Foreign Currency Borrowings by Licensed Banks

MONETARY BOARD CENTRAL BANK OF SRI LANKA 12 December 2017 BANKING ACT DIRECTIONS No. 07 of 2017 1 FOREIGN CURRENCY BORROWINGS BY LICENSED BANKS Foreign currency borrowings are an important source of funding for banks. However, excessive and unregulated foreign capital flows are likely to cause unwarranted macroeconomic and financial stability concerns in a country. The Monetary Board introduces a policy framework for foreign currency borrowings of licensed banks with the objectives of addressing the high dependence on foreign currency borrowings and the resulting exposure of licensed banks to foreign exchange risk and minimising the pressure on the reserves and exchange rate of the country arising from large borrowings in foreign currency. Accordingly, the Monetary Board issues Directions to licensed commercial banks (LCB) and licensed specialised banks (LSB) as follows:

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

MONETARY BOARD CENTRAL BANK OF SRI LANKA 12 December 2017 BANKING ACT DIRECTIONS No. 07 of 2017 2 4.2 The percentage of foreign currency borrowings of a licensed bank shall be based on the sum of scores assigned for each licensed bank based on the external long term credit rating and the total capital ratio of the bank as given in Tables 1 and 2 below: Table 1 – Calculation of the Score Bank’s Credit Rating Bank’s Total Capital Ratio Score Assigned to Each Cell AAA to AA- or equivalent >14.0% 3 A+ to A- or equivalent 13.6% - 14.0% 2 BBB+ to BBB- or equivalent 12.5% - 13.5% 1 Below BBB- <12.5% 0 Table 2 - Borrowing Limits as a Percentage of Total Assets Sum of Score Short-Term Total 1 - 2 1.5% 5.0% 3 - 4 1.5% 7.5% 5 - 6 1.5% 10.0% 5. Approval of the Monetary Board 5.1 Any foreign currency borrowings in excess of limits specified in Direction 4 above shall be undertaken with the prior written approval of the Monetary Board, under exceptional circumstances of national interest. 5.2 The Monetary Board may grant such approval to exceed the applicable limit of foreign currency borrowings of a licensed bank by 5% of assets, on a case-by-case basis, subject to terms and conditions it may deem fit, taking into consideration of the macroprudential aspects and provisions in Directions 6, 7 and 8 below. 5.3 Borrowings approved by the Monetary Board under the Direction 5.2 above shall be undertaken within 3 months from the date of the approval of the Monetary Board.

MONETARY BOARD CENTRAL BANK OF SRI LANKA 12 December 2017 BANKING ACT DIRECTIONS No. 07 of 2017 3 6. General Terms and Conditions 6.1 All foreign currency borrowings of a licensed bank shall be approved by the Board of Directors of the bank. 6.2 Licensed banks shall comply with all prudential requirements at all times, including, but not limited to, minimum capital under Basel III, Statutory Liquid Assets Ratios, Liquidity Coverage Ratio and Net Open Position. 6.3 Licensed banks shall hedge interest rate and foreign exchange risks and manage the maturity mismatch arising from foreign currency borrowings. 6.4 Hedging with an international counterparty is encouraged where the foreign currency borrowed is converted to another foreign currency. 6.5 Foreign currency borrowings with a maturity of less than a year shall not be utilised to grant credit facilities with a maturity of more than a year. 6.6 Licensed banks shall prove their ability to service repayments of foreign currency borrowing in a timely manner. 7. Eligible Foreign Currency Borrowings 7.1 Lender should have a good track record as a stable financial institution. Possible lenders are: (i) Multilateral Development Banks (ii) Banks with international repute (iii) Foreign Government owned or affiliated agencies (iv) Head Office and branches of foreign banks 7.2 Interest rates (inclusive of all related costs) of the borrowing shall be competitive. 7.3 Borrowings shall not be settled prior to the initial specified date of settlement and shall not carry call or put option features.

MONETARY BOARD CENTRAL BANK OF SRI LANKA 12 December 2017 BANKING ACT DIRECTIONS No. 07 of 2017 4 7.4 Bunching effect from repayments shall not arise. 7.5 Borrowings shall not result in excessive credit growth. 8. Utilisation of Foreign Currency Borrowings 8.1 Long-term foreign currency borrowings shall be utilised for lending/investment purposes in the country to: (i) fund exports, import substitution, infrastructure, government development projects and small and medium enterprises (ii) settle or retire current foreign currency loans (iii) invest in Sovereign Debt of the Government of Sri Lanka and activities of national importance 9. Application to be submitted 9.1 Licensed banks may submit a written request with following details to obtain the Monetary Board approval under Direction 5 above: (i) Profile of the Lender (ii) Features of the Loan (iii) Specific purpose/objectives with targets (iv) Performance status of existing foreign currency loans (v) Proposed risk management mechanism 10. Exclusion from the maximum limits 10.1 Foreign currency borrowings from the Head Office or any branch operating outside Sri Lanka of an LCB incorporated outside Sri Lanka will be exempted from the limits specified in Direction 4 above, provided the proceeds are used for the intended purpose the borrowing is obtained. 10.2 Borrowings utilised for investments in Development Bonds, Sovereign Bonds and Treasury Bonds issued by the Government of Sri Lanka, held to maturity for more than 3 years. 11. Interpretations 11.1 Total assets shall be the amount as per the latest audited statements. 11.2 Foreign currency shall mean any designated foreign currency.

l2Decemb er 2017 MONETARY BOARI) CENTRAL BANK OF SRI LANKA BANKING ACT DIRECTIONS No.07 of20l7 12.Implementation l2.I These Directions shall come into effect from 01 January 2018. 13. Transitional Arrangement 14. Revocation 13.1 Any licensed bank which has obtained foreign currency borrowings in excess of the maximum limit specified under Direction 4 above shall not be permitted to borrow further, until such time the outstanding amount of foreign cuffency borrowings falls below the maximum limit. 13.2 Approvals granted by the Monetary Board to a licensed bank exceed the maximum limits on foreign currency borrowings prior these Directions will lapse by 3 1 March 20 1 8. l4.l The Circular No. BD/FX/196 dated 13 January 1997 issued by the Chief Accountant is hereby revoked. fl"**- Dr. Indrajit Coomaraswamy Chairman of the Monetary Board and Governor of the Central Bank of Sri Lanka to to