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 x) The paid -in amount is classified as equity under Sri Lanka Accounting Standards.
 xi) It is directly issued and paid -in and the bank has not directly or indirectly funded the purchase
of the instrument .
 xii) The paid -in amount is neither secured nor covered by a guarantee of the issuer or a related entity
or subject to any other arrangement that legally or economically enhances the seniority of the
claim .
 xiii) It is issued only with the approval of the Board of Directors of the issuing bank and in line with
other p rovisions specified in the Articles of Association and the Companies Act No. 7 of 2007 .
 xiv) It is clearly and separately disclosed in the bank’s financial statements .
20.2. 1.1.1.2  Reserve Fund
 Reserve fund as in the latest audited financial statements maintained in terms of Section 20 of the
Banking Act  No. 30 of 1988.
20.2. 1.1.1.3  Published Retained Earnings/(Accumulated Retained Losses)
(1)  Accumulated published retained earnings/(losses) reflected in the statement of changes in equity in
the latest audited financial statements .
(2)  Dividends paid and/or declared shall be deducted from retained earnings .
(3)  Losses arising from items that will not be recycled into the income statement shall be deducted from
the published retained earnings accordingly . i.e., changes in revaluation surplus  of property, plant
and equipment  and actuarial gains and losses on defined benefit plans .
20.2. 1.1.1.4  Other Comprehensive Income (OCI)
(1)  Items that are or may be reclassified/recycled subsequently to the income statement
 i) 60 percent of accumulated OCI gains reflected in the statement of changes in equity in the latest
audited financial statements subject to reclassification to the income statement shall be included
in CET1 capital.
 ii) Maximum amount of OCI gains recognised is limited to 10  percent of total CET1 capital before
item (i) above.


item (i) above.
 iii) OCI gains (net of tax) that are already realised and recycled on disposal and shall be excluded.
 iv) OCI losses arising from items subject to reclassification must be immediately deducted.
v) Items that are or may be reclassified/recycled subsequently to the income statement.
a) Gains and losses arising from translating the financial statements of a foreign operation
b) Gains and losses on re -measuring available -for-sale financi al assets
c) Gains and losses on cash flow hedges
(2)  Items that will not be reclassified/recycled subsequently to the income statement
 Gains that will not be reclassified shall not be taken into C ET1 c apital  (i.e. changes in revaluation
surplus of property, plant and equipment and actuarial gains and losses on defined benefit plans ).


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20.2. 1.1.1.5  General and Other Disclosed Reserves
 General and other disclosed reserves  created or increased by appropriation of retained earnings as in
the latest audited financial statements excluding reserves maintained for specific purposes.
20.2. 1.1.1.6  Unpublished current year profit/(losses) and OCI gains in the latest reporting period
(1)  The unpublished current year profit and OCI gains subject to item 20.2. 1.1.1.4 shall be included with
the certification of the  external auditor .
(2)  The unpublished current year loss reflected in the income statement shall be deducted
20.2. 1.1.1.7  Voting and Non -Voting Ordinary Shares Issued by Consolidated Banking and Financial
Subsidiaries of the Bank and Held by Third Parties
 Minority interest arising from the issue of ordinary shares by a consolidated banking and financial
subsidiary of the bank .
(1)  Criteria for Inclusion of Minority Interest in CET1 Capital
 i) Meet all of the criteria for classification as ordinary shares for regulatory capital
purposes given in WBRC 20.2.1.1.1.1
 ii) The consolidated subsidiary is a financial institution regulated by CBSL
(2)  Calculation of Minority Interest Recognised in Consolidated CET1 Capital
 Step 1 - Surplus CETI Capital of the Subsidiary
= CET1 capital of the Subsidiary - (Minimum CET1 c apital requirement of the subsidiary + CCB
on a staggered basis over a period of 2.5 years)
 Step 2 - Surplus CET1 Capital of the Subsidiary Attributable to Minority Shareholders
= Surplus CET1 c apital of the S ubsidiary * Percentage of CET1 c apital held by Minority
Shareholders
 Step 3 - Minority Interest Recognised in Consolidated CET1 Capital
= Total Eligible Mi nority Interest - Surplus CET1 c apital of the subsidiary attributable to minority
shareholders
20.2. 1.1.2.0  Adjustments to CET1
 Adjustments to be applied both on a solo and a consolidated basis .
20.2. 1.1.2.1


Adjustments to be applied both on a solo and a consolidated basis .
20.2. 1.1.2.1
(1) Less: Goodwill
Goodwill as shown in the balance sheet.
(2) Goodwill shall be in accordance with the Sri Lanka Accounting Standard – SLFRS 3 on Business
Combinations.
20.2. 1.1.2.2  Less: Other Intangible Assets
 Intangible assets shall be in accordance with the Sri Lanka Accounting Standard - LKAS 38 on
Intangible Assets .


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20.2. 1.1.2.3  Less: Revaluation Losses of Property, Plant and Equipment
(1)  Revaluation losses shall not be netted against the revaluation gains .
(2)  Sri Lanka Accounting Standard - LKAS 16 on Property Plant and Equipment will be applicable .
20.2. 1.1.2.4  Less: Deferred Tax Assets  (DTAs)  (net)
(1)  DTAs shall be netted with Deferred Tax Liability (DTLs) .
(2)  Sri Lanka  Accounting Standard - LKAS 12 on Income Taxes will be applicable .
20.2. 1.1.2.5  Cash Flow Hedge Reserve
 The amount of the cash flow hedge reserve which relates to the hedging of items that are not fair
valued, i.e., valued at amortised cost, in the statement of financial position (including projected cash
flows) .
Less:  Positive amounts of the cash flow hedge
Add:  Negative amounts of the cash flow hedge
20.2. 1.1.2.6  Less: Unrealised Gains on Sale Related Securitisation Transactions
 An increase in equity capital due to  unrealised gains related to  securitisation transactions
20.2. 1.1.2.7  Less: Shortfall of the Cumulative Impairment to Specific  Provisions
 Any shortfall in specific  provisions as per Banking Act Directions on Classification of Loans and
Advances, Income Recognition and Provisio ning over cumulative impairment.
20.2. 1.1.2.8  Changes in Own Credit Risk
 Changes in fair value of financial liabilities measured at fair value recognised in the income statement
 Add:  Unrealised losses from changes in fair value of liabilities due to changes in the bank’s own
credit risk
 Less:  Unrealised gains from changes in fair value of financial liabilities due to changes in bank’s
own credit risk
20.2. 1.1.2.9  Less: Defined Benefit Pension Fund Assets (Net)
(1)  Defined benefit asset s in excess of defined benefit liabilit ies.
(2)  Sri Lanka Accounting Standard - LKAS 19 on Employee Benefits and the Sri Lanka Accounting


(2)  Sri Lanka Accounting Standard - LKAS 19 on Employee Benefits and the Sri Lanka Accounting
Standard - LKAS 26 on Accounting and Reporting by Retirement  Benefit Plans  will be applicable.
20.2. 1.1.2.10  Less: Investment in Own Shares
(1)  Bank’s investments  in own shares or invest ment /purchase s in its capital instruments (shares and debt
instruments) due to contractual obligations shall be deducted in the relevant Tiers of capital in the
computation of capital ratios. The same application shall be adopted to  investments in own shares
within the group entities as well.  However, prior approval of the Monetary Board  is required to invest
in own shares.


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20.2. 1.1.2.11  Less: Reciprocal Cross Holdings in the Capital of Banking and Other Financial Institutions
(1)  Reciprocal crossholding s shall mean lower amount of both entities’ investments in the capital
instruments in different Tiers of capital .
(2)  The bank should total its own investments in investee entity, i.e., financial institutions, and investee
entity’s investment in the bank. Banks shall apply a corresponding deduction approach for such
investments.
(3)  The remaining portion of such investments, i.e., above the lower amount of both entities, shall be
deducted in different Tiers of capital under the provisions of WBRC 20.2. 1.1.2.12  and 20.2. 1.1.1.2.13
(4)  Corresponding Deduction Approach
Deduction should be  applied to the same component of capital (Common Equity Tier 1, Additional
Tier 1 and Tier 2 capital) for which the capital would qualify if it was issued by the bank itself.
20.2. 1.1.2.12  Less: Investments in the Capital of Banking and Financial Institutions where the Bank does
not own more than 10 per cent of the Issued Ordinary Share Capital of the Entity
(1)  The following types of investments shall be considered for the purpose of this calculation:
 i) Capital including ordinary shares (only direct  holdings of both voting and non -voting ordinary
shares) and all other types of capital instruments (e.g.: preference shares and subordinated debt) .
 ii) If the instrument is issued by a regulated financial entity and not included in regulatory capital
of such entity, such investments shall not be included .
(2)  If the total of all investments listed above in aggregate exceed 1 per cent of the bank’s CET1 capital
(after applying all regulatory adjustments listed prior to this deduction in full) then the amount  above
1 per cent is required to be deducted, applying a corresponding deduction approach .


1 per cent is required to be deducted, applying a corresponding deduction approach .
(3)  The amount to be deducted from CET1 capital should be calculated as the total of all holdings which
in aggregate exceed 1 per cent of the bank’s CET1 capital multiplied by the ordinary share
investments as a percentage of the total capital investments .
(4)  A similar approach shall be applied for deduction from AT1 and Tier 2 capital .
(5)  The remaining investment,  i.e., investment less than 1 per cent of CET1 capital, which is not deducted
from the respective Tiers of capital should be risk weighted appropriately .
(6)  For the application of risk weighting, the amount of investments must be allocated on a pro rata basis
between portfolios based on the credit risk (WBRC 20.3.1.5.0.0  to 20.3.1.6.0.0 ) and market risk
(WBRC 20.4.1.1.0.0  to 20.4.1.2.0.0 ) rules.
20.2. 1.1.2.13  Less: Significant Investments in the Capital of Financial Institutions where the Bank owns
more than 10 per cent of the Issued Ordinary Share Capital of the Entity
(1)  The types of investments for this purpose  shall be equal to 20.2. 1.1.2.12  (1).
(2)  All investments included in 20.2. 1.1.2.1 2 (1) above that are not ordinary shares must be fully
deducted following a corresponding deduction approach .


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(3)  The deduction of investments which are not ordinary shares should be applied to the same Tier of
capital for which the capital would qualify if it was issued by the financial institution itself. If the
bank is required to make a deduction from a particular Tier of capital and it does not have enough of
that Tier of capital to satisfy that deduction, the shortfall will be deducted from the next higher Tier
of capital .
(4)  All investments included in 20.2. 1.1.2.1 2 (1) above that are ordinary shares in excess of 1 per cent of
CET1 capital (after making all regulatory deductions prior to this deduction) of the bank shall be
fully deducted from CET1 Capital. The investments les s than 1 per cent shall be risk weighted at 250
per cent (WBRC 20.3.1.13.2.0 ).
20.2. 1.1.2.14  Less: Shortfall of Capital in Financial Subsidiaries
 Any shortfall of capital applicable for financial subsidiaries
20.2. 1.1.2.15  Regulatory adjustments applied to CET1 capital due to Insufficient AT1 and Tier 2 Capital to
cover deductions
 Indicative List of Financial Institutions
i) Licensed commercial banks and licensed specialised banks licensed under the Banking Act No.
30 of 1988 (as amended)
ii) Licensed finance companies licensed under the Finance Business Act No. 42 of 2011
iii) Specialised leasing companies registered under the Finance Leasing Act No. 56 of 2000
iv) Microfinance i nstitutions registered under the Microfinance Act No. 6 of 2016
v) Insurance companies, their agents and insurance brokers registered under the Insurance Industry
Act No. 43 of 2000 (as amended)
vi) Primary d ealers licensed under the Local Treasury Bills Ordinance No. 8 of 1923  (as amended)
and Registered Stocks and Securities Ordinance No. 7 of 1937  (as ame nded)
vii) Merchant/investment banks and venture capital companies incorporated under the Compani es
Act No. 7 of 2007


Act No. 7 of 2007
viii) Registered market intermediaries, including margin providers, investment managers,
underwriters, securities clearing houses, credit rating agencies, stock brokers/dealer companies
and managing companies of unit trust registered under t he Securities and Exchange
Commission of Sri Lanka Act No. 36 of 1987 (as amended)
ix) Any other financial subsidiaries/institutions established in or outside Sri Lanka
 Adjustments to CET1 applicable only for Branches of Foreign Banks
20.2. 1.1.2.16  Less: Amount due from head office & branches outside Sri Lanka in Sri Lanka n Rupees
Debit balances in VOSTRO current accounts in Sri Lanka Rupees held by Head Office and branches
outside Sri Lanka in Sri Lanka Rupees.


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20.2. 1.1.2.17  Add: Amount due to head office & branches outside Sri Lanka in Sri Lanka Rupees
Credit balances in VOSTRO current accounts in Sri Lanka Rupees held by Head Office and branches
outside Sri Lanka in Sri Lanka Rupees.
20.2. 1.1.2.18  Less: Amount due from he ad office & branches outside Sri Lanka in Foreign Currency (net)
Net d ebit balances (after netting of credit balances) in NOSTRO current accounts in foreign currency
held with Head Office and branches outside Sri Lanka and the net amount of fixed and othe r deposits
placed with and amounts lent to Head Office and branches outside Sri Lanka (after netting of fixed
and other deposits and amounts borrowed from Head Office and branches outside Sri Lanka) in
foreign currency. Ignore any net credit balance.

20.2. 2.1.0.0  Additional Tier 1 (AT1) Capital after Adjustments
20.2. 2.1.1.0  Additional Tier 1 (ATI) Capital
20.2.2.1.1.1  Qualifying Additional Tier 1 Capital Instruments
 Instruments issued by the bank that meet the criteria for inclusion in AT1 capital.
 Criteria for Classification/Inclusion in Additional Tier 1 Capital
(1)  Issued and fully paid -in cash. Only the net proceeds received from the issuance of the capital
instrument shall be included as capital .
(2)  Subordinated to the claims of depositors, c reditors and holders of Tier 2 c apital instruments issued
by the bank .
(3)  Is neither secured nor covered by a guarantee of the issuer, related entity or any other arrangement
that legally or economically enhances the seniority of the claim abov e the depositors, creditors and
subordinated debt capital i nstruments issued under Tier 2 c apital .
(4)  Perpetual, i.e., has no maturity date and have  no step -ups or other incentives for early redemption .
(5)  The capital instrument may be callable at the initiative of the issuer only after a minimum of five


years from the date of issue, subject to satisfying the following minimum requirements:
i) Prior approval of the Monetary Board to exercise a call option has been obtained by the bank;
ii) The bank shall not create an expectation that the call option will be exercised; and
 iii) The bank shall not exercise a call option unless:
a) The capital instrument is replaced by the bank with capital of the  same or better quality and
the replacement of this capital is done in a  manner that does not affect the income capacity
of the issuing bank; or
b) The bank demonstrates that its capital position/ratios will be maintained well above the
minimum after the call option is exercised .


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(6)  Any repayment of principal ( e.g. through repurchases or redemptions) is done only with the prior
approval of the Monetary Board. The bank shall not assume or create expectations that approval will
be given by the Monetary Board.
(7)  Dividend/Coupon discretion:
i) The bank has full discretion at all times to cancel distributions or payments: In this regard,
dividend pushers and mandatory distributions are prohibited;
ii) Any cancellation of dividend or coupon is not an event of default;
iii) The bank must have full access to cancelled dividend or coupon paymen ts to meet obligations
as they fall due; and
iv) Any cancellation of dividend or coupon does not impose restrictions on the bank, except in
relation to distributions to ordinary shareholders.
(8)  Dividends/coupons must be paid out of distributable items: Any div idend or coupon to be paid under
the capital instrument is only paid to the extent that the bank has retained profits for distributions.
(9)  The capital instrument shall not have a credit sensitive dividend feature. In this regard, the capital
instrument shall not have a dividend or coupon that is reset periodically, based in whole or in part on
the credit standing of the bank or any banking group.
(10)  The instrument cannot contribute to liabilities exceeding assets if such a statement of financial
position forms part of the solvency test as specified in the Companies Act No. 7 of 2007.
(11)  Instruments classified as liabilities for accounting purposes must have principal loss absorption
through:
 i) Conversion to ordinary shares at an objective pre -specified trigger point;
 ii) A write -down mechanism which allocates losses to the instrument at a pre -specified trigger
point. The write -down will have the following effects:
 a) It reduces the claim of the capital instrument in liquidation of the issuing bank;


a) It reduces the claim of the capital instrument in liquidation of the issuing bank;
 b) It reduces the amount to be repaid when a call option is exercised; and
 c) It partially or fully reduces dividend or coupon payments on the capital instrument.
 iii) Trigger points/events for the purpose of loss absorption at the point of non -viability:  The
trigger point/event is the earlier of:
 a) A decision that a write -down, without which the bank would become non -viable, is
necessary, as determined by the Monetary Board; and
 b) The decision to make a public sector injection of capital, or equivalent support, without
which the bank would have become non -viable, as determined by the Monetary Board.
 iv) Any compensation paid to the instrument holders as a result of the write -down must be paid
immediately in the form of ordinary shares or its equivalent.


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 v) The issuing bank must maintain at all times all prior authorisation necessary to immediately issue
the relevant number of shares at the time of trigger event occurs.
(12)  The issuance of any new shares as a result of the trigger point/event must occur prior to any public
sector injection of capital.
(13)  Neither the bank nor a banking group over which the bank exercises control or significant influence
can have purchased the instrument, nor can the bank directly or indirectly have funded the purchase
of the instrument.
(14)  The capital instrument does not have any feature that hinders recapitalisation, such as provisions that
require the issuer to compensate investors if a new instrument is issued at a lower price during a
specified time frame.
(15)  If the capital instrument is not issued by an operating entity or the holding company of the bank [e.g.
issued through a special purpose vehicle (SPV)], the proceeds from the issuance o f the capital
instrument shall be immediately available, without limitation, to an operating entity or the holding
company of the bank in a form which meets or exceeds all of the other criteria for inclusion in AT1
capital.
(16)  Prior approval of the Monetary  Board is required for inclusion of capital instruments in AT1 capital.
(17)  If AT1 capital instruments issued out of a branch or a subsidiary in a foreign jurisdiction such
instruments shall meet the eligibility criteria in both home and host country regulations relating to
Basel III.
20.2.2.1.1.2  Instruments Issued by Consolidated Banking and Financial Subsidiaries of the Bank and Held
by Third Parties
 Instruments issued by consolidated banking and financial subsidiaries of the bank and held by third
parties that meet the criteria for inclusion in AT1 capital and are not included in CET1 capital.
20.2.2.1.2.0  Adjustments to AT1 Capital
20.2.2.1.2.1  Less: Investment in Own Instruments


20.2.2.1.2.0  Adjustments to AT1 Capital
20.2.2.1.2.1  Less: Investment in Own Instruments
 Bank’s investments or investment/purchases in its capital instruments due to contractual obligations
shall be deducted in the relevant Tiers of capital in the computation of capital ratios. The same
application shall be adopted to investments in own capital instruments within the group entities as
well. However, prior approval of the Monetary Board is required to invest in own capital instruments.
20.2.2.1.2.2  Less: Reciprocal Cross Holdings in AT1 Capital Instruments
Instructions as given under WBRC 20.2.1.1.2.11
20.2.2.1.2.3  Less: Investments in the Capital of Banking and Financial Institutions where the Bank does
not own more than 10 per cent of the Issued Ordinary Share Capital of the Entity
Instructions as given under WBRC 20.2.1.1.2.12


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20.2.2.1.2.4  Less: Significant Investments in the Capital of Financial Institutions where the Bank owns
more than 10 per cent of the Issued Ordinary Share Capital of the Entity
Instructions as given under WBRC 20.2.1.1.2.13
20.2.2.1.2.5  Regulatory Adjustments Applied to AT1 Due to Insufficient Tier 2 Capital to Cover
Adjustments

20.2.3.1.0.0  Tier 2 Capital after Adjustments
20.2.3.1.1.0  Tier 2 Capital
Maximum Tier 2 capital shall be limited to 100 per cent of CET1 capital.
20.2.3.1.1.1  Qualifying Tier 2 Capital Instruments
 Criteria for Classification/Inclusion in Tier 2 Capital
(1)  Issued and fully paid -in cash. Only the net proceeds received from the issuance of the capital
instrument /term debt  shall be included as capital.
(2)  Subordinated to the claims of depositors and general creditors.
(3)  Is neither secured nor covered by a guarantee or any other arrangement that legally or economically
enhances the seniority of the claim above the depositors and general creditors of the bank.
(4)  Prior approval of the Monetary Board is required for inclusion of capital instruments /term debt  in
Tier 2 capital.
(5)  Shall be listed in a recognised s tock exchange.
(6)  The total approved Tier 2 capital instruments /term debt shall not exceed 50 per cent of total CET1
capital.
(7)  Maturity of the capital instrument /term debt :
 i) Minimum original maturity of at least five years . Where the agreement governing the issuance
of the capital instrument/ term debt provides for the loan to be drawn down in a series of tranches,
the minimum original maturity for each tranche shall be 5 years from the date of its draw -down.
 ii) Recognition in regulatory capital in the remaining five years before maturity will be amortised
on a straight line basis as specified in Table 1. The eligible amount to be amortised shall be


on a straight line basis as specified in Table 1. The eligible amount to be amortised shall be
equally distributed among the four quarters of that financial year when computing the quarterly
capital ratios.
 Table 1: The Amortization Schedule for Tier 2 Capital Instrum ents
Remaining years to
maturity (X)  Amount eligible to be
included in Tier 2 capital
X > 4  100%
3 < X ≤ 4  80%
2 < X ≤ 3  60%
1 < X ≤ 2  40%
X ≤ 1  20%


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 iii) There are no step -ups (changes in coupon rate or taxes) or other provisions that mandate or create
an incentive for the bank to redeem the capital instrument /term debt .
(8)  The capital instrument /term debt  may be callable at the initiative of the issuer only after a minimum
of five years from the date of issue, subject to the following minimum requiremen ts:
 i) The bank must obtain prior approval of the Monetary Board to exercise a call option
 ii) A bank shall not create an expectation that the call option will be exercised; and
 iii) The bank shall not exercise a call option unless:
 a) The capital instrument /term  debt is replaced by the bank with capital of the same or better
quality and the replacement of this capital is done in a manner that does not affects the
income of the issuing bank; or
 b) The bank demonstrates that its capital position/ratios will be maintained well above the
minimum after the call option is exercised
(9)  The investors in the capital instrument /term debt  have no rights to accelerate the repayment of future
scheduled payments (either coupon or principal), except in bankruptcy and liquidation of the bank.
(10)  Instruments classified as liabilities for accounting purposes must have principal loss absorption
through:
 i) Conversion to ordinary shares at an objective pre -specified trigger point
 ii) A write -down mechanism which allocates losses to the instrument at a pre -specified trigger
point. The write -down will have the following effects:
 a) It reduces the claim of the capital instrument in liquidation of the issuing bank
 b) It reduces the amount to be repaid when a call option is exercised
 c) It partially or fully reduces dividend or coupon payments on the capital instrument
 iii) Trigger points/events for the purpose of loss absorption at the point of non -viability: The trigger
point/event is the earlier of:


point/event is the earlier of:
 a) A decision that a write -down, without which the bank would become non -viable, is
necessary, as determined by the Monetary Board
 b) The decision to make a public sector injection of capital, or equivalent support, without
which the bank would have become non -viable, as determined by the Monetary Board
 iv) Any compensation paid to the instrument holders as a result of the write -down must be paid
immediately in the form of ordinary shares or its equivalent.
 v) The issuing bank must maintain at all times all prior authorisation necessary to immediately issue
the relevant number of shares at the time of trigger event.
 vi) The issuance of any new shares as a result of the trigger event must occur prior to any public
sector injection of capital.


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(11)  The capital instrument /term debt  shall not have a credit sensitive dividend/coupon feature. In this
regard, the capital instrument /term debt  shall not have a dividend or coupon that is reset periodically,
based in whole or in part on the credit standing of the bank or any banking group.
(12)  Neither the bank nor a banking group over which the bank exercises control or significant influence
can have purchased the instrument and the bank cannot directly or indirectly have funded the
purchase of the instrument.
(13)  If the capital instrument /term debt  is not issued by an operating entity or the holding company of the
bank (e.g. issued through an SPV), the proceeds from the issuance of the capital instrument /term debt
shall be immediately available without limitation to an operating entity or the holdin g company of
the bank in a form which meets or exceeds all of the other criteria for inclusion in Tier 2 capital.
(14)  If Tier 2 capital instruments /term debt  issued out of a branch or a subsidiary in a foreign jurisdiction,
such instruments shall meet the el igibility criteria in both home and host country regulations relating
to Basel III.
20.2.3.1.1.2  Revaluation Gains
 The revaluation gains shall satisfy the following requirements when including in Tier 2 capital.
 i) Prior approval of the Monetary Board .
ii) The revaluation gains may be included in Tier 2 capital once in every three years subject to a
discount of 50 per cent on the difference between the cost and the fair value/market value of
property, plant and equipment.
iii) Such revaluation is required to be p rudently valued to reflect the current market prices in terms
of the Banking Act Direction No. 1 of 2014 on the Regulatory Framework for Valuation of
Immovable Property of LCBs and LSBs.
iv) Revaluation gains shall be based on the current valuation. Revaluatio n shall be made with


iv) Revaluation gains shall be based on the current valuation. Revaluatio n shall be made with
sufficient frequency to ensure that the carrying amount does not differ materially from the fair
value/market value at the end of the reporting period.
v) Sri Lanka Accounting Standard – LKAS 16 on Property Plant and Equipment, and the Sri Lanka
Accounting Standard – LKAS 36 on Impairment of Assets will be applicable.
vi) Impairment charges taken against any property, plant and equipment are not netted against the
revaluation gains from any other asset.
vii) If an item of immovable property is re valued, the entire class of property, plant and equipment
to which that asset belongs shall be revalued once in every three years.
viii) Newly acquired or developed properties shall be included in Tier 2 capital after completing 3
years from the completion of ac quisition/development.


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20.2.3.1.1.3  General Provisions
General provisions based on the Banking Act Directions No. 3 of 2008 on Classification of Loans
and Advances, Income Recognition and Provisioning shall be eligible for inclusion in Tier 2 capital
with a maximum of 1.25 per cent of risk weighted assets (RWA s) on credit risk under the
Standardised Approach.
20.2.3.1.1.4  Instruments Issued by Consolidated Banking and Financial Subsidiaries of the Bank and
Held by Third Parties
 These instruments shall meet the cr iteria for inclusion in Tier 2 c apital and are not included in Tier
1 capital.
20.2.3.1.2.0  Adjustments to Tier 2 Capital
20.2.3.1.2.1  Less: Investment in Own Capital Instruments
 Bank’s investments or investment/purchases in its debt capital instruments due to contractual
obligations shall be deducted in the relevant Tiers of capital in the computation of capital ratios. The
same application shall be adopted to investments in own c apital instruments within the group entities
as well. However, prior approval of the Monetary Board is required to invest in its own capital
instruments.
20.2.3.1.2.2  Less: Reciprocal cross holdings in Tier 2 capital instruments
Instructions as given under WBRC 20.2.1.1.2.11
20.2.3.1.2.3  Less: Investments in the Capital of Banking and Financial Institutions where the Bank does
not own more than 10 per cent of the Issued Ordinary Share Capital of the Entity
Instructions as given under WBRC 20.2.1.1.2.12
20.2.3.1.2.4  Less: Significant Investments in the Capital of Financial Institutions where the Bank owns
more than 10 per cent of the Issued Ordinary Share Capital of the Entity
Instructions as given under WBRC 20.2.1.1.2.13
20.2.4.1.0.0  Total Tier 1 Capital
20.2.5.1.0.0  Total Capital


30
 PART II(B) - GUIDELINES ON MAINTAINING CAPITAL BUFFERS
1. Capital Conservation Buffer (CCB)
1.1 Objective
CCB is designed to ensure that banks build up capital buffers during normal times (i.e.
outside the period of stress) which can be drawn down during a stressed period.
1.2 Key Features of CCB
i) CCB that have been drawn down during a period of stress shall be re built by way
of reducing discretionary distributions of earnings .
ii) Discretionary distribution s may include dividend payments and  share buy -backs .
iii) Additional capital may be raised from the market to conserve internally generated
capital .
iv) Future predictions of recovery will not be accepted as justification for maintaining
generous distributions when capital buffers are depleted .
v) Fall in CCB in normal times, due to increasing RWAs without a commensurate
increase in CET1 capital ratio (although adhering to the restric tions on
distributions), will require  increasing  the buffer to the desired level within a time
frame prescribed by the Monetary Board .
1.3 The Framework
i) Maintaining the full CCB requirement is mandatory from 01 January 2019 both on
a solo and consolida ted basis. However, this will not limit a draw -down of CCB
during a period of stress. The phase -in arrangement of CCB from 01 July 2017 is
indicated in Table 1.
Table 1 - Phase -in Arrangements for CCB
 01.07 .2017  01.01.2018  01.01.2019
CCB  1.25%  1.875%  2.5%
ii) CCB of 2.5 per cent of R WAs shall be met by using CET1 c apital remaining after
complying with the minimum CET1 and Total Capital Ratios.
iii) Commencing 01 July 2017 , distribution constraints will apply when a bank’s capital
level falls into the buffer ra nge. However, during the buffer range the bank can carry
out its business as normal except for restrictions imposed by CBSL.
iv) Table 2 and 3 below indicates the minimum capital conservation ratios (MCCR) a


iv) Table 2 and 3 below indicates the minimum capital conservation ratios (MCCR) a
bank must meet at various levels of CET1 Capital an d Total Capital Ratios,
respectively.


31 v) “Minimum capital conservation ratios” refer to the percentage of a bank’s earnings
for a financial year that a bank is required to conserve in the subsequent financial
year.
Table 2 - Minimum Capital Conservation Ratios for CET1 Capital
CET1 capital ratio buffer
range  (%) MCCR
(percentage of earnings)
    4.50 - 5.125  100
> 5.125 - 5.75 80
> 5.75 - 6.375  60
> 6.375 - 7.00 40
> 7.00 0

Table 3 - Minimum Capital Conservation Ratios for Total Capital
Total capital ratio buffer
range  (%) MCCR
(percentage of earnings)
10.0 - 0.625  100
>10.625  - 11.25  80
>11.25 - 11.875  60
>11.875 - 12.5 40
>12.5 0
1.4 Any distributions in excess o f constraints imposed in Table 2 and 3  shall require the
prior approval of the Monetary Board .
1.5 Any draw down of CCB shall require  the prior approval of the Monetary Board , and
the bank should submit a capital augmentation plan for rebuilding the CCB. Monetary
Board will provide an appropriate time frame to rebuild CCB.
1.6 Although the b uffer may be capable of being drawn down, banks shall not operate in
the buffer range during normal times .
1.7 Other key aspects of CCB requirements:
i) Elements subject to the restriction on distributions :
a) Cash dividends
b) Share buy -backs
c) Payments which do not result in depletion of CET1 capital are not considered
as distributions.


32 ii) Definition of E arnings: Distributable profits before the deduction of elements
subject to the restriction on distributions mentioned at (i) above.

2. Capital Surcharge on Domestic Systemically Important Banks (D -SIBs)
2.1 Objective
D-SIBs must have a higher capacity for loss absorbance to cover the greater risks that
they pose to the financial system .
2.2 Key Features
Banks with total assets of Rs. 500Bn and over, as in the latest annual audited financial
statements would be identified as D -SIBs in the banking sector .
2.3 The Framework
i) The capital surcharge on D -SIBs would commence from 01 July 2017 both on a
solo and consolidated basis.  The phase -in arrangement of capit al surcharge on D -
SIBs is indicated in Table 4 .
Table 4 - Phase -in Arrangements for Capital Surcharge on D -SIBs
 01.07 .2017  01.01.2018  01.01.2019
Capital Surcharge on D -SIBs  0.5%  1.0%  1.5%
ii) The capital surcharge requirements for D-SIBs are to be met with CET1 c apital.
iii) If a bank fails to meet the capital surcharge on D -SIBs during the transitional period
and full implementation time frame, licensed banks shall adhere to the  time frame
for meeting the requirement by imposing restrictions on discretionary dis tributions
as stated below.
Table 5 - MCCR for CET1 Capital as of 01 July 2017  (in percentage)
CET1 Capital Ratio  MCCR  Total Capital Ratio  MCCR
    5.75  - 5.875  100 11.25 - 11.375  100
> 5.875 - 6.00 80 > 11.375  - 11.50  80
> 6.00 - 6.125  60 > 11.50 - 11.625  60
> 6.125 - 6.25 40 > 11.625 – 11.75  40
> 6.25  0 > 11.75  0

Table 6 - MCCR for CET1 Capital as of 01 January 2018  (in percentage)
CET1 Capital Ratio  MCCR  Total Capital Ratio  MCCR
    6.875   - 7.00 100 12.375 - 12.5 100
> 7.00 - 7.125  80 > 12.5  - 12.625  80
> 7.125 - 7.25 60 > 12.625 - 12.75  60
> 7.25 - 7.375  40 > 12.75 - 12.875  40
>7.375  0 > 12.875   0


Appendix IV
34
 PART III  - GUIDELINES ON COMPUTATION OF TOTAL RISK WEIGHTED
ASSETS
Risk Weighted Amount  for Credit Risk  Based On the Standardised Approach
1 General Rules for Measuring Credit Risk Based on the Standardised Approach
1.1 Under the Standardised Approach (SA), the rating assigned by the eligible external
credit assessment institutions (ECAIs) will largely support the measure of credit risk.
Banks may rely upon the ratings assigned by the ECAIs recognised by CBSL (See
paragra ph 2) for assigning risk weights for capital requirement  purposes as per the
mappin g furnished in these guidelines.
1.2 The risk weighting of claims will be as described under Specific Rules for Measuring
Credit Risk Based on the Standardised Approach.
1.3 Claims (exposures) on a counterpart would include placements with banks,
investments, loans and advances or any other credit exposure.
1.4 On-balance sheet claims (exposures) would be risk weighted applying the risk weight
as given in specific rules  while off -balance  sheet items would continue to be converted
to credit equivalents using the credit conversion factors given in part III(B) and
thereafter risk weighted according to the risk weight applicable to the counterpart.
1.5 All exposures should be risk -weighted net of  specific provisions and interest in
suspense that has been charged to the respective customer account.
2 External Credit Assessments
2.1 Recognition of Eligible Credit Rating Agencies
2.1.1 The new c apital standards require  recognizing ECAIs and developing a mapping
process to assign the ratings issued by eligible credit rating agencies to the risk weights
available under the Standardised Approach. CBSL has identified Fitch Ratings Lanka
Ltd and ICRA Lanka Limited operating in Sri Lanka for the purposes of risk weighting
claims by banks for capital requirement  purposes.
2.1.2 The following internationally recognized credit ratings agencies are also accepted as


2.1.2 The following internationally recognized credit ratings agencies are also accepted as
ECAIs.
a) Moody’s
b) Standard and Poor’s
c) Fitch Ratings
2.1.3 Banks are required to  obtain the prior approval of CBSL for the use of other ECAIs.


35 2.2 Scope of Application of External Ratings
2.2.1 Banks should use the chosen ECAIs and their ratings consistently for each type of
claim, for both risk weighting and risk management purposes. Banks wil l not be
allowed to “cherry pick” the assessments provided by different ECAIs.
2.2.2 Banks shall not use one ECAI’s rating for one exposure, while using another ECAI’s
rating for another exposure to the same counterpart, unless the respective exposures are
rated by only one of the chosen ECAIs, whose ratings the bank has decided to use.
External assessments for one entity within a corporate group cannot be used to risk
weight other entities within the same group.
2.3 Mapping Process
2.3.1 The ratings issued by the eligibl e ECAIs have been mapped to the appropriate risk
weights applicable as per the Standardised Approach under the Revised Framework.
The rating risk weight - mapping furnished in the tables below shall be adopted by all
banks:
Table 1 - Mapping of Notations o f the Credit Rating Agencies in Sri Lanka
Fitch Rating Lanka  ICRA Lanka Limited  Rating Scale for C apital
Ratios
AAA (lka)  (SL) AAA  AAA
AA+ (lka)  (SL) AA+  AA+
AA (lka)  (SL) AA  AA
AA- (lka)  (SL) AA -  AA-
A+ (lka)  (SL) A+  A+
A (lka)  (SL) A  A
A- (lka)  (SL) A -  A-
BBB+ (lka)  (SL) BBB+  BBB+
BBB (lka)  (SL) BBB  BBB
BBB - (lka)  (SL) BBB -  BBB -
BB+ (lka)  (SL) BB+  BB+
BB (lka)  (SL) BB  BB
BB- (lka)  (SL) BB -  BB-
B+ (lka)  (SL) B+  B+
B (lka)  (SL) B  B
B-(lka) &  Lower  (SL) B - & Lower  B- & Lower


36 Table 2 - Mapping of Notations of the International Credit Rating Agencies
Standard and
Poor’s  Moody's  Fitch Ratings  Rating Scale of
Capital Ratios
AAA  Aaa AAA  AAA
AA+  Aa1 AA+  AA+
AA Aa2 AA AA
AA- Aa3 AA- AA-
A+ A1 A+ A+
A A2 A A
A- A3 A- A-
BBB+  Baa1  BBB+  BBB+
BBB  Baa2  BBB  BBB
BBB - Baa3  BBB - BBB -
BB+  Ba1 BB+  BB+
BB Ba2 BB BB
BB- Ba3 BB- BB-
B+ B1 B+ B+
B B2 B B
B- & Lower  B3 & Lower  B- & Lower  B- & Lower
Table 3  - Mapping of Short Term Ratings
Standard and
Poor’s  Moody's  Fitch Ratings  ICRA Lanka
Limited  Risk weights
A - 1+/A - 1 P - 1 F1+/ F1  (SL) A1+ / A1  20%
A - 2+/A - 2 P - 2 F2 (SL) A2+ / A2  50%
A - 3+/A - 3 P - 3 F3 (SL) A3+ / A3  100%
Below A - 3 NP Below F3  (SL) Below A3  150%

2.4 Short -Term Ratings
2.4.1 Short -term assessments may only be used for short -term claims against banks and
corporates.
2.4.2 For risk-weighting purposes, short -term ratings are deemed to be issue specific. They
can only be used to derive risk weights for claims arising from the rated facility. They
cannot be generalised to other short -term claims. In no event can a short -term rating be
used to support a risk weight for an unrated long -term claim.
2.4.3 If a short -term rated facility attracts a 50% risk weight, unrated short -term claims
cannot attract a risk weight lower than 100%. If an issuer has a short -term facility with
an assessment that warrants a risk weight of 150%, all unrated claims, whether long
term or short term, should also receive a 150% risk weight, unless the b ank uses
recognized CRM techniques for such claims.
2.4.4 The above risk weight mapping of both long term and short -term ratings of the chosen
domestic rating agencies would be reviewed annually by CBSL.


37 2.5 Use of Unsolicited Ratings
A rating would be treated as solicited only if the issuer of the instrument has requested
the credit rating agency for the rating and has accepted the rating assigned by the
agency. As a general rule, banks should use only solicited rating from the chosen
ECAIs.  No ratings issued by the credit rating agencies on an unsolicited basis should
be considered for risk weight computation as per the Standardised Approach.
2.6 Issuer versus Issues Assessment
Where a bank’s exposure is to a particular issue that has an i ssue-specific assessment,
the risk weight of the claim will be based on this assessment.
2.7 Use of Multiple Rating Assessments
2.7.1 Banks shall be guided by the following in respect of exposures/obligors having multiple
ratings from the eligible ECAIs chosen by the bank for the purpose of risk weight
Computation:
(i) If there is only one rating by an eligible credit rating agency for a particular
claim, that rating would be used to determine the risk weight of the claim.
(ii) If there are two ratings accorded by eligible credit rating agencies, which map
into different risk weights, the higher risk weight should be applied.
(iii) If there are three or more ratings accorded by eligible credit rating agencies with
different risk weights, the ratings corresponding to the two lowest  risk weights
should be referred to and the higher of those two risk weights should be applied,
i.e., the second lowest risk weight.


38
 PART III(A) – COMPUTATION OF RISK WEIGHTED AMOUNT FOR CREDIT RISK
Web Based
Return Code  Assets  Risk
Weight
%
20.3.1.0.0.0  Total risk -weighted amount for c redit risk
The amount must agree to  sum of total amount of on -balance sheet items (from
WBRC 20.3.1.1.0.0 to 20.3.1.14.0.0) and total amount of credit equivalent items
after applying the specific risk weight assigned.
20.3.1.1.0.0  Claims on Central Government and Central Bank of Sri Lanka
The amount must agree to sum of items WBRC 20.3.1.1.1.0 to 20.3.1.1. 2.0.
20.3.1.1.1.0  Central Government
20.3.1.1.1.1  Rupee Claims on Central Government
All rupee claims on Government of Sri Lanka  0
20.3.1.1.1.2  Foreign Claims on Central Government
All foreign claims on Government of Sri Lanka are risk -weighted commencing
01.01.2018  20
20.3.1.1.2.0  Central Bank of Sri Lanka
All claims on the Central Bank of Sri Lanka  0
20.3.1.2.0.0  Claims on Foreign Sovereigns and their Central Banks
Exposures on foreign sovereigns and their central banks will attract risk weights as
per the rating assigned to those sovereigns/sovereign exposures by international
rating agencies as given.
The amount must agree to sum of items from WBRC 20.3.1.2.1.0 to 20.3.1.2.6.0
20.3.1.2.1.0  AAA to AA - 0
20.3.1.2.2.0  A+ to A - 20
20.3.1.2.3.0  BBB+ to BBB - 50
20.3.1.2.4.0  BB+ to B - 100
20.3.1.2.5.0  Below B - 150
20.3.1.2.6.0  Unrated  100
20.3.1.3.0.0  Claims on Public Sector Entities (PSEs)
All performing claims on domestic public sector entities (including public
corporations, statutory boards, provincial authorities, local government bodies, etc.)
and claims on foreign PSEs will be risk weighted in a manner similar to claims on
corporates as given.
The amount must agree to sum of items from WBRC 20.3.1.3.1.0 to 20.3.1.2.5.0
20.3.1.3.1.0  AAA to AA - 20


39 Web Based
Return Code  Assets  Risk
Weight
%
20.3.1.3.2.0  A+ to A - 50
20.3.1.3.3.0  BBB+ to BB - 100
20.3.1.3.4.0  Below BB - 150
20.3.1.3.5.0  Unrated  100
20.3.1.4.0.0  Claims on Official Entities and Multilateral Development Banks (MDBs)
The amount must agree with the sum of the following items from WBRC 20.3.1.4.1.0
to 20.3.1.4.6.0 .
20.3.1.4.1.0  BIS, IMF,  ECB, EC and Eligible MDBs
i) Exposures on following official entities will be assigned a zero risk weight:
a) Bank for International Settlements (BIS)
b) International Monetary Fund (IMF)
c) European Central Bank (ECB)
d) European Community (EC)
ii) The following Eligible MDBs will be assigned a zero risk weight:
a) The World Bank Group comprising of the International Bank for
Reconstruction and Development (IBRD) and the International Finance
Corporation (IFC)
b) The Asian Development Bank (ADB)
c) The African Development Bank (AFD B)
d) The European Bank for Reconstruction and Development (EBRD)
e) The Inter -American Development Bank (IADB)
f) The European Investment Bank (EIB)
g) The European Investment Fund (EIF)
h) The Nordic Investment Bank (NIB)
i) The Caribbean Development Bank (CDB)
j) The Islami c Development Bank (IDB)
k) The Council of Europe Development Bank (CEDB)
l) The International Finance Facility for Immunization (IFFIm)
iii) The risk weight applicable to claims on other MDBs will depend on the external
rating assigned for each MDBs as follows:  0
20.3.1.4.2.0  AAA+ to AA - 20
20.3.1.4.3.0  A+ to BBB - 50
20.3.1.4.4.0  BB+ to B - 100
20.3.1.4.5.0  Below B - 150


40 Web Based
Return Code  Assets  Risk
Weight
%
20.3.1.4.6.0  Unrated  100
20.3.1.5.0.0  Claims on Banks Exposures
Total performing claims on banks denominat ed in LKR and foreign currency. The
amount must agree to sum of total rupee claims and foreign currency claims.
(WBRC 20.3.1.5.1.0  + 20.3.1.5.2.0  + 20.3.1.5.3.0)
Short -Term Claims:  In order to qualify for the preferential treatment for short -term
claims, they should have an original contractual maturity of 3 months or less, and
should not be rolled over.
Branches of banks incorporated abroad:  The rating applicable to the Head Office
may be used as the rating applicable to the particular branch, if the branch is not rated
locally.
20.3.1.5.1.0  Rupee Exposures less than 3 months
All performing claims on all banks (short -term) including LCBs and LSBs,
excluding investment in equity sh ares and other instruments eligible for capital
status, denominated in LKR would be risk weighted based on their external credit
assessment as follows:
The amount must agree with the sum of the following items from WBRC 20.3.1.5.1.1
to 20.3.1.5.1.4
20.3.1.5.1.1  AAA to BBB - 20
20.3.1.5.1.2  BB+ to B - 50
20.3.1.5.1.3  Below B - 150
20.3.1.5.1.4  Unrated  100
20.3.1.5.2.0  Foreign Currency Exposures less than 3 months
All performing claims denominated in foreign currency on banks (short -term) will
be risk weighted based on their external credit assessment as given in the table below.
The amount must agree with the sum of the following items from WBRC 20.3.1.5.2.1
to 20.3.1.5.2.5
20.3.1.5.2.1  AAA to A - 20
20.3.1.5.2.2  BBB+ to BBB - 50
20.3.1.5.2.3  BB+ to B- 100
20.3.1.5.2.4  Below B - 150
20.3.1.5.2.5  Unrated  100
20.3.1.5.3.0  Rupee and Foreign Currency Exposures more than 3 months
All performing claims , excluding investments adjusted under WBRC 20.2. 1.1.2.12 ,


41 Web Based
Return Code  Assets  Risk
Weight
%
20.2. 2.1.2.3 and 20.2. 3.1.2.3 in Part II(A) – Computation of Total Regulatory
Capital, denominated in rupees and foreign currency on banks (more than 3 months)
will be risk weighted based on their external credit assessment as given in the table
below.
The amount must agree with the sum of the following items from WBRC 20.3.1.5.3.1
to 20.3.1.5.3.5
20.3.1.5.3.1  AAA to AA - 20
20.3.1.5.3.2  A+ to BBB - 50
20.3.1.5.3.3  BB+ to B - 100
20.3.1.5.3.4  Below B - 150
20.3.1.5.3.5  Unrated  100
20.3.1.6.0.0  Claims on Financial Institutions
Total performing claims  on non -bank financial institutions,  excluding investments
adjusted under WBRC 20.2.1.1.2.12, 20.2.2.1.2.3 and 20.2.3.1.2.3 in Part II(A) –
Computation of Total Regulatory Capital.
(WBRC 20.3.1.6.1.0  + 20.3.1.6.2.0)
20.3.1.6.1.0  Claims on Institutions Regulated by the Central Bank of Sri Lanka
The amount must agree with the sum of the following items from WBRC 20.3.1.6.1.1
to 20.3.1.6.1.5
20.3.1.6.1.1  AAA to AA - 20
20.3.1.6.1.2  A+ to BBB - 50
20.3.1.6.1.3  BB+ to B - 100
20.3.1.6.1.4  Below B - 150
20.3.1.6.1.5  Unrated  100
20.3.1.6.2.0  Claims on Other Financial Institutions
The amount must agree with the sum of the following items from WBRC 20.3.1.6.2.1
to 20.3.1.6.2.5
20.3.1.6.2.1  AAA to AA - 20
20.3.1.6.2.2  A+ to A - 50
20.3.1.6.2.3  BBB+ to BB - 100
20.3.1.6.2.4  Below BB - 150
20.3.1.6.2.5  Unrated  100


42 Web Based
Return Code  Assets  Risk
Weight
%
20.3.1.7.0.0  Claims on Corporates
All performing claims on corporates shall be risk weighted as per the ratings
assigned.
Banks can, with prior approval of CBSL, exercise the option to rate all corporate
customers at 100%. Once decided and approved by CBSL the banks should apply a
single consistent approach.
The amount must agree with the sum of the following items from WBRC 20.3.1.7.1.0
to 20.3.1.7.5.0 .
20.3.1.7.1.0  AAA to AA - 20
20.3.1.7.2.0  A+ to A - 50
20.3.1.7.3.0  BBB+ to BB - 100
20.3.1.7.4.0  Below BB - 150
20.3.1.7.5.0  Unrated  100
20.3.1.8.0.0  Retail Claims
All performing retail claims include: Retail claims that qualify for regulatory capital
purposes and retail claims that do not qualify for regulatory capital purposes
However, the following shall be excluded from the retail portfolio:
a) Investments in securities such as bonds and equities (to be treated as
investments).
b) Resid ential housing loans secured by mortgages over the residential property that
qualify for inclusion as claims secured by residential property (refer WBRC
20.3.1.9.0.0).
The amount must agree with the sum of the retail claims that qualify for regulatory
capital purposes and retail claims that do not qualify for regulatory capital purposes.
(WBRC 20.3.1.8.1.0 to 20.3.1.8.3 .0)
20.3.1.8.1.0  Retail Claims that Qualify for Regulatory Capital Purposes
Performing claims that meet the criteria given below qualify for inclusion in the
regulatory retail portfolio.
The qualifying criteria for the Regulatory Retail Portfolio (applicable to both the
retail and SME portfolios):
a) Orientation Criterion  – The exposure should be to an individual person or
persons or to a SME.
b) Product Criterion  – The exposure should be of one of the following product
types. Both fund based and non -fund based facilities to be included:


43 Web Based
Return Code  Assets  Risk
Weight
%
i) Revolving credit and lines of credit including overdrafts and credit cards
ii) Personal term loans and leases (e.g.  instalment loans, vehicle loans and
leases, student and educational loans, personal finance)
iii) SME facilities.
c) Granularity Criterion  – The regulatory retail portfolio must be sufficiently
diversified to a degree that reduces the risks in the portfolio.  In order to meet
this criterion,
i) No aggregate exposure without considering CRM, to one counterpart should
exceed 0.2% of the overall retail portfolio (excluding any non -performing
retail/ SME claims).
ii)  “To one counterpart” means one or several entities that constitute a single
beneficiary, eg: in the case of a small business affiliated to another small
business, the limit would apply to  the bank’s aggregate exposure on both
businesses.
d) Low value of Exposure
i) SME Exposures
I. The maximum credit exposure of the lending bank to an SME shall not
exceed Rs. 250 million.
II. The annual turnover of the SME shall not exceed Rs.750 million.
III. The annual t urnover should be based on the latest available audited
financial statements at the time of granting the facilities.
IV. The annual turnover should be based on latest available audited financial
statements or certified by a Chartered Accountant or an Approved
Accountant acceptable to the Department of Inland Revenue. In the case
of draft financial statements, the turnover certified by a Chartered
Accountant or an Approved Accountant should be obtained within the
year.
V. In the case of grant of credit facilities l ess than Rs. 50 million, the
condition III  and IV above shall not be applicable and banks shall adopt
their own internal mechanism to verify the SME’s annual turnover.
ii) Individual Exposures
The amount must agree with the sum of following items from WBRC
20.3.1.8.1.1 to 20.3.1.8.1.3


44 Web Based
Return Code  Assets  Risk
Weight
%
20.3.1.8.1. 1 SME Exposures Secured on Immovable Property
a) Qualifying SME exposures, fully secured by a primary mortgage over
immovable  property , qualify for a lower risk weight of 60% .
b) The claims shall  meet the following qualifying criteria:
i) A margin of at least 25% on the forced sale value of the property based on
the latest valuation report .
ii) Valuation of property: valuation of property is carried out by an external
independent valuer or current internal assessment of the  value of the
properties subject to the conditions stated in the Directions on Classification
of Loans and Advances , Income Recognition and Provisioning  issued under
the Banking Act.  60
20.3.1.8.1. 2 Other SME Exposures
Sum of qualifying SME exposures that do not meet the criteria given in WBRC
20.3.1.8.1.1 above.     75
20.3.1.8.1.3  Individual Exposures
Sum of claims with maximum aggregate retail exposure (not taking any CRM into
account) to one counterpart that does not exceed the lower of 0.2% of capital base
(as included in the computation as at the reporting date) or Rs.10 million at the time
of first granting.  75
20.3.1.8.2.0  Retail Claims that do not Qualify for Regulatory Capital Purposes
Performing claims that  do not qualify for inclusion in the regulatory retail portfolio.  100
20.3.1.8.3.0  Claims Secured by Gold
The amount must agree with the sum of the following items from WBRC 20.3.1.8.3.1
to 20.3.1.8.3.3
20.3.1.8.3.1  Loan to Value Ratio equal to or less than 70%
Claims collateralized by gold with a loan to value ratio of equal  to or less than 70%
at the reporting date.  0
20.3.1.8.3.2  Loan to Value Ratio over 70% and less than 100%
Total  value of c laims collateralized by gold with a loan to value ratio of over 70%
and less than 100% at the reporting date.  20
20.3.1.8.3.3  Loan to Value equal to or over 100%


and less than 100% at the reporting date.  20
20.3.1.8.3.3  Loan to Value equal to or over 100%
Claims collateralized by gold with a loan to value ratio  of equal to or  over 100%  at
the reporting date.
 100


45 Web Based
Return Code  Assets  Risk
Weight
%
20.3.1.9.0.0  Claims Secured by Residential Property
The amount must agree with the sum of the claims secured by residential property
that qualify for regulatory capital purposes and claims secured by residential
property that do not qualify for regulatory capital purposes.
(WBRC 20.3.1.9.1.0 to 20.3.1.9.2.0)
The exposures secured by mortgages on commercial real estates shall be excluded
from here.
20.3.1.9.1.0  Claims that Qualify for Regulatory Capital Purposes
a) Subject to conditions below, residential housing loans fully secured by a primary
mortgage over such residential property that is or will be occupied by the
borrower, or rented .
b) The claims should strictly meet the following qualifying criteria to be able to use
the p referential risk weight :
 A margin of at least 25% on the forced sale value of the property based on
the latest valuation report ;
 Valuation of property: valuation of property is carried out by an external
independent valuer or current internal assessment of the value of the
properties subject to the conditions stated in the Directions on Classification
of Loans and Advances, Income R ecognition and Provisioning issued under
Banking Act.
c) Mortgages other than primary mortgages will qualify for the same risk weight,
subject to the above conditions, if:
 The mortgage is with the same bank
 The purpose of the loan is for residential purposes . 50
20.3.1.9.2.0  Claims that do not Qualify for Regulatory Capital Purposes
Performing claims that do not meet the criteria given above  100
20.3.1.10.0.0  Claims Secured by Commercial Real Estate
Commercial real estate exposure is defined as exposures secured by mortgages on
commercial real estate such as office buildings, multi -purpose or multi -tenanted
commercial premises, multi -family residential buildings, industrial or warehouse


commercial premises, multi -family residential buildings, industrial or warehouse
space, hotels, land acquisition, land development and construction.  100


46 Web Based
Return Code  Assets  Risk
Weight
%
20.3.1.11.0.0  Non-Performing Assets (NPAs)
The unsecured portion of NPAs, other than a qualifying residential mortgage loan
which is addressed in item 20.3.1.12.0.0, net of specific provision will be risk
weighted as items 20.3.1.11.1.0 and 20.3.1.11.2.0 below.
For the purpose of computing the level of specific provisions of NPAs for deciding
the risk -weighting, all funded NPA exposures of a single counterparty (without
netting the value of the eligible collateral under CRM) should be reckoned i n the
denominator.
For the purpose of defining the secured portion of the NPA, eligible collateral will
be the same as recognised for credit risk mitigation purposes. Hence, other forms of
collateral like land, buildings, plant, machinery, current assets, etc. will not be
reckoned while computing the secured portion of NPAs for capital requirement
purposes.
The amount must agree with the sum of the following items WBRC 20.3.1.11.1.0 +
20.3.1.11.2.0 .
20.3.1.11.1.0  Specific Provisions are equal  to or more than 20%
Specific provisions equal or more than 20% of the outstanding amount of the NPA  100
20.3.1.11.2.0  Specific Provisions are less than 20%
Specific provisions are less than 20% of the outstanding amount of the NPA  150
20.3.1.12.0.0  Non-Performing Assets Secured by Residential Property
The unsecured portion of NPAs (without netting the value of property mortgage),
net of specific provision will be risk weighted as items WBRC 20.3.1.12.1.0 and
20.3.1.12.2.0
For the purpose of computing  the level of specific provisions in NPAs for deciding
the risk -weighting, all funded NPA exposures of a single counterparty (without
netting the value of property mortgage) should be reckoned in the denominator.
The amount must agree with the sum of the f ollowing items WBRC 20.3.1.12.1.0
and 20.3.1.12.2.0
20.3.1.12.1.0  Specific Provisions are equal or more than 20%


and 20.3.1.12.2.0
20.3.1.12.1.0  Specific Provisions are equal or more than 20%
Specific provisions equal or more than 20% of the outstanding amount of the NPA  50
20.3.1.12.2.0  Specific Provisions are less than 20%
Specific provisions are less than 20% of the outstanding amount of the NPA  100
20.3.1.13.0.0  Higher -risk Categories
Exposures to the following segments, which are considered as high -risk exposures:


47 Web Based
Return Code  Assets  Risk
Weight
%
20.3.1.13.1.0  Venture capital funds/companies and Private equity investments  150
20.3.1.13.2.0  Significant Investments in the Capital of Financial Institutions
All investments in financial institutions that have not been adjusted under WBRC
20.2. 1.1.2.13 , 20.2. 2.1.2.4 and 20.2. 3.1.2.4 in Part II(A) – Computation of Total
Regulatory Capital  250
20.3.1.14.0.0  Cash Items and Other assets
The amount must agree with the sum of cash items 20.3.1.14.1.0 and Other Assets
20.3.1.14.2.0
20.3.1.14.1.0  Cash Items
Total of cash items from 20.3.1.14.1.1 to 20.3.1.14.1.3
20.3.1.14.1.1  Notes and Coins in Own Vault
Local currency notes and coins held by tellers, in ATMs, in vault and petty cash  0
20.3.1.14.1.2  Gold Bullion held in Own Vault
Gold and bullion held in the bank’s vaults. Gold items held in safe custody sh all be
excluded.  0
20.3.1.14.1.3  Cash Items in the Process of Collection
Cheques, drafts and other cash items, such as money orders, postal orders drawn on
banks and other authorized institutions and pa id immediately on presentation and
cash in transit. Trade bills, such as import bills and export bills, in the process of
collection should be excluded from this item and considered as loans and advances.  20
20.3.1.14.2.0  Other Assets
Total of items 20.3.1.14.2.1 and 20.3.1.14.2.2
20.3.1.14.2.1  Property Plant and Equipment
The item includes bank premises, immovable property, machinery and equipment,
motor vehicles, furniture and fittings and other fixed assets, reported at cost or at
revalued amount, net of accumulated depreciation  excluding intangible assets .  100
20.3.1.14.2.2  Other Assets/Exposures
All other assets/exposures which are not specified elsewhere.  100


48 PART III(B) - COMPUTATION OF CREDIT EQUIVALENT AMOUNT OF OFF -BALANCE
SHEET ITEMS
Code  Description  Credit
Conversion
Factor (%)
20.3.2.0.0.0  Off-balance Sheet Items
The exposure on off -balance sheet items is to be included in the computation of
the risk weighted capital ratio. The conversion of the credit risk inherent in each
off-balance sheet item would be converted into an on -balance sheet credit
equivalent by multiplying the principal amount by a credit conversion factor. The
credit equivalent amount would then be weighted according to the corresponding
asset item.
The amoun t must agree with the sum of the principal amount of off -balance sheet
items and credit equivalent of off -balance sheet items from WBRC 20.3.2.1.0.0 to
20.3.2.10.0.0 . -
20.3.2.1.0.0  Direct Credit Substitutes
Total direct credit substitutes of the following items from WBRC 20.3.2.1.1.0 to
20.3.2.1.4.0
20.3.2.1.1.0  General Guarantees of Indebtedness
General guarantees of indebtedness where the risk of loss in the transaction may
crystallise into a direct liability and become a direct claim on the counterparty.
These include guarantees in respect of counterparties like insurance agents, sales
agents, e tc. to cover any non -payment by them of premium, sales proceeds, etc. to
their beneficiaries. Bank guarantees in favour of customs would cover any non -
payment of customs duties by their counterparties.  100
20.3.2.1.2.0  Standby Letters of Credit serving as  Financial Guarantees
Stand -by Letters of Credit, which are direct, credit substitutes where the risk of
loss in the transaction is equivalent to that of a direct claim on the counterparty.
This includes stand -by Letters of Credit serving as financial guar antees for loans,
securities and other financial liabilities.  100
20.3.2.1.3.0  Bank Acceptances
Liabilities arising from acceptances on accommodation of bills but excludes bills


Liabilities arising from acceptances on accommodation of bills but excludes bills
that have been discounted by the bank itself. Risk participation and other similar
commitments undertaken to repay the financial obligation of a customer, on his
failure to do so, should be included.

 100


49 Code  Description  Credit
Conversion
Factor (%)
20.3.2.1.4.0  Others (please specify)
Any other obligation which carries the same risk of loss in the transaction and is
equivalent to that of a direct claim on the counterparty  100
20.3.2.2.0.0  Transaction -related Contingencies
Total transaction - related contingencies of following items from WBRC
20.3.2.2.1.0 to 20.3.2.2.3.0
20.3.2.2.1.0  Performance Bonds, Bid Bonds & Warranties
Transaction -related contingent items such as Performance Bonds, Bid Bonds and
Warranties, where the risk of loss arises from an irrevocable obligation to pay a
third party, the non -financial obligation of the customer upon his failure to fulfil
obligations under a contract or a transaction. Such contingencies would crystallise
into actual liabilities dependent upon the occurrence or non -occurrence of an event
other than that of a default in payment by the counterparty.  50
20.3.2.2.2.0  Standby Letters of Credit  Related to Particular Transactions
Contingent liabilities relating to particular transactions. Here too, there is a
likelihood of the contingencies crystallizing into actual l iabilities depending upon
the occurrence or non -occurrence of an  event other than that of a default in
payment by counterparty.  50
20.3.2.2.3.0  Others (please specify)
Other contingent liabilities arising from an irrevocable obligation to pay a third
party, the non -financial obligation of a customer upon his failure to fulfil such
obligation or terms under contract or transaction.  50
20.3.2.3.0.0  Short -Term Self -Liquidating Trade -Related Contingencies
Total short -term self -liquidating trade -related contingencies of following items
from WBRC 20.3.2.3.1.0 to 20.3.2.3.4.0 .
20.3.2.3.1.0  Shipping Guarantees
Invoice value of g uarantees issued by the reporting institution to customers where
the reporting institution agrees to indemnify fully, to a named shipping agent,


the reporting institution agrees to indemnify fully, to a named shipping agent,
against all liabilities arising from the release of goods without production of Bills
of Lading and/or other shipping documents by the receiving party.  20
20.3.2.3.2.0  Documentary Letters of Credit
Documentary credits collateralised by the underlying shipments which are short -
term self-liquidating and trade -related transactions.  20


50 Code  Description  Credit
Conversion
Factor (%)
20.3.2.3.3.0  Trade Related Acceptances
Liabilities arising from acceptances that are based on a specific trade transaction
either domestic or foreign e.g. Letters of Credit.  20
20.3.2.3.4.0  Others (please specify)
Contingent liabilities arising from short -term self -liquidating trade related
obligations.  20
20.3.2.4.0.0  Sale and Repurchase Agreements and Assets Sale with recourse where the
credit risk remains with the Bank
Total of following items f rom WBRC 20.3.2.4.1.0 to 20.3.2.4.6.0
20.3.2.4.1.0  Sale and Repurchase Agreements
Sale and Repurchase Agreement (REPO) is an agreement whereby a bank sells an
asset to a third party with a commitment to repurchase it at an agreed price on an
agreed future date. Purchase and Resale Agreements (Reverse REPOS) should be
considered as collateralised loans. The risk is to be measured as an exposure to the
counterparty unless the underlying asset has been reported as an on -balance sheet
item where the risk  weight appropriate to the underlying asset should be used.  100
20.3.2.4.2.0  Housing Loans Sold with Recourse
The amount of housing loans sold to a counterparty with recourse where the credit
risk remains with the Bank.  100
20.3.2.4.3.0  Other Assets Sold  with Recourse
Assets sold with recourse where the credit risk remains with the reporting
institution. The holder of the asset is entitled to put the assets back to the reporting
institution within an agreed period or under certain prescribed circumstances  – e.g.
deterioration in the value or credit quality of the asset concerned.  100
20.3.2.4.4.0  Forward Assets Purchase
Commitment to purchase, at a specified future date and/or on pre -arranged terms,
a loan, security or other asset from another party.  100
20.3.2.4.5.0  Partly Paid Shares/Securities
Unpaid amounts on partly -paid shares and securities where the issuer may call


Unpaid amounts on partly -paid shares and securities where the issuer may call
upon the bank to pay at a pre -determined or unspecified date in the future.  100
20.3.2.4.6.0  Others (please specify)
Placements of forward deposits and other commitments with certain drawdown. A
forward deposit is an agreement between two parties whereby one will place and 100


51 Code  Description  Credit
Conversion
Factor (%)
the other will receive, at a pre -determined future date, a deposit, at an agreed rate
of interest. A commitment to place a forward deposit should be reported under this
item and weighted according to the risk -weight appropriate to the counterparty.
20.3.2.5.0.0  Obligations under an On -going Underwriting Agreement
Total of following items from WBRC 20.3.2.5.1.0 to 20.3.2.5.3.0 . -
20.3.2.5.1.0  Underwriting of Shares/Securities Issue
Obligations due to underwriting of shares and securities, net of the amount sub -
underwritten by another institution.  50
20.3.2.5.2.0  Note Issuance Facilities and Revolving Underwriting Facilities
Arrangements where a borrower may draw funds up to a prescribed limit over a
pre-defined period through the issue of notes which the reporting bank has
committed to underwrite.  50
20.3.2.5.3.0  Others (please specify)
Othe r obligations due to on -going underwriting agreements.  50
20.3.2.6.0.0  Other Commitments with an Original maturity of up to one year or which
can be unconditionally cancelled at any time
Total of following items from WBRC 20.3.2.6.1.0 to 20.3.2.6.4.0 .
20.3.2.6.1.0  Formal Standby Facilities and Credit Lines
Commitments include the undrawn portion of any binding arrangements which
obligate the reporting institution to provide funds at some future date. Such
commitments would have an original maturity of less than one year or which can
be unconditionally cancelled at any time by the reporting bank at its discretion.
Formal stand -by facilities and credit lines for Letters of Credit, Trust Receipts, etc.
should be included under the item.  0
20.3.2.6.2.0  Undrawn Term Loans
Undrawn portion of a term loans with an original maturity of less than one year or
which can be unconditionally cancelled at any time by the reporting bank.  0
20.3.2.6.3.0  Undrawn Overdraft Facilities/Unused Credit Card Lines


20.3.2.6.3.0  Undrawn Overdraft Facilities/Unused Credit Card Lines
The undrawn portion of overdraft facilities and credit card lines with an original
maturity of less than one year or which can be unconditionally cancelled at any
time by the reporting bank.

 0


52 Code  Description  Credit
Conversion
Factor (%)
20.3.2.6.4.0  Others (please specify)
Any other commitment with an origin al maturity up to one year or which can be
unconditionally cancelled at any time.  0
20.3.2.7.0.0  Commitments with an original maturity up to 1 year
Total of following items from WBRC 20.3.2.7.1.0 to 20.3.2.7.3.0
20.3.2.7.1.0  Formal Standby Facilities and Credit Lines
The commitments under formal standby facilities and credit lines with an original
maturity is up to one year.  20
20.3.2.7.2.0  Undrawn Term Loans
The undrawn portion of term loans where the original maturity is up to one year.  20
20.3.2.7.3.0  Others (please specify)
Any other commitment with an original maturity up to one year.  20
20.3.2.8.0.0  Other Commitments with an Original Maturity of Over One Year
Total of following items from WBRC 20.3.2.8.1.0 to 20.3.2.8.3.0
20.3.2.8.1.0  Formal Standby Facilities and Credit Lines
The commitments under formal standby facilities and credit lines with an original
maturity are  over one year.  50
20.3.2.8.2.0  Undrawn Term Loans
The undrawn portion of term loans where the original maturity is over one year.  50
20.3.2.8.3.0  Others (please specify)
Any other commitment with an original maturity over one year.  50
20.3.2.9.0.0  Foreign Exchange Contracts
Exchange rate contracts shall include the following items ( ‘a’ to ‘e’), but exclude
exchange rate contracts which have an original maturity o f 14 calendar days or
less.
a) Forward  foreign exchange contracts
b) Currency futures
c) Currency options purchased
d) Cross c urrency FX swaps
e) Other similar instruments
To arrive at the credit equivalent amounts of excha nge rate contracts, applying the
original exposure method, a bank will have to apply one of the conversion factors
as given from 20.3.2.9.1.0 to 20.3.2.9.3.0 to the notional principal amounts of each


as given from 20.3.2.9.1.0 to 20.3.2.9.3.0 to the notional principal amounts of each
instrument according to the nature of the instrument and  its maturity.


53 Code  Description  Credit
Conversion
Factor (%)
20.3.2.9.1.0  Original Maturity -less than One Year  2
20.3.2.9.2.0  Original Maturity -More than One year and less than Two years  5
20.3.2.9.3.0  Original Maturity -More than Two years (For each additional year)  3
20.3.2.10.0.0  Interest Rate Contracts
Interest rat e contracts shall include,
a) Single c urrency interest rate swaps
b) Basis swaps
c) Forward rate agreements
d) Interest rate futur es
e) Interest rate options purchased, and
f) Other similar instruments
To arrive at the credit equivalent amounts of interest rate contracts, applying the
original exposure method, a bank will have to apply one of the conversion factors
as given from 20.3.2.10.1.0 to 20.3.2.10.3.0 to the notional principal amounts of
each ins trument according to the nature of the instrument and its maturity.  -
20.3.2.10.1.0  Original Maturity -less than One Year  0.5
20.3.2.10.2.0  Original Maturity -More than One year and less than Two years  1
20.3.2.10.3.0  Original Maturity -More than two years  (For each additional year)  1
Note:  In the case of foreign exchange and interest rate contracts above, the netting of contracts subject to novation
would be permitted. Therefore, the net rather than the gross claims arising out of swaps and similar contra cts (subject
to novation) with the same counterparts will be weighted. In this context, novation is defined as a bilateral contract
between two counterparties under which any obligation to each other to deliver a given currency on a given date is
automatic ally amalgamated with all other obligations for the same currency and value date, legally substituting one
single net amount for the previous gross obligations.


54
 PART III(C): EXPOSURES RECOGNISED UNDER CREDIT RISK MITIGATION

1 Overview of Credit Risk Mitigation (CRM)
1.1 Banks use a number of techniques to mitigate the credit risks to which they are exposed.
For example, exposures may be collateralised by first priority claims, in whole or in
part with cash or securities, a loan exp osure may be guaranteed by a third party, or a
bank may buy a credit derivative to offset various forms of credit risk. Additionally,
banks may agree to net loans owed to them against deposits from the same counterpart.
1.2 Credit risk mitigation allows a wide r range of credit risk mitigants to be recognised for
regulatory capital purposes provided that these techniques meet the minimum
conditions described below.
1.3 While the use of CRM techniques reduces or transfers credit risk, it simultaneously may
increase o ther risks (residual risks). Residual risks include legal, operational, liquidity
and market risks. Therefore, it is imperative that banks employ robust procedures and
processes to control these risks, including strategy, consideration of the underlying
credit, valuation, policies and procedures, systems, control of roll -off risks and
management of concentration risk arising from the bank’s use of CRM techniques and
its interaction with the bank’s overall credit risk profile.
1.4 Treatment of Pools of CRM Techn iques: In case where a bank has multiple CRM
techniques covering a single exposure (e.g. a bank has both collateral and guarantee
partially covering an exposure), the bank will be required to subdivide the exposure
into portions covered by each type of CRM  technique (e.g. portion covered by
collateral, portion covered by guarantee) and the risk -weighted assets of each portion
must be calculated separately. When credit protection provided by a single protection
provider has differing maturities, they must be  subdivided into separate protection as
well.


55
 PART III(C): GUIDELINES ON RECOGNISING EXPOSURES UNDER CREDIT RISK
MITIGATION

Code  CRM Techniques
20.3.3.0.0.0  Total CRM exposure
Total exposure of collateralised transactions and other CRM techniques.
All exposures should be reported net of specific provisions and interest in suspense that has been
charged to the respective counterparty account. Exposures which are reported in this part under CRM
should not be reported in the other parts of the capital requirements  return. The amount is
automatically shown on web -based return.
The amount must agree with the sum of items WBRC 20.3.3.1.0.0 and 20.3.3.2.0.0
20.3.3.1.0.0  Collateralised transactions
The sum of collateralised retail exposures and collateralised other exposures. The amount must agree
to sum of items WBRC 20.3.3.1.1.0 and 20.3.3.1.2.0. The amount is automatically shown on web -
based return.
(1)  A collateralised transaction is one in which:
 banks have a credit exposure or potential credit exposure; and
 that credit exposure or potential credit exposure is hedged in whole or in part by collateral posted
by a counterpart or by a third party on behalf of the counterpart.
(2)  The Simple Approach wil l be Followed in computing the effects  of CRM
a) In the Simple A pproach, the portions of claims collateralised by the market value of recognised
collateral receive the risk weight applicable to the collateral instrument. The risk weight on the
collateralised portion will be subject to a floor of 20%. The remainder of the claim should be
assigned to the risk weight appropriate to the counterparty.
b) Mismatches in the maturity of the underlying exposure and collateral will not be allowed, i.e. the
collateral must be pledged for at least the life of the exposure.
(3)  Risk Weights
The 20% floor for the risk weight on a collateralised transaction will not be applied and 0% risk


The 20% floor for the risk weight on a collateralised transaction will not be applied and 0% risk
weight can be applied provided the exposure and the collateral are denominated in the same
currency, and either:
a) the collateral is cash on deposit , or
b) the collateral is in the form of Government securities , or
c) the collateral is in the form  of provident fund balances.
(4)  Minimum Conditions
a) Legal Certainty:  All documentation used in collateralised transactions and guarantees must be
binding on all parties and legally enforceable in all relevant jurisdictions. Banks must have


56 Code  CRM Techniques
conducted sufficient legal review, which should be well documented, to verify this. Such
verification should have a well -founded legal basis for reaching the conclusion about the binding
nature and enforceability of the documents. Banks should also undertake such further review as
necessary to ensure continuing enforceability
b) Ability to L iquidate:  The bank should have the right to liquidate or take legal possession of it,
in a timely manner, in the event of the default, insolvency or bankruptcy (or one or more
otherwise -defined credit events set out in the transaction documentation) of the  counterparty
(and, where applicable, of the custodian holding the collateral). Furthermore banks must take all
steps necessary to fulfil those requirements under the law applicable to the bank’s interest in the
collateral for obtaining and maintaining an enforceable security interest.
c) Material Correlation:   In order for collateral to provide protection, the credit quality of the
counterparty and the value of the collateral must not have a material positive correlation. For
example, securities issued by the  counter party or by any related group entity - would provide
little protection and so would be ineligible.
d) Recovery Procedures:  Banks must have clear and robust procedures for the timely liquidation
of collateral to ensure that any legal conditions requi red for declaring the default of the counter
party and liquidating the collateral are observed, and that collateral can be liquidated promptly.
Where the collateral is held by a custodian, banks must take reasonable steps to ensure that the
custodian segre gates the collateral from its own assets.
20.3.3.1.1.0  Retail Exposure
The total amount of retail exposures against the collateral instruments given below from 20.3.3.1.1.1
to 20.3.3.1.1., which are eligible for recognition in the simple approach. The amo unt is automatically
shown on web -based return.


shown on web -based return.
20.3.3.1.1.1  Cash
(as well as certificates of deposit or comparable instruments, including fixed deposit receipts, issued
by the lending bank) on deposit with the bank, which is incurring the counterparty exposure.
20.3.3.1.1.2  Government of Sri Lanka Securities
20.3.3.1.1.3  Provident Fund Balances
20.3.3.1.1.4  Debt securities rated by a r ecognised ECAI
These are either
i) At least BB - when issued by sovereigns or PSEs that have been recognized, or
ii) At least BBB - when issued by other entities (including banks), or
iii) At least A -3//P-3 for short -term debt instruments


57 Code  CRM Techniques
20.3.3.1.1.5  Debt securities not rated by a r ecognised ECAI
These are:
i) Issued by a bank; and
ii) Listed on a recognized exchange, and
iii) Classifi ed as senior debt
iv) Other securities, specified by the Central Bank.
20.3.3.1.1.6  Equities that are included in a Main Index
Equities those are included in the S & P SL20 index, subject to a discount of 25% on the market
value.
20.3.3.1.2.0  Other Exposures
The total amount of other exposures against the collateral instruments given from  WBRC 20.3.3.1.2.1
to 20.3.3.1.2. which are eligible for recognition in the simple approach.
The amount is automatically shown on web -based return.
(WBRC 20.3.3.1.2.1 to 20.3.3.1.2.)
20.3.3.1.2.1  Cash
Cash ( as well as certificates of deposit or comparable instruments, including fixed deposit receipts,
issued by the lending bank) on deposit with the bank, which is incurring the counterparty exposure.
20.3.3.1.2.2  Government Securities
20.3.3.1.2.3  Provident Fund Balances
20.3.3.1.2.4  Debt securities rated by a r ecognised ECAI
These are either
i) At least BB - when issued by sovereigns  or PSEs that have been recognis ed, or
ii) At least BBB - when issued by other entiti es (including banks), or
iii) At least A -3//P-3 for short -term debt instruments.
20.3.3.1.2.5  Debt securities not Rated by a r ecognised ECAI
These are:
i) Issued by a bank
ii) Listed on a recognis ed exchange
iii) Classified as senior debt
iv) Other securities, specified by the Central Bank.
20.3.3.1.2.6  Equities th at are Included in a Main Index
Equities which  are included in the S&P SL20 index, subject to a discount of 25% on the market value.


58 Code  CRM Techniques
20.3.3.2.0.0  Other CRM Techniques
The total amount of exposures against the other CRM techniques (other than  collateralis ed
transactions). The amount is automatically shown on web -based return.
(WBRC 20.3.3.2.1.0 + 20.3.3.2.2.0)
20.3.3.2.1.0  On-balance Sheet Netting
The total amount of exposures against the on -balance sheet netting.
(1)  A bank may use the net exposure of loans and deposits as the basis for its capital ratio computation
where the bank:
i) has a well -founded legal basis for concluding that the netting or offsetting agreement is
enforceable in each relevant jurisdic tion regardless of whether the counterpart is insolvent or
bankrupt ;
ii) is able at any time to determine those assets (loans) and liabilities (deposits) with the same
counterpart that are subject to the netting agreement ;
iii) monitors and controls its roll -off risks ; and
iv) monitors and controls the relevant exposures on a net basis .
20.3.3.2.2.0  Guarantees
The total amount of exposures against the guarantees should be reported in line with the
instructions given below.
(1)  Guaranteed Transactions: Where guarantees are direct, explicit, irrevocable and unconditional,
banks may take account of such credit protection in calculating capital requirements.
(2)  Minimum Conditions
a) A guarantee (or counter -guarantee) must represent a direct claim on the protection provider and
must be explicitly referenced to specific exposures or a pool of exposures, so that the extent of
the cover is clearly defined and incontrovertible.
b) Other than  non-payment by a protection purchaser of money due in respect of the credit
protection contract it must be irrevocable; there must be no clause in the contract that would
increase the effective cost of cover as a result of deteriorating credit quality in the hedged
exposure.
c) It must also be unconditional; there should be no clause in the protection contract outside the


c) It must also be unconditional; there should be no clause in the protection contract outside the
control of the bank that could prevent the protection provider from being obliged to pay out in a
timely manner in the event that the orig inal counterpart fails to make the payment(s) due.
d)  In addition to the legal certainty requirements above, the following conditions must also be
satisfied:
 On the qualifying default or non -payment of the counterpart, the bank may in a timely manner
pursue the guarantor for any monies outstanding under the documentation governing the


59 Code  CRM Techniques
transaction. The guarantor may make one lump sum payment of all monies under such
documentation to the bank, or the guarantor may assume the future payment obligations of
the co unterpart covered by the guarantee. The bank must have the right to receive any such
payments from the guarantor without first having to take legal actions in order to pursue the
counterpart for payment.
 The guarantee is an explicitly documented obligatio n assumed by the guarantor.
 Except as noted in the following sentence, the guarantee covers all types of payments the
underlying obligor is expected to make under the documentation governing the transaction,
for example notional amount, margin payments, et c.
 Where a guarantee covers payment of principal only, interests and other uncovered payments
should be treated as an unsecured amount.
(3)  Eligible Guarantors (counter -guarantors): Credit protection given by the following entities will
be recognised: sovereign entities, PSEs and other entities with a risk weight of 20% or better and a
lower risk weight than the counterpart.
(4)  Risk Weights:
a) The protected portion is assigned the risk weight of the protection provider.
b) A zero risk weight will be applied to that portion of loans guaranteed by GOSL and CBSL .
c) The portion of exposures guaranteed by the Sri Lanka Export Credit Insurance Corporation
(SLECIC) and other guarantees acceptable to CBSL will receive a 50% risk weight.
d) The uncovered portion of the exp osure is assigned the risk weight of the underlying counterpart.


60
 PART IV - COMPUTATION OF RISK -WEIGHTED AMOUNT FOR MARKET RISK
1 Scope and Coverage of Capital Charge for Market Risks
1.1 Market risk is defined as the risk of losses in on -balance sheet and off balance sheet
positions arising from movements in market prices. The market risk subject to the
capital charge requirements are:
i) The risks pertaining to interest rate related instrum ents in the trading book
ii) The risks pertaining to equities in the trading book.
iii) The risks pertaining to foreign exchange position (including gold positions)
throughout the bank.
1.2 For the purpose of this section, the trading book and foreign exchange position  will
include the following:
i) Securities classified in the ‘Tr ading Account’ in terms of the D irection on
Prudential Norms for Classification, Valuation and Operation of the Bank’s
Investment Portfolio issued by CBSL dated 01 March 2006.
ii) Open gold positions
iii) Open foreign exchange positions

2 GUIDELINES ON COMPUTATION OF RISK -WEIGHTED AMOUNT FOR
MARKET RISK
Code  Item
20.4.1.0.0.0  Total Capital Charge for Market Risk
(1)  The total amount of capital charge for  interest rate risk, capital charge for equity risk
and capital charge for foreign exchange risk.
(WBRC 20.4.1.1.0.0 + 20.4.1.2.0.0 + 20.4.1.3.0.0)
(2)  The capital charge for interest rate derivatives will be excluded from the capital charge
for market risks.
(3)  Aggregation of the Capital Charge for Market Risk
The capital charges for specific risk and general market risk are to be computed
separately before aggregation.
20.4.1.1.0.0  Capital Charge for Interest Rate  Risk  = (20.4.1.1.1.0 + 20.4.1.1.2.0)
The total amount of capital charge for general interest rate risk and capital charge for
specific interest rate risk. The amount is automatically shown on web -based return.


61
 Code  Item
(1)  Measurement of Capital Charge for Interest Rate Risk
Measuring the risk of holding or taking positions in debt securities and other interest
rate related instruments denominated in Sri Lanka Rupees as well as foreign currencies
in the trading book.
i) The capital charge for interest rate related instruments wou ld apply to the current
market value of these items in the bank’s trading book. Since banks are required
to maintain capital for market risk on an ongoing basis, they are required to mark -
to-market their trading positions on a daily basis. The current mark et value will be
determined according to the Direction on Prudential Norms for Classification,
Valuation and Operation of the bank’s investment portfolio issued by CBSL.
ii) The minimum capital requirement is expressed in terms of two separately
calculated cha rges, “ specific risk ” charge for each security, which is akin to the
conventional capital charge for credit risk, both for short and long positions, and
“general market risk ” charge for interest rate risk in the portfolio, where long
and short positions in  different securities or instruments can be offset.
20.4.1.1.1.0  General Interest Rate Risk
(1)  The capital requirements for general market risk are designed to capture the risk of
loss arising from changes in market interest rates.
The capital charge is the sum of four components WBRC 20.4.1.1.1.1 to 20.4.1.1.1.4.
Note – Items in WBRC 20.4.1.1.1.2, 20.4.1.1.1.3 and 20.4.1.1.1.4 will not apply at
present.
(2)  It has been decided to allow banks to initially adopt the Standardised Measurement
Method, as Sri Lankan banks are still developing internal risk management models.
There are two principal methods of measuring market risk under the Standardised
Measurement Method, i.e. a ‘maturity’ method and a ‘duration’ method. It has been
decided to adopt the ‘durat ion’ method to arrive at the capital charge. Accordingly,


decided to adopt the ‘durat ion’ method to arrive at the capital charge. Accordingly,
banks are required to measure the general market risk charge by calculating the price
sensitivity of each instrument in the trading book separately and adding the resulting
price sensitivities based  on a maturity ladder, subject to disallowances if any.
(3)  The steps for the computation are as follows:
i) calculate the price sensitivity of each instrument in terms of a change in interest
rates between 1.2 and 2.0 percentage points, depending on the maturi ty of the
instrument (see Table 1);
ii) slot the resulting price sensitivities into a duration based maturity ladder with the
fifteen time bands as set out in Table 1;


62
 Code  Item
iii) subject long and short positions in each time band to a 5% vertical disallowance
designed to capture basis risk; and
iv) carry forward the net positions in each time -band for horizontal offsetting subject
to the disallowances set out in Table 2.
Note – Steps  (ii) to (iv) are not required at present.
Table 1 - Duration Method – Time Bands and Assumed Changes in Yield
Time Bands  Assumed Change in
Yield
Maturity Zone 1
1 month or less  2.00
Over 1 month to 3 months  2.00
Over 3 months to 6 months  2.00
Over  6 months to 12 months  2.00
Maturity Zone 2
Over 1.0 year to 1.9 years  1.80
Over 1.9 years to 2.8 years  1.60
Over 2.8 years to 3.6 years  1.50
Maturity Zone 3
Over 3.6 years to 4.3 years  1.50
Over 4.3 years to 5.7 years  1.40
Over 5.7 years to 7.3 years  1.30
Over 7.3 years to 9.3 years  1.20
Over 9.3 years to 10.6 years  1.20
Over 10.6 years to 12 years  1.20
Over 12 years to 20 years  1.20
Over 20 years  1.20
Table 2 - Horizontal Disallowances
Maturity
Zones  Time Band  Within
the
zones  Between
adjacent
zones  Between
zones 1 and
3
Maturity
Zone 1  month or less
over 1 month to 3 months
over 3 months to 6 months
over 6 months to 12
months  40%

        40%

40%

      100%

 Maturity
Zone 2  over 1.0 year to 1.9 years
over 1.9 years to 2.8 years
over 2.8 years to 3.6 years  30%
Maturity
zone 3  over 3.6 years to 4.3 years
over 4.3 years to 5.7 years
over 5.7 years to 7.3 years
over 7.3 years to 9.3 years
over 9.3 years to 10.6 years
over 10.6 years to 12 years
over 12 years  to 20 years
over 20 years  0%


63
 Code  Item
20.4.1.1.1.1  Net Long or Short Position
The net short or long position in the whole trading book .
20.4.1.1.1.2  Horizontal Disallowance
A larger proportion of the matched positions across different time bands .
20.4.1.1.1.3  Vertical Disallowance
A smaller proportion of the matched positions in each time -band .
20.4.1.1.1.4  Options
A net charge for positions in options, where appropriate .
20.4.1.1.2.0  Specific Interest Rate Risk
The capital charge for specific risk is designed to protect against an adverse movement
in the price of an individual security owing to factors related to the individual issuer.
The risk charges to be used in the computation of specific risk will be as follows:
i) Specific risk charge for g overnment securities and central banks:
a) Government securities issued by the GOSL and securities issued by the CBSL
will be subject to a risk charge of zero percent.
b) Securities issued by a foreign government or by a foreign central bank will be
subject to a  risk charge based on the credit rating as indicated in the following
table:
Table 3 - Specific Risk Charge for Securities Issued by Foreign
Governments/Central Banks
Sovereign Rate  Capital Charge for Specific Risk
AAA to AA - 0%
A+ to BBB - 0.25% (residual term to final maturity 6 months or less)
1% (residual term to final maturity greater than 6 and up to
and including 24 months)
1.60% (residual term to final maturity exceeding 24 months)
All others  Required total capital ratio (including buffers)
ii) The ‘Qualifying’ category for Corporate entities:
a) Corporate entities (local) will be given a risk charge for specific market risk
based on their ratings as indicated in the table below:
Table 4 - Specific Risk Charge for Corporates
External Ratin g Capital Charge for Specific Risk
AAA to AA - 0.25%
A+ to BBB -
 1.00% (residual term to final maturity 6 months or less)


AAA to AA - 0.25%
A+ to BBB -
 1.00% (residual term to final maturity 6 months or less)
1.60% (residual term to final maturity greater than 6 and up
to and including 24 months)
10.00% (residual term to final maturity exceeding 24 months)
All others  Required total capital ratio  (including buffers)


64
 Code  Item
b) The specific risk charge for foreign corporates  would be one notch less
favourable than the risk charge applied to the local corporates.
iii) ‘Public sector entities’ should be treated like corporate entities unless they are
backed by an explicit Treasury guarantee, which warrants a risk charge of zero
percent.
iv) The ‘Other’ category: A capital charge based on the required  minimum total
capital ratio  (including buffers)  will apply to all other types of exposures.
v) Banks may rely upon the ratings assigned by the ECAIs recognised by CBSL [See
paragraph 2 of Part III(A)]  for the purpose of ratings referred in the Table 3 and 4
above.
20.4.1.2.0.0  Capital Charge for Equity
The total amount of capital charge for general equity risk and capital charge for
specific equity risk. The amount is automatically shown on the web -based return.
WBRC 20.4.1.2.1.0 + 20.4.1.2.2.0
 Measurement of Capital Charge for Equities
The minimum capital requi rement to cover the risk of holding or taking positions in
equities in the trading book is set out below.  It applies to all instruments that exhibit
market behaviour similar to equities.  The instruments covered include equity shares
(voting and non -voting) , convertible securities that behave like equities (e.g. units of
unit trusts) and commitments to buy or sell equity securities (e.g. warrants, right issues
and bonus issues).
20.4.1.2.1.0  General Equity Risk
General market risk is defined as the overall net position in an equity market (i.e. the
difference between the sum of the longs and the sum of the shorts). The general market
risk charge will be the applicable minimum total capital ratio plus buffers.
20.4.1.2.2.0  Specific Equity Risk
Specific risk is defined as the bank’s gross equity positions (i.e. the sum of all long
equity positions and of all short equity positions). The capital charge for specific risk


equity positions and of all short equity positions). The capital charge for specific risk
for equities on the S & P SL20 Price Index will be the required total  Tier 1 ratios with
buffers as applicable, while all other equities will have a specific risk charge of total
capital ratio plus buffers as applicable.
20.4.1.3.0.0  Capital Charge for Foreign Exchange & Gold
Minimum capital requirement to cover the risk of holding or taking positions in foreign
currencies, including gold.