Directions, Determinations, and Circulars issued to ...

[Pages:418]Directions, Determinations, and Circulars issued to

Licensed Specialised Banks

(Inclusive of amendments made up to 30 November 2013)

Bank Supervision Department Central Bank of Sri Lanka

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

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

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

Directions, Determinations, and Circulars issued to Licensed Specialised Banks

iii

Governor's Statement

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

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

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

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

Ajith Nivard Cabraal Governor Central Bank of Sri Lanka

02 December 2013

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Directions, Determinations, and Circulars issued to Licensed Specialised Banks

Directions, Determinations, and Circulars issued to Licensed Specialised Banks

Contents

v

Page No.

1. Licensing of Banks

Determinations

1.1 Determination No. 02 of 2011 ? Annual Licence Fee

1

Circulars

1.2 Establishment of Bank Branches

2

1.3 Classification of Banking Outlets

3

2. Capital Adequacy

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

4

Directions

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

6

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

Maintenance of Capital Adequacy Ratio

68

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

for Licensed Commercial Banks and Licensed Specialised Banks

69

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

of Issued Capital Carrying Voting Rights

83

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

84

2.7 Reserve Fund

87

Circulars

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

88

2.9 Criteria for Selection of Valuers Undertaking the Revaluation of

Fixed Assets for the Computation of the Capital Adequacy Ratio

90

2.10 Enhancement of Minimum Capital Requirement of Banks

92

2.11 Interpretation of Capital Funds

96

2.12 Shipping Guarantees Issued by Banks

97

3. Credit Risk Management

Directions

3.1 Conditions for Grant of Accommodation

98

3.2 Investments in Equity

99

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

Loans and Advances, Income Recognition and Provisioning

101

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

Income Recognition and Provisioning

102

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

114

3.6 Accommodation to Directors and Related Companies

120

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

as Approved Security for Accommodation to Any Director

124

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

by Licensed Commercial Banks and Licensed Specialised Banks

125

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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

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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

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