Directions, Determinations, and Circulars issued to Licensed Specialised Banks  399
Ref. : 02  / 17 / 600 / 0031  / 001
Bank Supervision Department
28 July 2011
To : CEOs of all Licensed Commercial Banks, and
       Licensed Specialised Banks
Dear Sir  / Madam,
REGISTRATION OF SECURED INTERESTS OVER MOV ABLE PROPERTIES
WITH THE SECURED TRANSACTIONS REGISTRY
It is observed that the Secured Transactions Registry maintained by Credit Information Bureau
(CRIB) of Sri Lanka under section 23 of the Secured Transactions Act, No. 49 of 2009, will be beneficial
to credit risk management of banks as it provides valuable information to assess the availability and
quality of movable assets taken as securities for loans and other banking facilities.
Therefore, licensed banks are requested to register any pledge, mortgage or obligation on movable
assets as collaterals for loans and other banking facilities, as provided for in sections 2 and 3 of
the Secured Transactions Act, with the Secured Transactions Registry at the CRIB and utilize such
information obtainable from the CRIB for credit risk management decisions.
Yours faithfully,
(Mrs.) T M J Y P Fernando
Director of Bank Supervision


400 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Ref. No. : 02  / 01 / 00 / 0002  / 001
Bank Supervision Department
31 December 2007
To :  CEOs of All Licensed Banks
Dear Sir  / Madam,
GUIDELINES FOR EMPLOYMENT OF EXPATRIATE STAFF IN BANKS
 As announced at the meeting of the Chief Executive Officers of licensed banks on 22 November
2007, the Guidelines for employment of expatriate staff in banks, which have been developed to facilitate
the introduction of new banking products and risk management of banks, are sent herewith.
 Please acknowledge receipt of this Circular .
Yours faithfully,
Sgd, B.D.W.A. Silva
Actg.  Director of Bank Supervision
Encl.


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  401
Guidelines for Employment of Expatriate Staff in Banks
1. Curr ent Policy
1.1 At present, the Central Bank of Sri Lanka (CBSL) recommends to Immigration and Emigration
Department resident visas for expatriate staff of foreign banks to enable the banks to employ them
as follows.
 (i) Maximum of three officers without any restriction.
 (ii) Permission for any officers exceeding 3 is granted on a case-by-case-basis for a specific
period not exceeding one year subject to condition that local staff should be trained to handle
the work initiated/undertaken by such expatriate officers.
1.2 The objective of developing this policy is to provide local staff with the training and opportunities
to take on positions held by the expatriate officers.
1.3 In the case of local banks, there has not been such a policy since local banks generally do not
employ foreign personnel. However, four local banks have employed foreign consultants to
undertake specific assignments.
2. Need for  a Revision of the Policy
 The following factors are considered favourably to relax the current policy to permit more expatriate
officers and to encourage domestic banks to employ foreign experts.
 (i) Expansion of business operations of some foreign banks.
 ( ii)  Foreign banks now t end to expand business in Sri Lanka, especially infrastructure projects,
through funds borrowed from their respective head offices and branches.
 (iii) The active presence of foreign banks with internationally experienced professionals will help
improve Sri Lanka’s image and investment promotion internationally.
 (iv) T endency to introduce international banking products such as securitization, loan syndication,
foreign loan raising, infrastructure funding and derivative products.
 (v) Banks in Sri Lanka mainly depend on conventional deposit and loan products. Introduction of


(v) Banks in Sri Lanka mainly depend on conventional deposit and loan products. Introduction of
innovative banking products indicate the development of the financial sector and the economy.
International banking know-how is necessary to introduce new banking products, especially to
attract foreign capital to Sri Lanka.
 (vi) Banks will need to employ risk management specialists to implement advanced approaches of
Basel II in the medium term and there may be a need to look for such specialists from countries
which implement Basel II.
 (vii) The proposed adoption of IAS/IFRS also will require bankers who have practical experience in
adopting IAS/IFRS.
 (viii)  In general, banking industry needs experts who have global banking experience if Sri Lankan
banks are to introduce modern banking products, technology and risk management techniques.
3. Policy Guidelines
 3.1 For  Foreign Banks
 (i) The maximum number of expatriate officers permitted will be as follows:
 (a) 3 for banks whose staf f strength is less than 75.
 (b) 5 for banks with staf f strength of 75 to 400.
 (c) 10 for banks with staf f strength of more than 400.


402 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
 (ii) In the case of Indian banks, agreement as per on-going negotiations of the Comprehensive
Economic Partnership Agreement (CEPA) will be adopted as the minimum criteria.
 (iii) Approval for expatriate officers in excess of the above limits will be considered on a case-
by-case-basis taking into consideration the specific skills of the nominated expatriates
and specific assignments given to them. The banks should submit projections for specific
business or deliverables expected from expatriate officers.
 (iv) V alidity period of the approval will be two years for expatriates under the normal quota and
one year for others (case-by-case-basis criteria).
 (v) In the case of expatriate officers under the normal quota except for CEO, approval may
be renewed for another term of two years after assessing the performance of respective
expatriate officer. For CEOs, approval may be extended for two terms (4 more years) on the
basis of performance records. The renewal for the term of expatriates permitted in excess of
the normal quota (case-by-case basis) will be considered only for extension of the projects/
assignments or new projects/assignments.
 (vi) Approving authority for expatriate officers under normal quota will be the Director of Bank
Supervision. The Deputy Governor will approve expatriate officers in excess of the normal
quota.
 3.2  For  Locally Incorporated Banks
Permission will be granted on a-case-by-case basis taking into consideration the specific needs of
the banks. Special attention will be given to employment of foreign experts in the following fields:
 (a) Basel II-based risk management
 (b) International Accounting Standards
 (c) Risk modelling and data warehouse
 (d) Structuring of derivative products
 (e) Corporate governance


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  403
Ref. No. : 02  / 04 / 003 / 0400  / 001
Bank Supervision Department
19 January, 2004
To :  All Chief Executive Officers
 of LCBs and LSBs
GUIDELINES ON CREDIT RATING OF BANKING INSTITUTIONS
 I refer to the discussions on the above subject at the meetings of the Chief Executive Officers of
Licensed Commercial Banks (LCBs) and Licensed Specialised Banks (LSBs) held on 20.11.2003 and
18.12.2003 and the agreement of the Chief Executive Officers to obtain ratings for banks.
 All LCBs and LSBs are hereby required to observe the following guidelines in this regard.
1. All LCBs and LSBs (both local and foreign) are hereby required to obtain a Credit Rating on
or before 30 June 2004.
2. All ratings should be from an independent rating agency acceptable to the Central Bank of Sri
Lanka.
3. Local branches of foreign banks may disclose their parent bank’ s rating.
4. W ith effect from July 2004, all banks are required to disclose their rating in all their advertise -
ments soliciting deposits and other debt instruments. The fact that a bank has not obtained a
rating should also be disclosed, if that is the case.
5. Credit Ratings should be updated annually and the rating report should be submitted to the
Central Bank of Sri Lanka within one month from the date of the report.
Please acknowledge the receipt of this letter.
Yours faithfully,
Director of Bank Supervision


404 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Our Ref. : 02  / 17 / 800 / 0014  / 01
Bank Supervision Department
24 April 2013
To : CEOs of all Licensed Commercial Banks and
       Licensed Specialised Banks
Dear Sir / Madam,
AMENDMENTS TO GUIDELINES ON THE
OPERATIONS OF THE INVESTMENT FUND ACCOUNT
An amendment to paragraph 3.1( iii) of the above Guidelines and the amended format to submit
information on the utilisation of the investment fund account on a monthly basis are enclosed for
compliance.
The letter dated 1st October 2011 sent on the above subject is hereby withdrawn.
Yours faithfully,
(Ms.) T M J Y P Fernando
Director of Bank Supervision
Encl.
Annex
Amendment to Guidelines to Licensed Commercial Banks and Licensed Specialised Banks
on the Operations of the Investment Fund Account
The following Guidelines will replace 3.1( iii) of the above.
3.1(iii)  Lend only for the following purposes commencing 01 May 2013:
 (a) Long-term loans for cultivation of plantation crops/agriculture crops including, fruits,
vegetables, cocoa and spices and for livestock and fisheries
 (b) Factory/mills modernization/establishment/expansion
 (c) Small and medium enterprises: loans up to Rs. 200 mn to enterprises with annual
turnover less than Rs. 600 mn
 (d) Information Technology related activities and Business Process Outsourcing
 (e) Infrastructure development
 (f) Education: vocational training and tertiary education
 (g) Housing: up to Rs. 2 mn per customer for construction of a house for residential purposes
 (h) Housing development: construction of low cost houses for residential purposes
 (i) Construction of hotels and for related purposes
 (j) Investment in/purchases of sustainable energy sources including solar power up to
Rs. 10 mn
 (k) W omen enterpreneurship venture capital projects up to Rs. 10 mn
 (l) Restructuring of loans extended for the above purposes.


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  405
Utilization of Investment Fund Account (IFA)
Name of Bank :  …………………………………………………………
Month ended :  …………………………………………………………
(Rs. ’000)
Item Amount
A. Total Transferred to IFA XXXX
B. Total Loans Granted
XXXX
Sector Description Amount
(a) Long-term loans for cultivation of plantation
crops/agriculture crops including, fruits,
vegetables, cocoa and spices and for livestock
and fisheriesXX
(b) Factory/mills modernization/establishment/
expansionXX
(c) Small and medium enterprises: loans up to Rs.
200 mn to enterprises with annual turnover
less than Rs. 600 mnXX
(d) Information Technology related activities and
Business Process OutsourcingXX
(e) Infrastructure development XX
(f) Education: vocational training and tertiary
educationXX
(g) Housing: up to Rs. 2 mn per customer
for construction of a house for residential
purposesXX
(h) Housing development: construction of low
cost houses for residential purposesXX
(i) Construction of hotels and for related
purposesXX
(j) Investments in/purchases of sustainable
energy sources including solar power up to
Rs. 10 mnXX
(k) W omen entrepreneurship venture capital
projects up to Rs. 10 mnXX
(l) Restructuring of loans extended for above
purposesXX
Sub Total
C. Total investments in Government Securities  –  long-term
                                                                                –  short-termXXXX
XXXX
  Sub Total XXXX
D. Balance available for utilization (A-B-C) XXXX
NOTE:  E-mail the above details to dbsd@cbsl.lk with copies to mihiri@cbsl.lk  and
  manjulap@dfd.treasury.gov.lk by 10th of each month following the month of reporting.


406 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Our Ref. : 02  / 17 / 800 / 0014  / 02
Bank Supervision Department
31 October 2011
To : CEOs of all Licensed Commercial Banks and
       Licensed Specialised Banks
Dear Sir / Madam,
AMENDMENTS TO GUIDELINES ON THE
OPERATIONS OF THE INVESTMENT FUND ACCOUNT
An amendment to paragraph 3.1( iii) of the above Guidelines and the amended format to submit
information on the utilisation of the investment fund account on a monthly basis are enclosed for
compliance.
Yours faithfully,
(Ms.) T M J Y P Fernando
Director of Bank Supervision
Encl.
Annex  I
Amendment to Guidelines to Licensed Commercial Banks and Licensed Specialised Banks
on the Operations of the Investment Fund Account proposed in the 2011 Budget
The following Guidelines will replace 3.1( iii) of the above.
3.1(iii)  Lend only for the following purposes commencing 1 November 201 1:
 (a) Long-term loans for cultivation of plantation crops/agriculture crops including, fruits,
vegetables, cocoa and spices and for livestock and fisheries
 (b) Factory/mills modernization/establishment/expansion
 (c) Small and medium enterprises:  loans up to Rs. 200 mn to enterprises with annual
turnover less than Rs. 600 mn
 (d) Information Technology related activities and Business Process Outsourcing
 (e) Infrastructure development
 (f) Education: vocational training and tertiary education
 (g) Ho using: up to Rs. 2 mn per customer for construction of a house for residential
purposes
 (h) Construction of hotels and for related purposes
 (i) Restructuring of loans extended for the above purposes.


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  407
Utilization of Investment Fund Account (IFA)
Name of Bank :  …………………………………………………………
Month ended :  …………………………………………………………
(Rs. ’000)
Item Amount
A. T otal Transferred to IFA XXXX
B. T otal Loans Granted
XXXXSector Description Amount
(a) Agriculture XX
(b) Factory/mills modernization XX
(c) Small and Medium Enterprises XX
(d) Information Technology and BPO XX
(e) Infrastructure development XX
(f) Education XX
(g) Housing XX
(h) Construction of hotels and for
related purposesXX
(i) Restructuring of loans extended
for above purposesXX
C. Total investments in Government Securities  -  long-term
                                                                             -  short-termXXXX
XXXX
D. Balance available for utilization XXXX
NOTE:  E-mail the above details to dbsd@cbsl.lk with copies to mayadunne@cbsl.lk  and
  jayaminiw@fpd.treasury.gov.lk by 10th of each month following the month of reporting.


408 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
Our Ref. : 02  / 17 / 800 / 0041  / 01
Bank Supervision Department
29 April 2011
To : CEOs of all Licensed Commercial Banks and
       Licensed Specialised Banks
Dear Sirs,
GUIDELINES ON THE OPERATION OF THE
INVESTMENT FUND ACCOUNT
We enclose the Guidelines on the establishment and operations of the Investment Fund Account
proposed in the Budget 2011, for compliance.
Yours faithfully,
(Mrs.) T M J Y P Fernando
Director of Bank Supervision
Encl.


Directions, Determinations, and Circulars issued to Licensed Specialised Banks  409
Guidelines to Licensed Commercial Banks and Licensed Specialised Banks
on the Operations of the
Investment Fund Account proposed in the 2011 Budget
1. Establishment of an Investment Fund Account (IFA)
 As proposed in Budget 2011, every person or partnership who is in the business of banking or financial
services, is required to establish and operate an IFA.
2. Initial Cr edits to IFA
 As and when taxes are paid after 1 January 2011, licensed banks shall transfer the following funds to
the IFA and build a permanent fund in the bank:
 (i) 8 per cent of the profits calculated for the payment of Value Added Tax (V AT) on financial services
on dates as specified in the V AT Act for payment of V AT.
 (ii) 5 per cent of the profits before tax calculated for payment of income tax purpos es on dates
specified in Section 113 of the Inland Revenue Act for the self assessment payments of tax.
3. Utilisation of Funds
3.1 Banks shall commence utilization of funds in the IFA in the following manner within three months
from the date of transfer to the IFA:
 (i) Invest in long-term Government securities and/or bonds with maturities not less than seven
years.
 (ii) Lend on maturities not less than five years at interest rates not exceeding 5-year Treasury bond
rates plus 2 per cent.
 (iii) Lend only for the following purposes:
 (a) Long-term loans for cultivation of plantation crops/agriculture crops including, fruits,
vegetables, cocoa and spices and for livestock and fisheries
 (b) Factory/mills modernization/establishment/expansion
 (c) Small and medium enterprises:
 a. loans up to Rs. 30 mn or
 b. loans over Rs. 10 mn to enterprises with annual turnover less than Rs. 300 mn and
employees less than 400
 (d) Information Technology related activities and Business Process Outsourcing
 (e) Infrastructure development
 (f) Education - vocational training and tertiary education


(e) Infrastructure development
 (f) Education - vocational training and tertiary education
 (g) Restructuring of loans extended for the above purposes.
3.2 Lending may be in Sri Lanka Rupees and/or foreign currency loans granted within the country .
3.3 Ba nks shall invest funds in short-term Government securities until the commencement of
utilization of funds as stated in 3.1 above.
4. Conditions
4.1 Applicability of Prudential Requirements
 (i) Subject to paragraph ( ii) below, transactions of the IFA shall be subject to all Regulations,
Directions, Determinations and Circulars issued by the Central Bank of Sri Lanka as
applicable.


410 Directions, Determinations, and Circulars issued to Licensed Specialised Banks
 (ii) Lending to the Agriculture sector in the case of licensed banks shall be in addition to the
requirement on lending to agriculture by banks of 10 per cent of total loans and advances of
the bank in terms of the budget proposal 2006.
4.2 Accounting for Transactions
 (i) T ransfers to the IFA shall be treated as appropriations of profit after tax.
 (ii) The IF A shall be maintained as a separate item under general and other reserves and constitutes
a part of shareholder funds.
 (iii) Cost of operations of IF A and income from investments and lending operations shall be
accounted for in the financial statements of the bank.
 (iv) Banks shall maintain separate accounts with necessary details on all operations of the IF A.
 (v) IF A shall not be impaired or reduced without the approval of the Central Bank of Sri Lanka.
4.3 Disclosur es and Reporting to Central Bank of Sri Lanka
 (i) The following disclosures shall be made in the “Notes to the financial statements”:
 (a) Number of loans granted and total amount outstanding for each purpose stated in
paragraph 3.1(iii ), interest rates and tenure of loans.
 (b) T otal investments in Government securities, interest rates and maturity.
 (ii) Information on the operations of the IFA shall be made available as and when required by the
Central Bank of Sri Lanka and Ministry of Finance.
4.4 T reatment of Taxation
The tax liability in relation to the operations of IFA shall be computed in accordance with
applicable tax laws. However, the following shall be noted:
 (i) Interest income on investments, stated in paragraphs 3.1( i) and 3.3 is liable to income tax.
 (ii) Interest income on loans granted utilizing the IF A will be exempt from income tax.
 (iii) Specific provisions on loan losses will be subject to normal adjustments applicable to bad
debts.


debts.
 (iv) Any over-funding or under-funding shall be in accordance with the relevant tax laws/
regulations/guidelines.


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.
A|, \h-J q
rl
Nivard Ajith Leslie Cabraal
Chairman of the Monetary Board and
Governor of the Central Bank of Sri Lanka
Colombo
| ( December 2014
BANKING ACT DETERMINATION NO. I OF 2OI4
ANNUAL LICENCE FEE OF'
LICENSED COMMERCIAL BANKS AND LICENSED SPECIALISED BANKS
Annual licence l. In terms of Sections 8(1) and 76D(6) of the Banking Act, the
fee for the years Monetary Board has determined that the licence fee that shall be
2015 and 2016 paid by licensed commercial banks (LCBs) and licensed
specialised banks (LSBs) for the years 2015 and 2016 shall be
based on the total assets as follows:
Total Assets
as at the end ofthe previous yearLicence Fee
Above Rs 750 bn Rs.30.0 Mn
Above Rs 500 bn to Rs.750 bn Rs. 25.0 Mn
Above Rs 200 bn to Rs 500 bn Rs. 22.0 Mn
Above Rs 125 bn to Rs 200 bn Rs. 16.5 Mn
Above Rs 75 bn to Rs 125 bn Rs. I1.0 Mn
Rs 25 bn to Rs 75 bn Rs. 5.5 Mn
Less than Rs 25 bn Rs. 2.2 Mn
Payment of 2. Every LCB and LSB shall pay the licence fee to the Central Bank
licence fee of Sri Lanka on or before 31't day of January of the respective
year.
3. The licence fee shall be paid on calendar year basis.


Orco q6ooo oqerboo@dqO@ goor @o OcoqO
@ordrane ropdru onird
CENTRAL BANK OF SRI LANKA
eurdldl Grodunrimeuq; q6lanooroseino Bank Supervision Department
<r1 lanuary 2014
Circular No.: 01/2014
To : CEOs of all Member Institutions of
Sri Lanka Deposit Insurance and Liquidity Support Scheme
Dear Sir/Madam
Sri Lanka Deposit Insurance and Liquidity Support Scheme
Operating Instructions
We write to inform you of the following:
1. In terms of the Sri Lanka Deposit Insurance and Liquidity Support Scheme Regulations No. 1
of 2013 dated 30.12.2013, the title of the "Sri Lanka Deposit Insurance Scheme" has been
renamed as the "Sri Lanka Deposit Insurance and Liquidity Support Scheme" and the title of
the "Deposit Insurance Fund" has been renamed as the "Sri Lanka Deposit Insurance and
Liquidity Support Fund", with effect from22.ll.20l3. A copy of the Regulation is attached.
2. Further, with the implementation of the new "General Ledger Accounting System" by the
Central Bank of Sri Lanka, the account number "4681" of the Sri Lanka Deposit Insurance
and Liquidity Support Fund has been changed as "54523", with effect from 01 .01.2014.
3. Accordingly, all member institutions are requested to adhere to the following instructions
with immediate effect:
(i) The premium on eligible deposits in terms of the Regulation No. 6 of the Sri Lanka
Deposit Insurance and Liquidity Support Scheme Regulations No. 1 of 2010 dated
28.09.2010, as amended should be paid to "Sri Lanka Deposit Insurance and Liquidity
Support Fund" through RTGS, specially mentioning the account name as ooSri Lanka
Deposit Insurance and Liquidity Support Fund - Account Number 54523" or
drawing a cheque in favor of the said account.
(ii) Make necessary amendments in order to rename the "Sri Lanka Deposit Insurance
Scheme" as the "Sri Lanka Deposit Insurance and Liquidity Support Scheme" and the
"Deposit Insurance Fund" as the "Sri Lanka Deposit Insurance and Liquidity Support


"Deposit Insurance Fund" as the "Sri Lanka Deposit Insurance and Liquidity Support
Fund" in the correspondence with the Sri Lanka Deposit Insurance and Liquidity Supporl
Scheme (SLDILSS).
(iii)Previous e-mail address, "sldis@cbsl.lk" of SLDILSS has been changed as
'o{di!S5_@clrs!!!" and therefore, forward e-mail correspondence to sldilss(a)cbsl.lk with a
copy to dbsd@cbsl.lk.
Yours faithfully
@(Mrs.)TMJYPFernando
Director of Bank Supervision
6 Oeo Oco€, qco 3O, do:6ed O:Oo, 6 e6rb onrg, @o. :o emrplu$ onropbop GtenqgLbq 1 Level 6, N0.30, Janadhipathi Mawatlra, Colombo I
tD! . se . 59O, @rDte@ Of, 6 €ploro p. Ou. @o. 590, Genqgrbq 01, Oa)trio6 P.0, B0x.590, Colombo 01, Sd lanka.
I %fizttztoolssg (,J g+ f 2477711-A- banksup@cbst.tk @ www.cbsl.gov.lk


6 f,ohc adrnrC$n argrd0rf dnddod 01n0 0003
gB Eocaee
The Gazette of theDemocratic SocialistRepublic of SriLanka
EXTRAORDINARY
g"zo 1843/8 - 2Ol3 oQeel@Ob @ee 30 O18 eegqc - 2013J230
No. 1843/8 - MONDAY DECEMBER 30, 2013
(Published by Authority)
PART I : SECTION (I) - GENERAL
Central Bank of Sri Lanka Notices
THE MONETARYLAWACT
REGULATIONS made by the Monetary Board under Sectton32E of the Monetary LawAct, (Chapter 422).
Nlvano A:rru Lssr-re Casnaal,
Chairman,
Monetary Board.
Central Bank ofSri Lanka,
Colombo,
23'd December,20l3.
Sri Lanka Deposit Insurance and Liquidity Support Scheme Regulations
Amendment to the Sri Lanka Deposit Insurance Scheme Regulations, No. I of 2010
I .1 These Regulations shall be cited as Sri Lanka Deposit Insurance and Liquidity Support Scheme L citation
Regulations, No. I of 2013.
2.1 Sri Lanka Deposit Insurance Scheme Regulations, No. 1 of 2010 publishedin Gazette 2. Amendments
Extraordinary No. 1673/11 of 28th September,2010 is hereby amended as follows :- toj.li,lJl''r''
2.2 ln regulation 3.1 thereof, by the substitution for the words "This Scheme shall be titled Sri
Lanka Deposit Insurance Scheme" of the words "This Scheme shall be titled Sri Lanka Deposit Insurance
and Liquidity Support Scheme (hereinafter referred to as "the Scheme")".
2.3 In regulation 7.1 thereof, by the substitution for the words "The Scheme shall have a fund titled
"Deposit lnsurance Fund" " of the words "The Scheme shall have a fund titled "Sri Lanka Deposit Insurance
and Liquidity Support Fund" ".
This Gazette Extraordinary can be downloaded from www.documcnts.gov.lk 1A


2A I orslcOes , (I) odqcs - @ goroc AdcorcrrJ$zo o@cdOcQ dr.:,dc'o.ol qB Eooe olcsO epco - 2013.12.30
Panr I : Src. (I) - GAZETTE EXTRAORDINARY OF THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA - 30.12.2013
2.4 ln regulation 9.1 thereof, by the substitution for the words "Deposit Insurance Fund", and
wherever those words occur in these regulations, of the words "Sri Lanka Deposit Insurance and Liquidity
Support Fund".
2.5 In regulation 10.5 thereof, by the substitution for the words "Sri Lanka Deposit Insurance
Scheme", and wherever those words occur in these regulations, of the words "Sri Lanka Deposit Insurance
and Liquidity Support Scheme".
3. Effective date 3 . 1 These amendments shall come into effect from 22nd Novembeq 20 I 3.
01 -417
PRINTED AT THE DEPARTMENT OF GOVERNMENT PRINTING. SRI LANKA.


@ goor @co OcoapO
euridl GLo$unrioror$ $eoom&aenLb Bank Supervision Department AUoGD qA!r€6 oqefioo@dqO
3\ March2014
Ref No. : 02/ 17 I 600 10029 I 001
To: CEOs of all Licensed Commercial Banks and Licensed Specialised Banks
Dear Sir/Madam
IMPLEMENTATION OF THE STANDARDISED APPROACH ON
COMPUTATION OF RISK-WEIGHTED AMOUNT FOR OPERATIONAL
RISK UNDER BASEL II CAPITAL ADEQUACY FRAMEWORK
We refer to our previous correspondence and discussions on the above and enclose
the revised Guidelines and reporting format on computation of operational risk capital
charges for licensed commercial banks (LCBs) and licensed specialised banks (LSBs).
Accordingly, with effect from 0l .07.2014:
a. Guideline No. 6.8 of Part V on the computation of Risk-Weighted Amount for
Operational Risk referred to in Schedule I of the Banking Act Directions Nos. 9
and 10 of 2007 issued to LCBs and LSBs, respectively, are replaced with the
revised Guidelines in Schedule I; and
b. Existing reporting format of the computation of Risk-Weighted Amount for
Operational Risk as referred to in Schedule II of the Banking Act Directions Nos.
9 and l0 of 2007 issued to LCBs and LSBs, respectively, are replaced with the
new formats in Schedule II.
Yours faithfully
8-(Mrs.)f".-VflYPFernando
Director of Bank Supervision
Encl.
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t'!. @G,,59O, elo€O oI, 6 elclolo6egri: onrg, @o. :o emrpflupfl onogog GtsrqgLbq 1 lerel 6,No,30,JanadhlpathlMawatha,Colombo
pi. Ou. OED. 590, Oengrbq 01, Oa)rEd)6 P,0. 80x.590, Colombo 01, Sd Lanka.


Schedule II
Part V(a): Computation of Risk -weighted Amount for Operational Risk
First year Second year Third year First year Second year Third year
11.5.1.1.0.0 The Basic Indicator Approach (BIA) 15% 0 0 0
11.5.1.2.0.0 The Standardised Approach (TSA) 0 0 0 0 0 0
11.5.1.2.1.0 Corporate Finance (β 1) 18% 0 0 0
11.5.1.2.2.0 Trading and Sales (β 2) 18% 0 0 0
11.5.1.2.3.0 Payment and Settlement (β 3) 18% 0 0 0
11.5.1.2.4.0 Agency Services (β 4) 15% 0 0 0
11.5.1.2.5.0 Asset Management (β 5) 12% 0 0 0
11.5.1.2.6.0 Retail Brokerage (β 6) 12% 0 0 0
11.5.1.2.7.0 Retail Banking(β 7) 12% 0 0 0
11.5.1.2.8.0 Commercial Banking(β 8) 15% 0 0 0
11.5.1.3.0.0 The Alternative Standardised Approach (ASA) 0 0 0
11.5.1.3.1.0 Sub total 0 0 0 0 0 0
11.5.1.3.1.1 Corporate Finance (β 1) 18% 0 0 0
11.5.1.3.1.2 Trading and Sales (β 2) 18% 0 0 0
11.5.1.3.1.3 Payment and Settlement (β 3) 18% 0 0 0
11.5.1.3.1.4 Agency Services (β 4) 15% 0 0 0
11.5.1.3.1.5 Asset Management (β 5) 12% 0 0 0
11.5.1.3.1.6 Retail Brokerage (β 6) 12% 0 0 0
11.5.1.3.2.0 0 0 0 0 0 0
11.5.1.3.2.1 Retail Banking(β7) 12% 0.035 0 0 0
11.5.1.3.2.2 Commercial Banking(β8) 15% 0.035 0 0 0
11.5.1.9.0.0
11.5.1.9.1.0 0
11.5.1.9.2.0 0
11.5.1.9.3.0 0
11.5.1.10.0.0
11.5.1.10.1.0 0
11.5.1.10.2.0 0
11.5.1.10.3.0 0 The Alternative Standardised Approach (11.5.1.9.3.0*10)Sub total
Capital Charges for Operational Risk
The Basic Indicator Approach (11.5.1.9.1.0*10)
The Standardised Approach 11.5.1.9.2.0*10)The Basic Indicator Approach
The Standardised Approach
Risk-weighted Amount for Operational RiskCapital Charge
Factor (ɑ & β)
11.5.1.5.0.0Fixed factor
'm'
11.5.1.6.0.0Capital Charges
11.5.1.8.0.0Gross Income/ Loans & Advances
11.5.1.7.0.0
CodeBusiness Lines
(11.5.1.4.0.0)
The Alternative Standardised Approach

Capital Charge for Operational Risk under BIA
KBIA = [Σ(GI 1….n xɑ )]/n

Capital Charge for Operational Risk under TSA


KBIA = [Σ(GI 1….n xɑ )]/n

Capital Charge for Operational Risk under TSA
KTSA = {Σ years 1 -3 max[Σ(GI 1-8 x β1-8),0]}/3

Capital Charge for Operational Risk under ASA
KASA = {Σyears 1 -3 max[Σ(GI 1-6 x β1-6),0]} /3 + (β 7 x m x LA r) + (β 8 x m x LA c)


Part V(b): Computation of Gross Income under Operational Risk

First
yearSecond
yearThird
yearFirst
yearSecond
yearThird
yearFirst
yearSecond
yearThird
yearFirst
yearSecond
yearThird
yearFirst
yearSecond
yearThird
year
11.5.2.1.0.0 The Basic Indicator Approach
11.5.2.2.0.0The Standardised Approach/The
Alternative Standardised
Approach 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
11.5.2.2.1.0 Corporate Finance
11.5.2.2.2.0 Trading and Sales
11.5.2.2.3.0 Payment and Settlement
11.5.2.2.4.0 Agency Services
11.5.2.2.5.0 Asset Management
11.5.2.2.6.0 Retail Brokerage
11.5.2.2.7.0 Retail Banking
11.5.2.2.8.0 Commercial BankingExtraordinary / Irregular
Item of Income
(11.5.2.8.0.0)Realised Profits from the
Sale of Securities in the
Banking Book
(11.5.2.7.0.0)CodeBusiness Lines
(11.5.2.3.0.0)Interest Income
(11.5.2.4.0.0)Interest Expenses
(11.5.2.5.0.0)Non Interest Income
(11.5.2.6.0.0)


1
 Schedule I

Revised  Guidelines on Computation of Risk -weighted Amount
for Operational Risk

6.8. Part V – Computation of Risk -weighted Amount (RWA) for Operational Risk.
6.8.1.  Overview
6.8.1.1.  Definition of Operational Risk
Operational risk is defined as the risk of loss resulting from inadequate or failed
internal processes, people and systems 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 damages resulting from
supervisory actions, as well as private settlements.
6.8.1.2.  The Measurement Methodologies
The Basel II Framework presents three methods for calculating operational risk
capital charges in a continuum of incr easing sophistication and risk sensitivity: (i)
the Basic Indicator Approach (BIA) ; (ii) the Standardised Approach (TSA); and (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, the Banks shall with supervisory approval
migrate from BIA to other advance approaches  subject to comply ing with qualifying
criteria .

6.8.2.  Approaches for Calculating Operational Risk
6.8.2.1.  A Bank shall use one of the following approaches to calculate its operational RWA:
a) The BIA in accordance with item 6.8.3; or
b) The TSA in accordance with item 6.8.4; or
c) The ASA in accordance with item 6.8.5 .
6.8.2.2.  A Ba nk which has been allowed to use  TSA or ASA shall not use a simpler
approach without the prior  written  approval of the Director of Bank Supervision
(DBS) of CBSL .
6.8.2.3.  Once a Bank moves  to a simpler approach, such Bank cannot use an advanced
approach without the approval of DBS. DBS shall grant such approval subject to


2
 requiring the Bank to comply with other conditions prior to migrating to the
respective advanced approach.
6.8.2.4.  When DBS is not satisfied that a Bank which has adopted TSA or ASA complies
with the specified requirements, DBS may require the Bank to use a simpl er
approach.

6.8.3.  The Basic Indicator Approach (BIA)
6.8.3.1.  Bank shall calculate its operational risk capital requirement as follows:
KBIA = [ Σ ( GI1...n  x α.) ] / n
   Where;
a) KBIA = capital charge for operational risk  under BIA
b) GI    = annu al gross income, where positive, over the preceding three
years as set out in items 6.8.3.2 to 6.8.3.4
c) n      = number of years in the preceding three years when annual gross
income is positive
d) α     = 15%, which is set by BCBS.
6.8.3.2.  Bank shall calc ulate its gross income as the sum of its net interest income and non -
interest income, taking into account the following adjustments:
a) gross of any provisions /impairments  (including unpaid interest);
b) gross of operating expenses, including fees paid to outsou rcing 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 s ale of securities in the banking
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 deri ved from the ordinary activities of the
Bank and not expected to recur frequently or regularly, i.e., sale of fixed
assets , income derived from insurance recoveries , etc.


3
 6.8.3.3.  If the annual gross income /capital charge  for any given year i s negative or zero, it
should be excluded from both the numerator and denominator when calculating the
average capital charge.
6.8.3.4.  A Bank shall calculate its annual gross income for the most recent year by
aggregating the gross income of the last four financia l quarters and follow same to
calculate annual gross income for each of the two years preceding the most recent
year. Table 20 provides an illustration of the calculation of the annual gross income
for the previous three years, for a Bank calculating its o perational RWA as at end
June 2014.

Table 20
 Illustration of Calculation of Annual Gross Income
 Third Year  Second Year  First Year
Gross
Income
for
financial
quarter
ending  Jun’14 (GI3a) Jun’13 (GI 2a) Jun’12 (GI1a)
Mar’14 (GI3b) Mar’13 (GI 2b) Mar’12 (GI1b)
Dec’13 ( GI3c) Dec’12 (GI 2c) Dec’11 (GI1c)
Sep’13 (GI3d) Sep’12 (GI 2d) Sep’11 (GI 1d)
Total  GI3 = GI3a + GI3b
+ GI3c + GI3d GI2 = GI 2a + GI 2b
+ GI 2c + GI2d GI1 = GI1a + GI1b
+ GI1c + GI1d

where GI = Gross Income

6.8.4.  The Standardised Approach ( TSA)
6.8.4.1.  Any Bank can use the Standardised Approach for computation of capital charge of
operational risk with the prior approval of DBS subject to complying with
qualifying criteria set out in item 6.8.4. 4.
6.8.4.2.  A Bank adopting TSA shall classify their business activities into eight business
lines, namely, corporate finance, trading and sales, payment and settlement, agency
services,  asset manag ement, retail brokerage, retail banking  and commercial
banking . The definition of these business lines are provided in detail in Table 2 1.


4
 Table 21
Mapping of Busi ness 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 exchanges,
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 and
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 Trust  Debenture trustee.
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 car ds,
private labels and retail.
8 Commercial
Banking  Commercial
Banking  Lending including project finance, corporate
loans, real estate,  trade finance including
export and import loans, letter of credit , bills.


5
  Level 1  Level 2  Activity Groups
of exchange, leasing, factoring  and
guarantees.
Deposits and other repayable funds

6.8.4.3.  The Bank 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 = {Σyears 1 -3 max[Σ(GI1-8 x β1-8),0]}/3
Where:
a) KTSA     = capital charge for operational risk under TSA
b) GI1-8       = annual gross income in a given year, calculated in accordance
                      with item 6.8.3.2 and 6.8 .3.4 under BIA, for each of the eight
                      business  lines set out in Table 2 1 above
c)  β 1-8        =  fixed beta factor (Table 22 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.

Table 22
Beta (β)  factors for each business line
No. Business Line  β Factors
1  Corporate finance (β1)  18%
2  Trading and sales (β2)  18%
3  Payment and settlement (β3)  18%
4  Agency services (β4)  15%
5  Asset management (β5)  12%
6  Retail brokerage (β6)  12%
7  Retail banking(β7)  12%
8  Commercial banking(β8)  15%

d) 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 cap ital charges across all business lines within a given year is
negative, then the operational risk capital charges for the Bank for that


6
 year is deemed to be zero (input to the numerator for that year will be
zero).
e) Within each business line, gross income i s a broad indicator that serves as
a proxy for the scale of business operations and thus the likely scale of
operational risk exposure within each of these business lines.
f) Each beta factor serves as a proxy for the industry -wide relationship
between the op erational risk loss experience for a given business line and
the aggregate level of gross income for that business line.
g) 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 the gross income of the eight business lines should be equal to the
gross income of the Bank.
6.8.4.4.  Qualifying criteria
6.8.4.4.1.  The Board of Directors and senior management shall a ctively involve in the
oversight of the operational risk management of the Bank.
6.8.4.4.2.  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 operat ional risk management function. A Bank
shall ensure that operational risk management function:
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 methodology
and operational risk -reporting system of the Bank .
6.8.4.4.3.  The Bank shall have sufficient resources in the use of TSA in the major
business lines as well as the cont rol and audit area .
6.8.4.4.4.  The Bank shall have a system for regular reporting of operational exposures,
including material operational losses to management  of the business unit s,


including material operational losses to management  of the business unit s,
senior management and the Board of Directors .
6.8.4.4.5.  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


7
 of internal policies, controls and procedures concerning the operational risk
management system, which must include polic ies for the treatment of non -
compliance issues .
6.8.4.4.6.  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 .
6.8.4.4.7.  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 a), b), c) and Table 2 1 above .
a) The senior management shall be responsible in developing the mapping
policy, which shall be subject to the approval of the Board of Directors.
These mapping policies should be reviewed and adjusted in line with new
business ac tivities as appropriate.
b) A Bank shall comply with the following principles when mapping its
business activities to the appropriate business lines:
i. Subject to item ii below, each activity or business of a Bank shall be
mapped into eight Level 1 business lines (refer Table 21) in a mutually
exclusive and jointly exhaustive manner.
ii. Any banking or non -banking activity or product that cannot be readily
mapped into any business line and which is ancillary to and supports a
business lin e shall be allocated to the business line it supports. If the
activity supports more than one business line, an objective criterion
shall be used to allocate the annual gross income.
iii. 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%.
iv. 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


(as would be recorded under BIA) still equals the sum of gross income
for the eight business lines.
v. Once an activity has been mapped to a particular business line, the
activity shall be mapped to the same business line consistently over
time.


8
 vi. 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.
vii. Processes must be in place to define the ma pping of any new activities
or products.
viii. The mapping process shall be subject to regular independent reviews
by the internal or external auditors of a Bank.
c) Supplementary business line mapping guidelines: There are a variety of
valid approaches that Bank s can use to map their activities to the eight
business lines, provided the approach used meets the business line
mapping principles. The following is a possible approach that could be
used by a Bank to map its gross income:
i. Gross income for retail banking  consists of net interest income on
loans and advances to retail customers and SMEs treated as retail, plus
fees related to traditional retail activities, net income from swaps and
derivatives held to hedge the retail banking book, and income on
purchased retail receivables. To calculate net interest income for retail
banking, a Bank takes the interest earned on its loans and advances to
retail customers less the weighted average cost of funding of the loans
(from whatever source – retail or other deposits) .
ii. Similarly, gross income from commercial banking consists of the 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 commitments, guarantees,
bills of exchange, net income (e.g. from coupons and dividends) on
securities held in the banking book, and profits/losses on swaps and
derivatives held to hedge the commercial b anking book. Again, the
calculation on net interest income is based on interest earned on loans


calculation on net interest income is based on interest earned on loans
and advances to corporate, interbank and sovereign customers less the
weighted average of funding for these loans (from whatever source).


9
 iii. For trading and sales,  gross income consists of profits/losses on
instruments held in the trading book , net of funding cost, plus fees
from wholesale broking.
iv. 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 assets on behalf of others.

6.8.5.  The Alternati ve Standardised Approach (ASA)
6.8.5.1.  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
6.8.4.2 under TSA.
6.8.5.2.  Under ASA, the operational risk capital requirement/methodology is the same as
under TSA, except for two business lines , retail banking and commercial banking
business lines. 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.
6.8.5.3.   A Bank which has adopted ASA shall not use TSA or BIA without the prior
approval of DBS.
6.8.5.4.  The Ba nk shall calculate operational risk capital requirement under ASA as follows:
 KASA = {Σyears 1 -3 max[Σ(GI1-6 x β1-6),0]} /3 + (β7 x m x LAr) + (β8 x m x LAc)
 Where:
a) KASA   =   capital charge for operational risk  under  ASA
b) GI1-6   = annual gross income in a given year calculated in accordance
with item 6.8.3.2 under BIA, for each of the eight business
lines set out in Table 21, except for retail banking and
commercial  banking business lines
c) β1-8     =   fixed beta factor as set out in Table 22
d) m      = 0.035
e) LAr   = total outstanding loans and advances of the retail banking
business line


10
 f) LAc   = total outstanding loans and advances of the commercial
banking busines s line .

6.8.5.5.   For the purposes of the ASA, total outstanding  loans and advances  shall be  as
follows:
a) Retail banking business line  consists of the total on-balance sheet
outstanding amount of the retail, SMEs treated as retail, residential
mortgages and purchased retail receivables , credit portfolios .
b) Commercial business line  consists of the total on-balance sheet
outst anding 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.
6.8.5.6.  For the purpose of determining LAr and LAc, a Bank shall take a simple average of
the total outstanding loans and adva nces of the relevant business line over the 12
most recent financial quarters without gross of any provisions/ impairment charges.

6.8.6.  Specific Instruction for completion of Part V
6.8.6.1.  Part V(a): Computation of Risk -weighted Amount for Operational Risk
6.8.6.1.1.  Gross Income / Loans and Advances
 (WBRC 11.5. 1.7.0.0)
Gross income:  The value of gross income for each year in respect of BIA
(WBRC 11.5.1. 1.0.0), business lines of TSA  (WBRC 11.5. 1.2.1.0 to 11.5. 1.2.8.0)
and business lines of ASA  (WBRC 11.5. 1.3.1.1 to 11.5.1.3.1.6 ) is automatically
shown  based on the data provided in the Part V (b)  as follows ;
Gross income =  Interest Income  (WBRC 11.5. 2.3.0.0) - Interest Expenses
(WBRC 11.5.2.4.0.0) + Non Interest Income (WBRC 11.5.2.5.0.0) (+/-)
Realised Profits /losses  from the Sale of Securities in the Banking Book
(WBRC 11.5.2.6.0.0) (+/-) Extraord inary /Irregular Item of Income  (WBRC
11.5.2.7.0.0) .


11
 This is illustrated further by the example below  (Table 2 3).

Table 2 3
Illustration of Calculation of Annual Gross Income
Item  Amount -
Rs’ 000  Amount -
Rs’000
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
Other s 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 11.5.1.3.2.1 ) and commercial banking  (WBRC 11.5.1.3. 2.2) should be
filled in accordance with the item 6.8.5.6 .
6.8.6.1.2.  Capital charges
 (WBRC 11.5.1. 8.0.0)
The value of capital charges  for each year in respect of  BIA, TSA and ASA is
calculated  as follows;
(i) BIA: by multiplying the gross income  for each year by α (15%).
(ii) TSA: by multiplying the gross income of individual business line for
each year by β assigned  to each business line.
(iii) ASA: by multiplying the gross income of individual business line for
each year by β assigned to each business line.  In the case of  retail
banking business line and commercial banking business  line, capital


12
 charge is calculated by multiplying the yearly average outstanding
amount of loans and advances  by a fixed factor ‘m’ , i.e., 0.035 with the
respective β , i.e., 12% and 15 %, respect ively.

6.8.6.1.3.  Capital Charges for Operational Risk
 (WBRC 11.5. 1.9.0.0)
The value of capital charges for operational risk in respect  of BIA , TSA  and ASA
is automatically shown as follows ;
(i) Capital charges for operational risk in respect of each approach is
calcu lated by aggregating the capital charges for the 3 years as reported
under WBRC 11.5.1. 8.0.0 and 11.5.1. 1.0.0 of BIA, WBRC 11.5.1.8.0.0
and 11.5.1.2.0.0 of TSA and WBRC 11.5.1.8.0.0 and 11.5.1.3.0.0 of
ASA by dividing that aggregate by 3 (number of year s).
(ii) 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.
(iii) In the case of BIA, n umber of years referred  to in (i) above, may change
in accordance with the item 6.8.3.3.
6.8.6.1.4.  Risk -weighted Amount for operational risk
 (WBRC 11.5. 1.10.0.0)
The value of risk -weighted amount for operational risk in respect of BIA (WBRC
11.5. 1.10.1.0), TSA (WBRC 11.5.1. 10.2.0), and ASA (WBRC 11.5.1. 10.3.0) is
automatically shown by multiplying the capital charge for operational risk under
BIA (WBRC 11.5.1. 9.1.0), TSA (WBRC 11.5.1. 9.2.0), and ASA (WBRC
11.5.1. 9.3.0) by 10, separately.

6.8.6.2.  Part V(b): Computation of Gross Income Under Oper ational Risk
6.8.6.2.1.  The reporting of income and expenses  items referred to in this Part should be in
accordance with the item 6.8.3.4 .
6.8.6.2.2.  WBRC 11.5. 2.1.0.0 is applicable only for BIA , six business lines un der WBRC
11.5. 2.2.1.0 to 11.5.2.2.6.0 are applicable for both TSA and  ASA and two
business lines under WBRC 11.5.2.2.7.0 and 11.5.2.2.8.0 are applicable only for
TSA.


Ocoq @rre6 oqctrt5oo@dAO eurrird@ goor @co Ooo4O
@ordrola ropdur onjrd
CENTRAT BANK OFSRI TANKA
Gro$unrianeu$ pflanaro*eorLb BankSupervision Department
R:ef . : 02 I 17 I 600 I 0003 I 002
To: Chief Executive Officers of Licensed Commercial Banks
and Licensed Specialised Banks
Dear Sir/MadamOt June 2014
Compliance with the requirements imposed under the Banking Act
on valuation of immovable property
We write to inform you that the requirements on assessing the present market value of
immovable property and the eligibility criteria for valuers as specified in paragraphs (i) and (ii)
below shall be complied in accordance with the requirements of the Banking Act Directions No.I of 2014 on Regulatory Framework on Valuation of Immovable Property of Licensed
Commercial Banks and Licensed Specialised Banks dated 05 June 2014.
(D ltem 6.2.2.4.1 - "Revaluation Reserves" and Item 6.4.3.1.9 - "Claims Secured by
Residential Property" of the Schedule I of the Banking Act Directions Nos. 9 and 10 of
2007 onMaintenance of Capital Adequacy Ratio, as applicable.
(ii) Directions 7(1) (I) (iii) - "Current external professional valuation report" of the Banking
Act Directions Nos. 3 and 4 of 2008 on Classification of Loans and Advances, Income
Recognition and Provisioning, as applicable.
2. The Circular dated 19 April 1999 under reference B3169193 on "Criteria for selection of
valuers undertaking the revaluation of fixed assets for the computation of the Capital Adequacy
Ratio" is hereby revoked.
Yours faithfully
(Mrs.)TMJYPFernando
Director of Bank Supervision
6 OeD Ot'e, ecto 30, deDrA€(, oJO!D, 6 ggLb oflg, Odu. 30 etrtrpflugil onapog G6tr@rbq I
!D.. eE . 5eO, olDr€O Ol, €l €p@ro tri. Ou. Oa). 590, Gangfrl 01, ea)nio6level 6, t{0.30, Janadhlpatfil mawatfia, Colombo 1
P. 0. 8u.590, Colombo 01, Sri lrnka.
I sqfi zafircorcss lJ g+tt2477711 fi banksup@cbsl.lk www.cbsl.gov.lk


@ @o£))^6ursj6»a ID^LU suiEiaSCENTRAL BANK OF SRI LANKA©cot® £f(Ds®^3 ®^ojba>@®s5EB© 6uraj£0 (Bu>j)urrrra»6ii^ ^iaDHroTaaE>«Ttb . , Bank Supervision Department IRef: 02/17/550/0016/00117 February 2014To: The Chief Executive Officers of Licensed Commercial BanksDear Sir/MadamDefinition of Liquid Assets under Section 86 of the Banking Act No. 30 of 1988, as AmendedIn terms of section 21 (1) and the definition of "liquid assets" in paragraph (g) of section 86 of the Banking Act, No. 30 of 1988, as amended, the Monetary Board has determined that Standing Deposit Facility balances held by Licensed Commercial Banks with the Central Bank of Sri Lanka are liquid assets.2. Licensed commercial banks shall report the eligible value of Standing Deposit Facility under code number 4.1.2.3.0.0 of the monthly web based return oh Statutory Liquid Assets Ratio for Domestic Banking Unit (BSD-MF-04-LD).Yours faithfully(Mrs.) T M J Y P FernandoDirector of Bank Supervision
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ffiF,#fli;r*ffi
Oaoag qdlp6 sgcmt rDs@dc2o orrirdl GroSunnorop pflanorod;e6rri Bank Supervlsion Depailment
Ref , 02 I 17 I 550/00 1 4/00 Il). August 2014
To: Chief Executive Officers of ticensed Commercial Banks
and Licensed Specialised Banks
Dear SirAvladam
Introduction of New'Returns under the Web Based Off-site Surveillance System
We refer to our letter dated 22 November 2013 on the above and write to inform you that
introduction of new annual web returns, viz. Statement of Financial Position (BSD-AF-01-FP)
and Statement of Comprehensive Income (BSD-AF-02-CI) have been completed successfully.
We therefore, request you to submit annual audited data through the above web retums in future.
As the secondary step, it has been decided to introduce the following web returns on a
test basis.
a) BSD-MF-01-FP: Statement of Financial Position
b) BSD-MF-02-CI: Statement of Comprehensive Income
To facilitate smooth migration all Licensed Commercial Banks and Licensed Specialised
Banks are kindly requested to submit data through above returns on quarterly basis from the end
of 2"d quarter of 2014 until further notice.
Any clarifications on this matter may be sought from Ms. Sureka Ketawala, Senior
Assistant Director on TeI:2398602 or email: sureka@cbsl.lk and Mr. Jayod Danthanaxayana,
Assistant Director on Tel:2398551 or email: iayod@,cbs1.lk
Yours faithfully
#flrz?(Mrs.) TMJYPFernando
Director of Bank Supervision
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@ @o£3J ©© ©50^©||i @60FBJ«D® LD^UJ edfEJflQCENTRAL BANK OF SRI LANKAsunM CiorbuirfrsiDsu^ ^eoGouTSx^erTLd Bank Supervision DepartmentRef. No.: 02/17/800/0014/02September 2014to: Chief Executive Officers of all Licensed Commercial Banksand Licensed Specialised BanksInvestment Fund AccountWe refer to the Circular dated 31 July 2014 on the above subject and write to inform you that paragraph 2 (iii) (b) of the above Circular is hereby repealed.Yours faithfully,(Mrs.) T M J Y P FernandoDirector of Bank Supervision
6 Sa Qoza 30, aantfesS ©3353, 6 inrrt^, @so. 30 ^ssnr^lu^l Qarr^tbLi 1 Level 6, No. 30Janadhipathi Mawatha, Colombo 1as. . 590, ®55>3es) 01, § ©05333 Qu. @60.590, Qairoptby 61, @6urH6®a P.O.Box.590,Colombo 01, Sri Lanka.( 94 11 2477100/659 (^ 94 11 2477711 banksup@cbsl.lk www.cbsl.gov.lk[rnraniimn


§ ©ozsn ©20|I LD^^LU 6UI5J50' CENTRAL BANK OF SRI LANKAS)CQ^ euniiaS <SLDfburriT6iD&u^ £96ft&roT%<%6nLb Bank Supervision DepartmentRef: 02/17/402/0073/00223 December 2014To: Chief Executive Officers of Licensed Commercial BanksDear Sir/MadamEnhancement of Minimum Capital Requirement of BanksWe refer to our Circular No. 02/17/402/0073/002 dated 29 July 2010 on the above subject and write to inform you that as announced in the Master Plan on Consolidation of the Financial Sector dated 17 January 2014, and in terms of Section 19(3) of the Banking Act, the Monetary Board of the Central Bank of Sri Lanka has decided to require all licensed commercial banks incorporated or established within Sri Lanka to increase their capital to Rs. 10 Billion commencing 01 January 2016, in view of a strong and dynamic banking sector.2. Capital for this purpose shall mean the Core Capital as defined in terms of item No. 6.2.2.2 in the Guidelines that were annexed as Schedule I to the Banking Act Direction No. 9 of 2007 dated 26 December 2007 on Maintenance of Capital Adequacy Ratio.3. All banks are required to take appropriate action to comply with the above on a timely basis.(Mrs.) T M J Y P FernandoDirector of Bank Supervision
6 a® CM® 30, eSewScHStSK . <3© . 590, ©OJg® 01, § ©oSD©6 ^60. 30 1 Level 6, No. 30, Janadhipathi Mawatha, Colombo 1Qu. geo. 590, Gtorrtipibq 01, P. 0. Box. 590, Colombo 01, Sri Lanka.Yours faithfully


©6t)r&J65)® LD^^LU GUIhiaSCENTRAL BANK OF SRI LANKAsufBiafl GLprburrrreiDQj^ cQsDSMkBasnLb Bank Supervision DepartmentRef: 02/17/402/0073/0023 December 2014To: Chief Executive Officers of Licensed Specialised BanksDear Sir/Madam.Enhancement of Minimum Capital Requirement of BanksWe refer to our Circular No. 02/17/402/0073/002 dated 29 July 2010 on the above subject and write to inform you that as announced in the Master Plan on Consolidation of the Financial Sector dated 17 January 2014, and in terms of Section 76G of the Banking Act, the Monetary Board of the Central Bank of Sri Lanka has decided to require all licensed specialised banks to increase their capital to Rs. 5 Billion commencing 01 January 2016, in view of a strong and dynamic banking sector.2. Capital for this purpose shall mean the Core Capital as defined in terms of item No. 6.2.2.2 in the Guidelines that were annexed as Schedule I to the Banking Act Direction No. 10 of 2007 dated 26 December 2007 on Maintenance of Capital Adequacy Ratio.3. All banks are required to take appropriate action to comply with the above on a timely basis.Yours faithfully,(Mrs.) T M J Y P FernandoDirector of Bank Supervision
6 ffoca 30, efeojSts®os . ee. 500, ©sajg© 01, g* IPl , .6^b tctn^, ©so. 30 Qatrcipihq 1Qu. ©60. 590, Q&rrQptbLi 01, ©GOraaMs ----------------  -_______________________________ ___Level 6, No. 30, Janadhipathi Mawatha, Colombo 1P. 0. Box. 590, Colombo 01, Sri Lanka. fa Cfmi Ek


Directions issued by the Monetary Board of the Central Bank of Sri Lanka under sections
46(1) and 76(JX1) of the Banking Act, No. 30 of 1988, as amended.
4i^ fuJu
Nivard Ajith Leslie Cabraal
Chairman
Monetary Board
Central Bank of Sri Lanka
Colombo
-( June 2014
BANKING ACT DIRECTIONS NO. 1 OF 2014
REGULATORY FRAMEWORK ON VALUATION OF IMMOVABLE PROPERTY OF
LICENSED COMMERCIAL BANKS AND LICENSED SPECIALISED BANKS
In the exercise of the powers conferred by Sections 46(1) and 76(JX1) of the Banking Act,
No. 30 of 1988, last amended by the Banking Act, No. 46 of 2006, the Monetary Board
hereby issues Directions No. 1 of 2014 on the Regulatory Framework on Valuation of
Immovable Property of Licensed Commercial Banks (LCBs) and Licensed Specialised Banks
(LSBs).
In terms of sections 46( I ) and 76(JX I ) 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 ofsuch banks is to be conducted.
Every LCB and LSB shall ensure that appropriate board approved
prudent policies and procedures on valuation of immovable
property are in place. In the case of banks incorporated outside Sri
Lanka, the 'Board of Directors' shall mean the Head Office or the
Regional Office that supervises the respective bank.
In establishing policies and procedures on valuation of immovable
property as referred to in Direction2.l above, every LCB and LSB
shall consider the following minimum requirements and shall1. Empowerment
under the
Banking Act
2. Establishment 2.1
and
implementation
of a policy on
valuation of
immovable
propertyt.l
2.2


b)
c)comply with all requirements set out by any other regulator or
institution including the Securities & Exchange Commission of
Sri Lanka and the Institute of Chartered Accountants of Sri Lanka.
a) Responsibility of the Board of Directors, senior
management and other relevant committees, o.9., Credit
Committee, on the formulation and periodical review of
the policy.
Appointment of panels of valuers, both internal and
external.
Procedures to identify and select qualified valuers for the
appointment of panel(s) of valuers, subject to Direction 5
below.
Procedures to assess the reasonableness of the market
value of an immovable property derived from the
valuation model and, the reliability and the accuracy of
data used for such valuation.
Threshold for internal and extemal valuation reports
obtained/to be obtained in respect of immovable property
against all loans and advances, as the case may be, subject
to Direction 6 below.
Frequency of valuation, subject to Direction 7 below.
Valuation criteria for internal valuations.
Independence and Disclosure, subject to Direction 8
below.
Notification to borrowers: The loan agreement shall
include detailed specifications of the manner and
frequency of revaluation together with a detailed
description of the immovable property obtained as
collateral.
Procedure of payment and fee structure for external
valuers.d)
e)
0
s)
h)
i)
i)


3. Immovable
Property
4. Purposes
5. Eligibilify
criteria for
valuers3.1For the purposes of these Directions, immovable property shall
mean any land, land and building or any rights therein which are
acquired or held for the purposes including the following:
a) land, and land and building which are obtained as
collateral against any accommodation extended by any
bank including foreclosed properties.
b) land, and land and building which are purchased or
acquired for the purpose of conducting banking business
by any bank which are measured and disclosed in
accordance with Sri Lanka Accounting Standards (SLAS),
e.g., LKAS l6: Property, Plant and Equipment.
c) land, and land and building which are purchased or
acquired as bank's investments, which are measured and
disclosed in accordance with SLAS, e.g., LKAS 40:
Investment Property.
Immovable property valuation shall be made for the following
purposes.
a) To meet the regulatory requirements imposed in terms of
the Banking Act, No. 30 of 1988.
b) To value immovable property for financial reporting as
required under SLAS.
c) Other on-going business requirements of banks which
necessitate valuation of immovable property.
Every bank shall ensure that:
a) eligibility criteria for valuers are set out as follows.
A. A corporate member of the Institute of Valuers of Sri
Lanka (IVSL) who shallbe:
I. A Fellow member; or
II. A Graduate member with 5 years experience in
such grade of membership; or
III. A Graduate member who has been an
Associate member at the time of his admission
to the Graduate Membership, with number of
34.1
5.1


6. Threshold for
internal and
external
valuation
reports
7. Frequency of
valuation6.1
6.2
7.1years of experience equivalent to the period
that the member would have taken to complete
l0 years in the Associate Membership; or
IV. An Associate Member with 10 years
experience in such grade of membership.
B. A Fellow member of the Royal Institution of
Chartered Surveyors of the United Kingdom (RICS).
C. Any other member of RICS with 3 years experience
in such grade of membership.
b) valuers eligible as per the qualifications set out in Direction
5.1 a) above acquire Continuous Professional Development
as approved/recommended by the respective professional
body; and
c) I January 2015 onwards, internal valuation of immovable
property is undertaken by valuers who satisfy the eligibility
criteria in Directions 5.1 a) and b) above.
In respect of immovable property obtained/to be obtained as
collaterals against all loans and advances, as the case may be
excluding non-performing loans and advances, banks shall
establish an appropriate threshold for internal and extemal
valuation as per the bank's policy.
The threshold for internal valuation reports in respect of non-
performing loans, shall be in accordance with the requirements of
the Banking Act Directions Nos. 3 and 4 of 2008 on Classification
of Loans and Advances, Income Recognition and Provisioning,
i.e., facility/ies where the capital outstanding amount is less than
Rs. 5,000,000 or 0.1% of the bank's capital base, whichever is
less.
The frequency of valuation as referred to in Direction 2.2 (f) above
shall be as follows.
a) Valuation of immovable property obtained as collateral
against loans and advances which are non-performing shall
be made at the frequency as required under the Banking


8.Independence
and DisclosureAct Directions Nos. 3 and 4 of 2008 on Classification of
Loans and Advances, Income Recognition and
Provisioning, i.e., in respect of credit facilities granted
against residential property which is occupied by the
borrower for residential purposes: a report that is not more
than four years old and all other credit facilities: a report
that is not more than three years old.
b) Revaluation of immovable property as referred to in
Directions 3.1 b) and c) above shall be made:
A. annually depending on any significant and volatile
changes in fair value of such immovable property
are experienced; or
B. at least once in every three years.
8.1 Every bank shall ensure the independence ofexternal valuers and
that disclosures are made in the bank's Annual Report or in the
Audited Financial Statements as set out below.
a) An extemal valuer shall not be a related party in terms of
the Direction 3(7) (i) of the Banking Act Direction Nos. I I
and 12 of 2007 on Corporate Governance for LCBs and
LSBs in Sri Lanka, to avoid any conflict of interest that
may arise from such engagement.
b) The Board of Directors/senior management shall ensure
that disclosures are made in the bank's Annual Report or in
the Audited Financial Statements on the valuation policy,
measurement and recognition of immovable property,
under disclosures to be made in terms of paragraph 1.3 of
the Specified Format for the Preparation of Annual
Financial Statements of Licensed Commercial Banks and
Licensed Specialised Banks issued along with Circular
' dated 1 1.02.2013 under reference 021171900100011004.


Directions issued by the Monetary Board in terms of Section 46(1) of the Banking Act, No.30 of 1988, as amended. KBDWASilvaSenior Deputy Governor Central Bank of Sri LankaColombo26 June 2014BANKING ACT DIRECTIONS NO. 2 OF 2014AMENDMENT TO BANKING ACT DIRECTIONS NO. 7 OF 2007 ONMAXIMUM AMOUNT OF ACCOMMODATIONIn the exercise of the powers conferred by Section 46(1) of the Banking Act, No. 30 of i 988, last amended by the Banking Act, No. 46 of 2006, the Monetary Board hereby issues following Directions amending Banking Act Directions No. 7 of 2007 dated 01 November 2007 issued by the Monetary Board of the Central Bank of Sri Lanka. These Directions may be cited as the Banking Act Directions No. 2 of 2014.1. The following new Direction shall replace Direction 5 of the Banking Act Directions No. 7 of 2007 dated 01 November 2007.5 (1) In the case of accommodation granted as at any given date to anycategory of customers referred to in paragraphs 2(i) and 2(ii) above in excess of 15 per centum of the capital base of the licensed commercial bank, the sum total of the outstanding amount of accommodation granted to such customers shall not exceed 55 per centum of the total outstanding amount of accommodation granted by the licensed commercial bank to all customers as at the end of the immediately preceding month.(2) The following accommodations shall be excluded from the computation of Direction 5(1) above.(i) Accommodation granted to the Government of Sri Lanka (GOSL).(ii) Accommodation granted in excess of the maximum limits specified under Directions 3 and 4 above with the approval of the Monetary


Board in terms of Direction 6 below.(iii) Accommodation granted under Direction 7(iii) below.2. The following new Directions shall be included immediately after Direction 7(ii) of the Banking Act Directions No. 7 of 2007 dated 01 November 2007.(iii) Accommodation granted by a licensed commercial bank incorporated outside Sri Lanka if such accommodation is funded directly through funds raised from its Head Office and/or any branch of such bank operating outside Sri Lanka.
2


Directions issued by the Monetary Board in terms of Section 76J(1) of the Banking Act, No.30 of 1988, as amended. BDWASilvaSenior Deputy Governor Central Bank of Sri LankaColombo26 June 2014BANKING ACT DIRECTIONS NO. 3 OF 2014AMENDMENT TO BANKING ACT DIRECTIONS NO. 8 OF 2007 ONMAXIMUM AMOUNT OF ACCOMMODATIONIn the exercise of the powers conferred by Section 76J(1) of the Banking Act, No. 30 of 1988, last amended by the Banking Act, No. 46 of 2006, the Monetary Board hereby issues following Directions amending Banking Act Directions No. 8 of 2007 dated 01 November 2007 issued by the Monetary Board of the Central Bank of Sri Lanka. These Directions may be cited as the Banking Act Directions No. 3 of 2014.1. The following new Direction shall replace Direction 5 of the Banking Act Directions No. 8 of 2007 dated 01 November 2007.5 (1) In the case of accommodation granted as at any given date to anycategory of customers referred to in paragraphs 2(i) and 2(ii) above in excess of 15 per centum of the capital base of the licensed specialised bank, the sum total of the outstanding amount of accommodation granted to such customers shall not exceed 55 per centum of the total outstanding amount of accommodation granted by the licensed specialised bank to all customers as at the end of the immediately preceding month.(2) The following accommodations shall be excluded from the computation of Direction 5(1) above.(i) Accommodation granted to the Government of Sri Lanka (GOSL).(ii) Accommodation granted in excess of the maximum limits specified under Directions 3 and 4 above with the approval of the Monetary Board in terms of Direction 6 below.


Directions issued by the Monetary Board of the Central Bank of Sri Lanka under Sections 46(1) and 76(J)( 1) of the Banking Act, No. 30 of 1988, as amended.BDWA SilvaSenior Deputy Governor Central Bank of Sri LankaColomboJune 2014BANKING ACT DIRECTIONS NO. 4 OF 2014 AMENDMENT TO DIRECTIONS ON INTEGRATED RISK MANAGEMENT FRAMEWORK FOR LICENSED BANKSIn the exercise of the powers conferred by Sections 46(1) and 76(f)(1) of the Banking Act, No. 30 of 1988, last amended by the Banking Act, No. 46 of 2006, the Monetary Board hereby issues the following amendment to the Guidelines annexed to the Banking Act Direction No. 7 of 2011 dated 05 October 2011 on Integrated Risk Management Framework for Licensed Banks to implement the Baseline Security Standard for Information Security Management.1. The following paragraph shall be inserted immediately after paragraph 2.8 of Part D of the Guidelines annexed to the Banking Act Directions No. 7 of 2011 dated 05 October 2011 on Integrated Risk Management Framework for Licensed Banks.“2.9 Information Security Management -(a) With effect from 01 July 2015, all banks should implement the Baseline Security Standard for Information Security Management as per Attachment 4 hereto.1


(b) The Baseline Security Standard establishes minimum acceptable security standards for banks and standardizes the information security policies of such banks. However, each bank should ensure adoption of such standards relative to the size, nature of business activities and complexity of respective bank.(c) The BOD should ensure compliance with the Baseline Security Standard for Information Security Management.”
2


^601516©* LD^llU 6UI5J^ICENTRAL BANK OF SRI LANKAScosa e^tajtoe^afajc) GiDpunfran®15 ^6iDw%«6nib Bank Supervision DepartmentRef. No.: 02/17/800/0014/0231 July 2014To: Chief Executive Officers of all Licensed Commercial Banksand Licensed Specialised BanksInvestment Fund AccountWe refer to the Guidelines dated 29 April 2011 and 24 April 2013 issued on the above subject and write to inform you that operations of the Investment Fund Account (IF A) will cease with effect from 1 October 2014.2. Accordingly, following clarifications are made with respect to the Guidelines on the Operations of IF A.(i) Guideline 2 - Credits to IFA(a) The requirement to transfer an amount equal to 8 per cent of the profits calculated for the payment of value added tax (VAT) on financial services to IFA expired on 31 December 2013. Accordingly, the last payment of VAT was due on 20 January 2014.(b) The requirement to transfer an amount equal to 5 per cent of the profit before tax calculated for income tax purposes on dates specified in Section 113 of the Inland Revenue Act to IFA in the year of assessment 2013/2014 expired on 31 March 2014. The final tax payment on income tax for the year of assessment 2013/2014 will be due on 30 September 2014.(ii) Guideline 4.3 - Disclosures and Reporting to Central Bank of Sri Lanka(a) Disclosure requirements in financial statements and the requirement to furnish a return on the utilisation of IFA shall be applicable until 30 September 2014.(iii) Guideline 4.4 - Treatment of Taxation(a) Any adjustments arising after 1 July 2014 due to finalising of tax payments of prior periods can be adjusted to IFA until 30 September 2014.(b) Interest income earned from any loans and advances granted from IFA will not be exempted from income tax after 1 July 2014 onwards.(Contd.)6 30, dsDjSes© 6 ^ib win?, geo. 30 1 Level 6, No. 30, Janadhrpatii Mawatiia, Colombo 1OK . ©u. 590, eoDgs) Ol, § ©ocs>x) Qu. 590, GtoiQpwq 01, @6OIEWDS P. 0. Box 590, Colombo 01, Sri Lanka.( 9411


eoDgs) Ol, § ©ocs>x) Qu. 590, GtoiQpwq 01, @6OIEWDS P. 0. Box 590, Colombo 01, Sri Lanka.( 9411 2477100/659 6^ 94 11 2477711 banksup@cbsl.lk www.cbsl.gov.lk


3. Other(i) Capital Funds Recovered through Loan Repayments and Maturity Proceeds of Long-term Government Securitiesa) With effect from 1 July 2014, Guidelines on the operations of IF A shall not be applicable for the utilisation of capital funds recovered through loan repayments and maturity proceeds of long-term Government securities.b) Accordingly, banks may reduce an amount equivalent to the capital funds recovered from sources mentioned in paragraph 3(i)(a) above from IFA.(ii) Cessation of the operations of IFAa) The operations of IFA will cease with effect from 1 October 2014. Accordingly, banks shall transfer the remaining balance in IFA to retained earnings through the Statement of Changes in Equity.Yours faithfully,(Mrs.) T M J Y P FernandoDirector of Bank Supervision
2


@ ©85)CENTRAL BANK OF SRI LANKA>
eurbi^! (3iDfDuniT6ff)6u^ ^16©655r<s®6nibBank Supervision DepartmentRef: 02/17/600/002/00116 October 2014To: Chief Executive Officers of Licensed Commercial BanksDear Sir/Madam,Recovery of Accommodation to ExportersThe Central Bank of Sri Lanka having considered the improvement in the country’s external sector stability with increased earnings from exports and strengthened external reserves with the improvement in the Balance of Payment has decided to withdraw the Circulars dated 22 January 2001, 29 January 2001, 16 February 2001 and 30 March 2001 on Recovery of Accommodation to Exporters, with effect from 03 October 2014.Accordingly, you are requested to take necessary measures to comply with the above.Yours faithfully.(Mrs) T M J Y P FernandoDirector of Bank Supervision
G tfom 30, daaSoS ©JSO, 01a*, ©ea. 590, ©cn^S) O1T § ©OSDJD.6 imj, Hies. 30, gg®TTT^LJ^ G®r(iptbL| 01 Level 6, No, 30, Janadliipathi Mawatha, Colombo 01Gu. ®|6D. 590, G&irftgtbq 01,P 0. Box. 590, Colombo 01, Sri Lanka.^9411 2477100/659 ------------ 9411 2477711 ------------------  banksup@cbsl.lk --------------------- 0^ www.cbsl.gov.lk


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0 gohc Adrnrul$n t^r@rd0( dnddod finO 0000
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The Gazette of the Democratic SocialistRepuhlic of SriLanka
BXTRAORDINARY
q"zo 1891/11 - 2Ol4 oqeel@Ob @a: 02 O1E qroeodlOcqc - 2Ot4.12.O2
No.l89l/11 - TUESDAY DECEMBER 02,2014
(Published by Authority)
PART I : SECTION (I) - GENERAL
Central Bank of Sri Lanka Notices
TTIE MONETARY LAWACT
REGULATIONS made by the Monetary Board under Section 32E ofthe Monetary Law Act, (Chapter 422).
Nrvnno A.lrru Lnslrn CasRAar-
Chairman
Monetary Board
Colombo, 28 November 2014.
Sri Lanka Deposit fnsurance and Liquidity Support Scheme Regulations
Amendment to the Sri Lanka Deposit Insurance Scheme Regulations, No. I of 2010
LI These Regulations shall be cited as Sri Lanka Deposit Insurance and Liquidity Support Scheme l. citation
Regulations, No. 1 of 2014.
2.1 Sir Lanka Deposit Insurance Scheme Regulations, No. 1 of 2010 published in Gazette 2. Amendment
ExtraordinaryNo. 167311 I of 28 September,20l0 is hereby amended as follows :- to the principal
reg u la tion
2.2 ln regulation 9 thereof by the repeal ofparagraph 9.6 ofthat regulation and the substitution
ofthe following paragraph :
*9.6 The amount of compensation payable to a depositor shall be limited to the total insured
deposits computed as above, subject to a maximum of Rs. 300,000 or its equivalent in
the case offoreign currency deposits, ifsuch amount exceeds Rs. 300,000."
3.1 This amendment shall come into effect ftom 0l January 2015.3. Effective
date
12-s67
PRINTED AT THE DEPARTMENT OF GOVERNMENT PRINTING, SRI LANKA, I AThis Gazette Extraordinary can be downloaded from www.documents.gov.lk


Guidelines  on Stress Testing
of Licensed Commercial Banks and
Licensed Specialised  Banks

Bank Supervision Department
September  2014


Contents
                      Page

1. Introduction           1

2. Objectives of Stress Testing         1

3. Principles Governing Stress Testing       2

4. Scope and Applicability         2

5. Stress Testing Framework (STF)        2 - 8
5.1 Developing and Implementing STF        2
5.2 The Board of Directors and Senior Management Oversight     3
5.3 Principal Risk Factors          4
5.4 Stress Testing Methodologies and Scenario Selection     5
5.5 Data and Appropriate M anagement Information System (MIS)    6
5.6 Reporting and Interpretation of Stress Test Results      7
5.7 Frequency of Stress Testing         7
5.8 Internal Controls and Independent Assessment       7
5.9 Remedial Actions          8
5.10 Disclosures           8

Annex            9 - 11
Frequently Asked Questions (FAQs)        12 - 13


1
 1. Introduction
1.1. Stress testing has become an integral part of a bank’s risk management system  and is
used to evaluate its potential vulnerability to certain unlikely but plausible events or
movements in financial variables. The vulnerability is usually measured with reference to
the bank’s  profita bility , liquidity  and/or capital adequacy.
1.2. Stress testing provides guidance to manage  risks on the  basis of normal business
conditions and emphasises the importance of robust risk management  systems which
factor -in a forward looking element and recognise the need to manage risks over the
economic cycle .
1.3. Improvement in risk management practices in the banking system in Sri Lanka has been
in focus since the adoption of the Basle II capital adequacy framework beginning in
2008 . This  process gained momentum with the issue of the Banking Act Direction No. 07
of 2011 on Integrated Risk Management  (IRM)  Framework in 2011  and the Banking Act
Direction No. 5 of 2013 on Supervisory Review Process (SRP) for licensed commercial
banks and lice nsed specialised banks  (hereinafter referred to as “banks”)  in 2013.
1.4. Building upon on previously issued supervisory guidance on stress testing under IRM
framework and SRP, these guidelines  provide  broad principles a bank sh all follow in
developing and imp lementing  its stress testing activities  and integrating its stress testing
results into the overall risk management and decision making process.

2. Objectives of Stress Testing
Stress testing is intended to:
 provid e rigorous and forward -looking assessments of risk;
 facilitat e the development of risk mitigation or contingency plans across a range
of stressed conditions;
 facilitate  capital and liquidity planning proce ss;
 guide in the process of undertaking new business activities, entering new markets
or undertaking strategic initiatives;


or undertaking strategic initiatives;
 provide information to set  banks’ risk tolerance  limits ; and
 link external environmental factors with internal risk management framework .


2
 3. Principles Governing Stress Testing
Banks shall follow the following key principles, that are designed based on the
“Principles for sound stress testing practices and supervision”  issued by the Basel
Committee on Banking Supervision in May 2009 when developing and i mplement ing
their stress testing activities.
3.1. Stress testing sh all form an integral part of the overall governance and risk management
culture of the bank.
3.2. Stress testing of a bank shall promote risk identification , control and shall provide a
complementary risk perspective to other risk management tools.
3.3. Stress testing shall take account of views , from across the bank in order to cover a range
of perspectives, scenarios and techniques including forward -looking aspects.
3.4. Stress testing sh all be actionable at the appropriate manag ement level, including strategic
business decisions of the board of directors and senior management.
3.5. Stress testing  activities  and the robustness of major individual components sh all be
assessed regularly and independently.

4. Scope and Applicability
This Stress Testing Framework shall be applicable to banks on both standalone ("So 1o")
level as well as on the consolidated ("Group") level.

5. Stress Testing Framework (STF)
5.1. Developing and Implementing  STF
(a) Every bank sh all develop an d implement a rigorous and well documented STF
proportional to its operations, risk profile and consistent with prudential
requirements.
(b) Stress testing of a bank shall include activities and exercises that are tailored to
and sufficiently capture the exposures, strategies, activitie s, risks, their
interactions and combined effects.
(c) STF shall be adjusted  according to the complexity of each bank’s business
activities. Banks shall be able to justify their choice of stress tests and the choice
of risk factors that are stressed.


3
 (d) Banks which have global  operations, and/or are active in derivatives markets,
and/or are operating an active trading portfolio shall use stress tests that suit to
stress such activities.
(e) The STF of a bank shall satisfy the following essential requirements.
(i) The board of directors and senior management oversight ;
(ii) principal risk factors;
(iii) stress testing methodolog ies and scenario selection ;
(iv) data and appropriate Management Information Systems (M IS);
(v) reporting and interpretation of stress test results ;
(vi) frequency of stress test ing;
(vii) internal controls and independent assessment;
(viii) remedial actions;  and
(ix) disclosures .

5.2. The Board of Directors and Senior Management Oversight
(a) The Board shall ensure that the bank has put in place a Board approved STF
which suits to its individual requirements and integrate into its risk management
systems.
(b) The Board shall exercise effective oversight over the bank’s stress testing
activities.
(c) The Board shall establish appropriate stress tolerance limits and shall ensure that
the appropriate remedial actions that banks may consider necessary to address the
alarms of stress testing are put in place at required point of time.
(d) The Board shall establish formal lines of authority and the appropriate se gregation
of duties to maintain an effective check and balance within the stress testing
process.
(e) The Board shall ensure that the senior management performs their duties
effectively and adequately i n order to develop and implement its STF
successfully.
(f) The Board shall review the effectiveness and robustness of STF periodically, at
least annually. Areas for review include:
(i) effectiveness of STF in meeting its intended purposes;
(ii) effectiveness of stress testing policies, procedures and process;


4
 (iii) scope of coverage of the framework , risk factors, stress scenarios and the
levels of stress applied;
(iv) integrity of MIS , data, assumptions and judgments  feeding into stress
tests;
(v) adequacy of the documentation for various elements;
(vi) integration of STF in the day -to-day risk management processes; and
(vii) adequacy of the remedial actions and the efficiency of the systems for
their activation.
(g) The Senior Management shall  ensure effective implementation of STF, including :
(i) identif ication of  principal risk factors;
(ii) design ing and implement ation of  appropriate single /multi factor stress
tests;
(iii) designing  of an appropriate MIS to support the stress tests to be
conducted;
(iv) ensuring  an appropriate and effective internal control mecha nism is in
place to implement and validate stress tests and their findings;
(v) review ing of stress test results and monitor for loss limits;
(vi) activat ion of appropriate remedial actions;
(vii) reporting periodically the stress test results and the actions taken, if any, to
the Board; and
(viii) ensur ing the staff involved will have adequate training and qualifications.

5.3. Principal Risk Factors
(a) A bank shall identify its material risks that shall be subject to stress tests, their
exposures and the correlation between these risks .
(b) Suggested  list of risks that banks in general are exposed to are ; credit risk, credit
concentration risk,  interest rate risk, market risk, foreign currency risk, liquidity
risk, operational risk, reputational  risk, model risk, strategic  risk, macro -economic
and country risk. These are only a probable  list and banks shall identify the risks
to which they are exposed to with regard to their bank specific circumstances and
portfolios.


5
 (c) Suggested  list of items  that a bank shall consider when designing its STF:
(i) on and off -balance sheet activities;
(ii) business strategy;
(iii) portfolio composition;
(iv) asset quality;
(v) bank -specific events;
(vi) reputational events ;
(vii) operating environment;
(viii) macro -economic factors (interest rate, fore ign exchange rate, inflation,
GDP growth, unemployment rate, asset prices , property price index );
(ix) geographical and political factors (health of other economies,
vulnerabilities to external events, contagion effects);
(x) historical events; and
(xi) latest developm ent in the economic, political, geographical and global
conditions and perspectives .

5.4. Stress Testing Methodolog ies and Scenario Selection
(a) The stress events and scenarios identified and developed by a bank shall be
plausible and relevant to its portfolio.  It shall cover a range of scenarios, including
forward -looking , quantitative and qualitative  that take into account system -wide
interactions and feedback effects .
(b) Stress tests that can be applied to a bank are broadly in two categories: sensitivity
tests and scenario tests. These may be used either separately or in conjunction
with each other.
(c) Sensitivity tests are normally used to assess the impact of change in one variable
or the change in closely linked variables  on the bank’s financial position
(examples for sensitivity tests – Annex) .
(d) Scenario tests include simultaneous moves in a number of variables based on a
single event experienced in the past or a plausible market event that has not yet
happened and the assessment of their impact on the ba nk’s financial position. A
bank shall determine the various risks that shall be included in a scenario, take
into account the linkages among the various risks without looking at each of them


6
 in isolation and assess the extent to which the stress would impa ct their financial
position (examples for stress test scenarios – Annex).
(e) Stress testing shall  be conduct ed over various relevant time horizons to
adequately capture risk characteristics of exposures, conditions that may
materialize in the near term and ad verse situations that take longer to develop .
(f) Banks shall stress the relevant parameters at least at three levels of increasing
adversity,  i.e. minor, medium and major , with reference to the normal situation
and estimate the resources needed under each of  the circumstances to:
(i) meet the risk as it arises and for mitigating the impact of manifestation of
that risk;
(ii) meet the liabilities as they fall due; and
(iii) meet the minimum capital and liquidity requirements.
(g) Assumptions for stress testing :
(i) banks are free to choose the various assumptions underlying the stress
tests and the basis for their assumptions .
(ii) these assumptions shall be well documented and available for verification
by the supervisor/auditors .
(iii) assumptions underlying the stress tests shal l be reviewed periodically for
assessing their validity  and changes, if any, shall be supported with
relevant reasons . Banks shall undertake fresh stress tests when there are
significant modifications in the underlying assumptions.
(h) When designing stress te sting methodologies and scenarios, t he second round or
spillover effects that might arise from the original shock must be taken into
account .

5.5. Data and Appropriate MIS
(a) A bank shall use appropriate, accurate and complete data when performing stress
tests.
(b) A bank shall have a suitably robust infrastructure in place, which is sufficiently
flexible to accommodate different and possibly changing stress tests at an
appropriate level of granularity.
(c) IT resources shall be commensurate with the suitability of the techniques and the


(c) IT resources shall be commensurate with the suitability of the techniques and the
coverage of the stress tests.


7

5.6. Reporting and Interpretation of Stress Test Results
(a) The results of stress test ing shall be reviewed by the senior management and
reported to the Board.
(b) The r esults shall be an essential ingredient of bank’s risk management systems.
(c) Banks shall be conscious of the fact that the stress tests only indicate the likely
impact and do not indicate the likelihood of the occurrence of the stress events.
(d) Since stress testing is influenced by the judgment s and e xperience s, the
effectiveness of the stress tests will depend upon whether banks have identified
their major risks, whether they have chosen the right level of stress/stress
scenarios, whether they have understood and interpreted the stress test results
appropriately  and whether they have initiated the necessary steps to address the
situation presented by the stress test results.

5.7. Frequency of Stress Testing
(a) A bank may apply stress tests at varying frequencies necessitated  by their
respective business requ irements, relevance and cost.
(b) Some stress tests may be conducted daily or weekly and some others may be
conducted at monthly or quarterly intervals.
(c) Under specific circumstances, ad -hoc stress tests may be required to assess the
impact of observed deteri oration , which banks had not taken into account .

5.8. Internal Controls and Independent  Assessment
(a) An appropriate and effective internal control mechanism is essential to implement
and validate stress tests and their findings.
(b) As part of the bank’s internal control process, regular and independent assessment
of stress testing policies, procedures and processes sh all be carried out to ensure
the quality and effectiveness of STF.
(c) The independent assessment  may be carried -out by internal audit or those who are
not involved in model development nor makes decision based on the model
output.


8
 5.9. Remedial Actions
The remedial actions , that banks may consider necessary to activate when the various
stress tolerance levels are breached may include  and not limited to :
(a) reduction of risk limits;
(b) reduction of risks by enhancing collateral requirements, seeking higher level of
risk mitigants;
(c) reduction of exposures to specific sectors, portfolios, countries  or regions;
(d) revision of pricing and other policies to reflect enhanc ed risks or previously
unidentified risks;
(e) augmentation of  capital levels to enhance the buffer to absorb shocks;
(f) implementation of contingency plans;
(g) enhanc e sources of funds through credit lines, managing the liability structure,
altering the liquid asse t profile, etc.

5.10. Disclosures
The Board of Directors/senior management shall ensure that disclosures are made in the
bank's Annual Report or in the Audited Financial Statements on stress testing as
appropriately .