Directions, Determinations, and Circulars issued to Licensed

Directions, Determinations, and Circulars issued to
Licensed Commercial Banks
(Inclusive of Amendments made up to 30 November 2013)
Bank Supervision Department Central Bank of Sri Lanka

DISCLAIMER This updated edition contains of Directions, Determinations and Circulars issued by Central Bank of Sri Lanka to Licensed Commercial Banks up to 30th November 2013. Please note that this edition is issued only for the purpose of convenience, and although every effort has been made to ensure the accuracy of the text, the Central Bank of Sri Lanka does not hold itself responsible for any errors, omissions or inadvertent alterations, in any manner.
Printed at Central Bank Printing Press, 58, Sri Jayawardenepura Mw., Rajagiriya, Sri Lanka. Published by Bank Supervision Department
Central Bank of Sri Lanka, 30, Janadhipathi Mawatha, Colombo 01, Sri Lanka.

Directions, Determinations, and Circulars issued to Licensed Commercial Banks

iii

Governor’s Statement
Sri Lankan economy has now entered into an accelerated growth path of achieving Rs. 100 billion economy with USD 4,000 per capita income by 2016. In this scenario, Sri Lankan banking sector which holds more than 55% of the financial sector assets of the country is destined to play a pivotal role in supporting the growth momentum of the economy. Improved resilience to face external and internal shocks, innovative and futuristic banking products, expanded access to finance and consumer protection are some of the key drivers to promote a strong and dynamic banking sector through business excellence.
Despite the global financial crisis, Sri Lanka’s banking sector has remained resilient with the existing prudential regulatory initiatives and reforms that have ensured the financial system stability. A strong regulatory framework that promotes risk management of banks is a key component of the safety net to ensure systemic stability. Thus, the earlier regulatory initiatives on improving risk management, corporate governance and capital requirements have continued with reforms in 2013 too. Compliance with these new regulatory reforms has enabled the Banks to improve their governance structure, risk management framework and capital requirements. It is expected that the consolidation between banks and the financial institutions would further strengthen the resilience in the financial sector.
At the same time, the Directors of Banks are expected to play a major role in setting strategic directions to ensure a sound and resilient banking sector in the country by adopting prudent policies in line with new financial reforms. In that context, the Central Bank expects all Directors, Senior Management and Other Staff of the banks to be fully conversant with the Directions, Determinations, and Circulars issued time to time by the Central Bank, thereby ensure compliance. In order to facilitate such task, this volume containing “Directions, Determinations, and Circulars issued to Licensed Commercial Banks”, incorporating the changes and amendments up to 30 November 2013, is being issued.
It is hoped that this new volume will create greater awareness of and compliance therewith, so that more effective inputs will contribute to ensure improved risk management, corporate governance, efficiency and resilience in the Banking Sector.
Ajith Nivard Cabraal Governor Central Bank of Sri Lanka
02 December 2013

iv

Directions, Determinations, and Circulars issued to Licensed Commercial Banks

Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Contents

v
Page No.

1. Licensing of Banks

Determinations

1.1 Determination No.1 of 2011 – Annual Licence Fee

1

Circulars

1.2 Establishment of Bank Branches

2

1.3 Classification of Banking Outlets

3

2. Capital Adequacy

2.1 The Adoption of Basel II Capital Adequacy Framework Beginning 2008

4

Directions

2.2 Direction No. 09 of 2007 – Maintenance of Capital Adequacy Ratio

6

2.3 Direction No. 05 of 2013 – Supervisory Review Process

(Pillar 2 of Basel II) for Licensed Commercial Banks and Licensed Specialised Banks 74

2.4 Direction No. 09 of 2011 – Amendments to Directions on Maintenance of

Capital Adequacy Ratio

88

2.5 Direction No. 01 of 2009 – Amendment to Directions on Ownership of

Issued Capital Carrying Voting Rights

89

2.6 Direction No. 01 of 2007 – Ownership of Issued Capital Carrying Voting Rights

90

Determinations

2.7 Foreign Participation in the Share Capital of a Licensed Commercial Bank

Incorporated or Established in Sri Lanka

93

Circulars

2.8 ICRA Lanka Limited – Recognition as an External Credit Assessment Institution

94

2.9 Criteria for Selection of Valuers Undertaking the Revaluation of Fixed Assets

for the Computation of the Capital Adequacy Ratio

96

2.10 Interpretation of Capital Funds

98

2.11 Enhancement of Minimum Capital Requirement of Banks

99

2.12 Request to Maintain Capital of Banks in Foreign Currency

103

2.13 Shipping Guarantees Issued by Banks

105

3. Credit Risk Management

Directions

3.1 Direction No. 07 of 2007 – Maximum Amount of Accommodation

106

3.2 Direction No. 03 of 2010 – Amendments to Directions on Classification of Loans and

Advances, Income Recognition and Provisioning

112

3.3 Direction No. 03 of 2008 – Classification of Loans and Advances, Income Recognition and

Provisioning

113

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Directions, Determinations, and Circulars issued to Licensed Commercial Banks

3.4 Direction No. 01 of 2013 – Exposure to Stock Market by

Licensed Commercial Banks and Licensed Specialised Banks

126

Determinations

3.5 Shares in Companies Held by Licensed Commercial Banks

129

3.6 Accommodation Granted to a Director / a Close Relation of such Director /

any Concern in which Director has a Substantial Interest

130

3.7 Determination No. 3 of 2009 – Lease-Backed Trust Certificates / Lease Receivables

as Approved Security for Accommodation to any Director

133

Circulars

3.8 Accounting for Properties Acquired by Foreclosure of Collateral / Part Settlement of

Debt

134

3.9 Establishment of a Revolving Fund to grant Loans to Acquire Property to

the State Sector Employees

135

3.10 Financial Accommodation to Finance Companies

136

3.11 Prepayment of Import Bills

137

3.12 Recovery of Accommodation to Exporters

140

3.13 Concessions Granted to Tourism Industry

148

3.14 Relief Package for the Tea Sector

149

3.15 Granting Credit Facilities to Private Sector

150

Orders

3.16 Monetary Law Act Order No. 01 of 2012 – Ceiling on Credit Growth of Licensed Banks 151

Guidelines

3.17 Guidelines on the Grant of Facilities for the Issue of Commercial Paper and

other Forms of Promissory Notes

152

4. Liquidity Risk Management

Circulars

4.1 Definitions of Liquid Assets

156

4.2 Monthly Statement of Liquid Assets

163

4.3 Monthly Statement of Liquid Assets for the Domestic Banking Unit and the

Off-Shore Banking Unit

166

4.4 Monthly Statement of Liquid Assets for the Off-Shore Banking Unit

167

Determinations

4.5 Application of Prudential Regulations on Off-Shore Banking Units

169

4.6 Liquid Assets

93

5. Market Risk Management

Directions

5.1 Prudential Norms for Classification, Valuation and Operation of

the Bank’s Investment Portfolio

170

5.2 Direction No. 03 of 2009 – Risk Management Relating to Foreign Exchange Business 173

Directions, Determinations, and Circulars issued to Licensed Commercial Banks

vii

5.3 Direction No. 01 of 2012 – Foreign Exchange Trading Activities of

Licensed Commercial Banks in Sri Lanka

182

Circulars

5.4 Adoption of the ACI Model Code by Sri Lanka

188

5.5 Declaration to be Submitted by Persons Engaged in Foreign Exchange Business

189

5.6 Forward Sales and Purchases of Foreign Exchange

192

Explatory Notes

5.7 Explanatory Note 2/2012

Direction No. 01 of 2012 Foreign Exchange Trading Activities / FAQ

199

6. Operational Risk Management

Directions

6.1 Direction No. 02 of 2012 – Outsourcing of Business Operations of a

Licensed Commercial Bank and Licensed Specialised Bank

201

Circulars

6.2 Use of Banking System by Institutions and Persons not Authorised to Accept Deposits 207

6.3 Regulations made under the Public Security Ordinance Proscription of

Tamil Rehabilitation Organization

208

6.4 Acceptance of Certificates of Deposit

211

6.5 Scheme of Certificates of Deposit with Maturity Periods of not less than Four Years

214

6.6 Conduct of Non-Government Organizations (NGO) Accounts by Licensed Banks

215

6.7 Customer Due Diligence – “Know Your Customer” Procedures

219

6.8 Dishonoured Cheques

223

6.9 Internal Audit Function

224

6.10 Prevention of Frauds Using Electronic Cards

225

6.11 Reporting of Post-Tsunami Remittances Received through

NGOs and Non-NGOs to the Central Bank of Sri Lanka

227

7. Corporate Governance for Banks

Directions

7.1 Direction No.11 of 2007 – Corporate Governance

229

7.2 Direction No. 05 of 2008 – Amendments to Directions on Corporate Governance

245

7.3 Direction No. 07 of 2008 – Amendments to Directions on Corporate Governance

246

7.4 Direction No. 03 of 2013 – Amendments to Direction on

Corporate Governance Issued to Licensed Commercial Banks in Sri Lanka

247

7.5 Direction No. 07 of 2011 – Integrated Risk Management Framework

248

Determinations

7.6 Determination No. 03 of 2010 – Assessment of Fitness and Propriety of

Officers Performing Executive Functions

277

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Directions, Determinations, and Circulars issued to Licensed Commercial Banks

Circulars

7.7 Special Payments / Benefits to Directors at their Retirement

284

7.8 Disclosures in Annual Reports

285

7.9 Appointment of Directors of Banks

286

7.10 Disclosures in Terms of the Direction on Corporate Governance

300

7.11 Requirements Under the Corporate Governance Direction

301

7.12 Assessment of Fitness and Propriety of Chief Executive Officers

302

Explanatory Notes

7.13 Explanatory Note 1/2012 – Authority of the Monetary Board to Issue Directions to

Licensed Banks Reaffirmed by the Court of Appeal

311

8. Off-Shore Banking Business

Circulars

8.1 Permitting Licensed Commercial Banks to Trade in the International Sovereign Bonds

Issued in 2007 by the Government of Sri Lanka

312

Orders

8.2 Amendment to Banking Act Order No. 02 of 2011 – Banking (Off-shore Banking

Business Scheme) Order

313

8.3 Banking Act Order No. 1 of 2011 – Banking (Off-shore Banking Business Scheme)

Order

315

8.4 Banking Act Order No. 1 of 2008 – Banking (Off-Shore Banking Business Scheme) Order 317

8.5 Banking Act Order No. 1 of 2009 – Banking (Off-Shore Banking Business Scheme) Order 319

8.6 Banking (Off-Shore Banking Scheme) Order 2000

321

8.7 Off-Shore Banking Business

324

9. Abandoned Property

Directions

9.1 Direction No. 05 of 2009 – Identifying, Reporting, Transferring and Maintaining

Abandoned Property

326

Guidelines

9.2 Implementation of the Provisions of Part IX (Sections 72 to 76) of the Banking Act on

Abandoned Property

334

10. Disclosures

Circulars

10.1 Implementation of Part V of the Banking Act

340

10.2 List of Qualified Auditors

341

10.3 Preparation, Presentation and Publication of Annual Audited Accounts of Banks

343

10.4 Display of Interest Rates, Exchange Rates, Service Charges, Fees & Commissions

380

10.5 Inadequate / Incorrect Disclosures / Press Statements by Banks

385

10.6 Publication of Audited Financial Statements of Banks in the Press

386

10.7 Public Disclosure by Publication of Quarterly Financial Statements of Banks in Press 387

10.8 Public Disclosure by Publication of Bank Accounts in the Press

401

Directions, Determinations, and Circulars issued to Licensed Commercial Banks

ix

10.9 Publication of Capital Adequacy Statement in the Annual Report

402

10.10 Submission of Audited Financial Statements by Banks

403

10.11 Publication of Financial Statements and other Disclosures on the Websites

404

Guidelines

10.12 Guidelines for External Auditors Relating to their Statutory Duties

405

11. Reporting of Data to Central Bank

Circulars

11.1 Submission of Statutory Returns

415

11.2 Implementation of the New Web-based Off-Site Surveillance System

417

11.3 Submission of the Monthly & Quarterly Compliance Reports

423

12. General Banking Practices

Directions

12.1 Licensed Commercial Banks (Pawning) Conditions 1998

424

12.2 Secrecy of Banking Transactions

434

12.3 Direction No. 08 of 2011 – Customer Charter of Licensed Banks

435

Circulars

12.4 Cap on Penal Interest Rates Charged by Licensed Banks on Loans and Advances

440

12.5 Interest Rates on Credit Cards and other Loans and Advances

441

12.6 Interest Rates on Credit Cards and Housing Loans

442

12.7 Extending / Restricting of Banking Hours by the Banks

443

12.8 Incentive Schemes for Mobilising Demand Deposit Accounts

444

12.9 Introduction of Products Based on Islamic Principles

445

12.10 Withdrawals on Savings Accounts

446

12.11 Withdrawals on Savings Accounts and 7 Day Call Deposit Accounts

447

12.12 Threshold Age of Senior Citizens for Transactions with Licensed Banks

448

13. Sri Lanka Deposit Insurance Scheme

Directions

13.1 Direction No. 05 of 2010 – Insurance of Deposit Liabilities

449

Gazette Notifications 13.2 Amendment to the Sri Lanka Deposit Insurance Scheme Regulation, No. 02 of 2011 450

13.3 Amendment to the Sri Lanka Deposit Insurance Scheme Regulation, No. 01 of 2011 451

13.4 Sri Lanka Deposit Insurance Scheme Regulation, No. 01 of 2010

452

Circulars

13.5 Sri Lanka Deposit Insurance Scheme – Operating Instruction, No. 01 of 2011

457

13.6 Sri Lanka Deposit Insurance Scheme – Operating Instruction, No. 02 of 2010

458

13.7 Sri Lanka Deposit Insurance Scheme – Premium to be Levied on Insured Deposits,

No. 01 of 2010

460

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Directions, Determinations, and Circulars issued to Licensed Commercial Banks

14. Other Determinations, Circulars and Guidelines

Determinations

14.1 Limits on Purchase of Immovable Property

462

14.2 Definition of Intangible Assets

93

Circulars

14.3 Exempting Foreign Borrowings of Licensed Commercial Banks from Regulatory

Limits

463

14.4 Decision of the Cabinet of Ministers on Reservation of Government Sector

Import Cargo for the Ceylon Shipping Corporation Ltd.

464

14.5 Stimulus Package Approved by the Government for the Finance and Leasing Industry 465

14.6 Appointment of Compliance Officers

466

14.7 Enhancing Lending to Agriculture Sector

468

14.8 Mandatory Lending to Agriculture Sector

469

14.9 Payment of Taxes by the Banking and Financial Sector

475

14.10 Misleading and Unethical Advertisements

476

14.11 Registration of Secured Interest over Movable Properties with the

Secured Transaction Registry

478

Guidelines

14.12 Guidelines for Employment of Expatriate Staff in Banks

479

14.13 Guidelines on Credit Rating of Banking Institutions

482

14.14 Amendments to Guidelines on the Operation of the Investment Fund Account

483

14.15 Guidelines on the Operations of the Investment Fund Account

485