank may increase the quality standards for the specific industry or group. (d) Target rating-wise volume of loans, probable defaults and provisioning requirements as a prudent planning exercise. For any deviation/s from the expected parameters, an exercise for restructuring the portfolio may immediately be undertaken and if necessary, the entry-level criteria could prudently be enhanced to insulate the portfolio from further deterioration. (e) Undertake rapid portfolio reviews, stress tests and scenario analyses when the external environment undergoes rapid changes (rise in oil prices, global/country specific slowdowns, international/market risk events, extreme liquidity conditions, war situation etc.). (f) Introduce discriminatory time schedules for review/renewal of borrower exposures. Lower rated borrowers whose financials show signs of weakness should be subject to renewal control twice/thrice a year.

194 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
2.6 Risk models – Credit risk models offer banks a framework for quantifying, aggregating and
managing risk across geographical and product lines in a timely manner. Therefore, banks should evaluate the utility of various models with suitable modifications to the environment in Sri Lanka and build up adequate internal expertise and databases to facilitate the models utilisation.
2.7 Loan Review Mechanism (LRM) – LRM is an effective tool for constantly evaluating the
quality of the loan book and bringing about qualitative improvements in credit administration. In this regard, banks should formulate a loan review policy under the review of BOD, annually. The policy should, inter alia, address:
(a) Qualification and Independence – Loan Review Officers should be independent in reporting to the BOD and have sound knowledge of the credit appraisal, lending practices and loan policies of the bank. (b) Frequency and Scope of Reviews – Reviews of high value loans should be undertaken usually within three months of sanction/renewal, or more frequently when factors indicate a potential for deterioration in the credit quality. The scope of the review should cover all performing loans above a cut-off limit. At least 30% – 40% of the loan portfolio should be subjected to LRM each year to provide reasonable assurance that all major credit risks embedded in the balance sheet have been tracked. (c) Depth of Reviews – Loan reviews should focus on: the approval process, accuracy and timeliness of credit ratings assigned by loan officers, adherence to internal policies and procedures, and applicable laws/regulations, compliance with loan covenants, postsanction follow-up, sufficiency of documentation, portfolio quality and recommendations for improving portfolio quality.
2.8 Risk in Investment banking – A significant degree of credit risk, in addition to market risk,
is inherent in investment banking. Therefore, banks should stipulate entry level minimum ratings/quality standards, industry, maturity, duration, issuer-wise, etc. limits in investment proposals as well, to mitigate the adverse impacts of concentration and risk of illiquidity.
2.9 Inter-Bank Exposure – A suitable framework should be evolved to provide a centralised
overview on the aggregate exposure to other banks. Bank-wise exposure limits could be set on the basis of external or internal ratings.
2.10 Risk in Off-balance sheet exposure – Mechanics involved in the assessment of non-funded
lines should be similar to the assessment of funded lines. Utmost care must be taken whilst extending these facilities. Banks should, therefore, evolve adequate frameworks for managing their exposure in off-balance sheet products such as Forex forward contracts, forward rate agreements, swaps, options, futures etc. as a part of credit appraisal, limits and monitoring procedures.
C. Market Risk Management

Management Oversight
The BOD should clearly articulate market risk management policies, procedures, prudential risk limits, review mechanisms and reporting and auditing systems.
1.1 policies should address the following:
(a) assessment of bank’s exposure on a consolidated basis, considering issues related to interest rate, currency, equity price and liquidity risks; and (b) risk measurement systems capture all material sources of market risk and assess the effects on bank’s capital.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 195
1.2 The BOD should ensure that bank’s overall market risk exposure is maintained at prudent levels
and consistent with the available capital. The operating prudential limits and the accountability of line management should also be clearly defined.
2. Risk Management
2.1 Structure – Each bank should establish an organizational set up for market risk management,
including the following:
(a) Asset-Liability Management Committee (ALCO) – The ALCO, consisting of the bank’s senior management, including the CEO/GM must function as the top-end operational unit for managing the balance sheet within the performance/risk parameters laid down by the BOD. The ALCO should also articulate the bank’s view on various market variables and base its decisions for future business strategy. (b) Middle Office – The banks should set up an independent Middle Office to track the magnitude of market risk on a real time basis. The Middle Office should:
i. consist of experts in market risk management, economists, statisticians and general
bankers and may be functionally placed directly under the ALCO; and
ii. be separated from the Treasury Department and should not be involved in the
day-to-day management of the treasury;
iii. apprise the top management/ALCO/Treasury about adherence to prudential/risk
parameters and also aggregate the total market risk exposures assumed by the bank at any point of time.
2.2 Foreign Exchange (Forex) Risk – Forex risk could be mitigated through fixing appropriate
limits on open positions, gaps, adopting risk measurement methods and monitoring exposures. In this regard, the banks are encouraged to adopt the following measures:
(a) Fix appropriate limits (even less than the limits set by CBSL) depending upon the capital position, overall risk profile and risk management capabilities. (b) Fix appropriate limits on individual and aggregate gaps on major currencies, linked to capital. (c) Adopt the Value at Risk (VaR) technique to measure the risk associated with exposures. (d) Monitor Forex risk exposures with the preparation of the statement of Maturity of Assets and Liabilities (MAL) (Attachment -1), statement of Sensitivity of Assets and Liabilities (SAL) (Attachment – 2) and statement of Forex Position (FXP) (Attachment – 3). (e) Ensure clear-cut and well-defined division of responsibility between front, middle and back offices.
2.3 Foreign Currency Liquidity Risk Management – In running multi currency balance sheets,
and particularly when domestic currency assets are funded with foreign currency liabilities, banks are exposed to another layer of complexity to liquidity management. Banks should, therefore, be vigilant in creating understandable currency mismatches to avoid liquidity crises. D. Operational Risk Management

Management Oversight
An effective operational risk management strategy requires that BOD should recognise that operational risk is distinct and controllable, and should put in place appropriate risk management policies, procedures and practices and an independent audit and review mechanism.

196 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
1.1 BOD should put in place well defined policies on operational risk management. These policies
and procedures should be based on common elements across business lines or risks. The policy should address:
(a) product review processes;
(b) business involved;
(c) risk management; and
(d) internal control functions.
2. Risk Management
2.1 Structure – Taking into account institution-specific factors, banks should consider establishing
an independent bank-wide Operational Risk Committee or Unit under Integrated Risk Management Committee (IRMC) or Chief Risk Officer, with the following responsibilities:
(a) Establish consistent definitions for operational risk across business units. (b) Develop policies, procedures and practices. (c) Report and review risk exposures. (d) Oversee and ensure the integrity of risk management procedures. (e) Allocate and maintain economic capital. (f) Develop strategies for risk mitigation techniques.
2.2 Risk Measurement – Since, there is no uniformity of approach in measuring operational risk in
the banking system, and a number of breakdowns in internal controls and corporate governance evidenced lately, need for more advanced techniques for allocating capital in this regard has become an important issue. Therefore, during the measurement of operational risks, banks should:
(a) Consider both internal factors (such as complexity of structure, nature of activities, quality of personnel, organisational changes and employee turnover) and external factors (such as fluctuating economic conditions, changes in the industry and technological advances) that could adversely affect the banks’ stated objectives. (b) Make clear distinction between controllable and uncontrollable operational risk events. (c) Assess their operational activities against a menu of operational risk events (i.e., internal and external frauds, employment practices and work place safety, clients, products and business practices, damage to physical assets, business distribution and system failures, execution, delivery and process management, etc.). (d) Review key risk indicators such as failed trades, staff turnover rates, frequency and/or severity of errors and omission to track the magnitude of risk concerns, with thresholds or limits set on key risk indicators. (e) Develop simple benchmarks based on an aggregate measure of business activity such as gross revenue, fee income, operating costs, total assets adjusted for off-balance sheet exposures or a combination of these variables, in the event the bank does not have so far evolved any scientific methods for quantifying the risk. (f) Carry out Business Impact Analysis (BIA) with its Recovery Time Objectives (RTO) under the proposed Business Continuity and Disaster Recovery Plan.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 197
2.3 Risk Monitoring – The operational risk monitoring system should:
(a) Focus on operational performance measures such as volume, turnover, settlement facts, delays and errors. (b) Monitor operational loss directly with an analysis of each occurrence and description of the nature and causes of the loss. (c) Integrate internal controls into the bank’s operations and produce regular reports to the Senior Management. (d) Undertake compliance reviews by the Internal Audit and the Risk Management Department, separately.
2.4 Internal Control – Banks should adopt well-established internal control systems, which
include segregation of duties, clear management reporting lines and adequate operating procedures in order to mitigate operational risks. As per Directions Nos. 3(8)(ii)(b)&(c) of the Banking Act, Direction Nos. 11 & 12 of 2007 on Corporate Governance for licensed banks:
(a) a report by the Board should be included in the Annual Report on the bank’s internal control mechanism that confirms that the financial reporting system has been designed to provide reasonable assurance regarding the reliability of financial reporting and that the preparation of financial statements for external purposes has been done in accordance with relevant accounting principles and regulatory requirements; and (b) the external auditor’s certification on the effectiveness of the internal control mechanism referred to in (a) above, in respect of any statements prepared or published. A proper internal control system should:
(a) promote effective and efficient operation; (b) provide reliable financial information; (c) safeguard assets; (d) minimise the operating risk of loss from irregularities, fraud and errors; (e) ensure effective risk management systems; and (f) ensure compliance with relevant laws, regulations and internal policies.
2.5 Risk Mitigation Techniques – Risk mitigation techniques or tools should be used to contain
the severity of operational risk events. Investment in appropriate information technology under Business Continuity and Disaster Recovery Plan is also important for risk mitigation.
2.6 Insurance Policies – Innovative insurance policies could be used to externalise the risk of ‘low
frequency and high severity losses’, which may occur as a result of events such as errors and omissions, physical loss of securities, frauds and natural disasters.
2.7 Outsourcing – Banks should establish sound policies for managing risks associated with
outsourcing activities in line with the Banking Act, Directions Nos. 7 & 8 of 2010 on Outsourcing of Business Operations.
2.8 Contingency Plan – An enterprise-wide contingency plan should be in place to handle failures
and switch to alternative service providers at short notice.

198 Directions, Determinations, and Circulars issued to Licensed Specialised Banks E. Liquidity Risk Management

Management Oversight
(a) Managing liquidity is no longer purely the responsibility of the treasury function. Effective oversight by the BOD and the Senior Management is a critical element of the liquidity risk management process. (b) The ALCO should be mandated to execute liquidity management policies, procedures and practices approved by the BOD, effectively. (c) The BOD should, however, periodically monitor the liquidity profile to assess the liquidity risk more frequently where significant funding concentrations have been observed.
Risk Management
2.1 Structure – Liquidity risk management could either be centralized or decentralized, or a
combination of the two. The structure should be commensurate with the size and complexity of the bank’s operations. It should be flexible while ensuring that the liquidity strategy approved by the BOD can be effectively implemented.
2.2 Liquidity Measurement – Liquidity measurement is a difficult task and can be measured
through stock or flow approaches.
(a) Stock Approach – Under the stock approach, liquidity is measured in terms of key ratios which portray the liquidity stored in the balance sheet. Banks should calculate and analyse following ratios during their risk management process:
i. Net loans to total assets
ii. Loans to customer deposits
iii. Liquid assets to short-term liabilities
iv. Large liabilities (minus) temporary investments to earning assets (minus) temporary
investments, where large liabilities represent wholesale deposits which are market sensitive and temporary investments which are those maturing within one year and those investments which are held in the trading book and are readily sold in the market.
v. Purchased funds to total assets, where purchased funds include the entire
inter-bank and other money market borrowings, including certificates of deposits and institutional deposits.
vi. Commitments to total loans, where the commitment in the nature of Letter of Credits
(LCs), guarantees and acceptances.
(b) Flow approach – Banks should prepare a statement of Maturities of Assets and Liabilities (MAL) placing all cash inflows and outflows in the time bands according to the residual time to maturity. A format for the MAL is attached. (Attachment – 1). The time bands may be distributed as under:
i. Up to one month
ii. Over one month and up to 3 months
iii. Over 3 months and up to 6 months
iv. Over 6 months and up to 9 months
v. Over 9 months and up to 1 year
vi. Over 1 year and up to 3 years

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 199
vii. Over 3 years and up to 5 years
viii. Over 5 years
(Assumptions to be made – Some of the assets and liability items like overdraft, savings and current deposits etc., lack any definite contractual maturity. Similarly, a part of time deposits are also rolled over on maturity while the consumer loans are topped-up at frequent intervals. Thus, while determining the likely cash inflows/outflows, banks should make a number of assumptions according to the behaviour of assets and liabilities. At least, assumptions should be validated, bi-annually. Such assumptions may be fine-tuned, over a period, to facilitate near reality predictions about future behaviour of on/off-balance sheet positions). (c) Net funding requirement –
i. The difference between cash inflows and outflows in each time band, the excess or
deficit of funds, becomes a starting point for a measure of a bank’s future liquidity surplus or deficit, at a series of points in time.
ii. While the mismatches up to one year would be relevant as these provide early warning
signals of impending liquidity problems, the main focus should be on mismatches up to three months.
iii. Banks, however, are expected to fix prudential mismatch limits appropriate to the
size, complexity and financial conditions across all time bands.
iv. The liquidity position should be measured in all major currencies in which banks deal
at both individual and aggregate levels. Banks which are reliant on short-term funding should, however, concentrate primarily on managing their liquidity in the very short-term horizons and preferably on a day-to-day basis. (d) Alternate Scenarios –
i. Banks should evaluate liquidity profile under different stress situations, viz. normal
situation, bank specific crisis and market crisis scenarios.
ii. Under each scenario, banks should account for any significant positive or negative
liquidity swings that could occur on account of factors that are both internal (bank specific) and external (market-related).
iii. In this regard, banks must assign the timing of cash flows for each type of asset
and liability by assessing the probability of the behaviour of those cash flows under alternative scenarios.
iv. For each funding source, banks would have to decide whether a liability would be
(a) repaid in full at maturity, (b) gradually run off over the next few weeks or (c) virtually certain to be rolled over or available, if tapped. (e) Contingency Plan –
i. Banks should prepare liquidity contingency plans to measure their ability to withstand
bank-specific or market crisis scenarios.
ii. The blue-print for assets sales, market access, capacity to restructure the maturity and
composition of assets and liabilities should be clearly documented and alternative options of funding in the event of the bank’s failure to raise liquidity from existing sources should be clearly articulated.

200 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
iii. Liquidity from CBSL, as the lender of last resort, should not be reckoned for
contingency plans.
iv. Availability of back-up liquidity support in the form of committed lines of credit,
reciprocal arrangements, liquidity support from other external sources, liquidity of assets etc. should also be clearly established. F. Interest Rate Risk Management

Management Oversight
Management of interest rate risk should be one of the critical components of market risk management of banks. The BOD should clearly articulate interest rate risk management policies, procedures, review mechanisms and reporting systems. Policies and prudential limits should include the following. (a) Clear policies with regard to volume, maximum maturity, holding period, duration, position limits, stop loss, rating standards, etc. for classifying securities in the trading book. (b) Bank-wide VaR exposure limits to the trading portfolio (including Forex derivatives and commodities, if any, etc.). (c) Loss making tolerance limits for trading book.
Risk Management
2.1 Forms of Risk – The Net Interest Income (NII) or Net Interest Margin (NIM) of banks are
dependent on the movements of interest rates. Any mismatches in the cash flows (fixed rate assets or liabilities) or re-pricing dates (floating rate assets or liabilities) expose banks’ NII or NIM to variations. As financial intermediaries, banks encounter interest rate risk in many forms:
(a) Gap or Mismatch Risk
(b) Basis Risk
(c) Embedded Option Risk
(d) Yield Curve Risk
(e) Price Risk
(f) Reinvestment Risk
(g) Net Interest Position Risk
2.2 Measuring Risk – Before the interest rate risk (IRR) is to be managed, same should be
identified and quantified. In this regard, banks need to adopt an IRR measurement system which should:
(a) Address all material sources of interest rate risk including gap or mismatch, basis, embedded option, yield curve, price, reinvestment and net interest position risks, exposures associated with assets, liabilities and off-balance sheet positions. (b) Take into account the specific characteristics of each individual interest rate sensitive position. (c) Capture the full range of potential movements in interest rates, in detail.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 201 (d) Use different techniques, ranging from the traditional maturity Gap Analysis (to measure the interest rate sensitivity of earnings), Duration (to measure interest rate sensitivity of capital), Simulation and VaR. (e) Match on a daily basis the potential loss in Present Value Basis Points (PVBP) vis-à-vis prudential limits for trading book. (f) Undertake scenario analysis with specific possible stress situations by linking hypothetical, simultaneous and related changes in multiple risk factors present in the trading portfolio to determine the impact of moves on the rest of the portfolio. (g) Adopt VaR as an analytical tool for measuring and managing currency risk in the Banking Book.
2.3 Measuring Techniques –
(a) Maturity Gap Analysis – The simplest analytical technique for calculating IRR exposure begins with Maturity Gap analysis that distributes interest rate sensitive assets, liabilities and off-balance sheet positions into a number of pre-defined time-bands according to their residual term to maturity (fixed rate) or residual term for their next re-pricing (floating rate). Gaps may be identified in the following time bands:
i. Up to one month
ii. Over one month and up to 3 months
iii. Over 3 months and up to 6 months
iv. Over 6 months and up to 1 year
v. Over 1 year and up to 2 years
vi. Over 2 years and up to 3 years
vii. Over 3 years and up to 4 years
viii. Over 4 years and up to 5 years
ix. Over 5 years and up to 7 years
x. Over 7 years and up to 10 years
xi. Over 10 years and up to 15 years
xii. Over 15 years and up to 20 years
xiii. Over 20 years
xiv. Non-sensitive
Various items of rate sensitive assets and liabilities and off-balance sheet positions may be classified in line with their sensitivity to interest rates. A reporting format for Sensitivity of Assets and Liabilities (SAL) for interest rate sensitive assets and liabilities is also attached (Attachment – 2). (b) Duration Gap Analysis – Matching the duration of assets and liabilities, instead of matching the maturity or re-pricing dates, is a more effective way to protect the economic values of banks from exposure to IRR than the simple gap model. (c) Simulation – Simulation is a popular tool among banks to gauge the effect of market interest rate variations on reported earnings/economic values over different time zones. Simulation techniques attempt to overcome the limitation of gap analysis and duration approach by computer modelling the bank’s interest rate sensitivity.

202 Directions, Determinations, and Circulars issued to Licensed Specialised Banks G. Stress Testing

Management Oversight
(a) BOD or a committee formed under the Board with delegated authority should put in place a ‘Stress Testing Framework’ as a part of integrated risk management system with approved ‘Stress Testing Policy’, procedures to be followed and the methodology to be adopted. (b) BOD and the Senior Management should regularly review the results of stress tests, including major assumptions that underpin them. (c) BOD and Senior Management should put in place appropriate fall-back mechanisms for mitigating tail-end risks, considering an organised approach to manage extreme systemic risks.
1.1 Stress Testing Policy should include the following aspects:
(a) Frequency and procedure for identifying the principal risk factors, which affect the bank’s portfolio and required to be stressed. (b) Methodology for constructing stress tests. (c) Procedure for setting the stress tolerance limits. (d) Process of monitoring the stress loss limits. (e) Necessary remedial/trigger actions to be taken at various risk levels as revealed by the stress tests. (f) Delegation of authority to ensure timely execution of remedial/trigger action.
1.2 Roles and responsibilities of the persons involved in the exercise must be defined by well
constituted organisational structure and they should be independent.
1.3 An effective Management Information System (MIS) is necessary to ensure flow of information
to take necessary measures to avoid certain difficult conditions by the Senior Management.
Frequency of Stress Testing
Banks may apply stress tests at varying frequencies dictated by their respective business requirements, relevance and cost. In general, stress tests on market-sensitive portfolios should be run more frequently (eg.: daily, weekly). These may include trading portfolios in marketable securities, foreign exchange and interest rate exposures. Other portfolios which are less volatile in nature could be stress-tested at longer intervals (eg.: monthly, quarterly). Further, ad-hoc stress tests may be warranted when there are any special circumstances.
Scope of Stress Tests
Stress testing can and should be applied to the full range of material risks that a bank runs both at business unit level and on an aggregated group basis. Stress testing can be commonly used for interest rate, equity, liquidity, foreign exchange, credit and market instruments. Further, it is also important to introduce stress testing for operational risk. There are three different hypothetical scenarios that can be used in stress testing:
(a) Major Level Shocks: It involves large shocks to all the risk factors and is also defined for separately for each risk factor. (b) Moderate Level Shocks: It involves medium level shocks and the level is defined for each risk factor separately. (c) Minor Level Shocks: It involves small shocks to risk factors.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 203
4. Methodology and Calibration of Shocks
4.1 Credit Risk
Stress test for credit risk assesses the impact of increase in the level of non-performing loans of the bank on Capital Adequacy Ratio (CAR). This involves three types of shocks, namely; (a) Type One deals with the increase in the Non-Performing Loans (NPLs) and the respective provisioning. (b) Type Two deals with the negative shift in the NPL categories and hence the increase in respective provisioning. (c) Type Three deals with the fall in the Forced Sale Value (FSV) of mortgaged collateral.
4.2 Liquidity Risk
Stress test for liquidity risk evaluates the resilience of the banks towards the fall in liquid liabilities. The ratio “liquid assets to liquid liabilities” should be calculated before and after the shocks by dividing the liquid assets with liquid liabilities. They include cash and balances with banks, call money lending, lending under repo and investment in government securities. Liquid liabilities include deposits and borrowings.
4.3 Equity Price Shock
Stress test for equity price risk assesses the impact of the fall in the stock market index. The impact of resultant loss should be calculated after shocks on current market value of all the on-balance sheet and off-balance sheet securities listed on stock exchanges including shares, mutual funds, etc. and it should be calibrated in terms of the CAR.
4.4 Exchange Rate Risk
Stress test for exchange rate assesses the impact of change in exchange rate on the value of equity. To model direct foreign exchange risk, only, the overall Net Open Position (NOP) of the bank including the on-balance sheet and off-balance sheet exposures should be given adverse shocks. The overall NOP is measured by aggregating the sum of net short positions or the sum of net long positions, whichever is greater regardless of sign. The impact of the respective shocks should be calibrated in terms of the CAR. The revised CAR should be calculated after adjusting total loss from the risk-weighted assets of the bank.
4.5 Interest Rate Risk
Interest rate risk is the potential that the value of the on-balance sheet and the off-balance sheet positions of the bank would be negatively affected with the change in the interest rates. The vulnerability of an institution towards the adverse movements of the interest rate can be gauged by using duration gap analysis. Banks should follow the under mentioned steps in carrying out the interest rate stress tests. (a) Estimate the market value of all on-balance sheet rate sensitive assets and liabilities of the bank to arrive at market value of equity. (b) Calculate the durations of each class of asset and the liability of the on-balance sheet portfolio. (c) Arrive at the aggregate weighted average duration of assets and liabilities. (d) Calculate the duration gap by subtracting aggregate duration of liabilities from that of assets. (e) Estimate the changes in the economic value of equity due to change in interest rates on on-balance sheet positions along the three interest rate changes.

204 Directions, Determinations, and Circulars issued to Licensed Specialised Banks (f) Calculate surplus/(deficit) on off-balance sheet items under the assumption of three different interest rate changes, i.e., 1%, 2%, and 5%. (g) Estimate the impact of the net change (both for on-balance sheet and off-balance sheet) in the market value of equity on the CAR. (h) Market value of the assets or liabilities should be assessed, by calculating its present value discounted at the prevailing interest rate. The outstanding balances of assets and liabilities should be taken along with their respective maturity or reprising period, whichever is earlier.
4.6 Interpretation of Stress Testing Results
(a) Before interpretation of stress testing results, it is important to the banks to be aware of its limitations as stress testing is influenced by the judgment and experience of the risk managers designing the stress tests. Therefore, the effectiveness of the stress tests will depend upon whether banks have identified their major risks and they have chosen the right level of stress/stress scenarios. (b) Senior Management should review the results of the various stress tests and report to the Board. It is important to document the results of each of the sensitivity tests and scenario analysis undertaken and should also document, as part of the details of those tests and analyses, the key assumptions including the aggregation of the results. These should be preserved for a considerable period as mentioned in the policy document.
4.7 Review & Update
(a) Regular review and updating is important to ensure effectiveness of the stress testing programme of the bank. (b) Such review should be done at least once a year or more frequently if the portfolio or the environment changes are significant. Following should be covered in the review process.
i. The integrity of the management information system.
ii. Completeness and accuracy of the data used.
iii. Consistency, timeliness and reliability of data sources.
iv. The approval process for the stress testing programme.
v. Integration of stress testing into risk management.
vi. Interpretation of stress testing results.
H. Disclosure Requirements

Principles
1.1 Banks should adopt a formal disclosure policy approved by the BOD that addresses the bank’s
approach for determining what disclosures to be made and internal controls over the disclosure process.
1.2 Banks should implement a process for assessing the appropriateness of their disclosures,
including validation and frequency of them.
1.3 In order to enhance the role of market discipline, banks should take into account the following
norms to improve their disclosure practices.
(a) A balance between quantitative and qualitative disclosures - Disclosures should be consistent with banks’ own risk management practices.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 205 (b) Banks should endeavour to disclose information about inter-period exposures – particularly in the form of high, median and low observations – which could provide a more meaningful view of licensed banks’ risk profile than period end data alone.
1.4 Banks should decide relevant disclosures based on the materiality concept.
1.5 Qualitative disclosures such as bank’s risk management objectives and policies, reporting
systems and definitions set out here should be made at least bi-annually.
2. Disclosure Requirements
2.1 Risk Exposure and Assessment
(a) General Qualitative Disclosure Requirement For each separate risk area viz. credit, market, operational, liquidity etc.. Licensed banks should describe their risk management objectives and policies, including:
– strategies and policies;
– structure and nature of the relevant risk management function; – scope and nature of risk reporting and/or management system; – policies for hedging and/or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges / mitigants.

206 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Table - 1
Credit Risk – General Disclosures
Qualitative
Disclosures
(a) Definition of past due and impaired (for LKAS 32 & 39 purposes).
(b) Description of approaches followed for specific and general loan loss provisioning and statistical methods. (c) Discussion of the bank’s credit risk management policy. (d) Policies and processes for, and an indication of the extent to which the bank makes use of, on-balance sheet and off-balance sheet netting. (e) Policies and processes for collateral valuation and management. (f) A description of the main types of collateral taken by the bank. (g) Main types of guarantor/credit derivative counterparty and their creditworthiness. (h) Information about (market or credit) risk concentrations within the mitigation taken. Quantitative Disclosures (a) Total gross credit risk exposures, plus average gross exposure over the period broken down by major types of credit exposure. (b) Geographic distribution of exposures, broken down in significant areas by types of credit exposure. (c) Industry or counter-party type distribution of exposures, broken down by major types of credit exposure. (d) Residual contractual maturity breakdown of the whole credit portfolio, by major types of credit exposure. (e) By major industry or counterparty types:
– Amount of past due loans and if available impaired loans, provided separately, – Specific and general loan loss provisioning, and – Charges for specific loan loss provisions and charges-offs during the reporting period. (f) Amount of past due loans and, if available, impaired loans provided separately broken down by significant geographic area including the amount of specific and general loan loss provisions related to each geographical area. (g) Reconciliation of changes in the provisions for loan losses/impairment.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 207
Table - 2
Market Risk – General Disclosures
Qualitative
Disclosures
(a) The general qualitative disclosure requirement described in Para 2.1(a) above. (b) Differentiation between holdings on which capital gains are expected and those taken under other objectives including for relationship and strategic reasons. (c) Discussion of important policies covering the valuation and accounting of equity holdings in the Banking Book. This includes the accounting techniques and valuation methodologies used, including key assumptions and practices affecting valuation as well as significant changes in these practices. Quantitative Disclosures (a) Interest rate risk, including Interest Rate Sensitivity Gap Analysis of local and foreign currency denominated assets and liabilities in the format given in Attachment – 1&2. (b) Equity position risk –

Value disclosed in the balance sheet of investments, as well as the fair value
of those investments; for quoted securities, a comparison to publicly quoted share value where the share price is materially different from fair value.
Types and nature of investments, including the amount that can be classified
as:
– Publicly traded; and
– Privately held.
The cumulative realised gains (losses) arising from sales and liquidations in
the reporting period.
Total unrealised gains (losses).
Total latent revaluation gains (losses).
Any amounts of the above included in Tier 1 and/or Tier 2 capital.
(c) Foreign exchange risk, including statements of foreign exchange position (Attachment – 3), Maturity Gap Analysis of foreign currency denominated assets and liabilities. (d) Commodity risk.

208 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Table - 3
Operational Risk – General Disclosures
Qualitative
Disclosures
(a) The general qualitative disclosure requirement described in Para 2.1(a) above. (b) Description of the use of insurance for the purpose of mitigating operational risk. (c) Details of activities that have been outsourced together with parties and basis for payment for such services. (d) Details of investment in appropriate information technology, if any, and other risk mitigation techniques taken during the reporting period. (e) Details of due diligence tests of third party service providers. (f) Details of a contingency plan in place to handle failure situations. Quantitative Disclosures (a) Major operational viz. system or human, failures and financial losses incurred by the bank due to such failures during the reporting period.
Table - 4
Liquidity Risk – General Disclosures
Qualitative
Disclosures
(a) The general qualitative disclosure requirement described in Para 2.1(a) above. (b) Details of a liquidity contingency plan in place to bridge unforeseen liquidity difficulties. Quantitative Disclosures (a) Trends in the following indicators:

Net loans to total assets
Loans to customer deposits
Liquid assets to short term liabilities
Large liabilities (minus) temporary investments to earning assets (minus)
temporary investments
Purchased funds to total assets.
Commitments to total loans.
(Please refer to Section 1.4 of Appendix for definitions) (b) Maturities of Assets and Liabilities (MAL) in the format given in Attachment-1.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 209 Attachment 1 Maturities of Assets and Liabilities (MAL) (Currency ..................) * Heads of Accounts Upto 1 month 1–3 months 3–6 months 6–9 months 9–12 months 1–3 years 3–5 years Over 5 years Sr. Item A Inflows

Cash on hand
Deposits with CBSL
Balances due from Head Office, Affiliates and Own Branches
Balances due from Other Banks
Investments (Net of provisions)
Bills of Exchange
Overdraft
Loans and Advances
NPLs
Net Inter-Branch Transactions
Other Assets
Lines of credit committed from institutions
Other – Please Specify ,
Total (a) xx
B Outflows
Demand Deposits
Savings Deposits
Balances due to Head Office / Affiliates / Own Branches
Balances due from Other Banks
Time Deposits
Certificates of Deposits, Borrowings and Bonds
Net Inter-branch Transactions
Bills Payable
Interest Payable
Provisions other than for loan losses and depreciation in the value of investment portfolio
Other Liabilities
Lines of credit committed to institutions
Unutilized portion of Overdraft, Loans and Advances
Letters of Credit / Guarantees / Acceptances
Repo / Bills Rediscounted / Swaps / Forward contracts
Other – Please Specify
Total (b) xx
Gap = (a) - (b) xx
Cumulative Gap xx
Cumulative Liabilities xx
Cumulative gap as a % of cumulative liabilities x% x% x% x% x% x% x% x%

Separate returns for LKR, USS and all other major currencies should be prepared.
( …… Million )

210 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Attachment 1 (A) Maturities of Assets and Liabilities Guidelines on Classification of Assets and Liabilities into Time Bands Sr. Heads of Accounts Details sought A Inflows

Cash on Hand Up to one-month time band.
Deposits with CBSL While the excess balance in the Clearing Account over the
required statutory reserves could be placed under the ‘up to one-month’ time band, the statutory reserve against deposit should be distributed amongst various time bands, corresponding to the behavioral maturity profile of deposits.
Balances due from the Head
Office, Affiliates and own branches
Demand balances may be placed under the ‘up to one-month’ time band, all other balances should be distributed across the time bands as per the respective residual maturities.
Balances due from Other
Banks
Respective maturity time bands.
Investments
(Net of provisions)
Respective residual maturities. Investment ‘held-for-trading’ may be placed in the first three time bands, on the basis of liquidity profile of the instruments, irrespective of their residual maturities. 6. 7. 8. Advances (performing) (a) Bills of Exchange and promissory notes (b) Overdraft (c) Loans and Advances

(a) Respective residual maturities bands.
(b) 7.5% each of the outstanding should be distributed under one-month, 1-3 months, 3-6 months, 6-9 months, and 9-12 months time bands, respectively and the balance 62.5%, being the core component, should be shown equally under 1-3 years, 3-years and over 5 years time bands, respectively. (c) Respective residual maturities. However, 50% of the consumer loans, including credit cards, should be shown under over 5 years time band. The balance amount of 50% should be shown under respective time bands, on the basis of residual maturities.
9. NPLs 25% and 75% of the balances, net of reserved interest and specific
loan loss provisions should be shown in the 9-12 months and over five years time bands, respectively.
10. Net Inter-Branch
Transactions
Up to one-month time band.
11. Other Assets As per pattern of cash flows. However, intangible assets and assets
not representing cash receivables should be shown in over five years time band.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 211 Sr. Heads of Accounts Details sought B Outflows

Demand Deposits 75% of the balances in demand deposits should be distributed
under the first five time bands, at the rate of 20%, 20%, 15%, 10% and 10%, respectively and the balance of 25% in over 5 years time band.
Savings Deposits 25% of the saving deposits should be distributed equally under
one-month, 1-3 months, 3-6 months, 6-9 months, and 9-12 months, respectively, and the balance of 75%, being the core component, should be shown equally under 1-3 years, 3-5 years and over 5 years time bands, respectively.
Balances due to Head Office/
Affiliates/Own Branches
Respective residual maturity time bands.
Balances due to other Banks Respective residual maturity time bands.
Time Deposits 30% of the time deposits from individual depositors and pension
funds, irrespective of their residual maturities, should be shown under over 5 years time band. The balance amount of 70% should be shown under respective time bands, on the basis of residual maturities.
Certificates of Deposits,
borrowings and Bonds
(including subordinated debts)
Respective residual time bands. Where call/put options are built into the issue structure of any instrument/s, the call/put date/s should be reckoned as the residual maturity date/s and the balance should be shown in the respective residual maturity time bands.
Net Inter-branch Transactions Up to one month time band.
Bills Payable Up to one month time band.
Interest Payable Respective residual maturity time bands.
Provisions other than for loan
losses and depreciation in the value of investment portfolio Respective residual maturity time bands depending on the purpose.
Other Liabilities Respective maturity time bands. Items not representing cash
payables (i.e., income received in advance etc.) should be placed over 5 years time band.

212 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Sr. Heads of Accounts Details sought C Contingent Liabilities/Lines of credit committed/available and other in-flows & out-flows
12. Lines of Credit Committed
to institutions and other borrowers
Up to one month time band
13. Unutilized portion of
Overdraft, Loans and
Advances
Probable disbursements should be shown in the respective time bands on the basis of historical databases.
14. Letters of credit /guarantees /
acceptances
Probable funding obligations should be shown in the respective time band on the basis of past experiences.
15. Repo / Bills Rediscounted /
Swaps / Forward contracts
(LKR against Other
Currencies)
Respective maturity bands.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 213 Attachment 2 Sensitivity of Assets and Liabilities (SAL) (Currency*) Name of Bank : ……………………………………………………………… Period Ended : ……………………………………………………………… No. Assets and OBS Up to 1 month 1 – 3 months 3 – 6 months 6 – 12 months 1 – 2 years 2 – 3 years 3 – 4 years 4 – 5 years 5 – 7 years 7 – 10 Years 10 – 15 years 15 – 20 years Over 20 years Non Sensitive Total 1. Cash on Hand 2. Deposits with CBO 3. Balances due from HO / Affiliates / Branches 4. Balances due from Other Banks 5. Investments 6. Bills of Exchange and Promissory Notes 7. Overdrafts 8. Loans and Advances 9. Non Performing Loans 10. Fixed Assets 11. Net Inter-branch Transactions 12. Accrued Interest 13. Other Assets 14. Reverse Repos 15. FRAs 16. Swaps 17. Futures 18. Options 19. Others (Specify) Total Liabilities and OBS 1. Demand Deposits 2. Savings Deposits 3. Time Deposits 4. Other Deposits 5. Balances due to HO / Affiliates / Branches 6. Balance due to other Banks 7. Certificate of Deposits 8. Other Borrowings 9. Net Inter-branch Transactions 10. Bills Payable 11. Interest Payable 12. Provisions (others) 13. Capital 14. Reserves 15. Retained Earnings 16. Subordinated Debts 17. Other (Specify) 18. Repos 19. FRAs 20. Futures 21. Swaps 22. Options Total Gap * Separate returns for LKR, US$ and all other major currencies should be prepared. ( …… Million )

214 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Sensitivity of Assets and Liabilities Guidelines on Classification of Assets and Liabilities into Time Bands Sr. Heads of Accounts Rate Sensitivity and Time Band A Inflows

Cash on Hand Non-sensitive
Deposits with CBSL Non-sensitive
Balances due from head office,
Affiliates and Own branches
Interest payable portion is sensitive and should be shown under the time band corresponding to the remaining term to maturity or repricing. The non-interest paying portion is non-sensitive.
Balances due from Other Banks Interest payable portion is sensitive and should be shown
under the time band corresponding to the remaining term to maturity or repricing. The non-interest paying portion is non-sensitive.
Investments (Net of provisions)
(a) Fixed rate/Zero coupons.
(b) Floating rate
(c) Shares and investments in units
(a) Sensitive and should be shown under the time band corresponding to residual term to maturity. (b) Sensitive and should be shown under the time band corresponding to residual term to maturity. (c) Non-sensitive. 6. 7. 8. Advances (performing) (a) Bills of Exchange and promissory notes (b) Overdraft/loans (Fixed rates) (c) Overdraft/ Loans and Advances (Floating rates)

(a) Sensitive on maturity.
(b) Sensitive and should be shown under the time bands corresponding to the interim and final cash flows. (c) Sensitive and should be shown under the time band corresponding to the interim and final cash flows.
9. NPLs
(a) Special mentioned
(b) Substandard
(c) Doubtful
(d) Loss
(a) Over 1-2 years time band
(b) Over 3-5 years time bands
(c) Over 5 years time band
(d) Non-sensitive
10. Fixed Assets Non-sensitive
11. Net Inter-Branch Transactions Non-sensitive
12. Accrued interest Non-sensitive
13. Other Assets
(a) Leased assets
(b) Other
(a) Sensitive on interim and final cash flows. The amount should be distributed to the respective maturity bands corresponding to the cash flows. (b) Non-sensitive
14. Reverse repos, Swaps, (Buy/sell),
and bills discounted
Sensitive on maturity.
Attachment 2(A)

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 215 15. 16. 17. FRAs Futures Options These instruments should be treated as a combination of loan (assets) and short (liabilities) positions. The maturity of a Future or a FRA will be the period until delivery or exercise of the contract. The corresponding positions should undergo changes with passage of time. Swaps should be treated as two notional positions with relevant maturities. For e.g. an interest rate swap under which a bank is receiving floating rate of interest and paying fixed will be treated as long floating rate position of maturity equivalent to the period until the next interest fixing and a short position of maturity equivalent to the residual life of the swap. The notional underlying of the given option should be placed under the respective time band. Sr. Heads of Accounts Rate Sensitivity and Time Band

Demand Deposits Non-sensitive
Savings Deposits Sensitive and reprices when interest rate is reset.

Time Deposits,
Certificate of Deposits, and
Other Deposits
Sensitive and reprices on maturity. The amounts should be distributed to different time bands on the basis of remaining term to maturity. However, in case of floating rate term deposits, the amounts should be shown under the time band when deposits contractually become due for repricing.
5. Balances due to Head Office /
Affiliates/Own Branches
Interest payable portion is sensitive and should be shown under the time band corresponding to the remaining term to maturity or repricing. The non-interest paying portion is non-sensitive.
6. Balances due to other Banks Interest payable portion is sensitive and should be shown
under the time band corresponding to the remaining term to maturity or repricing. The non-interest paying portion is non-sensitive.
8. Borrowings
(a) Fixed rate borrowings
(b) Floating rate borrowings
(c) Zero Coupon borrowings
(d) Borrowings from CBSL
(a) Sensitive and reprices on maturity. The amounts should be distributed to different time bands on the basis of remaining term to maturity. (b) Sensitive and reprices when interest rate is reset. The amounts should be distributed to the appropriate time bands, coinciding with the contracted repricing date. (c) Sensitive and reprices on maturity. The amounts should be distributed to the respective maturity bands. (d) Up to one month time band.
9. Net-inter branch transactions Non-sensitive
10. Bills Payable Non-sensitive
11. Interest Payable Non-sensitive

216 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
12. Provisions Non-sensitive
13. Capital Non-sensitive
14. Reserves Non-sensitive
15. Retained earnings Non-sensitive
16. Sub-ordinated debts Please refer to Item (8) above.
17. Reverse Repos, and other
derivatives instruments
Reprices only on maturity and should be distributed to respective maturity bands. Sr. Heads of Accounts Details sought C Contingent Liabilities / Lines of credit committed / available and other inflows & out flows
3. Lines of Credit Committed to
institutions and other borrowers
Up to one month time band.
4. Unutilized portion of Overdraft,
Loans and Advances.
Probable disbursements should be shown in the respective time bands on the basis of historical databases.
5. Letters of credit / guarantees /
acceptances
Probable funding obligations should be shown in the respective time band on the basis of past experiences.
6. Repo / Bills Rediscounted /
Swaps / Forward Contracts
(LKR against other currencies)
Respective maturity bands.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 217 (Rs. million) Attachment 3 Foreign Exchange Position Bank : ………………………………………… As at end of ………………………………………… : Currency (1) Spot Forward (a) Net Open Position (8) Net position in other exchange contracts (b) (9) Overall exposure in respec- tive foreign currency (10) Overall exposure in Sri Lankan rupees(d) (11) Assets (2) Liabilities (3) Net (4) = (2) - (3) Assets (5) Liabilities (6) Net (7) = (5) - (6) US Dollars Pound Sterling Euro Japanese Yen Indian Rupee Australian Dollar Canadian Dollar Other currencies(c) Total Exposure (e) Total capital funds as per the latest audited financial statements Total exposure as a % of total capital funds as per the latest audited financial statements (should not exceed 30%) X% (a) Unsettled tom and spot transactions also should be included under forward operations (b)Report the net foreign exchange position in other foreign exchange contracts such as currency options, futures etc. (c) The Sri Lankan rupee equivalent of other currencies should be shown under column 11. (d)Column 11 should show the Sri Lankan rupee equivalent of column 10. (e) The exposure indicated against each currency in column 11 should be added ignoring signs to arrive at exposure under (e).

218 Directions, Determinations, and Circulars issued to Licensed Specialised Banks BANKING ACT NO. 30 OF 1988 AS AMENDED BY BANKING (AMENDMENT) ACT NO. 33 OF 1995 The directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 76J(1) of the Banking Act, No.30 of 1988 as amended by the Banking (Amendment) Act, No.33 of 1995. Sgd. A. S. Jayawardena Governor Colombo 21-11-1997. DIRECTIONS UNDER 76J(1) DISQUALIFICATION FOR APPOINTMENT AS MANAGER, SECRETARY OR OTHER OFFICIAL OF A LICENSED SPECIALISED BANK

No person shall be appointed as Manager, Secretary or other official of a licensed
specialised bank and any person appointed as Manager, Secretary or other official of such bank shall be removed from office if he –
1.1 is a person who, having been declared insolvent or a bankrupt under any law in Sri
Lanka or in any other country, is an undischarged insolvent or bankrupt; or
1.2 is serving or has served a sentence of imprisonment imposed by any court in Sri Lanka
or by any other country; or
1.3 has been convicted of any act which is of a fraudulent or illegal character.
No person who has been a director or has been a chief executive officer of a licensed
specialised bank which has been would up by an order of court shall, without the written approval of the Central Bank, act as a director or chief executive officer of a licensed specialised bank.
No licensed specialised bank shall employ or be managed by a managing agent other than
an employee of such licensed specialised bank.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 219 BANKING ACT NO. 30 OF 1988 AS AMENDED BY BANKING (AMENDMENT) ACT NO. 33 OF 1995 The directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 76j(1) of the Banking Act, No.30 of 1988 as amended by the Banking (Amendment) Act, No.33 of 1995. Sgd. A. S. Jayawardena Governor Colombo 21-11-1997. DIRECTIONS UNDER 76j(1) DISQUALIFICATION FOR BEING APPOINTED OR ELECTED DIRECTOR

No person shall be appointed or elected as a director of a licensed specialised bank if he –
1.1 has been under any written Law in force in Sri Lanka, found or declared to be of
unsound mind; or
1.2 is a person who, having been declared insolvent or bankrupt under any law in force in
Sri Lanka or in any other country, is an undischarged insolvent or bankrupt; or
1.3 has been convicted of an offence involving moral turpitude and punishable with a term
of imprisonment; or
1.4 is an employee or a director of any other licensed specialised bank or an employee
(other than the chief executive officer) of the licensed specialised bank. Provided a director or employee of any licensed specialised bank shall not be disqualified of being a director of a licensed specialised bank only if the latter licensed specialised bank is a subsidiary of the first mentioned licensed specialised bank
A director of a licensed specialised bank shall be removed from the office of director if –
2.1 he becomes subject to any of the disqualifications mentioned in paragraph (1) above;
or
2.2 he becomes permanently incapable of performing his duties; or
2.3 he has done an act or thing which is manifestly opposed to the objectives and interests
of the licensed specialised bank.

220 Directions, Determinations, and Circulars issued to Licensed Specialised Banks BANKING ACT NO. 30 OF 1988 AS AMENDED BY BANKING (AMENDMENT) ACT NO. 33 OF 1995 The directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 76j(1) of the Banking Act, No.30 of 1988 as amended by the Banking (Amendment) Act, No.33 of 1995. Sgd. A. S. Jayawardena Governor Colombo 21-11-1997. DIRECTIONS UNDER 76j(1) SECRETARY OF A LICENSED SPECIALISED BANK

Subject to paragraph 3 of this direction no licensed specialised bank shall appoint as its
Secretary, a person –
1.1 unless such person possesses such qualifications as may be prescribed for a Secretary
of a company under Sub section (1) of Section 176 of the Companies Act, No.17 of 1982, and;
1.2 Unless such person is an employee of that licensed specialised bank.
Such person so appointed as Secretary shall not become an employee of any other institution
so long as such person continues to be employed as the Secretary of that licensed specialised bank.
This direction shall not apply to the person presently employed as the Secretary of any
Institution specified in Schedule III of the Banking Act.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 221 Determinations made by the Monetary Board of the Central Bank of Sri Lanka under
Section 76H read with Section 44A of the Banking Act, No.30 of 1988, as amended.
Sgd. Nivard Ajith Leslie Cabraal
Chairman of the Monetary Board and
Governor of the Central Bank of Sri Lanka
Colombo
24 November 2010
BANKING ACT, DETERMINATION NO. 4 OF 2010
ASSESSMENT OF FITNESS AND PROPRIETY OF
OFFICERS PERFORMING EXECUTIVE FUNCTIONS IN
LICENSED SPECIALISED BANKS

This Determination may be cited as the Banking Act, Determination No.4
of 2010. The Sections referred to in this Determination will be those of the Banking Act, No. 30 of 1988, as amended.
2.1 In terms of Section 76H read with Section 44A of the Banking Act, officers
of a licensed specialised bank performing executive functions as may be determined by the Monetary Board shall be fit and proper persons. Section 42(2) of the Act shall apply in determining whether officers performing executive functions are fit and proper persons.
2.2 In addition, criteria set out in the Direction No.12 of 2007 on Corporate
Governance for Licensed Specialised Banks in Sri Lanka will also be applicable.
Officers holding following designations / positions are determined as
officers performing executive functions in a licensed commercial bank:
(i) Additional General Manager
(ii) Senior Deputy General Manager
(iii) Deputy General Manager
(iv) Assistant General Manager
(v) Chief Operating Officer
(vi) Chief Risk Officer
(vii) Chief Accountant
(viii) Chief Financial Officer
(ix) Chief Internal Auditor
(x) Compliance Officer
(xi) Head of Treasury
(xii) Head of Legal
(xiii) Head of Information Technology
(xiv) Board Secretary
Citation.
Empowerment.
Officers
Performing
Executive
Functions.

222 Directions, Determinations, and Circulars issued to Licensed Specialised Banks (xv) Officers serving as consultants / advisor to the Board or bank (xvi) Any other officers falling under the definition of section 3(1)(i)(f) of the Banking Act, Direction No. 12 of 2007 on Corporate Governance for Licensed Specialised Banks in Sri Lanka.
4.1 Fitness and propriety of such officers performing executive functions shall
be assessed and decided by the Director of Bank Supervision as has been provided for in the Banking Act and be applicable to those officers:
(i) currently in office,
(ii) at the time of appointment on a permanent or contract basis, (iii) at the time of renewal of employment contracts, and (iv) at any other time where there are supervisory concerns in respect of any officer as may be determined by the Director of Bank Supervision.
4.2 Each bank shall obtain from the respective officers an affidavit and a
declaration as in Annex I and Annex II, respectively, and submit to the Director of Bank Supervision.
4.3 In addition, at the time of first appointment of an officer, a letter from the
former employer immediately preceding the appointment (if the former employer is not a licensed bank in Sri Lanka) regarding the level of performance of duties assigned to him / her in the particular institution should be submitted to the Director of Bank Supervision.
4.4 In the case of expatriate officers appointed to branches of banks incorporated
outside Sri Lanka (foreign banks), a letter obtained from the home country regulator with regard to any supervisory concerns on the suitability of such officers should be submitted.
4.5 With respect to officers, currently performing executive functions, banks
shall obtain and submit affidavits and declarations to Director of Bank Supervision before 31 December 2010. Procedure to be followed in assessing the fitness and propriety.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 223
Annex I
Name of Bank :……………………………………………………………………………………… Affidavit to be submitted by officers performing executive functions in Licensed Specialised Banks in terms of Section 76H read with Section 44A of the Banking Act I, ………………………………………………………………………………………… (full name) holder of National Identity Card No. / Passport No. ……………….………..………..……..…… of ………………….…………………………………………………………………………. (address) being a (Buddhist / Hindu do hereby solemnly, sincerely and truly declare and affirm / Christian / Catholic /Muslim make oath and state) as follows :

I am the [affirmant / deponent] above named and I am the …………………… (designation) of
……………………………………………………………………………………. (name of bank) which is a specialised bank licensed under the Banking Act, No. 30 of 1988.
I [affirm / state] that I possess the following academic and / or professional qualification/s:
……………………………………………………………………………………………………
……………………………………………………………………………………………………
I [affirm / state] that the effective experience that I possess in banking, finance, business or
administration or of any other relevant discipline is as follows:
……………………………………………………………………………………………………
……………………………………………………………………………………………………
I [affirm / state] that there is no finding of any regulatory or supervisory authority, professional
association, any Commission of Inquiry, tribunal or other body established by law in Sri Lanka or abroad, to the effect that I have committed or have been connected with the commission of, any act which involves fraud, deceit, dishonesty or any other improper conduct.
I [affirm / state] that I am not subject to an investigation or inquiry consequent upon being
served with notice of a charge involving fraud, deceit, dishonesty or other similar criminal activity, by any regulatory authority, supervisory authority, professional association, any Commission of Inquiry, tribunal or other body established by law, in Sri Lanka or abroad.
I [affirm / state] that I have not been convicted by any Court in Sri Lanka or abroad in respect
of a crime committed in connection with financial management or of any offence involving moral turpitude.
I [affirm / state] that I am not an undischarged insolvent nor have I been declared a bankrupt in
Sri Lanka or abroad.

224 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
8. I [affirm / state] that I have not failed, to satisfy any judgment or order of any Court whether
in Sri Lanka or abroad, or to repay a debt.
9. I [affirm / state] that I have not been declared by a Court of competent jurisdiction in Sri Lanka
or abroad, to be of unsound mind.
10. I [affirm / state] that I have not been removed or suspended by an order of a regulatory or
supervisory authority from serving in a licensed bank or any other financial institution or corporate body, in Sri Lanka or abroad.
11. I [affirm / state] that I have not been a Director, Chief Executive Officer or held any other
position of authority in any bank or financial institution – (i) Whose license has been suspended or cancelled; or (ii) Which has been wound up or is being wound up, or which is being compulsorily liquidated; whether in Sri Lanka or abroad.
12. I [affirm / state] that to the best of my knowledge I am a fit and proper person to hold office
as ……………………………………………………….. (designation) of a licensed specialised bank in terms of the provisions of Section 76H read with Section 44A of the Banking Act. The averments contained herein were read over to the [affirmant/deponent] who having understood the contents hereof and having accepted same as true, affirmed/swore to and placed his/her signature at Colombo on this ……… day of ………………….. JUSTICE OF THE PEACE Affix Stamps as applicable Before me

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 225
Annex II
Name of Bank: ……………………………………………………………………………………… Declaration to be submitted by officers performing executive functions in Licensed Specialised Banks in terms of the Banking Act (with enclosures as appropriate as of ………………….)

Personal Details
1.1 Full name: ……………………………………………………………………………………
1.2 NIC / Passport number: ……………………………………………………………………
1.3 Date of birth : ………………………………………………………………………………
1.4 Permanent address : …………………………………………………………………………
1.5 Present address : ……………………………………………………………………………
Appointment to the Bank
2.1 Date of appointment to the present position:
(please attach a certified copy of the appointment letter)
2.2 Designation : …………………………………………………………………………………
2.3 Local or expatriate : …………………………………………………………………………
Personal Details of Close Relations in terms of Section 86 of the Banking Act
3.1 Full name of spouse : ………………………………………………………………………
3.2 NIC / Passport number : ……………………………………………………………………
3.3 Names of dependant children : ……………………………………………………………
Full name NIC/ Passport number
3.3.1
3.3.2
3.3.3
3.3.4
Background and Experience
Name/s of licensed bank/s, its subsidiaries in terms of the Banking Act and associates if any, in which he / she is or has been employed as an officer performing executive functions:
Name of the institution Period of office Designation

226 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
5. Shareholdings in Banks and their Related Companies
Share ownerships in licensed banks, their subsidiaries and associates if any, presently held:
Name of the institution No. of shares Percentage holding
6. Business Transactions1/
Any business transaction the officer performing executive functions presently has with the bank and its subsidiaries and associates if any. Name of the institution Date of transaction Amount as at …………………. (Rs. mn) Classification (performing/ nonperforming) Type and value of collateral (Rs. mn) % of Bank’s regulatory capital Limit Out-standing Accommodations Investments Deposits
7. Appointment, Shareholdings and Business Transactions of Close Relations
7.1 Any close relations presently employed as officers performing executive functions in
licensed banks their subsidiaries and associates if any.
Name of the bank Full name of the close relation Position held 1/ “Business transaction” shall mean any accommodations, borrowings, investments and deposits.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 227
7.2 Direct or indirect share ownership in the bank, its subsidiaries and associates if any,
presently held by any close relation.
Full name of the close relation No. of Shares Percentage holding Direct Indirect Direct Indirect
7.3 Any business transaction, the close relation currently has with the bank, its subsidiaries and
associates if any.
Full name of the close relation
Nature of business transaction
Date of transaction
Limit as at
……………
(Rs. mn)
Outstanding as at
…………
(Rs. mn)
Type and value of collateral
(Rs. mn)
% of
Bank’s regulatory capital
8. Any other explanation/information in regard to the information furnished above and other
information considered relevant for assessing the suitability of the officer performing executive functions in the bank. DECLARATION:
I confirm that the above information is to the best of my knowledge and belief true and complete. I undertake to keep the bank fully informed, as soon as possible, of all events, which take place subsequently, which is relevant to the information provided above. I state that I am not prevented by any Statute from being appointed to the above post. Date : …………… ………………………………………………………………………… Signature of Officer Performing Executive Functions in the Bank TO BE FILLED BY THE CHIEF EXECUTIVE OFFICER

Any other explanation / information in regard to the information furnished above and other
information considered relevant for assessing the suitability of the person performing executive functions in the bank.
I confirm that, in terms of Section 76H read with Section 44A of the Banking Act, the officer
referred to above is fit and proper to carry out executive functions of the bank. Date : …………… ………………………………………………………………………… Signature of Chief Executive Officer and the official stamp

228 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Ref. No. : 02 / 17/600 /0017/001 Bank Supervision Department 27 August 2010 To : CEOs of all Licensed Banks; Dear Sir/Madam APPOINTMENT OF DIRECTORS Reference our letter No. 02/04/002/0012/002 dated 31 March 2005 on the above subject. We enclose herewith a revised declaration, which incorporates additional information, to enable the licensed banks to ascertain compliance with the provisions of the Directions on Corporate Governance by Directors of banks. Please replace Annex 2 of the letter under reference with the revised declaration effective from 01.09.2010. Yours faithfully, Sgd, (Mrs.) T M J Y P Fernando Director of Bank Supervision Encl. c.c. - Mr. Upali De Silva Secretary General – Sri Lanka Banks’ Association Level 8, Ceylinco House No. 69, Janadhipathi Mawatha Colombo 01.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 229
Annex 2
Name of Bank: ……………………………………………………………………………………… Declaration to be submitted in terms of Section 42 of the Banking Act by persons proposed to be appointed / elected / nominated as a Director of a Licensed Bank (with enclosures as appropriate as of ………………….)

Personal Details
1.1 Full name: ……………………………………………………………………………………
1.2 NIC / Passport number: ……………………………………………………………………
1.3 Date of birth : ………………………………………………………………………………
1.4 Age : …………………………………………………………………………………………
1.5 Permanent address : …………………………………………………………………………
1.6 Present address : ……………………………………………………………………………
1.7 Occupation : …………………………………………………………………………………
Appointment as a Director of the Bank
2.1 Date of initial appointment as a Director to the Board of Directors of the bank : ………
2.2 Nature of the appointment (Executive Director / Independent Director / Non-independent
Director /Non-executive Director / Alternate Director) : …………………………………
Personal Details of Close Relations1/ in terms of Section 86 of the Banking Act
3.1 Full name of spouse : ………………………………………………………………………
3.2 NIC / Passport number : ……………………………………………………………………
3.3 Names of dependant children : ……………………………………………………………
Full name NIC / Passport number
3.3.1
3.3.2
3.3.3
3.3.4
Background and Experience
4.1 Name/s of Licensed Bank/s, its subsidiaries2/ in terms of the Banking Act and associates if any, in
which he / she is or has been a member of the Board of Directors:
Name of the institution Period of office
1/ “Close relation” shall mean the spouse or financially dependant children. 2/ “Subsidiary” as defined by Section 17(3) of the Banking Act.

230 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
4.2 Names of entities in which he/she presently is a Director:
4.2.1 Names of specified business entities in terms of the Sri Lanka Accounting and
Auditing Standards Act, No. 15 of 1995.
(a)
(b)
(c)
(d)
4.2.2 Names of other institutions / entities
(a)
(b)
(c)
(d)
4.3 Name/s of Licensed Bank/s, its subsidiaries2/ and associates if any, in which he / she is or
has been employed as an officer performing executive functions:
Name of the institution Position / Designation Period of office
5. Shareholdings in Banks and their Related Companies
5.1 Direct or indirect share ownerships in licensed banks, their subsidiaries2/ and associates if
any, presently held:
Name of the institution No. of Shares Percentage holding Direct Indirect Direct Indirect 2/ “Subsidiary” as defined by Section 17(3) of the Banking Act.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 231
6. Business Transactions3/
6.1 Any business transaction the Director / proposed Director currently has / had with the
licensed banks, their subsidiaries2/ and associates if any, and finance and leasing companies registered with Central Bank of Sri Lanka during the last two years immediately preceding the appointment as Director. Name of the institution Date of transaction Amount as at …………………. (Rs. mn) Classification (performing/ non-performing) Type and value of collateral (Rs. mn) % of Bank’s regulatory Limit Outstanding capital Accommodations Borrowings Investments Deposits
6.2 Any business transaction the Director / proposed Director currently has / had during the
last two years immediately preceding the appointment as Director, with “related parties” as defined by Section 3(7)(i) of the Banking Act, Direction No.11 and 12 of 2007 on Corporate Governance for Licensed Banks in Sri Lanka. Name of the institution Date of transaction Amount as at …………………. (Rs. mn) Classification (performing/ non-performing) Type and value of collateral (Rs. mn) % of Bank’s regulatory capital Limit Outstanding Accommodations Borrowings Investments Deposits 3/ “Business transaction” shall mean any accommodations, borrowings, investments and deposits.

232 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
7. Appointment, Shareholdings and Business Transactions of Close Relations
7.1 Any close relation presently appointed as a Director or Chief Executive Officer or a
member of the key management of licensed bank/s their subsidiaries and associates if any. Name of the bank Full name of the close relation Position held
7.2 Direct or indirect share ownership in licensed banks, its subsidiaries and associates if any,
presently held by any close relation.
Name of the institution Full name of the close relation No. of Shares Percentage holding Direct Indirect Direct Indirect
7.3 Any business transaction, the close relation currently has or had with licensed banks its
subsidiaries and associates if any during the last two years immediately preceding the appointment as Director. Name of the institution Full name of the close relation Nature of business transaction Date of transaction Limit as at …………… (Rs. mn) Out-standing as at ………… (Rs. mn) Type and value of collateral (Rs. mn) % of Bank’s regulatory capital
8. Any other explanation / information in regard to the information furnished above and other
information considered relevant for assessing the suitability of the Director / proposed Director. DECLARATION:
I confirm that the above information is to the best of my knowledge and belief true and complete. I undertake to keep the bank fully informed, as soon as possible, of all events, which take place subsequently, which is relevant to the information provided above. I state that I am not prevented by the Articles of Association of the Company and or by any other Statute from being appointed to the above post. Date : …………… …………………………………………………… Signature of Director / Proposed Director

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 233 TO BE FILLED BY THE COMPANY SECRETARY

Any other explanation / information in regard to the information furnished above and other
information considered relevant for assessing the suitability of the Director / proposed Director.
Submitted to the Board of Directors of the Bank.
Date : …………… …………………………………………………………………………
Signature of Company Secretary and the official stamp

234 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Ref. No. : 02 / 04/0012 / 002 Bank Supervision Department 12 April 2005 To : CEOs of all Licensed Commercial Banks and Licensed Specialised Banks; Dear Sirs, APPOINTMENT OF DIRECTORS OF BANKS I refer to my letter of 31 March 2005 on the above subject, enclosing the affidavit and the declaration to be submitted in respect of directors of banks. Enclosed please find a fresh affidavit which incorporates the Committee stage amendments to the Banking (Amendment) Bill. Please replace the affidavit attached to the above letter with this version. Yours faithfully, Sgd, Director of Bank Supervision

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 235 Affidavit to be submitted in terms of Section 42(2) of the Banking Act I, …………………………………………………….. of ……………………………. Being a [Buddhist / Hindu solemnly, sincerely and truly declare and affirm / Christian / Catholic / Muslim make oath and state] as follows :
(a) I am the [affirmant / deponent] above named and I [am a director / have been elected as a director / have been nominated as a director] of ……………………………… which is a licensed commercial bank / licensed specialised bank, licensed under the Banking Act, No.30 of 1988. (b) I [affirm/state] that I possess the following academic and / or professional qualifications :
(c) I [affirm/state] that the effective experience that I possess in banking, finance, business or administration or of any other relevant discipline is as follows :
(d) I [affirm/state] that there is no finding of any regulatory or supervisory authority, professional association, any Commission of Inquiry, tribunal or other body established by law in Sri Lanka or abroad, to the effect that I have committed or have been connected with the commission of, any act which involves fraud, deceit, dishonesty or any other improper conduct; (e) I [affirm/state] that as such I am not subject to any investigation or inquiry consequent upon being served with notice of a charge involving fraud, deceit, dishonesty or other similar criminal activity, by any regulatory authority, supervisory authority, professional association, Commission of Inquiry, tribunal or other body established by law, in Sri Lanka or abroad; (f) I [affirm/state] that I have not been convicted by any Court in Sri Lanka or abroad in respect of a crime committed in connection with financial management or of any offence involving moral turpitude; (g) I [affirm/state] that I am not an undischarged insolvent nor have I been declared a bankrupt in Sri Lanka or abroad;

236 Directions, Determinations, and Circulars issued to Licensed Specialised Banks (h) I [affirm/state] that I have not failed, to satisfy any judgment or order of any court whether in Sri Lanka or abroad, or to repay a debt; (i) I [affirm/state] that I have not been declared by a court of competent jurisdiction in Sri Lanka or abroad, to be of unsound mind; (j) I [affirm/state] that I have not been removed or suspended by an order of a regulatory or supervisory authority from serving as a director, Chief Executive Officer or other officer in any bank or financial institution or corporate body, in Sri Lanka or abroad; (k) I [affirm/state] that I have not been a director, Chief Executive Officer or held any other position of authority in any bank or financial institution – (i) whose license has been suspended or cancelled; or (ii) which has been wound up or is being wound up, or which is being compulsorily liquidated; whether in Sri Lanka or abroad. (l) I [affirm/state] that to the best of my knowledge I am a fit and proper person [to hold office as a director / to be appointed, nominated or elected as a director] of a licensed commercial bank / licensed specialised bank in terms of the provisions of Section 42 of the Banking Act as amended by Banking (Amendment) Act, No. 2 of 2005. The averments contained herein ] were read over to the [affirmant/deponent ] who having understood the contents ] hereof and having accepted same as ] Before me true, swore to and placed his / her signature ] at Colombo on this ……………… day ] of ……………… ] JUSTICE OF THE PEACE

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 237 Ref. No. : 02 / 04/002/0012/002 Bank Supervision Department 31 March 2005 To : The CEOs of all Licensed Commercial Banks (Domestic) and Licensed Specialised Banks Dear Sirs, APPOINTMENT OF DIRECTORS OF BANKS (SECTION 42 OF THE BANKING ACT, NO.30 OF 1988 AS AMENDED) In terms of Section 42(1) of the Banking Act a person who is to be appointed, elected or nominated as a director of a licensed commercial bank or who continues as a director of such bank must be a fit and proper person to hold such office and should not be prevented from doing so by the provisions of the Banking Act or by any other written law. The Act also sets out specific matters to be taken into consideration in determining whether a person is fit and proper. Further, in terms of Section 42(4) of the Act, all banks are required to notify the Director of Bank Supervision, details of proposed/appointed/elected/nominated directors for approval under
Section 42(5). Boards of licensed commercial banks should ensure that adequate information relating
to any person who is to be appointed, elected or nominated to the Board of Directors is made available to the Board before such appointment, election or nomination takes place. Furthermore, it is necessary that relevant information in respect of current directors should also be available to the Board of Directors. For this purpose we annex hereto a draft affidavit to be obtained from all directors and persons nominated for election or appointment as directors of the bank or to be nominated to the Board. In addition to the affidavit, a declaration may also be obtained from such person to enable the bank to ascertain compliance by directors of the bank with other provisions of the Act. For this purpose a draft declaration as in Annex 2 may be used. The Secretary of each bank shall submit a copy of the affidavit and the declaration in respect of each such person to be appointed, to the Director of Bank Supervision, together with the information specified in sub-section (4) of Section 42, by the bank when approval for appointment, election or nomination of a director is sought. With respect to current directors, the declaration and affidavit should be obtained and copies furnished to the Central Bank in respect of each director holding office, by 30 April 2005. Thereafter, the declaration and affidavit should be obtained and copies furnished to the Central Bank annually, before the Annual General Meeting of the respective bank in respect of every continuing director. Yours faithfully, Sgd, Director of Bank Supervision cc – Mr. Upali De Silva Secretary-General – Sri Lanka Bankers Association Level 8, Ceylinco House, 69, Janadhipathi Mawatha Colombo 01.

238 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Affidavit to be submitted in terms of Section 42(2) of the Banking Act I, …………………………………………………….. of ……………………………. Being a [Buddhist solemnly, sincerely and truly declare and affirm/Christian/Catholic make oath and state/Muslim make oath and state] as follows :
(a) I am the [affirmant / deponent] abovenamed and I [am a director / have been elected as a director / have been nominated as a director] of ……………………………… which is a licensed commercial bank / licensed specialized bank, licensed under the Banking Act, No. 30 of 1988. (b) I [affirm/state] that I possess the following academic and/or professional qualifications :
(c) I [affirm/state] that the effective experience that I possess in banking, finance, business or administration or of any other relevant discipline is as follows :
(d) I [affirm/state] that there is no finding of any regulatory or supervisory authority, professional association, any Commission of Inquiry, tribunal or other body established by law in Sri Lanka or abroad, to the effect that I have committed or have been connected with the commission of, any act which involves fraud, deceit, dishonesty or any other improper conduct; (e) I [affirm/state] that as such I am not subject to any investigation or inquiry in Sri Lanka or elsewhere by any regulatory authority, or supervisory authority, professional association, any Commission of Inquiry, tribunal or other body established by law in Sri Lanka or abroad, that I have committed or have been connected with the commission of, any act which involves fraud, deceit, dishonesty or any other improper conduct; (f) I [affirm/state] that I have not been convicted by any Court in Sri Lanka or abroad in respect of a crime committed in connection with financial management or of any offence involving moral turpitude;

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 239 (g) I [affirm/state] that I am not an undischarged insolvent nor have I been declared a bankrupt in Sri Lanka or abroad; (h) I [affirm/state] that I have not failed, to satisfy any judgment or order of any court whether in Sri Lanka or elsewhere, or to repay a debt; (i) I [affirm/state] that I have not been declared by a competent court in Sri Lanka or abroad, to be of unsound mind; (j) I [affirm/state] that I have not been removed or suspended by an order of a regulatory or supervisory authority from serving as a director, Chief Executive Officer or other officer in any bank or financial institution or corporate body, in Sri Lanka or abroad; (k) I [affirm/state] that I have not been a director, Chief Executive Officer or held any other position of authority in any bank or financial institution – (i) whose license has been suspended; or (ii) which has been wound up or is being wound up, or which is being compulsorily liquidated; whether in Sri Lanka or elsewhere. (l) I [affirm/state] that to the best of my knowledge I am a fit and proper person [to hold office as a director / to be appointed, nominated or elected as a director] of a licensed commercial bank / licensed specialised bank in terms of the provisions of Section 42 of the Banking Act as amended by Banking (Amendment) Act, No. 2 of 2005. The averments contained herein ] were read over to the [affirmant/deponent ] who having understood the contents ] hereof and having accepted same as ] Before me true, swore to and placed his/her signature ] at Colombo on this ……………… day ] of ……………………… ] JUSTICE OF THE PEACE

240 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Annex 2
Name of Bank: …………………………………………………
Declaration to be submitted in terms of Section 42 of the Banking Act by persons proposed to be/appointed/elected/nominated as a Director of a Licensed Bank (with enclosures as appropriate as of ………………….)

Personal Details
1.1 Full name:
1.2 NIC No./Passport No.:
1.3 Permanent Address:
1.4 Present Address:
1.5 Occupation:
List of close relations in terms of Section 86 of the Banking Act:
2.1 Name in full of spouse:
NIC No./Passport No. :
2.2 Names of dependent children:
Full Name NIC No. / Passport No.
List of entities in which director/prospective director has a substantial interest in terms of Section
86 of the Banking Act

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 241
4. Name/s of Licensed Bank/s in which he/she is or has been a member of the Board of Directors
(give details of period during which such office was held)
5. Accomodation, if any, presently availed by him/her or by his close relations at 2 above, and by
entities at 3 above from the bank, and collateral Declaration:
I confirm that the above information is to the best of my knowledge and belief true and complete. I undertake to keep the bank fully informed, as soon as possible, of all events which take place subsequently which are relevant to the information provided above. Signature:
Date:
Any other explanation/information in regard to the information furnished above and other information considered relevant for assessing the suitability of the proposed/appointed director. Remarks of Board of Directors of the Bank Date: Signature of Company Secretary

242 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Ref. No. : 02 / 17/550 /002 /003 Bank Supervision Department 24 December 2010 To : CEOs of all Licensed Commercial Banks; Licensed Specialised Banks, and Auditors conducting Bank Audits Dear Sir/Madam, REQUIREMENTS UNDER THE CORPORATE GOVERNANCE DIRECTION We write to inform you that the Institute of Chartered Accountants of Sri Lanka (ICASL) has issued guidelines on the internal control mechanism and annual corporate governance report to be followed by banks in relation to Directions 3(8)(ii) (b), (c) and (g) of the Corporate Governance Direction dated
26.12.2007 issued by the Central Bank of Sri Lanka.
Please find the guidelines in the website of the ICASL. The link is as follows:
http://www.icasrilanka.com/Technical/Central%20Bank%20Internal%20Control%20-%20 Final%20printed%20uploaded.pdf Yours faithfully, Sgd, N W G R D Nanayakkara Addl. Director of Bank Supervision c.c. - President Institute of Chartered Accountants of Sri Lanka 30A Malalasekera Mawatha Colombo 7.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 243 Ref. No. : 02 / 17/600/0017/001 Bank Supervision Department 08 August 2011 To : CEOs of Licensed Specialised Banks Dear Sirs, ASSESSMENT OF FITNESS AND PROPRIETY OF CHIEF EXECUTIVE OFFICERS OF LICENSED SPECIALISED BANKS In terms of Section 76H read with Section 44A of the Banking Act, Chief Executive Officers (CEOs) of Licensed Specialised Banks (LSBs) are required to be fit and proper persons to perform executive functions in a LSB. Accordingly, we enclose herewith formats for the affidavit and the declaration to be submitted by the CEOs of LSBs and a guidance note to duly complete such affidavits and the declarations.
Annex I : Affidavit to be submitted by CEOs of LSBs
Annex II : Declaration to be submitted by CEOs of LSBs
Annex III : Guidance Note
Yours faithfully,
(Mrs.) T M J Y P Fernando
Director of Bank Supervision

244 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Annex I
Name of Bank : ………………………………………………………………………………………… Affidavit to be submitted by Chief Executive Officers of Licensed Specialised Banks in terms of Section 76H read with Section 44A of the Banking Act I, ……………………………………………………………………………………………… (full name) holder of National Identity Card No. / Passport No. ……………….………..……..……..……………… of ………………….………………………………………………………………………………. (address) being a [Buddhist / Hindu do hereby solemnly, sincerely and truly declare and affirm / Christian / Catholic / Muslim make oath and state] as follows :
(a) I am the [affirmant / deponent] above named and I am the [Chief Executive Officer / proposed Chief Executive Officer] of ………………………………………………………………………………… ……………. (name of bank) which is a specialised bank, licensed under the Banking Act, No. 30 of 1988. (b) I [affirm / state] that I possess the following academic and / or professional qualification/s:
………………………………………………………………………………………………………
………………………………………………………………………………………………………
(c) I [affirm / state] that the effective experience that I possess in banking, finance, business or administration or of any other relevant discipline is as follows:
………………………………………………………………………………………………………
………………………………………………………………………………………………………
(d) I [affirm / state] that there is no finding of any regulatory or supervisory authority, professional association, any Commission of Inquiry, tribunal or other body established by law in Sri Lanka or abroad, to the effect that I have committed or have been connected with the commission of, any act which involves fraud, deceit, dishonesty or any other improper conduct. (e) I [affirm / state] that I am not subject to an investigation or inquiry consequent upon being served with notice of a charge involving fraud, deceit, dishonesty or other similar criminal activity, by any regulatory authority, supervisory authority, professional association, any Commission of Inquiry, tribunal or other body established by law, in Sri Lanka or abroad. (f) I [affirm / state] that I have not been convicted by any Court in Sri Lanka or abroad in respect of a crime committed in connection with financial management or of any offence involving moral turpitude. (g) I [affirm / state] that I am not an undischarged insolvent nor have I been declared a bankrupt in Sri Lanka or abroad.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 245 (h) I [affirm / state] that I have not failed, to satisfy any judgment or order of any Court whether in Sri Lanka or abroad, or to repay a debt. (i) I [affirm / state] that I have not been declared by a Court of competent jurisdiction in Sri Lanka or abroad, to be of unsound mind. (j) I [affirm / state] that I have not been removed or suspended by an order of a regulatory or supervisory authority from serving as a Director, Chief Executive Officer or other officer in any licensed bank or financial institution or corporate body, in Sri Lanka or abroad. (k) I [affirm / state] that I have not been a Director, Chief Executive Officer or held any other position of authority in any bank or financial institution – (i) whose license has been suspended or cancelled; or (ii) which has been wound up or is being wound up, or which is being compulsorily liquidated; whether in Sri Lanka or abroad. (l) I [affirm / state] that to the best of my knowledge I am a fit and proper person [to hold office as a Chief Executive Officer / to be appointed as a Chief Executive Officer] of a licensed specialised bank in terms of the provisions of Section 76H read with Section 44A of the Banking Act. The averments contained herein were read over to the [affirmant / deponent] who having understood the contents hereof and having accepted same as true, affirmed / swore to and placed his / her signature at …………………..… on this ……………………… day of ………………….. JUSTICE OF THE PEACE / COMMISSIONER FOR OATHS Affix Stamps as applicable Before me

246 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Annex II
Name of Bank: ………………………………………………………………………………………… Declaration to be submitted by Chief Executive Officers of Licensed Specialised Banks in terms of Section 76H read with Section 44A of the Banking Act (with enclosures as appropriate as of ………………….)

Personal Details
1.1 Full name: ………………………………………………………………………………………
1.2 NIC / Passport number: …………………………………………………………………………
1.3 Date of birth : …………………………………………………………………………………
1.4 Permanent address : ……………………………………………………………………………
1.5 Present address : ………………………………………………………………………………
Appointment to the Bank
2.1 Date of appointment :
(please attach a certified copy of the appointment letter)
2.2 Designation : ……………………………………………………………………………………
2.3 Local or expatriate : ……………………………………………………………………………
Background and Experience
Name/s of licensed bank/s, its subsidiaries in terms of the Banking Act and associates if any, in which he / she is or has been employed as Chief Executive Officer, Director or an officer performing executive functions:
Name of the institution Period of office Designation
Shareholdings in Banks and their Related Companies
Share ownerships in any licensed banks, their subsidiaries and associates, if any, presently held:
Name of the institution No. of shares Percentage holding

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 247
5. Business Transactions1/
Any business transactions the Chief Executive Officer / proposed Chief Executive Officer presently has with the bank and its subsidiaries and associates, if any. Name of the institution Date of transaction Amount as at …………………. (Rs. mn) Classification (performing/ non-performing) Type and value of collateral (Rs. mn) % of Bank’s capital Limit Out-standing Accommodations Investments Deposits
6. Personal Details of Close Relations in terms of Section 86 of the Banking Act
6.1 Full name of spouse :……………………………………………………………………………
6.2 NIC / Passport number : ………………………………………………………………………
6.3 Names of dependant children : …………………………………………………………………
Full name NIC / Passport number
6.3.1
6.3.2
6.3.3
6.3.4
7. Appointments, Shareholdings and Business Transactions of Close Relations
7.1 Any close relations presently employed as Chief Executive Officers, Directors or officers
performing executive functions in any licensed banks, their subsidiaries and associates, if any. Name of the bank Full name of the close relation Position held 1/ “Business transaction” shall mean any accommodations, investments and deposits and in the case of foreign banks, only the business transactions with Sri Lankan operations.

248 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
7.2 Direct or indirect share ownership in the bank, its subsidiaries and associates, if any, presently
held by any close relation.
Full name of the close relation No. of Shares Percentage holding Direct Indirect Direct Indirect
7.3 Any business transaction, the close relation currently has with the bank, its subsidiaries and
associates, if any.
Name of the institution
Date of transaction
Amount as at
………………….
(Rs. mn)
Classification
(performing/ non-performing)
Type and value of collateral
(Rs. mn)
% of Bank’s regulatory capital
Limit Out-standing
Accommodations
Investments
Deposits
8. Any other explanation / information in regard to the information furnished above and other
information considered relevant for assessing the suitability of the Chief Executive Officer / proposed Chief Executive Officer of the bank.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 249 DECLARATION:
I confirm that the above information is to the best of my knowledge and belief true and complete. I undertake to keep the bank fully informed, as soon as possible, of all events, which take place subsequently, which is relevant to the information provided above. I state that I am not prevented by any Statute from being appointed as the Chief Executive Officer of Licensed Specialised Bank. Date : …………… ………………………………………………………………………… Signature of Chief Executive Officer / Proposed Cheif Executive Officer TO BE FILLED BY THE CHAIRMAN / REGIONAL HEAD (in the case of foreign banks)

Any other explanation / information in regard to the information furnished above and other
information considered relevant for assessing the suitability of the Chief Executive Officer / proposed Chief Executive Officer of the bank.
I confirm that, in terms of Section 76H read with Section 44A of the Banking Act, No. 30 of 1988,
the officer referred to above is fit and proper to carry out functions of the Chief Executive Officer of …………………………… . Date : …………… ………………………………………………………………………… Signature of the Chairman / Regional Head and the official stamp

250 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Annex III
GUIDANCE TO DULY COMPLETE THE AFFIDAVITS AND
DECLARATIONS TO BE SUBMITTED BY CHIEF EXECUTIVE OFFICERS OF LICENSED SPECIALISED BANKS A. PURPOSE OF OBTAINING AFFIDAVITS AND DECLARATIONS

The purpose of obtaining affidavits and declarations of Chief Executive Officers (CEOs) of
Licensed Specialised Banks (LSBs) is to enable the Bank Supervision Department to assess the fitness and propriety of such officers in terms of the provisions of the Banking Act. Accordingly, the Bank Supervision Department requires comprehensive information to evaluate the experience, qualifications, integrity and compliance with other requirements specified in the Banking Act, to assess the suitability of the CEOs of the LSBs.
Further, these should be legally binding documents in the event of any dispute.
This guidance is issued to ensure that sufficient information is provided by banks for assessing the
fitness and propriety of the CEOs.
B. AFFIDAVITS

It is preferable that the affidavit is prepared as a fresh document, based on the format provided by the
Bank Supervision Department, so as to avoid inclusion of unnecessary words. However, if the given format is filled, all alterations, erasures and interlineations should be initialed by the Commissioner for Oaths.
Academic/professional qualifications

Relevant qualification should be mentioned clearly with:
– Qualification obtained
– Name of the Institution/University
– Year of obtaining the qualification
– Name of the Professional body where he/she is a member

Effective experience should include:

Institution
Designation
Period

Complete all blank spaces and clauses appropriately. (Eg., Name in full, NIC No. / Passport No.,
Address, Chief executive officer/proposed chief executive officer, Name of the Bank, etc.)
Appropriate words should be used based on the religion of the person
5.1 Delete/strike out inappropriate words
Eg.

Buddhist/Hindu: affirm/affirmant/solemnly, sincerely and truly declare and affirm.
Christian/Catholic/Muslim: deponent/state/make oath and state/ swear.
If a person refrains/objects to disclose his/her religion: affirm/affirmant/solemnly, sincerely
and truly declare and affirm. In this event, a confirmation should be submitted by the officer stating that:
– he/she is an atheist or belongs to a religion not mentioned in this affidavit; or – he/she objects to disclosing his/her religion.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 251
5.2 If the inappropriate words are stricken out, the Commissioner for Oaths/Justice of the Peace
should place his initials immediately after all such amendments.
6. If the person is a foreigner and signs the affidavit while overseas:
– signature of the person should be attested by a Commissioner for Oaths or an equivalent in the country in which he places his signature. – attestation should be made in front of the Sri Lankan High Commissioner in the respective country.
7. Affix a stamp for a sum of Rs.25/- and the signature of the person. In the case of future affidavits,
the denomination of the stamp should be changed according to the value applicable as at the date of signing the affidavit.
8. Attest by a Commissioner for Oaths/Justice of the Peace immediately after the signature of the person
at ‘Before me’.
C.DECLARATIONS

Declarations:
– should be duly completed: All the sections (1-8) should be completed (full name, date etc.) and irrelevant sections stated as Not applicable/nil/none or cancelled out. – should be signed and dated.
The last section should be completed, dated and signed with official stamp/seal by the Chairman/
Regional Head (in the case of foreign banks). If there is no comment it should be stated as Not applicable/nil/none.
Terms of appointment (including designation, date of appointment, duties, responsibilities and
remuneration package) should be attached.
D. INTERPRETATION
“Close relation” means spouse or dependent child.
“Business Transaction” shall means any accommodations, investment and deposits and in the case
of foreign banks, only the business transactions with Sri Lankan operations.
“Accommodation” means any loan, overdraft or advance or such other facility as may be determined
by the Monetary Board or any commitment to grant any loan, overdraft or advance or such other facility as may be determined by the Monetary Board, including a commitment to accept a contingent liability.

252 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Our Ref. : 02 / 17/ 600/0036 / 001 Bank Supervision Department 17 July 2012 To : Chief Executive Officers of all locally incorporated licensed banks Dear Sir / Madam, SPECIAL PAYMENTS/BENEFITS TO DIRECTORS AT THEIR RETIREMENT Having observed that exorbitant special payments / benefits have been made in the form of gratuity to retiring directors of some banks and that such payments / benefits are not prudent in terms of good governance, the Monetary Board has decided to require licensed banks to obtain prior approval of shareholders for any special payments / benefits made to bank directors at their retirement in addition to normal remuneration. Accordingly, all locally incorporated licensed banks are requested to:
(1) incorporate such special payments / benefits to its directors at their retirement to the remuneration policy; (2) obtain prior approval of the shareholders for any special payments / benefits made to directors at their retirement in addition to normal remuneration; (3) ensure that all special payments / benefits are extended on arm’s length basis; and (4) disclose separately the aggregate value of total special payments / benefits made to retiring directors during the respective financial year in the Annual Report. Yours faithfully, (Mrs.) T M J Y P Fernando Director of Bank Supervision Cc : Chairmen of all locally incorporated licensed banks

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 253 Ref. No. : 02 / 17/550/002/003 Bank Supervision Department 29 March 2012 To : CEOs of all Licensed Banks and Panel of Qualified Auditors Dear Sir/Madam, DISCLOSURE IN ANNUAL REPORTS BANKING ACT DIRECTIONS ON CORPORATE GOVERNANCE We write to inform you that, the Monetary Board has approved of accepting the following as substitutes for compliance with the Directions 3(8)(ii)(c) and 3(8)(ii)(g) of the Banking Act, Directions No. 11 and 12 of 2007. Direction Disclosure Requirements Substitute Disclosure Requirements 3(8)(ii)(c) The external auditor’s certification on the effectiveness of the internal control mechanism reported by the board of directors The Assurance Report issued by the auditors under “Sri Lanka Standard on Assurance Engagements SLSAE 3050 – Assurance Reports for Banks on Directors’ Statements on Internal Control”. 3(8)(ii)(g) The external auditor’s certification of the compliance with Corporate Governance Directions in the annual corporate governance reports published in the annual report A confirmation by the Board of Directors in its Annual Corporate Governance Report that all the findings of the “Factual Findings Reports” of auditors issued under “Sri Lanka Related Services Practice Statement 4750” have been incorporated in the Annual Corporate Governance Report, provided that auditors confirm to the Director of Bank Supervision to this effect. Accordingly, you are required to adhere to the above requirements. Yours faithfully, (Mrs.) T M J Y P Fernando Director of Bank Supervision

254 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Explanatory Note: 1/2012 Bank Supervision Department 06 July 2012 AUTHORITY OF THE MONETARY BOARD TO ISSUE DIRECTIONS TO LICENSED BANKS REAFFIRMED BY THE COURT OF APPEAL The Monetary Board of the Central Bank of Sri Lanka (CBSL) issued Directions on corporate governance to licensed banks on 26 December 2007. The Directions were issued in terms of the Banking Act requiring, inter alia, fitness and propriety of bank directors, limiting the age of a director of a bank to 70 years, the term of office of a director to be not more than 9 years, etc. Consequent to issuing these Directions, the authority of the Monetary Board of the CBSL to issue such Directions was challenged in the Court of Appeal CA (Writ) Application No. 330 /2008 by K.C. Vignarajah, the Petitioner. As per the Court of Appeal judgment of the above action delivered on 28 March 2012, it was held that, inter-alia, the Banking Act, No. 30 of 1988 falls within the category of legislation referred to as Administrative Legislation, and that a necessary aspect of such legislation is one of delegating powers to an extraneous body of persons to act at Parliament’s bidding. The Court further held that, accordingly, the Banking Act is a Primary Legislation for the purpose of providing for any aspect of banking business and of business of such banks and includes the right to control the existing systems and functions of banks, and therefore that the Monetary Board has been delegated with the power to make directions which had the approval, licence or stamp of a legislative power. On that basis, the Court of Appeal ruled that Direction No.11 of 2007 on Corporate Governance of 26 December 2007 is within the powers prescribed in the Banking Act, No. 30 of 1988, as amended.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 255 Ref. No. : 02 / 17/402/0079/001 Bank Supervision Department May 02, 2006 To : CEOs of Licensed Commercial Banks and CEOs of Licensed Specialised Banks Dear Sirs, IMPLEMENTATION OF THE PROVISIONS OF PART IX (SECTIONS 72 TO 76) OF THE BANKING ACT ON ABANDONED PROPERTY As intimated to you at the meeting of the CEOs of Licensed Commercial Banks and Licensed Specialised Banks held on 24.11.05, in terms of Section 73(1) of the Banking Act, all licensed commercial banks (LCBs) are hereby required to report “Abandoned Property” referred to in
Section 72 of the Banking Act in the format determined by the Monetary Board given in Annex 1.
In implementing the provisions of the Banking Act on Abandoned Property LCBs are requested to follow the guidelines at Annex 2. The provisions of the Banking Act do not require the licensed specialized banks (LSBs) to report Abandoned Property. However, the LSBs too are requested to identify the articles that could be considered abandoned as described in Section 72 of the Banking Act and to report them using the format at Annex 1 till such time these provisions are made applicable to LSBs as well. The first Report should contain property that would have been presumed abandoned up to 31.12.2005. Please acknowledge receipt of this letter. Yours faithfully, Sgd, Director of Bank Supervision Encl:

256 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Annex 1 Report of Abandoned Property Name of Bank : Reporting Period :
A
B
C
D
E
F
G
H I J K
L
M
Owner’s
Last Name with Other Names in Full
Last known
Complete
Address
Owner’s
Identification
Nos., if available
(NIC,
Passport No., date of birth etc.)
Description of
Property
Property
Identification
Number
Interest bearing
Yes/No
Last
Activity
Date
Nature of
Activity
Amount
Due
Amount
Deducted
Description of
Deduction
Amount Terms of
Agreement and owner’s instructions
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Total
I, ……………………………………………………….., being first duly sworn, on oath depose and state that I have cause to be prepared and have examined this report consisting of …………………pages totaling Rs …………….. as to property presumed abandoned under the provisions of the Banking Act, No.30 of 1988, for the period stated above that I am duly authorised by the ...................................................................... (name of the bank) to execute this Report and that to the best of my knowledge and belief the Report is true, correct and complete as of said date, excepting for such property as has since ceased to be abandoned. Signature: ……………………………………… Name: ……………………………………… Designation: ……………………………………… Sworn and placed his/her signature before me on this ….. day of……… in the year …… Signature: ……………………………………… Name: ………………………………………

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 257
Annex 2
Guidelines on the implementation of Part IX (Section 72 to 76) of the Banking Act on Abandoned Property The Central Bank of Sri Lanka has decided to implement the provisions of Part IX of the Banking Act with effect from 31 December 2005. These guidelines establish the procedures for handling such property.

Identification of Abandoned Property
a. All licensed commercial banks (LCBs) should identify articles presumed to be abandoned property as described in Section 72 of the Banking Act. In general abandoned property includes the following articles in respect of which no activity has been evidenced for a period of ten years.

Any general deposit (demand, savings or matured time deposit) with an LCB with any interest
or dividend but excluding any lawful charges.
Any funds paid towards the purchase of shares or other interests in an LCB with any interest or
dividend but excluding any lawful charges.
Any sum payable on cheques or other instruments for which the LCB is directly liable.
Any intangible personal property and any income or interest thereon held in a fiduciary capacity.
The contents of safe deposit boxes upon which the rental period has expired and of which notice
has been sent by registered post to the last known address of the lessee and the lessee has failed to respond within three years. b. Activity in this regard is evidenced by any action taken by an owner with respect to his property, which indicates that the owner does not intend his property to be considered abandoned. Such action would include a deposit or a withdrawal in the case of a customer account, notification of change of address, payment of a safe deposit rental charge, any other written correspondence, presenting the pass book for updating etc.

Filing of the Report on Abandoned Property with the Central Bank of Sri Lanka (CBSL)
a. All LCBs holding any abandoned property should submit a report to CBSL within six months of the end of each financial year. The first Report should cover property that would have been presumed abandoned up to 31.12.2005. In the case of LCBs whose financial year ends on 31 March, the first report may cover the position as at 31.03.2006. b. All reporting of abandoned property should be in accordance with the format approved by the Monetary Board given at Annex 1. Information should be recorded in alphabetical order of the owners’ last name, to the extent possible, and branchwise. Minors accounts should be reported separately. The process of identifying and completing the Report is expected to be automated by LCBs.
c. While the banks should report all property that falls within the definition of abandoned property, if
there are special considerations attached to such property, e.g.: the owner having migrated or left the country for an infinite period with notice to the bank, such special consideration should be reported to CBSL. d. Where an LCB does not hold any abandoned property to be reported as required by Section 73 of the Banking Act, the respective bank is expected to formally communicate it to CBSL. Such communication will be considered as a “Negative Report”. e. Prior to reporting abandoned property to CBSL, the banks should make notification of it to the owner of such abandoned property, by registered mail, to the last known address of the owner giving a reasonable period to respond. Such notice should include a description of the property, a statement explaining the statutory requirements of abandoned property and the intended date that the property

258 Directions, Determinations, and Circulars issued to Licensed Specialised Banks will be reported to CBSL if there is no response. In the case of Minors’ accounts where the banks are of the view that it is not reasonable to consider a particular account as abandoned due to its intrinsic characteristics, banks need not notify the owners/guardians of such accounts. However, the banks should report all Minors’ accounts that fall within the definition of abandoned property to CBSL with specific mention why they should not be considered as abandoned property. f. Pursuant to the filing of a Report on Abandoned Property, a bank should maintain documents necessary to prove information submitted in the Report for a period of at least six years from the date of submitting the Report.
3. Delivery of Abandoned Property to CBSL
Any further action to be taken in terms of Subsections (2) and (3) of Section 73 of the Banking Act will be notified to all LCBs in due course.
4. Publication of Notice of Abandoned Property
a. In accordance with Section 74 of the Banking Act a bank should, within thirty days of submission of the Report, required under paragraph 2.a above,

publish a notice in the Sinhala, Tamil and English daily newspapers stating the name of the owner
and particulars concerning the property; and
should dispatch by registered post, a notice containing particulars of the property to the last
known address of the owner. b. With regard to Minors’ accounts, the procedure stated in paragraph 2e. above should be followed.

Drilling/Opening of safe deposits
a. The bank should prepare a Safe Deposit Inventory Sheet to record details of safe deposit boxes opened. Opening of the safe custody lockers should be carried out in the presence of two responsible officers who are, inter-alia, specifically assigned with such task and one of whom should be at least at Senior Executive Level. All items found in safe deposit boxes presumed to be abandoned should be included in the Inventory Sheet without exceptions. No item should be sold, destroyed or disposed. b. The format at Annex 3 may be used for this purpose. The Inventory Sheet should be signed by the staff conducting the inventory and returned to CBSL along with the Report on Abandoned Property.
c. All items contained in the safe deposit boxes should be itemised and kept in safe custody after the
drilling/opening of safe deposit boxes.
The costs
The banks should attempt to comply with these guidelines in the most cost efficient manner. These costs should be charged to the owners of abandoned property only if it has been made known to the customers in a valid, enforceable and written contract between the bank and the customer, specifying the amount of the fee and the customer is notified of the charging of such fee.
Submission of information by licensed specialized banks (LSBs)
The provisions of the Banking Act do not require LSBs to identify and report Abandoned Property. However, LSBs are requested to identify the articles that could be considered abandoned as described in Section 72 of the Banking Act and to report them to CBSL using the format at Annex 1.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 259 Instructions for completing the Report of Abandoned Property at Annex 1 Information should be recorded in alphabetical order of the owners’ last name, to the extent possible, and branchwise. A separate sheet should be used for Minors accounts. Name of Bank: Enter the name of the reporting bank. Reporting Date: Enter the date as at when the reporting is done. Column A: Enter the owner’s last name followed by full first name and full middle name/s. Enter information that would aid in identification such as Miss, Mr., Mrs., after the middle name. If a single item has two or more owners, the names of all such owners must be reported with the relationship. If your records do not show an owner name for an item, enter the owner as “unknown”. Column B: Enter the complete address available in your records. If no address is available indicate so. In the case of several owners if the address is same, the address may be entered once and indicated that it is same for others. Column C: Enter the owner’s National Identity Card No., Passport No., date of birth or any other information that will assist in identification of an owner. These will be essential in paying claims and if known, they must be included in the Report. Column D: Enter the description of item with sufficient detail. Column E: Enter your identification number for each item such as Account No., Cheque No. etc. Column F: Indicate whether the item is interest bearing. Column G: Indicate the date when the last deposit, withdrawal or contact was made by the owner. It could also be the date a dividend became payable, cheque or draft was issued, certificate was purchased. Column H: Indicate the nature of the last activity. Column I: Indicate the total amount due to the owner including all interest, dividend, earned up to the reporting date without deducting any service charges. In the case of safe deposit boxes or other items held for safekeeping, identify the contents and include the description of any item that has a value. For all safe deposit boxes include an inventory sheet as in Annex3. Column J: Enter the amount of deductions made which should include only any lawful charges. Column K: Indicate the nature of deduction made such as service charges, tax etc. Column L: Indicate the net amount due after the deductions mentioned. Column M: Indicate the terms agreed with the owner such as interest rate, payment instructions etc., that will be essential in case of payment of claims. Also indicate any special considerations attached to such property and the date of maturity in case of term deposits. Total: Total the Column L and enter at the bottom of each page. On the last page enter the page total and the grand total for the entire Report.

260 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Annex 3
Safe Deposit Box Inventory Sheet
Name of Bank: ………………………………………………………………………………………… Reporting Year:………………………………………………………………………………………… Name of Box Owner(s): ……………………………………………………………………………… Box Number: ………………… Date Drilled: ………………… Vault Location: …………….. Quantity Detailed Description of Contents Any other Relevant Information We certify that the above information is true and that no items have been removed or destroyed. Date of Inventory:
-------------------------------- --------------------------------- ------------------------------ Signature of Bank Official Name of Official Designation -------------------------------- --------------------------------- ------------------------------ Signature of Bank Official Name of Official Designation Instructions for completing the Safe Deposit Box Inventory Sheet at Annex 3 Name of Bank: Enter the name of the reporting bank. Reporting Date: Enter the date as at the date of reporting. Name of the Box Owner(s): Indicate the full name(s) of the owner(s) including information useful for owner identification. Box Number: Enter the safe deposit box number. Date Drilled: Enter the date the safe deposit box was opened. Vault Location: Indicate where the vault containing the safe deposit is located. Quantity & Detailed Description: Indicate the nature of each item contained in the safe deposit box with the quantities. Date of Inventory: The date on which the inventory was taken.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 261 Ref. No. : BS/38/90 Bank Supervision Department Central Bank of Sri Lanka 8th Floor – Renuka Building 41 Janadhipathi Mawatha Colombo 1. 30 April 1998. To : All Licensed Specialised Banks Dear Sir, LIST OF QUALIFIED AUDITORS S.38a OF THE BANKING ACT NO. 30 OF 1988 AS AMENDED BY ACT NO. 33 OF 1995 We refer to section 38a of the Banking Act, No. 30 of 1988 as amended by Act, No. 33 of 1995 and enclose herewith a list of qualified auditors compiled in accordance with S.38a(1) of the Act. Your attention is drawn to S.38a (2) and S.39(1) of the Act which requires that the appointment of an auditor to audit the accounts of your Bank from the list transmitted to you under S.38a (1) by the Director of Bank Supervision. You are required to comply with this provision when you next appoint an auditor in terms of S.39 of the Banking Act, No.30 of 1988 as amended by Act, No.33 of 1995. Please acknowledge receipt of this letter. Yours faithfully, Sgd. Y. A. Piyatissa Director of Bank Supervision

262 Directions, Determinations, and Circulars issued to Licensed Specialised Banks List of Qualified Auditors S.38a (1) of the Banking Act, No. 30 of 1988 as amended by Act, No.33 of 1995 Name Address

Ernst & Young 201 De Saram Place
P.O. Box 101
Colombo 10.
K P M G Ford Rhodes Thornton & Co. 32A Sir Mohamed Macan Marker Mawatha
P.O. Box 186
Colombo 3.
Pricewaterhouse Coopers P.O. Box 918
100, Braybrooke Place
Colombo 2.
SJMS Associates 2 Castle Lane
Colombo 4.
H L B Edirisinghe & Co. 45 Braybrooke Street
Colombo 2
B R de Silva & Co. 22/4 Vijaya Kumaratunga Mawatha
Colombo 5.
Kreston MNS & Co. P.O. Box 210
50/2 Sir James Peiris Mawatha
Colombo 2.
BDO Hathy ‘Charter House’
65/2
Sir Chittampalam A Gardiner Mawatha
P.O. Box 962
Colombo 2.
B V Fernando & Co. 78-3 1/1 Rodney Street
Colombo 8.
Tissa Fernando 519/2B Elvitigala Mawatha
Colombo 5.

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 263 Ref. No. : 02 / 05/006/0100/002 Bank Supervision Department 17 June 2011 To : CEOs of All Licensed Banks Dear Sir / Madam, DISPLAY OF INTEREST RATES, EXCHANGE RATES, SERVICE CHARGES, FEES AND COMMISSIONS Reference Circular No. 02/05/006/0100/001 dated 28 October 2003 on display of interest rates and exchange rates. To further improve the market efficiency by promoting healthy competition among banks, all licensed banks are required to expand the disclosures on interest rates of deposits and lending products, exchange rates and to display details of fees, commissions and other service charges in all branches and other banking outlets and publish them in banks’ web sites, commencing from 01 August 2011. Formats for display of above information are enclosed herewith. Banks may further expand the formats given to suit the products and services of each bank.
Annex I : Format for display of interest rates
Annex II : Format for display of foreign exchange rates
Annex III : Format for display of service charges, fees and commissions
Yours faithfully,
(Mrs.) T M J Y P Fernando
Director of Bank Supervision

264 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Annex I
Suggested format for the Display of Interest Rates Description Min. rate as at ….. Max. rate as at ….. Interest Rates on Deposits Savings Deposits Minor Savings Deposits Call Deposits Time Deposits - 1 Year

Interest Payable monthly
Interest Payable at maturity
NRFC Savings Deposits
US Dollar
Sterling Pound
Euro
Any other currencies
NRFC Fixed Deposits - 1 Year
US Dollar
Sterling Pound
Euro
Any other currencies
Interest Rates on Advances
Export Bill Finance - Rupee Facilities
Import Bill Finance - Rupee Facilities
Lease Finance
Lending to Small & Medium Scale Industries (SMEs) Residential Housing Pawning US Dollar Loans to Exporters Overdrafts
Permanent
Temporary
Personal Loans
Vehicle Loans
Credit Cards
Agricultural Lending
Refinance Schemes
i. Agriculture & Animal Husbandry
Tea Development Project (Revolving fund)- (TDPRF)
Agro – Livestock Development Project
Any other
ii. Small & Medium Enterprises Sector
Susahana Loan Scheme
Self-Employment Initiative Loan Scheme
Any other
iii. Micro Finance Sector
Poverty Alleviation Microfinance Project (Revolving Fund) PAMP Scheme
Small Farmers & Landless Credit Project Revolving Fund
Any other

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 265
Annex II
Suggested format for the Display of Foreign Exchange Rates Exchange Rates Rate: Rupees per unit of foreign currency as at …………. Currency Travelers Cheques Telegraphic Transfers Import Bill Rates Buying Rate Selling Rate Buying Rate Selling Rate Buying Rate Selling Rate Australian Dollar Canadian Dollar Danish Kroner Euro Hong Kong Dollar Japanese Yen New Zealand Dollar Norwegian Kroner Pound Sterling Singapore Dollar Swedish Kroner Swiss Franc United States Dollar

266 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Annex III
Suggested format for the Display of Service Charges, Fees & Commissions Description Rs. as at …….. SERVICE CHARGES Savings Accounts Charges for non-maintenance of account balance as stipulated minimum, etc… Current Accounts Current account monthly service charge Charges for account statement Cheque issuing cost Stop payment order Return cheques due to insufficient funds, etc… Remittances Inward credit to Sri Lanka rupee account Inward remittance to foreign currency account Issue of foreign currency demand draft, pay orders, etc… Traveller’s Cheques Encashment of Traveller’s Cheques Sale of Traveller’s Cheques, etc.… ATMs Issuing Fee ATM cash withdrawal - Own Bank ATM cash withdrawal - Other Bank, etc.… Credit Cards - Main Cardholder Annual fee Late Payment charges Interest charges, etc.… FEES & COMMISSIONS SLIPS Payment Charges RTGS Payment Charges Facility Arrangement Fees - Overdrafts

Security Backed
Clean Basis
Early Settlement Fees
Residential Housing
Vehicle Loans
Cheque Purchase Commission
LC Commission
LC Opening Fee & Commission
LC Negotiation Charges, etc.…
Shipping Guarantees
Bank Guarantees
Acceptance

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 267 Ref. No. : 02 / 05/006/0100/001 Bank Supervision Department 28th October 2003 To : All Licensed Commercial Banks and Licensed Specialised Banks Dear Sir/Madam, DISPLAY OF INTEREST RATES AND EXCHANGE RATES The Central Bank of Sri Lanka welcomes the efforts made by banks to publish their deposit and lending rates. You would no doubt appreciate that adequate market information is vital for improving market efficiency and in promoting healthy competition. As another step forward in this direction, all licensed commercial banks and specialised banks are requested to compile a representative list of their interest rates on deposits and advances and their buying and selling rates for foreign currencies and to display such information to the general public in all branches and other banking outlets. You would recall that we agreed at an earlier Bank Managers’ Meeting to follow this practice, but it is observed that not all banks adequately do so. All licensed commercial banks and specialised banks are informed that the display of interest rates and exchange rates of banks should commence from 1st January, 2004 the latest. A format suggested for the display of information is enclosed herewith. Please forward a copy of the list of interest rates and exchange rates displayed to this Department periodically as and when it is revised. Yours faithfully, Director of Bank Supervision Suggested Format for the Display of Interest Rates and Exchange Rates Bank ……………………………… Interest Rates on Deposits [per cent per annum] Rate as at …… Savings Deposits Fixed Deposits - 12 months Interest payable monthly Interest payable at maturity NRFC Savings Deposits - US Dollar
- Sterling Pound
NRFC One Year Fixed Deposits - US Dollar
- Sterling Pound
Interest Rates on Advances [per cent per annum] Rate as at …… Export Bill Finance - Rupee Facilities Import Bill Finance - Rupee Facilities Lease Finance Lending to Medium Scale Industries (up to 5 years) Residential Housing Pawning US Dollar Loans to Exporters Rate : Rupees per unit of Foreign Currency as at ……… Exchange Rates Currency Traveller’s Cheques Buying Rate Selling Rate Buying Rate Selling Rate US Dollar Sterling Pound Yen Euro Australian Dollar Singapore Dollar Indian Rupee

268 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Ref. No. : 02 / 04/003 / 0401/001 Bank Supervision Department 24 March 2006 To : CEOs of Licensed Commercial Banks and CEOs of Licensed Specialised Banks Dear Sirs, INADEQUATE / INCORRECT DISCLOSURES / PRESS STATEMENTS BY BANKS As intimated to you at the Chief Executive Officers meeting held on 23 March 2006, there have been several instances where banks have attempted to mislead the public by publishing incorrect statements/data or by not publishing certain aspects of information with regard to non-compliance with statutory regulations. Such attempts by banks to mislead the general public totally negate the efforts of the regulator to educate the public on the true state of the banks in the industry, and it would be futile to further enhance our efforts in this regard, if immediate action is not taken by the regulator to stop such deception. The Central Bank of Sri Lanka (CBSL) will be faulted for permitting the banks to misrepresent their financial condition to the public. It is incumbent on bank management, in the discharge of their fiduciary responsibility, to project the true picture of their financial condition to the public. Therefore, in the interest of providing accurate information to the public for making informed decisions, all banks are required, in making statements to the press, and in publishing the financial results of banks, to ensure that adequate publicity is given to non-compliance, if any, with the prudential ratios and the measures being taken by the bank to meet these ratios. Where banks, which are not compliant with regulatory requirements, do not make such disclosures to the public in press interviews or statements, the CBSL, as the regulator will be compelled to correct such information in the public domain. Yours faithfully, Sgd, Director of Bank Supervision Copy to : Secretary-General, SLBA

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 269 Ref. No. : 02 / 04/003/0401/001 Bank Supervision Department 21 February 2006 To : The CEOs of all Licensed Commercial Banks and Licensed Specialised Banks Dear Sirs, PUBLICATION OF AUDITED FINANCIAL STATEMENTS OF BANKS IN THE PRESS Further to the circulars issued with regard to the publication of financial statements of banks in the press, dated 30 September 2005 and 26 January 2006. Considering the representations made by the banks with regard to the practical difficulties faced by them with regard to the time period for publication of audited financial statements of banks in the press, in order to qualify for exemption from publishing the last quarter unaudited results, all licensed banks are informed as follows:
o If the bank publishes its annual audited financial statements within three months from the end of the financial year, the requirement to publish the financial statements for the fourth quarter in terms of the circular dated 30 September 2005 would not be mandatory. o The licensed commercial banks incorporated abroad may publish the latest available key performance indicators relating to the global operations of such bank on a quarterly basis, and the ratios based on audited financial information along with the audited financial statements of the parent bank. o With regard to the format for publication of audited financial statements, all banks should use the format issued on 30 September 2005 for the publication of quarterly financial statements. Yours faithfully, Sgd, Director of Bank Supervision (Formats referred to in the Circular are replaced with Circular No. 02/17/900/0001/04 dated 11.02.2013)

270 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Ref. No. : 02 / 04/003 / 0401/001 Bank Supervision Department 26 January 2006 To : CEOs of all Licensed Banks Dear Sirs, PUBLICATION OF QUARTERLY FINANCIAL STATEMENTS OF BANKS IN THE PRESS By circular No. 02/04/003/0401/001 dated 30 September 2005, all banks were informed of the requirements with regard to the publication of quarterly financial statements of banks in the press, which was applicable for the publication of financial statements from the 3rd Quarter of 2005 onwards. Several discrepancies were observed with regard to the publications in respect of the 3rd Quarter of
2005. Therefore all banks are informed that they should comply with all the requirements in the above
circular. The following points should be noted:

The time frame for publication is within two months from the end of each quarter.
The publication should be made in a Sinhala, English and Tamil daily newspaper – This
requirement is to inform the public of the financial condition of the banks and is uniformly applicable to all banks.
The format specified by the circular should be conformed to. If a ‘nil’ balance has to be
reported in respect of an item in the format, such items should be reported as ‘nil’, instead of deleting the entire row from the format.
The key performance indicators should be computed according to the definitions provided
by the BSD.
With regard to the publication of accounts by licensed commercial banks incorporated abroad, the publication of global accounts is mandatory on an annual basis, while the banks may publish information relating to the latest available period on a quarterly basis. However, all such banks should publish quarterly, the selected performance indicators such as capital adequacy ratio, return on assets, return on equity, and the non-performing advances ratio of the parent bank for the respective quarter. Yours faithfully, Sgd, Director of Bank Supervision

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 271 Ref. No. : 02 / 04/003/0401/001 Bank Supervision Department 30 September 2005 To : The CEOs of all Licensed Commercial Banks and Licensed Specialised Banks Dear Sirs, PUBLIC DISCLOSURE BY PUBLICATION OF QUARTERLY FINANCIAL STATEMENTS OF BANKS IN THE PRESS As discussed at the meeting of the CEOs of LCBs held on 28 July 2005, the format for publication of quarterly financial statements in the press has been revised in consultation with the representative of banks, and is attached herewith, along with the suggested Sinhala and Tamil translations.
2. The revision is aimed at increasing the transparency of banking operations, and to align the
publication requirements with those of other regulators. Accordingly, the formats have been drafted incorporating the disclosure requirements of the Securities and Exchange Commission (SEC) (in respect of listed banks) and the Sri Lanka Accounting Standards, as far as possible. In addition, selected performance indicators, including key prudential ratios have been included, as agreed with the banks.
3. The information published should be in respect of the entire bank, i.e. including the off-shore
banking unit and in the case of LCBs incorporated in Sri Lanka, any branches abroad.
4. The new format contains two parts viz;

Part I : The format for the summarized balance sheet, income statement, and the statement of
changes in equity and reserves and selected performance indicators.
Part II : Instructions for Preparation of Bank Accounts for publication in the press.

Balance Sheet information should be reported as at end of the relevant quarter. Comparative figures
to be published should be based on the audited financial statements for the previous financial year.
5.1 The reporting period in respect of the income statement should be the cumulative position as at the
end of the relevant quarter in the financial year. Comparative figures should be in respect of the same reporting period in the previous financial year.
5.2 In the case of selected performance indicators, the relevant ratios as at the reporting date should be
reported while the comparative ratios should be based on the audited financial statements for the previous financial year.
The publication should be made within two months from the end of each quarter, at least once in
an English, Sinhala and Tamil newspaper. If the bank publishes its annual audited financial statements within two months from the end of the financial year, the requirement to publish the financial statements for the fourth quarter in terms of these instructions would not be mandatory.

272 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
7. The licensed commercial banks incorporated abroad may report information pertaining to
the global operations of the parent bank, in the column for reporting the information on the Group. Such information may be reported in the currency of the home country or in US Dollars. In view of the heterogeneous character of group accounts of foreign banks, the banks are requested to make every endeavour to publish all items given in the agreed format.
8. The disclosure requirements contained herein specify the minimum requirements to be adopted
by the banks and all banks are encouraged to make additional disclosures for the benefit of the general public. In addition, the banks listed on the Colombo Stock Exchange should comply with any additional regulations imposed by the SEC with regard to publication of financial information.
9. The revised publication format will be effective for publication of banks’ financial statements from
the 3rd quarter of 2005 onwards.
9.1 The codes indicated in the formats are for cross reference with the definitions in the instructions and
not for publication.
10. The circular dated 30 January 2003 on the publication of quarterly financial statements is hereby
rescinded.
Please acknowledge receipt of this circular.
Yours faithfully,
Sgd, Director of Bank Supervision

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 273 Our Ref. : 02/17 / 900/0001/ 04 Bank Supervision Department 11 February 2013 To : CEOs of all Licensed Commercial Banks and Licensed Specialised Banks Dear Sir / Madam, PUBLIC DISCLOSURE BY PUBLICATION OF QUARTERLY FINANCIAL STATEMENTS OF BANKS IN THE PRESS We refer to our previous correspondence and discussions on the above and enclose the new format for the publication of quarterly financial statements of licensed commercial banks and licensed specialised banks in the press effective from the 1st quarter of 2013. Accordingly, format referred to in the paragraph No. 4 of the Circular dated 30 September 2005 on the above is replaced with the format in Annex. Yours faithfully, (Mrs.) T M J Y P Fernando Director of Bank Supervision Encl. Copy to : The Secretary-General, Sri Lanka Banks’ Association (Guarantee) Ltd.

274 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Annex
SPECIFIED FORMAT FOR THE PUBLICATION OF
QUARTERLY FINANCIAL STATEMENTS OF
LICENSED COMMERCIAL BANKS AND LICENSED SPECIALISED BANKS IN THE PRESS ………….. BANK INCOME STATEMENT FOR THE PERIOD ENDED …………. In Rupees Thousands Bank Group Current Period Previous Period Current Period Previous Period From DD/MM/YY To DD/MM/YY From DD/MM/YY To DD/MM/YY From DD/MM/YY To DD/MM/YY From DD/MM/YY To DD/MM/YY Interest income Interest expenses Net interest income Fee and commission income Fee and commission expenses Net fee and commission income Net gain / (loss) from trading Net gain / (loss) from financial instruments designated at fair value through profit or loss Net gain / (loss) from financial investments Other operating income (net) Total operating income Impairment for loans and other losses Individual impairment Collective impairment Others Net operating income Personnel expenses Depreciation and amortisation Other expenses Operating profit/(loss) before value added tax (VAT) Value added tax (VAT) on financial services

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 275 Bank Group From DD/MM/YY To DD/MM/YY From DD/MM/YY To DD/MM/YY From DD/MM/YY To DD/MM/YY From DD/MM/YY To DD/MM/YY Profit / (loss) for the period Other comprehensive income, net of tax Changes in revaluation surplus Actuarial gains and losses on defined benefit plans Gains and losses (arising from translating the financial statements of a foreign operation) Gains and losses on re-measuring available-for-sale financial assets Gains and losses on cash flow hedges Others Share of profits of associates and joint ventures Less: Tax expense/(income) relating to components of other comprehensive income Other comprehensive income for the period, net of taxes Total comprehensive income for the period Attributable to:
Owners of the parent
Non-controlling interests
………….. BANK
STATEMENT OF COMPREHENSIVE INCOME
FOR THE PERIOD ENDED ………….
In Rupees Thousands
Operating profit/(loss) after value added tax (VAT) Share of profits of associates and joint ventures Profit/(loss) before tax Tax expenses Profit/(loss) for the period Profit attributable to:
Owners of the parent
Non-controlling interests
Earnings per share on profit
Basic earnings per ordinary share
Diluted earnings per ordinary share
(Contd.)

276 Directions, Determinations, and Circulars issued to Licensed Specialised Banks ………….. BANK STATEMENT OF FINANCIAL POSITION AS AT …………. In Rupees Thousands Bank Group Current Period Previous Period Current Period Previous Period As at DD/MM/YY As at DD/MM/YY As at DD/MM/YY As at DD/MM/YY Assets Cash and cash equivalents Balances with central banks Placements with banks Derivative financial instruments Other financial assets held-for-trading Financial assets designated at fair value through profit or loss Loans and receivables to banks Loans and receivables to other customers Financial investments – Available-for-sale Financial investments – Held-to-maturity Investments in subsidiaries Investments in associates and joint ventures Property, plant and equipment Investment properties Goodwill and intangible assets Deferred tax assets Other assets Total assets Liabilities Due to banks Derivative financial instruments Other financial liabilities held-for-trading Financial liabilities designated at fair value through profit or loss Due to other customers Other borrowings Debt securities issued Current tax liabilities Deferred tax liabilities Other provisions Other liabilities Due to subsidiaries Subordinated term debts Total liabilities

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 277 ………….. BANK STATEMENT OF CHANGES IN EQUITY FOR THE PERIOD ENDED …………. BANK / GROUP In Rupees Thousands Stated capital/ Assigned capital Reserves Ordinary voting shares Ordinary non-voting shares Assigned capital Reserve fund Revaluation reserve Retained earnings Other reserves Total Non-controlling interest Total equity Balance as at DD/MM/YY (Opening balance) Total comprehensive income for the year Profit/(loss) for the year Other comprehensive income (net of tax) Total comprehensive income for the year Transactions with equity holders, recognised directly in equity Share issue/increase of assigned capital Share options exercised Bonus issue Rights issue Transfers to reserves during the period Dividends to equity holders Profit transferred to head office Gain/(loss) on revaluation of Property, Plant and Equipment (if cost method is adopted) Others (Please specify) Total transactions with equity holders Balance as at DD/MM/YY (Closing balance) (Contd.) Equity Stated capital/Assigned capital Statutory reserve fund Retained earnings Other reserves Total shareholders’ equity Non-controlling interests Total equity Total equity and liabilities Contingent liabilities and commitments Memorandum Information Number of Employees Number of Branches Note: Amounts stated are in net of impairment and depreciation

278 Directions, Determinations, and Circulars issued to Licensed Specialised Banks ………….. BANK STATEMENT OF CASH FLOWS FOR THE PERIOD ENDED …………. In Rupees Thousands Bank Group Current Period Previous Period Current Period Previous Period DD/MM/YY Cash flows from operating activities Profit before tax Adjustment for :
Non-cash items included in profits before tax
Change in operating assets
Change in operating liabilities
Net gains from investing activities
Share of profits in associates and joint ventures Dividend income from subsidiaries and associates Interest expense on subordinated debt Others (please specify) Contribution paid to defined benefit plans Tax paid Net cash generated from operating activities Cash flows from investing activities Purchase of property, plant and equipment Proceeds from the sale of property, plant and equipment Purchase of financial investments Proceeds from the sale and maturity of financial investments Net purchase of intangible assets Net cash flow from acquisition of investment in subsidiaries and associates Net cash flow from disposal of subsidiaries Proceeds from disposal of associates and joint ventures Dividends received from investment in subsidiaries and associates Others (please specify) Net cash (used in)/from investing activities Cash flows from financing activities Net proceeds from the issue of ordinary share capital Net proceeds from the issue of other equity instruments Net proceeds from the issue of subordinated debt Repayment of subordinated debt Interest paid on subordinated debt Dividend paid to non-controlling interest Dividend paid to shareholders of the parent company Dividend paid to holders of other equity instruments Others (please specify) Net cash from financing activates Net increase/(decrease) in cash & cash equivalents Cash and cash equivalents at the beginning of the period Exchange difference in respect of cash & cash equivalent Cash and cash equivalents at the end of the period Note: Banks have the option to use one of the two methods specified in LKAS 7 for the preparation of the statement of cash flows

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 279 ………….. BANK ANALYSIS OF FINANCIAL INSTRUMENTS BY MEASUREMENT BASIS AS AT …………. In Rupees Thousands a. Bank – Current period HFT Designated at fair value HTM Amortised cost AFS Hedging Total ASSETS Cash and cash equivalents Balances with central banks Placements with banks Derivative financial instruments Other financial assets at fair value through profit or loss Loans and receivables to banks Loans and receivables to other customers Financial investments Total financial assets HFT Designated at fair value Amortised cost Hedging Total LIABILITIES Due to banks Derivative financial instruments Other financial liabilities at fair value through profit or loss Due to other customers Other borrowings Debt securities issued Total financial liabilities HFT – Held for trading Designated at fair value – Designated at fair value through profit or loss Amortised cost – Loans and receivables/deposits at amortised cost HTM – Held-to-maturity AFS – Available-for-sale Hedging – Instruments of fair value and cash flow hedging b. Bank – Previous period as above
c. Group – Current period as above
d. Group – Previous period as above

280 Directions, Determinations, and Circulars issued to Licensed Specialised Banks ………….. BANK SELECTED PERFORMANCE INDICATORS (AS PER REGULATORY REPORTING) AS AT …………. Item Bank Group DD/MM/YY Regulatory Capital Adequacy Core Capital (Tier 1 Capital), Rs. ’000 Total Capital Base, Rs. ’000 Core Capital Adequacy Ratio, as % of Risk Weighted Assets (Minimum Requirement, 5%) Total Capital Adequacy Ratio, as % of Risk Weighted Assets (Minimum Requirement, 10%) Assets Quality (Quality of Loan Portfolio) Gross Non-Performing Advances Ratio, % (net of interest in suspense) Net-Non Performing Advances, % (net of interest in suspense and provision) Profitability Interest Margin, % Return on Assets (before Tax), % Return on Equity, % Regulatory Liquidity Statutory Liquid Assets, Rs. ’000 Statutory Liquid Assets Ratio, % (Minimum Requirement, 20%) Domestic Banking Unit Off-Shore Banking Unit CERTIFICATION:
We, the undersigned, being the Chief Executive officer and the Financial Controller / Compliance Officer of …………………… Bank certify jointly that:
(a) the above statements have been prepared in compliance with the format and definitions prescribed by the Central Bank of Sri Lanka; (b) the information contained in these statements have been extracted from the unaudited financial statements of the bank unless indicated as audited. (Name) (Name) (Sgd.) Chief Executive Officer (Sgd.) Financial Controller or Compliance Officer Date: DD/MM/YY Date: DD/MM/YY

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 281 Ref. : 02 /17 / 900 / 0001/004 Bank Supervision Department 11 October 2013 To : CEOs of all Licensed Commercial Banks and Licensed Specialised Banks Dear Sir / Madam, ADDITIONAL QUARTERLY DISCLOSURE IN THE PRESS AND ON THE WEBSITES Reference our Circulars dated 11 February 2013 and 17 September 2013 on Public Disclosure by Publication of Quarterly Financial Statements of Banks in the Press and Publication of Financial Statements and Other Disclosures on the Websites, respectively. Every bank shall ensure additional disclosures on the following items in their quarterly publications in the press and on their respective websites, from 3rd quarter of 2013 as given in Annex.

Loans and receivables to other customers
Loans and receivables to other customers – By product
Movements in individual and collective impairment during the period for loans and receivables
to other customers
Dues to other customers – By product
Accordingly, you are requested to take necessary measures to comply with the above. Yours faithfully, (Mrs.) T M J Y P Fernando Director of Bank Supervision Encl.

282 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Annex
ADDITIONAL QUARTERLY DISCLOSURES IN THE PRESS AND ON THE WEBSITES

Loans and Receivables to Other Customers
In Rupees Thousand
Bank Group
Current
Period
Previous
Period
Current
Period
Previous
Period
As at
DD/MM/YY
As at
DD/MM/YY
As at
DD/MM/YY
As at
DD/MM/YY
Gross loans and receivables
(Less): Individual impairment
Collective impairment
Net loans and receivables including those designated at fair value through profit or loss (Less): Loans and receivables designated at fair value through profit or loss Net loans and receivables
Loans and Receivables to Other Customers – By product
In Rupees Thousand
Bank Group
Current
Period
Previous
Period
Current
Period
Previous
Period
As at
DD/MM/YY
As at
DD/MM/YY
As at
DD/MM/YY
As at
DD/MM/YY
By product-Domestic Currency
Overdrafts
Term loans
Lease rentals receivable
Credit cards
Pawning
Other loans (Please specify)
Sub total
By product-Foreign Currency
Overdrafts
Term loans
Other loans (Please specify)
Sub total
Total

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 283
3) Movements in Individual and Collective Impairment during the period for
Loans and Receivables to Other Customers
In Rupees Thousand
Bank Group
Current
Period
Previous
Period
Current
Period
Previous
Period
As at
DD/MM/YY
As at
DD/MM/YY
As at
DD/MM/YY
As at
DD/MM/YY
Individual impairment
Opening balance at DD/MM/YY
Charge/(Write back) to income statement
Write-off during the year
Other movements
Closing balance at DD/MM/YY
Collective impairment
Opening balance at DD/MM/YY
Charge/(Write back) to income statement
Other movements
Closing balance at DD/MM/YY
Total impairment
4) Due to Other Customers – By product
In Rupees Thousand
Bank Group
Current
Period
Previous
Period
Current
Period
Previous
Period
As at
DD/MM/YY
As at
DD/MM/YY
As at
DD/MM/YY
As at
DD/MM/YY
By product-Domestic Currency
Demand deposits (current accounts)
Savings deposits
Fixed deposits
Other deposits (Please specify)
Sub total
By product- Foreign Currency
Demand deposits (current accounts)
Savings deposits
Fixed deposits
Other deposits (Please specify)
Sub total
Total

284 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Ref. No. : 02/04/004/0002/001 Bank Supervision Department 8th Floor, Renuka Building 41, Janadhipathi Mawatha Colombo 01. 15th December 1999 To : All Licensed Specialised Banks Dear Sir, PRESCRIBED ACCOUNTING FORMAT FOR THE PUBLICATIONS OF ANNUAL AUDITED ACCOUNTS OF LICENSED SPECIALISED BANKS We enclose herewith the Prescribed Accounting Format specified by the Monetary Board, in terms of Section 38(3) of the Banking Act, No.30 of 1988 as amended by Section 76(H) of the Banking (Amendment) Act, No.33 of 1995, for the publication of annual audited accounts of Licensed Specialised Banks (LSBs). All LSBs are required to publish their annual audited accounts for the accounting periods ending on or after 31.12.1999 in the enclosed Prescribed Accounting Format. Yours faithfully, Sgd. Ms. C. I. Fernando Director of Bank Supervision (Formats referred to in the Circular are replaced with Circular No. 02/17/900/0001/04 dated 11.02.2013)

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 285 Ref. No. : 02 / 17/900/0001/04 Bank Supervision Department 11 February, 2013 To : CEOs of all Licensed Commercial Banks and Licensed Specialised Banks Dear Sir / Madam, PREPARATION, PRESENTATION AND PUBLICATION OF ANNUAL AUDITED ACCOUNTS OF BANKS We refer to our previous correspondence and discussions on the above and enclose the new format for the preparation, presentation and publication of annual audited accounts of licenced commercial banks and licensed specialised banks effective from the financial reporting periods beginning on or after 1 January 2012. Accordingly, formats referred to in the Circulars dated 02 June 1998 and 15 December 1999 on preparation of annual audited accounts of licensed commercial banks and licensed specialised banks, respectively, are replaced with the format in Annex. Yours faithfully, (Mrs.) T M J Y P Fernando Director of Bank Supervision Encl. Copy to : The Secretary-General, Sri Lanka Banks’ Association (Gurantee) Ltd. Panel of Auditors

286 Directions, Determinations, and Circulars issued to Licensed Specialised Banks SPECIFIED FORMAT FOR THE PREPARATION OF ANNUAL FINANCIAL STATEMENTS OF LICENSED COMMERCIAL BANKS AND LICENSED SPECIALISED BANKS
Annex

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 287 Financial Statements
Table of Contents
Financial Statements
Income Statement
Statement of Comprehensive Income
Statement of Financial Position
Statement of Changes in Equity
Statement of Cash Flows
Notes to the Financial Statements

Corporate Information
Accounting Policies
Segment Information
Income Statement
Net Interest Income
Net Fee and Commission Income
Net Gain/(Loss) from Trading
Net Gain/(Loss) from Financial Instruments Designated at Fair Value through Profit or Loss
Net Gain/(Loss) from Financial Investments
Other Operating Income (net)
Impairment for Loans and Other Losses
Personnel Expenses
Other Expenses
Tax Expenses
Earnings Per Share
Statement of Financial Position: Assets
Analysis of Financial Instruments by Measurement Basis
Cash and Cash Equivalents
Balances with Central Banks
Placements with Banks
Derivative Financial Instruments
Other Financial Assets at Fair Value through Profit or Loss
Loans and Receivables to Banks
Loans and Receivables to Other Customers
Financial Investments - Available-for-Sale
Financial Investments - Held-to-Maturity
Investments in Subsidiaries
Investments in Associates and Joint Ventures
Property, Plant and Equipment
Investment Properties
Goodwill and Intangible Assets
Deferred Tax Assets/Liabilities
Other Assets

288 Directions, Determinations, and Circulars issued to Licensed Specialised Banks Statement of Financial Position: Liabilities
32. Due to Banks
33. Derivative Financial Instruments
34. Other Financial Liabilities at Fair Value through Profit or Loss
35. Due to Other Customers
36. Other Borrowings
37. Debt Securities Issued
38. Other Provisions
39. Other Liabilities
40. Due to Subsidiaries
41. Subordinated Term Debts
Statement of Financial Position: Capital and Reserves
42. Stated Capital/Assigned Capital
43. Statutory Reserve Fund
44. Retained Earnings
45. Other Reserves
46. Non-controlling Interests
Off-Balance Sheet Information
47. Contingent Liabilities and Commitments
Other Disclosures
48. Related Party Disclosures
49. Net Assets Value per Ordinary Share
Statement of Cash Flows
50. Non-Cash items included in Profit Before Tax
51. Changes in Operating Assets
52. Changes in Operating Liabilities
Other Disclosure Requirements

Information about the significance of financial instruments for financial position and performance
Information about the nature and extent of risks arising from financial instruments
Other disclosures

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 289 INCOME STATEMENT FOR THE YEAR ENDED DD MM YYYY In Rupees Million Note Bank Group 20XX Interest income Interest expenses Net interest income 04 Fee and commission income Fee and commission expenses Net fee and commission income 05 Net gain / (loss) from trading 06 Net gain / (loss) from financial instruments designated at fair value through profit or loss 07 Net gain / (loss) from financial investments 08 Other operating income (net) 09 Total operating income Impairment for loans and other losses 10 Net operating income Personnel expenses 11 Other expenses 12 Operating profit/(loss) before value added tax (VAT) Value added tax (VAT) on financial services Operating profit/(loss) after value added tax (VAT) Share of profits of associates and joint ventures Profit / (loss) before tax Tax expenses 13 Profit / (loss) for the year Profit attributable to:
Owners of the parent
Non-controlling interests
Earnings per share on profit 14
Basic earnings per ordinary share
Diluted earnings per ordinary share

290 Directions, Determinations, and Circulars issued to Licensed Specialised Banks STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED DD MM YYYY In Rupees Million Note Bank Group 20XX Profit / (loss) for the year Other comprehensive income, net of tax Changes in revaluation surplus Actuarial gains and losses on defined benefit plans Gains and losses (arising from translating the financial statements of a foreign operation) Gains and losses on re-measuring available-for-sale financial assets Gains and losses on cash flow hedges Others Share of profits of associates and joint ventures Less: Tax expense/(income) relating to components of other comprehensive income Other comprehensive income for the year, net of taxes Total comprehensive income for the year Attributable to:
Owners of the parent
Non-controlling interests

Directions, Determinations, and Circulars issued to Licensed Specialised Banks 291 STATEMENT OF FINANCIAL POSITION AS AT DD MM YYYY In Rupees Million Note Bank Group 20XX Assets Cash and cash equivalents 16 Balances with central banks 17 Placements with banks 18 Derivative financial instruments 19 Other financial assets held-for-trading 20 Financial assets designated at fair value through profit or loss 20 Loans and receivables to banks 21 Loans and receivables to other customers 22 Financial investments – Available-for-sale 23 Financial investments – Held-to-maturity 24 Investments in subsidiaries 25 Investments in associates and joint ventures 26 Property, plant and equipment 27 Investment properties 28 Goodwill and intangible assets 29 Deferred tax assets 30 Other assets 31 Total assets Liabilities Due to banks 32 Derivative financial instruments 33 Other financial liabilities held-for-trading 34 Financial liabilities designated at fair value through profit or loss 34 Due to other customers 35 Other borrowings 36 Debt securities issued 37 Current tax liabilities Deferred tax liabilities 30 Other provisions 38 Other liabilities 39 Due to subsidiaries 40 Subordinated term debts 41 Total liabilities Equity Stated capital/Assigned capital 42 Statutory reserve fund 43 Retained earnings 44 Other reserves 45 Total equity of the owners of the parent Non-controlling interests 46 Total equity Total equity and liabilities Contingent liabilities and commitments 47

292 Directions, Determinations, and Circulars issued to Licensed Specialised Banks STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DD MM YYYY BANK / GROUP In Rupees Million Stated capital/ Assigned capital Reserves Ordinary voting shares Ordinary non-voting shares Assigned capital Reserve fund Revaluation reserve Retained earnings Other reserves Total Non-controlling interest Total equity Balance as at DD/MM/YY (Opening balance) Total comprehensive income for the year Profit/(loss) for the year Other comprehensive income (net of tax) Total comprehensive income for the year Transactions with equity holders, recognised directly in equity Share issue/increase of assigned capital Share options exercised Bonus issue Rights issue Transfers to reserves during the period Dividends to equity holders Profit transferred to head office Gain/(loss) on revaluation of Property, Plant and Equipment (if cost method is adopted) Others (Please specify) Total transactions with equity holders Balance as at DD/MM/YY (Closing balance)

Directions, Determinations and Circulars Issued to Licensed Specialised Banks up to 30 November 2013

Lineage: In force

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