The above risk and financial data could be broadly categorised as follows:
Instrument/Account Data –  These data cover basic information about every financial
instrument held by the financial institution, i.e. Data about financial instruments such as
exposure (provision/allowances, outstanding balances, credit lines, etc.), maturity, asset,
product and industry classifications, interest rates, and so on.
Customer/Counterparty Data –  This refers to the relevant data for different parties that a
financial institution may deal with in a financial transaction. In addition, these data cover
information such as industry classification and customer financial information that may be
used in deriving PD estimates such as debt to equity ratios, current assets, net sales, retained
earnings, revenues, profits, cost of goods, share price, and bond price. Financial institutions
may use these data with regulatory capital data to perform customer-based profitability analysis.
Ledger Data – These data cover transaction and account balance data stored in a ledger. Ledger
data are used to do business unit and product based profitability analysis. Users may analyse
and report on capital for market, credit, and operational risk.
Risk Mitigation Data –  These data cover information about collateral, insurance, netting
agreements, credit derivatives, and guarantees. Among other attributes, these data include
the mitigant type, mitigation value, maturity of the instrument, and the specific instrument to
which the collateral maps. Insurance policy data information are relevant for the mitigation of
operational risks.
Incident Data – Analysis of credit and operational loss incidents depends upon having granular
incident data. This data covers the essential information about loss incidents such as loss
amount, business unit, loss description and risk category.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  69
Historical Data –  If financial institutions opt for the Advanced Internal Ratings based approach
for credit risk and the Advance Measurement approach for operational risk, they must store
a substantial volume of historical data. These data will be necessary to test historical default
experiences against the forecasted values generated by predictive models. These data cover both
historical credit and operational loss data.
Limits and Loss Provision Data –  The Basel II requirement is that the financial institutions
should limit their exposures for lending based on industries, geography, and specific customers.
These data cover the exposure limits and the loan loss provisions.
Examples of some data fields:
Borrower Legal Name, Customer Basel segment, Borrower Credit Grade, Consolidated Group
Turnover, Facility Currency, Limit Amount, Committed Limit Indicator, Collateral Type/Sub
Type, Country of Incorporation, Guarantor Credit Grade, Facility Type External Credit Rating,
Collateral Currency, Collateral Location, Negative Pledge Indicator, Maturity Date etc.
A typical Banking Data Warehouse for a financial institution could be as follows:
4. Data Governance & Management
4.1 Background
To achieve Basel II certification, the data used in all pillars must be effectively
managed. This includes both data management and technology governance. IRBA data
self-assessment requires a process to be in place for vetting inputs into internal rating systems.
It should include an assessment of the accuracy, completeness and appropriateness of data.
Establishment of standards and conducting relevant tests for accuracy, completeness,
timeliness and reliability  of data are essential to assess on  an ongoing basis  the risks
arising from potential poor quality data and to ensure that appropriate risk mitigation
measures have been undertaken.
4.2 Data Quality Management (DQM) framework


measures have been undertaken.
4.2 Data Quality Management (DQM) framework
Data quality management is an ongoing process and it consists of the stakeholders,
DQM process and DQM tools.
4.2.1  The Stakeholders
Data owners, system owners, data consumers and data services are the main
stakeholders. Data owners are responsible for the process of updating data into the


70 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
system. They will define the data quality measurements, monitor data quality metrics,
report data quality metrics to data services and resolve data quality issues. A data
consumer is any stakeholder, who extracts data from another system for processing or
information services. They will report data quality issues to DQ dashboard/DQ log,
provide input and take part in the resolution of DQ issues and escalate DQ issues to
data service in the event of non-resolution. The owner of the data management policy
is Data Services. It will administer data ownership, resolve data ownership issues,
administer DQ Dashboard and Issues Log, facilitate root cause analysis process and
train data quality management.
4.2.2  Data Quality Management (DQM) Pr ocess
The DQM process can be elaborated under 6 steps.
Step 1 - Identification of Critical Quality Elements (CQE)
E.g., CQE for Probability of Default (PD) Drivers; Detailed Drivers – Borrower PD,
Guarantor PD, PD validation; Field names – CRR, Ratings, Date of Ratings etc.
Step 2 – Definition of quality (CACTI)
1. Completeness – Are all the necessary data captured and present?
(E.g., Is this field mandatory?)
2. Accuracy – Do the data accurately represent reality or a verified source?
(E.g., Is there maker/checker in place?)
3. Consistency – Are the data elements consistently defined and understood?
(E.g., Is there a drop down list in the system?)
4. T imeliness – Are the data available within the required timeframe?
(E.g., What is the agreed turnaround time to complete data
capture/extraction?)
5. Integrity - Is the structure of the data and the relationship between fields
maintained consistently?
(E.g., Is there data verification on the field?)
Step 3 – Controls and checks
The business process that support data collection, updating and maintenance should


The business process that support data collection, updating and maintenance should
have the appropriate quality controls and checkpoints in place. This is to ensure
that data fit for the purpose is produced as close to the point of entry as possible,
and avoids or reduces the possibility of data errors and the need for data cleansing.
Examples of a control point include a maker checker process or mandatory fields in
the system. There are 3 defined stages to this step,
a) Document the data process flow
b) Review control and checks using the CACTI framework
c) Implement additional control checkpoints if required.
Step 4 – Data quality measurement
1. It will provide quantifiable evidence of an ef fective data management process.
2. It can be used as a toll to monitor and track the data quality level.
3. When combined with the data quality tar get, the measurement can be used as a
trigger to commence a review of the data management process.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  71
4. The standard frequency for a data quality measurement is monthly . However, this
can vary depending on the type of data or system.
    % Quality level =  No. of records meeting requirements              X   100
                  Total No. of records in universe or sample
5. The data quality tar get level should be set at a level, which is:
 – Realistic, given current knowledge of the data quality level;
 – Represents the next step that the data owner wants to achieve in improving data
quality given incremental improvement is achievable.
Step 5 – Monitoring
1. Monitoring is critical to ensure the sustainability of any data  quality management effort.
2. Monitoring can be achieved through periodic data quality measurement, manual or system
error reporting
3. The data quality tar get level can be used as a tool to monitor data quality.
Step 6 – Data cleansing, problem resolution and Escalation
Data owners – To ensure that data cleansing and error correction is performed in a consistent,
systematic and methodical manner, a documented error correction procedure is critical.
Data consumers – Data consumers may put in place a process for error correction.
Data quality escalation – Within each department, ideally, there should exist an escalation path
for dealing with data quality problems. These may include escalation for inaccurate or missing
information, such as to the Business Unit Officer or Business Support Unit.
Data Quality Management Process – Six broad Data Quality Management (DQM) Process steps to
guide Data Owners and Consumers to perform data quality management
Identify
Critical
Quality
ElementsDefine Data
Quality
RequirementsDocument
Data
Flow
Review
Controls
and checks
In place
Implement
Additional
Control
checkpointsMeasure
Data quality
level
Monitor
Data quality
level
Identifies Critical
Quality elements
& provides input for
measurement
definitionMonitors data


Identifies Critical
Quality elements
& provides input for
measurement
definitionMonitors data
Quality as Data
Owner of
Downstream
applicationCleansing ,
Error
Resolution
Escalates data
Quality issues
& provide
inputs
on resolution1. Identification 2. Measurement
Definition3. Controls
& Checks4. Measure
5. Monitoring6. Escalation ,
Cleansing &
Resolution
Data Owner
&
System
Owner
Data
ComsumerData
Consumer


72 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
5. T echnology Governance Framework
The following are the key requirements to consider from the Basel II Technology framework:
1. Robustness – Robustness is the resilience of the system, especially when under stress or
when confronted with invalid inputs. It is the ability of the software system to maintain
function even with changes in the internal structure or external environment.
2. Scalability – Scalability indicates the capability of a system to increase total throughput
under increased load when resources (typically hardware) are added. A scalable system is
one that can easily be altered to accommodate changes in the number of users, resources and
computing entities.
3. Security & Controls – The management, operational, and technical controls (i.e., safeguards
or countermeasures) prescribed for an information system to protect the confidentiality,
integrity, and availability of the system and its information.
4. System Availability – Availability means the degree to which a system, sub system or
equipment is operable and in a committable state at the start of a mission, when the mission
is called for at an unknown, i.e., a random, time.
5. Sustainability – Sustainability is a systemic concept, relating to the continuity of commercial
and technology aspects in this context.
6. Reusability – Reusability is the likelihood a technology component can be used again to add
new functionalities with slight or no modification. The ability to reuse relies in an essential
way on the ability to build larger things from smaller parts, and being able to identify
commonalities among those parts.
7. T estability – An adjective meaning “the ability to be tested”
8. T echnology Adequacy – Refers to the sufficiency of the chosen technology to address a
specific business need.
The key areas to be focussed under Basel II requirements are as follows:


specific business need.
The key areas to be focussed under Basel II requirements are as follows:
1. The collection of data (data source and data consolidation) –
- There should be a consistent and qualified process to collect and consolidate data with
proper metadata capture.
- It should be well defined and automated if possible.
- All processes involved should be traceable, accountable and auditable.
2. The storage of data and Basel II related system –
- The storage should be on a robust data infrastructure that allows the financial institution
to perform backup, restore, archive, replicate, high availability, and perform load
balancing when required.
- The application must be designed with security as the underlying core.
- The system must comply with the financial institution’s application and operational
security policies.
- Further the system must be designed with proper error handling and a defined process
under adequate control to cleanup and to recover the system to normal state.
- T echnology used should be in line with the financial institution’s architecture direction.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  73
3. Data processing and transmission –
- There must be control on all files that are exchanged between systems.
- There must be proper file identification for each file that is exchanged between systems.
- There should be a HASH total for each file that is exchanged between systems, to be
confirmed, if needed, as advised by regulators and internal security standards.
4. Analytical and reporting for end-user consumption –
- Data/report download and manual manipulation is not encouraged, unless justified by
business and exception sought.
- “Fit-for -purpose” reporting and analytical tools should be used in the technical solution.
- There should not be any manual report distribution via email or intranet.
6. Conclusion
Banks are free to develop, choose and purchase their IT systems and software for the Basel II
programme depending on their risk modelling and data warehouse requirements. However, the
Basel Committee has categorically outlined the following Supervisory expectations for the use
of vendor products in IRB processes in their Newsletter No. 8 (March 2006):
1. Banks must be able to document and explain the role of vendor products and the extent to
which they are used within their IRB processes.
2. Banks must be able to demonstrate a thorough understanding of vendor products used in their
IRB processes.
3. V endor products must be appropriate to the bank’s exposures and risk rating methodologies
and suitable for use within the IRB framework.
4. Banks must have clearly articulated strategies for regularly reviewing the performance of
vendor model results and the integrity of external data used in their IRB risk quantification
processes.
5. Further , the supervisors/regulators will only review and assess the acceptability of estimates
based on the system behind the estimates.


74 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Directions issued by the Monetary Board of the Central Bank of Sri Lanka under Sections 46(1) and
76(J)(1) of the Banking Act, No.30 of 1988, as amended.
Sgd. Nivard Ajith Leslie Cabraal
Chairman of the Monetary Board and
Governor of the Central Bank of Sri Lanka
Colombo
31 July 2013
BANKING ACT DIRECTION NO. 5 OF 2013
SUPERVISORY REVIEW PROCESS (PILLAR 2 OF BASEL II) FOR
LICENSED COMMERCIAL BANKS AND
LICENSED SPECIALISED BANKS
In the exercise of the powers conferred by Sections 46(1) and 76(J)(1) of the Banking Act, No. 30
of 1988, last amended by the Banking Act, No. 46 of 2006, the Monetary Board hereby issues Directions
No. 5 of 2013 on the implementation of Supervisory Review Process (SRP) for  Licensed Commercial
Banks (LCBs) and  Licensed Specialised Banks (LSBs), respectively,  in accordance with the Basel II
Capital Accord “International Convergence of Capital Measurement and Capital Standards – A Revised
Framework” issued by  the Basel Committee on Banking Supervision of the Bank for International
Settlements in June 2006.
1.1 In terms of Sections 19(7) and 76G(7) of the Banking Act, the Monetary Board
is empowered to determine the capital adequacy ratio to be maintained by every
LCB and LSB, respectively, as far as practicable by adopting the guidelines for
capital adequacy set out by the Bank for International Settlements in Basel.
1.2 In terms of Sections 46(1) and 76(J)(1) of the Banking Act, in order to ensure
the soundness of the banking system, the Monetary Board is empowered to issue
Directions to all or any LCB and LSB, respectively, regarding the manner in
which any aspect of the business of such banks is to be conducted.
2.1 Commencing from 1 January 2014, every LCB and LSB shall, at all times,
maintain adequate capital to cover its exposure to all risks, notwithstanding that


maintain adequate capital to cover its exposure to all risks, notwithstanding that
it has complied with the requirements of the Banking Act, Directions No. 9 and
10 of 2007 dated 26 December 2007 issued to LCBs and LSBs, respectively.
2.2 In determ ining the adequate capital referred to in Direction 2.1 above, every
LCB and LSB shall consider the requirements specified in the Regulatory
Framework on SRP attached hereto.
3.1 Every LCB and LSB shall develop and implement a sound Internal Capital
Adequacy Assessment Process (ICAAP) in accordance with the requirements
specified in Part II of the Regulatory Framework on SRP attached hereto.Empowerment
under the
Banking Act.
Maintain Adequate
Capital above the
Minimum Capital
Requirement.
Implement
Sound Internal
Capital Adequacy
Assessment
Process.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  75
4.1 T he Director of Bank Supervision or examiners of the Bank Supervision
Department shall review and evaluate the following, in accordance with
Part III of the Regulatory Framework on SRP attached hereto.
(a) ICAAP;
(b) compliance with the requirements set out in these Directions and the
Regulatory Framework on SRP attached hereto; and
(c) adequacy of capital maintained by each bank.
5.1 The Central Bank of Sri Lanka shall intervene at an early stage to prevent capital
of a bank falling below the minimum requirement, in accordance with Part IV
of the Regulatory Framework on SRP attached hereto.
6.1 Every LCB and LSB shall submit a Board approved ICAAP Document to the
Director of Bank Supervision within six months from the end of its financial
year. For the purposes of these Directions and the Regulatory Framework on
SRP attached thereto, in the case of banks incorporated outside Sri Lanka, the
“Board” shall mean the Head Office or the Regional Office that supervises the
respective bank.
6.2 ICAAP  Document shall be prepared in accordance with the format given in
Appendix I of the Regulatory Framework on SRP attached hereto. However, this
format shall be considered as the minimum requirement and ICAAP Document
of every LCB and LSB shall be comprehensive and relative to its size, nature
of the business and complexity of business activities.Supervisory
Review and
Evaluation
Process (SREP).
Supervisory
Intervention.

Regulatory
Reporting.


76 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
REGULATORY FRAMEWORK ON
SUPEVISORY REVIEW PROCESS
(PILLAR 2 OF BASEL II)
ATTACHMENT  TO THE
BANKING ACT,
DIRECTIONS No. 5 of 2013


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  77
CONTENTS
PART I – OVERVIEW
1. Introduction
2. Objectives of Supervisory Review Process (SRP)
3. Principles governing SRP
4. Scope and Applicability
PART II – INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP)
5. Developing and maintaining ICAAP
6. The Board of Directors and Senior Management Oversight
  6.1 Board responsibilities for ICAAP
  6.2 Senior management’ s responsibilities for ICAAP
7. Comprehensive assessment of risks
8. Sound Capital Assessment
9. Monitoring and Reporting
10. Internal Controls and Independent review
PART III – SUPERVISORY REVIEW AND EV ALUATION PROCESS (SREP)
11. Key Components
12. Review Methodologies
13. Objectives
14. Coverage
15. Qualitative Assessment
16. Dialogue with the bank
PART IV – SUPERVISORY INTERVENTION
Appendix I


78 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
PART  I  –  OVERVIEW
1. Introduction
1.1 The Basel II capital adequacy framework, seeks to harness best practices in risk management into
the regulatory process, by providing a spectrum of approaches to measure capital adequacy of banks.
The Basel II framework also seeks to provide regulatory capital requirements that are both more
comprehensive and more sensitive to risk, and as such, more closely aligned to the risk appetite of
banks.
 The Basel II framework is based on three mutually reinforcing pillars:
a. Pillar 1: Minimum capital requirements for three major components of risks that banks face:
credit, market and operational risks;
b. Pillar 2: Supervisory Review Process (SRP): Banks’ own assessments of their capital adequacy
and encourage banks to develop and use better risk management techniques in monitoring and
managing their risks; and
c. Pillar 3: Market Discipline: materially increased disclosure requirements.
1.2 The SRP of licensed commercial banks (LCBs) and licensed specialised banks (LSBs) (hereinafter
referred to as “banks”) is conducted to assess their capital adequacy and to determine whether
banks should hold additional capital to cover risks that are not covered or adequately covered by the
minimum capital requirements under Pillar 1 of Basel II.
2. Objectives of SRP
 SRP  is intended to:
2.1 encourage banks to utilise better risk management techniques – the level of risks a bank is exposed
to, and the control environment that will determine the level of capital required to be maintained by
banks;
2.2 enhance the risk-based supervision of banks in order to assess the capital adequacy relative to risks;
2.3 evaluate the bank’s Internal Capital Adequacy Assessment Process (ICAAP) that determines the
level of capital to be maintained against all risks and ensure that banks have adequate capital to
support all risks; and


support all risks; and
2.4 ensure that banks use ICAAP in more general business decisions and budgets, in more specific
decisions such as allocating capital to business units and when evaluating individual credit decision
process.
3. Principles governing SRP
 SRP  is conducted based on the following four key principles provided in the Pillar 2 of Basel II
capital framework:
a. Banks shall have a process for assessing their overall capital adequacy in relation to their risk
profiles and a strategy for maintaining their capital levels (Principle 1 of Pillar 2-SRP).
b. The Central Bank of Sri Lanka (CBSL) as the regulator will review and evaluate bank’s ICAAP
and strategies, as well as its ability to monitor and ensure compliance with regulatory capital
ratios (Principle 2 of Pillar 2-SRP).
c. CBSL  expects banks to operate above the minimum regulatory capital ratios and requires banks
to hold capital in excess of the minimum (Principle 3 of Pillar 2-SRP).


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  79
d. CBSL  will intervene at an early stage to prevent capital from falling below the minimum levels
required to support the risk characteristics of a particular bank (Principle 4 of Pillar 2-SRP).
4. Scope and Applicability
 This Regulatory Framework shall be applicable to banks on both standalone (“Solo”) level, as well
as on the consolidated (“Group”) level.
PART  II  –  INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS (ICAAP)
5. Developing and maintaining ICAAP
5.1 Every bank shall develop and maintain a rigorous and well-documented ICAAP proportional to its
operations and risk profile and consistent with prudential requirements.
5.2 ICAAP  of a bank shall include the following five main features.
a. Board and senior management oversight
b. Comprehensive assessment of risks
c. Sound capital assessment
d. Monitoring and reporting
e. Internal controls and independent review
5.3 A  bank shall design its ICAAP according to the size, complexity and business strategies of the
respective bank.
6. The Board of Dir ectors and Senior Management Oversight
6.1 Board responsibilities for ICAAP
a. The Board shall ensure that the bank has in place a strategic plan which clearly outlines its
current and future capital needs, anticipated capital expenditure, desirable capital level, and
external capital sources.
b. The Board shall review and approve the target level and composition of capital, and the process
for setting and monitoring such targets at least, annually.
c. The Board shall ensure that the senior management:
 (i) performs an analysis of the current and future capital requirements of the bank in relation
to its strategic objectives;
 (ii) establishes frameworks for assessing the categories of risks faced by the bank and develops
systems related to these risks to the capital level of the bank;


systems related to these risks to the capital level of the bank;
 (iii) establishes a method for monitoring compliance with internal policies on risk assessment
and the processes related to risks to capital levels; and
 (iv) establishes a strong internal control culture throughout the bank.
d. The Board shall approve and exercise effective oversight over the bank’s stress testing processes.
e. The Board shall review ICAAP  of the bank periodically, at least annually, to:
 (i) assess the level and trend of material risks and their ef fects on capital levels;
 (ii) evaluate the sensitivity and reasonableness of key assumptions used in the capital
assessment measurement system;
 (iii) determine that the bank holds adequate capital against the various risks and is in compliance
with established capital adequacy goals; and


80 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
 (iv) assess the bank’s future capital requirements based on its reported risk profile and make
necessary adjustments to the strategic plan, accordingly.
f. The Board shall ensure that public disclosures are made in the bank’s audited annual report/
audited financial statements, both qualitative and quantitative information, to assist in assessing
the adequacy of bank’s capital commensurate with all material risks the bank is exposed to in
relation to its current and future activities.
g. The Board shall approve the annual ICAAP  document.
6.2 Senior management’s responsibilities for ICAAP
 The senior management shall:
a. ensure the appropriateness of ICAAP  on an ongoing basis;
b. have a good understanding of the design and operation of ICAAP;
c. be responsible for developing a risk management framework that is appropriate in light of the
risk profile and business strategy of a bank and integrating ICAAP with the capital planning and
management processes of the bank. In this regard, senior management shall, at a minimum:
 (i) establish robust policies and procedures to be approved by the Board to identify, measure
and report all material risks;
 (ii) evaluate the level and trend of material risks and their ef fects on capital levels;
 (iii) evaluate the sensitivity and reasonableness of key assumptions used in the capital
assessment and measurement system;
 (iv) determine if the bank holds adequate capital against the risks faced by the bank;
 (v) assess future capital needs based on the risk profile of the bank and propose necessary
adjustments to its strategic plan; and
 (vi) ensure that ICAAP  is subject to annual independent review for robustness and integrity.
d. establish comprehensive and adequate written policies and procedures, to be approved by the
Board, on its stress testing processes taking an active interest in the development and operation


Board, on its stress testing processes taking an active interest in the development and operation
of stress-testing and, allocating sufficient skilled and competent resources to the modeling
function.
e. ensure regular reporting of bank’ s ICAAP to the Board.
f. prepare the annual ICAAP document in accordance with the specified format given in
Appendix I; and
g. submit the Board approved annual document of ICAAP to the Director of Bank Supervision
within six months from the end of the financial year of the respective bank.
7. Compr ehensive assessment of risks
7.1 Bank’ s ICAAP shall identify all material risks, which are arising from both on balance sheet and
off-balance sheet exposures, faced by the bank and measure these risks that can be reliably quantified
under both normal and stressed conditions. ICAAP shall, therefore, address the following risks.
a. Risks captured under Pillar 1: credit, market and operational risks;
b. Risks not fully captured under Pillar 1; concentration risk (credit risk), interest rate/rate of return
risk in the banking book (market risk) and
c. Risk types not covered by Pillar 1: risks which are not specifically addressed under Pillar 1,
which includes liquidity risk, concentration risk, reputational risk, compliance risk, strategic and
business risk, residual risk.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  81
7.2 A  bank shall be able to identify other external risk factors that may arise from the regulatory, economic
or business environment. In addition, adequate corporate governance and proper risk management
including internal control arrangements constitute the foundation of an effective ICAAP.
7.3 The risk measurement systems shall be sufficiently comprehensive and rigorous to capture the
nature and magnitude of the risks faced by the bank.
7.4 The risks that are not easily quantifiable shall be evaluated using qualitative assessment and
management judgment.
7.5 When measuring risks, comprehensive and rigorous stress tests shall be performed to identify
possible events or market changes that could have serious adverse effects or significant impact on
the bank’s capital and operations.
7.6 In assessing risks, banks shall also consider the applicable Directions issued under the Banking Act.
8 Sound Capital Assessment
 Internal capital allocation and assessment process shall meet the following requirements.
8.1 Banks shall have an explicit Board approved capital plan which states the objectives and the time
period for achieving those objectives, and in broad terms the capital planning process and the
responsibilities for that process.
8.2 The plan shall also lay out how the bank will comply with capital requirements in the future related
to the level of risk, and a general contingency plan for dealing with divergences and unexpected
events such as raising additional capital, restricting business activities or using risk mitigation
techniques.
8.3 The bank shall set capital targets which are consistent with their risk profile, stage of the business
cycle in which the bank is operating, and business plans.
8.4 An internal strategy for maintaining capital levels which should not only reflect the desired level of


risk coverage but also incorporate factors such as loan growth expectations, future sources and uses
of funds, and dividend policy.
8.5 The amount of capital held shall reflect not only the measured amount of risks but also an additional
amount to account for potential uncertainties in risk measurement.
8.6 In assessing capital, a bank shall also evaluate the quality and capacity of its capital to absorb losses.
8.7 The bank shall demonstrate to CBSL  that its capital assessement approach is conceptually sound
and that outputs and results are reasonable.
9. Monitoring and Reporting
9.1 The bank shall establish an adequate system for monitoring and reporting risk exposures and,
assessing how the bank’s changing risk profile affects the capital requirements.
9.2 The bank’ s Board and the senior management shall:
a.  receive reports on the bank’s risk profile and capital needs in a manner appropriate to facilitate
the conduct of their responsibilities;
b. evaluate the level and trend of material risks and their ef fects on capital levels;
c. evaluate the sensitivity and reasonableness of key assumptions used in the capital assessment
measurement system;


82 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
d. determine that the bank holds adequate capital against the risks and is in compliance with
established capital adequacy goals; and
e. assess its future capital requirements based on the bank’s reported risk profile and make necessary
adjustments to the bank’s strategic plan, accordingly.
10. Internal Contr ols and Independent Review
10.1 The bank’s internal control structure is essential to the capital assessment process. Effective control
of the capital assessment process includes an independent review, and where appropriate, with the
involvement of internal or external audits.
10.2 The person(s) responsible for the development or implementation of ICAAP shall not be involved
in the independent review.
10.3 The bank shall conduct periodic independent reviews of its risk management processes to ensure
their integrity, accuracy, and reasonableness. Areas that shall be reviewed include:
a. appropriateness of the bank’s capital assessment process given the nature, scope and complexity
of its activities;
b. identification of lar ge exposures and risk concentrations;
c. accuracy and completeness of data inputs into the bank’ s assessment process;
d. reasonableness and validity of scenarios used in the assessment process; and
e. stress testing and analysis of assumptions and inputs.
PART  III  –  SUPERVISORY REVIEW AND EV ALUATION PROCESS (SREP)
11. Key Components
 SREP , which consists of the following key components, shall be carried out by the Director of Bank
Supervision or examiners of the Bank Supervision Department.
a. Review of the bank’ s ICAAP;
b. Review of the bank’ s risk profile;
c. Review of the levels and quality of capital held; and
d. Communication of SREP  results to the bank.
12. Review Methodologies
 SREP  shall involve a combination of:
a. periodic examinations or inspections;
b. continuous supervision;
c. discussions with the bank management;


b. continuous supervision;
c. discussions with the bank management;
d. review of work of internal and external auditors; and
e. periodic reporting.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  83
13. Objectives
 The objective of the review is to:
a. evaluate the adequacy of bank’s internal capital adequacy assessments and strategies, as well as
their ability to monitor and ensure compliance with regulatory capital ratios;
b. ensure that the bank operates above the minimum regulatory capital ratios and composition of
capital is appropriate for the nature and scale of the bank’s business;
c. identify existing or potential problems and key risks faced by the bank, deficiencies in their
internal control and risk management frameworks, and the degree of reliance that can be placed
on the outputs of ICAAP;
d. intervene at an early stage to prevent capital from falling below the minimum levels required to
support the risk characteristics of the bank;
e. take appropriate supervisory action and regulatory measures if results of this process are not
satisfactory.
14. Coverage
 SREP  will cover a quantitative review of bank’s Pillar 1 inherent risk exposures and Pillar 2
inherent risk exposures.
15. Qualitative Assessment
 If Pillar 2 risks are not readily quantifiable, the supervisory judgment is to be used with respect to
qualitative assessments of the bank’s ability to contain actual risk exposures within prudent, planned
levels through effective risk governance, oversight, management and control practices.
16. Dialogue with the bank
16.1 SREP  involves an active dialogue with the bank regarding ICAAP, through which CBSL seeks to:
a. gain deeper insights into the bank’ s overall control and risk management framework;
b. establish a closer understanding of how the bank approaches the risks that are not covered under
the minimum capital requirements and the amount of internal capital allocated to them;
c. understand the mechanisms the bank has maintained for identifying, measuring, monitoring,
controlling, mitigating and reporting its risks; and


controlling, mitigating and reporting its risks; and
d. understand whether additional capital on top of that assessed is necessary to cover the
banks’existing risk exposures, as well as future planned sources of capital.
16.2 The dialogue will provide an opportunity for the bank to make appropriate changes to its ICAAP .
16.3 Communication of SREP  results:
a. After completion of the SREP, the Director of Bank Supervision may conduct discussions with
the bank based on the results of the assessment, including any areas of concern which may lead
to an increase in bank’s minimum CAR.
b. The Director of Bank Supervision will explain the outcome of the assessment and recommend
the prompt corrective actions to address the concerns of the bank, if any. If there is a proposed
increase in the capital, the bank will be notified (with the opportunity to make representations)
before the decision is finalised.


84 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
PART  IV  –  SUPERVISORY INTERVENTION
17. Based on the outcome of SREP , CBSL shall intervene at an early stage to:
a. prevent capital from falling below the minimum requirement of the respective bank; and
b. prevent potential impact to the stability of the financial system.
18. Depending on the capita l level, a range of supervisory actions including the following shall be
initiated.
a. moral suasion to encourage the bank to improve their capital positions and levels;
b. improve the bank’ s ICAAP including risk management systems and controls;
c. require the bank to submit a capital restoration plan;
d. impose restrictions on the payment of dividends, business activities, acquisitions, investments
etc.; and
e. require the replacement of the Board and/or the senior management.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  85
Appendix I
SPECIFIED FORMAT FOR THE PREPARATION OF ICAAP DOCUMENT
1. General
1.1 The purpose of ICAAP document is to inform the Board/senior management and the CBSL of the
ongoing assessment of the bank's risks, how the bank intends to mitigate those risks and how much
current and future capital is necessary having considered other mitigating factors.
1.2 Annual document of ICAAP of a bank shall be prepared in accordance with the contents given in
paragraph 2 below.
1.3 However , CBSL expects there to be a fair degree of variation in the length and format of submissions
since banks’ business and risk profiles differ from each other and ICAAP document should be
proportional to the size, nature and complexity of a bank’s business.
1.4 Use of this format may, therefore, make the review process more efficient for both the bank and
CBSL.
1.5 Base period and financial data of ICAAP document shall be in accordance with the audited financial
data as at the end of the preceding financial year.
1.6 The projected financial data of ICAAP  document should be at least for three financial years.
2. Contents
2.1 Executive Summary
2.2 Background
2.3 Board and Senior Management Oversight
2.4 Risk Governance
2.5 Sound stress testing processes
2.6 Capital Planning
2.7 Projected financial data and assessment of capital
3. Executive summary
 This section will present an overview of ICAAP  methodology and results. This overview will
include:
a. The purpose of the report and the group entities which are covered by ICAAP;
b. Financial forecasts, including the strategic position of the bank, its balance sheet strength, and
future profitability;
c. Regulatory capital management;
d. Regulatory capital assessment - Pillar 1;
e. Internal capital assessment - Pillar 2;
f. Ratio management: How much and what composition of internal capital the bank considers it


f. Ratio management: How much and what composition of internal capital the bank considers it
should hold as compared with the capital adequacy requirement under Pillar 1;
g. Risk management processes and assessment;
h. Descriptions of the capital and dividend plan; the manner in which the bank intends to manage
capital going forward and for what purposes;
i. Stress testing approach; and
j. Details of the approval.


86 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
4. Background
 This section will include the relevant organization structure and business lines, group structure
(legal and operations) and financial data of the bank largely including the profit, dividends, equity,
capital resources held and as compared with regulatory requirements, total assets, total loan and
advances, total deposits, and any conclusions that can be drawn from trends in the data which may
have implications for the bank’s future.
5. Board and Senior  Management Oversight
 This section would provide the following information:
a. Corporate governance structure;
b. Board and senior management oversight;
c. ICAAP  governance structure;
d. Monitoring and controls; and
e. Internal controls and independent review .
6. Risk Governance
 This section will provide the following;
a. Risk appetite;
b. Risk management framework;
c. Regulatory risk assessment (Pillar 1);
 i. Credit risk
 ii. Market risk
 iii. Operational risk
d. Internal risk assessment (Pillar 2);
 i. Concentration risk
 ii. Interest rate risk in the banking book
 iii. Settlement risk
 iv. Liquidity risk
 v . Compliance risk
 vi. Strategic/business risk, and
 vii. Reputation risk
 viii. Residual Risk
7. Sound str ess testing processes
 This section will provide the following details of bank’ s stress testing practices:
a. Overview of the stress testing process
b. Stress scenario/types
c. discuss the results of stress tests and its impact to the bank capital
d. risk mitigation or contingency plans across a range of stressed conditions


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  87
8. Capital planning
 This section will provide details of bank’s capital planning and management processes, which, at a
minimum, includes:
a. the bank’s short-term and long-term capital adequacy goals in relation to its risk profile, taking
into account its strategic focus and business plan;
b. the approved capital targets that are consistent with the bank’s overall risk profile and financial
position;
c. the approach for determining the bank’s overall capital adequacy in relation to its risk profile;
and
d. Conclusions.
9.	 Projected 	financial	position	and	assessment 	of	capital
 This section will explain Pillar 1 and 2 capital requirements, in respect to;
a. the expected changes to the business profile of the bank, the environment in which it expects to
operate, its projected business plans (by appropriate lines of business), and projected financial
position for the next, three to five years; and
b. given these business plans, this section would also discuss the bank’s assessment as to whether
additional capital is necessary on top of that assessed to cover their existing risk exposures, as
well as future planned sources of capital.


88 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Directions issued by the Monetary Board of the Central Bank of SriLanka under Section 46(1) of the
Banking Act, No.30 of 1988, as amended.
Sgd. B D W A Silva
Senior Deputy Governor
Central Bank of Sri Lanka
Colombo
31 October 2011

BANKING ACT DIRECTIONS NO. 9 OF 2011
AMENDMENT TO DIRECTIONS ON
MAINTENANCE OF CAPITAL ADEQUACY RATIO
The qualifying criteria for the SME exposures given in paragraph 6.4.3.1.8 ( i)(d) of Schedule I in
Direction 1(2) of the Banking Act, Directions No. 9 of 2007 is amended by replacing with the following
paragraph:
SME Exposures.  i. The maximum credit exposure of the lending bank to an SME shall not exceed
Rs. 200 million.
 ii. The annual turnover of the SME shall not exceed Rs. 600 million.
 iii. 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.
 iv. In the case of grant of credit facilities less than Rs. 50 million, the condition
iii above shall not be applicable and banks shall adopt their own internal
mechanism to verify the SME’s annual turnover.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  89
Directions made by the Monetary Board of the Central Bank of Sri Lanka under Section 46(1) of
the Banking Act, No. 30 of 1988, as amended.
Sgd. W A Wijewardena
Senior Deputy Governor
Central Bank of Sri Lanka
Colombo
24 April, 2009
DIRECTIONS
BANKING ACT DIRECTION NO.1 OF 2009
AMENDMENT TO DIRECTIONS ON OWNERSHIP OF ISSUED CAPITAL CARRYING
VOTING RIGHTS FOR LICENSED COMMERCIAL BANKS
In the exercise of the powers conferred by Section 46(1) of the Banking Act, No. 30 of 1988,
last amended by the Banking Act, No. 46 of 2006, the Monetary Board hereby issues the following
Direction amending Direction No.1 of 2007 dated 19 January 2007, issued by the Monetary Board of the
Central Bank of Sri Lanka. This Direction may be cited as the Banking Act Direction No.1 of 2009.
The following new Direction shall replace Direction No. 5 of the Banking Act Direction No. 1 of 2007.
5. Nevertheless, in the case of a licensed commercial bank which requires
restructuring to avoid inadequacy of capital, insolvency or potential failure,
such upper limit as specified in Direction 4 above may not be imposed, and the
Monetary Board may grant permission to any of the categories of shareholders
specified in Sections 12(1 c) and 46(1)(d) to acquire a material interest in
excess of 15 per cent of the issued capital carrying voting rights in the licensed
commercial bank, subject to the condition that the material interest so acquired
shall be reduced to 15 per cent within a specified period as may be determined
by the Monetary Board, on a case-by-case basis.Exceptions.


90 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Directions issued by the Monetary Board under Section 46(1) of the Banking Act, No.30 of 1988,
as amended.
Nivard Ajith Leslie Cabraal
Governor
Colombo
19 January 2007
DIRECTIONS
BANKING ACT DIRECTIONS NO. 1 OF 2007
OWNERSHIP OF ISSUED CAPITAL CARRYING VOTING RIGHTS

In exercise of the powers conferred by Section 46(1) of the Banking Act, No.30 of 1988, last
amended by the Banking Act, No.46 of 2006, the Monetary Board hereby issues Directions as follows:
1. Thes e Directions may be cited as the Banking Act, Directions No.1 of 2007.
The Sections referred to in these Directions will be those of the Banking Act, No.30
of 1988, last amended by the Banking Act, No.46 of 2006.
2. In terms of Section 46(1), in order to ensure the soundness of the banking
system, the Monetary Board has been empowered to issue Directions to licensed
commercial banks regarding the manner in which any aspect of the business of
such banks is to be conducted, including Directions pertaining to the maximum
percentage of the share capital in a licensed commercial bank incorporated in Sri
Lanka–
 (i) held by a company , an incorporated body, or an individual;
 (ii) held in the aggregate by—
 (a) a company and one or more of the following:—
(aa)  its subsidiaries
(bb)  its holding company;
(cc)  a subsidiary of its holding company; or
(dd)  a company in which such company or its subsidiary, or its holding
company, or a subsidiary of its holding company has a substantial
interest; or
 (b) an individual and one or more of the following:—
(aa) his close relations;
(bb) a company in which he has a substantial interest or in which his
close relation has a substantial interest;
(cc) the subsidiary of such company; Citation.
Empowerment
under Section
46(1).


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  91
(dd) a holding co mpany of such company;
(ee) a subsidiary of such company's holding company;
(ff) a company in which such company, or its subsidiary, or its holding
company or a subsidiary of its holding company has a substantial
interest; or
(gg) an incorporated body other than a company in which such individual
or his close relation has a substantial interest; or
(c) companies in each of which an individual or company as the case may
be, has either directly, indirectly or beneficially a substantial interest or
significant management interest.
3. (1) In terms of Section 12(1C)( a), an individual, partnership or corporate body
shall not, either directly or indirectly or through a nominee or acting in concert
with any other individual, partnership or corporate body, acquire a “material
interest” in a licensed commercial bank incorporated or established within Sri
Lanka by or under any written law without the prior written approval of the
Monetary Board given with the concurrence of the Minister in charge of the
subject of Finance.
 (2) In terms of Section 12(1C)( b), the Monetary Board is empowered to grant such
approval subject to terms and conditions it may deem fit.
 (3) A  “material interest” means the holding of over 10 per cent of the issued capital
of a licensed commercial bank carrying voting rights.
4. Ac cordingly, the Monetary Board, subject to Sections 12(1B), 12(1C) and 13
and subject to terms and conditions it may deem fit, may grant permission on a
case-by-case basis to any of the categories of shareholders referred to in Section
12(1C) and 46(1)( d) to acquire a material interest not exceeding 15 per cent of the
issued capital carrying voting rights in a licensed commercial bank.
5. Nevertheless, in the case of a licensed commercial bank which requires restructuring


5. Nevertheless, in the case of a licensed commercial bank which requires restructuring
to avoid inadequacy of capital, insolvency or potential failure, such upper limit as
specified in Direction 4 above may not be imposed, and the Monetary Board may
grant permission to any of the categories of shareholders specified in Sections
12(1C) and 46(1)(d) to acquire a material interest in excess of 15 per cent of the
issued capital carrying voting rights in the licensed commercial bank subject to
the condition that the material interest so acquired shall be reduced to 15 per cent
within a specified period as may be determined by the Monetary Board on a case-
by-case basis, provided also that such period shall not exceed five years from the
date of granting permission.
6.  (1) Any material interest previously acquired by any of the categories of
shareholders referred to in Sections 12(1C) and 46(1)(d) in excess of 15 per
cent of the issued capital carrying voting rights in a licensed commercial bank
and held at the date of these Directions, shall be disposed of and/or otherwise
reduced by such shareholders to a level not exceeding 15 per cent of the issued
capital carrying voting rights in the licensed commerc ial bank.Empowerment
under Section
12(1C).
Maximum
percentage
of ownership
of shares.
Exceptions.
Provisions in
relation to existing
ownership.


92 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
 (2) Such disposal and/or reduction shall be carried out within the period as may be
specified by the Monetary Board on a case-by-case basis, provided that such
period shall not exceed five years from the date of stipulation.
 ( 3)  In the event, any of the categories of shareholders referred to in Section
12(1C) and 46(1)(d) fails to comply with the directives of the Monetary Board
within the stipulated period of time, the voting rights in excess of 10 per cent
attributable to the ownership of shares held by the categories of shareholders
subject to this Direction shall be deemed invalid with effect from the last date
of the period specified by the Monetary Board to reduce the material interest.
7. (1) W ithin two months of the date of these Directions, each licensed commercial
bank shall inform the Monetary Board of instances, if any, in its bank where
the categories of shareholders referred to in Sections 12(1C) and 46(1)( d) own
a material interest exceeding 15 per cent of the issued capital carrying voting
rights in its bank and seek a Direction from the Monetary Board as to the period
within which the disposal and/or reduction of the material interest to the level
of 15 per cent shall be carried out.
 (2) W ithin two months of receipt of such information and request, the Monetary
Board will specify the period within which the disposal and/or reduction should
take place as per Direction 6(2) above and inform the licensed commercial
bank accordingly.
 ( 3)  Immediately thereafter , in terms of Section 46(3), the licensed commercial
bank shall direct the shareholders who hold a material interest in its bank over
the limits specified in these Directions to dispose of and/or reduce the number
of shares carrying voting rights in order to comply with these Directions,
within the period as stipulated by the Monetary Board.


within the period as stipulated by the Monetary Board.
8. In terms of Section 12(1C)( c) and subject to Directions 6 and 7 above, a licensed
commercial bank shall not enter in its register of members the name of any
shareholder referred to in Sections 12(1C) and 46(1)( d) as the holder of shares of
the bank, who or which has contravened the provisions of Section 12(1C) and/or
these Directions.
9. Anything contained in these Directions shall not be construed to restrict the
ownership of issued capital carrying voting rights in–
(a) the Bank of Ceylon established under the Bank of Ceylon Ordinance, No.53 of
1938;
(b) the People’ s Bank established under the People’s Bank Act, No.29 of 1961.
(c) a licensed commercial bank established by a statute in which the ownership of
a majority of the shares is held by the Government or a public corporation or a
statutory body.
10. (1) The Banking Act, Directions No.1 of 1998 (Share Capital Ownership) dated
22 October 1998 and Directions No.1 of 1999 (Share Capital Ownership) dated
5 March 1999 are hereby revoked.
 (2) The effect of revocation of previous Directions shall not affect any penalty or
liability incurred under those Directions pri or to the revocation.Transitional
arrangements.
Steps to secure
compliance.
Non-application
of Directions.
Revocation
of previous
Directions.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  93
BANKING ACT
Determinations made by the Monetary Board of the Central Bank of Sri Lanka under sections 8, 19,
20, 21 and 86 of the Banking Act as amended by the determination made on 29th February, 2000.
Sgd. A. S. Jayawardena
Governor
Colombo
DETERMINATION
1. By virtue of the provisions of section 8, the Monetary Board has determined that with effect from
1st January 1989 the annual licence fee that shall be paid by a licensed commercial bank  –
 (a) carrying on domestic banking business excluding foreign exchange business be
  Rs.10,000.00;
 (b) carrying on domestic banking business including foreign exchange business and of f-shore,
banking business be Rs.250,000.00;
 (c) carrying on of f-shore banking business only be Rs.150,000.00.
*2. In exercise of the powers conferred by section 19(4), the Monetary Board determined that, with
effect from 24 May 2002, foreign participation in the share capital of a Licensed Commercial Bank
incorporated or established in Sri Lanka, is permitted upto 100 percentum of its issued share capital,
subject to compliance with the provisions of section 12(1)d and the limitations on share capital
ownership imposed by Direction No.1 of 1998 issued on 22, October 1998 under section 46(1)d.
3. For the purposes of the provison to section 20(1), “intangible assets” are determined to be goodwill,
preliminary expenses including legal and other fees, all capitalised expenses and other items not
represented by tangible assets.
4. (a) The Monetary Board has determined:
 (i) by virtue of the provisions of section 21(1), that every licensed commercial bank shall
with effect from 1st April, 1989 maintain liquid assets of an amount not less than 20%
of its total liabilities, less liabilities to the Central Bank and to the share holders;
 (ii) by virtue of section 21(3) that every licen sed commercial bank which fails to maintain


(ii) by virtue of section 21(3) that every licen sed commercial bank which fails to maintain
liquid assets as required under section 21(1) shall pay to the Central Bank a penalty
at the rate of 0.1% per day calculated on the amount of the deficiency of its required
liquid assets. Such penalty shall be paid not later than the last working day of the month
succeeding the month in which deficiency of the liquid assets occurred.
5. The Monetary Board has determined under section 86 that inland trade bills, cash items in process of
collection, balances with banks abroad and treasury bonds issued under section 21 a of the Registered
Stock and Securities Ordinance shall also form part of the liquid assets of a licensed commercial
bank.
* Amended by the determination dated 24th May, 2002.


94 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Our Ref. : 02  / 17 / 500 / 0086  / 001
Bank Supervision Department
07 December 2012
To : CEOs of all Licensed Commercial Banks and
       Licensed Specialised Banks
Dear Sir / Madam,
ICRA Lanka Limited –
Recognition as an External Credit Assessment Institution
The Monetary Board of the Central Bank of Sri Lanka (CBSL) has approved ICRA Lanka Limited
as a recognised External Credit Assessment Institution, for the purpose of all regulatory requirements of
CBSL applicable to Licensed Commercial Banks and Licensed Specialised Banks.
Accordingly, Table 1 and Table 3 under the item No. 6.4.2.3.1 of the Guidelines on Computation
of Capital Adequacy Ratio is revised as in Annex.
Yours faithfully,
(Mrs.) T M J Y P Fernando
Director of Bank Supervision
Encl.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  95
Annex
Table 1
Mapping of Notations of the Credit Rating Agencies in Sri Lanka
Fitch Rating LankaRAM Ratings
(Lanka) LimitedRating of ICRA
Lanka Limited Rating Scale for CAR
AAA (lka) AAA (SL) AAA AAA
AA+ (lka) AA+ (SL) AA+ AA+
AA (lka) AA (SL) AA AA
AA- (lka) AA- (SL) AA- AA-
A+ (lka) A+ (SL) A+ A+
A (lka) A (SL) A A
A- (lka) A- (SL) A- A-
BBB+ (lka) BBB+ (SL) BBB+ BBB+
BBB (lka) BBB (SL) BBB BBB
BBB- (lka) BBB- (SL) BBB- BBB-
BB+ (lka) BB+ (SL) BB+ BB+
BB (lka) BB (SL) BB BB
BB- (lka) BB- (SL) BB- BB-
B+ (lka) B+ (SL) B+ B+
B (lka) B (SL) B B
B-(lka) & Lower B- & Lower (SL) B- & Lower B- & Lower
Table 3
Mapping of Short Term Ratings
Short term ratings
Risk
Weights RAM Ratings
(Lanka) LimitedStandard and
Poor’sMoody’sFitch
RatingsICRA Lanka
Limited
P – 1 A – 1+ / A – 1 P – 1 F1+ / F1 (SL) A1+ / A1 20%
P – 2 A – 2+ / A – 2 P – 2 F2 (SL) A2+ / A2 50%
P – 3 A – 3+ / A – 3 P – 3 F3 (SL) A3+ / A3 100%
NP Below A – 3 NP Below F3 (SL) Below A3 150%


96 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Ref. No. : 02  / 04 / 003 / 0400  / 001
Bank Supervision Department
13 July 2004
To : CEOs of all Licensed Commercial Banks
Dear Sirs,
CLASSIFICATION OF ADV ANCES AND SPECIFIC PROVISIONS  /
CRITERIA FOR SELECTION OF V ALUERS UNDERTAKING THE REV ALUATION OF
FIXED ASSETS FOR THE COMPUTATION OF THE CAPITAL ADEQUACY RATIO
Licensed Commercial Banks (LCBs) are required to note the following :–
1.  Current professional valuation reports referred to in the Directions dated 22 August 1997 on
Classification of Advances and Specific Provisions issued under Section 46 a of the Banking Act shall
mean current professional valuation reports obtained from external Independent valuers.
2.  For the Purpose of the Directions referred to in 1 above, the banks are exempted from the
requirement to obtain professional valuation reports in  respect of loans and advances of Rs.250,000 or
below, subject to the condition that a current internal assessment of the value of properties mortgaged for
such loans, signed by the Assistant General Manager or such other senior officer of the bank in charge of
credit, is available.
Note :  Current internal assessment is defined as an assessment that is not more than two years old.
3.  V aluers referred to in the circular dated 19 April 1999 issued on “Criteria for Selection of Valuers
Undertaking the Revaluation of Fixed Assets for the Computation of the Capital  Adequacy Ratio” shall
mean external Independent valuers.
Please acknowledge receipt of this circular.
Yours faithfully,
Sgd, Director of Bank Supervision


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  97
Ref. No. : BS/69/93
Bank Supervision Dept.
8th Floor, Renuka Building
No. 41 Janadhipathi Mawatha
Colombo 1.
19th April 1999
To : All Licensed Commercial Banks
Dear Sir/Madam,
CRITERIA FOR SELECTION OF V ALUERS UNDERTAKING
THE REV ALUATION OF FIXED ASSETS FOR THE
COMPUTATION OF THE CAPITAL ADEQUACY RATIO
All Licensed Commercial Banks are hereby informed that in the selection of Valuers to undertake
the revaluation of the Bank’s fixed assets for the purpose of including 50 per cent of such revaluation
reserves in the computation of the Capital Adequacy Ratios, the following eligibility criteria would
apply:–
The Valuer shall be :–
 (a) a Chartered Valuation Surveyor; or
 (b) a Fellow of the Institute of Valuers (Sri Lanka) with a Degree or Diploma in Valuation and
work experience of 15 years; or
 (c) a Licentiate of the Institute of Valuers (Sri Lanka) with work experience of over 25 years.
Please acknowledge receipt of this letter.
Yours faithfully,
Sgd. Ms. C I Fernando
Actg. Director of Bank Supervision


98 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Ref. No. : 02  / 04 / 002 / 0005  / 003
Bank Supervision Department
06 January 2004
To : All Licensed Commercial Banks and
       all Licensed Specialised Banks
Dear Sir  / Madam,
INTERPRETATION OF CAPITAL FUNDS
All Domestic Licensed Commercial Banks and Licensed Specialised Banks are hereby informed
that the proceeds of redeemable cumulative preference shares would constitute part of Capital Funds of
banks for the purpose of Banking Act, and the direction issued thereunder, relating to the basis for the
computation of the Single Borrower Limit and Investments in Equity in terms of section 46 and 17  a
respectively and, section 76 j(1) of the Banking Act.
Yours faithfully,
Sgd. Director of Bank Supervision


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  99
Ref. No. : 02  / 17 / 402 / 0073  / 002
Bank Supervision Department
29 July 2010
To : CEOs of Licensed Commercial Banks
Dear Sir  / Madam,
ENHANCEMENT OF MINIMUM CAPITAL REQUIREMENT OF BANKS
We refer to our Circular No. 02/17/402/0073/001 dated 12 April 2005 on the above subject and
write to inform you that as announced at the meeting held on 24 November 2009, the Monetary Board
of the Central Bank of Sri Lanka has decided to require all licensed commercial banks to increase their
capital as follows in the interest of a strong and sound banking system:
(a) Rs. 3 bn by 31 December 201 1
(b) Rs. 4 bn by 31 December 2013
(c) Rs. 5 bn by 31 December 2015
Capital for this purpose shall mean the Core Capital as defined in terms of item No. 6.2.2.2 in
the Guidelines that were annexed as Schedule I to the Banking Act Direction No. 9 of 2007 dated 26
December 2007 on Maintenance of Capital Adequacy Ratio.
Yours faithfully,
Sgd, T M J Y P Fernando
Director of Bank Supervision


100 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Ref. No. : 02  / 17 / 402 / 0073  / 002
Bank Supervision Department
01 January 2008
To : CEOs of Licensed Commercial Banks
Dear Sir/Madam,
ENHANCEMENT OF MINIMUM CAPITAL REQUIREMENT OF BANKS
Further to our circular dated April 12, 2005 on the above, informing Licensed Commercial Banks
(LCBs) of the decision of the Monetary Board of the Central Bank of Sri Lanka to increase the minimum
capital requirement of LCBs to Rs.2,500 million.
We write to inform you that ‘capital’ for the purpose of meeting the minimum capital requirement
shall mean the Core Capital as defined under item No. 6.2.2.2 in the Guidelines annexed as Schedule I
of the Banking Act, Direction No.9 of 2007 dated December 26, 2007 issued by the Monetary Board of
the Central Bank of Sri Lanka.
Yours faithfully,
Sgd, B.D.W.A. Silva
Actg. Director of Bank Supervision


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  101
Ref. No. : 02  / 17 / 800 / 0002  / 001
Bank Supervision Department
11 December 2006
To : CEOs of All Licensed Commercial Banks
Dear Sirs,
MINIMUM CAPITAL REQUIREMENT OF LICENSED COMMERCIAL BANKS
This is to inform you that considering the difficulties faced by some Licensed Commercial Banks
that are in the process of infusing fresh capital to meet the increased minimum capital requirement in
terms of Circular No. 02/17/402/0073/001, dated 12 April 2005, the Monetary Board of the Central Bank
of Sri Lanka has decided to grant an extension of time to such banks on a case-by-case basis to meet the
said requirement, on the following basis–
(a) till end 2008 to infuse at least 50 per cent of the shortfall
(b) till end 2009 to meet the total capital requirement of Rs. 2,500 million
2. The banks which require an extension of time may submit their requests to the Director of Bank
Supervision for consideration of the Monetary Board, along with a time-bound capital infusion plan to
meet the minimum capital requirement by the new dates stipulated above. The Monetary Board may
grant extensions subject to such terms and conditions as it may deem necessary.
Yours faithfully,
Sgd, Mrs. L K Gunatilake
Actg. Director of Bank Supervision


102 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Ref. No. : 02  / 17 / 402 / 0073  / 001
Bank Supervision Department
12 April 2005
To : The CEOs of all Licensed Commercial Banks
Dear Sirs,
ENHANCEMENT OF MINIMUM CAPITAL REQUIREMENTS OF BANKS
As intimated to you at the meeting held on 08.04.2005, as part of its responsibility to maintain
financial system stability and in the interest of a strong and sound banking system, the Monetary Board
of the Central Bank of Sri Lanka has decided to require all licensed commercial banks to increase their
capital to Rs.2,500 mn.  For this purpose capital shall mean the Tier I capital (Core Capital) as defined
by the Directions dated 22.08.1997 issued by the Monetary Board under Section 19(2) and 19(7) of
the Banking Act as amended from time to time.  Commercial banks that do not currently meet this
requirement may enhance their capital in the following manner.
• The current capital should be enhanced by at least 50% of the deficiency by the end of 2006;
and
• the balance of the  deficiency should be met by the end of 2007.
All commercial banks are required to meet the enhanced capital requirements within the stipulated
periods.
The Monetary Board has also determined, subject to the concurrence of the Hon. Minister of
Finance, that, with immediate effect the required equity capital for a new commercial bank should be
Rs.2,500 mn and that the present requirement on foreign banks to remit the sum of US $ 2 mn under
the provisions of Section 4(1) of the Banking Act should be waived.
You are kindly requested to assess the present position of your bank vis-à-vis the enhanced capital
requirements based on the audited financials for the last financial year and inform me of the position
by 30 June 2005, along with a time bound plan for capital augmentation in case the level of capital is
below the stipulated minimum capital requirement.


below the stipulated minimum capital requirement.
Further, you are requested to be mindful of the enhanced capital requirements when deciding on
declaration of dividends or repatriation of profits.
Please acknowledge receipt.
Yours faithfully,
Sgd, Director of Bank Supervision
cc – Mr . Upali De Silva
 Secretary-General
 Sri Lanka Bankers Association (Gte) Ltd.
 Level 8, Ceylinco House
 Colombo 01.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  103
Ref. No. : 02  / 04 / 002 / 0018  / 001
Bank Supervision Department
12 August 2005
To : The CEOs of all Licensed Commercial Banks
Dear Sirs,
REQUEST TO MAINTAIN CAPITAL OF BANKS IN FOREIGN CURRENCY
Further to my circular dated 29 July 2005 on the above subject, informing the Licensed Commercial
Banks of the decision of the Monetary Board to permit part of the new capital of banks that is brought in,
to be maintained in foreign currency.
2. The operating procedure for maintaining part of the capital as a reserve with the Central Bank of
Sri Lanka, for the banks that wish to exercise the option is as follows:
2.1 Deposits may be made only in the following designated currencies:
 • US Dollars
 • Pounds Sterling
 • Euro
2.2 The amount of capital that is required to be maintained with the CBSL should be deposited with the
CBSL’s current accounts, depending on the currency as follows:
Currency  US Dollars  Euro  Pounds Sterling
Bank Name  Federal Reserve Bank,  Deutsche Bundesbank,  HSBC plc,
 New York  Frankfurt   London
Account No.  SRILA  021083514  5040040828  39600144
Swift Code  FRNYU33  MARKDEFF  MIDLGB22
2.3 Upon transfer of funds to any of the CBSL’s above accounts by the commercial banks, the bank
concerned should inform the undersigned (stating the amounts and the value dates of the deposits) with
copy to the Chief Accountant of the CBSL.
3. Since the deposits are linked to the capital of the respective banks, generally, no withdrawals will
be permitted. Requests for any withdrawals should be submitted to the Director of Bank Supervision
(DBS) for authorization. The Chief Accountant of the CBSL will not accept any withdrawals that have
not been authorized by the DBS.  Further, in view of the timing differences among the financial centres
where CBSL maintains its reserve funds/investments, a minimum of one day’s notice is required by the


Chief Accountant of CBSL to effect the withdrawal. A minimum of one day’s processing time is required
by the DBS (Altogether two day’s notice required by the CBSL).
4. Reporting pr ocedure
4.1 The capital held in foreign currency in the Off-shore Banking Unit (OSBU) should be reported
in the monthly statement of assets and liabilities of the OSBU, under internal accounts, by inserting an
additional row to be named as “Capital held in Foreign Currency”.
4.2 The reserve account held with the CBSL  should be reported as ‘deposits with the CBSL’, under
assets ‘in Sri Lanka’.
5. The reserve account held at CBSL which represents part of the capital held in foreign currency
should not be included as a liquid asset, since it is part of capital.
6. Submission of capital plans
The banks that have so far not submitted their plans for meeting the increased capital requirement are
requested to do so not later than 31 August 2005.
Yours faithfully,
Sgd, Director of Bank Supervision


104 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Bank Supervision Department
29 July 2005
To : The CEOs of all Licensed Commercial Banks
Dear Sirs,
REQUEST TO MAINTAIN CAPITAL IN FOREIGN CURRENCY
With the increase in the minimum capital requirement of banks, several licensed commercial
banks incorporated abroad have requested the Central Bank (CBSL) to permit them to maintain at least
part of the capital in foreign currency. In order to accommodate this request, the Monetary Board of the
Central Bank has determined as follows:
To extend the following option to the licensed commercial banks incorporated abroad , that make
such a request to maintain capital in foreign currency–
1. A  maximum amount of 50 per cent (50%) of the new capital that is brought in to be
maintained in foreign currency.  The balance 50 per cent should be converted to Rupees and
maintained in the Domestic Banking Unit of the bank.
2. T wenty five per cent (25%) of the new capital to be brought in (50 per cent of the above) will
have to be maintained as a non-interest bearing reserve with the Central Bank.
3. T wenty five per cent (25%) of the new capital to be brought in to be retained in the Off-Shore
Banking Unit (OSBU) to be utilized only for lending to BOI companies. Any amount that
cannot be lent in this manner to be deposited in the reserve account with the CBSL.
4. The appreciation/depreciation in the capital maintained in foreign currency in Rupee terms,
to be credited/debited to a separate account named ‘Exchange Equalisation Account’ which
should not be included as part of capital for prudential purposes. The rupee amount of capital
account should continue to be shown at the exchange rate prevailing on the day that the
capital was brought in.
5. CBSL  reserves the right to request the banks to convert all or part of capital in foreign
currency to Rupees in order to off-set operational losses.
Please acknowledge receipt.
Yours faithfully,


Please acknowledge receipt.
Yours faithfully,
Sgd, Director of Bank Supervision


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  105
02/04/003/0400/002
Bank Supervision Department
16 December 2004
To : CEOs of Licensed Commer cial Banks
 CEOs of Licensed Specialised Banks
 Panel of Approved Auditors
 Secr etary-General / SLBA
Dear Sirs,
SHIPPING GUARANTEES ISSUED BY BANKS
Further to the discussion of the above subject at the Meetings of the Chief Executive Officers
of Licensed Commercial Banks and Licensed Specialised Banks, the amendment to the Directions
on Single Borrower Limit and Risk Weighted Capital Adequacy Ratio to enable the banks to include
shipping guarantees issued at the invoice value of goods, are included herewith.
Please acknowledge receipt.
Yours faithfully,
Sgd, Director of Bank Supervision


106 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 46(1) of
the Banking Act, No.30 of 1988, as amended.
Nivard Ajith Leslie Cabraal
Governor
Colombo
01st November 2007
DIRECTIONS
BANKING ACT DIRECTIONS NO. 7 OF 2007
MAXIMUM AMOUNT OF ACCOMMODATION
In exercise of the powers conferred by Section 46(1) of the Banking Act, No.30 of 1988, last
amended by the Banking Act, No.46 of 2006, the Monetary Board hereby issues Directions as follows:
1. These Directions may be cited as the Banking Act, Direction No.7 of 2007. The
Sections referred to in these Directions will be those of the Banking Act, No.30 of
1988, last amended by the Banking Act, No.46 of 2006.
2. In terms of Section 46(1), the Monetary Board has been empowered to give
Directions to licensed commercial banks or to any category of licensed commercial
banks regarding the manner in which any aspect of the business of such banks is
to be conducted. Accordingly, the Monetary Board hereby gives Directions to
licensed commercial banks pertaining to the maximum amount of accommodation
as may be made by such banks–
 (i) to any single company, public corporation, firm, association of persons or an
individual; or
 (ii) in the aggregate to–
 (a) an individual, his close relations or to a company or firm in which he has
a substantial interest;
 (b) a company and one or more of the following:–
 (aa) its subsidiaries;
 (bb) its holding company;
 (cc) its associate company;
 (dd) a subsidiary of its holding company; or
 (ee) a company in which such company or its subsidiary , or its holding
company, or a subsidiary of its holding company, has a substantial
interest.
3. The maximum amount of accommodation that may be granted by a licens ed
commercial bank shall not exceed the following percentage of the capital base of
the licensed commercial bank subject to the Directions 7, 8 and 9.


the licensed commercial bank subject to the Directions 7, 8 and 9.
 (i) 30 per cent in respect of customers referred to in Section 2(i) above. Citation.
Empowerment
under 46(1).
Maximum limits of
accommodation
to customers
referred to in
paragraphs 2(i)
and 2(ii) above.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  107
 (ii) 33 per cent in respect of customers referred to in Section 2(ii) above.
4. (1) Notwithstanding the provisions of Direction 3(ii) above, a licensed commercial
bank may grant accommodation in excess of 33 per cent of the capital base of the
licensed commercial bank to customers referred to in paragraph 2(ii) above, on
the basis of a sum of scores assigned for the following as determined in Direction
4(2) below.
 ( i) T he Credit Rating and Capital Adequacy Ratio of the bank granting
accommodation and,
 (ii) The Credit Rating of the holding company of the customers referred to in
paragraph 2(ii) above. In the event the relationships within the companies in
respect of whom accommodation shall be aggregated in terms of paragraph
2(ii) above do not lead to a holding company, the credit ratings of each of
the companies that comprise such aggregate shall be considered and the
lowest credit rating assigned to any company within such aggregate shall
be deemed to be the credit rating that shall be applicable for the purpose of
giving effect to this Direction.
(2) The scores referred to in Direction 4(1) above shall be assigned as follows.Enhanced
limits of
accommodation
in aggregate
to customers
referred to
in paragraph
2(ii) above.
Aggregate
limit of large
accommodation.
Monetary Board
to approve
accommodation Bank’s
Credit RatingCustomers’
Credit RatingBank’s Capital
Adequacy RatioScore Assigned
for Each Column
AAA to AA- or
equivalentAAA to AA- or
equivalent> 12% 1
A+ to A- or
equivalentA+ to A- or
equivalent11% - 12% 2
BBB+ or
equivalent and
belowBBB+ or
equivalent and
below or unrated10% - <11% 3
(3) The maximum amount of accommodation that may be granted by a licensed
commercial bank under Direction 4(1) above to customers referred to in
paragraph 2(ii) above shall not exceed the following percentages of the capital


paragraph 2(ii) above shall not exceed the following percentages of the capital
base of the licensed commercial bank, based upon the sum of the scores assigned
for the three columns as per the Table set out in Direction 4(2) above.
 (i) 40 per cent if the sum of scores is between 3 and 5.
 (ii) 36 per cent if the sum of scores is between 6 and 8.
5. In the case of amount of accommodations granted as at any given date to any
category of customers referred to in paragraphs 2(i) and 2(ii) above excluding the
Government of Sri Lanka in excess of 15 per cent of the capital base of the licensed
commercial bank, the sum total of the outstanding amount of accommodation granted
to such customers shall not exceed 55 per cent of the total outstanding amount of
accommodation granted by the licensed commercial bank to all customers excluding
the Government of Sri Lanka as at the end of the immediately preceding month.
6. (1) Notwithstanding the provisions of Directions 3 and 4 above, a licensed commercial
bank may grant accommodation in excess of the maximum limits specified under


108 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Directions 3 and 4 above to the categories of customers referred to in paragraphs
2(i) and 2(ii) above, provided that the prior approval of the Monetary Board has
been sought and obtained. The Monetary Board may grant such approval on a
case-by-case basis, subject to terms and conditions it may deem fit, taking into
consideration, inter-alia, instances of national priorities and/or national interest
and the ability of the licensed commercial bank to withstand the potential risk
arising from the exposure to such enhanced accommodation, provided that
the assessment of risks arising out of such accommodation to the licensed
commercial bank has been analysed in detail and such analysis is furnished by
the licensed commercial bank to the Monetary Board when seeking approval
of the Monetary Board.
 ( 2)  Su bject to Direction 6(1) above, a licensed commercial bank may grant
accommodation to the categories of customers referred to in paragraphs 2(i)
and 2(ii) above up to 50 per cent of the capital base of the licensed commercial
bank for the purpose of direct funding of infrastructure projects referred to in
Annex 1 hereto for the commencement or expansion of the projects, provided
that,
 (i) the customer(s) has (have) been awarded a contract to directly engage in
an infrastructure development project in Sri Lanka, and,
 (ii) such project is funded to the extent of at least 50 per cent by sources
outside Sri Lanka or by a consortium of licensed banks excluding the
bank providing the accommodation.
7. When computing the maximum amount of accommodation under Directions 3 and
4 above that may be granted to any category of customers referred to in paragraphs
2(i) and 2(ii) above, the following accommodations shall be excluded.
 ( i) Ac commodation granted against the security of cash, gold, Government
Securities, Central Bank Securities, Treasury Guarantees, Central


Securities, Central Bank Securities, Treasury Guarantees, Central
Bank Guarantees and Guarantees issued by the World Bank, the Asian
Development Bank, International Development Association or any other
international institution acceptable to the Director of Bank Supervision.
 ( ii) Ac commodation granted against the security of a guarantee or similar
instrument Director of Bank Supervision issued by a bank incorporated
within or outside Sri Lanka other than the bank granting accommodation,
subject to the following:–
 (a) The bank that provides the guarantee having a credit rating of AAA to
A- or equivalent.
 (b) T he amount of accommodation that shall be excluded from the
computation of accommodation being 80 per cent in the event the
credit rating of the bank that provides the guarantee is in the rank of
AAA to AA- or equivalent and 50 per cent in the event the bank’s
credit rating is in the rank of A+ to A- or equivalent.
 (c) The aggregate amount of all accommodation that shall be excluded in
respect of all such instances not exceeding 100 per cent of the capital
base of the licensed commercial bank.
 (d) The licensed commercial bank being satisfied that the credit rating of
the bank providing the guarantee has been obtained within 15 months
of providing accommodation and the accommodation be revised
immediately if there is any change in such credit rating.Exclusions of
accommodations
from maximum
limits under
Directions
3 and 4.in excess of the
specified limits.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  109
8. The maximum limits of accommodation specified in these Directions shall not
apply to the following persons / institutions.
 (i) The Government of Sri Lanka.
 (ii) The Ceylon Petroleum Corporation and the Ceylon Electricity Board for a
maximum period of two years from the date of these Directions.
 (iii) Other licensed banks in respect of accommodation granted with a contractual
maturity of less than two years.
9. The following definitions shall be applicable for the purposes of these
Directions.
 (i) Accommodations: As defined and provided for in Section 86 of the Banking
Act, accommodations shall mean credit exposure and investment exposure
as specified below.
 (a) Credit exposure shall include all on-balance sheet accommodations such
as any loan, overdraft or advance inclusive of finance lease, hire purchase
and reverse repurchase agreements against debt securities and all
off-balance sheet accommodations such as any commitment to grant
any loan, overdraft or advance or such other facility including a
commitment to accept a contingent liability.
 (b) Investments exposure shall include all financial investments excluding
investments in equity (only ordinary shares).
 ( ii) Amount of accommodations: The amount of accommodations shall be
the total of on-balance sheet accommodations and off-balance sheet
accommodations.
 ( a) Amount of on-balance sheet accommodations: The amount of
on-balance sheet accommodations shall mean the total of the
accommodation limits prevailing at any given time or the total
outstanding amount of all accommodations, whichever is
higher. In the case of fully drawn term loans, the outstanding
amount of accommodations shall be reckoned as the amount of
accommodations.
 ( b) Amount of of f-balance sheet accommodations: The amount of
off-balance sheet accommodations shall mean the credit equivalent


off-balance sheet accommodations shall mean the credit equivalent
amount of total of the accommodation limits prevailing at any given
time or the outstanding amount of accommodations, whichever is
higher.
 (iii) Outstanding amount of accommodations: The outstanding amount of
accommodations shall be the total of outstanding on-balance sheet
accommodations and outstanding off-balance sheet accommodations.
 ( a) Outstanding on-balance sheet accommodations: The outstanding
amount of on-balance sheet accommodations shall be the capital
outstanding.
 ( b) Outstanding of f-balance sheet accommodations: The outstanding
amount of off-balance sheet accommodations shall be the
credit equivalent amount of the outstanding off-balance sheet
accommodations. Persons/
Institutions
exempted from
maximum limits
under Directions
3 and 4.
Definitions.


110 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
 (iv) Credit equivalent amount of off-balance sheet accommodations: The credit
equivalent amount computed using the credit conversion factors applicable
to off-balance sheet accommodations in the computation of the Capital
Adequacy Ratio shall be applicable.
 ( v) Capital Base and Capital Adequacy Ratio: Capital Base and Capital
Adequacy Ratio appearing in the computation of the Capital Adequacy
Ratio shall be applicable, provided that those shall be as at end of the
preceding financial year or immediately preceding quarter or other latest
quarter preceding the applicable quarter, whichever is available, subject to
certification by the licensed commercial bank’s external auditor.
 (vi) Credit Rating: The credit rating shall be the credit rating obtained from a
credit rating agency listed in the Annex 2 hereto and shall be one that has
been obtained within the past 15 months of providing accommodation.
10. (1) In instances where the accommodation granted to a customer has to be revised
due to a reduction in the applicable accommodation limit, the accommodation
granted shall be reduced at the next facility review date or within six months,
whichever occurs earlier.
 (2) In the event a merger or acquisition between any institutional customers results
in existing accommodations exceeding the applicable maximum limits, the
licensed commercial bank shall reduce such accommodations to be within the
applicable maximum limits before expiry of six months from the date of such
merger or acquisition.
11. In the event the accommodation that has been granted to any category of
customers referred to in paragraphs 2(i) and 2(ii) above as at the date of these
Directions exceeds the limits, i.e., maximum limits or aggregate limit, specified in
these Directions, the licensed commercial bank shall reduce such accommodation


these Directions, the licensed commercial bank shall reduce such accommodation
to be within the respective limits before the expiry of three months from the date
of these Directions.
12. Where the Monetary Board has determined that a licensed commercial bank has
contravened these Directions and the determination of such contravention has
been conveyed to the licensed commercial bank, such licensed commercial bank
shall not pay dividends or repatriate profits until the contravention is rectified and
such rectification is confirmed by the Director of Bank Supervision.
13. The Banking Act, Direction No.3 of 2007 dated 20 February 2007 of Maximum
Amount of Accommodation is hereby revoked.Review of
Accommodation.
Transitional
Arrangements.
Steps to secure
compliance with
Directions.
Revocation
of Previous
Directions.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  111
Annex 1
DIRECTIONS
BANKING ACT DIRECTIONS NO. 7 OF 2007
MAXIMUM AMOUNT OF ACCOMMODATION
Specification 	of	Infrastructure 	Projects
Any project that involves in developing or operating and maintaining or developing, operating,
upgrading and maintaining any infrastructure facility listed below shall qualify for the accommodation
under the Direction 6(2) of the above Directions, provided that the accommodation referred to in the
Direction shall be for the purpose of meeting direct cost of the project which shall not include repayment
of any accommodation already granted by other banks or financial institutions or meeting the cost of
purchase of a project already in operation.
 (i) a road, including toll road, a bridge or a rail system;
 (ii) a highway project including other activities being an integral part of the highway project;
 (iii) a port, airport, inland waterway or inland port;
 (iv) a water supply project, irrigation project, water treatment system, sanitation and sewerage system
or solid waste management system;
 (v) telecommunication services whether basic or cellular, including radio paging, network of trunking,
network and internet services;
 (vi) an industrial park or special economic zone;
 (vii) generation or generation and distribution of power;
 (viii)  transmission or distribution of power by laying a network of new transmission or distribution
lines;
 (ix) construction relating to projects involving agro-processing and supply of inputs to agriculture;
 (x) construction of educational institutions and hospitals;
 (xi) any other infrastructure project as may be specified by the Monetary Board from time to time.
Annex 2
DIRECTIONS
BANKING ACT DIRECTIONS NO. 7 OF 2007
MAXIMUM AMOUNT OF ACCOMMODATION
List of Credit Rating Agencies Acceptable to the Monetary Board
1. Fitch Ratings Lanka Ltd.
2. Lanka Ratings Agency Ltd.
3. Standard & Poors


1. Fitch Ratings Lanka Ltd.
2. Lanka Ratings Agency Ltd.
3. Standard & Poors
4. Moody’ s Investors Service
5. Credit Rating Information Services of India (CRISIL)
6. Investment Information & Credit Rating Agency (ICRA)
7. Fitch Ratings India Ltd.
8. Pakistan International Credit Rating Agency
9. Rating Agency Malaysia
10. Japan Credit Rating Agency Ltd.
11. Any other credit rating agency as may be accepted by the Monetary Board from time to time.


112 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Directions issued by the Monetary Board of the Central Bank of Sri Lanka in terms of
Section 46(1) of the Banking Act, No.30 of 1988, as amended.
Nivard Ajith Leslie Cabraal
Chairman of the Monetary Board /
Governor of the Central Bank of Sri Lanka
Colombo
27 September 2010
BANKING ACT DIRECTION NO. 3 OF 2010
AMENDMENTS TO DIRECTIONS ON CLASSIFICATION OF LOANS AND ADV ANCES,
INCOME RECOGNITION AND PROVISIONING FOR
LICENSED COMMERCIAL BANKS IN SRI LANKA
In the exercise of the powers conferred by Sections 46(1) and 46 A of the Banking Act, No. 30
of 1988, last amended by the Banking Act, No. 46 of 2006, the Monetary Board hereby issues the
following Directions replacing Directions No. 6(1)(I) of the Banking Act, Direction No.3 of 2008
dated 8 May 2008 issued by the Monetary Board.
6(1)(I)  General Pr ovisions
 Banks shall maintain general provisions in the following manner:
 (i) Commencing 01 January 2012, 0.5% of total outstanding of on-balance sheet PLAs as
referred to in Direction 3(4) above and total outstanding of special mention on-balance
sheet credit facilities as referred to in Direction 4(6)(I) above net of interest in suspense
that has been debited to the respective accounts.
 (ii) For this purpose banks shall reduce the existing general provision requirement of
1% to 0.5% at a rate of 0.1% per quarter during the five quarters commencing 01 October
2010.
 (iii) Banks are exempted from maintaining a general provision in respect of credit facilities
secured by cash deposits, gold or Government Securities with the same bank. Banks shall,
for this purpose, meet the following conditions to be eligible for the exemption:
 (a) Bank shall have the right to take legal possession of such securities in the event of
default, insolvency or bankruptcy of borrower.
 (b) All documentation used in such collateralised transactions shall be binding on all


(b) All documentation used in such collateralised transactions shall be binding on all
parties and be legally enforceable in all relevant jurisdictions.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  113
Directions issued by the Monetary Board of the Central Bank of Sri Lanka in terms of Section 46(1)
of the Banking Act, No.30 of 1988, as amended.
Sgd. Nivard Ajith Leslie Cabraal
Chairman of the Monetary Board /
Governor of the Central Bank of Sri Lanka
Colombo
08 May 2008.
DIRECTIONS
BANKING ACT DIRECTION NO.3 OF 2008
CLASSIFICATION OF LOANS AND ADV ANCES, INCOME RECOGNITION AND
PROVISIONING
In the exercise of the powers conferred by Sections 46(1) and 46 a of the Banking Act, No.30 of 1988, last
amended by the Banking Act, No.46 of 2006, the Monetary Board hereby issues Directions as follows:
1(1) These Directions may be cited as the Banking Act, Direction No.3 of 2008.
The Sections referred to in these Directions will be those of the Banking
Act, No.30 of 1988, last amended by the Banking Act, No.46 of 2006.
2(1) In terms of Section 46(1) of the Banking Act, in order to ensure the
soundness of the banking system, the Monetary Board is empowered to
issue Directions to licensed commercial banks regarding the manner in
which any aspect of the business of such banks is to be conducted.
2(2) In terms  of Section 46 a of the Banking Act, the Monetary Board is
empowered to require both general and specific provisions relating to bad
and doubtful debts, to be made by licensed commercial banks.
3(1) The following definitions shall be applicable for the purposes of these
Directions.
3(2) T otal credit facilities shall mean on-balance sheet credit facilities and
off-balance sheet credit facilities as specified below:
3(2)(I)  On-balance sheet credit facilities:
   On-balance sheet credit facilities shall mean Overdrafts, Term
loans, Block loans, Packing credits, Pledge loans, Revolving loans,
Bills financed, Discounting facilities, Hire purchase loans, Leasing
facilities, Trust receipts, Pawning advances, Credit card facilities,


facilities, Trust receipts, Pawning advances, Credit card facilities,
Reverse repurchase facilities, Lending for debt instruments under
stand by credit lines and other instruments of a similar nature.
3(2)(II)  Of f-balance sheet credit facilities:
   Off-balance sheet credit facilities shall mean a commitment to accept
contingent liabilities, and include guarantees, bonds, warranties,
letters of credit and acceptances. Citation.
Empowerment
under Sections
46(1) and 46 a of
the Banking Act.
Definitions.


114 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
3(3) Borrower shall mean individuals, single companies, the Government of Sri
Lanka, public corporations, statutory bodies, firms, associations of persons
and any other institutions.
3(4) Performing loans and advances (PLA) shall mean all credit facilities other
than non-performing loans and advances (NPL) classified in terms of
Direction 3(5).
3(5) NPL  shall mean bad and doubtful debts as referred to in Section 46 a of
the Banking Act. For this purpose, all credit facilities, excluding exempted
credit facilities referred to in Direction 4(2), are classified as non-performing
on the following basis:
3(5)(I)  Based on period
 (i) Overdrafts:
 ( a) I f the outstanding balance has remained in excess of the
sanctioned limit continuously for a period of 90 days or
more; or
 ( b) In cases where a borrower has several current accounts
with overdraft limits with the bank, the daily outstanding
aggregate balance on all such accounts shall be considered
as the outstanding balance for the purposes of Direction
3(5)(I)(i)(a) above.
 ( ii) Credit facili ties repayable in monthly installments: when
3 consecutive installments, principal and/or interest, have not
been paid.
 (iii) Credit facilities repayable in quarterly/half yearly installments:
when an installment is not paid within 90 days from the due
date.
 ( iv) Credit facilities repayable in one installment at the end of a
specified period or on a due date (bullet payments): when the
payment is not made within 90 days from the end of the agreed
period or the due date.
 ( v) Credit cards: when the minimum payment is in arrears for
90 days from the due date.
3(5)(II)  Based on potential risk
   In addition to the classification requirements for NPL  as set out
in Direction 3(5)(I), banks shall classify PLA as NPL where full
recoverability in accordance with the agreed terms is in doubt due to


recoverability in accordance with the agreed terms is in doubt due to
circumstances affecting the repayment capacity.
3(6) New c redit facility shall mean any credit facility granted to borrowers
with the involvement of cash/ fund movements. A facility granted for the
capitalisation of accrued and unpaid interest or to convert an overdraft to a
term loan shall not be considered as a new credit facility.
4(1) Classification of performing and non-performing credit facilities:
  Banks shall classify all credit facilities granted to a borrower, for monitoring
and risk mitigation purposes, into the two categories of (a) performing loans Classification of
credit facilities.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  115
and advances and (b) non-performing loans and advances, as specified in
Directions 3(4) and 3(5) above.
4(2) Exempted credit facilities:
  When classifying credit facilities as NPL under Direction 4(1) above, credit
facilities secured on cash deposits shall be exempted. Banks shall, for this
purpose, meet the following conditions to be eligible for the exception:
 (i) Banks  shall have the right to take legal possession of such cash
deposit, in the event of default, or insolvency or bankruptcy of
borrower.
 ( ii)  All documentation used in cash collateralised transactions shall
be binding on all parties and legally enforceable in all relevant
jurisdictions. A duly signed lien in the bank’s favour and a letter of
set-off shall be available.
 (iii) Such cash deposit shall be set-of f against the credit facilities within
3 months from the date on which the credit facilities would have
otherwise been classified as non-performing.
 ( iv)  During the period referred to in Direction 4(2)(iii) above, if the
outstanding exceeds the deposit, such excess shall be classified as
non-performing.
4(3) The availability of security or net worth of the borrower/guarantor shall not
be considered in the application of Direction 3(5) except as permitted by
Direction 4(2) above.
4(4) Classification of rescheduled credit facilities:
  When rescheduling occurs before a credit facility is classified as NPL,
the rescheduled credit facility shall be classified as non-performing when,
in aggregate, the period of time the credit facility was in arrears before
rescheduling and after rescheduling exceeds the time period specified in
the Direction 3(5) in respective credit facilities. In the case of capitalisation
of accrued and unpaid interest, banks shall classify a credit facility created
by way of capitalisation of accrued and unpaid interest as NPL in terms of