Approved Securities for Accommodation Granted to Related Parties of Licensed Banks

CENTRAL BANK OF SRI LANKA 01 October 2024 BANKING ACT DETERMINATION No. 04 of 2024 1 APPROVED SECURITIES FOR ACCOMMODATION GRANTED TO RELATED PARTIES OF LICENSED BANKS The Central Bank of Sri Lanka (CBSL), with a view to mitigating potential conflicts of interest and preventing the extension of more favourable treatment to related parties of licensed commercial banks and licensed specialised banks (hereinafter referred to as licensed banks), and thereby ensuring the safety and soundness of the banking sector, by virtue of the powers conferred by Sections 47(3),(4), (5), (6) and (11B), and 76K of the Banking Act No. 30 of 1988, as amended, hereby issues this Determination on Approved Securities for Accommodation Granted to Related Parties of Licensed Banks.

1. Related Parties 1.1 The “related parties” of licensed banks for the purpose of this Determination, are as follows: (a) a director of a licensed bank; (b) close relations of such director; (c) a concern in which a director of a licensed bank has a substantial interest, being an interest acquired either before or after the appointment as a director of such licensed bank; (d) a concern in which a close relation of a director of a licensed bank has a substantial interest; (e) a chief executive officer or an officer performing executive functions of a licensed bank in respect of any accommodation granted other than accommodation granted to such officer under a scheme applicable to the employees of such licensed bank; (f) a shareholder of a licensed bank having material interest, whether individual or a concern; (g) a subsidiary or an associate company of the licensed bank;

CENTRAL BANK OF SRI LANKA 01 October 2024 BANKING ACT DETERMINATION No. 04 of 2024 2 (h) a holding company of the licensed bank including its subsidiaries, excluding the parent bank and subsidiaries of a bank incorporated outside Sri Lanka; (i) a director of a subsidiary or an associate company of the licensed bank; (j) a director of a holding company of the licensed bank and its subsidiaries; (k) a close relation of a person specified in Determinations 1.1 (e) and (f) above; (l) a concern, whose director or partner is a director of such bank; (m) a concern in which a material shareholder of a licensed bank has substantial interest; and (n) a concern in which a close relation of an individual material shareholder has substantial interest. 2. Approved Securities in respect of Accommodation granted to Related Parties 2.1 The Central Bank of Sri Lanka has approved the following securities to be obtained by a licensed bank in granting accommodation to related parties of such bank referred to in Determination 1.1 above as the case may be: (a) Guarantees, provided that the accommodation granted would not exceed 100 per cent of the Guarantee; (i) Sri Lanka Government Guarantees provided that such Guarantees are reported as liabilities in the financial statements of the Government of Sri Lanka (GOSL) (ii) Bank Guarantees (iii) Guarantees of international financial institutions such as World Bank (WB), International Monetary Fund (IMF), International Finance Corporation (IFC), Asian

CENTRAL BANK OF SRI LANKA 01 October 2024 BANKING ACT DETERMINATION No. 04 of 2024 3 Development Bank (ADB), United States Agency for International Development (USAID) (b) 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; (c) Cash deposits in any licensed bank (including deposits of third parties in the lending bank subject to obtaining consent of such party) held under lien to the order of the lending bank provided that the accommodation granted would not exceed 90 per cent of such cash deposits; (d) Gold provided that the accommodation granted would not exceed 70 per cent of the market value of such gold; (e) Immovable property held on freehold basis and on which a primary mortgage has been taken by the lending bank provided that the accommodation granted would not exceed 80 per cent of the forced sale value of such property; (f) Immovable property held on freehold basis and on which a secondary mortgage has been taken by a lending bank, subject to a primary mortgage also being obtained by the same bank provided that the total accommodation granted on the primary mortgage and the secondary mortgage does not exceed 80 per cent of the forced sale value of such property; (g) Immovable property held on leasehold basis provided that, (i) the lease has been granted by a statutory body; (ii) the unexpired period of the lease to be at least 10 years more than the tenor of the accommodation; (iii) there is no prohibition on the mortgage of the leasehold rights contained in the Deed of Lease, or if the Deed of

CENTRAL BANK OF SRI LANKA 01 October 2024 BANKING ACT DETERMINATION No. 04 of 2024 4 Lease requires the prior approval of the Lessor for the mortgage of the leasehold rights such approval has been obtained from the Lessor; (iv) a primary mortgage has been taken on the leasehold rights by the lending bank; and (v) accommodation granted does not exceed 60 per cent of the forced sale value of such leasehold property. (h) Mortgage over vehicles provided that the accommodation granted shall not exceed the applicable loan to value ratios specified in the Banking Act Directions on Loan to Value Ratios for Credit Facilities granted in respect of Motor Vehicles, for the time being in force; (i) Shares of Public Companies quoted on the Colombo Stock Exchange provided that the accommodation granted would not exceed 50 per cent of the market value of such shares and provided further that the licensed bank shall assess the market value of such shares on a semi-annual basis; (j) Unsubordinated Corporate Debentures of a third-party concern having an issuer rating between AAA and BBB￾issued by an acceptable credit rating agency provided that the accommodation granted would not exceed 50 per cent of the market value of such debentures; (k) Life Insurance Policies issued in Sri Lanka and assigned to the lending bank provided that the accommodation granted would not exceed 75 per cent of the surrender value of such policy; (l) Mortgage Stock in-Trade provided that the accommodation granted would not exceed 30 per cent of the market value of such stock-in-trade;

CENTRAL BANK OF SRI LANKA 01 October 2024 BANKING ACT DETERMINATION No. 04 of 2024 5 (m) Pledge of non-perishable goods of 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; (n) Lease-backed trust certificates/lease receivables provided that – (i) the total accommodation granted on the lease backed trust certificate/lease receivables shall not exceed 50 per cent of the value of such lease-backed trust certificates/lease receivables; (ii) the total accommodation granted on the lease-backed trust certificate/lease receivables shall not exceed 50 per cent of the aggregate amount of the total outstanding accommodation granted to the individual company; (iii) lease-backed trust certificate/lease receivables shall be based on unencumbered (performing) lease portfolio; (iv) Lease-backed trust certificates/lease receivables shall be mortgaged to the lending bank; and (v) the lending bank should be a registered establishment under the Finance Leasing Act No. 56 of 2000. (o) Corporate Guarantees of a third-party concern, provided that the accommodation granted would not exceed; (i) 80% of the Guarantee of a concern with an External Credit Rating between AAA to AA- issued by an acceptable credit rating agency. (ii) 60% of the Guarantee of a concern with an External Credit Rating between A+ to BBB- issued by an acceptable credit rating agency.

CENTRAL BANK OF SRI LANKA 01 October 2024 BANKING ACT DETERMINATION No. 04 of 2024 6 2.2 In the case of a concern, whose director or partner is a director of such licensed bank, in addition to approved securities mentioned in Determination 2.1 above, accommodation may be granted with the Loan Agreement between the borrower and the licensed bank provided that a specific condition is included in such loan agreement that the borrower undertakes to provide approved securities as specified in Determination 2.1 above, in the event of a deterioration of the credit quality depicting a significant increase in credit risk to the licensed bank, within 90 calendar days. Deterioration of credit quality shall mean downgrading of the borrower to Stage 3 in terms of the Banking Act Directions No. 13 of 2021 on “Classification, Recognition and Measurement of Credit Facilities in Licensed Banks”. 3. Interpretations 3.1 For the purpose of this Determination: (a) Acceptable credit rating agency shall mean a credit rating agency that has been recognized as an acceptable External Credit Assessment Institution by the Central Bank of Sri Lanka for the purpose of Banking Act Directions No. 01 of 2016 on “Capital Requirements under Basel III for Licensed Commercial Banks and Licensed Specialised Banks” and other related regulatory requirements pertaining to licensed banks, as amended. (b) Forced sale value shall be determined on a valid valuation report as specified in the Banking Act Directions issued by the Central Bank of Sri Lanka from time to time, on “Regulatory Framework on Valuation of Immovable Properties of Licensed Banks”.

0L October 2024 CENTRAL BAI\K OF SRI LAI\KA BANKING ACT DETERMINATION No.04 of2024 4. Regulatory Submissions 5. Revocation 4.1 Licensed banks shall submit the details of related party transactions to the Director of Bank Supervision in line with this Determination as at the end of each quarter commencing 31.12.2024, within one month in the reporting'format specified by the Central Bank of Sri Lanka. 5.1 The following Determinations are hereby revoked: (a) Banking Act Determination dated 11.02.2005 made by the Monetary Board of the Central Bank of Sri Lanka under Sections 47(3), (4), (5) and (6) of the Banking Act No. 30 of 1988, as amended, by Banking (Amendment) Act No 02 of2005. (b) Banking Act Determination No. 03 of 2009 dated 02.09.2009 on Lease-backed Trust Certificates/Lease Receivables as an Approved Security for Accommodation to any Director or Close Relation of a Director or any Concern in which the Director has Substantial Interest. ttl".-,a,A-ldA-: Dr. P Nan&fafm-eerasinghe v Chairman of the Governing Board and Governor of the Central Bank of Sri Lanka