65
 Code  Item
The capital charge will be calculated by multiplying the applicable otal capital ratio
with buffers by the overall net open position of foreign currency and gold.
(1)  Gold is treated as a foreign exchange position rather than a commodity because its
volatility is more in line with foreign currencies, and banks manage it in a similar
manner.
(2)  The off -balance sheet position, including forward contracts, will be included  in
computation of the capital charge for foreign exchange risks.
(3)  Computing the capital requirement for foreign exchange risk consists of two processes.
i) Measuring the Exposure in a Single Currency Position
The bank's net open position in each currency should be calculated by summing
the net position of all on balance sheet and off -balance sheet position, including
forward contracts denominated in that particular currency.
ii) Measuring the Risks Inherent in a Bank's Mix of Long and Short Positions
in Different Currencies
Banks are required to adopt the shorthand method of computation. Under the
shorthand method, the nominal amount of the net position in each foreign currency
and in gold is converted at spot rates into the reporting currency (i.e. LKR).  The
overall net open position is measured by aggregating:
a) the sum of the net short positions or the sum of the net long positions,
whichever is the greater, plus
b) the net position (short or long) in gold, regardless of sign.
Table 5 - Example of the Short hand Measure of Foreign Exchange Risk
YEN  EURO  GB INR US$ GOLD
+50 +100  +150  -20 -180 -35
+300  -200 -35
In the above example, the capital charge would be 12.5% for banks with asse ts less
than Rs. 500 bn and 14 % for banks with assets equal or greater than Rs. 500 bn in 2019
multiplied by the higher of either the net long currency positions or the net short
currency positions (i.e., 300) and of the net position in gold (35) = 335 x12.5% = 41.9
and =335x14% = 46.9 .


and =335x14% = 46.9 .
20.4.2.0.0.0  Total Risk -weighted Amount for Market Risk = (20.4.1.0.0.0 * reciprocal of
required total capital ratio  including buffers )
The total amount of risk -weighted amount for market risk should be the capital charge
for market risk multiplied by  the reciprocal of the required  minimum total capital ratio
(with buffers) .


66
 PART V - COMPUTATION OF RISK -WEIGHTED AMOUNT FOR OPERATIONAL
RISK
1 Overview
1.1 Definition of Operational Risk
Operational risk is defined as the risk of loss resulting from inadequate or failed internal
processes, people and s ystems or from external events. This definition includes legal
risk, but excludes strategic and reputational risk. Legal risk includes, but is not limited
to, exposure to fines, penalties, or punitive da mages resulting from supervisory actions,
as well as private settlements.
1.2 The Measurement Methodologies
The Basel II Framework presents three methods for calculating operational risk capital
charges in a continuum of increasing sophistication and risk sens itivity:
i) The Basic Indicator Approach (BIA)
ii) The Standardised Approach (TSA)
iii) Advanced Measurement Approaches (AMA)
In comparison with BIA, other approaches are more advanced methods to determine
the required capital for covering operational losses. Hence,  banks shall with supervisory
approval migrate from BIA to other advance d approaches subject to complying with
qualifying criteria.

2 Approaches for Calculating Operational Risk
2.1 A bank shall use one of the following approaches to calculate its operational R WA:
i) The BIA in accordance with item 3; or
ii) The TSA in accordance with item 4; or
iii) The Alternative Standardised Approach (ASA) in accordance with item 5.
2.2 A bank which has been allowed to use TSA or ASA shall not use a simpler approach
without the prior writte n approval of the Director of Bank Supervision (DBS) of CBSL.
2.3 Once a bank moves to a simpler approach, such bank cannot use an advanced approach
without the approval of DBS. DBS shall grant such app roval subject to requiring the
bank to comply with other c onditions prior to migrating to the respective advanced
approach.
2.4 When DBS is not satisfied that a b ank which has adopted TSA or ASA complies with


approach.
2.4 When DBS is not satisfied that a b ank which has adopted TSA or ASA complies with
the specified req uirements, DBS may require the b ank to use a simpler approach.


67
 3 The Basic Indicator Approach  (BIA)
3.1 Bank shall calculate its operational risk capital requirement as follows:
𝑲𝑩𝑰𝑨= [∑(𝑮𝑰𝟏….𝒏×𝜶)]
𝒏
Where ;
KBIA = capital charge for operational risk under BIA
GI = annual gross income, where positive, over the preceding three years as set
out in items 3.2 to 3.4
n = Number of years in the preceding three years when annual gross income
is positive
α = 15%, which is set by BCBS
3.2 Bank s shall calculate its gross income as the sum of net interest income and non -interest
income, taking into account the following adjustments:
i) gross of any provisions/impairments (including unpaid interest);
ii) gross of operating expenses, including fees paid to  outsourcing service providers,
in contrast to fees paid for services that are outsourced, fees received by banks that
provide outsourcing services shall be included in the definition of gross income but
excluding -
a) any realized profits/losses arising from the sale of securities in the b anking
book. Securities in the banking book shall be the securities that are classified as
“held to maturity” or “available for sale”, in accordance with Sri Lanka
Accounting Standard - LKAS 39;
b) any income or expenses not der ived from the ordinary activities of the b ank and
not expected to recur frequently or regularly, i.e., sale of fixed assets, income
derived from insurance recoveries, etc.
3.3 If the annual gross income/capital charge for any given year is negative or zero , it
should be excluded from both the numerator and denominator when calculating the
average capital charge.
3.4 Bank s shall calculate its annual gross income for the most recent year by aggregating
the gross income of the last four financial quarters and foll ow same to calculate annual
gross income for each of the two years preceding the most recent year. Table 1 provides
an illustration of the calculation of the annual gross income for the previous three years,


an illustration of the calculation of the annual gross income for the previous three years,
for a bank calculating its operational RWA as at  end June 2014.


68
 Table 1  - Illustration of Calculation of Annual Gross Income (GI)
 Third Year  Second Year  First Year
Gross  income
for financial
quarter  ending  Jun’16  (GI 3a) Jun’15  (GI 2a) Jun’14  (GI 1a)
Mar’16  (GI 3b) Mar’15  (GI 2b) Mar’1 4 (GI 1b)
Dec’15  (GI 3c) Dec’14  (GI 2c) Dec’13  (GI 1c)
Sep’15  (GI 3d) Sep’14  (GI 2d) Sep’1 3 (GI 1d)
Total  GI3 = GI 3a + GI 3b
+ GI 3c + GI 3d GI2 = GI 2a + GI 2b
+ GI 2c + GI 2d GI1 = GI 1a + GI 1b
+ GI 1c + GI 1d

4 The Standardised Approach (TSA)
4.1 Banks  can use TSA  for computation of capital charge of operational risk with the prior
approval of DBS subject to complying with qualifying criteria set out in item 4.4.
4.2 Banks  adopting TSA shall classify their business activities into eight business lines,
namely, corporat e finance, trading and sales, payment and settlement, agency services,
asset management, retail brokerage, retail banking and commercial banking. The
definition of these business lines are provided in detail in Table 2.
Table 2  -Mapping of Business Lines
 Level 1  Level 2  Activity Groups
1 Corporate
Finance  Corporate
Finance  Mergers and acquisitions, underwriting,
privatisations, securitisation, research, debt
(government, high yield), equity,
syndications, Initial Public Offering,
secondary private placements.  Government
Finance
Merchant
Banking
Advisory Services
2 Trading &
Sales  Sales  Fixed income, equity, foreign exchange,
credit products, funding, own position
securities, lending and repos, brokerage,
debt, prime brokerage and sale of
Government bonds to retail investors.  Market Making
Proprietary
Positions
Treasury
3 Payment &
Settlement  External Clients  Payments and collections, inter -bank funds
transfer (RTGS,  EFT, etc.), clearing and
settlement.
4 Agency
Services  Custody  Escrow, securities lending (customers)
corporate actions, depository services.
Corporate  Agency  Issuer and paying agents.


corporate actions, depository services.
Corporate  Agency  Issuer and paying agents.
Corporate Trust  Debenture trustee.


69
  Level 1  Level 2  Activity Groups
5 Asset
Management  Discretionary
Fund
Management  Pooled, segregated, retail, institutional,
closed, open, private equity.
Non-
Discretionary
Fund
Management  Pooled, segregated, retail, institutional,
closed, open.
6 Retail
Brokerage  Retail Brokerage  Execution and full service.
7 Retail
Banking  Retail Banking  Retail lending and deposits, banking
services, trust and estates.
Private Banking  Private lending (personal loans) and private
(institutional) deposits, banking services,
trust and estates, investment advice.
Card Services  Merchant/commercial/corporate cards,
private labels and retail.
8 Commercial
Banking  Commercial
Banking  Lending including project finance, corporate
loans, real estate, trade finance including
export and import loans, let ter of credit, bills
of exchange, leasing, factoring and
guarantees.
Deposits and other repayable funds
4.3 Banks shall calculate its operational risk capital requirement by taking the three -year
average of the simple summation of the operational risk capital requirements across
each of the business lines in each year as follows:
𝑲𝑻𝑺𝑨={∑ 𝒎𝒂𝒙 [∑(𝑮𝑰𝟏−𝟖×𝜷𝟏−𝟖),𝟎]𝒊=𝟑
𝒊=𝟏 }
𝟑
Where;
KTSA = capital charge for operational risk under TSA
GI1-8        = annual gross income in a given year, calculated in accordance with item
3.2 and 3.4 under BIA, for each of the eight business lines set out in Table
2 above
β1-8         = fixed beta factor (Table 3 below) as set out by BCBS, relating the level of
required capital to the level of the gross income for each of the eight
business lines
i = year


70
 Table 3  - Beta (β)  factors for each business line
No. Business Line  β Factors
1 Corporate finance (β 1)  18%
2 Trading and sales (β 2)  18%
3 Payment and settlement (β 3)  18%
4 Agency services (β 4)  15%
5 Asset management (β 5)  12%
6 Retail brokerage (β 6)  12%
7 Retail banking  (β7)  12%
8 Commercial banking  (β8)  15%

4.3.1 In any given year, negative capital charges (resulting from negative gross income) in
any business line may be set off against positive capital charges in other business lines.
However, where the aggregate operational risk capital charges across all business lines
within a given year is negative, then the operation al risk capital charges for the b ank
for that year is deemed to be zero (input to the numerator for that year will be zero).
4.3.2 Within each business line, gross income is a broad indicator that serves as a proxy for
the scale of business operations and thus t he likely scale of operational risk exposure
within each of these business lines.
4.3.3 Each beta factor serves as a proxy for the industry -wide relationship between the
operational risk loss experience for a given business line and the aggregate level of
gross income for that business line.
4.3.4 Gross income should be measured for each business line and not for the whole
institution, i.e., in commercial banking, the indicator is the gross income generated in
the commercial banking business line. However, the sum of t he gross income of the
eight business lines should be eq ual to the gross income of the b ank.
4.4 Qualifying criteria
4.4.1 The Board of Directors and senior management shall actively involve in the oversight
of the operational risk management of the bank.
4.4.2 The bank shall have an operational risk management system that is conceptually sound
and is implemented with integrity, and with clear responsibilities assigned to an
operational risk management function. A bank shall ensure that operational risk


operational risk management function. A bank shall ensure that operational risk
management functio n:


71
 i) develops strategies to identify, assess, monitor, control and mitigate operational
risk;
ii) codifies bank -level policies and procedures concerning operational risk
management and control; and
iii) designs and implements the operational risk assessment methodolo gy and
operational risk -reporting system of the bank.
4.4.3 The bank shall have sufficient resources in the use of TSA in the major business lines
as well as the control and audit area.
4.4.4 The bank shall have a system for regular reporting of operational exposur es, including
material operational losses to management of the business units, senior management
and the Board of Directors.
4.4.5 Operational risk management system of the bank should be well documented.  It must
have a routine in place for ensuring compliance  with a documented set of internal
policies, controls and procedures concerning the operational risk management system,
which must include policies for the treatment of non -compliance issues.
4.4.6 Operational risk management process and assessment system should  be subject to the
validation and regular independent review at least annually. These reviews must include
both the activities of the business units and of the operational risk management
function.
4.4.7 A bank shall develop specific policies and have a prudent documented procedure for
mapping its current business activities to the appropriate business lines in accordance
with items i), ii), iii) below and Table 2 above.
i) The senior management shall be responsible in developing the mapping policy,
which shall be s ubject to the approval of the Board of Directors. These mapping
policies should be reviewed and adjusted in line with new business activities as
appropriate.
ii) A bank shall comply with the following principles when mapping its business
activities to the appr opriate business lines:
a) Subject to item (b) below, each activity or business of a bank shall be mapped


a) Subject to item (b) below, each activity or business of a bank shall be mapped
into eight Level 1 business lines (refer Table 2) in a mutually exclusive and
jointly exhaustive manner.
b) Any banking or non -banking activity or product t hat cannot be readily mapped
into any business line and which is ancillary to and supports a business line shall
be allocated to the business line it supports. If the activity supports more than


72
 one business line, an objective criterion shall be used to al locate the annual gross
income.
c) Any activity which cannot be readily mapped into any business line shall be
allocated to the business line with the highest beta factor, i.e., 18%.
d) Banks may use internal pricing methods to allocate gross income between
business lines provided that total gross income for the Bank (as would be
recorded under BIA) still equals the sum of gross income for the eight business
lines.
e) Once an activity has been mapped to a particular business line, the activity shall
be mapped to th e same business line consistently over time.
f) The mapping of activities into business lines for operational risk capital
purposes must be consistent with the definitions of business lines used for
regulatory capital calculations in other risk categories, i.e. credit and market
risk.
g) Processes must be in place to define the mapping of any new activities or
products.
h) The mapping process shall be subject to regular independent reviews by the
internal or external auditors of a Bank.
iii) Supplementary business line mapping guidelines: There are a variety of valid
approaches that banks can use to map their activities to the eight business lines,
provided the approach used meets the bu siness line mapping principles. The
following is a possib le approach that could be used by a bank to map its gross
income:
a) Gross income  for retail banking consists net interest income on loans and
advances to retail customers and SMEs treated as retail, plus fees related to
traditional retail activities, net inc ome from swaps and derivatives held to hedge
the retail banking book, and income on purchased retail receivables. To
calculate net interest income for r etail banking, a b ank takes the interest earned
on its loans and advances to retail customers less the w eighted average cost of


on its loans and advances to retail customers less the w eighted average cost of
funding of the loans (from whatever source – retail or other deposits).
b) Similarly, gross income from commercial banking consists  net interest income
on loans and advances to corporate (plus SMEs treated as corporate), interbank
and sovereign customers and income on purchased corporate receivables, plus
fees related to traditional commercial banking activities including


73
 commitments, guarantees, bills of exchange, net income (e.g. from coupons and
dividends) on securities held in the b anking book, and profits/losses on swaps
and derivatives held to hedge the commercial banking book. Again, the
calculation on net interest income is based on interest earned on loans and
advances to corporate, interbank and sovereign customers less the wei ghted
average of funding for these loans (from whatever source).
c) For trading and sales, gross income consists, profits/losses on instruments held
in the trading book, net of funding cost, plus fees from wholesale broking.
d) For the other five business lines,  gross income consists primarily of the net
fees/commissions earned in each of these businesses. Payment and settlement
consists of fees to cover provision of payment/settlement facilities for wholesale
counterparties. Asset management is management of ass ets on behalf of others.

5 The Alternative Standardised Approach (ASA)
5.1 A bank may, with the prior approval of DBS, use ASA to calculate its operational risk
capital requirement. A bank shall not use ASA to calculate its operational risk capital
requirement unless it complies with all qualifying criteria set out in item 4.2 under TSA.
5.2 Under ASA, the operational risk capital requirement/methodology is the same as under
TSA, except for two business lines,  namely,  retail  banking and commercial banking.
For these  business lines, use outstanding amount of loans and advances after
multiplying by a fixed factor ‘m’ (0.035) as the exposure indicator which replaces gross
income.
5.3 A bank which has adopted ASA shall not use TSA or BIA without the prior approval
of DBS.
5.4 The Bank shall calculate operational risk capital requirement under ASA as follows:
          𝑲𝑨𝑺𝑨={∑ 𝒎𝒂𝒙 [∑(𝑮𝑰𝟏−𝟔×𝜷𝟏−𝟔),𝟎]𝟑
𝒊=𝟏
𝟑}+(𝜷𝟕×𝒎×𝑳𝑨 𝒓)+(𝜷𝟖×𝒎×𝑳𝑨 𝒄)


74
 Where;
KASA = capital charge for operational risk under ASA
GI1-6 = annual gross income in a given year calculated in accordance with item
3.2 under BIA, for each of the eight business lines set out in Table 2,
except for retail banking and commercial banking business lines
β1-8      = fixed beta factor as set out in Table 3
m = 0.035
LA r = total outstanding loans and advances of the retail banking business line
LA c = total outstanding loans and advances of the commercial banking business
line.
i = year
5.5 For the purposes of the ASA, total outstanding loans and advances shall be as  follows:
i) Retail banking business line consists of the total on -balance sheet outstanding
amount of the retail, SMEs treated as retail, residential mortgages an d purchased
retail receivables and credit portfolios.
ii) Commercial business line consists of the t otal on -balance sheet outstanding amount
of the  corporate, sovereign, bank, specialised lending, SMEs treated as corporate
and purchased corporate receivables, credit portfolios and the book value of
securities held in the held -to-maturity and available -for-sale categories.
5.6 For the purpose of determining LA r and LA c, a Bank shall take a simple average of the
total outstanding loans and advances of the relevant business line over the 12 most
recent financial quarters without gross of any provisions/impairmen t charges.


75
 PART V(A)  - COMPUTATION OF RISK -WEIGHTED AMOUNT FOR OPERATIONAL RISK
We Based
Return
Code  Description
20.5.1.7.0.0  Gross Income/ Loans and Advances
 Gross Income:  The value of gross income for each year in respect of BIA (WBRC 20.5.1.1.0.0),
business lines of TSA  (WBRC 20.5.1.2.1.0 to 20.5.1.2.8.0) and business lines of ASA  (WBRC
20.5.1.3.1.1 to 20.5.1.3.1.6) is automatically shown based on the data provided in the Part V(B) as
follows:
Gross Income  = Interest Income (WBRC 20.5.2.3.0.0)  - Interest Expenses (WBRC 20.5.2.4.0.0)  +
Non Interest Income (WBRC 20.5.2.5.0.0)  (+/-) Realised Profits/losses from the Sale of Securities
in the Banking Book (WBRC 20.5.2.6.0.0) (+/-) Extraordinary/Irregular Item s of Income (WBRC
20.5.2.7.0.0)
 Example :
Illustration of Calculation of Annual Gross Income  (Rs. ‘000)
Item  Amount  Amount
Interest Income  200,000  200,000
Less: Interest Expense  (100,000)  (100,000)
Net Interest Income  100,000  100,000
Non-interest Income
Fee and Commission Income  50,000  50,000
Dividend Income  30,000  30,000
Gain on sale of fixed assets  40,000
Profit/loss from Trading  20,000  20,000
Realised gains/losses from sale of banking book
securities  50,000
Others  10,000  10,000
Non-interest Income  200,000  110,000
Operating Income  300,000  210,000
Less: Operating expenses  (100,000)
Less: Allowances  (50,000)
Less: Taxes  (30,000)
Profit/loss for the period  120,000
Gross Income for the purpose of operational risk
capital requirement   210,000

 Loans and Advances:  The values of loans and advances in respect of retail banking (WBRC
20.5.1.3.2.1) and commercial banking (WBRC 20.5.1.3.2.2) should be filled in accordance with the
item 5.6.


76
 We Based
Return
Code  Description
20.5.1.8.0.0  Capital Charges
 The value of capital charges for each year in respect of BIA, TSA and ASA is calculated as follows :
20.5.1.1.0.0  The Basic Indicator Approach (BIA)
Multiply the gross income for each year by α (15%).
20.5.1.2.0 .0 The Standardised Approach (TSA)
Multiply the gross income of individual business line (WBRC 20.5.1.2.1.0 to 20.5.1.2.8.0) for each
year by β assigned to each business line.
20.5.1.3.0.0  The Alternative Standardised Approach (ASA)
20.5.1.3.1.0  i) Sub Total
Multiply the gross income of individual business line (WBRC 20.5.1.3.1.1 to 20.5.1.3.1.6) for
each year by β assigned to each business line .
20.5.1.3.2.0  ii) Sub Total
Multiply yearly average outstanding amount of loans and advances of retail banking business  line
(WBRC 20.5.1.3.2.1) and commercial banking business line (WBRC 20.5.1.3.2.2), by a fixed
factor ‘m’  (20.5.1.6.0.0) , i.e., 0.035 with the respective β of 12% and 15%, respectively.
20.5.1.9.0.0  Capital Charges for Operational Risk
(1)  The value of capital charges for operational risk in respect of BIA, TSA and ASA is automatically
shown as follows:
20.5.1.9.1.0  The Basic Indicator Approach
Aggregate the capital charges for the 3 years as reported under WBRC 20.5.1.8.0.0 and 20.5.1.1.0.0
of BIA and  divide by 3 (number of years).
The number of years  may change in accordance with the item 3.3 .
20.5.1.9.2.0  The Standardised Approach
Aggregate the capital charges for the 3 years as reported under WBRC 20.5.1.8.0.0 and 20.5.1.2.0.0
of TSA  and divide by  3 (number of years) .
20.5.1.9.3.0  The Alternative Standardised Approach
Aggregate the capital charges for the 3 years as reported under WBRC 20.5.1.8.0.0 and 20.5.1.3.0.0
of ASA and divide by 3 (number of years) .
(2)  Negative capital charge recorded in a given year/s of the these 3 years, shall be considered as a zero


value and not used to offset the positive capital charge recorded in other year/s.


77
 We Based
Return
Code  Description
20.5.1.10.0.0  Risk -weighted Amount for Operational Risk
 The value of risk -weighted amount for operational risk in respect of BIA, TSA and ASA is the
value arrived by multiplying the capital charge for operational risk under each approach by the
reciprocal of required total capital ratio  including buffers, separ ately.
20.5.1.10.1.0  The Basic Indicator Approach ( 20.5.1.9.1.0 *  reciprocal of required total capital ratio )
20.5.1.10.2.0  The Standardized Approach ( 20.5.1.9.2.0 *  reciprocal of required total capital ratio )
20.5.1.10.3.0  The Alternative Standardized Approach ( 20.5.1.1.9.3 * reciprocal of required total capital ratio )

PART V(B)  - COMPUTATION OF GROSS INCOME UNDER OPERATIONAL RISK
Code  Description
 The reporting of income and expenses items referred to in this Part should be in accordance with
the item 3.4
20.5.2.1.0.0  The Basic Indicator Approach
20.5.2.2.0.0  The Standardised Approach/The Alternative Standardised Approach
20.5.2.2.1.0  Corporate Finance
Applicable for both TSA and ASA  20.5.2.2.2.0  Trading and Sales
20.5.2.2.3.0  Payment and Settlement
20.5.2.2.4.0  Agency Service
20.5.2.2.5.0  Asset Management
20.5.2.2.6.0  Retail Brokerage
20.5.2.2.7.0  Retail Banking
Applicable only for TSA
20.5.2.2.8.0  Commercial Banking
20.5.2.3.0.0  Add: Interest Income
20.5.2.4.0.0  Less: Interest Expenses
20.5.2.5.0.0  Add: Non-Interest Income
20.5.2.6.0.0  Add/(Less): Realized Profits from the Sale of Securities in the Banking Book
20.5.2.7.0.0  Add/(Less): Extraordinary/ Irregular Item s of Income


Banking Act Directions No. 01 of 2016
Capital Requirements Under Basel III for Licensed Commercial Banks a nd
Licensed Specialised Banks
78

SCHEDULE II

PILLAR II
SUPERVISORY REVIEW PROCESS


79

 REGULATORY FRAMEWORK ON SUPERVISORY REVIEW PROCESS
PART I – OVERVIEW
1 Introduction
1.1 The Supervisory Review Process  (SRP) of licensed commercial banks (LCBs) and
licensed specialised banks (LSBs) (hereinafter referred to as “banks”) is conducted to
assess their capital adequacy and to determine whether banks should hold additional
capital to cover risks that are not cov ered or adequately covered by the minimum capital
requirements under Pillar I.
2 Objectives of SRP
2.1 Encourage banks to utilise better risk management techniques – the level of risks a bank
is exposed to, and the control environment that will determine the le vel of capital
required to be maintained by banks.
2.2 Enhance the risk -based supervision of banks in order to assess the capital adequacy
relative to risks.
2.3 Evaluate the bank’s Internal Capital Adequacy Assessment Process (ICAAP) that
determines the level of capital to be maintained against all risks and ensure that banks
have adequate capital to support all risks.
2.4 Ensure that banks use ICAAP in more general business decisions and budgets, in more
specific decisions such as allocating capital to business unit s and when evaluating
individual credit decision process.
3 Principles governing SRP
3.1 SRP is conducted based on the following four key principles:
a) Principle 1  - Banks shall have a process for assessing their overall capital adequacy
in relation to their risk profiles and a strategy for maintaining their capital levels.
b) Principle 2  - The Central Bank of Sri Lanka (CBSL) as the regulator will review
and evaluate  bank’s ICAAP and strategies, as well as its ability to monitor and
ensure compliance with regulatory capital ratios.
c) Principle 3  - CBSL expects banks to operate above the minimum regulatory capital
ratios and requires banks to hold capital in excess of th e minimum.


80

 d) Principle 4  - CBSL will intervene at an early stage to prevent capital from falling
below the minimum levels required to support the risk characteristics of a
particular bank.
4 Scope and Applicability
Regulatory Framework on Supervisory Review Pr ocess  shall be applicable to banks
on both standalone (“Solo”) level, as well as on the consolidated (“Group”) level.
PART II - INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP)
5 Developing and Maintaining ICAAP
5.1 Every bank shall develop and maintain a ri gorous and well -documented ICAAP
proportional to its operations and risk profile and consistent with prudential
requirements.
5.2 ICAAP of a bank shall include the following six main features.
a) Board and senior management oversight
b) Comprehensive assessment of risks
c) Sound capital assessment
d) Monitoring and reporting
e) Internal controls and independent review
f) Stress testing
5.3 A bank shall design its ICAAP according to the size, complexity and business strategies
of the respective bank.
6 The Board of Directors and Seni or Management Oversight
6.1 Board responsibilities for ICAAP
a) The Board shall ensure that the bank has in place a strategic plan which clearly
outlines its current and future capital needs, anticipated capital expenditure,
desirable capital level, and external  capital sources.
b) The Board shall review and approve the target level and composition of capital, and
the process for setting and monitoring such targets at least, annually.
c) The Board shall ensure that the senior management:
i) performs an analysis of the current and future capital requirements of the bank
in relation to its strategic objectives;


81

 ii) establishes frameworks for assessing the categories of risks faced by the bank
and develops systems related to these risks to the capital level of the bank;
iii) establ ishes a method for monitoring compliance with internal policies on risk
assessment and the processes  related to risks to capital levels;
iv) establishes a strong internal control culture throughout the bank; and
v) effectively communicate all relevant policies and procedures throughout the
bank.
d) The Board shall approve and exercise effective oversight over the bank’s stress
testing processes.
e) The Board shall review ICAAP of the bank periodically, at least annually, to:
i) assess the level and trend of material ris ks and their effects on capital levels;
ii) evaluate the sensitivity and reasonableness of key assumptions used in the
capital assessment measurement system;
iii) determine that the bank holds adequate capital against the various risks and is
in compliance with est ablished capital adequacy goals; and
iv) assess the bank’s future capital requirements based on its reported risk profile
and make necessary  adjustments to the strategic plan, accordingly.
f) The Board shall ensure that public disclosures are made in the bank’s a udited annual
report/audited financial statements, both qualitative and quantitative information,
to assist in assessing the adequacy of bank’s capital commensurate with all material
risks the bank is exposed to in relation to its current and future activi ties.
g) The Board shall approve the annual ICAAP document.
6.2 Senior management’s responsibilities for ICAAP
a) Ensure the appropriateness of ICAAP on an ongoing basis
b) Have a good understanding of the design and operation of ICAAP
c) Be responsible for developing a  risk management framework that is appropriate in
light of the risk profile and business strategy of a bank and integrating ICAAP with


light of the risk profile and business strategy of a bank and integrating ICAAP with
the capital planning and management processes of the bank. In this regard, senior
management shall, at a minimum:
i) establish robust policies and procedures to be approved by the Board to identify,
measure and report all material risks;
ii) evaluate the level and trend of material risks and their effects on capital levels;


82

 iii) evaluate the sensitivity and reasonableness of key assumptions used in the
capital assessment and measurement system;
iv) determine if the bank holds adequate capital against the risks faced by the bank;
v) assess future capital needs based on the risk profile of the bank and propose
necessary adjustments to its strategic plan; and
vi) ensure that ICAAP is subject to annual independent review for robustness and
integrity.
d) establish comprehensive and adequate written policies and procedures, to be
approved by the Board, on its stress testing processes taking a n active interest in the
development and operation of stress -testing and, allocating sufficient skilled and
competent resources to the modeling function.
e) ensure regular reporting of bank’s ICAAP to the Board.
f) prepare the annual ICAAP document in accordance  with the specified format
given in Appendix I; and
g) submit the Board approved annual document of ICAAP to the Director of Bank
Supervision within five months from the end of the financial year of the respective
bank.
7 Comprehensive Assessment of Risks
7.1 Bank’s ICAAP shall identify all material risks, which are arising from both on balance
sheet and off -balance sheet exposures, faced by the bank and measure these risks that
can be reliably quantified under both normal and stressed conditions. ICAAP s hall,
therefore, address the following risks.
a) Risks captured under Pillar 1: credit, market and operational risks;
b) Risks not fully captured under Pillar 1; concentration risk (credit risk), interest
rate/rate of return risk in the banking book (market risk ) and
c) Risk types not covered by Pillar 1: risks which are not specifically addressed under
Pillar 1, which includes liquidity risk, concentration risk, reputational risk,
compliance risk, strategic and business risk, residual risk.


compliance risk, strategic and business risk, residual risk.
7.2 A bank shall be able t o identify other external risk factors that may arise from the
regulatory, economic or business environment. In addition, adequate corporate
governance and proper risk management including internal control arrangements
constitute the foundation of an effec tive ICAAP.


83

 7.3 The risk measurement systems shall be sufficiently comprehensive and rigorous to
capture the nature and magnitude of the risks faced by the bank.
7.4 The risks that are not easily quantifiable shall be evaluated using qualitative assessment
and man agement judgment.
7.5 When measuring risks, comprehensive and rigorous stress tests shall be performed to
identify possible events or market changes that could have serious adverse effects or
significant impact on the bank’s capital and operations.
7.6 In assessin g risks , banks shall also consider the applicable Directions issued under the
Banking Act.
8 Sound Capital Assessment
Internal capital allocation and assessment process shall meet the following
requirements.
8.1 Banks s hall have an explicit Board approved capital plan which states the objectives
and the time period for achieving those objectives, and in broad terms the capital
planning process and the responsibilities for that process.
8.2 The plan shall also lay out how the bank will comply with capital requir ements in the
future related to the level of risk, and a general contingency plan for dealing with
divergences and unexpected events such as raising additional capital, restricting
business activities or using risk mitigation techniques.
8.3 The bank shall set  capital targets which are consistent with their risk profile, stage of
the business cycle in which the bank is operating, and business plans.
8.4 An internal strategy for maintaining capital levels which should not only reflect the
desired level of risk cove rage but also incorporate factors such as loan growth
expectations, future sources and uses of funds, and dividend policy.
8.5 The amount of capital held shall reflect not only the measured amount of risks but also
an additional amount to account for potentia l uncertainties in risk measurement.
8.6 In assessing capital, a bank shall also evaluate the quality and capacity of its capital to


8.6 In assessing capital, a bank shall also evaluate the quality and capacity of its capital to
absorb losses.
8.7 The bank shall demonstrate to CBSL  that its capital assessment approach is
conceptually sound and that outputs and results are reasonable.


84

 9 Monitoring and Reporting
9.1 The bank shall establish an adequate system for monitoring and reporting risk
exposures and, assessing how the bank’s changing risk profile affects the capital
requirements.
9.2 The bank’s Board and the senior management shall:
a) receive reports on the bank’s risk profile and capital needs in a manner appropriate
to facilitate the conduct of their responsibilities
b) evaluate the level and trend of material risks and their effects on capital levels
c) evaluate th e sensitivity and reasonableness of key assumptions used in the capital
assessment measurement system
d) determine that the bank holds adequate capital against the risks and is in compliance
with established capital adequacy goals
e) assess its future capital re quirements based on the bank’s reported risk profile and
make  necessary adjustments to the bank’s strategic plan, accordingly
10 Internal Controls and Independent Review
10.1 The bank’s internal control structure is essential to the capital assessment process.
Effective control of the capital assessment process includes an independent review, and
where appropriate, with the involvement of internal or external audits.
10.2 The person(s) responsible for the development or implementation of ICAAP shall not
be involved in t he independent review.
10.3 The bank shall conduct periodic independent reviews of its risk management processes
to ensure their integrity, accuracy, and reasonableness. Areas that shall be reviewed
include:
a) appropriateness of the bank’s capital assessment proc ess given the nature, scope
and complexity of its activities;
b) identification of large exposures and risk concentrations;
c) accuracy and completeness of data inputs into the bank’s assessment process;
d) reasonableness and validity of scenarios used in the asses sment process; and
e) stress testing and analysis of assumptions and inputs.
11 Stress Testing


e) stress testing and analysis of assumptions and inputs.
11 Stress Testing
11.1 Stress testing is a technique used to evaluate the potential effects on a bank’s financial
condition due to changes in specified risk factors by adverse scenarios.


85

 11.2 A forward -looking stress test should reasonably identify possible events or changes in
market conditions that could adversely impact the bank’ financial condition and capital
position.
11.3 Banks may follow the Guidelines on Stress Testing of Licensed Commercial Banks and
Licensed Specialised Banks issued by Bank Supervision Department in September
2014.
PART III - SUPERVISORY REVIEW AND EVALUATION PROCESS (SREP)
12 Key Components
SREP, which consists of the following key components, shall be carried out by the
Director of Bank Supervision or examiners of the Bank Supervision Department.
a) Review of the bank’s ICAAP
b) Review of the bank’s risk profile
c) Review of the levels and quality of capital hel d
d) Communication of SREP results to the bank
13 Review Methodologies
SREP shall involve a combination of:
a) periodic examinations or inspections;
b) continuous supervision;
c) discussions with the bank management;
d) review of work of internal and external auditors; and
e) periodic reporting.
14 Objectives
The objective of the review is to:
a) evaluate the adequacy of bank’s internal capital adequacy assessments and
strategies, as well as their ability to monitor and ensure compliance with regulatory
capital ratios;
b) ensure tha t the bank operates above the minimum regulatory capital ratios and
composition of capital is appropriate for the nature and scale of the bank’s business;
c) identify existing or potential problems and key risks faced by the bank, deficiencies
in their inter nal control and risk management frameworks, and the degree of
reliance that can be placed on the outputs of ICAAP;


86

 d) intervene at an early stage to prevent capital from falling below the minimum levels
required to support the risk characteristics of the bank ;
e) take appropriate supervisory action and regulatory measures if results of this
process are not satisfactory.
15 Coverage
SREP will cover a quantitative review of bank’s Pillar 1 inherent risk exposures and
Pillar 2 inherent risk exposures.
16 Qualitative Assessment
If Pillar 2 risks are not readily quantifiable, the supervisory judgment is to be used with
respect to qualitative assessments of the bank’s ability to contain actual risk exposures
within prudent, planned levels through effective risk governanc e, oversight,
management and control practices.
17 Dialogue with the bank
17.1 SREP involves an active dialogue with the bank regarding ICAAP, through which
CBSL seeks to:
a) gain deeper insights into the bank’s overall control and risk management
framework;
b) establis h a closer understanding of how the bank approaches the risks that are not
covered under the minimum capital requirements and the amount of internal capital
allocated to them;
c) understand the mechanisms the bank has maintained for identifying, measuring,
monitoring, controlling, mitigating and reporting its risks; and
d) understand whether additional capital on top of that assessed is necessary to cover
the banks ‘existing risk exposures, as well as future planned sources of capital.
17.2 The dialogue will provide an opportunity for the bank to make appropriate changes to
its ICAAP.
17.3 Communication of SREP results:
a) After completion of the SREP, the Director of Bank Supervision may conduct
discussions with the bank based on the results of the assessment, including any  areas
of concern which may lead to an increase in bank’s minimum CAR.
b) The Director of Bank Supervision will explain the outcome of the assessment and


b) The Director of Bank Supervision will explain the outcome of the assessment and
recommend the prompt corrective actions to address the concerns of the bank, if


87

 any. If there is a propos ed increase in the capital, the bank will be notified (with the
opportunity to make representations) before the decision is finalised.
PART IV – SUPERVISORY INTERVENTION
18 Based on the outcome of SREP, CBSL shall intervene at an early stage to:
a) prevent capi tal from falling below the minimum requirement of the respective bank;
and
b) prevent potential impact to the stability of the financial system.
19 Depending on the capital level, a range of supervisory actions including the following
shall be initiated.
a) moral s uasion to encourage the bank to improve their capital positions and levels;
b) improve the bank’s ICAAP including  risk management systems and controls;
c) require the bank to submit a capital restoration plan;
d) impose restrictions on the payment of dividends, business activities, acquisitions,
investments etc.; and
e) require the replacement of the Board and/or the senior management.


APPENDIX I
88
 FORMAT FOR THE PREPARATION OF ICAAP DOCUMENT
1 General
1.1 The purpose of ICAAP document is to inform the Board/senior management and the
CBSL of the ongoing assessment of the bank's risks, how the bank intends to mitigate
those risks and how much current and future capital is necessary having considered
other mitigating factors.
1.2 Annual document of ICAAP of a bank shall be prepared in accordance with the conten ts
given in paragraph 2 below.
1.3 However, CBSL expects there to be a fair degree of variation in the length and format
of submissions since banks’ business and risk profiles differ from each other and
ICAAP document should be proportional to the size, nature  and complexity of a bank’s
business.
1.4 Use of this format may, therefore, make the review process more efficient for both the
bank and CBSL.
1.5 Base period and financial data of ICAAP document shall be in accordance with the
audited financial data  as at the en d of the preceding financial year.
1.6 The projected financial data of ICAAP document should be at least for three financial
years.
2 Contents
a) Executive Summary
b) Background
c) Board and Senior Management Oversight
d) Risk Governance
e) Sound stress testing processes
f) Capital Planning
g) Projected financial data and a ssessment of capital
3 Executive Summary
This section will present an overview of ICAAP methodology and results. This
overview will include:
a) The purpose of the report and the group entities which are covered by ICAAP
b) Financial forecasts, including the strategic position of the bank, its balance sheet
strength, and future profitability


89

 c) Regulatory capital management
d) Regulatory capital assessment - Pillar 1
e) Internal capital assessment - Pillar 2
f) Ratio management: How much and what composition of internal capital the bank
considers it should hold as compared with the capital adequacy requirement under
Pillar 1
g) Risk management processes and assessment
h) Descriptions of the capital and dividend plan; the manner in which  the bank intends
to manage capital going forward and for what purposes
i) Stress testing approach
j) Details of the approval
4 Background
This section will include the relevant organization structure and business lines, group
structure (legal and operations) and financial data of the bank largely including the
profit, dividends, equity, capital resources held and as compared with regulatory
requirements, total assets, total loan and advances, total deposits, and any conclusions
that can be drawn from trends in the data which may have implications for the bank’s
future.
5 Board and Senior Management Oversight
This section would provide the following information:
a) Corporate governance structure
b) Board and senior management oversight
c) ICAAP governance structure
d) Monitori ng and controls
e) Internal controls and independent review
6 Risk Governance
This section will provide the following;
a) Risk appetite
b) Risk management framework
c) Regulatory risk assessment (Pillar 1)
i) Credit risk
ii) Market risk


90

 iii) Operational risk
d) Internal risk assessment (Pillar 2)
i) Concentration risk
ii) Interest rate risk in the
banking book
iii) Settlement risk
iv) Liquidity risk
v) Compliance risk  vi) Strategic/business risk
vii) Reputational risk
viii) Residual risk
ix) Off-balance sheet exposures and
securitizati on risk
7 Sound Stress Testing Processes
This section will provide the following details of bank’s stress testing practices:
a) Overview of the stress testing process
b) Stress scenario/types
c) discuss the results of stress tests and its impact to the bank capital
d) risk mitigation or contingency plans across a range of stressed conditions
8 Capital Planning
This section will provide details of bank’s capital planning and management processes,
which, at a minimum, includes:
a) the bank’s short -term and long-term capital adequacy goals in relation to its risk
profile, taking into account its strategic focus and business plan
b) the approved capital targets that are consistent with the bank’s overall risk profile
and financial position
c) the approach for determ ining the bank’s overall capital adequacy to its risk profile
d) Conclusion
9 Projected Financial Position and A ssessment of Capital
This section will explain Pillar 1 and 2 capital requirements, in respect to
a) the expected changes to the business profile of the  bank, the environment in which
it expects to operate, its projected business plans (by appropriate lines of business),
and projected financial position for the next, three to five years; and
b) given these business plans, this section would also discuss the bank’s assessment as
to whether additional capital is necessary on top of that assessed to cover their
existing risk exposures, as well as future planned sources of capital.


Banking Act Directions No. 01 of 2016
Capital Requirements Under Basel III for Licensed Commercial Banks a nd
Licensed Specialised Banks
91

SCHEDULE III

PILLAR III
MARKET DISCIPLINE


92
 MARKET DISCIPLINE – MINIMUM DISCLOSURE REQUIREMENTS UNDER
PILLAR III

1 Introduction
1.1 Pillar III aims to complement the minimum capital requirements and supervisory
review process by developing a set of disclosure requirements which will allow the
market participants to gauge the capital adequacy and risk exposures of licensed banks.
1.2 These  requirements will improve the comparability and consistency of disclosures
among licensed banks and facilitate assessment of the bank by others, including
investors, analysts, customers, other banks and rating agencies, which leads to good
corporate gover nance.
1.3 Disclosures under these requirements broadly include; the regulatory capital
requirements and liquidity, risk weighted assets, linkages between financial statements
and regulatory exposures, risk management and a discussion on adequacy/meeting
current and future capital requirements of banks.

2 Responsibility of the Management
2.1 The Board of Directors and Senior Management are responsible for establishing and
maintaining effective internal controls over the disclosure of financial information,
including Pillar III disclosures. The information provided by licensed banks under Pillar
III must be at a minimum and be subject to the same level of internal review and internal
control processes as in financial reporting.

3 Scope, Frequency and Reporting  Location of Disclosures
3.1 All licensed banks shall make the required disclosures :
i) on a both solo and group basis with comparative information
ii) in the press, annual reports and websites,  in the frequencies as set out in tables
below.

4 Implementation Date
4.1 Shall be effective from financial reporting periods beginning on o r after 01.07 .2017.


93
 MARKET DISCIPLINE - DISCLOSURE REQUIREMENTS

Area  Template Reference  Frequency &
Publication Location
No Name  Quarterly  Annually
Regulatory
Requirements
on Capital and
Liquidity  1  Key Regulatory Ratios - Capital and Liquidity  P, W  P, A, W
2  Basel III Computation of Capital Ratio s W A, W
3  Basel III Computation of Leverage Ratio*  W A, W
4  Basel III Computation of Liquidity Coverage Ratio  W A, W
5  Main Features of Regulatory Capital Instruments  W A, W
Risk Weighted
Assets (RWA)  6  Summary discussion on adequacy/meeting current
and future capital requirements   A, W
7  Credit Risk under Standardised Approach: Credit
Risk Exposures and Credit Risk Mitigation (CRM)
Effects  W A, W
8  Credit Risk under Standardised Approach:
Exposures by Asset Classes and Risk Weights   A, W
9  Market Risk under Standardised Measurement
Method  W A, W
10  Operational Risk under Basic Indicator
Approach/The Standardised Approach/The
Alternative Standardised Approach  W A, W
Linkages
Between
Financial
Statements &
Regulatory
Exposures  11  Differences Between Accounting and Regulatory
Scopes and Mapping of Financial Statement
Categories with Regulatory Risk Categories – Bank
Only  W A, W
12  Explanations of Differences Between  Accounting
and Regulatory Exposure Amounts   A, W
Risk
Management  13  Bank Risk Management Approach
 A, W
14  Risk Management related to Key Risk Exposures  A, W

A - Annual Report | P – Press | W – Website

*Disclosure requirements will commence with  the implementation of Leverage Ratio


94
 Template 1
Key Regulatory Ratios - Capital and Liquidity

Item  Reporting Period  Previous Reporting
Period
Regulatory Capital (LKR ’000)
Common Equity Tier 1
Tier 1 Capital
Total Capital
Regulatory Capital Ratios (%)
Common Equity Tier 1 Capital Ratio (Minimum
Requirement - …)
Tier 1 Capital Ratio (Minimum Requirement - …)
Total Capital Ratio (Minimum Requirement - …)
Leverage Ratio (Minimum Requirement - …)
Regulatory Liquidity
Statutory Liquid Assets (LKR’000)
Statutory Liquid Assets Ratio (Minimum Requirement -
…)
Domestic Banking Unit (%)
Off-Shore Banking Unit (%)
Liquidity Coverage Rat io (%)  – Rupee  (Minimum
Requirement - …)
Liquidity Coverage Ratio (%) – All Currency   (Minimum
Requirement - …)


95
 Template 2
Basel III Computation of Capital Ratio s
Item  Amount (LKR ‘000)
Reporting
Period  Previous
Reporting
Period
Common Equity Tier 1 (CET1) Capital after Adjustments
Common Equity Tier 1  (CET1) Capital
Equity Capital (Stated Capital)/Assigned Capital
Reserve Fund
Published Retained Earnings/(Accumulated Retained Losses)
Published Accumulated Other Comprehensive Income (OCI)
General and other Disclosed Reserves
Unpublis hed Current Year's Profit/Loss  and Gains reflected in OCI
Ordinary Shares issued by Consolidated Banking and Financial Subsidiaries of
the Bank and held by Third Parties
Total Adjustments to CET1 Capital
Goodwill (net)
Intangible Assets (net)
Others (specify)
Additional Tier 1 (AT1) Capital after Adjustments
Additional Tier 1 (AT1 ) Capital
Qualifying Additional Tier 1 Capital Instruments
Instruments issued by Consolidated Banking and  Financial Subsidiaries of the
Bank and held by Third Parties
Total Adjustments to AT1 Capital
Investment in Own Shares
Others (specify)
Tier 2 Capital after Adjustments
Tier 2 Capital
Qualifying Tier 2 Capital Instruments
Revaluation Gains
Loan Loss Provisions
Instruments issued by Consolidated Banking and Financial Subsidiaries of the
Bank and held by Third Parties
Total Adjustments to Tier 2
Investment in Own Shares
Others (specify)
CET1 Capital
Total Tier 1 Capital
Total Capital


96
 Item  Amount (LKR ‘000)
Reporting
Period  Previous
Reporting
Period
Total Risk Weighted Assets (RWA)
RWAs for Credit Risk
RWAs for Market Risk
RWAs for Operational Risk
CET1 Capital Ratio (including Capital Conservation Buffer,
Countercyclical Capital Buffer & Surcharge on D -SIBs) (%)
of which: Capital Conservation Buffer  (%)
of which: Countercyclical Buffer (%)
of which: Capital Surcharge on D -SIBs (%)
Total Tier 1 Capital  Ratio (%)
Total Capital Ratio (including Capital Conservation Buffer, Countercyclical
Capital Buffer & Surcharge on D -SIBs) (%)
of which: Capital Conservation Buffer  (%)
of which: Countercyclical Buffer (%)
of which: Capital Surcharge on D-SIBs (%)
Note:  Banks are expected to supplement the template with a narrative commentary to explain any significant
change over the reporting period and the key drivers of such changes.


97
 Template 3
Computation of Leverage Ratio*
Item  Amount (LKR ‘000)
Reporting Period  Previous Reporting
Period
Tier 1 Capital
Total Exposures
On-Balance Sheet Items
(excluding Derivatives and Securities  Financing
Transactions , but including Collateral)
Derivative Exposures
Securities Financing Transaction Exposures
Other Off -Balance Sheet Exposures
Basel III Leverage Ratio (%) (Tier 1/Total Exposure)

*  Disclosure will commence with implementation


98
 Template 4
Basel III Computation of Liquidity Coverage Ratio
Item  Amount (LKR’000)
Reporting Period  Previous Reporting
Period
Total
Un-weighted
Value  Total
Weighted
Value  Total
Un-
weighted
Value  Total
Weighted
Value
Total Stock of High -Quality Liquid Assets
(HQLA)
Total Adjusted Level 1A Assets
Level 1 Assets
Total Adjusted Level 2A Assets
Level 2A Assets
Total Adjusted Level 2B Assets
Level 2B Assets
Total Cash Outflows
Deposits
Unsecured Wholesale Funding
Secured Funding Transactions
Undrawn Portion of Committed (Irrevocable)
Facilities and Other Contingent Funding
Obligations
Additional Requirements
Total Cash Inflows
Maturing Secured Lending Transactions
Backed by Collateral
Committed Facilities
Other Inflows by Counterparty which are
Maturing within 30 Days
Operational Deposits
Other Cash Inflows
Liquidity Coverage Ratio (%) (Stock of
High Quality Liquid Assets/Total Net Cash
Outflows over the Next 30 Calendar Days) *
100


99
 Template 5
Main Features of Regulatory Capital Instruments

Must be provided for each type of capital instrument separately
Description of the Capital Instrument
Issuer
Unique Identifier (e.g., ISIN or Bloomberg Identifier for Private
Placement)
Governing Law(s) of the Instrument
Original Date of Issuance
Par Value of Instrument
Perpetual or Dated
Original Maturity Date, if Applicable
Amount Recognised in Regulatory Capital (in LKR ‘000 as at the
Reporting Date)
Accounting Classification (Equity/Liability)
Issuer Call subject to Prior Supervisory Approval
Optional Call Date, Contingent Call Dates and Redemption Amount (LKR
‘000)
Subsequent Call Dates, if Applicable
Coupons/Dividends
Fixed or Floating Dividend/Coupon
Coupon Rate and any Related Index
Non-Cumulative or Cumulative
Convertible or Non -Convertible
If Convertible, Conversion Trigger (s)
If Convertible, Fully or Partially
If Convertible, Mandatory or Optional
If Convertible, Conversion Rate


100
 Template 6
 Summary Discussion on Adequacy/Meeting Current and Future Capital Requirements

Item
Provide qualitative information on capital planning to meet current and future capital requirements
including:
(a) Overview of capital planning and assessment process;
(b) Material risk exposures in line with strategic plan;
(c) Current and future capital needs, anticipated capital expenditure and desirable capital level;
(d) Discussion on possible internal and external  capital sources;
(e) Assessment of the adequacy of bank’s capital commensurate with all material risks and other
capital needs in relation to its current and future activities;
General contingency plan for dealing with divergences and unexpected events such a s raising additional
capital, restricting business activities or using risk mitigation techniques


101
 Template 7
Credit Risk under Standardised Approach –
Credit Risk Exposures and Credit Risk Mitigation (CRM) Effects
Asset Class  Amount (LKR’000) as at ……………………..
Exposures before
 Credit Conversion
Factor (CCF) and
CRM  Exposures post CCF
and CRM  RWA and RWA
Density (%)
On-
Balance
Sheet
Amount  Off-
Balance
Sheet
Amount  On-
Balance
Sheet
Amount  Off-
Balance
Sheet
Amount  RWA  RWA
Density(ii)
Claims on Central
Government and CBSL
Claims on Foreign
Sovereigns and their
Central Banks
Claims on Public Sector
Entities
Claims on Official Entities
and Multilateral
Development Banks
Claims on Banks
Exposures
Claims on Financial
Institutions
Claims on Corporates
Retail Claims
Claims Secured by
Residential Property
Claims Secured by
Commercial Real Estate
Non-Performing Assets
(NPAs)(i)
Higher -risk Categories
Cash Items and Other
Assets
Total
Note:
(i) NPAs – As per Banking Act Directions on Classification of loans and advances, income recognition and
provisioning.
(ii) RWA Density – Total RWA/Exposures post CCF and CRM.
(iii) Banks are expected to supplement the template with a narrative commentary to explain any significant
change over the reporting period and the key drivers of such changes.


102
 Template 8
 Credit Risk under Standardised Approach: Exposures by Asset Classes and Risk Weights
Description  Amount (LKR’ 000) as at ……………. (Post CCF & CRM)
            Risk Weight
Asset Classes  0% 20%  50%  75%  100%  150%  >150%  Total Credit
Exposures
Amount
Claims on Central
Government and Central
Bank of Sri Lanka
Claims on Foreign
Sovereigns and their
Central Banks
Claims on Public Sector
Entities
Claims on Official Entities
and Multilateral
Development Banks
Claims on Banks Exposures
Claims on Financial
Institutions
Claims on Corporates
Retail Claims
Claims Secured by
Residential Property
Claims Secured by
Commercial Real Estate
Non-Performing Assets
(NPAs)
Higher -risk Categories
Cash Items and Other Assets
Total

Note:  Banks are expected to supplement the template with a narrative commentary to explain any significant
change over the reporting period and the key drivers of such changes.


103
 Template 9
Market Risk under Standardised Measurement Method
Item  RWA Amount
(LKR’000)
as at ……………
(a) RWA for Interest Rate Risk
General Interest Rate Risk
(i) Net Long or Short Position
(ii) Horizontal Disallowance
(iii) Vertical Disallowance
(iv) Options
Specific Interest Rate Risk
(b) RWA for Equity
(i) General Equity Risk
(ii) Specific Equity  Risk
(c) RWA for Foreign Exchange & Gold
Capital Charge for Market Risk [(a) + (b) + (c)]  * CAR

Note:  Banks are expected to supplement the templ ate with a narrative commentary to explain any significant
change over the reporting period and the key drivers of such changes.


104
 Template 10
Operational Risk under Basic Indicator Approach/The Standardised Approach/The Alternative
Standardised Approach

Business Lines  Capital
Charge
Factor  Fixed
Factor  Gross Income (LKR’000) as at
……………….
1st Year  2nd Year  3rd Year
The Basic Indicator Approach  15%
The Standardised Approach
Corporate Finance  18%
Trading and Sales  18%
Payment and Settlement  18%
Agency Services  15%
Asset Management  12%
Retail Brokerage  12%
Retail Banking  12%
Commercial Banking  15%
The Alternative Standardised Approach
Corporate Finance  18%
Trading and Sales  18%
Payment and Settlement  18%
Agency Services  15%
Asset Management  12%
Retail Brokerage  12%
Retail Banking  12% 0.035
Commercial Banking  15% 0.035
Capital Charges for Operational Risk  (LKR’000)
The Basic Indicator Approach

 The Standardised Approach
The Alternative Standardised Approach
Risk Weighted Amount for Operational Risk (LKR’000)
The Basic Indicator Approach

 The Standardised Approach
The Alternative Standardised Approach


105
 Template 11
Differences between Accounting and Regulatory Scopes and
Mapping of Financial Statement Categories with Regulatory Risk Categories – Bank Only

Item  Amount (LKR ‘000) as at ……………………
a b c d e
Carrying
Values as
Reported
in
Published
Financial
Statements  Carrying
Values
under
Scope of
Regulatory
Reporting  Subject to
Credit Risk
Framework  Subject to
Market
Risk
Framework  Not subject to
Capital
Requirements
or Subject to
Deduction
from Capital
Assets
Cash and Cash Equivalents
Balances with Central Banks
Placements with Banks
Derivative Financial Instruments
Other Financial Assets Held -For-
Trading
Financial Assets Designated at Fair
Value through Profit or Loss
Loans and Receivables to Banks
Loans and Receivables to Other
Customers
Financial Investments - Available -
For-Sale
Financial Investments - Held -To-
Maturity
Investments in Subsidiaries
Investments in Associates and Joint
Ventures
Property, Plant and Equipment
Investment Properties
Goodwill and Intangible Assets
Deferred Tax Assets
Other Assets
Liabilities
Due to Banks
Derivative Financial Instruments
Other Financial Liabilities Held -For-
Trading
Financial Liabilities Designated at
Fair Value Through Profit or Loss
Due to Other Customers
Other Borrowings
Debt Securities Issued
Current Tax Liabilities
Deferred Tax Liabilities


106
 Item  Amount (LKR ‘000) as at ……………………
a b c d e
Carrying
Values as
Reported
in
Published
Financial
Statements  Carrying
Values
under
Scope of
Regulatory
Reporting  Subject to
Credit Risk
Framework  Subject to
Market
Risk
Framework  Not subject to
Capital
Requirements
or Subject to
Deduction
from Capital
Other Provisions
Other Liabilities
Due to Subsidiaries
Subordinated Term Debts
Off-Balance Sheet Liabilities
Guarantees
Performance Bonds
Letters of Credit
Other Contingent Items
Undrawn Loan Commitments
Other Commitments
Shareholders' Equity
Equity Capital (Stated
Capital)/Assigned Capital
of which Amount Eligible for CET1
of which Amount Eligible for AT1
Retained Earnings
Accumulated Other Comprehensive
Income
Other Reserves
Total Shareholders' Equity

Notes:
Where a single item attracts capital charges according to more than one risk category, it should be reported in all
columns that it attracts a capital charge. As a consequence, the sum of amounts in columns (c) to (e) may be greater
than the amount in colu mn (b). An explanation note must be provided for such reporting for reconciliation purpose.


107
 Template 12
Explanations of Differences between Accounting and Regulatory Exposure Amounts

Provide qualitative explanations on the differences observed between  accounting carrying value and
amounts considered for regulatory purposes:
(a) Explain the origins of any significant differences between the amounts in columns (a) and (b) in
Template 11.
(b) Describe systems and controls to ensure that the valuation estimates ar e prudent and reliable:
• Valuation methodologies, including an explanation of how far mark -to-market methodologies
are used.
• Description of the independent price verification process.
• Procedures for valuation adjustments or reserves, including a description  of the process and
the methodology for valuing trading positions by type of instrument.


108
 Template 13
 Bank Risk Management Approach

Provide a description of the bank’s strategy and how the board of directors and senior management assess
and manage risks, enabling users to gain a clear understanding of the bank’s risk tolerance/appetite in
relation to its main activities and all significant risks.
(a) How the business model determines and interacts with the overall risk profile, how the business
model tr anslates into key risk profiles (credit, market, operational, liquidity, interest rate risk in
the banking book etc.) and how the risk profile of the bank interacts with the risk tolerance
approved by the board.
(b) Criteria and approach for risk management objectives, strategies, policies, risk appetites and
tolerance limits for key types of risks.
(c) The risk governance structure (overall and by key types of risks): Responsibilities attributed
throughout the bank (e.g. oversight and delegation of authority, br eakdown of responsibilities,
business unit etc.), relationships between the structures involved in risk management processes
(e.g. board of directors, integrated risk management committee, executive management, separate
risk committees, risk management str ucture, compliance function, internal audit function).
(d) Channels to communicate and enforce the risk culture within the bank (e.g. code of conduct,
manuals containing operating limits or procedures to treat violations or breaches of risk thresholds,
procedu res to raise and share risk issues between business lines and risk functions).
(e) The scope and main features of risk measurement systems for key risks (e.g.: methods, techniques,
measuring frequencies, assumptions etc.).
(f) Process of risk information reporting  provided to the board and senior management, in particular
the scope and main content of reporting on risk exposure (overenroll and by key types of risks).


the scope and main content of reporting on risk exposure (overenroll and by key types of risks).
(g) Qualitative information on stress testing (e.g. portfolios and risks subject to stress testing, scenarios
adopted and methodologies used and use of stress testing in risk management).
(h) The strategies and processes to manage, hedge and mitigate risks that arise from the bank’s
business model and the processes for monitoring the continuing effectiveness  of hedges and
mitigants, overenroll and by key types of risks, including the following:.
• Credit Risk Mitigation Techniques
Policies and processes for collateral evaluation and management, policies and processes for and
an indication of the extent to which  the bank makes use of on - and off -balance sheet netting,
main types of guarantor/credit derivative counterparty and their creditworthiness, information
about market or credit risk concentrations under the credit risk mitigation instruments used (i.e.
by guarantor type, collateral type and credit derivative providers) and any other.
• Liquidity Risk Mitigation Techniques
Details of liquidity contingency plans in place to bridge unforeseen liquidity difficulties and
any other.
• Operational Risk Mitigation Techn iques
Description of the use of insurance for the purpose of mitigating operational risk, details of
contingency plans in place to handle failure and situations, information technology and any other.
• Any Other


109
 Template 14
Risk Management Related to Key  Risk Exposures
i) Credit Risk
a) Breakdown of exposures subject to credit risk by major types, geographical areas, sectors and residual
maturity.
b) Description of policies, process, methods and key definitions on impairment/classification of exposures
subject to  credit risk.
c) Breakdown of exposures subject to credit risk (both on and off -balance sheet) in to impaired and non -
impaired (as per financial reporting) with related details on collateral/cash flows, impairment allowances,
write -offs and net exposure, by t ype-wise and age analysis -wise.
d) Breakdown of exposures subject to credit risk (both on and off -balance sheet) in to performing and non -
performing (as per regulatory reporting) with related details on collateral value, specific provision, write -
offs and net  exposure, by type -wise and age analysis -wise.
e) The extent of non -performing loans, that are not considered to be impaired and the reasons for this.
ii) Market Risk
a) Interest Rate Risk  - Interest rate sensitivity gap analysis for contractual and behavioural maturities (up to
1 month, 1 - 3 months, 3 - 6 months, 6 - 12 months, 1 - 3 years, 3 - 5 years and over 5 years) to cover both
on and off -balance sheet interest rate sensitive assets  and liabilities by currency -wise (local and major
currencies).
b) Equity Position Risk  - Type, carrying value, fair value, realised gains/(losses) and unrealised gains/(losses)
for the reporting period and amounts included in capital adequacy calculation.
c) Foreign Exchange Risk  - Foreign currency denominated assets and liabilities (both on and off -balance
sheet) broken down by maturity bands (for up to 1 month, 1 - 3 months, 3 - 6 months, 6 - 12 months, 1 - 3
years, 3 - 5 years and over 5 years), illustrating currency -wise maturity gaps, cumulative maturity gaps and
net open position.
iii) Liquidity Risk


net open position.
iii) Liquidity Risk
a) Trend in key liquidity ratios including, SLAR, LCR, net loans to total assets, loans to customer deposits,
liquid assets to short term liabilities, commitments to l iquid assets.
b) Currency -wise ( local and major currencies)  maturity gaps of assets and liabilities (contractual and
behavioural maturities for up to 1 month, 1 - 3 months, 3 - 6 months, 6 - 12 months, 1 - 3 years, 3 - 5 years
and over 5 years) to cover both on and off -balance sheet assets and liabilities.
c) Measurement tools/metrics that assess the structure of balance sheet, as well as metrics that project cash
flows and future liquidity positions, taking into account off -balance sheet risks which specific to the bank.
d) Key metrics that management monitors liquidity, including, but not limited to, concentration limits and
sources of funding (both products and counterparties), liquidity exposures and funding needs at the level of
individual legal entities, forei gn branches and subsidiaries, taking into account legal, regulatory and
operational limitations on the transferability of liquidity.
iv) Operational Risk
a) Major operational viz. system or human, failures and financial losses incurred by the bank due to such
failures during the reporting period.
b) Details of activities that have been outsourced together with parties and basis for payment for such services.
c) Details of due diligence tests of third party service providers.
v) Interest Rate risk in the Banking Book (IRRBB )
The increase/(decrease) in earnings or economic value (or relevant measure used by management) for upward and
downward rate shocks according to management’s method for measuring IRRBB, broken down by currencies (for
major currencies) and maturity bands (for up to 1 month, 1 - 3 months, 3 - 6 months, 6 - 12 months, 1 - 3 years, 3 -
5 years and over 5 years).


@601516®® LD^IU 61115160CENTRAL BANK OF SRi LANKA01 September 2016CIRCULAR Ref: 02/17/800/0007/002BANK SUPERVISION DEPARTMENTTo: All Chief Executive Officers of Licensed Commercial Banks and LicensedSpecialised BanksSecondary Market Trading of Government Securities and Reporting by Licensed Commercial Banks and Licensed Specialised BanksIn order to promote the secondary market for government securities by enhancing transparency in dealings and price discovery, all licensed commercial banks and licensed specialised banks shall comply with the following commencing 15 September, 2016:2 Use the Bloomberg Trading Platform (Fixed Income Quotes - FIQ) available for Sri Lanka to:i) Conduct all outright trades with other banks and primary dealers; andii) Report yield rates and volumes of all outright trades carried out over-the-counter in excess of Rs.50 million, within 30 minutes of each such trade.3 In the case of trades carried out through brokers, selling-side banks shall report under 2(ii) above.Superintendent of Public DebtDirector of Bank Supervision
6 ©© CM® 30, eDEto,ms . ©© . 590, ©ODG® 01, @C 9411 2477100/6596 ^ih miri?, @60. 30 ^lu^l Q*T(tpLbi_] 1 Level 6, No. 30, Janadhipathi Mawatha, Colombo 1Qu. ®60. 590, QsirQpihq 01, P.O.Box.590,Colombo 01, Sri Lanka.P 9411 2477711 B banksup@cbsl.lk www.cbsl.gov.lk


'25 July 2016MONETARY BOARI)
CENTRAL BANK OF SRI LANKA
BANKING ACT DETERMINATIONS No.01 of20l6
ANNUAL LICENCE FEE OF
LICENSED COMMERCIAL BANKS AND LICENSED SPECIALISED BANKS
Determination made by the Monetary Board of the Central Bank of Sri Lanka under
Sections 8 and 76D(6) of the Banking Act, No. 30 of 1988, as amended.
In terms of Sections 8(l) and 76D(6) of the Banking Act, the Monetary Board has determined
that every licensed commercial bank and licensed specialised bank shall pay the licence fee in
respect of the calendar year 2017 to the Central Bank of Sri Lanka on or before 31't day of
January of 2017, based on the total assets of such bank as at end of 2016 as set out in the
table below.
Total Assets
as at the end of 2016 (Rs. Bn)Licence Fee
(Rs. Mn)
Above 750 30.0
Above 500 to 750 2s.0
Above 200 to 500 22.0
Above 125 to 200 16.5
Above 75 to 725 1 1.0
25 to 75 5.5
Less than 25 2.2
%x
Dr. Indrajit Coomaraswamy
Chairman of the Monetary Board and
Governor of the Central Bank of Sri Lanka


01 February 2016@0233 ©CDCENTRAL BANK OF SRJ LANKACIRCULARRef: 02/17/500/0012/001Bank Supervision DepartmentTo: The Chief Executive Officers of Licensed Commercial Banks andLicensed Specialised BanksDisplay of Interest Rates, Exchange Rates, Service Charges, Fees and CommissionsReference our previous Circular dated 06 June 2011 on the above subject.All licensed banks are required to display fees charged from customers, for fund transfers through LankaSettle System, Sri Lanka Inter Bank Payment System and Common Electronic Fund Transfer Switch in all branches and publish same in banks’ web sites in the following suggested format, commencing 10 February 2016. These fees so disclosed shall be the fees determined and communicated by the Central Bank of Sri Lanka from time to time.
Mr A A M ThassimDirector of Bank SupervisionDescriptionFee (Rs.)Fund transfers through the LankaSettle systemFund transfers through the Sri Lanka Inter Bank Payment SystemCommon Electronic Fund Transfer Switch (CEFTS)Fund transfers through internet banking- Fund transfers through mobile bankingFund transfers through over-the-counterFund transfers through [Name. of the .Bank] ATMs- Fund transfers through ATMs of other CEFTs members
G ©20 sto®, epota 30, tfanSoiS ©JOCO, UK . ©©. 590, ©ewe® 01, § @ota»© £ 94 11 2477100/6596 loin?, 30 ^snir^lu^i iD(Taj<5S»g> Q&ropibq 1Qu. @60.590, Qewrqpiiq 01, ®6»IEI«DSC 9411 2477711 banksup@cbsl.lkLevel 6, No. 30, Janacfiiipattii Mawatha, Colombo 1P. 0. Box. 590, Colombo 01, Sri Lanka.www.cbsl.gov.lk

data\CBSL\2016\Display of Interest Rates, Exchange Rates, Service Charges, Fees and Commissions_0.pdf


$ goor Oo Orotg0
Samimo lo*#rr arrdld
cErrkfl ilrr{r( oFsnt lAffr(A
}g January 2016 CIRCULAR Refz 02n7n50l0095/001
Bank Supervision Department
To: The Chief Executive Oflicers of Licensed Commercial Banks and
Licensed Specialised Banks
Reporting on Cyber Security Events
All licensed banks are requested to submit the reports on Cyber Security Events (CSE) as
follows with immediate effect:
a. CSE-I as at Annex within one working day from the detection of any CSE.
b. CSE-II as at Annex within 15 days from the end of each quarter.
c. Details of all CSE detected by the bank from 01.01.2015 in same format as in (b.)
above, if not already submitted.
The above details shall be e-mailed to dbsd@cbsl.lk or delivered in confidential cover to the
Director of Bank Supervision.
Encl:
6 Oo oocr, qeo 80, dooa.rd @rOtD,
o..€cr.5go, elotgo Of, € €plooo
I $nzttttoorcss6 ggdr orr9, Oal. 30 sdrrrnugt mo$op Gatr(griq I
E. Ou. eo.590, Oangiq 01, eendtoststrd 6, ilo, 30, tranadhlpafil tlaudu, Colombo I
P.0.Box.590,Colombo 01, Sil lanl6.
@ www.cbsl.gov.lk H gtu24rrt11 E banksup@cbsl.lk

data\CBSL\2016\Reporting on Cyber Security Events_0.pdf


CSE-I
To: Director of Bank SuPervision
Repoft on Cvber Securitv Evenls
Name of Bank:
Name and designation of authorised officer
(!) Type ofincident: Inhusion/hacking, Malware, Malicious code, Virus, Phirhing, D€oial ofsavice, social engineering, uuauthorized slsteut
usage, Oth€r (specin
@) Please provide the amomt in case of finanoial impact and description in case of operational impaot'
(c) To whoor the event has been internally escalated.
[Email to dbsd@cbsl.lk or deliver in confidential cover to the Director of Bank Supervision.]Reporting time period:
Type of
incident(u)Summary of
incidentDate of
detectionPhysical location/
branch (if applicable)Estimated/actual
impact of the
incident
(Financial and
bnerational)@)Internal reporting
authority(c)Law
enforcement
authorities
involved
(if applicable)


CSE.II
To: Director of Bank SuPervision
Name of Bank:Ouarterlv Report on Cvber Securitv Events
Reporting time Period:
Type of
incident(")Summary
of incidentTime period
of incidentDate of
detectionPhysical
location/ branch
(if applicable)Impact of the
incident
(Financial and
dperational)(b)Internal reporting
authority(")Involved law
enforcement
authorities
(if applicable)
Nrme rltd designsdotr of &uthorised qfffcer
(8) Type ofinadene I rusiodhackilg, Malware, Malicious corle, virus, Phishing D€rdal ofservice, social engineeritrg, uoauthorized system
usage. Other (specifo)
(b) Please povide the.amount in oase offi.oanqial impacl alld desoaiption in case ofoperationat impaot'
(c) To whom the evsnt has beetr intemally escalated.
[Email to dbsd@,cbs1.lk or deliver in confidential cover to the Director of Bank Supervision.]


2.2. March 2017ffi
MONETARY BOARI)
CENTRAL BANK OF SRI LANKA
BANKING ACT DETERMINATION No.01 of 2017
AMENDMENT TO PAWNING CONDITIONS ISSUED TO
LICENSED COMMERCIAL BANKS
Determination made by the Monetary Board of the Central Bank of Sri Lanka under
Section 83A of the Banking Act, No' 30 of 1988, as amended.
In the exercise of the powers conferred by Section 83A of the Banking Act, No. 30 of 1988 (as
amended), the Monetary Board hereby issues the following Conditions amending the Pawning
Conditions issued to licensed commercial banks dated 07 September 1998.
2. The following new Conditions shall be included immediately after Condition 15(8) of
Pawning Conditions issued to licensed commercial banks dated 07 September 1998.
Sale of Pledges 15. (9) A Pawnee shall report details of purchases of articles where
total value is Rs.500,000 or above at auctions of pawned
articles, each month to the Director of Bank Supervision on
or before the 15ft day of the following month in the format
set out in Schedule 8 annexed hereto.
15. (10) A Pawnee shall report if there is reason to suspect that there
is collusion between two or more parties with a view to
buying large quantities of go1d.
15. (11) A Pawnee shall identify and report any purchases of
suspicious transactions arising from purchases of gold articles
from auctions of pawned articles to the Director Financial
Intelligence Unit (FIU) through the Compliance Officer of
the bank designated under the Financial Transactions
Reporting Act No. 6 of 2006. A suspicious transaction shall
' have the same meaning as in Sections 6 and 7 of the Financial
Transactions Reporting Act No. 6 of 2006 and the Circular
I3ll2dated 22March20l2 issued by the Director of FIU.
ilo*,^,*-r,
' Dr.IndrajitCoomaraswamy
Chairman of the Monetary Board and
Governor o.f the Central Bank of Sri Lankn


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MONETARY BOARD CENTRAL BANK OF SRI LANKA13 January 2017 BANKING ACT DIRECTIONS No. 01 of 2017LOAN TO VALLE RATIOS FOR CREDIT FACILITIESIN RESPECT OF MOTOR VEHIC LESIssued under Sections 46( 1) and 76( J)(I) of the Banking Act. No. 30 of 1988. as amended.The Monetary Board issues Directions as follows for the implementation of loan to value (LTV) ratios in respect of credit facilities granted by licensed commercial banks (LCBs) and licensed specialised banks (LSBs) for the purpose of purchase or utilisation of motor vehicles.1. Empowerment under the Banking Act1.1 In terms of Sections 46(1) and 76(J)( 1) of the Banking Act, in order to ensure the soundness of the banking system, the Monetary Board is empowered to issue Directions to all or any LCB and LSB. respectively, regarding the manner in which any aspect of the business of such banks is to be conducted.2. Maximum2.1 Commencing 16 January 2017. credit facilities granted by every licensedLTV Ratiobank for the purpose of purchase or utilisation of vehicles shall not exceed the follow ing percentages of the market value of such vehicles.(i) In respect of unregistered vehicles and registered vehicles which have been used in Sri Lanka for less than one year after the first registration;(a) 90 per cent for commercial vehicles (lorries and heavy- vehicles);(b) 50 per cent for motor cars, sports utility vehicles (SUVs) andvans;(c) 25 per cent for three wheelers; and(d) 70 per cent for any other vehicles.(ii) 70 per cent in respect of registered vehicles which have been used in Sri Lanka for not less than one year after the first registration.3. Exemptions from the Maximum3.1The limits in Direction 2 above will not be applicable to credit facilities granted to any company engaged in tourism and/or transportation forLTVpurchase of vehicle fleets to be utilized for their core business operations.1


MONETARY BOARD CENTRAL BANK OF SRI LANKA13 January 2017 BANKING ACT DIRECTIONS No. 01 of 2017provided that such vehicles financed shall not be transferred to any person or entity within one year from the date of the first registration.3.2 Licensed banks shall have internal limits and adopt adequate risk management procedures in granting credit facilities for this category of vehicles.4. Other Credit 4.1 A licensed bank shall not grant credit facilities for the purpose of Facilities for . ...... ,. . . . .Vehicles purchase or utilisation ot motor vehicles, other than credit facilitiesgranted in accordance with Directions 2 and 3 above.5. Interpretations 5.1 In these Directions:(i) Credit facilities shall mean finance leases, hire purchase facilities andall other credit facilities granted for the purpose of purchase or utilisation of vehicles.(ii) The value of the vehicle shall be the market value obtained from aprofessional valuer at the time of granting credit facilities as per the prevailing practice.6. Revocation of 6.1 The following Directions arc hereby revoked:Directions W Banking Act Directions No. 02 of 2015 on Loan to Value Ratio forLoans and Advances in respect of Motor Vehicles.(ii) Banking Act Directions No. 03 of 2015 on Loan to Value Ratio for Loans and Advances in respect of Motor Vehicles.Dr. Indrajit CoomaraswamyChairman of the Monetary Board and Governor of the Central Bank of Sri Lanka
2


15 February 2017MONETARY BOARI)
CENTRAL BANK OF SRI LANKA
BANKING ACT DIRECTIONS No.02 of20l7
AMENDMENT TO DIRECTIONS ON THE LOAN TO VALUE RATIOS FOR
CREDIT FACILITIES IN RESPECT OF MOTOR VEHICLES
The interpretations in Direction 5 of the Banking Act Directions No. 01 of 2017 are amended
by replacing the following:
5. Interpretations 5.1 Credit facilities shall mean finance leases, hire purchase facilities
and all other credit facilities granted for the purpose of purchase or
utilisation of vehicles.
The value of the vehicle shall be the market value. Licensed banks
may use the following for the purpose of valuing vehicles:
i) Brand new vehicles - value given by authorized agents
ii) Reconditioned vehicles - valuation considered at customs or
invoice value given by the dealer
iii) Registered vehicles - value given by a professional valuer
Licensed banks should ensure that the valuation is obtained at the
time of granting credit facilities and provides a true and fair value.
The vehicle classes provided by the Department of Motor Traffic
(DMT) may be categorised for the pulpose of the Direction as in
Table 1below:
le Classes able I - Casation of DM'l'Vehic
Vehicle Category Vehicle Class of
DMTLTV
Commercial vehicles (Lorries
and Heavy Vehicles)c1, c, cE, DE, G1,
G,J90o/o
Motor Cars, SUVs and Vans B, Dl, D 50%
Three wheelers B1 25%
Any other vehicle A1, A 70%
5.5 Fleet of vehicles referred to in Direction 3.1 shall mean two or more
vehicles.5.2
5.3
5.4


15 February 2017MONETARY BOARD
CENTRAL BANK OF SRI LANKA
BANKING ACT DIRECTIONS No.02 of2017
5.6 Company engaged in tourism referred to in Direction 3.1 shall mean
a company registered with the Sri Lanka Tourism Development
Authority or any other authority to provide services to tourism.
5.7 A company engaged in transportation referred to in Direction
shall mean any business entity registered at any state authority
the purpose ofbusiness oftransportation ofgoods or passengers.
5.8 An LTV of 70Yo may be approved for credit in respect of all
vehicles where applications for credit have been received or credit
facilities have been approved by a licensed bank on or before 16
January 2017.
tt"*"Q w\
Dr. Indrajit Coomaraswamy
Chairman of the Monetary Board and
Governor of the Central Bank of Sri Lanka3.1
for


MONETARY BOARDCENTRAL BANK OF SRI LANKA22 March 2017 BANKING ACT DIRECTIONS No. 03 of 2017AMENDMENT TO REGIONAL DEVELOPMENT BANKS (PAWNING) DIRECTIONS 1998In the exercise of the powers conferred by Section 76J(1) of the Banking Act, No. 30 of 1988 (as amended), the Monetary Board hereby issues the following amendment to the Regional Development Banks (Pawning) Directions issued to Regional Development Banks (now amalgamated and established as Pradeshiya Sanwardana Bank) dated 07 September 1998.2. The following new Directions shall be included immediately after Direction 15(8) of the Regional Development Banks (Pawning) Directions dated 07 September 1998.Sale of Pledges 15. (9) A Pawnee shall report details of purchases of articles where total value is Rs.500,000 or above at auctions of pawned articles, each month to the Director of Bank Supervision on or before the 15th day of the following month in the format set out in Schedule 8 annexed hereto.15. (10) A Pawnee shall report if there is reason to suspect that there is collusion between two or more parties with a view to buying large quantities of gold.15.(11) A Pawnee shall identify and report any purchases of suspicious transactions arising from purchases of gold articles from auctions of pawned articles to the Director Financial Intelligence Unit (FIU) through the Compliance Officer of the bank designated under the Financial Transactions Reporting Act No. 6 of 2006. A suspicious transaction shall have the same meaning as in Sections 6 and 7 of the Financial Transactions Reporting Act No. 6 of 2006 and the Circular 03/12 dated 22 March 2012 issued by the Director of FIU.—pDr. Indrajit CoomaraswamyChairman of the Monetary Board ahd Governor of the Central Bank of Sri Lanka


MONETARY BOARD CENTRAL BANK OF SRI LANKA31 May 2017 BANKING ACT DIRECTIONS No. 04 of 2017AMENDMENT TO DIRECTIONS ON THE LOAN TO VALUE RATIOS FORCREDIT FACILITIES IN RESPECT OF MOTOR VEHICLESThe Directions 5.1 and 5.4 of the Banking Act Directions No. 02 of 2017 on Amendment to Directions on the Loan to Value Ratios for Credit Facilities in Respect of Motor Vehicles are amended by replacing the following:5. Interpretations 5.1 Credit facilities shall mean finance leases, hire purchase facilities and all other credit facilities granted for the purpose of purchase or utilisation of vehicles by end-users.5.4 The vehicle classes provided by the Department of Motor Traffic (DMT) may be categorised for the purpose of the Direction as in Table 1 below:Table 1 - Calegorisation of DMT Vehicle ClassesVehicle Category’Vehicle Class of DMTLTVCommercial vehiclesC1,C, CE,D1,D, DE, Gl.G.J90%Motor Cars, SU Vs and VansB (other than light trucks & single cabs)50%Three wheelersBl25%Any other vehicleAl, A. light trucks & single cabs categorized under B70%Dr. Indrajit CoomaraswamyChairman of the Monetary Board and Governor of the Central Bank of Sri Lanka


lf September 2017MONETARY BOARD
CENTRAL BANK OF SRI LANKA
BANKING ACT DETERMINATION No.02 of 2017
ANNUAL LICENCE FEE OF
LICENSED COMMERCIAL BANKS AND LICENSED SPECIALISED BANKS
Determination made by the Monetary Board of the Central Bank of Sri Lanka under
Sections 8 and 76D(6) of the Banking Act, No. 30 of 1988, as amended.
In terms of Sections 8(1) and 76D(6) of the Banking Act, the Monetary Board has determined
that every licensed commercial bank and licensed specialised bank shall pay the licence fee in
respect of the calendar year 2018 to the Central Bank of Sri Lanka on or before 31't day of
January of2018, based on the total assets ofsuch bank as at end of2017, as set out in the table
below.
Total Assets
as at the end of 2017 (Rs. Bn)Licence Fee
(Rs. Mn)
Above 750 30.0
Above 500 to 750 25.0
Above 200 to 500 22.0
Above 125 to 200 16.5
Above 75 to 125 11.0
25 to 75 5.5
Less than 25 2.2
Paragraph No. 01 of the Banking Act Determination
Banking Act on licence fee to be paid with effect fromissued with respect to Section 8 of the
01.01.1989 is hereby revoked.
tleJ\^"r--T
Dr. Indrajit Coomaraswamy
Chairman of the Monetary Board and
Governor of the Central Bank of Sri Lanka


MONETARY BOARI)
CENTRAL BANK OF SRI LANKA
BANKING ACT DIRECTIONS 16 October 2017 No.05 of20l7
ENHANCEMENT OF MINIMUM CAPITAL REQUIREMENT OF BANKS
In terms of Sections 46(l) and76J(l) read with Sections 19(3) and 76G, respectively, of the Banking
Act, No. 30 of 1988, last amended by the Banking Act, No. 46 of 2006, the Monetary Board has
determined with the concurrence of the Minister to increase the minimum capital requirements for
licensed commercial banks (LCBs) and licensed specialised banks (LSBs), respectively:
1. Empowerment 1 . 1 In terms of Sections 46( I ) and 7 6J(1) of the Banking Act, in order to ensure
under the the soundness of the banking system, the Monetary Board is empowered to
Banking Act
issue Directions to all or any LCB or LSB, respectively, regarding the
manner in which any aspect of the business of such banks is to be conducted.
Minimum
Capital
Requirements1.2 In terms of the provisions of Sections 19(3) and 76G of the Banking Act, the
Monetary Board may vary the amounts specified as the minimum amount
of capital required to be maintained by LCBs and LSBs, respectively, having
regard to the assets, liabilities and the viability and stability of the banking
system and the interest of the national economy.
2.1 Commencing 31.12.2020, the minimum capital requirement of all existing
LCBs and LSBs shall be as given in Table 1:
Table 1: Minimum Capital Requirements for Banks
Type,rof Bank,
Locally Incorporated LCBs 20.0
Banks Incorporated Outside Sri Lanka
with assets over Rs.100 Bn
with assets upto Rs.100 Bn10.0
5.0
Locally Incorporated LSBs 7.5


}b October 2017/^ffi.s&:,HWZ
MONETARY BOARI)
CENTRAL BANK OF SRI LANKA
BANKING ACT DIRECTIONS No.05 of20l7
3. Interpretation
4. Capital
Planning
Process
5. Steps to
Secure
Compliance3.1 Capital for this purpose shall mean the sum of the following Web Based
Return Codes of Appendix I of Schedule I to the Banking Act Direction No.
01 of 2016 dated 29 December 2016 on Capital Requirements under Basel
III for LCBs and LSBs.
LCBs and LSBs shall, where necessary, include capital augmentation plans
to meet the above capital requirements in the annual Intemal Capital
Adequacy Assessment Process (ICAAP) and submit such ICAAP document
to the Director of Bank Supervision.
Where an LCB or LSB has failed to comply with these Directions, such LCB
or LSB shall not pay dividends or repatriate profits or adopt any other
measure that will further deteriorate the capital of such LCB or LSB until
such compliance is effected and confirmed by the Director of Bank
Supervision.
Restrictions in terms of asset growth and branch expansion will be imposed
- on LCBs and LSBs which are non-compliant with the above Directions.
t/.e $^^--7
Dr. Indrajit Coomaraswamy
Chairman of the Monetary Board and
Governor of the Central Bank of Sri Lanka4.1
5.1
5.2Equity capital or stated capital/assigned capital 20.2.t.t.t.1
Reserve fund 20.2.r.1.t.2
Published retained eamings/(Accumulated
retained losses)20.2.t.t.1.3
General or other disclosed reserves 20.2.t.1.1.5
20.2.t.1.1.6 Only unpublished current year's profit/(losses)
included in this Web based retum code
20.2.2.1.t.1 Qualifuing additional Tier I capital instruments


MONETARY BOARD
CENTRAL BANK OF SRI LANKA
 29 November  2017 BANKING ACT DIRECTIONS  No. 06 of 201 7
1

FINANCIAL DERIVATIVE TRANSACTIONS FOR
LICENSED COMMERCIAL BANKS AND LICENSED SPECIALISED BANKS
The Monetary Board issues the  following  Directions on Financial Derivative Transactions for Licensed
Commercial Banks (LCBs) and Licensed Specialised Banks (LSBs).
1. Empowerment
under the
Banking Act  1.1  In terms of Sections 46(1) and 76J(1) of the Banking Act, in order to ensure
the s oundness of the banking system, the Monetary Board is empowered to
issue Directions to all or any LCB and LSB, respectively, regarding the
manner in which any aspect of the business of such banks is to be conducted.
2. Applicability  2.1  These Directions will cover derivative transactions in foreign currency of
LCBs and LSBs which are authorised  to offer  such derivative transactions in
terms of the Foreign Exchange  Act of Sri Lanka.  The LCBs and LSBs shall
herein after be referred to as Eligible Banks (EBs).
2.2  These Directions shall be applicable to the Domestic Banking Units (DBUs)
and Off -shore Banking Units (OBUs) of EBs.
3. Commencement
of derivative
transactions  3.1
 LCBs which intend to engage in financial derivative transactions  shall notify
its interest , prior to the commencement of the initial  transaction , to the
Director  of Bank Supervision (DBS) with a copy to the Director of
International Operation s Department of the Central Bank of Sri Lanka
(CBSL) .
3.2  LSBs shall obtain the written approval of DBS to engage in each deriv ative
specified in 5 .2.
4. Board approved
policies and
procedures  4.1
 EBs shall have in place B oard approved policies and procedures on
derivative transactions and risk management framework to identify, quantify
and evaluate the exposures, manage risk and monitor performances related to
derivative transactions.


derivative transactions.
 4.2  EBs shall ensure that appropriate expertise and capacity building are in place
to engage in financial derivative transactions.


MONETARY BOARD
CENTRAL BANK OF SRI LANKA
 29 November  2017 BANKING ACT DIRECTIONS  No. 06 of 201 7
2

5. General Terms
and  Conditions  5.1
 Derivatives transactions may be entered into for the following purposes:
a) End User (EU) Deals: Transactions for the purpose of hedging EBs own
assets and liabilities (other than the assigned capital and retained
earnings ) and managing their own risk profile as may be necessary from
time to time, however, not for speculative purposes.
b) Non Market Maker  (NMM) Deals: Transactions executed by EBs with
their customers , i.e., any party other than an EB or with another EB with
the intention of making a spread. In these transactions an EB shall not
take any market risk into its own books and shall cover the transaction on
the same day on a back -to-back basis with another EB in Sri Lanka or
with a foreign counterparty.
c) Derivative Mar ket Maker (DMM) Deals: Transactions executed by
EBs with their customers or with another EB while taking the market risk
into its own books.
5.2  Derivatives permitted under these Directions are as follows:
a) Swaps
b) Options
c) Forward Rate Agreements
d) Forward Contracts
e) Swaptions
f) Such other instruments as may be specified by the Monetary Board from
time to time.
5.3  EBs shall ensure th e following :
a) all derivatives offered to customers are based on valid underlying
transactions which include current account transactions and permitt ed
capital account transactions.
b) the use of permitted derivative s is only for the purpose of hedging or
managing the risk arising from assets or liabilities of customers or valid
transactions and not for speculative purposes.


MONETARY BOARD
CENTRAL BANK OF SRI LANKA
 29 November  2017 BANKING ACT DIRECTIONS  No. 06 of 201 7
3

c) the notional principal amount, including any leverage of the derivative
shall not exceed the outstanding amount of the underlying
transaction/asset or liability or the underlying exposure.
5.4  EBs shall use products listed in 5.2 above to enter in to back to back
transactions with a foreign counterpart.
5.5  EBs are permitted to hedge contingent exposures or such risk s arising from
balance sheet exposures of their customers.
5.6  EBs may allow importers and exporters to hedge their exposure including a
contract based on estimated transaction value. The estimated transaction
value shall be determined based on their audited financials or by averaging
the preceding three contract values or immediately preceding contract value,
whichever  is higher, subject to confirmation by an EB.
5.7  Parties may unwind/sell back a derivative partially or fully, if they consider
such a derivative is no longer required , as follows:
a) all derivative contracts once unwound are eligible to be rebooked,
subject to the terms specified in these Directions .
b) any customer who wishes to unwind a derivative contract before
maturity while the underlying transaction still exists may do so with the
marked-to-market loss charged to such customer.
c) a marked -to-market gain  (financial gain)  should not be paid to the
customer.
d) the rate benefit , if any,  may be passed to the customer at the time of
rebooking.
5.8  In case of insolvency, if the claim of the counterparty provides for the
netting of the mutual transaction between the insolvent party and the
creditor, the amount payable by one party shall be set off against the amount
payable by the other party, and only the net balance shall be paid or
received .