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.
1. Licensing of Banks
 Determinations
 1.1 Determination No. 02 of 201 1 – 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 201 1 – 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 V oting Rights  83
 2.6 Direction No. 02 of 2007 – Ownership of Issued Capital Carrying V oting 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
 2.1 1  Interpretation of Capital Funds  96
 2.12 Shipping Guarantees Issued by Banks  97
3. Cr edit 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


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
 3.1 1  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 Or ganizations (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


7.2 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 Directi on 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 Pr operty
 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. 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
 1 1.1  Licensed Specialised Banks (Deposits) Directions  342
 1 1.2  Regional Develo pment Banks (Pawning) Directions 1998  344
 1 1.3  Secrecy of Banking Transactions  354
 11.4 Direction No. 08 of 201 1 – Customer Charter of Licensed Banks  355


viii Directions, Determinations, and Circulars issued to Licensed Specialised Banks
 Circulars
 1 1.5  Cap on Penal Interest Rates char ged by Licensed Banks on Loans and Advances  360
 1 1.6  Interest Rates on Credit Cards and Housing Loans  361
 1 1.7  Interest Rates on Credit Cards and Other Loans and Advances  362
 1 1.8  Extending / Restricting of Banking Hours by the Banks  363
 1 1.9  Introduction of Products based on Islamic Principles  364
 1 1.10  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 201 1 367
 12.3 Amendment to Sri Lanka Deposit Insurance Scheme Regulations, No. 01 of 201 1 368
 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 201 1 374
 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


13.9 Appointment of Compliance Officers  387
 13.10  Enhancing Lending to Agriculture Sector  389
 13.1 1  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 Staf f 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 76 D(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
1. I n terms of Section 76 D(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
2. 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 .
3. 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 Commer cial 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 Commer cial 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 76 J(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


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 Resour ce 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,


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 76 j(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 76 j(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 76 j(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)  T he 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 lic ensed specialised bank has failed to comply with these Directions, such


3 Where a lic ensed 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)  Al l 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 76 j 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
1. Introduction
 1.1 Approaches to Implementation of the Basel II Framework
 1.2 An initial step towards adopting Basel II
2. Scope of Application
3. Minimum Capital Ratio
4. Reporting Format
5. Submission dates
6. 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
1. Introduction
1.1 Appr oach 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 Bas el 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.
2. 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.
3. 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.


2008.
4. 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.
5. 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 quart er.
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 Cor e Capital (Eligible Tier I)
 (WBRC 1 1.1.1.0.0.0)
 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 1 1.1.2.0.0.0)
 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  T otal Risk-Weighted Amount
 (WBRC 1 1.1.3.0.0.0)
 T otal risk-weighted assets are determined by adding the resulting figures to the sum of risk-
weighted assets for credit risk, market risk and operational risk.
 T otal 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 1 1.1.3.1.0.0 + 11.1.3.2.0.0 + 11.1.3.3.0.0)
6.1.3.1  Risk-W eighted Amount for Credit Risk
 (WBRC 1 1.1.3.1.0.0)


6.1.3.1  Risk-W eighted Amount for Credit Risk
 (WBRC 1 1.1.3.1.0.0)
 The amount must agree with item 6.4.3.1 of Part III ( a) Computation of risk-weighted
amount for credit risk below.
 [=WBRC1 1.3.1.0.0.0 of Part III ( a)]
6.1.3.2  Risk-W eighted Amount for Market Risk
 (WBRC 1 1.1.3.2.0.0)
 T he 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-W eighted Amount for Operational Risk
 (WBRC 1 1.1.3.3.0.0)
 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  Cor e Capital (Tier I) Ratio, %
 (WBRC 1 1.1.4.0.0.0)
 Eligible core capital (6.1.1) divided by Total risk-weighted amount (6.1.3)
 (WBRC 1 1.1.1.0.0.0/11.1.3.0.0.0)*100
6.1.5  T otal Capital Ratio, %
 (WBRC 1 1.1.5.0.0.0)
 T otal capital base (6.1.2) divided by Total risk-weighted amount (6.1.3)
 (WBRC 1 1.1.2.0.0.0/11.1.3.0.0.0)*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 (T ier 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 Cor e Capital (Eligible Tier I)
 (WBRC 1 1.2.1.1.0.0)
 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 1 1.2.1.1.1.0 - 11.2.1.1.2.0)
6.2.2.2  Core Capital (Tier I)
 (WBRC 1 1.2.1.1.1.0)
 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).
 T he amount must agree with the sum of the following elements from 6.2.2.2.1 to
6.2.2.2.10
 (WBRC 1 1.2.1.1.1.1 to 11.2.1.1.1.10)
6.2.2.2.1  Paid-up Ordinary Shar es/Assigned Capital
 (WBRC 1 1.2.1.1.1.1)
 In the case of LCBs and LSBs incorporated in Sri Lanka:  Issued and fully


(WBRC 1 1.2.1.1.1.1)
 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-r edeemable Preference Shares
 (WBRC 1 1.2.1.1.1.2)
 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  Shar e Premium
 (WBRC 1 1.2.1.1.1.3)
 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 1 1.2.1.1.1.4 )
 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 Pr ofits/(Accumulated Losses)
 (WBRC 1 1.2.1.1.1.5)
 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 1 1.2.1.1.1.6)
 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 1 1.2.1.1.1.7)
 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 Curr ent Year’s Profit/(Loss)
 (WBRC 1 1.2.1.1.1.8)
 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


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 Inter ests (consistent with the above capital constituents)
 (WBRC 1 1.2.1.1.1.9)
 Minority interests on consolidation of capital items.
6.2.2.2.10  Perpetual Debt Capital Instruments
 (WBRC 1 1.2.1.1.1.10)
 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. S uch 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) T otal 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 – Cor e Capital (Tier I)
 (WBRC 1 1.2.1.1.2.0)
 The amount must agree with the sum of the following items from 6.2.2.3.1 to 6.2.2.3.9
 (WBRC 1 1.2.1.1.2.1 to 11.2.1.1.2.9)
6.2.2.3.1  Goodwill
 (WBRC 1 1.2.1.1.2.1)
 Report the amount of goodwill as shown in the balance sheet.
6.2.2.3.2  Net Deferred Tax
 (WBRC 1 1.2.1.1.2.2 )
 Net debit balance of deferred tax.
6.2.2.3.3  Other  Intangible Assets
 (WBRC 1 1.2.1.1.2.3)
 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 1 1.2.1.1.2.4)
6.2.2.3.5  Amount due fr om 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)


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 fr om 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 1 1.2.1.1.2.8)
 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 1 1.2.1.1.2.9)
 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 (T ier II)
 (WBRC 1 1.2.1.2.1.0)
 The amount must agree to sum of following items from 6.2.2.4.1 to 6.2.2.4.5
 (WBRC 1 1.2.1.2.1.1 to 11.2.1.2.1.5)
6.2.2.4.1  Revaluation Reserves (appr oved by CBSL)
 (WBRC 1 1.2.1.2.1.1)
 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 Pr ovisions
 (WBRC 1 1.2.1.2.1.2)
 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 1 1.2.1.2.1.3)


6.2.2.4.3  Hybrid Capital Instruments (Debt/Equity)
 (WBRC 1 1.2.1.2.1.3)
 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) A vailable 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 Inter ests arising from Preference Shares
 (WBRC 1 1.2.1.2.1.4)
 Minority interests arising from the consolidation of preference  shares.
6.2.2.4.5  Appr oved Subordinated Term Debt
 (WBRC 1 1.2.1.2.1.5)
 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 1 1.2.1.2.2.0)
 The amount must agree to sum of following items from 6.2.2.5.1 to 6.2.2.5.2
 (WBRC 1 1.2.1.2.2.1 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 1 1.2.1.2.2.1)
 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 1 1.2.1.2.2.2)
 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.


capital instruments or subordinated term debt in other banks and financial
institutions.
6.2.2.6  T otal Supplementary Capital
 (WBRC 1 1.2.1.2.0.0)
 The amount must agre e to Supplementary Capital (Tier II)  (6.2.2.4) less Tier II
deductions (6.2.2.5).
 (1 1.2.1.2.1.0 - 11.2.1.2.2.0)
6.2.2.7  Eligible Supplementary Capital
 (WBRC 1 1.2.1.3.0.0)
 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 1 1.2.1.4.0.0)
 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  Appr oved Short Term Subordinated Debt
 (WBRC 1 1.2.1.4.1.0)
 Total amount of approved short-term subordinated debts under above
conditions.
6.2.2.8.2  Eligible Supplementary Capital (Eligible Tier III) - Utilised
 (WBRC 1 1.2.1.4.2.0)
 The amount must agree with item 6.3.3.6.1 of Part II ( b) subject to the
following conditions.
 [=WBRC 1 1.2.2.6.1.0 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) T ier 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 1 1.2.1.5.0.0)
 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 1 1.2.1.1.0.0 + 11.2.1.3.0.0 + 11.2.1.4.2.0)


(WBRC 1 1.2.1.1.0.0 + 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 1 1.2.1.1.2.8, 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-T erm Subordinated Debt Covering Market Risk (Tier III Capital)
 F or 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) T ier 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) T ier 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.


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 1 1.2.2.5.1.0)
6.3.3.1  T otal Risk Weighted Assets (RWA)
 (WBRC 1 1.2.2.1.0.0)
 The amount must agree with the sum of the following items from 6.3.3.1.1 to 6.3.3.1.2
 (WBRC 1 1.2.2.1.1.0 to 11.2.2.1.2.0)
6.3.3.1.1  Total Risk Weighted Assets for Credit and Operational Risks
 (WBRC 1 1.2.2.1.1.0)
 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 1 1.3.1.0.0.0 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 1 1.2.2.1.2.0)
 The amount must agree to item 6.7.8.2 of Part IV Computation of
risk-weighted amount for market risk.
 (WBRC 1 1.4.2.0.0.0 of Part IV)


18 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
6.3.3.2  Minimum Capital Charge
 (WBRC 1 1.2.2.2.0.0)
 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 1 1.2.2.2.1.0 )
 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 1 1.2.2.2.2.0)
 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  T otal Capital Available to Meet the Capital Charge for Credit and Operational
Risks
 (WBRC 1 1.2.2.3.0.0)
 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.
 [WBRC1 1.2.1.1.0.0 and 11.2.1.3.0.0 of Part II ( a)]
6.3.3.4  T otal Capital Base Available to meet Market Risk
 (WBRC 1 1.2.2.4.0.0)
 T otal 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 1 1.2.2.3.0.0 - 11.2.2.2.1.0)
6.3.3.5  T otal Available Tier III Capital
 (WBRC 1 1.2.2.5.0.0)
6.3.3.5.1  Appr oved Short-term Subordinated Debt
 (WBRC 1 1.2.2.5.1.0)
 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 1 1.2.2.5.2.0)
 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)


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 1 1.2.2.2.2.0*28.5%)
 (ii) Amount Utilised
  (WBRC 1 1.2.2.5.2.2)
  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 1 1.2.2.5.3.0)
 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 1 1.2.2.4.0.0*250%)
 (ii) Amount Utilised
  (WBRC 1 1.2.2.5.3.2)
  The utilized amount is computed automatically .
6.3.3.6  Eligible Tier III Capital
 (WBRC 1 1.2.2.6.0.0)
 Eligible Tier III capital for market risk is computed as follows.
6.3.3.6.1  Eligible Tier III Capital utilised
 (WBRC 1 1.2.2.6.1.0)
 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 1 1.2.2.2.2.0 - 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.


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 Cr edit 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 Pr ocess
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


shall be adopted by all banks:
Table 1
Mapping of Notations of the Credit Rating Agencies in Sri
Lanka
Fitch Ratings
LankaLanka Rating
AgencyRating Scale
of CAR
AA(sri) AAA AAA
AA+(sri) AA1 AA+
AA(sri) AA2 AA
AA-(sri) AA3 AA-
A+(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
LankaLanka Rating
AgencyRating Scale
of CAR
BBB+(sri) BBB1 BBB+
BBB(sri) BBB2 BBB
BBB-(sri) BBB3 BBB-
BB+(sri) BB1 BB+
BB(sri) BB2 BB
BB-(sri) BB3 BB-
B+(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’sMoody’s Fitch Ratings Rating Scale of
CAR
AAA Aaa AAA AAA
AA+ Aa1 AA+ AA+
AA Aa2 AA AA
AA- Aa3 AA- AA-
A+ A1 A+ A+
A A2 A A
A- A3 A- A-
BBB+ Baa1 BBB+ BBB+
BBB Baa2 BBB BBB
BBB- Baa3 BBB- BBB-
BB+ Ba1 BB+ BB+
BB Ba2 BB BB
BB- Ba3 BB- BB-
B+ B1 B+ B+
B B2 B B
B- & Lower B3 & Lower B- & Lower B- & Lower
Table 3
Mapping of Short Term Ratings
Short term ratingsRisk
weightsLanka Rating
AgencyStandard and
Poor’sMoody’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-T erm 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


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  T otal Risk-weighted amount for Credit Risk
 (WBRC 1 1.3.1.0.0.0)
 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 1 1.3.1.1.0.0)
 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 1 1.3.1.1.1.0 to 11.3.1.1.2.0)
 (i) Claims on Government of Sri Lanka
  (WBRC 1 1.3.1.1.1.0)
  All claims on Government of Sri Lanka are risk-weighted at 0%.
 (ii) Claims on Central Bank of Sri Lanka
  (WBRC 1 1.3.1.1.2.0)
  All claims on Central Bank of Sri Lanka are risk-weighted at 0%.
6.4.3.1.2  Claims on For eign Sovereigns and their Central Banks
 (WBRC 1 1.3.1.2.0.0)
 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 1 1.3.1.2.1.0 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 1 1.3.1.3.0.0)
 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 1 1.3.1.3.1.0 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 1 1.3.1.4.0.0)
 The amount must agree with the sum of the following items from ( i) to (iii ).
 (WBRC 1 1.3.1.4.1.0 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 1 1.3.1.5.0.0 )
 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 1 1.3.1.5.1.0 + 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:  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 1 1.3.1.5.1.0)
  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 1 1.3.1.5.1.1 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 1 1.3.1.5.2.0)
  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 1 1.3.1.5.2.1 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 1 1.3.1.5.3.0)
  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 1 1.3.1.5.3.1 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 1 1.3.1.6.0.0)
 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 1 1.3.1.6.1.0 + 11.3.1.6.2.0)
 (i) Claims on Primary Dealers/Finance Companies/Specialised Leasing
Companies
  (WBRC 1 1.3.1.6.1.0)
  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 1 1.3.1.6.1.1 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 1 1.3.1.6.2.0)
  All performing claims  on other financial institutions.
  The amount must agree with the sum of the following items from
(i) to (v ).
  (WBRC 1 1.3.1.6.2.1 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 1 1.3.1.7.0.0)
 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 1 1.3.1.7.1.0 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 1 1.3.1.8.0.0)
 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 1 1.3.1.8.1.0 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 1 1.3.1.8.1.0 )
  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).
• “T o 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.


– This criterion will be applicable for a period of 3 years from
adoption.
– From 01.01.201 1, 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 1 1.3.1.8.2.0 )
  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 Secur ed by Residential Property
 (WBRC 1 1.3.1.9.0.0)
 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 1 1.3.1.9.1.0 to 11.3.1.9.2.0)
 (i) Claims that qualify for regulatory capital purposes
  (WBRC 1 1.3.1.9.1.0)
 (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.


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 1 1.3.1.9.2.0)
  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 Secur ed by Commercial Real Estate
 (WBRC 1 1.3.1.10.0.0)
 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 1 1.3.1.11.0.0)
 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 1 1.3.1.11.1.0 + 11.3.1.11.2.0)
 (i) Specific provisions are equal or more than 20 per cent
  (WBRC 1 1.3.1.11.1.0)
  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 1 1.3.1.11.2.0 )
  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 1 1.3.1.12.0.0)
 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


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 1 1.3.1.12.1.0 + 11.3.1.12.2.0)
 (i) Specific provisions are equal or more than 20 per cent
  (WBRC 1 1.3.1.12.1.0)
  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 1 1.3.1.12.2.0 )
  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 1 1.3.1.13.0.0)
 Exposures to the following segments, which are considered as high-risk
exposures, will attract a higher risk weight of 150 per cent:
 (i) V enture capital funds/companies
 (ii) Private equity investments
6.4.3.1.14  Cash Items and Other  Assets
 (WBRC 1 1.3.1.14.0.0)
 The amount must agree with the sum of cash items ( i) and Other Assets (ii)
 (WBRC 1 1.3.1.14.1.0 to 11.3.1.14.2.0)
 (i) Cash Items
  (WBRC 1 1.3.1.14.1.0)
  T otal of cash items from (a) to (c)
 (a) Notes and Coins
   (WBRC 1 1.3.1.14.1.1)
  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 1 1.3.1.14.1.2)
  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 pr ocess of Collection
  (WBRC 1 1.3.1.14.1.3)
  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 1 1.3.1.14.2.0)
  T otal of items ( a) and (b ) below.
 (a) Fixed Assets
  (WBRC 1 1.3.1.14.2.1)
  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 1 1.3.1.14.2.2)
  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 of f-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 cr edit conversion factors to be used will be as follows:
6.5.2.1  Off-Balance Sheet Items:
 (WBRC 1 1.3.2.0.0.0)
 The exposure on of f-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 of f-balance sheet items
and credit equivalent of off-balance sheet items from 6.5.2.1.1 to 6.5.2.1.10.
 (WBRC 1 1.3.2.1.0.0 to11.3.2.10.0.0)
6.5.2.1.1  Direct Credit Substitutes
 (WBRC 1 1.3.2.1.0.0)
 Total direct credit substitutes of the following items from ( i) to (iv).
 Conversion Factor 100 per cent
 (WBRC 1 1.3.2.1.1.0 to 11.3.2.1.4.0)
 (i) General Guarantees of Indebtedness
  (WBRC 1 1.3.2.1.1.0)
  General guarantees of indebtedness where the risk of loss in the


(WBRC 1 1.3.2.1.1.0)
  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 1 1.3.2.1.2.0)
  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 1 1.3.2.1.3.0)
  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 1 1.3.2.1.4.0)
  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 1 1.3.2.2.1.0)
  T ransaction-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 r elated to particular transactions
  (WBRC 1 1.3.2.2.2.0)
  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 1 1.3.2.2.3.0)
  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-T erm Self Liquidating Trade-Related Contingencies
 (WBRC 1 1.3.2.3.0.0)
 Total short-term self liquidating trade-related contingencies of following
items from ( i) to (iv).


items from ( i) to (iv).
 Conversion Factor 20 per cent
 (WBRC 1 1.3.2.3.1.0 to 11.3.2.3.4.0)
 (i) Shipping Guarantees
  (WBRC 1 1.3.2.3.1.0)
  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 Cr edit
  (WBRC 1 1.3.2.3.2.0)
  Documentary credits collateralised by the underlying shipments which
are short-term self-liquidating and trade-related transactions.
 (iii) T rade-Related Acceptances
  (WBRC 1 1.3.2.3.3.0)
  Liabilities arising from acceptances that are based on a specific trade
transaction either domestic or foreign e.g.: Letters of Credit.
 (iv) Others
  (WBRC 1 1.3.2.3.4.0)
  Contingent liabilities arising from short-term self-liquidating trade
related obligations.
6.5.2.1.4  Sale and Repur chase agreements and Assets sale with recourse where the
credit risk remains with the bank
 (WBRC 1 1.3.2.4.0.0)
 Total of following items from ( i) to (vi).
 Conversion Factor 100 per cent
 (WBRC 1 1.3.2.4.1.0 to 11.3.2.4.6.0)
 () Sale and Repur chase Agreements
  (WBRC 1 1.3.2.4.1.0)
  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 1 1.3.2.4.2.0)
  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 1 1.3.2.4.3.0)
  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.


credit quality of the asset concerned.
 (iv) Forward Assets Purchases
  (WBRC 1 1.3.2.4.4.0 )
  Co mmitment 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 Shar es/Securities
  (WBRC 1 1.3.2.4.5.0)
  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 1 1.3.2.4.6.0)
  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 1 1.3.2.5.0.0)
 Total of following items from ( i) to (iii ).
 Conversion Factor 50 per cent
 (WBRC 1 1.3.2.5.1.0 to 11.3.2.5.3.0)
 (i) Underwriting of Shar es/Securities Issue
  (WBRC 1 1.3.2.5.1.0)
  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 1 1.3.2.5.2.0)
  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 1 1.3.2.5.3.0)
  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 1 1.3.2.6.0.0)
 Total of following items from ( i) to (iv).
 Conversion Factor 0 per cent
 (WBRC 1 1.3.2.6.1.0 to 11.3.2.6.4.0)
 (i) Formal Stand-by Facilities and Cr edit Lines
  (WBRC 1 1.3.2.6.1.0)
  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


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 T erm Loans
  (WBRC 1 1.3.2.6.2.0)
  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 Cr edit Card Lines
  (WBRC 1 1.3.2.6.3.0)
  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 1 1.3.2.6.4.0)
  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 1 1.3.2.7.0.0)
 Total of following items from ( i) to (iii ).
 Conversion Factor 20 per cent
 (WBRC 1 1.3.2.7.1.0 to 11.3.2.7.3.0)
 (i) Formal Stand-by Facilities and Cr edit Lines
  (WBRC 1 1.3.2.7.1.0)
  The commitments under formal standby facilities and credit lines with
an original maturity is up to one year.
 (ii) Undrawn T erm Loans
  (WBRC 1 1.3.2.7.2.0)
  The undrawn portion of term loans where the original maturity is up
to one year.
 (iii) Others
  (WBRC 1 1.3.2.7.3.0)
  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 1 1.3.2.8.0.0)
 Total of following items from ( i) to (iii ).
 Conversion Factor 50 per cent
 (WBRC 1 1.3.2.8.1.0 to 11.3.2.8.3.0)
 (i) Formal Stand-by Facilities and Cr edit Lines
  (WBRC 1 1.3.2.8.1.0)
  The commitments under formal standby facilities and credit lines with
an original maturity is over one year.
 (ii) Undrawn T erm Loans
  (WBRC 1 1.3.2.8.2.0)
  The undrawn portion of term loans where the original maturity is over
one year.
 (iii) Others
  (WBRC 1 1.3.2.8.3. 0)
  Any other commitment with an original maturity over one year .
6.5.2.1.9  Exchange Rate Contracts
 (WBRC 1 1.3.2.9.0.0)
 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  Inter est Rate Contracts
 (WBRC 1 1.3.2.10.0.0 )
 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,


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