Directions, Circulars, Guidelines and Operating

Directions, Circulars, Guidelinesand

Operating Instructionsissued to

Licensed Commercial Banks

(Inclusive of amendments made up to 31 December 2008)

Central Bank of Sri Lanka

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Printed at Central Bank Printing Press

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Governor’s StatementSecuring financial system stability is a key policy objective of the Central Bank, and is crucial in achieving macroeconomic stability and sustainable economic growth. Maintaining a sound and stable financial system is critically dependent on an efficient and resilient banking system, as the banking sector is the single most important segment of the financial system. Hence, the Central Bank adopts a comprehensive approach in preserving banking sector stability, encompassing both a carefully designed set of regulations, and surveillance, at both individual institution and system levels, to ensure that prudent risk management practices are adopted by banking institutions.

In the context of a continuously evolving financial landscape and global integration of financial markets, Sri Lanka’s banking sector has shown a significant expansion. This is evident from a number of key financial performance and prudential indicators. Therefore, it is important that the system remains flexible and capable of managing the multitude of risks that arise in this new environment. The need to promote strong risk management practices in banks is underscored by the recent international financial market turmoil that has now turned into a global economic crisis. The financial turmoil has had far reaching effects on global financial markets, causing significant losses in international banks and requiring the governments and central banks of major countries to inject funds to ease the liquidity crunch. In view of these concerns, the Basel Committee on Banking Supervision has announced several steps to improve the resilience of the banking system, including further strengthening of banks’ risk management practices, in particular liquidity risk management, stress testing and better market discipline through transparency.

During the past few years, there have been continuous efforts directed at further strengthening the regulatory framework, in view of the new developments and challenges in the banking sector and the changes in international regulatory standards. These measures will enhance the Central Bank’s ability to detect and assess emerging vulnerabilities in the banking sector and take appropriate remedial measures in a timely manner. However, in the final analysis, the primary responsibility and accountability for the overall operations and risk management of banks lies with the boards of directors, senior management and other staff who run the banks. Therefore, the Central Bank expects such directors, senior management and other staff to be fully conversant with the Directions, Circulars, Guidelines and other regulations issued by the Monetary Board to ensure compliance with these.

This compact disk contains the key Directions, Circulars, Guidelines and Operating Instructions issued to Licensed Commercial Banks by different departments of the Central Bank of Sri Lanka, viz., Bank Supervision Department, Domestic Operations Department, Exchange Control Department, Financial Intelligence Unit, International Operations Departments, Payments and Settlements Department, Public Debt Department and Regional Development Department. I hope that this initiative will facilitate greater awareness of the regulations and compliance there with, which will contribute to improved risk management, thereby enhancing the dynamism and resilience of the banking sector.

Ajith Nivard CabraalGovernorCentral Bank of Sri Lanka

25 March 2009

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Contact us for Further Information

BANK SUPERVISION DEPARTMENTTelephone Fax

B.D.W.A.Silva Director (94 11) 2477100 (94 11) 2477711 Mrs. T.M.J.Y.P. Fernando Actg. Addl. Director (94 11) 2477468 (94 11) 2477711 A.A.M. Thassim Actg. Addl. Director (94 11) 2477078 (94 11) 2477711

DOMESTIC OPERATIONS DEPARTMENT A. Kamalasiri Director (94 11) 2477036 (94 11) 2346287 D.A.G.K. Wijetunga Actg. Addl. Director (94 11) 2477083 (94 11) 2346288

EXCHANGE CONTROL DEPARTMENT E.A.Hettiarachchi Actg. Controller (94 11) 2477244 (94 11) 2477716 FINANCIAL INTELLIGENCE UNIT H. A. Karunaratne Director (94 11) 2477125 (94 11) 2477692D.M. Rupasinghe Actg. Addl. Director (94 11) 2477515 (94 11) 2477692 INTERNATIONAL OPERATIONS DEPARTMENT Mrs. P. Liyanage Director (94 11) 2477038 (94 11) 2346284 R. A. A. Jayalath Addl. Director (94 11) 2477088 (94 11) 2346284 PAYMENTS AND SETTLEMENTS DEPARTMENT Mrs. J.P. Mampitiya Director (94 11) 2477035 (94 11) 2387009 K.B. Dissakaruna Addl. Director (94 11) 2477042 (94 11) 2346271

PUBLIC DEBT DEPARTMENT C. J. P. Siriwardana Superintendent

and Registrar (94 11) 2477277 (94 11) 2477718

C.N.Wijesekara Addl. Superintendent (94 11) 2477212 (94 11) 2477718

REGIONAL DEVELOPMENT DEPARTMENT W.M. Karunaratne Director (94 11) 2477447 (94 11) 2477734 P.G.Jayasooriya Addl. Director (94 11) 2477528 (94 11) 2477734

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ContentsPage No.

1. BANK SUPERVISION DEPARTMENT

1. Licensing of Banks

Determinations 1.1 Determination No.1 of 2008 – Annual Licence Fee of Licensed Commercial Banks 1

Circulars 1.2 Establishment of Bank Branches 2 1.3 Classification of Banking Outlets 3 2. Capital Adequacy

Directions 2.1 Direction No.9 of 2007 – Maintenance of Capital Adequacy Ratio 5 2.2 Direction No.1 of 2007 – Ownership of Issued Capital Carrying Voting Rights 66

Determinations 2.3 Foreign Participation in the Share Capital of a Licensed Commercial Bank Incorporated or Established in Sri Lanka 69 Circulars 2.4 Criteria for Selection of Valuers undertaking the Revaluation of Fixed Assets for the Computation of the Capital Adequacy Ratio 70 2.5 Interpretation of Capital Funds 72 2.6 Enhancement of Minimum Capital Requirement of Banks 73 2.7 Minimum Capital Requirement of Licensed Commercial Banks 75 2.8 Request to Maintain Capital of Banks in Foreign Currency 76 2.9 Shipping Guarantees issued by Banks 78

3. Credit Risk Management

Directions 3.1 Direction No.7 of 2007 – Maximum Amount of Accommodation 79 3.2 Direction No.9 of 2008 – Amendments to Directions on Classification of Loans and Advances, Income Recognition and Provisioning for Licensed Commercial Banks in Sri Lanka 85 3.3 Direction No.3 of 2008 – Classification of Loans and Advances, Income Recognition and

Provisioning 86

Determinations 3.4 Shares in Companies held by Licensed Commercial Banks 99 3.5 Accommodation Granted to a Director / a Close Relation of such Director / a Concern 100

Circulars 3.6 Accounting for Properties Acquired by Foreclosure of Collateral / Part Settlement of Debt 103 3.7 Financial Accommodation to Finance Companies 104 3.8 Prepayment of Import Bills 105 3.9 Recovery of Accommodation to Exporters 107

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Guidelines

3.10 Guidelines on Grant of Facilities for the issue of Commercial Paper and other Forms of Promissory Notes 115 4. Liquidity Risk Management

Circulars

4.1 Definition of Liquid Assets 119 4.2 Monthly Statement of Liquid Assets 123 4.3 Monthly Statement of Liquid Assets for the Off-Shore Banking Unit 126 4.4 Monthly Statement of Liquid Assets for the Domestic Banking Unit and the Off-Shore

Banking Unit 128

Determinations

4.5 Application of Prudential Regulations on Off-Shore Banking Unit 129 4.6 Liquid Assets 130

5. Market Risk Management

Directions

5.1 Prudential Norms for Classification, Valuation and Operation of the Bank’s Investment Portfolio 131

Circulars

5.2 Forward Sales and Purchases of Foreign Exchange 134 5.3 Margin Requirements for Imports made on Advance Payment Terms 142 5.4 Imports of Motor Vehicles on Documents Against Acceptance Terms (DA) 146 5.5 Imports on Documents Against Acceptance Terms (DA) 152

6. Operational Risk Management

Circulars

6.1 Use of Banking System by Institutions and Persons not Authorised to Accept Deposits 156 6.2 Regulations made under the Public Security Ordinance Proscription of Tamil Rehabilitation Organization 157 6.3 Acceptance of Certificates of Deposit 160 6.4 Scheme of Certificates of Deposit with Maturity Periods of not less than Four Years 163 6.5 Conduct of Non-Government Organizations (NGO) Accounts by Licensed Banks 164 6.6 Customer Due Diligence - “Know Your Customer” Procedures 167 6.7 Dishonoured Cheques 171 6.8 Internal Audit Function 172 6.9 Prevention of Frauds using Electronic Cards 173 6.10 Reporting of Post-Tsunami Remittances Received through NGOs and Non-NGOs to the Central Bank of Sri Lanka 175 7. Corporate Governance for Banks

Directions

7.1 Direction No.7 of 2008 – Amendments to Directions on Corporate Governance for Licensed Commercial Banks in Sri Lanka 177

issued to Licensed Commercial Banks ix

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7.2 Direction No.5 of 2008 – Amendments to Directions on Corporate Governance for Licensed Commercial Banks in Sri Lanka 178 7.3 Direction No.11 of 2007 – Corporate Governance for Licensed Commercial Banks in Sri Lanka 179

Circulars 7.4 Appointment of Directors of Banks 193

8. Off-Shore Banking Business

Directions 8.1 Permitting Licensed Commercial Banks to Trade in the International Sovereign Bonds issued in 2007 by the Government of Sri Lanka 201 8.2 Designated Foreign Currencies 202 8.3 Banking (Off-Shore Banking Scheme) Order 2000 204 8.4 Off-Shore Banking Business 207

9. Abandoned Property

Guidelines 9.1 Implementation of the Provisions of Part IX (Sections 72 to 76) of the Banking Act on Abandoned Property 209 10. Disclosures

Circulars 10.1 Implementation of Part V of the Banking Act 214 10.2 List of Qualified Auditors 215 10.3 Preparation of Annual Audited Accounts 217 10.4 Display of Interest Rates and Exchange Rates 233 10.5 Inadequate / Incorrect Disclosures / Press Statements by Banks 234 10.6 Publication of Audited Financial Statements of Banks in the Press 235 10.7 Publication of Quarterly Financial Statements of Banks in the Press 236 10.8 Public Disclosure by Publication of Quarterly Financial Statements of Banks in the Press 237 10.9 Public Disclosure by Publication of Bank Accounts in the Press 252 10.10 Publication of Capital Adequacy Statement in the Annual Report 253 10.11 Submission of Audited Financial Statements by Banks 254

Guidelines 10.12 Guidelines for External Auditors relating to their Statutory Duties 255

11. Reporting of Data to Central Bank

Circulars 11.1 New Web-based Off-site Surveillance System 264 11.2 Submission of the Monthly & Quarterly Compliance Reports 270

12. General Banking Practices

Directions 12.1 Licensed Commercial Banks (Pawning) Conditions 1998 271 12.2 Secrecy of Banking Transactions 282

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1/ Includes only key Operating Instructions and Gazette Notifications of Exchange Control Department. For further information please refer “A Guide to Foreign Exchange Transactions” issued by the Exchange Control Department.

Circulars

12.3 Extending / Restricting of Banking Hours by the Banks 283 12.4 Incentive Schemes for Mobilising Demand Deposit Accounts 284 12.5 Introduction of Products based on Islamic Principles 285 12.6 Withdrawals on Savings Accounts 286 12.7 Withdrawals on Savings Accounts and 7 day Call Deposit Accounts 287

13. Other Determinations, Circulars and Guidelines

Determinations

13.1 Limits on Purchase of Immovable Property 288 13.2 Definition of Intangible Assets 69

Circulars

13.3 Appointment of Compliance Officers 289 13.4 Enhancing Lending to Agriculture Sector 291 13.5 Mandatory Lending to Agriculture Sector 292 13.6 Payment of Taxes by the Banking and Financial Sector 295 13.7 Misleading and Unethical Advertisements 296

Guidelines

13.8 Guidelines for Employment of Expatriate Staff in Banks 297 13.9 Guidelines on Credit Rating of Banking Institutions 300

2. DOMESTIC OPERATIONS DEPARTMENT

Operating Instructions

1. Reserve Requirements 301 2. Central Bank’s Rate of Interest on Advances 306 3. Central Bank Cheque Book Facility Granted to Commercial Banks and Primary Dealers 307 4. Operating Instructions on Open Market Operations of the Central Bank of Sri Lanka in Scripless Government Securities 308 5. Operating Instructions on Provision of Intra-Day Liquidity Facility (ILF) Against Scripless Government Securities on LankaSettle 318 6. Margin Requirements Against Letters of Credit 323 7. Reverse Repurchase Facility 339 8. Operating Instructions on issuing Central Bank Securities in Scripless Form under Open Market Operations of the Central Bank of Sri Lanka 344 9. Operating Instructions on Long Term Repo Transactions (LTRT) under the Auction System 349

3. EXCHANGE CONTROL DEPARTMENT1/

1. Operating Instructions

1.1 Resident Non-Nationals’ Foreign Currency Accounts 353 1.2 Non-Resident Foreign Currency Accounts (NRFC Accounts) 354 1.3 Scheme for the Opening of Special Accounts with Foreign Exchange Remittances 356 1.4 Resident Foreign Currency Accounts (RFCA) 358

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1.5 Removal of Surrender Requirement in respect of Export Proceeds and Relaxations of Restrictions on Current Account Transactions 361 1.6 Removal of Exchange Control Restrictions on Current (Non-Capital) Transactions 365 1.7 Special Accounts 371 1.8 Guarantees 372 1.9 Foreign Currency Loans to Exporters 373 1.10 Repatriation of Sale Proceeds of Properties Purchased and/or Developed through Inward Remittances of Foreign Currency Brought into the Country 374 1.11 Loans and Advances in Foreign Currency to Sri Lankans Employed Abroad Against the Pledge of Balances in Non-Resident Foreign Currency (NRFC) Accounts 376 1.12 Sri Lanka Development Bonds (SLDBs) 377 1.13 Operating Instructions to Authorised Dealers – “Post Tsunami Inward Remittances Account” (PTIRA) 380 1.14 Monitoring Scheme on Foreign Exchange Drawings against International Electronic Credit, Debit or any other Fund Transfer Cards (EFTCs) 382 1.15 Sale and Purchase of Foreign Exchange - Submission of Form 1 and Form 2 387 1.16 Investment in Treasury Bills by Foreign Investors 388 1.17 Investment in Rupee Denominated Treasury Bonds by Foreign Investors 390 1.18 Foreign Currency Account for Professional Services Providers (FCAPS) 397 1.19 Foreign Currency Account for Suppliers of Inputs (FCASI) 399 1.20 Foreign Currency Fixed Deposit Accounts for Dual Citizenship Applicants 400 1.21 Resident Guest Scheme – Special Accounts 402 1.22 Issuance of Foreign Currency Notes to Sri Lankans Traveling Abroad 405 1.23 Permission for Third Party Foreign Exchange Deposits in NRFC Accounts 406 1.24 Foreign Investment Deposit Accounts (FIDA) 407 1.25 Non-Resident Blocked Accounts 408 1.26 Sale of Foreign Exchange to Emigrants 410 1.27 Margin Requirements for Imports made on Advance Payment Terms 142 1.28 Imports of Motor Vehicles on Documents Against Acceptance Terms (DA) 146 1.29 Imports on Documents Against Acceptance Terms (DA) 152

2. GazetteNotifications

2.1 Resident in Ceylon 412 2.2 Import and Export of Sri Lanka Currency, Possession of Unutilised Foreign Currency 414 2.3 Limitations in respect of issue and transfer of Shares in a Company 415 2.4 Buying and Selling of Gold, Importing and Exporting of Gold 418 2.5 Payment in Sri Lanka Rupees, of the Purchase Price Payable in respect of any Residential Property in Sri Lanka 420 2.6 Electronic Fund Transfer Card ( EFTCs) 421 2.7 Treasury Bond Investment External Rupee Account (TIERA) 422 2.8 Possession and Retention of Foreign Exchange 423 2.9 Export and Import of Sri Lanka Currency, Import and Export of Foreign Currency 425

4. FINANCIAL INTELLIGENCE UNIT

Circulars

1. Compliance with KYC/CDD Rules for New Customers and Existing Customers – State of Readiness 427 2. Mandatory Reporting Requirement – Electronic Fund Transfers 428 3. Compliance with the Reporting Requirements under the Financial Transactions Reporting Act, No.6 of 2006 429

xii Directions, Circulars, Guidelines and Operating Instructions

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4. Financial Transactions Reporting Act, No.6 of 2006 (FTRA) – Know-Your-Customer and Customer Due Diligence Rules Prescribed in Terms of Section 2 (3) of the FTRA 432 5. Light a Million Candles Campaign 443 6. Financial Transactions Reporting Act, No. 6 of 2006 444 7. Financial Transactions Reporting Act, No. 6 of 2006 – Submission of Data 445 8. Section 312 & Section 319 of the Patriot Act 446 9. Due Diligence to be carried out in respect of all Remittances Received into Customer Accounts and Transfers there from 447 10. Inclusion of the World Tamil Movement among the List of Terrorist Organisations in Canada 448

5. INTERNATIONAL OPERATIONS DEPARTMENT

Directions, Circulars, Operating Instructions and Guidelines

1. Non-resident Foreign Currency Accounts for Sri Lanka Nationals 449 2. Information on Local Inter-bank Foreign Exchange Spot Transaction 451 3. Commercial Banks Borrowing from Abroad 452 4. Foreign Currency Loans to Non-BOI Exporters and Indirect Exporters 453 5. Introduction of the European Single Currency – the “EURO” – the impact of the European Economic and Monetary Union on Monetary Obligations Related to Transactions Involving ICC Rules 455 6. Weekly Report on Foreign Currency Deposit Liabilities 461 7. Daily Inter-Bank Foreign Exchange Transactions Report 462 8. Limit on Daily Working Balances in Foreign Currencies 463 9. Guidelines to Commercial Banks on Foreign Exchange SWAPS (USD/LKR) 467 10. Directions on Financial Derivative Products (Revised) 468 11. Directions to Commercial Banks on LKR based FX Options 473

6. PAYMENTS AND SETTLEMENTS DEPARTMENT

Directions

1. General Direction on the Participating Institutions’ Service Norms and Standard Times for Accepting Cheque Deposits from Customers and Crediting Cheque Proceeds to Customers’ Accounts under the Cheque Imaging and Truncation System 475 2. General Direction in respect of Cheque Imaging and Truncation System No. 01/2006 477

Rules

3. LankaSettle System Rules 487

Guidelines

4. Guidelines on Business Continuity Planning 526

7. PUBLIC DEBT DEPARTMENT

Directions

1. Segregation of Proprietary Government Securities Accounts 533 2. Financial Statements 537 3. Secondary Market Quotes (Bid and Offer Prices) 538 4. New Products 539 5. Establishment of a Branch Office by Primary Dealers 540 6. Repurchase and Reverse Repurchase Agreements 541

issued to Licensed Commercial Banks xiii

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1/ Includes only key Operating Instructions issued by Regional Development Department.

7. Secondary Market Actual Rates 546 8. Capital Adequacy 547 9. Custodial & Trust Holdings of Scrip Securities 549 10. Forward Rate Agreements and Interest Rate Swaps 553 11. Firm Two Way Quotes (Bid and Offer Prices) for Benchmark Maturities 558 12. Minimum Subscriptions Levels for Treasury Bill and Bond Auctions 560 13. Minimum Capital Requirement 561 14. Special Risk Reserve 562 15. Accounting for Repo Transactions 563 16. Short Selling of Securities 564 17. Adjusted Trading (Away Prices) 565 18. Enhancement of Minimum Capital Requirement of Primary Dealers 566 19. Enhancement of Minimum Capital Requirement, Dividend Distribution and Maintenance of Tier II Capital by Primary Dealers 567 20. Risk Weighted Capital Adequacy Framework (RWCAF) for Primary Dealers 568 Circulars

1. Amendment to LankaSettle System Rules 582 2. Central Bank of Sri Lanka Wide Area Network (CBSLNet) based Application to Record Overnight Customer Repo Repositioning Transactions involving Government Securities 598

8. REGIONAL DEVELOPMENT DEPARTMENT1/


1. Loan Scheme to Assist the Small and Medium Enterprises (SMEs) Affected by Tsunami on 26.12.2004 – Tsunami Relief Loan Scheme (SUSAHANA) 602 2. Small Business Revival Programme (SBRP) under the Sri Lanka Tsunami Affected Areas Recovery and Take-Off (STAART) Project 609 3. Loan Scheme for Sustainable Recovery of the Micro-Enterprise Sector (SRMES) Funded by UNDP 621 4. Second Perennial Crops Development Project Revolving Fund Credit Scheme 631 5. Tea Development Project Revolving Fund Credit Scheme (TDPRFCS) 645 6. Loan Scheme for Reconstruction of Small and Medium Sized Projects (Industrial, Tourism and Other Service Sector) Revival Program (RSMSRP) under Post-Tsunami Line of Credit (Contract B) – Sri Lanka Funded by European Investment Bank (EIB) 653 7. Krushi Navodaya Loan Scheme 659 8. Poverty Alleviation Microfinance Project (Revolving Fund) Loan Scheme 665 9. Matale Regional Economic Advancement Project Revolving Fund (MREAPRF) 673 10. Construction Sector Development Project (CSDP) to Assist the Construction and Public Work relating to Post-Tsunami Reconstruction 678 11. Agro Livestock Development Loan Scheme (ALDL) 695 12. Recommendation of Interest Subsidy under New Comprehensive Rural Credit Scheme (NCRCS) – 2008/09 Maha 701

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DISCLAIMER

This compact disk contains the electronic version of Directions, Circulars, Guidelines and Operating Instructions issued by the Central Bank of Sri Lanka to Licensed Commercial Banks up to 31st December 2008. Please note that this electronic version 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.

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1Determinations made by the Monetary Board of the Central Bank of Sri Lanka under Section 8 of

the Banking Act, No. 30 of 1988, as amended.

Sgd. Nivard Ajith Leslie Cabraal

Chairman of the Monetary Board andGovernor of the Central Bank of Sri Lanka

Colombo05 September 2008.

DETERMINATIONSBANKING ACT, DETERMINATION NO.1 OF 2008

ANNUAL LICENCE FEE OF LICENSED COMMERCIAL BANKS

Citation.1. This Determination may be cited as the Banking Act Determination No.1 of 2008. The Sections referred to in this Determination will be those of the Banking Act, No.30 of 1988, as amended.

2. (1) In terms of Section 8(1) of the Banking Act every licensed commercial bank shall pay to the Central Bank an annual licence fee as may be determined by the Monetary Board, having regard to the different classes of banking business carried on by such bank.

(2) In terms of Section 8(2) of the Banking Act the Monetary Board shall inform each such licensed commercial bank the amount payable as licence fee, and the manner in which such fee shall be paid.

(3) In terms of Section 8(3) of the Banking Act where a licence fee is determined in respect of classes of banking business such fee shall apply to all banks carrying on such classes of business.

3. In the exercise of powers conferred by Section 8(1) of the Banking Act, No.30 of 1988 as amended, the Monetary Board has determined that the licence fee that shall be paid for the year 2009 by a licensed commercial bank carrying on –

(1) domestic banking business including foreign exchange business and off-shore banking business be Rs. 500,000.00;

(2) off-shore banking business only be Rs. 300,000.00.

4. (1) Every licensed commercial bank shall pay the respective licence fee to the Central Bank of Sri Lanka by 31 January 2009.

(2) Every licensed commercial bank licensed in 2009, shall pay the annual licence fee for 2009 before the issue of the licence.

5. The annual licence fee applicable for future calendar years will be determined by the Monetary Board and notified to banks accordingly.

6. The previous Determination dated 01 March 1989 issued by the Monetary Board in terms of Section 8 of the Banking Act in relation to the annual licence fee of licensed commercial banks is hereby revoked.

Empowerment under Section 8 of the Banking Act.

Annual licence fee for 2009.

Payment of licence fee.

Annual licence fee for future calendar years.

Revocation of previous Determinations.

2 Directions, Circulars, Guidelines and Operating Instructions

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1Bank Supervision Department26 May 2008

To : CEOs of Licensed Commercial Banks and CEOs of Licensed Specialised Banks

Dear Sir/Madam,ESTABLISHMENT OF BANK BRANCHES

The Central Bank currently approves the opening of bank branches and other outlets by licensed banks considering the feasibility and suitability of the proposed expansion. At present, nearly 40 per cent of the bank branches in the country are concentrated in the Western Province resulting in a banking density (bank branches for 100,000 persons) of 11.9 in the Western Province as against a range of 5.3 to 8.4 in the other provinces.

There is a need to accelerate economic development in areas of the country outside the Western Province to achieve balance regional development in the country. Establishing more branches and banking outlets outside the Western Province is expected to enhance access to finance and promote the savings habits, thereby increasing economic activity in those regions.

To facilitate this, the Monetary Board has decided that banks shall establish a minimum of two branches outside the Western Province for each new branch established in the Western Province. This new criteria will be applicable for all future requests made to the Central Bank for opening of branches.

Yours faithfully,

Sgd, B.D.W.A. Silva

Director of Bank Supervision

issued to Licensed Commercial Banks �

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1Ref. No. : 02 / 08 / 005 / 0002 / 002

Bank Supervision DepartmentMay 3, 2006


Dear Sirs,CLASSIFICATION OF BANKING OUTLETS

Reference is made to the discussion on the above subject at the meeting of the CEOs of licensed banks held on 23.03.06 and the subsequent requests made by banks in the above regard. All licensed banks should name and operate their banking outlets in conformity with the classification given in the Annexed schedule.

In the case of existing outlets, where possible, banks are requested to rename them appropriately or restrict activities, to conform to the new classification, with prior notification to us. However, for regulatory purposes, the existing outlets too would be considered under the new classification.

The mobile banking units, which comprise the following, are excluded from the above classification.

a. Banking services carried out in vehicles in different locations.

b. “Barefoot banking” where bank officers visit customers outside the bank premises and transact business with them.

c. Banking services carried out by a unit on a few days of the week (not on all working days) in a permanent place with staff attached to a branch of the bank visiting the unit to transact business.

d. Banking services carried out at temporary outlets operated at public places such as temples, schools, carnivals, exhibitions, conferences, etc.

Please acknowledge receipt.

Yours faithfully,

Signed on 03/05/2006


CC: Secretary-General, Sri Lanka Banks’ Association (Guarantee) Ltd.

� Directions, Circulars, Guidelines and Operating Instructions

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1Annex

Name of Banking Outlet Permitted Activities StatusBranch All activities permitted under the Banking Act. Fully fledged main branch.Student Savings Unit Opening and operating savings accounts by

students, teachers and other staff of the respective school.

Should be affiliated to a main branch.

Pawning centre Pawning related activities. – do –Pay Office in the Airport Issue and encashment of foreign currencies and

Travellers Cheques.– do –

Extension Offices - Accepting deposits and loan recoveries of existing customers

- Accepting applications for deposits and loans. - Pawning related activities.- Issue and encashment of foreign currency and

Travellers Cheques- Provide cash withdrawals where the necessary

verifications and authorizations are available- Accept utility bills payments - Pay Government pensions - Granting advances against deposits where the

necessary verifications and authorizations are available

- Promotional and Marketing activities. – do –Post office/sub post office units of the National Savings Bank

Mobilising deposits and permitting withdrawals to the extent approved by the bank’s Head Office.

– do –


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1Directions 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. Nivard Ajith Leslie CabraalGovernor

Colombo26th December 2007

DIRECTIONSBANKING ACT DIRECTIONS NO. 9 OF 2007

MAINTENANCE OF CAPITAL ADEqUACY RATIO

WHEREAS in terms of the powers conferred by Section 19(7)(a) of the Banking Act, No.30 of 1988 as amended, the Monetary Board has arrived at a determination in respect of the maintenance of capital adequacy ratio of licensed commercial banks having regard to the guidelines for capital adequacy set out by the Bank for International Settlements in Basle; and

WHEREAS in the exercise of powers conferred by Section 46(1) of the Banking Act, No.30 of 1988 as amended, the Monetary Board hereby issues the following directions.

Minimum Capital Adequacy Ratio.

1(1) Commencing from 01 January 2008, all licensed commercial banks shall, at all times, maintain a capital adequacy ratio of not less than 10% in relation to total risk weighted assets with core capital constituting not less than 5% in relation to total risk weighted assets.

1(2) The capital adequacy ratios referred to in Direction 1(1) above shall be computed as per guidelines given in Schedule I hereto prepared in accordance with the Basel II Capital Accord “International Convergence of Capital Measurement and Capital Standards - A Revised Framework” recommended by the Basle Committee on Banking Supervision at the Bank for International Settlements.

2 Licensed commercial banks shall use the format at Schedule II attached hereto for reporting of capital adequacy ratios on a periodic basis as specified in Schedule I.

3 Where a licensed commercial bank has failed to comply with these Directions, such licensed commercial bank shall not pay dividends or repatriate profits until such compliance is effected and confirmed by the Director of Bank Supervision.

4(1) All previous Determinations, Directions and Guidelines that have been issued to licensed commercial banks by the Monetary Board in relation to maintenance of capital adequacy ratio in terms of Section 19(7) or 46(1) of the Banking Act are hereby revoked.

4(2) Notwithstanding the revocation referred to in Direction 4(1) above, licensed commercial banks granted time by the Monetary Board in terms of Section 19(7)(b) of the Banking Act shall comply with the requirements contained in such previous Determinations, Directions and Guidelines until the expiration of the time so granted.

Reporting Format.

Steps to secure compliance with Directions.

Revocation of previous Determinations.

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� Directions, Circulars, Guidelines and Operating Instructions

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1 Schedule I

Guidelineson

Computation of Capital Adequacy Ratio(Revised Framework – Basel II)

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1CONTENTS

1. Introduction

1.1 Approaches to Implementation of the Basel II Framework

1.2 An initial step towards adopting Basel II

2. Scope of Application

3. Minimum Capital Ratio

4. Reporting Format

5. Submission dates

6. Instructions for Completion the Return

6.1 Part I – Computation of Capital Adequacy Ratio

6.2 Part II (a) – Computation of Total Capital Base (Regulatory Capital)

6.3 Part II (b) – Computation of Eligible Tier III for Market Risk

6.4 Part III (a) – Computation of Risk-weighted Amount for Credit Risk

6.5 Part III (b) – Computation of Credit Equivalent Amount of Off-Balance Sheet Items

6.6 Part III (c) – Exposures Recognized under Credit Risk Mitigation (CRM)

6.7 Part IV – Computation of Risk-weighted Amount for Market Risk

6.8 Part V – Computation of Risk-weighted Amount for Operational Risk

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1Abbreviations

AMA – Advanced Measurement ApproachesBIA – Basic Indicator Approach

BIS – Bank for International Settlements

BCBS – Basel Committee on Banking Supervision

CAR – Capital Adequacy Ratio

CBSL – Central Bank of Sri Lanka

CCR – Counterparty Credit Risk

CIPC – Cash Items in the Process of Collection

CRM – Credit Risk Mitigation

ECAI – External Credit Assessment Institution

GOSL – Government of Sri Lanka

IMF – International Monetary Fund

LKR – Sri Lanka Rupee

MDB – Multilateral Development Bank

NPA – Non Performing Aassets

PSE – Public Sector Entities

SA – Standardised Approach

SLECIC – Sri Lanka Export Credit Insurance Corporation

SME – Small and Medium Enterprise

SMM – Standardised Measurement Method

LCB – Licensed Commercial Bank

LSB – Licensed Specialised Bank

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11. Introduction

1.1 Approach to Implementation of the Basel II Framework: As announced by the Central Bank of Sri Lanka (CBSL) in March 2006, the “International Convergence of Capital Measurement and Capital Standards – a Revised Framework”, widely known as Basel II, issued by the Basel Committee on Banking Supervision of the Bank for International Settlements in June 2004 and as amended to framework in June 2006, will be the basis for the computation of the Capital Adequacy Ratio effective from 1st January 2008.

1.2 As an initial step towards adopting Basel II, all licensed commercial banks (LCBs) and licensed specialized banks (LSBs) are required to apply the following approaches in computing the capital adequacy ratio.

1.2.1 The Standardised Approach for credit risk1.2.2 The Standardised Measurement Method for market risk1.2.3 The Basic Indicator Approach for operational risk.

2. Scope of Application

2.1 The revised capital adequacy norms will be applicable, in the case of all LCBs and LSBs incorporated in Sri Lanka:

2.1.1 on the solo basis - All positions of the bank and its local and overseas branches/offices.

2.1.2 on the consolidated basis – All position of the bank (including its local and overseas branches/ offices) and its subsidiary companies.

2.2 In the case of LCBs incorporated outside Sri Lanka, the revised capital adequacy norms will be applicable to the branch operations in Sri Lanka and subsidiaries in Sri Lanka, established with the assigned capital of the branch, if any.

2.3 All LCBs and LSBs are required to use the attached reporting format (Schedule II) for reporting capital adequacy, commencing 2008.

3. Minimum Capital Ratio

All LCBs and LSBs shall at all times maintain the capital adequacy ratios determined by the Monetary Board in term of Sections 19(7)(a) and 76J(1)(a) of the Banking Act, commencing from 01 January 2008.

4. Reporting Format

4.1 The attached reporting format (Schedule II) collects information on the capital adequacy position of licensed banks. The return comprises 5 major parts.

4.1.1 Part 1 – Computation of capital adequacy ratio.

4.1.2 Part 1I – (a) Computation of total capital base. (b) Computation of eligible Tier III capital for market risk.

4.1.3 Part III – (a) Computation of risk-weighted amount for credit risk. (b) Credit equivalent of off-balance sheet items. (c) Exposures recognized under credit risk mitigation (CRM).

4.1.4 Part IV – Computation of risk-weighted amount for market risk.

4.1.5 Part V – Computation of risk-weighted amount for operational risk.

5. Submission dates

5.1 The return should show the position as at the last calendar day of each quarter/each financial year, and should be submitted through the web-based system as follows. Regional Developments Banks are required to submit the attached return (Schedule II) in the manual form.

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15.1.1 Quarterly return/s – within 1 month after the end of each quarter.

5.1.2 Annual audited return/s – within 6 months after the end of the financial year of the respective bank.

5.1.3 If the submission deadline falls on a bank holiday, it will be deferred to the next working day.

5.2 The Statement of Certification on the information submitted in the above return/s and the capital adequacy ratio should be forwarded to Bank Supervision Department in manual form. For this purpose, banks may use the existing format (copy attached), which was issued under the implementation of the new web-based returns in July 2006.

6. Instructions for Completion the Return

The instructions for completion of the capital adequacy return are divided into eight parts. The details/definitions of each element in these eight parts are described with the web-based return code (WBRC).

6.1 Part 1 – Computation of Capital Adequacy Ratio

The values of the items in this form are updated automatically on the web-based return.

6.1.1 Eligible Core Capital (Eligible Tier I) (WBRC 11.1.1.0.0.0)

The amount must agree with item 6.2.2.1 of Part II (a) Computation of total capital base below.

[= WBRC 11.2.1.1.0.0 of Part II (a)]

6.1.2 Capital Base (Regulatory Capital) (WBRC 11.1.2.0.0.0)

The amount must agree with item 6.2.2.9 of Part II (a) Computation of total capital base below.

[= WBRC 11.2.1.5.0.0 of Part II (a)]

6.1.3 Total Risk-Weighted Amount (WBRC 11.1.3.0.0.0)

Total risk-weighted assets are determined by adding the resulting figures to the sum of risk-weighted assets for credit risk, market risk and operational risk.

Total of risk-weighted amount for credit risk (6.1.3.1), market risk (6.1.3.2) and operational risk (6.1.3.3).

(WBRC 11.1.3.1.0.0 + 11.1.3.2.0.0 + 11.1.3.3.0.0)

6.1.3.1 Risk-Weighted Amount for Credit Risk (WBRC 11.1.3.1.0.0)

The amount must agree with item 6.4.3.1 of Part III (a) Computation of risk-weighted amount for credit risk below.

[=WBRC11.3.1.0.0.0 of Part III (a)]

6.1.3.2 Risk-Weighted Amount for Market Risk (WBRC 11.1.3.2.0.0)

The amount must agree with item 6.7.8.2 of Part IV Computation of risk-weighted amount for market risk below.

[= WBRC 11.4.2.0.0.0 of Part IV]

6.1.3.3 Risk-Weighted Amount for Operational Risk (WBRC 11.1.3.3.0.0)

The amount must agree with item 6.8.2.3 of Part III (a) Computation of risk-weighted amount for operational risk below.

[= WBRC 11.5.3.0.0.0 of Part V]

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16.1.4 Core Capital (Tier I) Ratio, % (WBRC 11.1.4.0.0.0)

Eligible core capital (6.1.1) divided by Total risk-weighted amount (6.1.3)

(WBRC 11.1.1.0.0.0/11.1.3.0.0.0)*100

6.1.5 Total Capital Ratio, % (WBRC 11.1.5.0.0.0)

Total capital base (6.1.2) divided by Total risk-weighted amount (6.1.3)

(WBRC 11.1.2.0.0.0/11.1.3.0.0.0)*100

6.2 Part II (a) – Computation of Total Capital Base (Regulatory Capital)

6.2.1 Constituents of Capital Base

Capital base consists of eligible core capital (Tier I), eligible supplementary capital (Tier II) and eligible short term subordinated debt covering market risk (Tier III).

6.2.2 Specific instructions for elements of Capital

6.2.2.1 Eligible Core Capital (Eligible Tier I) (WBRC 11.2.1.1.0.0)

The Eligible Core Capital shall be the total core capital less total amount of deductions/adjustments to core capital. Total eligible core capital should represent at least half of total capital base, i.e., the sum total of eligible supplementary capital plus eligible Tier III capital should not exceed total eligible core capital.

The amount must agree with core capital (6.2.2.2) less Tier I adjustments (6.2.2.3).

(WBRC 11.2.1.1.1.0 - 11.2.1.1.2.0)

6.2.2.2 Core Capital (Tier I) (WBRC 11.2.1.1.1.0)

Core capital includes only permanent shareholders’ equity (issued and fully paid ordinary shares/common stock and perpetual non-cumulative preference shares), assigned capital and disclosed reserves (created or increased by appropriations of retained earnings or other surplus, e.g., share premiums, retained profit, general reserves and statutory reserves).

The amount must agree with the sum of the following elements from 6.2.2.2.1 to 6.2.2.2.10

(WBRC 11.2.1.1.1.1 to 11.2.1.1.1.10)

6.2.2.2.1 Paid-up Ordinary Shares/Assigned Capital (WBRC 11.2.1.1.1.1)

In the case of LCBs and LSBs incorporated in Sri Lanka: Issued and fully paid ordinary shares in terms of the Banking Act. For the computation only the paid up portion of partly paid shares should be counted as capital (will be revised in terms of the Companies Act, No.7 of 2007).

LCB incorporated or established outside Sri Lanka: Equity capital that shall be assigned by the Head Office of a LCB incorporated or established outside Sri Lanka.

6.2.2.2.2 Non-cumulative, Non-redeemable Preference Shares (WBRC 11.2.1.1.1.2)

Issued and fully paid non-cumulative, non-redeemable preference shares where the payment of dividend could be reduced or waived permanently in the event of profitability being inadequate to support such payment in part or full.

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16.2.2.2.3 Share Premium (WBRC 11.2.1.1.1.3)

The excess of issue price over the par value of the ordinary shares or common stock or non-cumulative, non-redeemable preference shares (will be revised in terms of the Companies Act, No.7 of 2007).

6.2.2.2.4 Statutory Reserve Fund (WBRC 11.2.1.1.1.4)

Balance in the Reserve Fund as per last audited statement of accounts and set up by banks in terms of the Banking Act.

6.2.2.2.5 Published Retained Profits/(Accumulated Losses) (WBRC 11.2.1.1.1.5)

Balance in the profit and loss account brought forward from the previous financial years and as reported in the last audited statement of accounts. Accumulated losses should be reported in parenthesis and deducted from the other capital constituents.

6.2.2.2.6 General and Other Reserves (WBRC 11.2.1.1.1.6)

Disclosed reserves in the form of general or other reserves created or increased by appropriation of retained earnings, share premium or other surplus as per last audited financial statements.

6.2.2.2.7 Gain/(Loss) After Tax Arising from the Sale of Fixed and Long-term Investments

(WBRC 11.2.1.1.1.7)

Any gain/(loss) after tax arising from the sale of fixed and long-term investments since the closing date of the last audited accounts. Net loss arising from the sale of fixed and long-term investments should be reported in parenthesis and deducted from the other capital constituents.

6.2.2.2.8 Unpublished Current Year’s Profit/(Loss) (WBRC 11.2.1.1.1.8)

Current year profit (excluding any profit/ (loss) after tax arising from the sale of fixed and long term investments) earned/incurred since the closing date of the last audited accounts and subject to certification by the institution’s external auditor. Current year loss should be reported in parenthesis and deducted from the other capital constituents. For this purpose, the banks are required obtain the audit certificate based on the Sri Lanka Auditing Practice Statements 1 (SLAPs 1) “The Auditor’s Report on Special Purpose Audit Engagements”

6.2.2.2.9 Minority Interests (consistent with the above capital constituents) (WBRC 11.2.1.1.1.9)

Minority interests on consolidation of capital items.

6.2.2.2.10 Perpetual Debt Capital Instruments (WBRC 11.2.1.1.1.10)

Perpetual debt capital instruments that satisfy the following conditions:

(i) Prior written approval of the CBSL has been obtained.

(ii) Such instruments shall have no maturity.

(iii) Unsecured, fully paid up and subordinated to the interests of creditors

(iv) The perpetual debt capital instruments should contain a clause that the issuing bank shall not be liable to pay interest, if:

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1 a. The bank’s CAR is below the minimum regulatory requirement in

terms of the Direction on CAR, or b. The impact of such payment results in the bank’s CAR falling

below the minimum CAR, and c. Such interest not paid shall not be cumulative or accrued for

payment in the future.

(v) Such instruments may contain a call option, which may be exercised in 10 years from the date of issue, provided that the prior approval of CBSL has been obtained to exercise such option.

(vi) Total perpetual debt approved as core capital shall not exceed 15 per cent of the total non-innovative core capital after adjustments and deductions.

(vii) Any other conditions stipulated by CBSL on prudential grounds.

6.2.2.3 Deductions/Adjustments – Core Capital (Tier I) (WBRC 11.2.1.1.2.0)

The amount must agree with the sum of the following items from 6.2.2.3.1 to 6.2.2.3.9

(WBRC 11.2.1.1.2.1 to 11.2.1.1.2.9)

6.2.2.3.1 Goodwill (WBRC 11.2.1.1.2.1)

Report the amount of goodwill as shown in the balance sheet.

6.2.2.3.2 Net Deferred Tax (WBRC 11.2.1.1.2.2)

Net debit balance of deferred tax.

6.2.2.3.3 Other Intangible Assets (WBRC 11.2.1.1.2.3)

Intangible assets and losses in the current period and those brought forward from previous periods should be deducted from core capital.

6.2.2.3.4 Advances granted to employees of the bank for the purchase of shares of the bank under a share ownership plan.

(WBRC 11.2.1.1.2.4)

6.2.2.3.5 Amount due from head office & branches outside Sri Lanka in Sri Lanka Rupees (applicable only to branches of foreign banks).

(WBRC 11.2.1.1.2.5)

Debit balances in VOSTRO current accounts in Sri Lanka Rupees held by Head Office and branches outside Sri Lanka in Sri Lanka Rupees.

6.2.2.3.6 Amount due to head office & branches outside Sri Lanka in Sri Lanka Rupees (-) (applicable only to branches of foreign banks)

(WBRC 11.2.1.1.2.6)

Credit balances in VOSTRO current accounts in Sri Lanka Rupees held by Head Office and branches outside Sri Lanka in Sri Lanka Rupees. Report with negative (-) sign.

6.2.2.3.7 Amount due from head office & branches outside Sri Lanka in Foreign Currency (net) (applicable only to branches of foreign banks)

(WBRC 11.2.1.1.2.7)

Net Debit balances (after netting of credit balances) in NOSTRO current accounts in foreign currency held with Head Office and branches outside Sri Lanka and the net amount of fixed and other deposits placed with and amounts

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1� Directions, Circulars, Guidelines and Operating Instructions

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1lent to Head Office and branches outside Sri Lanka (after netting of fixed and other deposits and amounts borrowed from Head Office and branches outside Sri Lanka) in foreign currency. Ignore any net credit balance.

6.2.2.3.8 50 per cent of Investments in Unconsolidated Banking and Financial Subsidiary Companies

(WBRC 11.2.1.1.2.8)

50 per cent of investments in capital by way of shares, perpetual/hybrid capital instruments or subordinated term debt in unconsolidated banking and financial subsidiary companies.

6.2.2.3.9 50 per cent of Investments in the Capital of Other Banks and Financial Institutions

(WBRC 11.2.1.1.2.9)

50 per cent of investments in capital by way of shares, perpetual/hybrid capital instruments or subordinated term debt in other banks and financial institutions.

6.2.2.4 Supplementary Capital (Tier II) (WBRC 11.2.1.2.1.0)

The amount must agree to sum of following items from 6.2.2.4.1 to 6.2.2.4.5

(WBRC 11.2.1.2.1.1 to 11.2.1.2.1.5)

6.2.2.4.1 Revaluation Reserves (approved by CBSL) (WBRC 11.2.1.2.1.1)

Revaluation reserves may be included within Tier II Supplementary Capital provided that such revaluation is prudently valued reflecting fully the possibility of price fluctuations and forced sale, with prior approval of CBSL, subject to a discount of 50 per cent. Revaluation surplus may be included in Tier II capital not more than once in 7 years.

6.2.2.4.2 General Provisions (WBRC 11.2.1.2.1.2)

General provisions or general loan loss reserves created against the possibility of future losses. Where they are not ascribed to particular assets and do not reflect deduction in the valuation of particular assets, they qualify for inclusion in Supplementary Capital (Tier II). General provisions should not exceed 1.25 per cent of the sum of risk-weighted assets.

6.2.2.4.3 Hybrid Capital Instruments (Debt/Equity) (WBRC 11.2.1.2.1.3)

Capital instruments which combine certain characteristics of equity capital and debt. i.e., cumulative redeemable preference shares, etc. and satisfy the following characteristics :

(i) Prior written approval of CBSL has been obtained for inclusion of such items in the capital.

(ii) Unsecured, fully paid up and subordinated to the interests of creditors. (iii) Not redeemable in less than 5 years or without the prior approval of

CBSL. (iv) Available to participate in losses without the Bank being obliged to

cease trading. (v) Obligation to pay interest can be deferred where the profitability of the

Bank would not support such payment. (vi) Any other condition stipulated by CBSL on prudential grounds.

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16.2.2.4.4 Minority Interests arising from Preference Shares (WBRC 11.2.1.2.1.4)

Minority interests arising from the consolidation of preference shares.

6.2.2.4.5 Approved Subordinated Term Debt (WBRC 11.2.1.2.1.5)

Subordinated term debt that satisfies the following conditions:

(i) The prior written approval of CBSL has been obtained for inclusion as Tier II capital.

(ii) Unsecured and subordinated to the interests of creditors, at fully paid up value in the case of coupon bonds or paid up value plus accrued interest in the case of zero coupon bonds.

(iii) A minimum original maturity of 5 years. (iv) Early repayment or redemption shall not be made without the prior

consent of CBSL. (v) The amount counted as capital should be discounted by 1/5th each

year during the four years preceding maturity. (vi) The total approved subordinated term debt should not exceed 50 per

cent of total Tier 1 capital. (vii) Any other conditions stipulated by CBSL on prudential grounds.

6.2.2.4.6 Actual Amount of Approved Subordinated Term Debts (WBRC 0.0.0.0.0.0)

Report total actual amount of approved subordinated term debts.

6.2.2.5 Deductions – Tier II (WBRC 11.2.1.2.2.0)

The amount must agree to sum of following items from 6.2.2.5.1 to 6.2.2.5.2

(WBRC 11.2.1.2.2.1 to 11.2.1.2.2.2)

6.2.2.5.1 50 per cent of Investments in Unconsolidated Banking and Financial Subsidiary Companies

(WBRC 11.2.1.2.2.1)

50 per cent of investments in capital by way of shares, perpetual/hybrid capital instruments or subordinated term debt in unconsolidated banking and financial subsidiary companies.

6.2.2.5.2 50 per cent of Investments in the Capital of Other Banks and Financial Institutions

(WBRC 11.2.1.2.2.2)

50 per cent of investments in capital by way of shares, perpetual/hybrid capital instruments or subordinated term debt in other banks and financial institutions.

6.2.2.6 Total Supplementary Capital (WBRC 11.2.1.2.0.0)

The amount must agree to Supplementary Capital (Tier II) (6.2.2.4) less Tier II deductions (6.2.2.5).

(11.2.1.2.1.0 - 11.2.1.2.2.0)

6.2.2.7 Eligible Supplementary Capital (WBRC 11.2.1.3.0.0)

Eligible supplementary capital (Eligible Tier II) will be restricted to 100 per cent of Total Core Capital (6.2.2.1) (After deductions/adjustments).

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16.2.2.8 Short Term Subordinated Debt (Tier III) (WBRC 11.2.1.4.0.0)

Short term subordinated debt may be used for the sole purpose of meeting a proportion of the capital requirements for market risk. For short-term subordinated debt to be eligible as supplementary capital, it needs, if circumstances demand, to be capable of becoming part of a bank's permanent capital and thus be available to absorb losses in the event of insolvency. It must, therefore, at a minimum:

(i) be unsecured, subordinated and fully paid up (ii) have an original maturity of at least two years (iii) not be repayable before the agreed repayment date unless the prior consent of CBSL

is obtained (iv) be subject to a lock-in clause which stipulates that neither interest nor principal

may be paid (even at maturity) if such payment means that the bank falls below or remains below its minimum capital requirement.

6.2.2.8.1 Approved Short Term Subordinated Debt (WBRC 11.2.1.4.1.0)

Total amount of approved short-term subordinated debts under above conditions.

6.2.2.8.2 Eligible Supplementary Capital (Eligible Tier III) - Utilised (WBRC 11.2.1.4.2.0)

The amount must agree with item 6.3.3.6.1 of Part II (b) subject to the following conditions.

[=WBRC 11.2.2.6.1.0 of Part II (b)]

(i) A minimum of about 28½ per cent of market risk needs to be supported by eligible core capital that is available to support market risk.

(ii) Tier III capital will be limited to 250 per cent of a bank’s eligible core capital that is available to support market risk after meeting credit risk and operational risk.

6.2.2.9 Capital Base (WBRC 11.2.1.5.0.0)

The amount must agree with the sum of items of eligible core capital (6.2.2.1), eligible supplementary capital (6.2.2.7) and eligible tier III capital (6.2.2.8.2).

(WBRC 11.2.1.1.0.0 + 11.2.1.3.0.0 + 11.2.1.4.2.0)

6.2.3 An indicative list of institutions which may be deemed to be financial subsidiaries/institutions for the purposes of items 6.2.2.3.8, 6.2.2.3.9, 6.2.2.5.1 and 6.2.2.5.2 above is as under:

(WBRC 11.2.1.1.2.8, 11.2.1.1.2.9, 11.2.1.2.2.1 and 11.2.1.2.2.2)

(i) LCBs and LSBs, (ii) Insurance Companies, (iii) Registered Finance Companies, (iv) Specialised Leasing Companies, (v) Merchant Banks, (vi) Primary Dealers.

6.2.4 Subsidiary companies referred to in items 6.2.2.3.8, 6.2.2.3.9, 6.2.2.5.1 and 6.2.2.5.2 above will be as defined in the Banking Act.

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16.3 Part II (b) - Computation of Eligible Tier III for Market Risk

6.3.1 Rule of Short-Term Subordinated Debt Covering Market Risk (Tier III Capital)

For short-term subordinated debt to be eligible as Tier III capital, it needs, if circumstances demand, to be capable of becoming part of a bank's permanent capital and thus be available to absorb losses in the event of insolvency. Short-term subordinated debt may be used for the sole purpose of meeting a proportion of the capital requirements for market risk. It must, therefore, at a minimum:

(i) be unsecured, subordinated and fully paid up (ii) have an original maturity of at least two years (iii) not be repayable before the agreed repayment date unless the prior consent of CBSL is

obtained (iv) be subject to a lock-in clause which stipulates that neither interest nor principal may be paid

(even at maturity) if such payment means that the bank falls below or remains below its minimum capital requirement.

6.3.2 Eligible Tier III capital

(i) Tier III capital will be limited to 250 per cent of a bank’s eligible core capital that is available to support market risk after meeting credit risk and operational risk.

(ii) The minimum of about 28½ per cent of market risk needs to be supported by eligible core capital that is available to support market risk.

(iii) Tier 2 elements may be substituted for Tier III up to the same limit of 250 per cent so far as the overall limits stated in paragraphs 6.2.2.4.5 and 6.2.2.7 are not breached, i.e., eligible supplementary capital may not exceed eligible core capital, and long-term subordinated debt may not exceed 50 per cent of core capital.

(iv) In addition, eligible core capital should represent at least half of total capital base, i.e., the sum total of supplementary capital plus Tier III capital should not exceed eligible core capital.

(v) In determining the level of eligible core capital for the purposes of determining eligible Tier III capital, all adjustments required in arriving at the total capital base (as stated in 6.2.2.3 and 6.2.2.5) should be taken into consideration.

6.3.3 Specific instructions for Computation of eligible Tier III for market risk

The values of the items in this form are updated automatically, except item 6.3.3.5.1 below.

(WBRC 11.2.2.5.1.0)

6.3.3.1 Total Risk Weighted Assets (RWA) (WBRC 11.2.2.1.0.0)

The amount must agree with the sum of the following items from 6.3.3.1.1 to 6.3.3.1.2

(WBRC 11.2.2.1.1.0 to 11.2.2.1.2.0)

6.3.3.1.1 Total Risk Weighted Assets for Credit and Operational Risks (WBRC 11.2.2.1.1.0)

The amount must agree with the sum of item 6.4.3.1 of Part III (a) Computation of risk-weighted amount for credit risk and item 6.8.2.3 of Part V Computation of risk-weighted amount for operational risk below.

(WBRC 11.3.1.0.0.0 of Part III (a) and 1.5.3.0.0.0 of Part V)

6.3.3.1.2 Total Risk Weighted Assets for Market Risk (WBRC 11.2.2.1.2.0)

The amount must agree to item 6.7.8.2 of Part IV Computation of risk-weighted amount for market risk.

(WBRC 11.4.2.0.0.0 of Part IV)

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16.3.3.2 Minimum Capital Charge (WBRC 11.2.2.2.0.0)

The amount must agree with the sum of the following items from 6.3.3.2.1 to 6.3.3.2.2 (WBRC 11.2.2.2.1.0 to 11.2.2.2.2.0)

6.3.3.2.1 Capital charge for Credit and Operational Risk (WBRC 11.2.2.2.1.0)

The amount must agree with 10 per cent of the total risk weighted assets for credit and operational risks item 6.3.3.1.1 above.

(10% of WBRC11.2.2.1.1.0)

6.3.3.2.2 Capital Charge for Market Risk (WBRC 11.2.2.2.2.0)

The amount must agree with 10 per cent of total risk weighted assets for market risk item 6.3.3.1.2

(10% WBRC 11.2.2.1.2.0)

6.3.3.3 Total Capital Available to Meet the Capital Charge for Credit and Operational Risks

(WBRC 11.2.2.3.0.0)

The amount must agree with the sum of total core capital (6.2.2.1) and eligible supplementary capital (6.2.2.7) of Part II (a) Computation of total capital base above.

[WBRC11.2.1.1.0.0 and 11.2.1.3.0.0 of Part II (a)]

6.3.3.4 Total Capital Base Available to meet Market Risk (WBRC 11.2.2.4.0.0)

Total capital available to meet the capital charge for credit and operational risks (6.3.3.3) less capital charge for credit and operational risks (6.3.3.2.1)

(WBRC 11.2.2.3.0.0 - 11.2.2.2.1.0)

6.3.3.5 Total Available Tier III Capital (WBRC 11.2.2.5.0.0)

6.3.3.5.1 Approved Short-term Subordinated Debt (WBRC 11.2.2.5.1.0)

Report total amount of approved short-term subordinated debts under the conditions are stated at item 6.2.2.8.

(as per WBRC 11.2.1.4.0.0)

6.3.3.5.2 Minimum of 28.5 per cent of Capital Charge for Market Risk to be met by eligible core capital that is not Required for Credit Risk

(WBRC 11.2.2.5.2.0)

A minimum of about 28½ per cent of market risk needs to be supported by eligible core capital that is available to support market risk.

(i) Limit (WBRC 11.2.2.5.2.1)

Limit is computed under condition at 6.2.2.8.2 (i) above. The amount must agree to item 6.3.3.2.2 *28.5%

(WBRC 11.2.2.2.2.0*28.5%)

(ii) Amount Utilised (WBRC 11.2.2.5.2.2)

Minimum utilised amount should be equal to above limit.

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16.3.3.5.3 Maximum of 250 per cent of eligible core capital that is not Required for

Credit and Operational Risks

(WBRC 11.2.2.5.3.0)

Tier III capital will be limited to 250 per cent of a bank's eligible core capital that is available to support market risk after meeting credit risk and operational risk.

(i) Limit (WBRC 11.2.2.5.3.1)

Limit is computed under condition at 6.2.2.8.2 (ii) above. The amount must agree to item 6.3.3.4 *250%

(WBRC 11.2.2.4.0.0*250%)

(ii) Amount Utilised (WBRC 11.2.2.5.3.2)

The utilized amount is computed automatically.

6.3.3.6 Eligible Tier III Capital (WBRC 11.2.2.6.0.0)

Eligible Tier III capital for market risk is computed as follows.

6.3.3.6.1 Eligible Tier III Capital utilised (WBRC 11.2.2.6.1.0)

Total capital charge for market risk (6.3.3.2.2) less eligible core capital utilized for market risk [6.3.3.5.2 (ii)]

(WBRC 11.2.2.2.2.0 - 11.2.2.5.2.2)

6.3.3.6.2 Eligible but Unutilized Tier III Capital

The approved short-term subordinated debt (6.3.3.5.1) less eligible Tier III capital utilized (6.3.3.6.1).

(11.2.2.5.1.0 - 11.2.2.6.1.0)

6.4 Part III (a) – Computation of Risk-weighted Amount for Credit Risk

6.4.1 General Rules for Measuring Credit Risk Based on the Standardised Approach (SA)

6.4.1.1 Under the SA, the rating assigned by the eligible external credit assessment institutions (ECAIs) will largely support the measure of credit risk. Banks may rely upon the ratings assigned by the ECAIs recognised by CBSL (See paragraph 6.4.2) for assigning risk weights for capital adequacy purposes as per the mapping furnished in these guidelines.

6.4.1.2 The risk weighting of claims will be as described in paragraphs 6.4.3 (under specific rules for measuring credit risk).

6.4.1.3 Claims (exposures) on a counterpart would include placements with banks, investments, loans and advances or any other credit exposure.

6.4.1.4 On-balance sheet claims (exposures) would be risk weighted applying the risk weight as given in paragraphs 6.4.3 while off-balance sheet items would continue to be converted to credit equivalents using the credit conversion factors given in paragraph 6.5 and thereafter risk weighted according to the risk weight applicable to the counterpart.

6.4.1.5 All exposures should be risk-weighted net of specific provisions and interest in suspense that has been charged to the respective customer account.

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16.4.2 External Credit Assessments

6.4.2.1 Recognition of Eligible Credit Rating Agencies

6.4.2.1.1 The Revised Capital Adequacy Framework requires recognizing ECAIs and developing a mapping process to assign the ratings issued by eligible credit rating agencies to the risk weights available under the Standardised Approach. In accordance with the principles laid down in the revised framework, CBSL has identified the following two credit rating agencies operating in Sri Lanka for the purposes of risk weighting claims by banks for capital adequacy purposes:

(i) Fitch Ratings Lanka Ltd. and (ii) Lanka Rating Agency Ltd.

6.4.2.1.2 The following internationally recognized credit ratings agencies are also accepted as ECAIs.

(i) Moody’s (ii) Standard and Poor’s and (iii) Fitch Ratings

6.4.2.1.3 Banks are required to obtain the prior approval of CBSL for the use of other ECAIs.

6.4.2.2 Scope of Application of External Ratings

6.4.2.2.1 Banks should use the chosen ECAIs and their ratings consistently for each type of claim, for both risk weighting and risk management purposes. Banks will not be allowed to “cherry pick” the assessments provided by different ECAIs.

6.4.2.2.2 Banks shall not use one ECAI’s rating for one exposure, while using another ECAI’s rating for another exposure to the same counterpart, unless the respective exposures are rated by only one of the chosen ECAIs, whose ratings the bank has decided to use. External assessments for one entity within a corporate group cannot be used to risk weight other entities within the same group.

6.4.2.3 Mapping Process

6.4.2.3.1 The ratings issued by the eligible ECAIs have been mapped to the appropriate risk weights applicable as per the Standardised Approach under the Revised Framework. The rating risk weight - mapping furnished in the tables below shall be adopted by all banks:

Table 1

Mapping of Notations of the Credit Rating Agencies in Sri Lanka

Fitch Ratings Lanka

Lanka Rating Agency

Rating Scaleof CAR

AA(sri) AAA AAAAA+(sri) AA1 AA+AA(sri) AA2 AAAA-(sri) AA3 AA-A+(sri) A1 A+A(sri) A2 AA-(sri) A3 A-

(Contd. on next page)

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1Fitch Ratings

LankaLanka Rating

AgencyRating Scale

of CARBBB+(sri) BBB1 BBB+BBB(sri) BBB2 BBBBBB-(sri) BBB3 BBB-BB+(sri) BB1 BB+BB(sri) BB2 BBBB-(sri) BB3 BB-B+(sri) B1 B+B(sri) B2 BB-(sri) & Lower B3 & Lower B- & Lower

Table 2

Mapping of Notations of the International Credit Rating Agencies

Standard and Poor’s Moody’s Fitch Ratings Rating Scale of

CARAAA Aaa AAA AAAAA+ Aa1 AA+ AA+AA Aa2 AA AAAA- Aa3 AA- AA-A+ A1 A+ A+A A2 A AA- A3 A- A-BBB+ Baa1 BBB+ BBB+BBB Baa2 BBB BBBBBB- Baa3 BBB- BBB-BB+ Ba1 BB+ BB+BB Ba2 BB BBBB- Ba3 BB- BB-B+ B1 B+ B+B B2 B BB- & Lower B3 & Lower B- & Lower B- & Lower

Table 3

Mapping of Short Term Ratings

Short term ratings Risk

weightsLanka Rating Agency

Standard and Poor’s Moody’s Fitch Ratings

L - 1 A - 1+/A - 1 P - 1 F1+/ F1 20%L - 2 A - 2+/A - 2 P - 2 F2 50%L - 3 A - 3+/A - 3 P - 3 F3 100%NP Below A - 3 NP Below F3 150%

(Contd. from last page)

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16.4.2.4 Short-Term Ratings

6.4.2.4.1 Short-term assessments may only be used for short-term claims against banks and corporates.

6.4.2.4.2 For risk-weighting purposes, short-term ratings are deemed to be issue specific. They can only be used to derive risk weights for claims arising from the rated facility. They cannot be generalised to other short-term claims. In no event can a short-term rating be used to support a risk weight for an unrated long-term claim.

6.4.2.4.3 If a short-term rated facility attracts a 50 per cent risk weight, unrated short-term claims cannot attract a risk weight lower than 100 per cent. If an issuer has a short-term facility with an assessment that warrants a risk weight of 150 per cent, all unrated claims, whether long term or short term, should also receive a 150 per cent risk weight, unless the bank uses recognized CRM techniques for such claims.

6.4.2.4.4 The above risk weight mapping of both long term and short-term ratings of the chosen domestic rating agencies would be reviewed annually by CBSL.

6.4.2.5 Use of Unsolicited Ratings

A rating would be treated as solicited only if the issuer of the instrument has requested the credit rating agency for the rating and has accepted the rating assigned by the agency. As a general rule, banks should use only solicited rating from the chosen ECAIs. No ratings issued by the credit rating agencies on an unsolicited basis should be considered for risk weight Computation as per the Standardised Approach.

6.4.2.6 Issuer versus Issues Assessment

Where a bank’s exposure is to a particular issue that has an issue-specific assessment, the risk weight of the claim will be based on this assessment.

6.4.2.7 Use of Multiple Rating Assessments

Banks shall be guided by the following in respect of exposures/obligors having multiple ratings from the eligible ECAIs chosen by the bank for the purpose of risk weight Computation:

6.4.2.7.1 If there is only one rating by an eligible credit rating agency for a particular claim, that rating would be used to determine the risk weight of the claim.

6.4.2.7.2 If there are two ratings accorded by eligible credit rating agencies, which map into different risk weights, the higher risk weight should be applied.

6.4.2.7.3 If there are three or more ratings accorded by eligible credit rating agencies with different risk weights, the ratings corresponding to the two lowest risk weights should be referred to and the higher of those two risk weights should be applied, i.e., the second lowest risk weight.

6.4.3 Specific Rules for Measuring Credit Risk Based on the Standardised Approach (SA)

6.4.3.1 Total Risk-weighted amount for Credit Risk (BRC 11.3.1.0.0.0)

The amount must agree to sum of total amount of on-balance sheet items and total amount of credit equivalent items (from 6.4.3.1.1 to 6.4.3.1.14) after applying the specific risk weight assigned.

(WBRC 11.3.1.1.0.0 to11.3.1.14.0.0)

6.4.3.1.1 Claims on Government of Sri Lanka and Central Bank of Sri Lanka (WBRC 11.3.1.1.0.0) All claims on Government of Sri Lanka and Central Bank of Sri Lanka are

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1risk-weighted at zero per cent. The amount must agree to sum of items (i) and (ii)

(WBRC 11.3.1.1.1.0 to 11.3.1.1.2.0)

(i) Claims on Government of Sri Lanka (WBRC 11.3.1.1.1.0)

All claims on Government of Sri Lanka are risk-weighted at 0%.

(ii) Claims on Central Bank of Sri Lanka (WBRC 11.3.1.1.2.0)

All claims on Central Bank of Sri Lanka are risk-weighted at 0%.

6.4.3.1.2 Claims on Foreign Sovereigns and their Central Banks (WBRC 11.3.1.2.0.0)

Exposures on foreign sovereigns and their central banks will attract risk weights as per the rating assigned to those sovereigns/sovereign exposures by international rating agencies as given in the table below. The amount must agree to sum of following items from (i) to (vi).

(WBRC 11.3.1.2.1.0 to 11.3.1.2.6.0)

Table 4

Item WBRC Credit Assessment Risk Weight(i) 11.3.1.2.1.0 AAA to AA- 0%

(ii) 11.3.1.2.2.0 A+ to A- 20%(iii) 11.3.1.2.3.0 BBB+ to BBB- 50%(iv) 11.3.1.2.4.0 BB+ to B 100%(v) 11.3.1.2.5.0 Below B- 150%

(vi) 11.3.1.2.6.0 Unrated 100%

6.4.3.1.3 Claims on Public Sector Entities (PSEs) (WBRC 11.3.1.3.0.0)

All performing claims on domestic public sector entities (including public corporations, statutory boards, provincial authorities, local government bodies, etc.) and claims on foreign PSEs will be risk weighted in a manner similar to claims on corporates as given in the table below. The amount must agree to sum of following items from (i) to (v).

(WBRC 11.3.1.3.1.0 to 11.3.1.2.5.0)

Table 5

Item WBRC Credit Assessment Risk Weight(i) 11.3.1.3.1.0 AAA to AA 20%

(ii) 11.3.1.3.2.0 A+ to A- 50%(iii) 11.3.1.3.3.0 BBB+ to BB- 100%(iv) 11.3.1.3.4.0 Below BB- 150%(v) 11.3.1.3.5.0 Unrated 100%

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16.4.3.1.4 Claims on Official Entities and Multilateral Development Banks (MDBs) (WBRC 11.3.1.4.0.0)

The amount must agree with the sum of the following items from (i) to (iii).

(WBRC 11.3.1.4.1.0 to 11.3.1.4.6.0)

(i) Exposures on following official entities will be assigned zero risk weight:

(a) Bank for International Settlements (BIS) (b) International Monetary Fund (IMF) (c) European Central Bank (ECB) (d) European Community (EC)

(ii) The following Eligible MDBs will be assigned a zero risk weight:

(a) The World Bank Group comprising of the International Bank for Reconstruction and Development (IBRD) and the International Finance Corporation (IFC)

(b) The Asian Development Bank (ADB) (c) The African Development Bank (AFDB) (d) The European Bank for Reconstruction and Development (EBRD) (e) The Inter-American Development Bank (IADB) (f) The European Investment Bank (EIB) (g) The European Investment Fund (EIF) (h) The Nordic Investment Bank (NIB) (i) The Caribbean Development Bank (CDB) (j) The Islamic Development Bank (IDB) (k) The Council of Europe Development Bank (CEDB) (l) The International Finance Facility for Immunization (IFFIm)

(iii) The risk weight applicable to claims on other MDBs will depend on the external rating assigned for each MDBs as follows:

Table 6

Item WBRC Credit Assessment Risk Weight(i) 11.3.1.4.1.0 BIS,IMF and MDBs 0%

(ii) 11.3.1.4.2.0 AAA to AA- 20%(iii) 11.3.1.4.3.0 A+ to BBB- 50%(iv) 11.3.1.4.4.0 BB+ to B- 100%(v) 11.3.1.4.5.0 Below B- 150%

(vi) 11.3.1.4.6.0 Unrated 100%

6.4.3.1.5 Claims on Banks (WBRC 11.3.1.5.0.0)

Total performing claims on banks denominated in LKR and foreign currency. The amount must agree to sum of total rupee claims and foreign currency claims.

(WBRC 11.3.1.5.1.0 + 11.3.1.5.2.0 + 11.3.1.5.3.0)

Short-Term Claims: In order to qualify for the preferential treatment for short-term claims, they should have an original contractual maturity of 3 months or less, and should not be rolled over.

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1 Branches of banks incorporated abroad: The rating applicable to the Head

Office may be used as the rating applicable to the particular branch, if the branch is not rated locally.

(i) Claims on Banks: Rupee Exposures less than 3 months (WBRC 11.3.1.5.1.0)

All performing claims on all banks (short-term) including LCBs and LSBs, excluding investment in equity shares and other instruments eligible for capital status, denominated in LKR would be risk weighted based on their external credit assessment as follows:

The amount must agree with the sum of the following items from (i) to (iv).

(WBRC 11.3.1.5.1.1 to 11.3.1.5.1.4)

Table 7

Item WBRC Credit Assessment Risk Weight(i) 11.3.1.5.1.1 AAA to BBB- 20%

(ii) 11.3.1.5.1.2 BB+ to B- 50%(iii) 11.3.1.5.1.3 Below B- 150%(iv) 11.3.1.5.1.4 Unrated 100%

(ii) Claims on Banks: Foreign Currency Exposures less than 3 months (WBRC 11.3.1.5.2.0)

All performing claims denominated in foreign currency on banks (short-term) will be risk weighted based on their external credit assessment as given in the table below.

The amount must agree with the sum of the following items from (i) to (v).

(WBRC 11.3.1.5.2.1 to 11.3.1.5.2.5)

Table 8

Item WBRC Credit Assessment Risk Weight(i) 11.3.1.5.2.1 AAA to A- 20%

(ii) 11.3.1.5.2.2 BBB+ to BBB- 50%(iii) 11.3.1.5.2.3 BB+ to B- 100%(iv) 11.3.1.5.2.4 Below B- 150%(v) 11.3.1.5.2.5 Unrated 100%

(iii) Claims on Banks: Rupee and Foreign Currency Exposures more than 3 months

(WBRC 11.3.1.5.3.0)

All performing claims denominated in rupee and foreign currency on banks (more than 3 months) will be risk weighted based on their external credit assessment as given in the table below.


(WBRC 11.3.1.5.3.1 to 11.3.1.5.3.5)

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1Table 9


(ii) 11.3.1.5.3.2 A+ to BBB- 50%(iii) 11.3.1.5.3.3 BB+ to B- 100%(iv) 11.3.1.5.3.4 Below B- 150%(v) 11.3.1.5.3.5 Unrated 100%

6.4.3.1.6 Claims on Financial Institutions (WBRC 11.3.1.6.0.0)

Total performing claims on non-bank financial institutions. However, investment in equity shares and other instruments eligible for capital status in the financial institutions are stated in paragraph 6.2.3 and 6.2.4 should be excluded from here.

(WBRC 11.3.1.6.1.0 + 11.3.1.6.2.0)

(i) Claims on Primary Dealers/Finance Companies/Specialised Leasing Companies

(WBRC 11.3.1.6.1.0)

All performing claims on following institutions.

Primary Dealers: Registered under the Local Treasury Bills Ordinance (Primary Dealers), Regulations No.1 of 2002.

Finance Companies: Registered under the Finance Companies Act, No.78 of 1988, as amended.

Specialised Leasing Companies: Registered under the Finance Leasing Act, No.56 of 2000.


(WBRC 11.3.1.6.1.1 to 11.3.1.6.1.5)

Table 10


(ii) 11.3.1.6.1.2 A+ to BBB- 50%(iii) 11.3.1.6.1.3 BB+ to B- 100%(iv) 11.3.1.6.1.4 Below B- 150%(v) 11.3.1.6.1.5 Unrated 100%

(ii) Claims on Other Financial Institutions (WBRC 11.3.1.6.2.0)

All performing claims on other financial institutions.


(WBRC 11.3.1.6.2.1 to 11.3.1.6.2.5)

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1Table 11



6.4.3.1.7 Claims on Corporates (WBRC 11.3.1.7.0.0)

All performing claims on corporates shall be risk weighted as per the ratings assigned.

Banks can, with prior approval of CBSL, exercise the option to rate all corporate customers at 100 per cent. Once decided and approved by CBSL the banks should apply a single consistent approach.


(WBRC 11.3.1.7.1.0 to 11.3.1.7.5.0)

Table 12



6.4.3.1.8 Retail Claims (WBRC 11.3.1.8.0.0)

All performing retail claims include: Retail claims that qualify for regulatory capital purposes and retail claims that do not qualify for regulatory capital purposes.

However, the following shall be excluded from the retail portfolio:

(a) Investments in securities such as bonds and equities (to be treated as investments).

(b) Residential housing loans secured by mortgages over the residential property that qualify for inclusion as claims secured by residential property (refer WBRC 1.3.1.9.0.0).

The amount must agree with the sum of the retail claims that qualify for regulatory capital purposes and retail claims that do not qualify for regulatory capital purposes.

(WBRC 11.3.1.8.1.0 to 11.3.1.8.2.0)

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1 (i) Retail claims that qualify for regulatory capital purposes (WBRC 11.3.1.8.1.0)

Performing claims that meet the criteria given below qualify for inclusion in the regulatory retail portfolio. All such exposures qualify for a 75 per cent risk weight.

The qualifying criteria for the Regulatory Retail Portfolio (applicable to both the retail and SME portfolios):

(a) Orientation Criterion – The exposure should be to an individual person or persons or to a SME.

(b) Product Criterion – The exposure should be of one of the following product types. Both fund based and non-fund based facilities to be included:

• Revolving credit and lines of credit including overdrafts and credit cards

• Personal term loans and leases (e.g., installment loans, vehicle loans and leases, student and educational loans, personal finance)

• SME facilities.

(c) Granularity Criterion – The regulatory retail portfolio must be sufficiently diversified to a degree that reduces the risks in the portfolio. In order to meet this criterion,

• No aggregate exposure without considering CRM, to one counterpart should exceed 0.2 per cent of the overall retail portfolio (excluding any non-performing retail/SME claims).

• “To one counterpart” means one or several entities that constitute a single beneficiary, e.g.: in the case of a small business affiliated to another small business, the limit would apply to the bank’s aggregate exposure on both businesses.

(d) Low value of Individual Exposures –

• Individual Exposures: The maximum aggregate retail exposure (not taking any CRM into account) to one counterpart cannot exceed:– the lower of 0.4 per cent of capital base (as included in the

computation as at the reporting date) or Rs.10 million at the time of first granting.

– This criterion will be applicable for a period of 3 years from adoption.

– From 01.01.2011, the criterion would be the lower of 0.2 per cent or Rs.10 million.

• SME Exposures:– The maximum exposure in the case of SME loans would be

Rs.35 million at the time of first granting.– In order to qualify as an SME, the firm’s annual turnover

should not be more than Rs.140 million.– The annual turnover should be based on the latest available

audited financial statements at the time of granting the facilities.

– If audited financial statements are not available, the draft accounts may be used. However, the audited financial statements should be obtained during the year.

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1– The qualifying criteria is given above should be reviewed in

respect of each financial year.

(ii) Retail claims that do not qualify for regulatory capital purposes (WBRC 11.3.1.8.2.0)

Claims that not qualify for inclusion in the regulatory retail portfolio:

Performing claims that do not meet the criteria given above do not qualify for inclusion in the regulatory retail portfolio. All such exposures qualify for a 100 per cent risk weight.

6.4.3.1.9 Claims Secured by Residential Property (WBRC 11.3.1.9.0.0)

All performing claims secured by residential property include: Claims that qualify for regulatory capital purposes and claims that do not qualify for regulatory capital purposes.

However, the exposures secured by mortgages on commercial real estates shall be excluded from here.

The amount must agree with the sum of the claims secured by residential property that qualify for regulatory capital purposes and claims secured by residential property that do not qualify for regulatory capital purposes.

(WBRC 11.3.1.9.1.0 to 11.3.1.9.2.0)

(i) Claims that qualify for regulatory capital purposes (WBRC 11.3.1.9.1.0)

(a) Subject to conditions below, residential housing loans fully secured by a primary mortgage over such residential property that is or will be occupied by the borrower, or rented, qualify for a risk weight of 50 per cent.

The claims should strictly meet the following qualifying criteria to be able to use the preferential risk weight– A margin of at least 25 per cent on the value of the property

based on the latest valuation report– Valuation of property: valuation of property is carried out by

an external independent valuer or current internal assessment of the value of the properties subject to the conditions stated in the Directions on Classification of Advances and Specific Provisions issued under Banking Act.

(b) Mortgages other than primary mortgages will qualify for the same risk weight, subject to the above conditions, if:– The mortgage is with the same bank– The purpose of the loan is for residential purposes.

(ii) Claims that do not qualify for regulatory capital purposes (WBRC 11.3.1.9.2.0)

Performing claims that do not meet the criteria given above do not qualify for inclusion in the regulatory residential portfolio. All such exposures qualify for a 100 per cent risk weight.

6.4.3.1.10 Claims Secured by Commercial Real Estate (WBRC 11.3.1.10.0.0)

Commercial real estate exposure is defined as exposures secured by mortgages on commercial real estate (office buildings, multi-purpose or multi-tenanted commercial premises, multi-family residential buildings,

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1industrial or warehouse space, hotels, land acquisition, land development and construction).

Commercial real estate exposures, as defined above will attract a risk weight of 100 per cent.

6.4.3.1.11 Non-Performing Assets (NPAs) (WBRC 11.3.1.11.0.0)

The unsecured portion of NPAs, other than a qualifying residential mortgage loan which is addressed in item 6.4.2.1.12, net of specific provision will be risk weighted as items (i) and (ii) below.

For the purpose of computing the level of specific provisions of NPAs for deciding the risk-weighting, all funded NPA exposures of a single counterparty (without netting the value of the eligible collateral under CRM) should be reckoned in the denominator.

For the purpose of defining the secured portion of the NPA, eligible collateral will be the same as recognised for credit risk mitigation purposes. Hence, other forms of collateral like land, buildings, plant, machinery, current assets, etc., will not be reckoned while computing the secured portion of NPAs for capital adequacy purposes.

The amount must agree with the sum of the following items (i) and (ii).

(WBRC 11.3.1.11.1.0 + 11.3.1.11.2.0)

(i) Specific provisions are equal or more than 20 per cent (WBRC 11.3.1.11.1.0)

100 per cent risk weight when specific provisions are equal or more than 20 per cent of the outstanding amount of the NPA.

(ii) Specific provisions are less than 20 per cent (WBRC 11.3.1.11.2.0)

150 per cent risk weight when specific provisions are less than 20 per cent of the outstanding amount of the NPA.

6.4.3.1.12 Non-Performing Assets Secured by Residential property (WBRC 11.3.1.12.0.0)

The unsecured of portion NPAs (without netting the value of property mortgage), net of specific provision will be risk weighted as items (i) and (ii):

For the purpose of computing the level of specific provisions in NPAs for deciding the risk-weighting, all funded NPA exposures of a single counterparty (without netting the value of property mortgage) should be reckoned in the denominator.

The amount must agree with the sum of the following items (i) and (ii).

(WBRC 11.3.1.12.1.0 + 11.3.1.12.2.0)

(i) Specific provisions are equal or more than 20 per cent (WBRC 11.3.1.12.1.0)

50 per cent risk weight when specific provisions are equal or more than 20 per cent of the outstanding amount of the NPA.

(ii) Specific provisions are less than 20 per cent (WBRC 11.3.1.12.2.0)

100 per cent risk weight when specific provisions are less than 20 per cent of the outstanding amount of the NPA.

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16.4.3.1.13 Higher-Risk Categories (WBRC 11.3.1.13.0.0)

Exposures to the following segments, which are considered as high-risk exposures, will attract a higher risk weight of 150 per cent:

(i) Venture capital funds/companies (ii) Private equity investments

6.4.3.1.14 Cash Items and Other Assets (WBRC 11.3.1.14.0.0)

The amount must agree with the sum of cash items (i) and Other Assets (ii)

(WBRC 11.3.1.14.1.0 to 11.3.1.14.2.0)

(i) Cash Items (WBRC 11.3.1.14.1.0)

Total of cash items from (a) to (c)

(a) Notes and Coins (WBRC 11.3.1.14.1.1)

Local currency notes and coins held by tellers, in ATMs, in vault and petty cash.

Risk weight is 0 per cent

(b) Gold and Bullion held in own vault (WBRC 11.3.1.14.1.2)

Gold and bullion held in the bank’s vaults. Gold items held in safe custody should be excluded.

Risk weight is 0 per cent

(c) Cash Items in the process of Collection (WBRC 11.3.1.14.1.3)

Cheques, drafts and other cash items, such as money orders, postal orders drawn on banks and other authorized institutions and paid immediately on presentation. Trade bills, such as import bills and export bills, in the process of collection should be excluded from this item and considered as loans and advances.

Risk weight is 20 per cent.

(ii) Other Assets (WBRC 11.3.1.14.2.0) Total of items (a) and (b) below.

(a) Fixed Assets (WBRC 11.3.1.14.2.1)

The item includes bank premises, immovable property, machinery and equipment, motor vehicles, furniture and fittings and other fixed assets, reported at cost or at revalued amount, net of accumulated depreciation will attract a risk weight of 100 per cent.

(b) Other Assets/Exposures (WBRC 11.3.1.14.2.2)

All other assets/exposures which are not specified elsewhere will attract a uniform risk weight of 100 per cent.

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16.5 Part III (b) – Computation of Credit Equivalent Amount of Off-Balance Sheet Items

6.5.1 General Instructions

6.5.1.1 The risk-weighted amount of an off-balance sheet item that gives rise to credit exposure is generally calculated by means of a two-step process:

6.5.1.1.1 The notional amount of the transaction is converted into a credit equivalent amount, by multiplying the amount by the specified credit conversion factor or by applying the current exposure method, and

6.5.1.1.2 The resulting credit equivalent amount is multiplied by the risk weight applicable to the counterpart or type of asset.

6.5.1.2 Where the off-balance sheet item is secured by eligible collateral or guarantee, the CRM guidelines detailed in paragraph 6.6 may be applied.

6.5.2 The credit conversion factors to be used will be as follows:

6.5.2.1 Off-Balance Sheet Items: (WBRC 11.3.2.0.0.0)

The exposure on off-balance sheet items is to be included in the computation of the risk weighted capital ratio. The conversion of the credit risk inherent in each off-balance sheet item would be converted into an on-balance sheet credit equivalent by multiplying the principal amount by a credit conversion factor. The credit equivalent amount would then be weighted according to the corresponding asset item.

The amount must agree with the sum of the principal amount of off-balance sheet items and credit equivalent of off-balance sheet items from 6.5.2.1.1 to 6.5.2.1.10.

(WBRC 11.3.2.1.0.0 to11.3.2.10.0.0)

6.5.2.1.1 Direct Credit Substitutes (WBRC 11.3.2.1.0.0)

Total direct credit substitutes of the following items from (i) to (iv).

Conversion Factor 100 per cent

(WBRC 11.3.2.1.1.0 to 11.3.2.1.4.0)

(i) General Guarantees of Indebtedness (WBRC 11.3.2.1.1.0)

General guarantees of indebtedness where the risk of loss in the transaction may crystallise into a direct liability and become a direct claim on the counterparty. These include Guarantees in respect of counterparties like insurance agents, sales agents, etc., to cover any non-payment by them of premium, sales proceeds, etc. to their beneficiaries. Bank Guarantees in favor of customs would cover any non-payment of customs duties by their counterparties.

(ii) Stand-by LCs serving as Financial Guarantees (WBRC 11.3.2.1.2.0)

Stand-by Letters of Credit, which are direct, credit substitutes where the risk of loss in the transaction is equivalent to that of a direct claim on the counterparty. This includes stand-by Letters of Credit serving as financial guarantees for loans, securities and other financial liabilities.

(iii) Bank Acceptances (WBRC 11.3.2.1.3.0)

Liabilities arising from acceptances on accommodation of bills but excludes bills that have been discounted by the bank itself. Risk

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1participation and other similar commitments undertaken to repay the financial obligation of a customer, on his failure to do so, should be included.

(iv) Others (WBRC 11.3.2.1.4.0)

Any other obligation which carries the same risk of loss in the transaction and is equivalent to that of a direct claim on the counterparty.

6.5.2.1.2 Transaction-Related Contingencies (WBRC 11.3.2.2.0.0)

Total transaction-related contingencies of following items from (i) to (iii).


(WBRC 11.3.2.2.1.0 to 11.3.2.2.3.0)

(i) Performance Bonds, Bid Bonds & Warranties (WBRC 11.3.2.2.1.0)

Transaction-related contingent items such as Performance Bonds, Bid Bonds and Warranties, where the risk of loss arises from an irrevocable obligation to pay a third party, the non-financial obligation of the customer upon his failure to fulfill obligations under a contract or a transaction. Such contingencies would crystallise into actual liabilities dependent upon the occurrence or non-occurrence of an event other than that of a default in payment by the counterparty.

(ii) Stand-by LCs related to particular transactions (WBRC 11.3.2.2.2.0)

Contingent liabilities relating to particular transactions. Here too, there is a likelihood of the contingencies crystallizing into actual liabilities depending upon the occurrence or non-occurrence of an event other than that of a default in payment by a counterparty.

(iii) Others (WBRC 11.3.2.2.3.0)

Other contingent liabilities arising from an irrevocable obligation to pay a third party, the non-financial obligation of a customer upon his failure to fulfill such obligation or terms under contract or transaction.

6.5.2.1.3 Short-Term Self Liquidating Trade-Related Contingencies (WBRC 11.3.2.3.0.0)

Total short-term self liquidating trade-related contingencies of following items from (i) to (iv).


(WBRC 11.3.2.3.1.0 to 11.3.2.3.4.0)

(i) Shipping Guarantees (WBRC 11.3.2.3.1.0)

Guarantees issued by the reporting institution to customers where the reporting institution agrees to indemnify fully, to a named shipping agent, against all liabilities arising from the release of goods without production of Bills of Lading and/or other shipping documents by the receiving party.

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1 (ii) Documentary Letters of Credit (WBRC 11.3.2.3.2.0)

Documentary credits collateralised by the underlying shipments which are short-term self-liquidating and trade-related transactions.

(iii) Trade-Related Acceptances (WBRC 11.3.2.3.3.0)

Liabilities arising from acceptances that are based on a specific trade transaction either domestic or foreign e.g.: Letters of Credit.

(iv) Others (WBRC 11.3.2.3.4.0)

Contingent liabilities arising from short-term self-liquidating trade related obligations.

6.5.2.1.4 Sale and Repurchase agreements and Assets sale with recourse where the credit risk remains with the bank

(WBRC 11.3.2.4.0.0)

Total of following items from (i) to (vi).


(WBRC 11.3.2.4.1.0 to 11.3.2.4.6.0)

( ) Sale and Repurchase Agreements (WBRC 11.3.2.4.1.0)

Sale and Repurchase Agreement (REPO) is an agreement whereby a bank sells an asset to a third party with a commitment to repurchase it at an agreed price on an agreed future date. Purchase and Resale Agreements (Reverse REPOS) should be considered as collateralised loans. The risk is to be measured as an exposure to the counterparty unless the underlying asset has been reported as an on-balance sheet item where the risk weight appropriate to the underlying asset should be used.

(ii) Housing Loans Sold with Recourse (WBRC 11.3.2.4.2.0)

The amount of housing loans sold to a counterparty with recourse where the credit risk remains with the Bank.

(iii) Other Assets Sold with Recourse (WBRC 11.3.2.4.3.0)

Assets sold with recourse where the credit risk remains with the reporting institution. The holder of the asset is entitled to put the assets back to the reporting institution within an agreed period or under certain prescribed circumstances – e.g.: deterioration in the value or credit quality of the asset concerned.

(iv) Forward Assets Purchases (WBRC 11.3.2.4.4.0)

Commitment to purchase, at a specified future date and/or on pre-arranged terms, a loan, security or other asset from another party.

(v) Partly-Paid Shares/Securities (WBRC 11.3.2.4.5.0)

Unpaid amounts on partly-paid shares and securities where the issuer may call upon the bank to pay at a pre-determined or unspecified date in the future.

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1 (vi) Others (WBRC 11.3.2.4.6.0)

Placements of forward deposits and other commitments with certain drawdown. A forward deposit is an agreement between two parties whereby one will place and the other will receive, at a pre-determined future date, a deposit, at an agreed rate of interest. A commitment to place a forward deposit should be reported under this item and weighted according to the risk-weight appropriate to the counterparty.

6.5.2.1.5 Obligations under an On-going Underwriting Agreement (WBRC 11.3.2.5.0.0)

Total of following items from (i) to (iii).


(WBRC 11.3.2.5.1.0 to 11.3.2.5.3.0)

(i) Underwriting of Shares/Securities Issue (WBRC 11.3.2.5.1.0)

Obligations due to underwriting of shares and securities, net of the amount sub-underwritten by another institution.

(ii) Note Issuance Facilities and Revolving Underwriting Facilities (WBRC 11.3.2.5.2.0)

Arrangements where a borrower may draw funds up to a prescribed limit over a pre-defined period through the issue of notes which the reporting bank has committed to underwrite.


Other obligations due to on-going underwriting agreements.

6.5.2.1.6 Commitments with an Original maturity of up to one year or which can be unconditionally cancelled at any time

(WBRC 11.3.2.6.0.0)

Total of following items from (i) to (iv).


(WBRC 11.3.2.6.1.0 to 11.3.2.6.4.0)

(i) Formal Stand-by Facilities and Credit Lines (WBRC 11.3.2.6.1.0)

Commitments include the undrawn portion of any binding arrangements which obligate the reporting institution to provide funds at some future date. Such commitments would have an original maturity of less than one year or which can be unconditionally cancelled at any time by the reporting bank at its discretion. Formal stand-by facilities and credit lines for Letters of Credit, Trust Receipts, etc; should be included under the item.

(ii) Undrawn Term Loans (WBRC 11.3.2.6.2.0)

Undrawn portion of a term loans with an original maturity of less than one year or which can be unconditionally cancelled at any time by the reporting bank.

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1 (iii) Undrawn Overdraft Facilities/Unused Credit Card Lines (WBRC 11.3.2.6.3.0)

The undrawn portion of overdraft facilities and credit card lines with an original maturity of less than one year or which can be unconditionally cancelled at any time by the reporting bank.

(iv) Others (WBRC 11.3.2.6.4.0)

Any other commitment with an original maturity up to one year or which can be unconditionally cancelled at any time.

6.5.2.1.7 Other Commitments with an Original maturity of up to one year (WBRC 11.3.2.7.0.0)



(WBRC 11.3.2.7.1.0 to 11.3.2.7.3.0)


The commitments under formal standby facilities and credit lines with an original maturity is up to one year.


The undrawn portion of term loans where the original maturity is up to one year.


Any other commitment with an original maturity up to one year.

6.5.2.1.8 Other Commitments with an Original maturity of over one year (WBRC 11.3.2.8.0.0)



(WBRC 11.3.2.8.1.0 to 11.3.2.8.3.0)


The commitments under formal standby facilities and credit lines with an original maturity is over one year.


The undrawn portion of term loans where the original maturity is over one year.


Any other commitment with an original maturity over one year.

6.5.2.1.9 Exchange Rate Contracts (WBRC 11.3.2.9.0.0)

Exchange rate contracts shall include the following items (a to e), but exclude

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1exchange rate contracts which have an original maturity of 14 calendar days or less.

(a) Forward foreign exchange contracts (b) Currency futures (c) Currency options purchased (d) Cross currency FX swaps (e) Other similar instruments

To arrive at the credit equivalent amounts of exchange rate contracts, applying the original exposure method, a bank will have to apply one of the conversion factors as given in the table below to the notional principal amounts of each instrument according to the nature of the instrument and its maturity.

Table 13

Item WBRC Original Maturity Conversion Factor

(i) 11.3.2.9.1.0 Less than one year 2%

(ii) 11.3.2.9.2.0 One year and less than two years 5%

(iii) 11.3.2.9.3.0 For each additional year 3%

6.5.2.1.10 Interest Rate Contracts (WBRC 11.3.2.10.0.0)

Interest rate contracts shall include,

(a) Single currency interest rate swaps (b) Basis swaps (c) Forward rate agreements (d) Interest rate futures (e) Interest rate options purchased, and (f) Other similar instruments

To arrive at the credit equivalent amounts of interest rate contracts, applying the original exposure method, a bank will have to apply one of the conversion factors as given in the table below to the notional principal amounts of each instrument according to the nature of the instrument and its maturity.

Table 14

Item WBRC Original Maturity Conversion Factor

(i) 11.3.2.10.1.0 Less than one year 0.5%

(ii) 11.3.2.10.2.0 One year and less than two years 1.0%

(iii) 11.3.2.10.3.0 For each additional year 1.0%

Note: In the case of foreign exchange and interest rate contracts above, the netting of contracts subject to novation would be permitted. Therefore, the net rather than the gross claims arising out of swaps and similar contracts (subject to novation) with the same counterparts will be weighted. In this context, novation is defined as a bilateral contract between two counterparties under which any obligation to each other to deliver a given currency on a given date is automatically amalgamated with all other obligations for the same currency and value date, legally substituting one single net amount for the previous gross obligations.

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16.6 Part III (c) – Exposures Recognized under Credit Risk Mitigation (CRM)

6.6.1 Overview of CRM

6.6.1.1 Banks use a number of techniques to mitigate the credit risks to which they are exposed. For example, exposures may be collateralised by first priority claims, in whole or in part with cash or securities, a loan exposure may be guaranteed by a third party, or a bank may buy a credit derivative to offset various forms of credit risk. Additionally, banks may agree to net loans owed to them against deposits from the same counterpart.

6.6.1.2 The revised approach to credit risk mitigation allows a wider range of credit risk mitigants to be recognised for regulatory capital purposes than is permitted under Basel I, provided that these techniques meet the minimum conditions described below.

6.6.1.3 While the use of CRM techniques reduces or transfers credit risk, it simultaneously may increase other risks (residual risks). Residual risks include legal, operational, liquidity and market risks. Therefore, it is imperative that banks employ robust procedures and processes to control these risks, including strategy, consideration of the underlying credit, valuation, policies and procedures, systems, control of roll-off risks and management of concentration risk arising from the bank’s use of CRM techniques and its interaction with the bank’s overall credit risk profile.

6.6.1.4 Legal Certainty: All documentation used in collateralised transactions and guarantees must be binding on all parties and legally enforceable in all relevant jurisdictions. Banks must have conducted sufficient legal review, which should be well documented, to verify this. Such verification should have a well founded legal basis for reaching the conclusion about the binding nature and enforceability of the documents. Banks should also undertake such further review as necessary to ensure continuing enforceability.

6.6.1.5 Treatment of Pools of CRM Techniques: In case where a bank has multiple CRM techniques covering a single exposure (e.g.: a bank has both collateral and guarantee partially covering an exposure), the bank will be required to subdivide the exposure into portions covered by each type of CRM technique (e.g.: portion covered by collateral, portion covered by guarantee) and the risk-weighted assets of each portion must be calculated separately. When credit protection provided by a single protection provider has differing maturities, they must be subdivided into separate protection as well.

6.6.2 CRM Techniques

6.6.2.1 Collateralised Transactions: A collateralised transaction is one in which:

• banks have a credit exposure or potential credit exposure; and• that credit exposure or potential credit exposure is hedged in whole or in part by

collateral posted by a counterpart or by a third party on behalf of the counterpart.

6.6.2.1.1 The Simple Approach will be Followed in Computing the Effects of CRM

(i) In the simple approach, the portions of claims collateralised by the market value of recognised collateral receive the risk weight applicable to the collateral instrument. The risk weight on the collateralised portion will be subject to a floor of 20 per cent. The remainder of the claim should be assigned to the risk weight appropriate to the counterparty.

(ii) Mismatches in the maturity of the underlying exposure and collateral will not be allowed, i.e., the collateral must be pledged for at least the life of the exposure.

6.6.2.1.2 Risk Weights

(i) The 20 per cent floor for the risk weight on a collateralised transaction will not be applied and 0 per cent risk weight can be applied provided the exposure and the collateral are denominated in the same currency, and either:

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1 (a) the collateral is cash on deposit and gold or (b) the collateral is in the form of Government securities or (c) the collateral is in the form provident fund balances.

6.6.2.1.3 Minimum Conditions

(i) Legal Certainty: as described in paragraph 6.6.1.4

(ii) Ability to Liquidate: The bank should have the right to liquidate or take legal possession of it, in a timely manner, in the event of the default, insolvency or bankruptcy (or one or more otherwise-defined credit events set out in the transaction documentation) of the counterparty (and, where applicable, of the custodian holding the collateral). Furthermore banks must take all steps necessary to fulfill those requirements under the law applicable to the bank’s interest in the collateral for obtaining and maintaining an enforceable security interest.

(iii) Material Correlation: In order for collateral to provide protection, the credit quality of the counterparty and the value of the collateral must not have a material positive correlation. For example, securities issued by the counter party or by any related group entity - would provide little protection and so would be ineligible.

(iv) Recovery Procedures: Banks must have clear and robust procedures for the timely liquidation of collateral to ensure that any legal conditions required for declaring the default of the counter party and liquidating the collateral are observed, and that collateral can be liquidated promptly. Where the collateral is held by a custodian, banks must take reasonable steps to ensure that the custodian segregates the collateral from its own assets.

6.6.2.1.4 Eligible Financial Collateral

The following collateral instruments are eligible for recognition in the simple approach:

(i) Cash (as well as certificates of deposit or comparable instruments, including fixed deposit receipts, issued by the lending bank) on deposit with the bank, which is incurring the counterparty exposure.

(ii) Gold: Gold would include both bullion and jewellery.

(iii) GOSL securities

(iv) Provident fund balances

(v) Debt securities rated by a recognized ECAI where these are either– At least BB- when issued by sovereigns or PSEs that have been

recognized, or– At least BBB- when issued by other entities (including banks), or– At least A-3//P-3 for short-term debt instruments.

(vi) Debt securities not rated by a ECAI where these are:– Issued by a bank; and– Listed on a recognized exchange, and– Classified as senior debt– Other securities, specified by the Central Bank.

(vii) Equities those are included in the Milanka index, subject to a discount of 25 per cent on the market value.

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16.6.2.2 On-Balance Sheet Netting - Where a bank,

6.6.2.2.1 has a well-founded legal basis for concluding that the netting or offsetting agreement is enforceable in each relevant jurisdiction regardless of whether the counterpart is insolvent or bankrupt;

6.6.2.2.2 is able at any time to determine those assets (loans) and liabilities (deposits) with the same counterpart that are subject to the netting agreement;

6.6.2.2.3 monitors and controls its roll-off risks; and

6.6.2.2.4 monitors and controls the relevant exposures on a net basis

6.6.2.2.5 it may use the net exposure of loans and deposits as the basis for its capital adequacy computation.

6.6.2.3 Guarantees

6.6.2.3.1 Guaranteed Transactions: Where guarantees are direct, explicit, irrevocable and unconditional, banks may take account of such credit protection in calculating capital requirements.

6.6.2.3.2 Minimum Conditions

(i) A guarantee (or counter-guarantee) must represent a direct claim on the protection provider and must be explicitly referenced to specific exposures or a pool of exposures, so that the extent of the cover is clearly defined and incontrovertible.

(ii) Other than non-payment by a protection purchaser of money due in respect of the credit protection contract it must be irrevocable; there must be no clause in the contract that would increase the effective cost of cover as a result of deteriorating credit quality in the hedged exposure.

(iii) It must also be unconditional; there should be no clause in the protection contract outside the control of the bank that could prevent the protection provider from being obliged to pay out in a timely manner in the event that the original counterpart fails to make the payment(s) due.

(iv) In addition to the legal certainty requirements above, the following conditions must also be satisfied:– On the qualifying default or non-payment of the counterpart, the

bank may in a timely manner pursue the guarantor for any monies outstanding under the documentation governing the transaction. The guarantor may make one lump sum payment of all monies under such documentation to the bank, or the guarantor may assume the future payment obligations of the counterpart covered by the guarantee. The bank must have the right to receive any such payments from the guarantor without first having to take legal actions in order to pursue the counterpart for payment.

– The guarantee is an explicitly documented obligation assumed by the guarantor.

– Except as noted in the following sentence, the guarantee covers all types of payments the underlying obligor is expected to make under the documentation governing the transaction, for example notional amount, margin payments, etc.

– Where a guarantee covers payment of principal only, interests and other uncovered payments should be treated as an unsecured amount.

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16.6.2.3.3 Eligible Guarantors (counter-guarantors): Credit protection given by the

following entities will be recognised: sovereign entities, PSEs and other entities with a risk weight of 20 per cent or better and a lower risk weight than the counterpart.

6.6.2.3.4 Risk Weights

The protected portion is assigned the risk weight of the protection provider. The uncovered portion of the exposure is assigned the risk weight of the underlying counterpart.

(i) A zero risk weight will be applied to that portion of loans guaranteed by GOSL and CBSL.

(ii) The portion of exposures guaranteed by the Sri Lanka Export Credit Insurance Corporation (SLECIC) will receive a 50 per cent risk weight.

6.6.3 Specific Instructions for completion Part III (c)

6.6.3.1 Total CRM Exposure

(WBRC 11.3.3.0.0.0)

Total exposure of collateralised transactions and other CRM techniques. All exposures should be reported net of specific provisions and interest in suspense that has been charged to the respective counterparty account. Exposures which are reported in this part under CRM should not be reported in the other parts of the capital adequacy return. The amount is automatically shown on web-based return.

The amount must agree with the sum of items 6.6.3.1.1 and 6.6.3.1.2.

(WBRC 11.3.3.1.0.0 + 11.3.3.2.0.0)

6.6.3.1.1 Collateralised Transactions (WBRC 11.3.3.1.0.0)

The sum of collateralised retail exposures and collateralised other exposures. The amount must agree to sum of items (i) and (ii). The amount is automatically shown on web-based return.

(WBRC 11.3.3.1.1.0 + 11.3.3.1.2.0)

(i) Retail Exposures (WBRC 11.3.3.1.1.0)

The total amount of retail exposures against the collateral instruments which are eligible for recognition in the simple approach as specified in paragraph 6.6.2.1.4. The amount is automatically shown on web-based return.

(WBRC 11.3.3.1.1.1 to 11.3.3.1.1.7)

(ii) Other Exposures (WBRC 11.3.3.1.2.0)

The total amount of other exposures against the collateral instruments which are eligible for recognition in the simple approach as specified in paragraph 6.6.2.1.4. The amount is automatically shown on web-based return.

(WBRC 11.3.3.1.2.1 to 11.3.3.1.2.7)

6.6.3.1.2 Other CRM Techniques (WBRC 11.3.3.2.0.0)

The total amount of exposures against the other CRM techniques (other

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1than collateralized transactions). The amount is automatically shown on web-based return.

(WBRC 11.3.3.2.1.0 + 11.3.3.2.2.0)

(i) On-Balance Sheet Netting (WBRC 11.3.3.2.1.0)

The total amount of exposures against the on-balance sheet netting should be reported in line with the instructions given in the items under paragraph 6.6.2.2 above.

(ii) Guarantees (WBRC 11.3.3.2.2.0)

The total amount of exposures against the guarantees should be reported in line with the instructions given in the items under paragraph 6.6.2.3 above.

6.7 Part IV – Computation of Risk-weighted Amount for Market Risk

6.7.1 Capital Charge for Market Risk - Market risk is defined as the risk of losses in on-balance sheet and off balance sheet positions arising from movements in market prices. The market risk subject to the capital charge requirements are:

6.7.1.1 The risks pertaining to interest rate related instruments in the trading book.

6.7.1.2 The risks pertaining to equities in the trading book.

6.7.1.3 The risks pertaining to foreign exchange position (including gold positions) throughout the bank.

6.7.2 Scope and Coverage of Capital Charge for Market Risks

6.7.2.1 This involves computing capital charges for interest rate related instruments in the trading book, equities in the trading book and foreign exchange risk (including gold positions) throughout the bank. For the purpose of this section, the trading book and foreign exchange position will include the following:

6.7.2.1.1 Securities classified in the ‘Trading Account’ in terms of the direction on Prudential Norms for Classification, Valuation and Operation of the Bank’s Investment Portfolio issued by the CBSL dated 01 March 2006.

6.7.2.1.2 Open gold positions

6.7.2.1.3 Open foreign exchange positions.

6.7.3 Measurement of Capital Charge for Interest Rate Risk

6.7.3.1 This section describes the framework for measuring the risk of holding or taking positions in debt securities and other interest rate related instruments denominated in Sri Lanka Rupees as well as foreign currencies in the trading book.

6.7.3.2 The capital charge for interest rate related instruments would apply to the current market value of these items in the bank’s trading book. Since banks are required to maintain capital for market risk on an ongoing basis, they are required to mark-to-market their trading positions on a daily basis. The current market value will be determined according to the Direction on Prudential Norms for Classification, Valuation and Operation of the bank’s investment portfolio issued by CBSL.

6.7.3.3 The minimum capital requirement is expressed in terms of two separately calculated charges, “specific risk” charge for each security, which is akin to the conventional capital charge for credit risk, both for short and long positions, and “general market risk” charge for interest rate risk in the portfolio, where long and short positions in different securities or instruments can be offset.

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16.7.3.3.1 Specific Risk

(i) The capital charge for specific risk is designed to protect against an adverse movement in the price of an individual security owing to factors related to the individual issuer.

(ii) The risk charges to be used in the Computation of specific risk will be as follows:

(iii) Specific risk charge for government securities and central banks:

(a) Government securities issued by the GOSL and securities issued by the CBSL will be subject to a risk charge of 0 per cent.

(b) Securities issued by a foreign government or by a foreign central bank will be subject to a risk charge based on the credit rating as indicated in the following table:

Table 15

Specific Risk Charge for Securities Issued by Foreign Governments/Central Banks

Sovereign Rate Capital Charge for Specific Risk

AAA to AA- 0%

A+ to BBB- 0.25% (residual term to final maturity 6 months or less)

1% (residual term to final maturity greater than 6 and up to and including 24 months)

1.60% (residual term to final maturity exceeding 24 months)

All others 10.00%

(iv) The ‘Qualifying’ category for Corporate entities:

(a) Corporate entities (Local) will be given a risk charge for specific market risk based on their ratings as indicated in the table below:

Table 16

Specific Risk Charge for Corporates

Sovereign Rate Capital Charge for Specific Risk

AAA to AA- 0.25%

A+ to BBB- 1.00% (residual term to final maturity 6 months or less)

1.60% (residual term to final maturity greater than 6 and up to and including 24 months)10.00% (residual term to final maturity exceeding 24 months)

All others 10.00%

(b) The specific risk charge for foreign corporates would be one notch less favourable than the risk charge applied to the local corporates.

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1 (v) ‘Public sector entities’ should be treated like corporate entities unless

they are backed by an explicit Treasury guarantee, which warrants a risk charge of 0 per cent.

(vi) The ‘Other’ category:

A capital charge of 10 per cent will apply to all other types of exposures.

(vii) Banks may rely upon the ratings assigned by the ECAIs recognised by CBSL (See paragraph 6.4.2) for the purpose of ratings referred in the table 15 and 16 above.

6.7.3.3.2 General Market Risk

The capital requirements for general market risk are designed to capture the risk of loss arising from changes in market interest rates. The capital charge is the sum of four components:

(i) the net short or long position in the whole trading book;

(ii) a smaller proportion of the matched positions in each time-band (the “vertical disallowance”);

(iii) a larger proportion of the matched positions across different timebands (the “horizontal disallowance”), and

(iv) a net charge for positions in options, where appropriate.

Note – Components (ii), (iii) and (iv) will not apply at present.

6.7.3.4 It has been decided to allow banks to initially adopt the Standardised Measurement Method, as Sri Lankan banks are still at a nascent stage of developing internal risk management models. There are two principal methods of measuring market risk under the Standardised Measurement Method, i.e., a ‘maturity’ method and a ‘duration’ method. It has been decided to adopt the ‘duration’ method to arrive at the capital charge. Accordingly, banks are required to measure the general market risk charge by calculating the price sensitivity of each instrument in the trading book separately and adding the resulting price sensitivities based on a maturity ladder, subject to disallowances if any.

6.7.3.5 The steps for the computation are as follows:

6.7.3.5.1 Calculate the price sensitivity of each instrument in terms of a change in interest rates between 1.2 and 2.0 percentage points, depending on the maturity of the instrument (see Table 17);

6.7.3.5.2 slot the resulting price sensitivities into a duration based maturity ladder with the fifteen time bands as set out in Table 17;

6.7.3.5.3 subject long and short positions in each time band to a 5 per cent vertical disallowance designed to capture basis risk; and

6.7.3.5.4 carry forward the net positions in each time-band for horizontal offsetting subject to the disallowances set out in Table 18.

Note – Steps (6.7.3.5.2) to (6.7.3.5.4) are not required at present since components ii, iii and iv under paragraph 6.7.3.3.2 above are currently not applicable.

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1Table 17

Duration Method – Time Bands and Assumed Changes in Yield

Time Bands Assumed Change in Yield

Maturity Zone 1

1 month or less 2.00Over 1 month to 3 months 2.00Over 3 months to 6 months 2.00Over 6 months to 12 months 2.00

Maturity Zone 2

Over 1.0 year to 1.9 years 1.80Over 1.9 years to 2.8 years 1.60Over 2.8 years to 3.6 years 1.50

Maturity Zone 3

Over 3.6 years to 4.3 years 1.50Over 4.3 years to 5.7 years 1.40Over 5.7 years to 7.3 years 1.30Over 7.3 years to 9.3 years 1.20Over 9.3 years to 10.6 years 1.20Over 10.6 years to 12 years 1.20Over 12 years to 20 years 1.20Over 20 years 1.20

Table 18

Horizontal Disallowances

Maturity Zones Time Band Withinthe zones

Between adjacent zones

Between zones1 and 3

Maturity Zone 1

1 month or less

40%

40%

100%

over 1 month to 3 monthsover 3 months to 6 monthsover 6 months to 12 months

Maturity Zone 2Over 1.0 year to 1.9 years

30%Over 1.9 years to 2.8 yearsOver 2.8 years to 3.6 years

Maturity Zone 3

Over 3.6 years to 4.3 years

30% 40%

Over 4.3 years to 5.7 yearsOver 5.7 years to 7.3 yearsOver 7.3 years to 9.3 yearsOver 9.3 years to 10.6 yearsOver 10.6 years to 12 yearsOver 12 years to 20 yearsOver 20 years

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16.7.4 Measurement of Capital Charge for Equities

6.7.4.1 The minimum capital requirement to cover the risk of holding or taking positions in equities in the trading book is set out below. It applies to all instruments that exhibit market behaviour similar to equities. The instruments covered include equity shares (voting and non-voting), convertible securities that behave like equities (e.g.: units of unit trusts) and commitments to buy or sell equity securities (e.g.: warrants, right issues and bonus issues).

6.7.4.2 Specific and General Market Risk

6.7.4.2.1 Specific Equity Risk

Specific risk is defined as the bank’s gross equity positions (i.e., the sum of all long equity positions and of all short equity positions). The capital charge for specific risk for equities on the Milanka Price Index will be 5 per cent, while all other equities will have a specific risk charge of 10 per cent.

6.7.4.2.2 General Equity Risk

General market risk is defined as the overall net position in an equity market (i.e., the difference between the sum of the longs and the sum of the shorts). The general market risk charge will be 10 per cent.

6.7.5 Measurement of the Capital Charge for Foreign Exchange and Gold Open Positions

6.7.5.1 This section sets out the minimum capital requirement to cover the risk of holding or taking positions in foreign currencies, including gold. Gold is treated as a foreign exchange position rather than a commodity because its volatility is more in line with foreign currencies, and banks manage it in a similar manner.

6.7.5.2 The Off-balance sheet position, including forward contracts, will be included in computation of the capital charge for foreign exchange risks.

6.7.5.3 Computing the capital requirement for foreign exchange risk consists of two processes.

6.7.5.3.1 Measuring the Exposure in a Single Currency Position

The bank’s net open position in each currency should be calculated by summing the net position of all on balance sheet and off-balance sheet position, including forward contracts denominated in that particular currency.

6.7.5.3.2 Measuring the Risks Inherent in a Bank’s Mix of Long and Short Positions in Different Currencies

Banks are required to adopt the shorthand method of computation. Under the shorthand method, the nominal amount of the net position in each foreign currency and in gold is converted at spot rates into the reporting currency (i.e., LKR). The overall net open position is measured by aggregating:

(i) the sum of the net short positions or the sum of the net long positions, whichever is the greater, plus

(ii) the net position (short or long) in gold, regardless of sign.

6.7.5.4 The capital charge will be 10 per cent of the overall net open position of foreign currency and gold.

Table 19

Example of the Shorthand Measure of Foreign Exchange Risk

YEN EURO GB INR US$ GOLD+50 +100 +150 -20 -180 -35

+300 -200 -35

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1In the above example, the capital charge would be 10 per cent of the higher of either the net long currency positions or the net short currency positions (i.e., 300) and of the net position in gold (35) = 335 x 10% = 33.5.

6.7.6 Aggregation of the Capital Charge for Market Risks

The capital charges for specific risk and general market risk are to be computed separately before aggregation.

6.7.7 Capital Charge for Interest Rate Derivatives

The capital charge for interest rate derivatives will be excluded from the capital charge for market risks at present and will be introduced shortly.

6.7.8 Specific Instruction for completion of Part IV return

(Computation of Risk-weighted amount for Market Risk)

6.7.8.1 Total Capital Charge for Market Risk (WBRC 11.4.1.0.0.0)

The total amount of capital charge for interest rate risk (6.7.8.1.1), capital charge for equity risk (6.7.8.1.2) and capital charge for foreign exchange risk (6.7.8.1.3). The amount is automatically shown on web-based return.

(WBRC 11.4.1.1.0.0 + 11.4.1.2.0.0 + 11.4.1.3.0.0)

6.7.8.1.1 Capital Charge for Interest Rate Risk (WBRC 11.4.1.1.0.0)

The total amount of capital charge for general interest rate risk and capital charge for specific interest rate risk. The amount is automatically shown on web-based return.

(WBRC 11.4.1.1.1.0 + 11.4.1.1.2.0)

(i) General Interest Rate Risk (WBRC 11.4.1.1.1.0)

Capital charge for general interest rate risk should be calculated in line with the specific instruction given in the paragraph 6.7.3.3.2

(ii) Specific Interest Rate Risk (WBRC 11.4.1.1.2.0)

Capital charge for specific interest rate risk should be calculated in line with the specific instruction given in the paragraph 6.7.3.3.1

6.7.8.1.2 Capital Charge for Equity Risk (WBRC 11.4.1.2.0.0)

The total amount of capital charge for general equity risk and capital charge for specific equity risk. The amount is automatically shown on web-based return.

(WBRC 11.4.1.2.1.0 + 11.4.1.2.2.0)

(i) General Equity Risk (WBRC 11.4.1.2.1.0)

Capital charge for general equity risk should be calculated in line with the specific instruction given in the paragraph 6.7.4.2.2.

(ii) Specific Equity Risk (WBRC 11.4.1.2.2.0)

Capital charge for specific equity risk should be calculated in line with the specific instruction given in the paragraph 6.7.4.2.1.

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16.7.8.1.3 Capital Charge for Foreign Exchange & Gold (WBRC 11.4.1.3.0.0)

Capital charge for Foreign exchange & gold should be calculated in line with the specific instruction given in the paragraph 6.7.5.

6.7.8.2 Total Risk-weighted Amount for Market Risk (WBRC 11.4.2.0.0.0)

The total amount of risk-weighted amount for market risk should be ten times the capital charge for market risk (6.7.8.1*10). The amount is automatically shown on web-based return.

(WBRC 11.4.1.0.0.0*10)

6.8 Part V – Computation of Risk-weighted Amount for Operational Risk.

6.8.1 Capital Charge for Operational Risk

6.8.1.1 Definition of Operational Risk: Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputational risk. Legal risk includes, but is not limited to, exposure to fines, penalties, or punitive damages resulting from supervisory actions, as well as private settlements.

6.8.1.2 The Basic Indicator Approach (BIA): To begin with, banks shall compute the capital requirements for operational risk under the BIA. Under the BIA, banks must hold capital for operational risk equal to the average over the previous three years of a fixed percentage (denoted α) of positive annual gross income. Figures for any year in which annual gross income is negative or zero should be excluded from both the numerator and denominator when calculating the average.

6.8.1.3 The charge may be expressed as follows:

KBIA = [ ∑ (GI 1…n x α. ) ] / n

Where;

KBIA = the capital charge under the Basic Indicator ApproachGI = annual gross income, where positive, over the previous three audited financial

yearsn = number of the previous three financial years for which gross income is positiveα = 15%, which is set by the BCBS.

6.8.1.4 Gross income is defined as “net interest income” plus “net non-interest income”. It is intended that this measure should:

6.8.1.4.1 be gross of any provisions (e.g.: for unpaid interest),

6.8.1.4.2 be gross of operating expenses, including fees paid to outsourcing service providers, in contrast to fees paid for services that are outsourced, fees received by banks that provide outsourcing services shall be included in the definition of gross income,

6.8.1.4.3 exclude realized profits/losses from the sale of securities in the banking book, and

6.8.1.4.4 exclude extraordinary or irregular items.

6.8.1.5 Banks are advised to compute the capital charge for operational risk under the BIA as follows:

6.8.1.5.1 Average of [ Gross Income x α ] for each of the last three financial years, excluding years of negative or zero gross income

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16.8.1.5.2 Gross income = Net interest income + non-interest income – items (6.8.1.4.3)

and (6.8.1.4.4) of above.

6.8.1.5.3 α = 15%

6.8.2 Specific Instruction for completion of Part V (Computation of Risk-weighted amount for Operational Risk)

6.8.2.1 Gross Income (WBRC 11.5.1.0.0.0)

The total gross income should be total net income (6.8.2.1.1) less total exclude items as specified in the paragraph 6.8.1.4.3 and 6.8.1.4.4. The amount is automatically shown on web-based return.

(WBRC 11.5.1.1.0.0 - 11.5.1.2.0.0)

6.8.2.1.1 Net Income (WBRC 11.5.1.1.0.0)

The total net income should be sum of total net interest income and total non-interest income. The amount is automatically shown on web-based return.

(WBRC 11.5.1.1.1.0 + 11.5.1.1.2.0)

(i) Net Interest Income (WBRC 11.5.1.1.1.0)

The total net interest income should be the total interest income less total non-interest expenses as reported in the annual audited profit and loss statement.

(ii) Non-Interest Income (WBRC 11.5.1.1.2.0)

The total non-interest income should be the total income other than the interest income.

6.8.2.1.2 Less Amount (WBRC 11.5.1.2.0.0)

The total aggregate amount of following items, as specified in the paragraph 6.8.1.4.3 and 6.8.1.4.4, which banks are required to deduct from total net income.

6.8.2.2 Total Capital Charge for Operational Risk (WBRC 11.5.2.0.0.0)

The total capital charge for operational risk should be 15 per cent of gross income (6.8.2.1.) above. The amount is automatically shown on web-based return.

(WBRC 11.5.1.0.0.0*15%)

6.8.2.3 Total Risk-weighted Amount for Operational Risk (WBRC 11.5.3.0.0.0)

The total amount of risk-weighted amount for operational risk should be ten times the capital charge for operational risk (6.8.2.2*10). The amount is automatically shown on web-based return.

(WBRC 11.5.2.0.0.0*10)


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1Schedule II

CAPITAL ADEqUACY RATIO OF

LICENSED COMMERCIAL / SPECIALISED BANKS

BANK ONLY (SOLO Basis) / CONSOLIDATED RETURN


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1Part I – Computation of Capital Adequacy Ratio (Rs. ’000)

Web-basedReturn Code Item Amount

11.1.1.0.0.0 Eligible Core Capital (Eligible Tier I) = 11.2.1.1.0.0 of Part II (a) 11.1.2.0.0.0 Capital Base = 11.2.1.5.0.0 of Part II (a)11.1.3.0.0.0 Total Risk-weighted Amount11.1.3.1.0.0 Risk-Weighted Amount for Credit Risk = 11.3.1.0.0.0 of Part III (a)11.1.3.2.0.0 Risk-Weighted Amount for Market Risk = 11.4.2.0.0.0 of Part IV11.1.3.3.0.0 Risk-Weighted Amount for Operational Risk = 11.5.3.0.0.0 of Part V11.1.4.0.0.0 Core Capital (Tier 1) Ratio, % = (11.1.1.0.0.0/11.1.3.0.0.0)*10011.1.5.0.0.0 Total Capital Ratio, % = (11.1.2.0.0.0/11.1.3.0.0.0)*100

Part II (a) – Computation of Total Capital Base (Rs. ’000)

Web-based Return Code Item Amount

11.2.1.1.0.0 Eligible Core Capital (Eligible Tier I)11.2.1.1.1.0 Core Capital (Tier 1)11.2.1.1.1.1 Paid-up Ordinary Shares/ Assigned Capital11.2.1.1.1.2 Non-cumulative, Non-redeemable Preference Shares11.2.1.1.1.3 Share Premium11.2.1.1.1.4 Statutory Reserve Fund11.2.1.1.1.5 Published Retained Profits/(Accumulated Losses) (+/-)11.2.1.1.1.6 General and Other Reserves11.2.1.1.1.7 Gain/(Loss) After Tax arising from the Sale of Fixed and Long-term

Investments11.2.1.1.1.8 Unpublished Current Year’s Profit/(Loss) (+/-)11.2.1.1.1.9 Minority Interests (consistent with the above capital constituents)11.2.1.1.1.10 Perpetual Debt Capital Instruments11.2.1.1.2.0 Deductions/ Adjustments-Tier 111.2.1.1.2.1 Goodwill11.2.1.1.2.2 Net Deferred Tax11.2.1.1.2.3 Other Intangible Assets11.2.1.1.2.4 Advances granted to employees of the bank for the purchase of shares of

the bank under a share ownership plan. 11.2.1.1.2.5 Amount due from head office & branches outside Sri Lanka in Sri Lanka

Rupees

(applicable only to branches of foreign banks)11.2.1.1.2.6 Amount due to head office & branches outside Sri Lanka in Sri Lanka

Rupees (-)

(applicable only to branches of foreign banks)11.2.1.1.2.7 Amount due from head office & branches outside Sri Lanka in Foreign

Currency (net)

(applicable only to branches of foreign banks)11.2.1.1.2.8 50% of Investments in Unconsolidated Banking and Financial Subsidiary

Companies11.2.1.1.2.9 50% of Investments in the Capital of Other Banks and Financial

Institutions


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111.2.1.2.1.0 Supplementary Capital (Tier II)11.2.1.2.1.1 Revaluation Reserves (approved by CBSL)11.2.1.2.1.2 General Provisions11.2.1.2.1.3 Hybrid Capital Instruments (Debt/Equity)11.2.1.2.1.4 Minority Interests arising from Preference Shares11.2.1.2.1.5 Approved Subordinated Term Debt0.0.0.0.0.0 Actual Amount of Approved Subordinated Term Debts11.2.1.2.2.0 Deductions -Tier 1I11.2.1.2.2.1 50% of Investments in Unconsolidated Banking and Financial Subsidiary

Companies11.2.1.2.2.2 50% of Investments in the Capital of Other Banks and Financial

Institutions11.2.1.2.0.0 Total Supplementary Capital

(Tier II) = (Item 11.2.1.2.1.0 - 11.2.1.2.2.0)11.2.1.3.0.0 Eligible Supplementary Capital (Eligible Tier II)11.2.1.4.0.0 Short Term Subordinated Debt (Tier III Capital)11.2.1.4.1.0 Approved Short Term Subordinated Debt11.2.1.4.2.0 Eligible Tier III Capital-Utilised = (item 11.2.2.6.1.0)11.2.1.5.0.0 Capital Base

Part I1 (b) – Computation of Eligible Tier III Capital for Market Risk (Rs. ’000)


11.2.2.1.0.0 Total Risk Weighted Assets (RWA)11.2.2.1.1.0 Total Risk Weighted Assets for Credit and Operational Risks 11.2.2.1.2.0 Total Risk Weighted Assets for Market Risk11.2.2.2.0.0 Minimum Capital Charge11.2.2.2.1.0 Capital Charge for Credit and Operational Risk 11.2.2.2.2.0 Capital Charge for Market Risk 11.2.2.3.0.0 Total Capital Available to Meet the Capital Charge for Credit and

Operational Risks 11.2.2.4.0.0 Total Capital Base Available to meet Market Risk11.2.2.5.0.0 Total Available Tier III Capital11.2.2.5.1.0 Approved Short-term Subordinated Debt11.2.2.5.2.0 Minimum of 28.5% of Capital Charge for Market Risk to be met by

Tier 1 Capital that is not Required for Credit Risk11.2.2.5.2.1 (a) Limit

11.2.2.5.2.2 (b) Amount Utilised

11.2.2.5.3.0 Maximum of 250% of Tier 1 Capital that is not Required for Credit and Operational Risks

11.2.2.5.3.1 (a) Limit

11.2.2.5.3.2 (b) Amount Utilised

11.2.2.6.0.0 Eligible Tier III Capital11.2.2.6.1.0 Eligible Tier III Capital Utilised11.2.2.6.2.0 Eligible but Unutilized Tier III Capital



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1Part III (a) – Computation of Risk-weighted Amount for Credit Risk

(Rs. ’000)

Web-based Return Code

Item Amount

Credit Equivalent of Off-balance Sheet Items

TotalRisk

Weight %

Risk Weighted

Assets Amoun

11.3.1.0.0.0 Total Risk-weighted Amount for Credit Risk

11.3.1.1.0.0 Claims on Government of Sri Lanka and Central Bank of Sri Lanka

11.3.1.1.1.0 Government of Sri Lanka11.3.1.1.2.0 Central Bank of Sri Lanka11.3.1.2.0.0 Claims on Foreign Sovereigns and their

Central Banks11.3.1.2.1.0 AAA to AA- 011.3.1.2.2.0 A+ to A- 2011.3.1.2.3.0 BBB+ to BBB- 5011.3.1.2.4.0 BB+ to B- 10011.3.1.2.5.0 Below B- 15011.3.1.2.6.0 Unrated 10011.3.1.3.0.0 Claims on Public Sector Entities PSEs)11.3.1.3.1.0 AAA to AA- 2011.3.1.3.2.0 A+ to A- 5011.3.1.3.3.0 BBB+ to BB- 10011.3.1.3.4.0 Below BB- 15011.3.1.3.5.0 Unrated 10011.3.1.4.0.0 Claims on Official Entities and Multilateral

Development Banks (MDBs)11.3.1.4.1.0 BIS,IMF, ECB, EC and Eligible MDBs 011.3.1.4.2.0 AAA to AA- 2011.3.1.4.3.0 A+ to BBB- 5011.3.1.4.4.0 BB+ to B- 10011.3.1.4.5.0 Below B- 15011.3.1.4.6.0 Unrated 10011.3.1.5.0.0 Claims on Banks11.3.1.5.1.0 Rupee Exposures less than 3 months11.3.1.5.1.1 AAA to BBB- 2011.3.1.5.1.2 BB+ to B- 5011.3.1.5.1.3 Below B- 15011.3.1.5.1.4 Unrated 10011.3.1.5.2.0 Foreign Currency Exposures

less than 3 months11.3.1.5.2.1 AAA to A- 2011.3.1.5.2.2 BBB+ to BBB- 5011.3.1.5.2.3 BB+ to B- 10011.3.1.5.2.4 Below B- 15011.3.1.5.2.5 Unrated 100


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1

11.3.1.5.3.0 Rupee and Foreign Currency Exposures more than 3 months

11.3.1.5.3.1 AAA to AA- 2011.3.1.5.3.2 A+ to BBB- 5011.3.1.5.3.3 BB+ to B- 10011.3.1.5.3.4 Below B- 15011.3.1.5.3.5 Unrated 10011.3.1.6.0.0 Claims on Financial Institutions11.3.1.6.1.0 Claims on Primary Dealers /Finance

Companies/Specialised Leasing Companies11.3.1.6.1.1 AAA to AA- 2011.3.1.6.1.2 A+ to BBB- 5011.3.1.6.1.3 BB+ to B- 10011.3.1.6.1.4 Below B- 15011.3.1.6.1.5 Unrated 10011.3.1.6.2.0 Claims on Other Financial Institutions11.3.1.6.2.1 AAA to AA- 2011.3.1.6.2.2 A+ to A- 5011.3.1.6.2.3 BBB+ to BB- 10011.3.1.6.2.4 Below BB- 15011.3.1.6.2.5 Unrated 10011.3.1.7.0.0 Claims on Corporates11.3.1.7.1.0 AAA to AA- 2011.3.1.7.2.0 A+ to A- 5011.3.1.7.3.0 BBB+ to BB- 10011.3.1.7.4.0 Below BB- 15011.3.1.7.5.0 Unrated 10011.3.1.8.0.0 Retail Claims11.3.1.8.1.0 Retail claims that qualify for regulatory capital

purposes75

11.3.1.8.2.0 Retail claims that not qualify for regulatory capital purposes

100

11.3.1.9.0.0 Claims Secured by Residential Property11.3.1.9.1.0 Claims that qualify for regulatory capital

purposes50

11.3.1.9.2.0 Claims that not qualify for regulatory capital purposes

100

11.3.1.10.0.0 Claims Secured by Commercial Real Estate 10011.3.1.11.0.0 Non-Performing Assets (NPAs)11.3.1.11.1.0 Specific provisions are equal or more than

20%100

11.3.1.11.2.0 Specific provisions are less than 20% 150


Item Amount


TotalRisk

Weight %

Risk Weighted

Assets Amoun


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11.3.1.12.0.0 Non-Per forming Asse t s Secured by Residential Property

11.3.1.12.1.0 Specific provisions are equal or more than 20%

50

11.3.1.12.2.0 Specific provisions are less than 20% 10011.3.1.13.0.0 Higher-Risk Categories 15011.3.1.14.0.0 Cash Items and Other Assets11.3.1.14.1.0 Cash Items 11.3.1.14.1.1 Notes and Coins11.3.1.14.1.2 Gold Bullion held in own vault11.3.1.14.1.3 Cash Items in the Process of Collection 2011.3.1.14.2.0 Other Assets 11.3.1.14.2.1 Fixed Assets 10011.3.1.14.2.2 Other Assets/Exposures 100

Part III (b) – Credit equivalent of Off-Balance Sheet Items (Rs.’000)


Description

Principal amount of

Off-Balance Sheet Items

Credit Conversion Factor (%)

Credit equivalent of Off-Balance Sheet Items

11.3.2.0.0.0 Off-balance Sheet Items 11.3.2.1.0.0 Direct Credit Substitutes 11.3.2.1.1.0 General Guarantees of Indebtedness 100 11.3.2.1.2.0 Stand-by LCs serving as Financial Guarantees 100 11.3.2.1.3.0 Bank Acceptances 100 11.3.2.1.4.0 Others (please specify) 100 11.3.2.2.0.0 Transaction-related Contingencies11.3.2.2.1.0 Performance Bonds, Bid Bonds & Warranties 50 11.3.2.2.2.0 Stand-by LCs related to particular Transactions 50 11.3.2.2.3.0 Others (please specify) 50 11.3.2.3.0.0 Short-Term Self-Liquidating Trade-Related

Contingencies11.3.2.3.1.0 Shipping Guarantees 20 11.3.2.3.2.0 Documentary Letters of Credit 20 11.3.2.3.3.0 Trade related Acceptances 20 11.3.2.3.4.0 Others (please specify) 20 11.3.2.4.0.0 Sale and Repurchase Agreements and Assets Sale

with Recourse where the Credit Risk remains with the Bank

11.3.2.4.1.0 Sale and Repurchase Agreements 100 11.3.2.4.2.0 Housing Loans sold with Recourse 100 11.3.2.4.3.0 Other Assets sold with Recourse 100 11.3.2.4.4.0 Forward Assets Purchase 100


Item Amount


TotalRisk

Weight %

Risk Weighted

Assets Amoun


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11.3.2.4.5.0 Partly paid Shares/Securities 100 11.3.2.4.6.0 Others (please specify) 100 11.3.2.5.0.0 Obligations under an On-going Underwriting

Agreement11.3.2.5.1.0 Underwriting of Shares/Securities Issue 50 11.3.2.5.2.0 Note Issuance Facilities and Revolving Underwriting

Facilities50

11.3.2.5.3.0 Others (please specify) 50 11.3.2.6.0.0 Commitments with an Original Maturity of up

to one year or which can be unconditionally cancelled at any time

11.3.2.6.1.0 Formal Stand-by Facilities and Credit Lines 0 11.3.2.6.2.0 Undrawn Term Loans 0 11.3.2.6.3.0 Undrawn Overdraft Facilities/Unused Credit Card

Lines0

11.3.2.6.4.0 Others (please specify) 0 11.3.2.7.0.0 Other Commitments with an Original Maturity

up to 1 year11.3.2.7.1.0 Formal Stand-by Facilities and Credit Lines 20 11.3.2.7.2.0 Undrawn Term Loans 20 11.3.2.7.3.0 Others (please specify) 20 11.3.2.8.0.0 Other Commitments with an Original Maturity

of over one year11.3.2.8.1.0 Formal Stand-by Facilities and Credit Lines 50 11.3.2.8.2.0 Undrawn Term Loans 50 11.3.2.8.3.0 Others (please specify) 50 11.3.2.9.0.0 Exchange Rate Contracts11.3.2.9.1.0 Original Maturity-less than one year 2 11.3.2.9.2.0 Original Maturity-more than one year and less than

two years5

11.3.2.9.3.0 Original Maturity-more than two years (For each additional year)

3(for each

year)11.3.2.10.0.0 Interest Rate Contracts11.3.2.10.1.0 Original Maturity-less than one year 0.5 11.3.2.10.2.0 Original Maturity-more than one year and less than

two years1

11.3.2.10.3.0 Original Maturity-more than two years (For each additional year)

1(for each

year)


Description

Principal amount of

Off-Balance Sheet Items

Credit Conversion Factor (%)

Credit equivalent of Off-Balance Sheet Items


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1Part III (c) – Exposures Recognised under Credit Risk Mitigation (CRM)

(Rs. ’000)

Web-based Return Code CRM techniques Principal Amount

11.3.3.0.0.0 Total CRM Exposure11.3.3.1.0.0 Collateralised Transactions11.3.3.1.1.0 Retail Exposure11.3.3.1.1.1 Cash11.3.3.1.1.2 Gold11.3.3.1.1.3 Government Securities11.3.3.1.1.4 Provident Fund Balances11.3.3.1.1.5 Debt Securities Rated by a recognised ECAIs11.3.3.1.1.6 Debt Securities not Rated by a recognised ECAIs11.3.3.1.1.7 Equities that are included in a Main Index.11.3.3.1.2.0 Other Exposures11.3.3.1.2.1 Cash11.3.3.1.2.2 Gold11.3.3.1.2.4 Provident Fund Balances11.3.3.1.2.3 Government Securities11.3.3.1.2.5 Debt Securities Rated by a recognised ECAIs11.3.3.1.2.6 Debt Securities not Rated by a recognised ECAIs11.3.3.1.2.7 Equities that are included in a Main Index.11.3.3.2.0.0 Other CRM Techniques11.3.3.2.1.0 On-balance Sheet Netting11.3.3.2.2.0 Guarantees

Part IV – Computation of Risk-weighted Amount for Market Risk(Rs. ’000)

Web-based Return Code Item Capital Charge Amount

11.4.1.0.0.0 Total Capital Charge for Market Risk = (11.4.1.1.0.0+11.4.1.2.0.0+11.4.1.3.0.0)

11.4.1.1.0.0 Capital Charge for Interest Rate = (11.4.1.1.1.0+11.4.1.1.2.0)11.4.1.1.1.0 General Interest Rate Risk11.4.1.1.1.1 i) Net Long or Short Position11.4.1.1.1.2 ii) Horizontal Disallowance11.4.1.1.1.3 iii) Vertical Disallowance11.4.1.1.1.4 iv) Options11.4.1.1.2.0 Specific Interest Rate Risk11.4.1.2.0.0 Capital Charge for Equity = (11.4.1.2.1.0+11.4.1.2.2.0)11.4.1.2.1.0 General Equity Risk11.4.1.2.2.0 Specific Equity Risk11.4.1.3.0.0 Capital Charge for Foreign Exchange & Gold11.4.2.0.0.0 Total Risk-weighted Amount for Market Risk = (11.4.1.0.0.0*10)


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1Part V – Computation of Risk-weighted Amount for Operational Risk

(Rs. ’000)

Web-based Return Code Item First

YearSecond

YearThird Year Total Average

11.5.1.0.0.0 Gross Income 11.5.1.1.0.0 Net Income 11.5.1.1.1.0 Net Interest Income (Interest Income-Interest

Expenses)11.5.1.1.2.0 Non-interest Income11.5.1.2.0.0 Less 11.5.1.2.1.0 Realised Profits from the Sale of Securities in the

Banking Book11.5.1.2.2.0 Extraordinary / Irregular Items of Income11.5.2.0.0.0 Total Capital Charge for Operational Risk

= (11.5.1.0.0.0*15%)11.5.3.0.0.0 Total Risk-weighted Amount for Operational

Risk = (11.5.2.0.0.0*10)


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Annex I

IMPLEMENTATION OF IT INFRASTRUCTURE FOR BASLE II

1. Implementation of IT Architecture and Design Principles for Basel II

Important requirements for this architecture are as follows;

• Create a robust, scalable & network friendly Basel II technology framework, which can support a regional user and is extendable to new regulatory compliance requirements as the Bank increases its presence in the emerging markets.

• Rationalise the technologies by choosing common platforms for common requirement across all Pillars and common business domain across all Pillars. This will reduce total cost of ownership, maintenance overheads and will facilitate change management for the bank.

• Adopt a robust and centralised data collection and consolidation approach for Basel II through the Banking Data Warehouse (BDW) for risk analytics and Consolidated reporting

• Reduce manual data capture methods for Basel II.

• Design for Basel II applications should cater for high availability, proper exception handling and proper backup/recovery to ensure that potential risk due to data loss during unforeseen circumstances is negligible.

• All new core banking applications and credit related applications in all geographical regions must be Basel II compliant.

• All Basel II applications must adhere to the bank’s policies for infrastructure security, data security, application controls and user administration.

• All Basel II applications should demonstrate disaster recovery as a capability.

2. Requirements for a Regulatory Capital IT Solution

The following eight elements are the system level requirements that a financial services institution must meet to comply with the Basel II Accord.

2.1 Storage of Current and Historical Data in a Data Warehouse

Basel II calls for financial institutions to store a substantial quantity of data. To produce a measure of Risk Weighted Assets, the Bank for International Settlement (BIS) requires financial institutions to store a comprehensive database of operational loss incidents, financial instruments, credit losses, and general ledger data. For financial institutions that seek to calculate Pillar I capital using the Advanced IRB approach for retail or wholesale assets, seven years of default data are required to validate internal ratings models. Beyond historical data storage requirements, a Basel II compliant IT solution must also provide the ability to store and process multiple versions of data. For example, in the area of stress testing, financial institutions are required to test the assumptions of their models in a variety of economic scenarios. Given these requirements, scalable and efficient storage of current, historical, and alternative scenario data is critical.

2.2 Auditable and Flexible Risk Weighted Asset Calculations

The Basel II Capital Accord defines a large number of rules for calculating Risk Weighted Assets and minimum required capital for credit, market and operational risks. However, beyond simply performing calculations, the BIS also requires that financial institutions have the ability to easily adjust these calculations, and the categorisations on which they depend. The Accord also implicitly requires that a financial services institution be able to switch between the various Pillar I methodologies. Therefore, a regulatory capital IT solution should not only provide all of the required calculations within the Accord, but should also allow auditors, regulators, and internal users to audit, review and revise these calculations as necessary. There are also certain areas where the Accord gives financial institutions the flexibility to optimise capital calculations such as in the case of collateral application.


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2.3 Control Management with automatic workflows

The Basel II framework requires financial institutions to demonstrate that they have the appropriate procedures and controls in place to manage their risks. Therefore, a regulatory capital IT system should allow financial institutions to map controls against their risks. In such a framework, financial institutions can define automatic workflows where the system prompts employees to act based on certain defined key performance indicators (KPIs) or user-defined business events. Finally, the system should also allow financial institutions to audit and monitor their controls and procedures in order to periodically assess their risk management practices based on actual loss experience.

2.4 Sophisticated Analytical Tools

Financial institutions can implement sophisticated models to assess their risk position and optimise usage of capital. The BIS allows qualifying financial institutions to implement internal models for Probability of Default (PD), Loss Given Default (LGD), and Exposure at Default (EAD). Therefore, a regulatory capital IT solution must allow a financial institution to implement and test any model that can properly assess its risk position. These external applications would also have the ability to write information back to a central data source.

2.5 Flexible User Driven methods

The Basel II Accord defines a vast range of calculations and options. Examples of these options include whether to use the Simple or Comprehensive approach for credit risk mitigation, to use supervisory or own-estimate haircuts, and to determine the risk weighted assets based on a top-down approach. Given the range of possibilities, users must have the flexibility to easily change the methods they use to calculate risk-weighted assets and assess the potential impact of those changes. Users should also have the flexibility to specify which specific calculation components are processed in a given job submission. For example, the system should not force the user to reprocess every single statistic if all they seek to do is recalculate a subset of the organisation’s assets. Additionally, the user should have the option to generate detailed auditing output, either for a sampling of accounts or an individual transaction at their discretion.

2.6 Coordinated Process Flow

The Basel II calculations requires data that would generally originate from different processing systems, including those used to support front office, back office and risk management operations. Further, the Accord requires synchronisation of this data to perform calculations on a consistent and integrated basis. Once calculations are completed, the system may need to further process the output data through a variety of third party applications for further analysis or reporting. Given these complex data workflow requirements, a regulatory capital solution needs to consolidate each of these process flow issues without any error.

2.7 Timely reporting that meets Internal and External Requirements

Systems and data are irrelevant if they do not provide information in a timely manner. Under the Basel II regime, financial institutions need to meet highly specific and demanding external and regulatory reporting requirements. Simultaneously, internal management requires a continuous stream of information to better understand their organization’s risk profile. Therefore, it is essential that a regulatory capital solution provide a sound management reporting platform. A Basel II compliant IT solution must be able to regularly and accurately produce the necessary internal and external reports for sound risk and profitability management.

2.8 Low Cost and Low Risk

Financial services management and information systems professionals do not have the time or the budget to deal with high priced or unreliable solutions. For this reason, any regulatory capital solution must maintain a low total cost of ownership and be highly reliable. The major components of the regulatory capital IT solution should be covered through a single data source so that constant reconciliation of data is avoided. Just as important, the system needs to eliminate the constant administrative management inherent to many enterprise systems. It should not have to rely on vigilant system administrators to coordinate the functioning of different applications.


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3. Data Integration and the Data Warehouse

There is a need to align the data structures that drive risk and financial data. These are:

1. Transactional data that covers all types of transaction and links the financial results of each transaction with the risk and financial objectives of the financial institution.

2. Asset data that covers all types of assets that might be linked to the transaction, the valuation of these assets and the correlation of asset behaviour.

3. Customer data for all counter-parties, which includes the credit risk of the counterparty and makes provisions when new information or circumstances changes that risk. Detailed data on customers are required to support product selection and pricing in addition to other relationship management decisions.

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.

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.


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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

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 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) Process

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.


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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. Timeliness – 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 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 effective 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 target, the measurement can be used as a trigger to commence a review of the data management process.

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 target 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 target level can be used as a tool to monitor data quality.


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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

IdentifyCriticalQuality

Elements

Define DataQuality

Requirements

DocumentDataFlow

ReviewControls

and checksIn place

ImplementAdditional

Controlcheckpoints

MeasureData quality

level

MonitorData quality

level

Identifies CriticalQuality elements

& provides input for measurement

definition

Monitors dataQuality as Data

Owner of Downstreamapplication

Cleansing ,Error

Resolution

Escalates dataQuality issues

& provide inputs

on resolution

1. Identification 2. Measurement Definition

�. Controls & Checks

�. Measure�. Monitoring

�. Escalation , Cleansing & Resolution

Data Owner&

System Owner

Data Comsumer

5. Technology 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.


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7. Testability – An adjective meaning “the ability to be tested”

8. Technology 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:

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.- Technology used should be in line with the financial institution’s architecture direction.

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. Vendor 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.


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1Directions issued by the Monetary Board under Section 46(1) of the Banking Act, No.30 of 1988,

as amended.

Nivard Ajith Leslie CabraalGovernor

Colombo19 January 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. These 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 ��(1).


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1(dd) a holding company 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. Accordingly, 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 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 commercial bank.

Empowerment under Section 12(1C).

Maximum percentage of ownership of shares.

Exceptions.

Provisions in relation to existing ownership.


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1 (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) Within 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) Within 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.

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 prior to the revocation.

Transitional arrangements.

Steps to secure compliance.

Non-application of Directions.

Revocation of previous Directions.


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1BANKING 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

GovernorColombo

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 off-shore,

banking business be Rs.250,000.00; (c) carrying on off-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 proviso 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 licensed 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 21a 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 2�th May, 2002.


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1Ref. No. : 02 / 04 / 003 / 0400 / 001

Bank Supervision Department13 July 2004

To : CEOs of all Licensed Commercial Banks

Dear Sirs,

CLASSIFICATION OF ADVANCES AND SPECIFIC PROVISIONS/CRITERIA FORSELECTION OF VALUERS UNDERTAKING THE REVALUATION 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 46a 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. Valuers 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


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1Ref. No. : BS/69/93

Bank Supervision Dept.8th Floor, Renuka BuildingNo. 41 Janadhipathi MawathaColombo 1.

19th April 1999

To : All Licensed Commercial Banks

Dear Sir/Madam,

CRITERIA FOR SELECTION OF VALUERS UNDERTAKING

THE REVALUATION 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


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1Ref. No. : 02 / 04 / 002 / 0005 / 003

Bank Supervision Department06 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 76j(1) of the Banking Act.

Yours faithfully,

Sgd. Director of Bank Supervision


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1Ref. No. : 02 / 17 / 402 / 0073 / 002

Bank Supervision Department01 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



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1Ref. No. : 02 / 17 / 402 / 0073 / 001

Bank Supervision Department12 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.

Further, you are requested to be mindful of the enhanced capital requirements when deciding on declaration of dividends or repatriation of profits.


Yours faithfully,


cc – Mr. Upali De Silva Secretary-General Sri Lanka Bankers Association (Gte) Ltd. Level 8, Ceylinco House Colombo 01.


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1Ref. No. : 02 / 17 / 800 / 0002 / 001

Bank Supervision Department11 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



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1Ref. No. : 02 / 04 / 002 / 0018 / 001

Bank Supervision Department12 August 2005


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 SterlingBank Name Federal Reserve Bank, Deutsche Bundesbank, HSBC plc, New York Frankfurt LondonAccount No. SRILA 021083514 5040040828 39600144Swift 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 procedure4.1 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 plansThe 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,



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1Bank Supervision Department29 July 2005


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. Twenty 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. Twenty 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.


Yours faithfully,



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102/04/003/0400/002

Bank Supervision Department16 December 2004

To : CEOs of Licensed Commercial Banks CEOs of Licensed Specialised Banks Panel of Approved Auditors Secretary-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.


Yours faithfully,



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1Directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 46(1) of


Nivard Ajith Leslie CabraalGovernor

Colombo01st November 2007

DIRECTIONSBANKING ACT DIRECTIONS NO. 7 OF 2007MAXIMUM 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 licensed 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.

(i) 30 per cent in respect of customers referred to in Section 2(i) above.

Citation.

Empowerment under ��(1).

Maximum limits of accommodation to customers referred to in paragraphs 2(i) and 2(ii) above.


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1 (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) The 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’sCredit Rating

Customers’Credit Rating

Bank’s Capital Adequacy Ratio

Score Assigned for Each Column

AAA to AA- or equivalent

AAA to AA- or equivalent > 12% 1

A+ to A- or equivalent

A+ to A- or equivalent 11% - 12% 2

BBB+ or equivalent and

below

BBB+ 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 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


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1Directions 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) Subject 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) Accommodation granted against the security of cash, gold, Government 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) Accommodation 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) The 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 � and �.

in excess of the specified limits.


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18. 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 off-balance sheet accommodations: The amount of 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 off-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 � and �.

Definitions.


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1 (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 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.


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1Annex 1


MAXIMUM AMOUNT OF ACCOMMODATION

SpecificationofInfrastructureProjects

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 2DIRECTIONS

BANKING ACT DIRECTIONS NO. 7 OF 2007MAXIMUM 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 & Poors4. Moody’s Investors Service5. Credit Rating Information Services of India (CRISIL)6. Investment Information & Credit Rating Agency (ICRA)7. Fitch Ratings India Ltd.8. Pakistan International Credit Rating Agency9. Rating Agency Malaysia10. Japan Credit Rating Agency Ltd.11. Any other credit rating agency as may be accepted by the Monetary Board from time to time.


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Nivard Ajith Leslie CabraalChairman of the Monetary Board /

Governor of the Central Bank of Sri Lanka

Colombo30 December 2008

DIRECTIONSBANKING ACT DIRECTION NO. 9 OF 2008

AMENDMENTS TO DIRECTIONS ON CLASSIFICATION OF LOANS AND ADVANCES,INCOME RECOGNITION AND PROVISIONING FORLICENSED COMMERCIAL BANKS IN SRI LANKA

In the exercise of the powers conferred by Sections 46(1) and 46A 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.3 of 2008 dated 08 May 2008, issued by the Monetary Board of the Central Bank of Sri Lanka. This Direction may be cited as the Banking Act Direction No.9 of 2008.

1. The following new Direction shall replace Direction No. 4(5)(i) of Banking Act Direction No.3 of 2008.

(i) Banks shall classify all credit facilities extended to a borrower as NPL, when one or more credit facilities has/have been classified as NPL in terms of Direction 3(5) and if the aggregate amount outstanding of such NPL exceeds 30 per cent of the total credit facilities extended to such borrower. Banks are required to comply with this Direction commencing 01 January 2010.

2. The following new Direction shall replace Direction No. 4(7)(I) of Banking Act Direction No.3 of 2008. This Direction will be effective till 31 December 2009.

4(7)(I) Reclassification of NPL as PLA:Banks shall reclassify NPL as PLA in the following manner:

Facility Type Criteria to reclassify NPL as PLA (i) Overdrafts in: Special mention category When 60% in excess of the sanctioned limit is paid by the borrower. Sub-standard category When 70% in excess of the sanctioned limit is paid by the borrower. Doubtful category When 80% in excess of the sanctioned limit is paid by the borrower. Loss category When 90% in excess of the sanctioned limit is paid by the borrower. (ii) Overdraft facilities where

the sanctioned limit has expired or cancelled or no limit has been availed

Reclassification does not arise.

(iii) Credit facilities repayable in monthly installments

When the installments, principal and/or interest, unpaid are less than three.

(iv) All other credit facilities If interest and principal in arrears are paid by the borrower.


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1Directions 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.


Chairman of the Monetary Board /Governor of the Central Bank of Sri Lanka

Colombo08 May 2008.

DIRECTIONSBANKING ACT DIRECTION NO.3 OF 2008

CLASSIFICATION OF LOANS AND ADVANCES, INCOME RECOGNITION ANDPROVISIONING

In the exercise of the powers conferred by Sections 46(1) and 46a 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 46a 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) Total 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, Reverse repurchase facilities, Lending for debt instruments under stand by credit lines and other instruments of a similar nature.

3(2)(II) Off-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 ��(1) and ��a of the Banking Act.

Definitions.


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13(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 46a 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) If 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 facilities 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 circumstances affecting the repayment capacity.

3(6) New credit 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.


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1and 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-off 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 Directions 3(5) and 4(5) and categorise as required by Direction 4(6).

4(5) Classification of multiple credit facilities granted to a single borrower:

(i) Banks shall classify all credit facilities extended to a borrower as NPL, when one or more credit facilities has/have been classified as NPL in terms of Direction 3(5) and if the aggregate amount outstanding of such NPL exceeds 30% of the total credit facilities extended to such borrower. Banks are required to comply with this Direction commencing January 1, 2009.

(ii) In the computation of the percentage threshold as specified in Direction 4(5)(i) above, banks shall exclude all accrued interest credited to an interest in suspense account from both numerator and denominator.


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14(6) Categorisation of non-performing credit facilities:

Banks shall categorise NPL, which are classified in terms of Directions 3(5) and 4(5) above, into the four categories mentioned below based on (a) the period which the credit facilities have remained non-performing and (b) the potential risk of credit facilities. However, multiple credit facilities granted to a single borrower, which are classified in terms Direction 4(5), shall be categorised as follows:

(i) Facilities classified in terms of Direction 3(5), shall be categorised as per Directions 4(6)(I) to 4(6)(IV).

(ii) Other facilities of such borrower shall initially be categorised into the “Special Mention” category. Subsequent categorisation of such facilities shall be in terms of Directions 4(6)(I) to 4(6)(IV).

4(6)(I) “Special Mention” credit facilities:

(i) The period which the credit facilities have remained non-per-forming.

Facility Type DeterminantOverdrafts Exceeds the sanctioned limit for a

continuous period of 90 days or more but less than 180 days.

Credit facilities, repayable in monthly installments

3 installments or more but less than 6 installments, principal and/or interest are due and unpaid.

Credit Cards The minimum payment is in arrears for 90 days or more but less than 120 days from the due date.

Other credit facilities The payments are in arrears for 90 days or more but less than 180 days from the due date.

4(6)(II) Sub-standard credit facilities:

(i) The period which the credit facilities have remained non-per-forming.








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1 (ii) The potential risk of credit facilities:

Where the situation of the borrower makes it uncertain that part or the entirety of the facility will be repaid and involves more than normal risk of loss due to unsatisfactory debt servicing record or financial condition of the borrower, insufficiency of collateral or any other factors which give rise to some doubts as to the ability of the borrower to comply with the present repayment terms.

4(6)(III) Doubtful credit facilities:

(i) The period which the credit facilities have remained non-performing.







(ii) The potential risk of credit facilities:

Where there is a high risk of partial default or where full collection is improbable and there is a high risk of default.

4(6)(IV) Loss credit facilities:

(i) The period which the credit facilities have remained non-performing.


continuous period of 540 days or more.Credit facilities, repayable in monthly installments

18 installments or more principal and/or interest are due and unpaid.

Credit Cards The minimum payment is in arrears for 240 days or more.

Other credit facilities The payments are in arrears for 540 days or more.

(ii) The potential risk of credit facilities:

Where the situation of the borrower makes it virtually certain that the facility will not be repaid, as in the following circumstances:


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1 (a) The customer is in a weak financial position or the ability of

the customer to earn income is low, which indicates that the customer may not be able to service the debt.

(b) The business of the customer has become uncertain or the customer has used the funds obtained for purposes other than for which they were meant.

(c) The customer is deceased and there are no assets to repay the debt.

(d) The customer has ceased or dissolved his business and is in debt to other creditors with preferential rights over the whole of the customer’s assets, where the said creditors’ total claims exceed the value of the customer’s assets.

(e) The customer’s business is under liquidation.

(f) The bank has filed a bankruptcy suit against the customer or has applied for participation in property with other creditors who have filed for bankruptcy, where the parties have agreed to restructure the debt with approval from the Court.

(g) The bank has applied for participation in property with other creditors who have sued the debtor.

(h) The bank is unable to contact or find the borrower.

4(7) Reclassification of credit facilities:

4(7)(I) Re-classification of NPL as PLA:

Banks shall reclassify NPL as PLA, if interest and principal in arrears are paid by the borrower in relation to classified NPLs.

4(7)(II) Re-classification of rescheduled NPL as PLA:

The NPL accounts which have been subjected to rescheduling, whether in respect of principal installment or interest amount, would be eligible to be upgraded to the PLA category only after the specified periods in respect of following category, subject to satisfactory performance during such period.

Rescheduled NPL in Upgrade to the PLASpecial mention category

Period of 90 days after the date when first payment of interest or of principal, whichever is earlier, falls due under the rescheduled terms.

Sub-standard and Doubtful categories

Period of 180 days after the date when first payment of interest or of principal, whichever is earlier, falls due under the rescheduled terms.

Loss category Period of 360 days after the date when first payment of interest or of principal, whichever is earlier, falls due under the rescheduled terms.


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1The amount of specific provision made earlier, in respective of rescheduled NPL of above categories, could also be reversed after the period specified above.

4(8) Granting of new credit facilities:

Banks shall not grant new credit facilities for repayment of NPL in the name of the same borrower or any party, unless the credit facility so created is also classified as NPL and categorised into the same category of the repaid NPL had been categorized under Direction 4(6). The reclassification of such NPL as PLA shall be subject to Directions (4)(7)(I) and 4(7)(II).

5(1) Banks shall recognise interest on an account which has been classified as NPL as income, as and when the interest is collected by the bank, if it is collectedon a cash basis.

5(2) Banks shall suspense all interest accrued but uncollected from the date a credit facility is classified as NPL and credit such accrued interest to the “Interest in Suspense Account” and debit such accrued interest to the “Interest Receivable Account-NPL”.

5(3) Banks shall continue the present practice of debiting the overdraft/credit card facilities classified as NPL with interest receivable and crediting to Interest in Suspense Account.

5(4) At the time of classifying the credit facilities as NPL, bank shall reverse the accrued interest and credit the same to Interest in Suspense Account. The reversal of unearned income identified after the close of a financial year could be accounted for in the financial year in which the advances were identified as NPL.

6(1) Banks shall maintain (a) General provisions and (b) Specific provisions, for credit risk mitigation purposes.

6(1)(I) General Provisions

Banks shall maintain general provisions in the following manner:

(i) 1% 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) Banks shall have a general provision of 0.7 per cent of total credit facilities as specified in Direction 6(1)(I)(i) above by 30.06.2008 and, thereafter, make an incremental provision of 0.1 per cent every quarter till 31.03.2009. In effect, banks shall meet the total requirement of 1 per cent not later than 31.03.2009.

(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:

Recognition of Interest on NPL.

Provisions for credit facilities.


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1 (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 parties and be legally enforceable in all relevant jurisdictions.

6(1)(II) Specific Provisions

Banks shall maintain specific provisions, as per the credit facilities categorised in accordance with Direction 4(6), on the amount outstanding, net of realisable security value as specified in Direction 7(1) and interest suspensed in the event of such interest being debited to the credit facility as per the following:

Categories of Non-performing Credit Facilities

Minimum Specific Provisioning Requirement

Substandard Credit card Others

25%20%

Doubtful 50%Loss 100%

6(2) In respect of any credit facilities falling within the ambit of Direction 4(8), banks shall maintain specific provisions as follows:

(i) Where credit facilities are applied for the repayment of the capital sum outstanding, provisions shall be maintained at a level not less than what would have been required to be maintained under Direction 6(1)(II) at the time of repayment of the NPL.

(ii) Where credit facilities are applied for the repayment of interest, provision shall be maintained at 100% of the outstanding facility.

(iii) Where credit facilities are applied for the repayment of capital and interest (e.g., in the case of an overdraft), provisions for capital and interest shall be provided for in accordance with Directions 6(2)(i) and 6(2)(ii).

7(1) Valuation of security for provisioning purposes shall be as specified below.

7(1)(I) Primary Mortgage over Immovable Property

(i) The value of security is based on progressive discounts on the forced sale value (FSV) of immovable property and on a current valuation report as specified below.

Valuation of Security.


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1 (ii) The progressive discounts shall be as follows:

Item

% of FSV of immovable property that can be considered as the value

of security

Freehold Property Leasehold Property

At the first time of Provisioning 75 60

Period in the Loss Section

Less than 12 months 75 60More than 12 but less than 24 months 60 50

More than 24 but less than 36 months 50 40

More than 36 but less than 48 months 40 30

More than 48 months

Property should be reviewed on a regular basis, and discounted further at the discretion of the bank’s manage-ment.

Nil

(iii) Current external professional valuation report:

The valuation report shall meet the following conditions.

(a) Banks shall obtain a current external professional valuation report in respect of a facility/ies where the capital outstanding amount is equal to or more than Rs.5,000,000/- or 0.1% of the bank’s capital base, whichever is less. Capital base shall be the same as that appearing in the computation of the Capital Adequacy Ratio subject to certification by the bank’s External Auditor.

(b) Such report shall be from an External Independent Valuer.

An External Independent Valuer shall be: (aa) A Chartered Valuation Surveyor; or (ab) A Fellow of the Institute of Valuers of Sri Lanka (IVSL)

with 5 years experience (ac) A Graduate member of IVSL with 10 years experience (ad) An Associate member of IVSL with 20 years

experience.

(c) The period of the valuation report shall be:

(aa) In respect of credit facilities granted against residential property which is occupied by the borrower for residential purposes: a report that is not more than four years old.


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1 (ab) In respect of credit facilities granted for all other

purposes: a report that is not more than three years old.

(iv) Current internal valuation report:

The valuation report shall meet the following conditions.

(a) Banks shall obtain a current internal valuation report in respect of a credit facility/ies where the capital outstanding amount is less than Rs.5,000,000/- or 0.1% of the bank’s capital base, whichever is less.

(b) It shall be a current internal assessment of the value of properties mortgaged for such credit facilities, carried out by an independent officer who has not been involved in the credit decision and signed by a senior officer of the bank.

(c) A current internal assessment is defined as an assessment that is not more than two years old.

7(1)(II) Mortgages other than Primary Mortgages

Mortgages other than primary mortgages over immovable property will qualify for the above purpose subject to complying with the conditions in Direction 7(1)(I) above and if such property is mortgaged to the same bank.

7(1)(III) Deposit of Title Deeds of Property with an Undertaking to Mortgage

No value shall be assigned until a property mortgage is executed in favour of the bank.

7(1)(IV) Assignment over Life Insurance Policies

90 per cent of the surrender value shall be considered as value of security, provided confirmation of surrender value from the insurer is available and the assignment in favour of the bank is duly registered.

7(1)(V) Secured on Gold

The market price of gold, subject to an adequate insurance cover.

7(1)(VI) Assignment of Shares

(i) Quoted

(a) 90 percent of the latest market price

(b) If trading has been suspended (other than temporary suspension), the net realisable tangible asset value, as per the latest audited financial statements (not more than 18 months old), is to be used, provided an auditor’s certificate evidencing the value per share is available. No value shall be given if appropriate financial statements/certificates are not available and if sales are temporarily suspended.


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1 (ii) Unquoted

Value may be given, provided the shares are marketable. Appropriate value may be determined on the basis of 75 per cent of the net tangible asset value per share as certified by the company’s auditors.

7(1)(VII) Mortgage over Plant, Machinery and Equipment

Value based on an external valuation report or, in the absence of such valuation, the net book value calculated by using a 20 per cent depreciation rate on the straight-line basis taking into account the date of acquisition and the acquisition price shall be applicable.

7(1)(VIII) Mortgage over Motor Vehicles

Based on an external valuation report or, in the absence of such valuation, the net book value calculated by using a 25 per cent depreciation rate on the straight line basis taking into account the date of original registration and the acquisition price on that date, would be applicable.

7(1)(IX) Pledge over Stocks/Goods under the Bank’s Control

50 per cent of the market value determined on a case-by-case basis may be applicable.

7(1)(X) Hypothecation of Stock-in-Trade

30 per cent of the current value of stocks provided that the level of stock-in-trade is closely monitored by the bank.

7(1)(XI) Quoted Debentures

(i) 90 per cent of the latest market price

(ii) If trading has been suspended (other than temporary suspension), the net realisable tangible asset value, as per the latest audited financial statements (not more than 18 months old), is to be used, provided an auditor’s certificate evidencing the value per share is available. No value shall be given if appropriate financial statements/certificates are not available and if sales are temporarily suspended.

7(1)(XII) Guarantees

(i) Licensed Banks – incorporated locally or outside Sri Lanka

Eligible value of guarantee is based on a rating given by an eligible credit rating agency recognition under the Direction issued on maintenance of capital adequacy ratio (Basel II), as follows:

Bank’s credit rating Value of securityAAA to AA- or equivalent 80%A+ to A- or equivalent 50%


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1 (ii) Government Guarantee

Full value.

7(1)(XIII) Other Types of Security

As specifically approved by the Director of Bank Supervision on a case-by-case basis.

8(1) Banks incorporated or established within Sri Lanka shall have a well-designed write-off/write down policy established by the Board of Directors, delineating the approach, authority, accountability for negligence and inappropriate follow-up, independent review and audit, continuous monitoring, reporting, etc. This policy should aim at recovering maximum salvage value through enforcement of collateral / guarantees, etc.

Banks, incorporated outside Sri Lanka, are required to follow write-off/write down policy duly laid down by their head office.

9(1) Banks shall segregate all credit facilities (a) classified as non-performing (b) rescheduled (c) written off/written down from other credit facilities to facilitate close follow-up action and to monitor recoveries.

10(1) Banks shall submit the information on classification of loans and advances to the Central Bank of Sri Lanka on a monthly basis, in accordance with reporting format and instructions at Annex attached hereto. The returns for a given period should be submitted to the Central Bank on or before the 15th day of the month following the month to which the information relates.

11(1) The following Directions and Circulars issued to licensed commercial banks are hereby revoked:

(i) Directions on Suspension of interest on non-performing advances and classification of bad and doubtful advances for provisioning purposes (Schedule I) and valuation of securities for provisioning purposes (Schedule II) dated 22 August 1997, issued under Section 46A of the Banking Act, as amended.

(ii) Circular letter dated 15 August 2003 amending Direction 11(1)(i) above.

(iii) Circular letter dated 13 July 2004 on criteria for selection of Valuers.

(iv) Circular letter dated 8 September 2004 on classification of bad and doubtful advances for provisioning purposes (classification of medium and long-term project loans).

(v) Amendment to Direction 11(1)(i) dated 15 December 2004 on valuation of securities for provisioning purposes relating to the requirement to obtain a current professional valuation report.

(vi) Circular letter dated 29 March 2006 on reversal of unearned income and classification of advances as non-performing.

(vii) Direction dated 6 December 2006 on the requirement to maintain a general provision for advances.

Write Off/Write down of non-performing credit facilities.

Segregation of non-performing credit facilities.

Reporting Requirement.

Revocation of Previous Directions and Circulars.


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1Annex

Licensed Commercial BanksBanking Act Direction No. 3 of 2008

ClassificationofLoansandAdvances,IncomeRecogntionandProvisioningReporting Format

Name of Bank:As at: DD/MM/YYYY Amount in ’000

Credit Facilities

Performing Loans and Advances

(PLA)

Categorisation of Non-performing Loans and Advances (NPL) Total

NPLs

Total Credit

FacilitiesSpecial Mention

Sub-standard

Doubt-ful Loss

On-balance Sheet Credit Facilities

Cheques purchasedImport billsExport billsOverdraftsCredit card Short-term loansMedium and long-term loansHousing loansStaff loansRe-scheduled loansLease rentals (net)Loans against debt securitiesPawning advancesLoans to Banks and Financial InstitutionsOther credit exposuresInterest receivablesLoans and Advances (gross)Suspended Interest (-)Specific provisions (-)General provisions (-)Loans and Advances (net)Value of Security

Off-balance Sheet Credit Facilities

GuaranteesBondsLetters of CreditAcceptancesInterest ReceivablesLoans and Advances (gross)Suspended Interest (-)Specific provisions (-)General provisions (-)Loans and Advances (net)Value of Security


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1BANKING ACT

Determinations made by the Monetary Board of the Central Bank of Sri Lanka under section 17a(1)(a) and (1)(b) of the Banking Act, No.30 of 1988 as amended by the Banking (Amendment) Act, No.33 of 1995.


GovernorColombo22 August 1997

DETERMINATION

By virtue of the provisions of section 17a(1)(a) and (1)(b) of the Banking Act, No.30 of 1988 as amended by Banking (Amendment) Act, No.33 of 1995, the Monetary Board has determined that a licensed commercial bank shall not acquire or hold shares in any company other than a listed public company, and

(i) shareholding acquired by such bank in any such listed public company shall not be in excess of ten percent of its capital funds :

Provided that such acquisition or holding of shares shall not exceed twenty percent of the paid up capital of such listed public company.

(ii) the aggregate amount invested in the shares of listed public companies excluding companies which are subsidiaries of the bank, shall not exceed thirty percent of its capital funds.


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1BANKING ACT

Determination made by the Monetary Board of the Central Bank of Sri Lanka under Section 47(3), (4), (5) and (6) of the Banking Act, No.30 of 1988 as amended by the Banking (Amendment) Act, No.2 of 2005.

Sgd. Sunil Mendis

GovernorColombo11 February 2005.

DETERMINATION

1. The Monetary Board, by virtue of the provisions of section 47(3), (4), (5) and (6) of the Banking Act, has approved the following as security to be obtained by a licensed commercial bank in granting accommodation to a director or to a close relation of such director or to any concern in which director has a substantial interest, as the case may be:

(a) Sir Lanka Government Guarantees;

(b) Bank Guarantees;

(c) Guarantees of International Financial Institutions; such as the World Bank, IMF, IFC, ADB, USAID etc.

In the case of accommodation secured by items (a), (b) or (c) above, the accommodation granted should not exceed 100 per cent of the guarantee.

(d) Government or Central Bank Securities provided that the accommodation granted would not exceed 90 per cent of the face value or market value, whichever is lower of such securities;

(e) Cash Deposits in any commercial bank held under lien to the order of the lending bank provided that the accommodation granted would not exceed 90 per cent of such cash deposits;

(f) Life Insurance Policies issued in Sri Lanka and assigned to the lending bank provided that the accommodation granted would not exceed 75 per cent of the surrender value of such policy;

(g) Immovable property held on a freehold basis and on which a primary mortgage has been taken by the lending bank provided that the accommodation granted would not exceed 60 per cent of the value of such property.

(h) Immovable property held on a leasehold basis provided that –

(i) the lease has been granted by a statutory body;

(ii) the unexpired period of lease is at least 50 years;

(iii) there is no prohibition on the mortgage of the leasehold rights contained in the Deed of Lease, or if the Deed of Lease requires the prior approval of the Lessor for the mortgage of the leasehold rights such approval has been obtained from the Lessor;

(iv) a primary mortgage has been taken on the leasehold rights by the lending bank;

and provided further that the accommodation granted does not exceed 60 per cent of the value of such property.

(i) Shares of Public Companies quoted on the Colombo Securities Exchange provided that the accommodation granted would not exceed 50 per cent of the market value of such shares;


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1 (j) Mortgage of Stock-in-Trade provided that the accommodation granted would not exceed 30 per

cent of the market value of such Stock-in-Trade.

(k) In the case of a concern where a substantial interest is held by a Banking Institution as defined in section 127 of the Monetary Law Act, other than a licensed commercial bank, immovable property held on a freehold basis and on which a secondary mortgage has been taken by a lending bank, provided that the total accommodation granted on the primary mortgage and the secondary mortgage does not exceed 60 per cent of the value of such property; and

(l) Pledge of non-perishable goods of a commercial nature which are readily marketable, excluding all manufactured foods and other items with a limited shelf life, provided that the accommodations granted would not exceed 40 per cent of the market value of such goods.

2. For the purposes of Section 47(5), in respect of accommodation granted by a licensed commercial bank to a concern in which a director of such bank has a substantial interest, where the substantial interest held in the concern by such director –

(i) exceeds one million rupees but does not exceed 10 per cent of its paid up capital or is the existence of a guarantee or indemnity for a sum less than 10 per cent of that capital, where the concern is a company.

(ii) Is the existence of a guarantee or indemnity for a sum less than 10 per cent of the total capital subscribed by all its partners, where the concern is a firm.

Such security as the licensed commercial bank considers adequate having regard to the creditworthiness of such concern should be obtained. Such accommodation should be reported to the Director, Bank Supervision, within one week of disbursement of such accommodation.


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1Order published under Section 47(4) of the Banking Act, No. 30 of 1988 as amended by

Banking (Amendment) Act, No. 2 of 2005

In terms of Section 47(4) of the Banking Act, No.30 of 1988 as amended by Banking (Amendment) Act, No.2 of 2005, the Monetary Board of the Central Bank of Sri Lanka has approved the following limits in respect of accommodation granted by a licensed commercial bank to a director or to a close relation of such director with effect from 11th February, 2005.

(a) In the case of accommodation secured by cash or near cash collateral [items (a) to (e) of the Determination issued by the Monetary Board in terms of Section 47(3) of the Banking Act, No.30 of 1988 as amended by Banking (Amendment) Act, No.2 of 2005, upto the limit of he security permitted in terms of the said Determination.

(b) In the case of accommodation secured by other types of approved securities, upto Rupees Five Hundred Thousand (Rs.500,000/-)

(c) In the case of accommodation by way of issue of a credit card, upto Rupees Five Hundred Thousand (Rs.500,000/-), provided that such accommodation is on the same terms and condition as for other customers of the respective bank.

Sgd. Sunil Mendis

GovernorColombo11 February 2005.


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1Bank Supervision Department31 December 2004

To : All Licensed Commercial Banks Licensed Specialised Banks; Approved Auditors

Dear Sirs,

ACCOUNTING FOR PROPERTIES ACqUIRED BY FORECLOSURE OFCOLLATERAL / PART SETTLEMENT OF DEBT

It has been observed that the accounting treatment adopted by some banks with respect to immovable property acquired by foreclosure of collateral from defaulting customers or which have devolved on the banks as part settlement of debt, leads to a misrepresentation of the bank’s assets and the level of non performing advances of the bank.

2. In order to create a uniform practice among the banks in accounting for such assets, and to avoid misrepresentation of the level of non performing advances, all banks are hereby informed to adhere to the following procedure in accounting for such property;

2.1 Immovable property acquired by foreclosure of collateral from defaulting customers, or which have devolved on the banks as part settlement of debt should not be accounted for as investment property or as part of the assets of the bank. Such property should be recorded on a memorandum basis.

2.2 The related facility should remain classified in the books of the bank until such property is disposed of and the proceeds realized by the bank.

3. Your attention is drawn to section 48a of the Banking Act, No.30 of 1988, as amended by Act, No.33 of 1995, which requires banks to dispose of property acquired by foreclosure of collateral from defaulting customers or which have devolved on the banks as part settlement of debt, at the earliest opportunity.

Yours faithfully,



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1Ref. No. : BS/13/89

20th March, 1989

To: All Commercial Banks

FINANCIAL ACCOMMODATION TO FINANCE COMPANIES

Commercial banks are hereby informed that as from 1st April 1989, no financial accommodation to finance companies against the security of Government Securities, Treasury Bills, Central Bank of Sri Lanka Securities and Fixed Deposits should be granted without the prior approval of the Director of Bank Supervision.

All commercial banks are required to furnish a return setting out the financial accommodation already granted to finance companies against the securities mentioned in paragraph (1) above and outstanding as at 28th February, 1989, to the Director of Bank Supervision within the two weeks of the receipt of this letter.

Sgd. P. T. Sirisena



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1Ref. No. : 02 / 17 / 800 / 0006 / 01

31 October 2008

Instructions to Licensed Commercial Banks Appointed as Authorised Dealers

Dear Sirs,

PRE PAYMENT OF IMPORT BILLS

The licensed commercial banks who are authorised dealers are informed that until further notice, they should not effect pre-payment of import bills and that such bills should be honoured as agreed to in the contract entered into with the supplier at the time of placing the import order.

Yours faithfully,

Controller of Exchange Director of Bank Supervision


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1Ref. No. : 02 / 04 / 004 / 0009 / 001

Bank Supervision Department8th Floor, Renuka Building41, Janadhipathi Mawatha Colombo 1.

17th August, 2001

To : All Licensed Commercial Banks who are Authorized Dealers in Foreign Exchange

Dear Sirs,

PREPAYMENT OF IMPORT BILLS

We refer to our circular dated 29th January 2001 on the above subject, in terms of which licensed commercial banks who are Authorized Dealers were informed that they should not effect pre-payment of import bills and that such bills should be honoured on the date of maturity as agreed to in the contract entered into with the supplier at the time of placing the import order.

Commercial banks who are Authorized Dealers are hereby informed that this requirement is withdrawn with effect from Monday, 20th August 2001. However, a commercial bank/Authorized Dealer may use his discretion for prudential reasons to reject any prepayment of an import bill, without referring to us.

Yours faithfully,



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1Ref. No. : 02 / 05 / 009 / 0100 / 001


05 September, 2001


RECOVERY OF ACCOMMODATION TO EXPORTERS

We refer to our circulars dated 22nd January, 2001, 29th January, 2001, 16th February, 2001 and 30th March, 2001 on the above subject.

As agreed at the Bank Managers’ meeting held on 23rd August, 2001, licensed commercial banks may use their judgment and discretion to extend the credit period granted to exporters who experienced delays in dispatching their documents due to interruption of flights in July by a maximum of 7 days.

Sgd, P.T. Sirisena



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1Ref. No. : 02 / 05 / 009 / 0100 / 001


30th March, 2001



We refer to our circulars 01/01/002/0034/001 dated 22nd January, 2001 and 02/05/009/0100/001 dated 29th January, 2001 and 16th February, 2001 on the above subject.

Some licensed commercial banks have sought further clarifications on the contents of the above circulars. Accordingly, we furnish the following clarifications;

1. Circulars will apply to credit granted to finance all types of export orders irrespective of the terms of payments which can be on sight, on deferred payment terms supported with letters of credit or other terms inclusive of bills on collection or on consignment basis. All such export credit should be recovered only out of export proceeds, and enhanced rates of interest should apply, if there is any delay in recovery of credit beyond the periods specified in the previous circulars.

2. There may be instances where export credit requested may not be identified with a particular export order with specific terms of payments. Also, some customers may negotiate for credit to finance imports of raw materials or other needs which are directly connected with export business, although it may be difficult to identify such credit with specific export orders. In such cases, banks are requested to apportion such credit among export orders or shipments of the particular exporter and enhanced rates of interest should apply if there is any delay in recovery of the apportioned credit beyond the periods specified in the previous circulars.

3. Certain instances have also been reported where some customers repay their export credit out of rupee funds on the grounds that export proceeds are brought and kept in their foreign cur-rency accounts with banks. However, this would not conform to the method of recovery of export credit stipulated in our circulars. Banks are requested to recover export credit only out of export proceeds, which should be surrendered to banks in sufficient amounts to settle in full the export credit.

All banks are requested to refer queries, if any, to Director, Bank Supervision Department, for any further clarifications on the contents of these circulars.

Sgd. J M T B JayasundaraActg. Director of Bank Supervision


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1Ref. No. : 02 / 05 / 009 / 0100 / 001


16th February, 2001



I refer to our Circulars 01/01/002/0034/001 dated 22nd January, 2001 and 02/05/009/0100/001 dated 29th January, 2001, in which procedures agreed on the above subject were conveyed by us. Since then, some banks and exporters have requested an extension of the maximum period of 90 days granted from the date of shipment to settle export credit out of export proceeds, without being subjected to enhanced interest rates, on the ground that it is customary for certain exports to be made on 120 days deferred payment terms. They have cited, as an example, tea exports to Russia where, in the normal course of business, a period exceeding 90 days would be necessary for settlement of export credits.

2. Having considered these representations, it has now been decided that licensed commercial banks may use their judgement and discretion to enhance the period granted to settle export credit out of export proceeds up to 120 days from the date of shipment in respect of exports where it is customary to grant 120 days deferred payment terms to buyers. Accordingly, enhanced rates of interest applicable on accommodation in respect of such exports will be as follows.

(i) 1,000 basis points per annum, where there is a delay of not more than 30 days beyond the 120 days or lesser period decided by the banks from the date of shipment; and

(ii) an additional 200 basis points per annum for every 30 days delay thereafter.

This will come into effect from Monday 19th February, 2001.

3. The following clarifications on the contents of the two Circulars referred to above are also made for your information.

(i) In the event the agreed payment period of the export bill/order connected with the accommodation exceeds 90 days or the period decided by the banks under the paragraph 2 above, enhanced interest rates would apply for the period beyond 90 days or the period decided by the banks, as the case may be, from the date of shipment.

(ii) Where export credits are not recovered within 90 days or the period decided by banks under the paragraph 2 above, enhanced interest rates would apply to all accommodation granted to such exporters by way of purchasing/discounting bills, pre-shipment/post-shipment credit as well as other loans and overdraft facilities. In the event credit facilities such as overdrafts cannot be identified with a specific export bill/order, such credit facilities may be apportioned among export bills/orders of the customer concerned for the purpose of applying enhanced interest rates.

(iii) Enhanced interest rates would apply to export credit facilities in rupees as well as in foreign currencies granted by both Domestic Banking Units and Foreign Currency Banking Units.

(iv) Enhanced interest rates would not apply to credit facilities granted against export bills negotiated prior to 22nd January, 2001. However, enhanced interest rates would apply to


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1such credit facilities if they are not recovered out of export proceeds within the agreed payment period of the export bill/order.

(v) The banks may permit exemption from enhanced interest rates in respect of credit facilities which will be granted against export bills which have been supported by Letters of Credit opened prior to 22nd January, 2001. However, enhanced interest rates would apply if such export credits are not recovered within the agreed period out of export proceeds.

4. The reporting format has now been changed as given in Annex. Please use the new format to report to the Bank Supervision Department monthly the details of accommodation and enhanced interest. In particular, please note that the credit settlement period of the normal 90 days or the enhanced 120 days should be indicated in column 2 of the Annex.

Sgd, P.T. Sirisena



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1

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anka

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1Ref. No. : 02 / 05 / 009 / 0100 / 001

Bank Supervision Department8th Floor, Renuka Building41, Janadhipathi Mawatha Colombo 1

29th January, 2001



At the meeting of Bank Managers held on 26 January 2001 the Bank Managers sought clarifications with regard to the contents of the Circular No. 01/01/002/0034/001 of 22nd January 2001 on the above subject. The agreements reached at the meeting are set out below.

(A) Settlement of Export Credit out of Export proceeds

The Bank Managers raised the issue as to whether in all instances export credit should be settled out of proceeds of the relevant exports. It is agreed that export credit (including overdraft granted for export purposes) is granted on the basis that repayment would be made out of export proceeds and that, therefore, the enhanced interest rates specified in the circular would apply where there is failure to settle the export credit out of export proceeds within 90 days of the shipment of goods under the export order.

(B) Applicability of the Circular to Off-shore Banking Units

The Bank Managers also raised the issue as to whether the requirements of the circular would apply to off-shore banking units as well. It was agreed that the rationale underlying the requirements of the circular would apply equally to credit granted by both domestic units and off-shore units of banks which are part of a single licensed commercial bank and that, therefore, its requirements would apply to settlement of export credit granted by both such units.

(C) Applicability of the Circular to Overdrafts

The Bank Managers raised the question of the settlement of overdrafts out of export proceeds. It was agreed that the overdraft facilities granted for export purposes should be settled out of export proceeds within 90 days of the shipment of goods and the failure to do so would attract the enhanced interest rates specified in the circular.

Licensed commercial banks are required to abide by the agreements reached at the Bank Managers’ meeting.



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1Ref. No. : 01 / 01 / 002 / 0034 / 001

Department of Bank Supervision

22nd January, 2001



As discussed at the Bank Managers’ meetings of 22nd December 2000 and 18th January 2001 and the meeting of Sri Lanka Forex Dealers’ Association on 24th November 2000, it has been agreed that the delays in the settlement of accommodation granted by licensed commercial banks for financing export orders, can cause problems for the prudential management of the banks and that there is a need to adopt a uniform practice in this regard by all the banks.

2. Therefore, with a view to securing the early settlement of financial accommodation granted to exporters on the basis of export orders, licensed commercial banks are required to observe the following procedures with effect from 23 January 2001.

(a) Licensed commercial banks should make every endeavour to ensure the repatriation of export proceeds in time against export orders made through them.

(b) In doing so, licensed commercial banks should ensure that their borrowers settle in full the accommodation granted to finance export orders out of export proceeds within a period of 90 days from the date of shipment of goods in respect of which the accommodation has been granted.

(c) In order to achieve the above objectives, the rate of interest applicable on such accommodation, where the borrower does not repay export proceeds in time, shall be enhanced as follows: (i) 1,000 basis points per annum, where there is a delay of not more than 30 days beyond

the 90 days from the date of shipment; and (ii) an additional 200 basis points per annum for every 30 days delay thereafter.

3. Licensed commercial banks are hereby requested to submit monthly reports to the Director of Bank Supervision (DBS) on the details of such accommodation which has not been settled within the specified period in the format given in the Annexure.

4. Each monthly report should be submitted to DBS on or before the end of the second week of the subsequent month. Accordingly, the first report providing the aforementioned details in respect of January 2001 should reach DBS on or before 16th February 2001.

Chief Accountant Director of Bank Supervision


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1

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(%)

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1Ref. No. : 02/04/004/0005/001

Central Bank of Sri LankaBank Supervision Department


GUIDELINES ON THE GRANT OF FACILITIES FOR THE ISSUE OFCOMMERCIAL PAPER AND OTHER FORMS OF PROMISSORY NOTES

All Licensed Commercial Banks (LCBs) and Licensed Specialised Banks (LSBs) are hereby required to observe the following guidelines when they provide accommodation for the issue of Commercial Paper and other forms of Promissory Notes (CP/PN) by their corporate customers by accepting, endorsing, guaranteeing, underwriting or purchasing such CP/PN, or where they support the issue of such instruments by acting as issuing/paying agents, dealers, or by authenticating signatures of the issuers.

1. Form of Commercial Paper/Promissory Notes – CP/PN shall take the form of a usance promissory note negotiable by delivery or endorsement and delivery, in accordance with the Bills of Exchange Ordinance.

2. Eligibility Criteria – The LCBs and LSBs shall observe the following criteria when supporting the issue of CP/PN referred to above:

2.1 The issuing corporate customers should not be LCBs, LSBs or Finance Companies.

2.2 All existing credit facilities enjoyed by the issuing company with any LCB/LSB should be “current” in terms of the Central Bank’s Directions on Non-Performing Advances issued under Section 46A and Section 76J(I) of the Banking Act for LCBs and LSBs, respectively.

2.3 In the case of providing accommodation, the issuing company should have an approved stand-by credit line from the LCB/LSB supporting the issue, to the full redemption value, which should be specifically reserved for the purposes of redemption of such CP/PN. Such credit line should be for a period longer than the maturity date of CP/PN.

OR

An ‘investment grade rating’ by a Rating Agency approved by the Central Bank of Sri Lanka.

“full redemption value” refers to the amount of the principal, interest and any other charges which is payable upon redemption of such CP/PN.

3. Procedures – A LCB's/LSB's support for the issue of CP/PN does not require the prior approval of the Central Bank of Sri Lanka. However, in supporting the issue of these instruments, LCBs/LSBs shall ensure that:

3.1 The company intending to issue such CP/PN submits to LCBs/LSBs –

(a) A written request indicating the nature of support applied for in respect of each issue of CP/PN;

(b) Comprehensive financial information which would include company profiles and financial data including a projected cash flow statement;

(c) The value of CP/PN already issued and outstanding; (d) Board resolution for the issue of CP/PN concerned.


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1 3.2 The LCBs/LSBs should also ensure that the company profiles and financial data are made

available to investors upon request.

3.3 An adequate appraisal of the financial condition of the issuer is carried out and due caution is exercised before lending the support of the LCB/LSB. For this purpose, the LCB/LSB should, among other things, obtain a report from the Credit Information Bureau (CRIB).

3.4 The CP/PN are printed on good quality security paper incorporating adequate security features, that necessary precautions have been taken to keep documents in safe custody, preventing access by unauthorised persons.

3.5 The issue of CP/PN is completed within a period of 14 calendar days from the date of issue. Thus, any unsold portion of the issue after the 14 day cannot be issued.

3.6 Each single issue of CP/PN should have the same maturity date.

3.7 The issuing company should discharge the obligations on the CP/PN on the date of maturity. No grace period shall be given to the issuer in this regard.

3.8 The CP/PN shall contain the following minimum information/features: (a) The description of debt instrument should be clearly printed on it; (b) Name of the issuing company; (c) Serial number; (d) Place of payment (of interest and principal); (e) Date of issue; (f) Amount (in words and figures); (g) Date of maturity; (h) Names of the issuing and paying agents; (i) If the repayment of principal and payment of interest are guaranteed, name of the

guarantor; (j) Signatures of authorised signatories of the issuing company (k) Where the LCB/LSB does not accept any obligation for the payment on the

CP/PN, as when it only authenticates the signature, such fact should be conspicuously stated on the CP/PN;

(l) The counterfoil of CP/PN should also contain the information at (a) to (k). In the case of (j), the signature/initials of the respective signatories.

(m) Adequate space should be provided for endorsements on the reverse of the CP/PN.

3.9 (a) The LCB’s/LSB’s accounts in respect of CP/PN should be in conformity with applicable/accepted accounting practices and non fund based support for CP/PN should be recorded and reported as off-balance sheet items.

(b) The LCB’s/LSB’s obligations/commitments on CP/PN shall be reported in the statutory returns submitted to the Central Bank of Sri Lanka.

(c) Details of the LCB/LSB support for the issue of CP/PN outstanding monthly, shall be reported to the Director of Bank Supervision in a monthly statement as in the annexed format. This statement shall be submitted by the 15th of the following month, duly certifying that the obligations of the LCB/LSB under the different categories of issue, as recorded in the General Ledger, are correctly reflected in the statement. A ‘nil’ statement should be sent if there are no outstanding balances.


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1 3.10 The LCBs/LSBs supporting the issue of CP/PN should conform to all legal requirements.

3.11 Roll-over of CP/PN should be considered as a new issue.

4. Prudential Requirements of the Central Bank

4.1 All credit facilities extended, and commitments made, by LCBs/LSBs relating to the issue of CP/PN will be treated as accommodation granted to the issuing company and shall be subject to directions issued from time to time under the Banking Act and to all prudential guidelines issued by the Central Bank.

5. These Guidelines shall be effective from 05 January 2001.

6. Guidelines to Licensed Commercial Banks in Sri Lanka on the grant of facilities for the issue of Commercial Paper dated 05.06.1995 are hereby rescinded.

7. Any clarifications/queries with regard to these Guidelines should be addressed to the Director of Bank Supervision.

Sgd. P. T. Sirisena


05 January 2001


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1

Mon

thly

Sta

tem

ent o

f Com

mer

cial

Pap

er /

Prom

issor

y N

otes

As a

t ……

……

……

……

… in

term

s of G

uide

lines

dat

ed 5

Jan

uary

200

1 (A

mou

nts i

n R

upee

s Tho

usan

ds)

N

ame

of

Lega

l Sta

tus

Type

of

Am

ount

A

mou

nt

Dat

e of

D

ate

of

Rat

e of

N

atur

e of

Is

suin

g C

ompa

ny

of Is

suin

g Pr

omis

sory

o

f the

Issu

e Su

bscr

ibed

Is

sue

Mat

urity

In

tere

st (%

) Su

ppor

t

C

ompa

ny

Not

es Is

sued

(F

ace

Valu

e)

(Y

Y/M

M/D

D)

(YY

/MM

/DD

)

(1

) (2

) (3

) (4

) (5

) (6

) (7

) (8

) (9

)

We

here

by c

ertif

y th

at th

is s

tate

men

t refl

ects

the

valu

e of

sup

port

exte

nded

to th

e B

ank’

s cu

stom

ers

and

that

the

stat

emen

t figu

res

tally

with

the

Gen

eral

Led

ger B

alan

ces a

s at

the

end

of

the

mon

th.

Dat

e :

Nam

e of

Ban

k :

Aut

horis

ed O

ffcer

:

* C

olum

n (9

)

Plea

se in

dica

te u

sing

the

folio

win

g C

odes

:

Nat

ure

of S

uppo

rt

Cod

e

Acc

eptin

g A

CEn

dors

ing

ENG

uara

ntee

ing

GT

Und

erw

ritin

g U

NPu

rcha

sing

PR

Issu

ing

Age

nt

IAPa

ying

Age

nt

PAD

eale

r D

EA

uthe

ntic

atin

g A

U

Inst

ruct

ions

:

* C

olum

n (2

)

Plea

se in

dica

te u

sing

the

folio

win

g C

odes

:

Priv

ate

Com

pany

–

PR

Publ

ic U

nquo

ted

Com

pany

–

PU

Publ

ic Q

uote

d C

ompa

ny

– P

QPe

ople

s Com

pany

–

PC

* C

olum

n (3

) : P

leas

e in

dica

te w

heth

er C

omm

erci

al P

aper

(CP)

, Pro

mis

sory

Not

es (P

N),

or a

ny o

ther

form

(Ple

ase

spec

ify)

* Th

is st

atem

ent s

houl

d re

ach

the

Dire

ctor

, Ban

k Su

perv

isio

n D

epar

tmen

t on

or b

efor

e th

e 15

th o

f the

follo

win

g m

onth

.

* A

‘nil’

stat

emen

t sho

uld

be su

bmitt

ed if

ther

e ar

e no

out

stan

ding

am

ount

s.


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1My. No. : 02 / 17 / 800 / 0005 / 01

Bank Supervision Department

20 August 2008


Dear Sirs,

DEFINITION OF LIqUID ASSETS – UNDER SECTION 86OF THE BANKING ACT, No. 30 OF 1988, AS AMENDED

The Monetary Board has determined that investment in the International Sovereign Bonds issued in 2007 by the Government of Sri Lanka shall be treated as liquid assets in terms of item (g) of the definition of “liquid assets” under Section 86 of the Banking Act, No.30 of 1988.

Licensed commercial banks may, therefore, take into account the daily market value of their investment in the International Sovereign Bonds in computing their liquid assets ratio for the purpose of complying with the provisions of Section 21 of the Banking Act.

Yours faithfully,

B D W A Silva



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1Ref. No. : 02 / 04 / 002 / 0106 / 001


15th August 2002


DEFINITION OF LIqUID ASSETS – UNDER SECTION 86OF THE BANKING ACT NO: 30 OF 1988

In exercise of the powers conferred by paragraph (g) of the definition of “liquid assets” in Section 86 of the Banking Act, No.30 of 1988 as amended by Banking (Amendment) Act, No.33 of 1995, the Monetary Board has determined that Sri Lanka Development Bonds (SLDBs) issued under the Foreign Loans Act, No.29 of 1957 shall be liquid assets.

Licensed Commercial Banks may, therefore, take into account the daily market value of their investment in SLDBs for the purpose of complying with the provisions of Section 21 of the Banking Act, relating to maintaining liquid assets.

Yours faithfully,

Sgd. Director of Bank Supervision


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1Ref. No. : 02 / 04 / 002 / 0005 / 002


31st January 2001


Dear Sir / Madam,

DEFINITION OF LIqUID ASSETS – UNDER SECTION 86OF THE BANKING ACT No. 30 OF 1988

In exercise of the powers conferred by Item (g) of the definition of “liquid assets” in Section 86 of the Banking Act, No.30 of 1988, the Monetary Board has determined that 50% of the investments in Commercial Paper/Promissory Notes, which are backed by an approved standby credit line from a Licensed Commercial Bank/Licensed Specialised Bank supporting the issue to the full redemption value or an investment grade rating by a Rating Agency approved by the Central Bank of Sri Lanka, and has a remaining maturity of less than 1 year be considered as liquid assets.

Kindly acknowledge receipt of this letter.

Yours faithfully,

Sgd. P. T. Sirisena



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1Ref. No. : BS/35/97

Bank Supervision DepartmentCentral Bank of Sri Lanka8th Floor – Renuka Building41 Janadhipathi MawathaColombo 1.

15th May 1998.


Dear Sir,

DEFINITION OF LIqUID ASSETS – UNDER SECTION 86 OFTHE BANKING ACT NO. 30 OF 1988

In exercise of the powers conferred by paragraph (g) of the definition of “liquid assets” in section 86 of the Banking Act, the Monetary Board has determined that Treasury Bonds issued under section 21A of the Registered Stock and Securities Ordinance shall be liquid assets.

The commercial banks may, therefore, take into account the Treasury Bonds they hold on their account for the purpose of complying with the provisions of section 21 of the Banking Act relating to their obligation to maintain the required amount in liquid assets.

Yours faithfully,

Sgd. Y. A. Piyatissa



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1Ref. No. : BS/14/88 Vol. IV

24th March, 1997

Sent to : All 26 Commercial Banks

Dear Sir,

MONTHLY STATEMENT OF LIqUID ASSETS

Your attention is drawn to our letter No. BS/14/88 of Vol. II dated 10th April, 1989 on the above subject.

We wish to inform you that the Monetary Board of the Central Bank of Sri Lanka has approved of the reporting of the re-discountable value of Treasury Bills held instead of the purchase prices of such Bills by commercial banks as part of their liquid assets in the monthly liquid assets statements furnished to the Central Bank.

The re-discountable value referred to above means the value of Treasury Bills arrived at on the basis of re-discounting prices determined by the Chief Accountant of the Central Bank of Sri Lanka.

Please acknowledge receipt of the letter.

Yours faithfully,




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1Ref. No. : BS/14/88 Vol. III

10th April, 1989

Dear Sir,

BANKING ACT NO. 30 OF 1988

MONTHLY STATEMENT OF LIqUID ASSETS

All licensed commercial banks are required, in terms of section 21(2) of the Banking Act, No.30 of 1988, to submit a monthly return certifying the total liabilities and the volume of liquid assets required to be maintained, substantially in the form shown in Appendix I of this notice. Such statement should be forwarded before the 15th day of the month following the month to which the statement relates.

In view of the fact that the Monetary Board has decided that maintenance of Liquid Assets, in accordance with the determination made by the Monetary Board as set out in Paragraph 5 of the notice dated 1st March, 1989, would come into operation with effect from 1st April, 1989, the first return (i.e. the return for the month of April) should be forwarded before 15th May, 1989.

Yours faithfully,

Sgd. P. T. Sirisena



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1APPENDIX I

From :

To : Director of Bank Supervision Central Bank of Sri Lanka

STATUTORY LIqUID ASSETS(Return in terms of section 21(2) of the Banking Act, No. 30 of 1988)

Sri Lanka Rs. (’000)

A. 1. Total liabilities excluding contingent liabilities as at the beginning of the first working day of the month of …………………. (base date) ……………………

Less :

(a) Liabilities to the shareholders ……………………

(b) Liabilities to the Central Bank ……………………

B. Average statutory liquid assets for the Month of …………………. (maintenance period) ……………………

1. Cash ……………………

2. Balances with licensed commercial banks ……………………

3. Money at call in Sri Lanka ……………………

4. Treasury Bills and Securities issued or guaranteed by the Government of Sri Lanka which have a maturity not exceeding one year ……………………

5. Goods Receipts ……………………

6. Import Bills ……………………

7. Export Bills ……………………

8. Inland Bills ……………………

9. Cash Items in process of collection ……………………

10. Balances with banks abroad

11. Treasury bonds issued under section 21A of the Registered Stock and Securities Ordinance ……………………

Total Liquid Assets ……………………

C. Liquid Assets Ratio (B as a % of A) ……………………

We, I hereby certify that the above statement is correct and is in accordance with the books of this bank.

…………………………………Authorised Official Signature

Date : ……………….

Note : The base date is the first working day of the month preceding the maintenance period. e.g. Liquid assets for April will be based on Liabilities on March 1st.

The required liquid assets should be maintained for a period (maintenance period ) commencing on the 1st working day and ending on the last working day of the calendar month following the month in which the base date occurs.


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1Bank Supervision Department

8th October 2003To : All Licensed Commercial Banks

Dear Sir / Madam,

MONTHLY STATEMENT OF LIqUID ASSETSFOR THE OFF-SHORE BANKING UNIT

Further to our letter dated 21 January 2003, and the discussion on the above subject at the Meeting of the Chief Executive Officers of Licensed Commercial Banks (LCBs) and Licensed Specialised Banks (LSBs), all LCBs are informed as follows:

1. Monthly Return on Liquid Assets – Since the liabilities of the Off-shore Banking Unit (OSBU) are in foreign currency, the liquid assets for meeting the Statutory Liquid Assets Ratio (SLAR) shall also be in foreign currency. A separate return indicating the SLAR for the OSBU in respect of each month, computed on the same basis as for the DBU shall be submitted each month.

2. Placements of the Domestic Banking Unit (DBU) with own OSBU – In computing the liquid assets ratio of the Domestic Banking Unit, placements of the DBU of a LCB with its own OSBU will be limited to 20%. The full amount of the placements should be included in the liability base of the OSBU.

3. Liquid Assets of the OSBU – Banks are required to ensure that the liquid assets included in the computation fall within the meaning of defined liquid assets. In this regard, the following could be considered: a. Securities/Bonds issued by Foreign Governments maturing within 1 year b. Other debt securities and Bonds, maturing within 1 year, which are traded on an exchange,

or have an investment grade rating, or are backed by a standby credit facility from a banking institution.

Such investments, which are not already defined as liquid assets, could be included with the prior approval of the Central Bank of Sri Lanka.

Yours faithfully,



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1Ref. No. : 02 / 04 / 002 / 0005 / 003


21st January 2003


Dear Sir/Madam,

BANKING ACT NO. 30 OF 1988MONTHLY STATEMENT OF LIqUID ASSETS FOR THE OFF-SHORE BANKING UNIT

Reference the Circular dated 24 December 2002, regarding the application of the provisions under Section 21(2) of the Banking Act, No.30 of 1988 to the off shore banking business of Licensed Commercial Banks, with effect from January 2003.

In terms of the provisions of the above Section, all Licensed Commercial Banks are required to submit a separate monthly return in respect of their off-shore banking business, indicating the total liabilities and the volume of liquid assets maintained by the Off-shore Banking Unit. Your attention is invited to the need to maintain the liquid asset in respect of the off-shore banking business in foreign currency. The return should denominated in US dollars, whilst the liquid asset components and the format of the return would be the same as for the Domestic Banking Unit. In view of the fact that the determination would come into operation with effect from 31 January 2003, the first return for the month of January 2003, should be forwarded to the undersigned by 15 February 2003.

You are hereby informed that the penalty for any shortfall in the Statutory Liquid Assets Ratio in terms of Section 21(3) would also be payable in foreign currency.

Yours faithfully,



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1Ref. No : 02 / 04 / 002 / 0005 / 003


20 May 2004


Dear Sir / Madam,

MONTHLY STATEMENT OF LIqUID ASSETSFOR THE DOMESTIC BANKING UNIT (DBU) AND

OFF-SHORE BANKING UNIT (OBU)

Reference the Determination dated 24.12.2002 and Directions dated 21.01.2003 and 08.10.2003 on the above subject.

All licensed commercial banks are required to note that they should maintain Statutory Liquid Assets of an amount not less than 20% of total liabilities, less liabilities to the Central Bank and to the share holders, in respect of the DBU in Rupees and in respect of the OBU in US dollars, for each month commencing May 2004.

Any deficiency in Statutory Liquid Assets in the DBU or in the OBU will be subject to the provisions of Section 21(3) of the Banking Act, No.30 of 1988 as amended by the Banking (Amendment) Act, No.33 of 1995, and the penalty involved will be payable in Rupees in the case of the DBU and in US dollars in the case of the OBU.


Yours faithfully,



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1APPLICATION OF PRUDENTIAL REGULATIONS ON

OFF-SHORE BANKING UNITS

Determination dated 10 April 1989 on Statutory Liquid Assets Ratio issued under Section 21(2) of the Banking Act:

The above Determination shall be applicable to all licensed commercial banks in respect of both the domestic banking business and the off-shore banking business on a consolidated basis, with effect from 01 January 2003.

Sgd. A. S. JayawardenaGovernor


1�0 Directions, Circulars, Guidelines and Operating Instructions

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1BANKING 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.


GovernorColombo

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 off-shore,

banking business be Rs.250,000.00; (c) carrying on off-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 proviso 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 licensed 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 21a 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 2�th May, 2002.

issued to Licensed Commercial Banks 1�1

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1BANKING ACT

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 by the Banking (Amendment) Act, No.33 of 1995 and Act, No.2 of 2005.

Sgd. Sunil Mendis

GovernorColombo01-03-2006.

DIRECTION ON THE PRUDENTIAL NORMS FOR CLASSIFICATION, VALUATION AND OPERATION OF THE BANK’S INVESTMENT PORTFOLIO

1. With effect from 31 March 2006, all Licensed Commercial Banks are required to classify their investment portfolio under two categories: i.e., the Investment Account and the Trading Account. All banks are required to maintain two separate books of accounts for this purpose.

2. Banks should decide on the category of investment at the time of acquisition and the decision should be documented. Classification is not a free choice but is based on facts and the management’s intent at the date of purchase. Transfers between categories after initial recognition are restricted.

3. The criteria for classifying and valuation of the bank’s investment portfolio are as provided below:

A. Investment Account

(a) All securities acquired with the positive intent and ability to hold till maturity shall be classified under the Investment Account.

(i) Positive intent cannot be demonstrated if:

• the bank has the intent to hold the securities for only an undefined period; or

• the bank stands ready to sell the securities in response to changes in market interest rates or risks, liquidity needs, changes in the availability of the yield on alternative investments, changes in financing sources or terms, or changes in foreign currency risk; or

• the issuer has a right to settle the securities at an amount significantly below its amortised cost.

(ii) The ability to hold the securities to maturity cannot be demonstrated if:

• the bank does not have the financial resources available to continue to finance the investment until maturity; or

• the bank is subject to legal or other constraints that could frustrate its intention to hold the securities to maturity.

(iii) When a bank’s actions cast doubt on its intent or ability to hold investments to maturity, the Central Bank of Sri Lanka shall retain the right to reclassify all or part of the Investment Account as Trading and require appropriate provisioning.


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1 (b) All unlisted securities (eg.: shares, debentures) should generally be classified under the

Investment Account. However, government securities will have to be classified based on the rules specified under point A(a) above.

(c) Securities in the Investment Account may be used for repurchase transactions.

(d) Securities in the Investment Account shall be carried and reported at acquisition cost over the period of redemption.

(i) Carrying values of interest bearing securities in the Investment Account may be adjusted to account for the accretion of discount (or depletion of premium). The adjustments should be amortised annually on a straight-line basis over the period to maturity.

(ii) All other securities should be maintained at cost. Any impairment in value which is considered to be permanent should be fully provided for in the Profit & Loss Account immediately. The following conditions should be taken into consideration in deciding on whether there is an impairment of value.

• Track record of dividends/returns – Non-receipt of dividends/returns for a consecutive period of three years, should be considered as an impairment and the investment should be classified as non-performing.

• Market prices – A continuously declining trend in market prices, with the investment value being below cost for over three years should be considered as an impairment in value.

(iii) The Central Bank of Sri Lanka will retain the flexibility to consider specific requests/exceptions in this regard.

(iv) Any impairment in value or losses on the sale of investments held in the Investment Account should be taken to the Profit & Loss Account.

(e) Sale of securities classified under the Investment Account should only be an insignificant amount of the investment portfolio and should be limited to circumstances that do not taint the rest of the portfolio. These circumstances are:

• if the investment was close enough to maturity or call date so that changes in the market rate of interest could not have a significant effect on the investment’s market value;

• the sale is made after the entity has collected substantially all of the investment’s original principal through scheduled payments or prepayments;

• the sale was due to an isolated event that was beyond the entity's control, non-recurring and could not have been reasonably anticipated.

B. Trading Account

(a) All securities acquired for the specific purpose of trading on a regular basis (at least every quarter), to take advantage of the short-term changes in market prices and yields, shall be classified under the Trading Account. The classification of Trading assets is based on original intention and these are not transferred to the Investment category because intention subsequently changes.

(b) Securities held in the Trading Account must be revalued or marked to market on a daily basis. In the case of securities for which daily prices are not available, banks are advised to

issued to Licensed Commercial Banks 1��

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1mark to market at least on a weekly basis. Where two-way quotes are published (eg.: Rates for government securities), the middle rate should be adopted.

(c) Any gains or losses on the sale of investments held in the Trading Account should be taken to the Profit & Loss Account.

C. Transfer of Securities

The transfer of securities between portfolios will generally not be permitted, except under specified circumstances. This is to limit the opportunities to manipulate the recognition of gains or losses or to mask changes in market value.

(a) Transfer of securities between the Trading Account and the Investment Account must be justifiable, documented and authorised.

(b) Portfolio transfers to or from the Investment Account shall only be undertaken rarely (preferably at the beginning of the accounting year), with the approval of the Board of Directors, the Assets and Liability Committee or the Investment Committee. The circumstances justifying such transfers are given below:

(i) A change in the statutory and regulatory requirements.

(ii) A significant increase in the capital requirements that may oblige the Bank to reduce its investment holdings.

(iii) A major business occurrence that necessitates the transfer of securities to maintain the Bank’s risk profile.

(iv) Exceptional circumstances such as tight liquidity conditions and extremely volatility.

(c) The carrying value of securities transferred from the Trading Account into the Investment Account shall be marked to market prior to the transfer. Therefore, any gains or losses due to revaluation would have been recognised in earnings prior to the transfer. The market value of the securities at the point of transfer into the Investment Account then becomes the ‘acquisition cost’ for accounting purposes.

(d) A statement on portfolio transfers, if any, shall be signed by the Chief Executive Officer of the Bank and submitted to the Bank Supervision Department of the Central Bank of Sri Lanka, on a quarterly basis.

(e) The Central Bank of Sri Lanka will retain the right to review the statement of portfolio transfers and require the bank to make provisions if considered necessary.

1�� Directions, Circulars, Guidelines and Operating Instructions

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1Ref. No. : 02 / 17 / 800 / 0006 / 01

Bank Supervision Department31 October 2008

Instructions to Licensed Commercial Banks Appointed as Authorised Dealers

Dear Sirs,

FORWARD SALES AND PURCHASES OF FOREIGN EXCHANGE

In view of the concerns relating to global financial market conditions, possible unhealthy speculative foreign exchange transactions, the impact on bank’s risk management and the need to avoid excessive volatility in foreign exchange market, licensed commercial banks are informed that they should conform to the following prudential requirements with immediate effect.

2. Authorised dealers shall, with immediate effect, comply with the following conditions when entering into forward contracts in foreign exchange (including renewal of existing contracts) with their customers, until further notice.

i. Forward contracts for the sale and/or purchase of foreign exchange should only be for a period up to 180 days and only for the purpose of payments and receipts in foreign exchange in respect of trade in goods and services.

ii. An authorized dealer entering into a forward contract for the sale of foreign exchange should satisfy himself that the transaction relates to a genuine commercial contract involving trade in goods and services.

iii. An authorized dealer who enters into a forward contract for the sale of foreign exchange with a customer should obtain at the time the contract is entered into, a deposit of not less than 100% of the value of contract in Sri Lankan rupees, which should be retained until the date of performance of the contract.

iv. The date of performance of the forward contract should not be beyond the date of payment or receipt in foreign exchange, as the case may be, in terms of the relevant commercial contract underlying the forward exchange contract.

v. As at present, any cancellation of a forward foreign exchange contract by the customer should be subject to a penalty, at least to fully compensate the loss arising the therefrom to the authorized dealer.

3. Please note that these operating instructions will not apply to:

i. Inter-bank forward contracts (local and foreign),

ii. Forward contracts where a foreign currency is purchased with another foreign currency,

iii. Purchases of foreign exchange in respect of share trading transactions specified in item 3 in the Operating Instructions No. 06/12/10/2002 dated 8th May 2002.

iv. Investments in government securities.


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14. In the case of renewal or an extension of a contract, the maximum period of forward foreign exchange contract should be 180 days inclusive of the period that has already elapsed. In cases where the period exceeds 180 days, a fresh contract should be entered into and requires a 100% deposit as in the case of a new forward contract for the sale of foreign exchange.

5. Authorised dealers may pay interest on such deposits.

6. In the case of an importer, the margin already obtained in respect of Letters of Credit, if any, should not be treated as the deposit required for a forward contract for the sale of foreign exchange and, therefore, a fresh deposit of 100% of the value of the contract in Sri Lanka rupees is required for the forward contract.

7. Details relating to forward transactions in foreign exchange on any day should be reported, until further notice, at the end of the same day (not later than 6.00 p.m.) to the Director of Bank Supervision in the form set out in the Annex hereto.

Yours faithfully,


Annex

FORWARD TRANSACTIONS IN FOREIGN CURRENCY

Name of the authorised dealer : ……………………………………………………

Date : …………………

Outstanding Balances at the beginning of the day (US$ equivalent

in mn)

Total transactions during the day

(US$ equivalent in mn)

Total margin deposit accepted

(in Sri Lankan Rupees in mn)

Outstanding position at the close of the day

(US$ equivalent in mn)

A. Total forward salesB. Total forward purchases

Not applicable

I certify that information given above is correct.

Date : ………………… ……………………………………… Signature of the Authorized Officer


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1Ref. No. : 02 / 04 / 004 / 0009 / 001


16th July, 2001

Instructions to Licensed Commercial Banks Appointed as Authorized Dealers in Foreign Exchange

Dear Sirs,


Further to our Operating Instructions dated 29.01.2001 and 19.03.2001 and the clarifications contained in our Operating Instructions dated 14.02.2001 on the above subject.

The requirement that a margin of not less than 25 per cent should be obtained from customers when entering into a forward contract for the sale of foreign exchange is withdrawn, with effect from 16th July, 2001.

However, for prudential reasons, banks may continue to obtain deposits from customers for forward sales of foreign exchange, based on their assessment of customer risk.

Contracts for forward sales and/or purchases will continue to be for a maximum of 180 days and only for the purpose of payments and receipts in foreign exchange in respect of trade in goods and services.

Yours faithfully,



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1Ref. No. : 02 / 04 / 004 / 0009 / 001


19th March, 2001

Instructions to Licensed Commercial Banks Appointed as Authorized Dealers in Foreign Exchange

Dear Sirs,


Further to our Instructions dated 29.01.2001 and the clarifications contained in our Operating Instructions dated 14.02.2001 on the above subject.

We wish to inform you that the 50% deposit referred to in sub-item (iii) of item (3) of the above mentioned Instructions dated 29.01.2001 has been reduced with immediate effect to 25% of the value of the contract in Sri Lanka Rupees in respect of forward contracts to be entered into with customers for the sale of foreign exchange.

Yours faithfully,



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1Ref. No. : 02 / 04 / 004 / 0009 / 001


14th Febuary, 2001

Operationg Instructions to Licensed Commercial Banks Appointed as Authorized Dealers in Foreign Exchange

Dear Sirs,


We have received inquiries from banks seeking clarifications on the contents of our Operating Instructions dated 29th January 2001, on the above subject. Accordingly, the following clarifications are made for your information.

1. The Operating Instructions will not apply to

(i) Inter-bank forward contracts (local and foreign),

(ii) Forward contracts where a foreign currency is purchased with another foreign currency,

(iii) Purchases of foreign exchange in respect of share trading transactions specified in the item 3 in the Operating Instructions No. EC/74/92(C&F) dated 28/07/1992 issued by the Controller of Exchange.

2. Subject to 1(iii) above, forward contracts with customers should be permitted only in respect of trade in goods and services. Forward contracts in respect of capital transactions should not be permitted.

3. In the case of renewal or extension of a contract, the maximum period of forward contract should be 180 days inclusive of the period that has already elapsed. In cases where the period exceeds 180 days, a fresh contract should be entered into which requires a 50 per cent of deposit in case of a forward contract for the sale of foreign exchange.

4. In case of an importer, the margin already obtained in respect of Letters of Credit, if any, should not be treated as the deposit required for a forward contract for the sale of foreign exchange and, therefore, a fresh deposit of 50% of the value of the contract in Sri Lanka rupees is required for the forward contract.

5. The banks may pay interest on the 50% margin as a deposit.

6. The attached format should be used in future to report details regarding daily position of forward transactions to the Bank Supervision Department.

Yours faithfully,



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1Annex


Name of the Authorised Dealer : …………………………………. Date: ………………..

Outstanding Balance New Contracts Total Margin Total Contracts Outstanding at the beginning Entered during Deposit Matured during position at the of the day the day Accepted the day end of the day (Rs. Mn.) (Rs. Mn.) (Rs. Mn.) (Rs. Mn.) (Rs. Mn.)

TotalForwardSales

TotalForward Not applicablePurchases


Date: ………………….. ……………………………………… Signature of the Authorised Dealer


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1Instructions to Licensed Commercial Banks Appointed as Authorized Dealers in Foreign Exchange

January 29, 2001Dear Sirs,


The Central Bank is concerned that in view of the weaknesses of the forward market in foreign exchange in Sri Lanka, licensed commercial banks that are Authorised Dealers under the Exchange Control Act (Authorised Dealers) could be undertaking heavy risks by engaging in forward transactions in foreign exchange which are unrelated to trade transactions, which would be detrimental to the interests of the depositors of such banks and to the economy. Therefore, in the interest of the depositors and to stabilise the foreign exchange market, it is considered necessary to streamline the operations in the forward market in foreign exchange, pending the development of an efficient forward market. Hence, both from a prudential standpoint and from considerations relating to the stability of the foreign exchange market, it is desirable that forward foreign exchange contracts by banks with their customers should, for the time being, be in respect of transactions concerning payments and receipts in foreign exchange relating to trade in goods and services and for a period reasonably adequate to meet the needs of trade transactions.

2. In view of the foregoing, Authorised Dealers are hereby informed that the authority conferred on them to enter into forward contracts for the sale and/or purchase of foreign exchange for a period up to 360 days irrespective of the purpose by paragraph B(ii)(a) of Operating Instructions No.EC/41/93(D) of 29.03.1993 issued by the Controller of Exchange is hereby withdrawn with immediate effect.

3. Therefore, without prejudice to the permission granted to Authorised Dealers for the release of foreign exchange for all current (non-capital) international transactions by Operating Instructions No.EC/06/94 of 18.03.1994 of the Controller of Exchange, and pending the development of an efficient forward market in foreign exchange in Sri Lanka, Authorised Dealers shall, with immediate effect, comply with the following conditions when entering into forward contracts in foreign exchange (including renewal of existing contracts) with their customers, until further notice;

(i) forward contracts for the sale and/or purchase of foreign exchange should only be for a period up to 180 days and only for the purpose of payments and receipts in foreign exchange in respect of trade in goods and services;

(ii) an Authorised Dealer entering into a forward foreign exchange contract should satisfy himself that the transaction relates to a genuine commercial contract involving trade in goods and services;

(iii) an Authorised Dealer who enters into a forward contract for the sale of foreign exchange with a customer should obtain at the time the contract is entered into, a deposit of not less than 50% of the value of the contract in Sri Lanka rupees, which should be retained until the date of performance of the contract;

(iv) the date of performance of the forward foreign exchange contract should not be beyond the date of payment or receipt in foreign exchange, as the case may be, in terms of the relevant commercial contract underlying the forward exchange contract; and

(v) as at present, any cancellation of a forward foreign exchange contract by the customer should be subject to a penalty, at least to fully compensate the loss arising therefrom to the Authorised Dealer.

4. Details relating to forward transactions in foreign exchange on any day should be reported at the end of the same day (not later than 6.00 p.m.) to the Director of Bank Supervision on fax No.325824 in the form set out in the Annex hereto. Please contact Mr. P. Samarasiri, Deputy Director of Bank Supervision on telephone number 344838 for any clarification.

Yours faithfully



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1Annex


Name of the Authorised Dealer: ………………. Date: ………………..

Outstanding Balances Total Transactions Total Margin Outstanding position at the beginning during the day Deposit Accepted at the end of the day of the Day (US dollar (US dollar (SL Rs Mn) (US dollar equivalent Mn) equivalent Mn) equivalent Mn)

A. Total Forward Sales

B. Total Forward Purchases Not applicable


Date: ………………….. ……………………………………… Signature of the Authorised Officer


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Ref. No. : 06/04/20/200808 December 2008

Instructions to Licensed Commercial Banks appointed as Authorised Dealers,

MARGIN REqUIREMENTS FOR IMPORTS MADE ON ADVANCE PAYMENT TERMS

Authorised Dealers are hereby informed that they are required to adhere to the following prudential requirements with effect from 08th December 2008.

i. A 100 per cent margin deposit on the total invoiced value of the goods given in the attached Schedule A1 which will be imported against advance payment terms, should be placed by the importer at the bank at the time of effecting the remittance.

ii. Banks should endorse the invoice to the effect that the margin deposit has been obtained.

iii. The margin deposit should be released on the production of documentary evidence in confirmation on clearance of goods from Sri Lanka Customs.

iv. Banks should not grant any loans to enable importers to place the margin deposits in respect of these imports.

v. Margin deposits will be subject to Statutory Reserve Requirements.

vi. The banks may pay interest on such margin deposits.

vii. Margin deposit requirements which are imposed for imports in terms of these instructions, are not applicable to the goods which are imported for re-export purposes under the Entrepot Trade subject to the following conditions:

a. Goods imported to be stored in a Custom Bonded Warehouse until such goods are re-exported to a third country.

b. Re-packing/labelling/simple processing of goods imported to be carried out in a Custom Bonded Warehouse before re-exporting to a third country.

c. Exportation of goods directly from a second country to a third country without the goods physically arriving in the trader's country.

d. Transfer from one ship/aircraft to another within the port without cargo being taken into Bonded Warehouse.

viii. The banks should submit monthly returns of the details of such margin deposits to the Director of Bank Supervision with a copy to the Controller of Exchange in the format as shown in the Annex I.

Directions previously issued under Ref. Nos. 06/04/16/2008 and 06/04/17/2008 dated 06/11/2008 and 11/11/2008 respectively on the above subject are hereby rescinded.

Yours faithfully,



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1Schedule A1

List of Items Requiring 100 per cent Margin Deposit against Advance Payments Terms

08/12/2008

Description HS Heading Covered

Oil and their fractions All HS Codes under 1511 except 1511.10All HS Codes under 1512 except 1512.11

Chocolates All HS Codes under 1806Bakery products, cakes, biscuits and other bakers’ wares All HS Codes under 1905

Beer 2203

Wine, Vermouth and other fermented beverages All HS Codes under 2204, All HS Codes under 2205 and All HS Codes under 2206

Spirits, liqueurs and other spirituous beverages All HS Codes under 2208Perfumes and toilet waters 3303Beauty or make-up preparations [Lip, Eye, Manicure, Pedicure etc.] All HS Codes under 3304

Preparations for use on the hair All HS Codes under 3305Pre-shave, shaving or after-shave preparation, Personal deodorants and anti-perspirants, Perfumed bath salts and other bath preparations, Preparations for perfuming or deodorizing rooms, and odoriferous preparation

3307.10, 3307.20, 3307.30, 3307.41, 3307.49 and 3307.90.90

Soap and organic surface-active products All HS Codes under 3401Tableware, kitchenware, other household articles and hygienic or toilet articles of plastics

All HS Codes under 3924 except 3924.90.10

Articles of leather, hand bags and similar containers All HS Codes under 4202 and All HS Codes under 4203

Articles of apparel of knitted or crocheted All HS headings under Chapter 61 except 6117.80.10, 6117.80.90 and 6117.90

Articles of apparel of not knitted or crocheted All HS headings under Chapter 62except 6217.10 and 6217.20

Footwear All HS headings under Chapter 64 except all HS Codes under 6406

Artificial flowers All HS Codes under 6702

Wall tiles, floor tiles and the like All HS Codes under 6907 and All HS Codes under 6908

Tableware, kitchenware, other household articles and toilet articles of ceramic, porcelain or china

All HS Codes under 6911 and All HS Codes under 6912

Statuettes and other ornamental ceramic articles All HS Codes under 6913Glassware of a kind used for table, kitchen, toilet, office, indoor decoration or similar purposes

All HS Codes under 7013 except 7013.99.10 (Infants’ feeding bottles)

Imitation Jewellery All HS Codes under 7117Tableware, kitchenware, other household articles of stainless steel 7323.93

Locks and padlocks 8301.10, 8301.20, 8301.30, 8301.40 and 8301.50Fans 8414.51 and 8414.59.10

(Contd.)


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Air conditioners All HS Codes under 8415

Refrigerators, Freezers and other refrigerating and freezing equipment

All HS Codes under 8418 except 8418.61.50, 8418.61.60, 8418.69.50, 8418.69.60, all HS Codes under 8418.91 and all HS Codes under 8418.99

Dish washing machines 8422.11Household and laundry-type washing machines All HS Codes under 8450 except 8450.20 and 8450.90Electro-mechanical domestic appliances All HS Codes under 8509 except 8509.90 (Parts)Shavers, hair clippers and hair-removing appliances, with self-contained electric motor

All HS Codes under 8510 except 8510.90 (Parts)

Electric instantaneous or storage water heaters and immersion heaters 8516.10

Hair dryers and other hair-dressing apparatus 8516.31 and 8516.32Electric smoothing irons All HS Codes under 8516.40Microwave ovens 8516.50Other Ovens and cookers All HS Codes under 8516.60Coffee or Tea makers 8516.71Toasters 8516.72Cellular mobile telephones 8517.12.10 and 8517.12.20Video recording or reproducing apparatus, whether or not incorporating a video tuner All HS headings under 8521

Televisions All HS Codes under 8528.72Antennas 8529.10.10, 8529.10.20, 8529.10.30Electric filament or discharge lamps 8539.22

Wrist-watches and clocksAll HS Codes under 9101, All HS Codes under 9102, All HS Codes under 9103 and All HS Codes under 9105

Lamps and light fittings 9405.10, 9405.20, 9405.30, 9405.40, 9405.40.10, 9405.40.20 and 9405.40.90

Toys All HS Codes under 9503

Decription HS Heading Covered

Schedule A1 (Contd.)


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1Annex 1

To: Director, Bank Supervision Dept. of Bank Supervision Central Bank of Sri Lanka Colombo 01

Fax : 2477711 E-mail : [email protected]

REPORT I : MARGIN DEPOSIT ON IMPORTS MADE ON ADVANCE PAYMENT TERMS

Name of the Bank : ………………………………………………………………………………………………Reporting Month : ………………………………………………………………………………………………

Bank Code

Name of the

Importer

Date of Remittance

(DDMMYYYY)

RemittanceRef. No.

Invoiced Value Deposit

(Rs.)Date of DepositCurrency

Type Amount

REPORT II : RELEASE OF MARGIN DEPOSIT ON IMPORTS MADE ON ADVANCE PAYMENT TERMS


Bank Code

Name of the

Importer

Date of Remittance

(DDMMYYYY)

RemittanceRef. No.

Invoiced Value Deposit

(Rs.)

Date of releaseof the

Deposit

Date of clearance

of the goods

Currency Type Amount

cc: Controller of Exchange Exchange Control Department Central Bank of Sri Lanka Colombo 01

Fax : 2477716 E-mail : [email protected]


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Ref. No. : 02 / 17 / 800 / 0006 / 01Bank Supervision Department

05 December 2008

Instructions to Licensed Commercial Banksappointed as Authorised Dealers

Dear Sirs,

IMPORTS OF MOTOR VEHICLES ONDOCUMENTS AGAINST ACCEPTANCE TERMS (DA)

This has reference to our Operating Instructions No: 02/17/800/0006/01 dated 07/11/2008 on the above subject.

Licensed Commercial Banks are hereby informed that the Schedule A referred to in our Operating Instructions No: 02/17/800/0006/01 dated 07/11/2008 is replaced with Schedule A, titled List of Items Requiring 200 per cent Margin Deposit against Imports on DA Terms - 05/12/2008, with effect from 08/12/2008.

Yours faithfully,


Schedule A

List of Items Requiring 200 per cent Margin Deposit against Imports on DA Terms05/12/2008

H.S. Code DescriptionMotor vehicles for the transport of ten or more persons, including the driver

With compression-ignition internal combustion piston engine (diesel or semi-diesel) :

8702.10.10 Motor vehicles for the transport of less than 13 persons (adults) including the driver, not more than three and half years old

8702.10.20 Motor vehicles for the transport of less than 13 persons (adults) including the driver, more than three and half years old

8702.10.30 Motor vehicles for the transport of 13 or more persons (adults) but less than 17 persons (adults) including the driver, not more than five years old

8702.10.40 Motor vehicles for the transport of 13 or more persons (adults) but less than 17 persons (adults) including the driver, more than five years old

(Contd.)


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1Other :8702.90.10 Motor vehicles for the transport of less than 13 persons (adults) including the driver,

not more than three and half years old8702.90.20 Motor vehicles for the transport of less than 13 persons (adults) including the driver,

more than three and half years old8702.90.30 Motor vehicles for the transport of 13 or more persons (adults)

but less than 17 persons (adults) including the driver, not more than five years old8702.90.40 Motor vehicles for the transport of 13 or more persons (adults)

but less than 17 persons (adults) including the driver, more than five years old

Motor cars and other motor vehicles principally designed for the transport of persons (other than those of heading 87.02), including station wagons and racing cars

Vehicles specially designed for travelling on snow; golf cars and similar vehicles :8703.10.10 Not more than three and half years old8703.10.20 More than three and half years oldOther vehicles, with spark-ignition internal combustion reciprocating piston engine :

Of cylinder capacity not exceeding 1,000 cc :8703.21.60 Motor cars including station wagons and racing cars, not more than three and half years old8703.21.70 Motor cars including station wagons and racing cars, more than three and half years old

Other :8703.21.91 Not more than three and half years old8703.21.92 More than three and half years old

Of a cylinder capacity exceeding 1,000 cc but not exceeding 1,500 cc :8703.22.50 Motor cars including station wagons and racing cars, not more than three and half years old8703.22.60 Motor cars including station wagons and racing cars, more than three and half years old8703.22.70 Other, not more than three and half years old8703.22.80 Other, more than three and half years old

Of a cylinder capacity exceeding 1,500 cc but not exceeding 3,000 cc :Motor cars including station wagons and racing cars of a cylinder capacity not exceeding 2,000 cc, not more than three and half years old :

8703.23.51 Of a cylinder capacity not exceeding 1,600 cc8703.23.59 Other8703.23.60 Motor cars including station wagons and racing cars of a cylinder capacity

not exceeding 2,000 cc, more than three and half years old8703.23.70 Motor cars including station wagons and racing cars of a cylinder capacity

exceeding 2,000 cc, not more than three and half years old8703.23.80 Motor cars including station wagons and racing cars of a cylinder capacity

exceeding 2,000 cc, more than three and half years oldOther :

8703.23.91 Of a cylinder capacity not exceeding 2,000 cc, not more than three and half years old8703.23.92 Of a cylinder capacity not exceeding 2,000 cc, more than three and half years old8703.23.93 Of a cylinder capacity exceeding 2,000 cc, not more than three and half years old8703.23.94 Of a cylinder capacity exceeding 2,000 cc, more than three and half years old

H.S. Code Description

Schedule A (Contd.)

(Contd.)


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Of a cylinder capacity exceeding 3,000 cc :8703.24.50 Motor cars including station wagons and racing cars, not more than three and half years old8703.24.60 Motor cars including station wagons and racing cars, more than three and half years old8703.24.70 Other, not more than three and half years old8703.24.80 Other, more than three and half years old

Other vehicles, with compression-ignition internal combustion piston engine (diesel or semi-diesel) :Of a cylinder capacity not exceeding 1,500 cc :

8703.31.70 Motor cars including station wagons and racing cars, not more than three and half years old8703.31.80 Motor cars including station wagons and racing cars, more than three and half years old


Of a cylinder capacity exceeding 1,500 cc but not exceeding 2,500 cc :Motor cars including station wagons and racing cars of a cylinder capacity not exceeding 2,000 cc, not more than three and half years old

8703.32.51 Of a cylinder capacity not exceeding 1,600 cc 8703.32.59 Other8703.32.60 Motor cars including station wagons and racing cars of a cylinder capacity






Other :8703.90.30 Other electric, not more than three and half years old8703.90.40 Other electric, more than three and half years old8703.90.50 Other, not more than three and half years old8703.90.60 Other, more than three and half years old


Schedule A (Contd.)

(Contd.)


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1Motor vehicles for the transport of goods.

with compression-ignition internal combustion piston engine (diesel or semi-diesel) :vehicles of g.v.w. less than 1,500 kg :

8704.21.81 Not more than five years old8704.21.82 More than five years old

Other :8704.21.91 Not more than five years old8704.21.92 More than five years oldOther, with spark-ignition internal combustion piston engine :

Other vehicles of g.v.w. less than 1,500 kg :8704.31.71 Not more than five years old8704.31.72 More than five years old

Other :8704.31.91 Not more than five years old8704.31.92 More than five years oldOther :8704.90.30 Electric, not more than five years old8704.90.40 Other electric, more than five years old8704.90.50 Other, not more than five years old8704.90.60 Other, more than five years old

Chassis fitted with engines, for the motor vehicles of headings 87.01 to 87.05 :8706.00.20 New chassis fitted with engines for other motor vehicles of heading 87.028706.00.40 Other new chassis fitted with engines for other motor vehicles8706.00.50 Used chassis fitted with engines

Bodies (including cabs), for the motor vehicles of headings 87.01 to 87.05 :8707.10 For the vehicles of heading 87.03

8707.90.10Other bodies and cabs incorporating attachments left over in the process of separating same from the main vehicle by cutting, but not meriting classification elseware by virtue of those left over attachments

8707.90.90 Other

Parts and accessories of the motor vehicles of headings 87.01 to 87.05 :8708.29.10 “Cut-portions” of bodies and cabs8708.70.10 Rims fitted with tyres, showing signs of wear8708.70.20 Other, rims fitted with tyres8708.99.20 Other new chassis not fitted with engines, but with or without fittings8708.99.30 Other used chassis not fitted with engines, but with or without fittings8708.99.40 “Cut-portions” of motor vehicles

Trailers and semi-trailers; other vehicles, not mechanically propelled; parts thereof :Trailers and semi-trailers of the caravan type, for housing or camping :8716.10.01 Not more than five years old8716.10.02 More than five years old


Schedule A (Contd.)


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Ref. No. : 02 / 17 / 800 / 0006 / 01Department of Bank Supervision

07 November 2008

Operating Instructions to Authorised Dealers

Dear Sirs,

IMPORTS OF MOTOR VEHICLES ONDOCUMENTS AGAINST ACCEPTANCE TERMS (DA)

Further to the circular No.: 35/01/005/0010/09 dated 04.11.2008, issued by the Director, Domestic Operations on Margin Requirements Against Letters of Credit, all licensed commercial banks (LCBs) are requested to adhere to the following requirements on the importation of motor vehicles and related items given in Schedule A (copy attached) on DA terms with immediate effect until further notice.

1. A 200 per cent margin deposit on the invoiced value of imports given in Schedule A, which are imported under DA terms, should be placed by the importer at the time of release of documents and acceptance of bills by the importer.

2. A 200 per cent margin requirement is on the total value of the invoice, even if the same invoice includes items which are not subject to the margin requirement.

3. Banks should endorse the invoice to the effect that the margin deposit has been obtained.

4. The margin deposit should be released on the production of documentary evidence or payments through the banking channels in Sri Lanka and custom documents of clearance of imports.

5. Banks should not grant any advance to enable importers to place the margin deposits in respect of these imports.

6. Margin deposits will be subject to the statutory reserve requirements.

7. The banks may pay interest on such margin deposits.

8. The banks should submit monthly returns of the details of such margin deposits to Director, Bank Supervision, in the format as shown in the Annex I.

9. Above requirements will not apply to imports where shipment of imports has been made on or before 06th November 2008. The date of shipment is considered as the date of Bill of Lading.

Yours faithfully,

Controller of Exchange Actg. Director of Bank Supervision


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05 December 2008

Instructions to Licensed Commercial Banksappointed as Authorised Dealers

Dear Sirs,

IMPORTS ON DOCUMENTS AGAINST ACCEPTANCE TERMS (DA)

Authorised Dealers are hereby informed that they are required to adhere to the following prudential requirements with effect from 08th December 2008.

1. A 100 per cent margin deposit on the invoiced value of the imports given in Schedule A1 titled List of Items Requiring 100 per cent Margin Deposit against DA Terms - 05/12/2008 should be placed by the importers at the banks that release documents, at the time of acceptance of documents by the importers. The 100 per cent margin requirement is on the total value of the invoice, even if the same invoice includes items which are not subject to the margin requirement. Banks should endorse the invoice to the effect that the margin deposit has been obtained.

2. The margin deposit should be released on the production of documentary evidence or payments through the banking channels in Sri Lanka and custom documents of clearance of imports.

3. Banks should not grant any advance to enable importers to place the margin deposits in respect of these imports.

4. Margin deposits will be subject to Statutory Reserve Requirements.

5. The banks may pay interest on such margin deposits.

6. Margin deposit requirements which are imposed for imports in terms of these instructions, are not applicable to the goods which are imported for re-export purposes under the Entrepot Trade subject to the following conditions:

a. Goods imported to be stored in a Custom Bonded Warehouse until such goods are re-exported to a third country.

b. Re-packing/labelling/simple processing of goods imported to be carried out in a Custom Bonded Warehouse before re-exporting to a third country.

c. Exportation of goods directly from a second country to a third country without the goods physically arriving in the trader’s country.


7. The banks should submit monthly returns of the details of such margin deposits to the Director of Bank Supervision, in the format as shown in the Annex I.


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18. Above requirements will not apply to the imports where shipment of imports has been made on or

before 3lst October 2008. The date of shipment is considered as the date of Bill of Lading.

Operating Instructions previously issued under Ref. No. 02/17/800/0006/01 dated 31/10/2008 and 02/17/800/0006/0 1 dated 04/11/2008 respectively on the above subject are hereby rescinded with effect from 08th Dcember 2008.

Yours faithfully,


Schedule A1

List of Items Requiring 100 per cent Margin Deposit against DA Terms05/12/2008




Beer 2203




3307.10, 3307.20, 3307.30, 3307.41, 3307.49 and 3307.90.90









(Contd.)


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Locks and padlocks 8301.10, 8301.20, 8301.30, 8301.40 and 8301.50Fans 8414.51 and 8414.59.10Air conditioners All HS Codes under 8415











Decription HS Heading Covered



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1Annex 1

Report 1 : Margin Deposit on Imports under DA Terms


Name of the Importer Type ofImport

Invoiced Value (Rs.)

Deposit(Rs.) Date of Deposit

s

………………………………Authorised Signature

Please forward the report to Bank Supervision DepartmentFax : 2477711E-mail : [email protected]

Report 2 : Release of Margin Deposit on Imports under DA Terms


Name of the Importer Type ofImport

Invoiced Value (Rs.)

Deposit(Rs.)

Date of Release of Deposit

s

………………………………Authorised Signature

Please forward the report to Bank Supervision DepartmentFax : 2477711E-mail : [email protected]


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1Ref. No. : 02 / 04 / 004 / 0012 / 001

08 October 2008

To CEOs of all Licensed Banks

USE OF BANKING SYSTEM BY INSTITUTIONS AND PERSONSNOT AUTHORISED TO ACCEPT DEPOSITS

A number of institutions and persons, that are not authorised to accept deposits from the public, are mobilising funds from the public in the guise of offering investment products/schemes. We find that such institutions and persons have used the banking system for their operations and that some banks have accommodated these transactions without identifying the legality of these transactions or the potential risks.

As you are aware, permitting these institutions and persons to use the banking system to resort to such practices can tarnish the image of your institution and thereby weaken public confidence in the banking system.

In this regard, we wish to draw your attention to the Circulars on Customer Due Diligence dated 3 December 2001 and Know Your Customer Procedures dated 19 January 2007 issued by the Director Bank Supervision and Know your Customer and Customer Due Diligence Rules issued by the Director, Financial Intelligence Unit dated 18 May 2007. We wish to emphasise that special attention should be paid to strengthen Customer Due Diligence and Know Your Customer Procedures and to comply with such Circulars/Rules to ensure that sources of income and movement of funds are monitored, as required in these instructions.

H A Karunaratne B D W A Silva

Director of Financial Intelligence Unit Director of Bank Supervision


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1Ref. No. : 02 / 17 / 800 / 0007 / 01


06 November 2008

To: The CEOs of All Licensed Commercial Banks and Licensed Specialised Banks

Dear Sirs,

REGULATIONS MADE UNDER THE PUBLIC SECURITY ORDINANCEPROSCRIPTION OF TAMIL REHABILITATION ORGANISATION

We write to inform you that His Excellency the President has promulgated Emergency (Proscription of Tamil Rehabilitation Organisation) Regulations, No. 9 of 2007 on December 26, 2007 proscribing the Tamil Rehabilitation Organisation in Sri Lanka. A copy of the relevant Extraordinary Gazette No.1529/13 dated December 26, 2007 is attached herewith for your information.

In this regard, we wish to draw your special attention to Regulation 3 of these Regulations and advise you to refrain from carrying out any transactions with the above proscribed organisation.

Yours faithfully,


Encl:cc: Secretary-General / SLBA


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1

PART I : SECTION (I) – GENERAL

Government NotificationsCF 1/64

THE PUBLIC SECURITY ORDINANCE (CHAPTER 40)

REGULATIONS made by the President under Section 5 of the Public Security Ordinance (Chapter 40).

Mahinda Rajapaksa,President.

Colombo,26th December, 2007.

REGULATIONS

1. These regulations may be cited as the Emergency (Proscription of Tamil Rehabilitation Organization) Regulations, No.9 of 2007.

2. For the purposes of ensuring public security, for the preservation of public order and for upholding the Rule of Law, the Organization styled as the “Tamil Rehabilitation Organization” is hereby proscribed.

3. From and after the date of the coming into operation of these regulations, any person who,–

(a) wears any uniform, dress, symbol or other emblem, which signifies or indicates any association with, or membership of, or adherence to the “Tamil Rehabilitation Organization” (hereinafter referred to as the “proscribed organization”) ; or

(b) summons or attends any meeting of the proscribed organization or participates or engages in any activity of, or any activity connected with or related to the said proscribed organization ; or


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1 (c) supports the proscribed organization, by inviting or exhorting persons to be enrolled as members,

or by contributing or collecting funds, or by furnishing information or securing any other assistance to the said proscribed organization ; or

(d) harbours, conceals or in any other manner assists any member of the proscribed organization, with intention thereby to prevent, hinder or interfere with the apprehension, trial or punishment of such member ; or

(e) makes, prints, distributes or is in any way connected with or concerned in the making, printing, distribution or publication of any written or printed matter, which is or which purports to be printed, by or on behalf of the proscribed organization or by any member thereof ; or

(f) communicates or attempts to communicate to any other person in any manner whatsoever, any order, decision, declaration or exhortation made or purported to have been made by the proscribed organization or by any member thereof, or any information relating thereto, for the purpose of advancing the objectives of the said proscribed organization,

shall be guilty of an offence and shall on conviction be liable to imprisonment for a period not exceeding fifteen years.

4. (1) Where the Minister is satisfied, after such inquiry as he thinks fit, that any person has custody of any money, securities or credits which are being used or which are intended to be used, for the purposes of the proscribed organization, the Minister may by order in writing declare that such moneys, securities, and credits as are in the custody of such person, or any such moneys, securities and credits which may come into his custody after the making of such order and any other movable or immovable property belonging to the said proscribed organization, shall be forfeited to the State.

(2) The decision of the Minister under paragraph (1) shall be conclusive and shall not be called in question in any court by way of writ or otherwise.


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1Ref. No. : 02 / 04 / 004 / 0012 / 001


23rd July 2003To : All Licensed Commercial Banks and Licensed Specialised Banks

Dear Sir / Madam,

ACCEPTANCE OF CERTIFICATE OF DEPOSIT (CDS)

Further to our even numbered letters dated 12 June and 16 June 2003 on the above subject, and the discussions at the monthly meeting of the Chief Executive Officers of Licensed Commercial Banks (LCBs) and Licensed Specialised Banks (LSBs).

All LCBs and LSBs are hereby informed that the requirement to maintain details pertaining to customer identification of persons encashing CDs shall not apply in respect of CDs issued before 30 June 2003.

Yours faithfully,



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1Ref. No. : 02 / 04 / 004 / 0012 / 001


16th June 2003To : All Licensed Commercial Banks and all Licensed Specialised Banks

Dear Sir / Madam,

ACCEPTANCE OF CERTIFICATES OF DEPOSIT

Further to our letter No. 02/04/004/0012/001 dated June 12, 2003 on the above subject, all licensed commercial banks and licensed specialised banks are hereby informed that they should satisfy themselves with KYC in respect of customers who invest in CDs with banks, and maintain records of adequate details pertaining to customer identification of the persons making investment in CDs with the banks, and of persons encashing the CDs from the banks at the date of maturity. The banks are requested to refrain from advertising the issue of CDs with anonymity.

The operating instructions BD/13/93 dated 5/10/1993 issued by the Central Bank on the Scheme of Certificates of Deposit will remain effective.

Yours faithfully,



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1Ref. No. : 02 / 04 / 004 / 0012 / 001


12th June 2003To : All Licensed Commercial Banks and all Licensed Specialised Banks

Dear Sir / Madam,

ACCEPTANCE OF CERTIFICATES OF DEPOSIT

We refer to the discussions held at the Bank Managers’ meetings on the above subject and the need to adhere to Know-Your-Customer rules (KYC) in respect of acceptance of certificates of deposits (CDs).

All licensed commercial banks and licensed specialised banks are hereby informed that they may satisfy themselves with KYC in respect of customers who invest in CDs with banks, and maintain records of adequate details pertaining to customer identification of the persons making investment in CDs with the banks, and of persons encashing the CDs from the banks at the date of maturity. The banks are requested to refrain from advertising the issue of CDs with anonymity.

The operating instructions BD/13/93 dated 5/10/1993 issued by the Central Bank on the Scheme of Certificates of Deposit will remain effective.

Yours faithfully,



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1Operating Instruction : BD/13/93 Banking Department Central Bank of Sri Lanka P O Box 590 Colombo 1

October 05, 1993

To : All Commercial Banks

SCHEME OF CERTIFICATES OF DEPOSIT WITH MATURITY PERIODSOF NOT LESS THAN FOUR YEARS

Commercial banks are hereby informed that they may issue Certificates of Deposits with a maturity period of not less than four years subject to the following terms and conditions : –

(a) The face value of each Certificate of Deposit shou1d not be less than Rupees One Hundred Thousand (Rs. 100,000/-).

(b) The funds mobilized through the Certificates of Deposit should be channelled only for long-term lending for capital investment such as purchase of machinery and equipment and construction.

(c) Separate accounts should be maintained in respect of funds mobilized through the Certificates of Deposit, long-term lending for capital investment utilizing such funds, and interest earned on such lending.

2. For the purpose of maintaining statutory reserves, the paid-up value of each deposit accepted against a Certificate of Deposit should be treated –

(i) as a Time Deposit from the date of receipt of funds up to and including the day before the date on which the deposit becomes payable/encashable whether the day before the date of redemption/encashment is a bank holiday or not, and –

(ii) as a Demand Deposit on and after the date on which the deposit becomes payable until a certificate of Deposit is redeemed by the Bank.

3. Certificates of Deposit issued for periods of not less than four years, which are not encashed prior to their maturity dates, are exempted from stamp duty in terms of the Stamp Duty Act as amended by the Stamp Duty (Amendment) Act, No. 29 of 1993

4. Certificates of Deposit issued for periods of not less than four years, but encashed prior to their dates of maturity, are subject to the payment of stamp duty at the point of encashment. The commercial banks are required to ensure that stamp duty at the prevailing rate is deducted and remitted to the Commissioner-General of Inland Revenue in the event of such premature encashment.

5. Interest accruing to banks on lendings under paragraph 1(b) will be exempted from Turnover Tax.

6. Any commercial bank which wishes to issue Certificates of Deposit under this Scheme is required to inform the Chief. Accountant of the Central Bank of Sri Lanka and obtain the approval of the Central Bank.

M. B. DissanayakeChief Accountant


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16 June 2006

To : CEOs of All Licensed Banks

Dear Sirs,

CONDUCT OF NON-GOVERNMENT ORGANIZATIONS (NGOs) ACCOUNTSBY LICENSED BANKS

Further to our circular dated 31 May, 2006 on the above subject, the attention of all licensed banks is drawn to the following:

• In order to scrutinize the legitimacy of financial transactions undertaken by NGOs who receive funding assistance from external sources, the Ministry of Finance & Planning has requested the relevant line Ministries to establish a proper monitoring procedure and ascertain the work undertaken by them.

• Accordingly all licensed banks are requested to obtain a clearance letter from the relevant line Ministry and External Resources Department before releasing such funds to the respective NGOs, where it is evident that such NGO is operating outside its scope of activity. Copy of clearance letter may be forwarded to Central Bank of Sri Lanka.

Yours faithfully,



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31 May 2006

To : All Licensed Banks

Dear Sirs,

CONDUCT OF NON-GOVERNMENT ORGANIZATIONS (NGO) ACCOUNTS BYLICENSED BANKS

The immediate attention of all licensed banks is drawn to the need to observe strict due diligence and the “Know Your Customer” (KYC) Rules with regard to inward remittances and outward transfers or withdrawal of funds from accounts operated by NGOs.

In this regard the attention of all licensed banks is drawn to the provisions of Section 15 subsection (2) of the Financial Transactions Reporting Act, No.6 of 2006 and Section 3 of the Convention on the Suppression of Terrorist Financing Act, No.25 of 2005 which are annexed for ease of reference.


Section 15 subsection (2) of the Financial Transactions Reporting Act, No. 6 of 2006 reads as follows:–

15 (2) Where the Financial Intelligence Unit has reasonable grounds to suspect that a transaction or attempted transaction may—

(a) involve the proceeds, which are attributable to any unlawful activity ; or (b) be connected to the commission of the money laundering offence under the Money Laundering Act, No.5 of 2006;

or(c) be preparatory to the commission of an offence under the Convention on the Suppression of Terrorist Financing Act,

No.25 of 2005,

it may direct the Institution in writing or by telephone to be confirmed in writing within twenty-four hours, not to proceed with the carrying out of that transaction or attempted transaction or any other transaction in respect of the funds affected by that transaction or attempted transaction for a period to be determined by the Financial Intelligence Unit, which may not be more than seven days, in order to allow the Financial Intelligence Unit —

(i) to make any necessary inquiries concerning the transaction or attempted transaction; and

(ii) if the Financial Intelligence Unit deems it appropriate, to consult or advise the relevant law enforcement agency in the inquiries.

(3) The Financial Intelligence Unit may make an ex-parte application to the High Court of the Western Province, holden in Colombo, for an extension of the period of time stipulated in subsection (2) setting out the grounds for such application.


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1 For the purposes of subsection 15 (2) (a) quote above “unlawful activity” interalia includes: – (a) . (b) any law or regulation for the time being in force relating to the prevention and suppression of terrorism

Hence, in view of the above provisions of law, if there is adequate proof that funds transferred from a company to an individual would finance terrorism, it is possible for the FIU to inform the Bank concerned which holds the funds for the company which proposes to release such funds to an individual to carry out any act of terrorism, to suspend the account for a period of 7 days. Before the expiry of 7 days, the FIU should apply to the High Court of Colombo for an extension of the time if the time is insufficient to take in appropriate action to seize the funds in the account.

Further, Section 3 of the Convention on the Suppression of Terrorist Financing Act, No.25 of 2005 reads as follows:–

3. (1) Any person who, by any means, directly or indirectly, unlawfully and willfully provides or collects funds, with the intention that such funds should be used, or in the knowledge that they are to be used or having reason to believe that they are likely to be used, in full or in part, in order to commit, –

(a) an act which constitutes an offence within the scope of, or within the definition of any one of the Treaties specified in Schedule I hereto;

(b) any other act, intended to cause death or serious bodily injury, to civilians or to any other person not taking an active part in the hostilities, in a situation of armed conflict, and the purpose of such act, by its nature or context is to intimidate a population or to compel a government or an international organization, to do or to abstain from doing any act,

shall be guilty of the offence of financing of terrorists or terrorist organizations:

Provided that, for an act to constitute the offence set out above, it shall not be necessary to show that the funds collected were actually used in the commission of an offence.

(2) Any person who– (a) Attempts to commit; (b) Aids or abets the commission of; or (c) Acting with a common purpose with another person or a group of persons, contributes to the commission of,

the offence of financing of terrorists or terrorist organizations, shall be guilty of an offence under this Act.

In this subsection “abet” has the same meaning as in sections 100 and 101 of the Penal Code.

(3) Where an offence specified in subsection (1) or subsection (2) of this section is committed by a body of persons, then, every member, Director, Manager, Secretary, officer or servant of such body of persons shall be guilty of such offence, unless it can be proved that the offence was committed without their knowledge or that they exercised all due diligence to prevent the commission of such offence.

(4) A person guilty of an offence under subsection (1) or subsection (2) of this section, shall on conviction after trial on indictment by the High Court, be punished with imprisonment for a term not less than fifteen years and not exceeding twenty years, and also be liable to a fine.

4. (1) On indictment of any person in the High Court, for an offence under this Act, all funds collected in contravention of the provisions of section 3, shall, with effect from the date of filing of such indictment –

(a) if such funds are lying in an account with any Bank, be subject to an order of freezing; or (b) if such funds are in the possession or control of any person be liable to seizure;

(2) The freezing or seizure of funds in terms of subsection (1) shall be in force until the conclusion of the trial.

(3) On the filing of indictment, the Attorney-General shall notify the Central Bank of the freezing or seizure as the case may be.

(4) The Central Bank shall thereupon take steps to give adequate publicity to the order of freezing or seizure as the case may be, as it shall think fit.


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1My No. : 02 / 04 /004 / 0012 / 001Your No. :


19 January 2007


Dear Sirs,

CUSTOMER DUE DILIGENCE – ‘KNOW YOUR CUSTOMER’ PROCEDURES

In view of the potential risks on the banking and financial system stability that may arise from cross-border financial transactions, all licensed banks shall conduct due diligence on all customers involved in cross-border financial transactions and ensure that all requirements under the relevant statutes including Prevention of Money Laundering Act, No.5 of 2006, financial Transactions Reporting Act, No.6 of 2006 and Convention on the Suppression of Terrorist Finance Act, No.25 of 2005 and the Exchange Control Act, No.24 of 1953 are complied with.

Accordingly, the licensed banks shall report any transaction of suspicious nature to the relevant authorities in terms of the above statutes immediately.

Yours faithfully,

Sgd, P. SamarasiriDirector of Bank Supervision


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1Bank Supervision DepartmentCentral Bank of Sri Lanka

3rd December, 2001

To : All Licensed Commercial Banks and Licensed Specialised Banks

CUSTOMER DUE DILIGENCE –‘KNOW YOUR CUSTOMER’ PROCEDURES

Your attention is drawn to the discussion on the above subject at the Bank Managers’ Meetings held in the months of October and November 2001. Please find enclosed a Guideline on Customer Due Diligence - ‘Know Your Customer’ procedures, which set out the minimum criteria to be adopted by banks.

These guidelines will be effective immediately.

Yours faithfully,



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1Ref. No. : 02 / 04 / 004 / 0012 / 001

Bank Supervision DepartmentCentral Bank of Sri Lanka

3rd December, 2001

To : All Licensed Commercial Banks and Licensed Specialised Banks

GUIDELINES ON CUSTOMER DUE DILIGENCE –‘KNOW YOUR CUSTOMER’ PROCEDURES

In order to prevent the unchecked use of the financial system for money laundering and transactions related to terrorism and subversive activities, it is recommended that all banks follow these guidelines on customer identification at the time of opening an account for a prospective customer, or before establishing a business relationship with a prospective customer, or thereafter when there is a material change in the way an account is operated. In addition to minimising the risk of use of the banking system for illicit activities, the adoption of these guidelines will provide protection against possible frauds, and enable the timely recognition of suspicious transactions and protect the bank from reputational, legal and financial risks.

1. All banks are encouraged to document their policies on customer acceptance, customer identification/risk management and monitoring of high risk accounts.

2. In order to ‘know their customers’ the banks are expected to: (i) Have sufficient information on the identity of the customer. (ii) Be satisfied that a prospective customer is who he/she claims to be. If the customer is acting

on behalf of another, sufficient evidence on the identity of both parties should be obtained. (iii) Ensure that information obtained in respect of a customer in the normal course of business is

used effectively for the prevention of money laundering/terrorism funding.

3. CustomerIdentification

3.1 Personal Accounts

The following information should be obtained from all prospective personal customers:• Customer’s name from an original of a document issued by an official authority, preferably

bearing a photograph of the customer, such as the national identity card, passport or the driving license. The reference number of such document should be recorded by the bank.

• Customer’s permanent mailing address and supporting evidence which should be confirmed through correspondence.

• The authenticity and integrity of an introducer and his own identity should be established to the satisfaction of the bank.

• Independent verification of introducer’s address should be made and filed with the mandate.

3.2 Corporate Customers

The following documents should be obtained:• Certificate of Incorporation, Memorandum and Articles of Association or Partnership

Agreement, as appropriate, to establish the legal status of the customer


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1• Resolution by the Board of Directors • Duly completed application form containing authorised specimen signatures• The identity of each director and those authorised to operate the account, should be

established.• For companies, businesses or partnerships registered outside Sri Lanka, similar documents

should be obtained, taking into consideration any soft regulatory system in the country of origin.

3.3 In the case of accounts operated by:• A Power of Attorney• Joint account holders• Partnerships• Trust accounts/Fiduciary accounts

The identity should be established in respect of each signatory to the account.

3.4 More stringent customer identification policies should be established in the following circumstances:• Accounts opened by post or in any other circumstances where there is no face to face

contact with the customer.• In the case of one-off transactions for non-account holders of the bank, in particular where

such transactions involve large amounts of cash, or the receipt of unusually large foreign remittances, the customer should be asked to produce documentary evidence of identity, and copies of such documents should be retained by the bank.

• Where safe custody facilities are made available to non-account holders, identification procedure for non-account holders, as above, should be followed.

• In accommodating requests for remittances of funds between accounts using electronic payment systems, where such transactions are of a large size, the bank should establish the identity of the sender and ascertain the identity of the recipient.

4. In instances where the bank cannot establish the true identity of the customer to its satisfaction, it should not commence any business relationship with such customer.

5. Other Recommendations

5.1 In respect of all types of accounts, returned letters and statements should be followed-up.

5.2 Where after opening an account, the features of the transactions, as known at the time of opening of the account changes significantly, causing grounds for suspicion of criminal activity, inquiries should be made with regard to the changes in the financial position and nature of activities, which should be recorded.

5.3 Retention of records: All evidence of identification as set out above should be maintained for a minimum period of five (05) years even after an account is closed.

5.4 Where the officer handling the account opening has reasons to believe that a new relationship may expose the bank to significant reputational risk, he may refer such request to an officer of higher authority before opening the account.

5.5 The internal controller/auditor may be required to ensure compliance with the bank’s policies on customer acceptance and identification.

P. T. SirisenaDirector of Bank Supervision


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1Ref. No. : BS/7/87

Bank Supervision DepartmentCentral Bank of Sri LankaRenuka Building41, Janadhipathi MawathaColombo 1.

25 March 1997


Dear Sir/Madam,

DISHONOURED CHEqUES

I wish to draw your attention to the high incidence of cheque returns which has become a serious matter of concern, in view of the impact it would have on the integrity and efficiency of the payment system.

The commercial banks are therefore requested to :

(a) draw the attention of their customers to the legal consequences that may be encountered in the event of a cheque return,

(b) Screen the prospective customers before opening current accounts, by calling for information from other banks about their status.

Yours faithfully,




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20th October 2003To : All Foreign Bank Branches

Dear Sir,

INTERNAL AUDIT FUNCTION

The Basel Committee on Banking Supervision has continuously emphasised the importance of the internal audit function as a vital component of an efficient internal control mechanism in banks. Internal auditing is defined as an “independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a systemic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes”.

An effective internal audit function within a bank would be a valuable source of information for bank management and supervisors, as it would indicate the quality of the internal control system of the bank.

In the light of the foregoing, I am directed by the Monetary Board to ensure that all banks have an effective internal audit function in place. Accordingly, all branches of Foreign Banks operating in Sri Lanka are hereby requested to ensure that an Internal Audit Unit of their own is established, or in the absence of the same the Head Office or the Regional Office of such bank carries out an audit of the branch at least annually.

Yours faithfully,



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13 June 2006


Dear Sirs,

PREVENTION OF FRAUDS USING ELECTRONIC CARDS

Recent reports have highlighted the use of credit cards and ATM cards for fraudulently withdrawing large sums of money from banks in many countries, especially in the South East Asian region.

The Presidential Secretariat, by its letter dated 06 June 2006 has drawn the attention of the Central Bank to the need to take precautionary measures to avert the possibility of such attempts being made even in Sri Lanka, considering the particular danger of terrorist groups using them as a means of creating a sense of insecurity in a vital sector of the economy.

Accordingly, Licensed Banks that issue electronic cards to customers should, as soon as is practicable take steps to:

1. Introduce security features such as tamper-proof micro chips for electronic cards, and in the interim-

2. Take appropriate steps to educate their customers with regard to the safety of their electronic cards and remind them at regular intervals the steps that should be taken by them, in order to avoid being victims of fraudulent use of such cards.

3. Ensure that adequate provision is made annually for the necessary investment in technology.

The banks are also encouraged to introduce other relevant security measures in respect of ATM cards/machines. It is suggested that CCTV cameras be installed at all ATM outlets in order to enhance the surveillance at ATM outlets.

Your views on this matter are welcome for discussion at the forthcoming monthly meeting of CEOs on the 22 June 2006.

Yours faithfully,



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1

SP

June 6, 2006

Desamanya Sunil MendisGovernorCentral Bank of Sri Lanka

The recently reported ATM scams in Singapore (Divaina – 25.05.2006) as well as other countries such as New Zealand, indicate the likelihood of such practices spreading across the world.

It seems prudent to take precautionary measures to avert the possibility of such attempts being made even in Sri Lanka, considering the particular danger of terrorist groups using them as means of creating a sense of insecurity in a vital sector of the economy.

Accordingly, it may be worth taking early action to request the banks in the country to take the following measures and any other, if they have so far not taken any initiatives in this regard.

1. Expedite the process of introducing tamper-proof micro chip Bank cards (being done in many countries now).

2. Keep the customers reminded at regular intervals the steps they should take in order to avoid being victims of ATM robberies.

We hope you would understand that our observations and suggestions are guided by the fact that it is vital to reduce the risk of any form of instability that would affect the Banks, their customers or the country.

Sincerely,

Sgd. Lalith WeeratungaSecretary to the President


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1Ref. No. : 02 / 19 / 40110072 / 001


07 March 2006To : CEOs of all Licensed Commercial Banks

Dear Sir,

REPORTING OF POST-TSUNAMI REMITTANCES RECEIVED THROUGHNGOS AND NON-NGOS TO THE CENTRAL BANK OF SRI LANKA

We refer to our circular dated 13 May, 2005 on the above subject and hereby revise the format for reporting of the information relating to the above remittances with effect from March 1, 2006.

In terms of the revised format, the banks are required to furnish the data in two tables attached hereto (Table 1 & 2). The new table (Table 2) should contain details of NGOs, respective donors/remitters, withdrawals and outstanding account balances on a monthly basis from March 2006 by the 10th of the month following the reporting month. The banks are also requested to furnish the information in Table 2 for the months of January and February, 2006 on or before 24 March, 2006.

The banks are requested to adhere strictly to the ‘Know Your Customer Guidelines’ and implement adequate systems and controls to monitor all such remittances to ensure that customer due diligence on transactions relating to such remittances is carried out. This is an imperative in the context of the Anti-money Laundering legislation that has just been passed by Parliament and which will soon be operative.

Your continued co-operation in this regard will be greatly appreciated.

Yours faithfully,Controller of Exchange Director of Bank Supervision

Table 1Donations received by Government, Non-Governmental Organisations (NGOs) and Others (Non-NGOs)

Name of Commercial Bank:- .........................................For the Period:- 26th December 2004 to .........................

Item

Tsunami Non-TsunamiForeign Donations

Local Donations: Sri Lankan

Rs.

Foreign Currency Amount

Rs. EquivalentForeign Currency Amount

Equivalent Amount of Sri Lankan

Rs.Donation Received by the GovernmentDonations Received by Non-Governmental Organisations (NGOs) (a)Donations Received by Others (Non-NGOs)Total

(a) Please provide detailed information as requested in Form 2


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1 Tabl

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Colombo24 October 2008


AMENDMENTS TO DIRECTIONS ON CORPORATE GOVERNANCE FORLICENSED COMMERCIAL BANKS IN SRI LANKA

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 and in terms of the Supreme Court order delivered on September 1, 2008, the Monetary Board hereby issues the following Direction amending Direction No. 5 of 2008 dated August 15, 2008, issued by the Monetary Board of the Central Bank of Sri Lanka. This Direction may be cited as the Banking Act, Direction No. 7 of 2008.

1. The following new Direction shall replace Direction No. 5 of the Banking Act, Direction No. 5 of 2008, dated August 15, 2008.

3(9)(v) If for any reason such as ill health or any incapacity as provided in the Banking Act, the Monetary Board considers that exemptions referred to in Directions 3(2)(ii)B, 3(3)(i)A and 3(3)(ii)A should not be availed of, such ground may be notified to the person by the Monetary Board, and after a hearing, the Monetary Board may limit the period of exemption.


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the Banking Act, No.30 of 1988 as amended.



Colombo15 August 2008.


AMENDMENTS TO DIRECTIONS ON CORPORATE GOVERNANCE FORLICENSED COMMERCIAL BANKS IN SRI LANKA

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 and in terms of the Supreme Court order delivered on July 8, 2008, the Monetary Board hereby issues the following Directions in lieu of Direction No.1 of 2008 dated April 23, 2008, issued by the Monetary Board of the Central Bank of Sri Lanka. These Directions may be cited as the Banking Act, Direction No.5 of 2008.

1. The Banking Act Direction No. 1 of 2008 dated April 23, 2008 described as “Provisions regarding executive directors and transitional provisions for founding directors, incumbent chairmen and executive directors”, is hereby revoked.

2. The following new Direction shall replace the present Direction 3(2)(ii) (B) of the Banking Act, Direction No.11 of 2007.

3(2)(ii) (B) In this context, the following general exemption shall apply:

A director who has completed nine years as at January 1, 2008, or who completes such term at any time prior to December 31, 2008, may continue for a further maximum period of 3 years commencing January 1, 2009.

3. The following new Direction shall replace Directions 3(3)(i)(A) and 3(3)(i)(B) of the Banking Act, Direction No.11 of 2007.

3(3)(i) (A) In this context, the following general exemption shall apply:

A director who has reached the age of 70 years as at January 1, 2008 or who would reach the age of 70 years prior to December 31, 2008 may continue in office for a further maximum period of 3 years commencing January 1, 2009.

4. The following new Direction shall be included immediately after Direction 3(3)(ii) of the Banking Act, Direction No.11 of 2007.

3(3)(ii) (A) In this context, the following general exemption shall apply:

If any person holds posts in excess of the limitation as above, such person shall within a maximum period of three years from 1 January 2009 comply with the above-mentioned limitation and notify the Monetary Board accordingly.

5. The following new Direction shall be included immediately after Direction 3(9)(iv) of the Banking Act, Direction No.11 of 2007.

3(9)(v) If for any reason such as ill health or other incapacity, the Monetary Board considers that exemptions referred to in Directions 3(2)(ii)B, 3(3)(i)A and 3(3)(ii)A should not be availed of, such ground may be notified to the person by the Monetary Board, and after a hearing, the Monetary Board may limit the period of exemption.


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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.

Sgd. Nivard Ajith Leslie CabraalGovernor



CORPORATE GOVERNANCE FOR LICENSED COMMERCIAL BANKS IN SRI LANKA

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 Directions on Corporate Governance for Licensed Commercial Banks in Sri Lanka. These Directions may be cited as the Banking Act, Direction No.11 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.

1. Responsibilities and Empowerment under the Banking Act and the Monetary Law Act

1(1) In terms of Section 46(1) of the Banking Act, No.30 of 1988 last amended by No.46 of 2006, 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.

1(2) In terms of Section 5 of the Monetary Law Act, No.58 of 1949, the Central Bank of Sri Lanka is charged with the duty of securing, as far as possible by action authorised by such Act, the two objectives, namely, (a) economic and price stability and (b) financial system stability.

1(3) In terms of Section 10(c) of the Monetary Law Act, the Monetary Board, in the exercise of its powers, duties, functions and responsibilities, is empowered to make such rules and regulations as the Monetary Board may consider necessary, in relation to any matter affecting or connected with or incidental to the exercise, discharge, or performance of the powers, functions, and duties of the Central Bank of Sri Lanka.

1(4) Under the provisions of the Monetary Law Act, No.58 of 1949, the supervision of banks has been made a duty of the Central Bank on account of specific reasons as stated in John Exter’s Report on the Monetary Law Act which states, inter-alia, as follows: “Banking is an economic activity which affects the public welfare to an unusual degree; it touches in one way or another, almost every phase of a country’s economic life. Sound banking is essential to healthy and vigorous economic development. Supervision of banks helps to protect the public against mismanagement, bank failures, and loss of confidence in the banking system. It helps to protect depositors and stock-holders against loss and frequently enables bank directors and officers to manage the affairs of their banks more wisely and intelligently.”

1(5) Accordingly, in order to enhance the overall banking sector stability which is the fundamental to financial system stability, the Monetary Board, hereby issues Directions under Section 46(1) of the Banking Act, No.30 of 1988 to improve and sustain the corporate governance processes and practices of the licensed commercial banks in Sri Lanka.

1(6) For purposes of this Direction, Corporate Governance processes and practices shall be deemed to be the management framework that facilitates the conduct of the banking business in a responsible and accountable manner so as to promote the safety and soundness of the individual banks, thereby leading to the stability of the overall banking sector.


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1(7) The rules of corporate governance as contained in Direction 3 of these Directions have, therefore, been developed on the basis of certain fundamental principles as set out in Direction 2 of these Directions with a view to facilitating the underlying supervisory responsibilities of the Central Bank and to promote safety and soundness of the banking system.

2. The Principles upon which the rules of Corporate Governance have been based upon and developed are the following:

The principles set out in this Direction 2 should be referred to for explanatory purposes and/or for clarification purposes only, so as to understand the rationale for the rules as contained in Direction 3 hereof. Hence, strict compliance under these Directions shall only be in respect of the rules that are set out under Direction 3.

2(1) Principle: The Responsibilities of the Board2(1)(i) The board of directors should assume the overall responsibility and accountability in respect

of: (a) the management of the affairs of the bank, i.e., conduct of business and maintenance of prudent risk management mechanisms; and (b) the safety and soundness of the bank.

2(1)(ii) Towards this end, the board should: (a) determine the structure of the management of affairs of the bank; (b) delegate business operations to key management personnel led by the chief executive officer designated by the board; (c) assume policy making and risk management for the business; and (d) ensure the effective role of the key management personnel. Key management personnel shall mean such key executives of the bank as defined in the International Accounting Standards.

2(1)(iii) The overall responsibility of the board should not be construed as an obligation to undertake the inspection of day-to-day activities, but should rather be understood as an obligation to oversee and ensure that the key management personnel are carrying out the day-to-day activities of the bank in a safe and sound manner in accordance with the policies set by the board.

2(1)(iv) Directors should understand the business and risk management mechanism of the bank and take objective decisions in the interest of the bank’s depositors, creditors, shareholders and other stakeholders. Further, they should ensure that the bank does not act in a manner that is detrimental or prejudicial to the interests of, and obligations to, depositors and creditors.

2(1)(v) The board should take the responsibility for compliance with accepted rules of corporate governance. They should also ensure compliance with all regulatory and supervisory requirements. Further, they should ensure that an effective combination of professionals with practical experience in relevant subjects such as banking, finance, economics, business management, human resource management, law, marketing, information technology or any other discipline relevant or complementary to banking operations, is available in the bank to undertake its operations and discharge its responsibilities.

2(1)(vi) The directors should be aware of potential civil and criminal liabilities that may arise from their failure to discharge their duties diligently. They should also understand that they should act with due care and prudence. In addition, the directors of state owned banks should be aware of the additional liabilities that arise from the status of such banks being state enterprises and consequently being accountable to the public. It is, therefore, necessary that directors commit sufficient time and energy to fulfilling the board’s responsibilities in managing the affairs of the bank in a prudent manner.

2(2) Principle: The Board’s composition2(2)(i) The board should be composed of a healthy mix of executive directors and non-executive

directors. Some of the non-executive directors should also be independent so that there is strong independent element brought into the decision-making process.

2(2)(ii) The board’s composition should ensure a balance of skills and experience as may be deemed appropriate and desirable for the requirements of the bank.

2(2)(iii) The banking industry worldwide is making tremendous progress and undergoing rapid change with new innovations, instruments, technologies, products, systems and processes being introduced regularly. It is vital therefore, that the directors should be persons who would: (a) be


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able to keep abreast with these changes, and (b) provide continuous contribution and guidance to the board decision-making process.

2(2)(iv) There should be a gradual infusion of new ideas into the board. There should also be assurance that the relationships between the directors amongst themselves as well as between the directors and the key management personnel is at a level that does not suggest the existence of excessive familiarity, undue influence or coercion. In this context, it should be noted that very long-standing relationships could sometimes impair the high sense of values, independence and objectivity that is needed in the discharge of the duties of a director of a bank.

2(3) Principle: Criteria to assess the Fitness and Propriety of Directors2(3)(i) In addition to the principles under the board’s composition in Direction 2(2) above, directors

should be fit and proper persons in order to be eligible to hold office as directors of a bank and no person should serve as a director unless such person is a fit and proper person.

2(3)(ii) There is strong need for commitment and effective contribution to the prudent management of the affairs of the bank. It is very likely that the effectiveness of such commitment and contribution would tend to decrease with advanced age of directors and more particularly, if the age of such director is well beyond the normal age of retirement, as generally accepted in the country.

2(4) Principle: Management functions delegated by the Board

2(4)(i) The board should have a formal schedule of matters specifically reserved to it for decision. The board should also give clear directions to key management personnel, as to the matters that should be approved by the board before decisions are made by key management personnel, on behalf of the bank.

2(5) Principle: The Chairman and the Chief Executive Officer2(5)(i) There are two key aspects of the management of every bank, viz., (a) the overall governance by

the board, and (b) the day-to-day management of the bank’s business by the CEO, in line with board approved strategic objectives, corporate values, overall risk policy and risk management procedures.

2(5)(ii) There should be a clear division of these responsibilities at the board level and the executive management level to ensure a greater balance of power and authority, so that powers are not concentrated in any one individual.

2(5)(iii) The board should appoint a chairman as well as a chief executive officer. The division of responsibilities between the chairman and chief executive officer should be clearly established and set out in writing.

2(6) Principle: Board appointed Committees 2(6)(i) The board should appoint separate board committees for audit, selection, remuneration,

integrated risk management and such other subjects as determined by the Board to ensure its oversight and control over the affairs of the bank.

2(6)(ii) Where the board appoints a committee, it should set out the authority of the committee, and in particular, whether the committee has the authority to act on behalf of the board or simply has the authority to examine a particular issue and report back to the board with recommendations.

2(6)(iii) Each committee should be chaired by a non-executive director who has some expertise in the relevant subject, and who preferably should be independent too. The majority of the members of the board committee should consist of non-executive directors with at least one independent director in the committee. If a need arises, professionals from outside may be invited or hired to serve in a committee. Bank staff may be present at the board committees for advice or special assignments, on invitation.


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2(7) Principle: Related party transactions

2(7)(i) The board should ensure that the bank does not engage in transactions with “related parties” in a manner that would grant such parties “more favourable treatment” than that accorded to other constituents of the bank carrying on the same business.

2(8) Principle: Disclosures

2(8)(i) The objective of disclosure is the transparency of information relating to affairs and risk management of banks which would help to promote market discipline of the respective banks.

2(8)(ii) Since market disclosure is the focus of the Pillar III of the risk management based capital standard known as Basel II recommended by the Basel Committee on Banking Supervision at the Bank for International Settlements, (which is the globally accepted body on introducing international standards on Bank Supervision), the extent of disclosures should be commensurate with the size, ownership structure, systemic importance, risk profile and the business model of the bank. Accordingly, it should be noted that the adequate and timely public disclosure of relevant information by banks would facilitate enhanced market discipline and lead to better and more effective corporate governance.

2(8)(iii) Disclosures by banks should generally include disclosures relating to capital adequacy, key performance indicators, business concentrations, transactions with related parties, corporate governance statements, financial statements, etc., and should be consistent with accounting standards, regulatory requirements as well as with any other information disclosed on voluntary basis.

3. The following rules of Corporate Governance shall be complied by all licensed commercial banks in Sri Lanka and such compliance shall be as provided for in Direction 3(9)(i) hereof.

3(1) The Responsibilities of the Board3(1)(i) The board shall strengthen the safety and soundness of the bank by ensuring the implementation

of the following:

a) Approve and oversee the bank’s strategic objectives and corporate values and ensure that these are communicated throughout the bank;

b) Approve the overall business strategy of the bank, including the overall risk policy and risk management procedures and mechanisms with measurable goals, for at least the next three years;

c) Identify the principal risks and ensure implementation of appropriate systems to manage the risks prudently;

d) Approve implementation of a policy of communication with all stakeholders, including depositors, creditors, share-holders and borrowers;

e) Review the adequacy and the integrity of the bank’s internal control systems and management information systems;

f) Identify and designate key management personnel, as defined in the International Accounting Standards, who are in a position to: (i) significantly influence policy; (ii) direct activities; and (iii) exercise control over business activities, operations and risk management;

g) Define the areas of authority and key responsibilities for the board directors themselves and for the key management personnel;

h) Ensure that there is appropriate oversight of the affairs of the bank by key management personnel, that is consistent with board policy;

i) Periodically assess the effectiveness of the board directors’ own governance practices, including: (i) the selection, nomination and election of directors and key management personnel; (ii) the management of conflicts of interests; and (iii) the determination of weaknesses and implementation of changes where necessary;

j) Ensure that the bank has an appropriate succession plan for key management personnel; k) Meet regularly, on a needs basis, with the key management personnel to review policies,

establish communication lines and monitor progress towards corporate objectives;


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l) Understand the regulatory environment and ensure that the bank maintains an effective relationship with regulators;

m) Exercise due diligence in the hiring and oversight of external auditors.

3(1)(ii) The board shall appoint the chairman and the chief executive officer and define and approve the functions and responsibilities of the chairman and the chief executive officer in line with Direction 3(5) of these Directions.

3(1)(iii) The board shall meet regularly and board meetings shall be held at least twelve times a year at approximately monthly intervals. Such regular board meetings shall normally involve active participation in person of a majority of directors entitled to be present. Obtaining the board’s consent through the circulation of written resolutions/papers shall be avoided as far as possible.

3(1)(iv) The board shall ensure that arrangements are in place to enable all directors to include matters and proposals in the agenda for regular board meetings where such matters and proposals relate to the promotion of business and the management of risks of the bank.

3(1)(v) The board procedures shall ensure that notice of at least 7 days is given of a regular board meeting to provide all directors an opportunity to attend. For all other board meetings, reasonable notice may be given.

3(1)(vi) The board procedures shall ensure that a director who has not attended at least two-thirds of the meetings in the period of 12 months immediately preceding or has not attended the immediately preceding three consecutive meetings held, shall cease to be a director. Participation at the directors’ meetings through an alternate director shall, however, be acceptable as attendance.

3(1)(vii) The board shall appoint a company secretary who satisfies the provisions of Section 43 of the Banking Act No. 30 of 1988, whose primary responsibilities shall be to handle the secretariat services to the board and shareholder meetings and to carry out other functions specified in the statutes and other regulations.

3(1)(viii) All directors shall have access to advice and services of the company secretary with a view to ensuring that board procedures and all applicable rules and regulations are followed.

3(1)(ix) The company secretary shall maintain the minutes of board meetings and such minutes shall be open for inspection at any reasonable time, on reasonable notice by any director.

3(1)(x) Minutes of board meetings shall be recorded in sufficient detail so that it is possible to gather from the minutes, as to whether the board acted with due care and prudence in performing its duties. The minutes shall also serve as a reference for regulatory and supervisory authorities to assess the depth of deliberations at the board meetings. Therefore, the minutes of a board meeting shall clearly contain or refer to the following: (a) a summary of data and information used by the board in its deliberations; (b) the matters considered by the board; (c) the fact-finding discussions and the issues of contention or dissent which may illustrate whether the board was carrying out its duties with due care and prudence; (d) the testimonies and confirmations of relevant executives which indicate compliance with the board’s strategies and policies and adherence to relevant laws and regulations; (e) the board’s knowledge and understanding of the risks to which the bank is exposed and an overview of the risk management measures adopted; and (f) the decisions and board resolutions.

3(1)(xi) There shall be a procedure agreed by the board to enable directors, upon reasonable request, to seek independent professional advice in appropriate circumstances, at the bank’s expense. The board shall resolve to provide separate independent professional advice to directors to assist the relevant director or directors to discharge his/her/their duties to the bank.

3(1)(xii) Directors shall avoid conflicts of interests, or the appearance of conflicts of interest, in their activities with, and commitments to, other organisations or related parties. If a director has a conflict of interest in a matter to be considered by the board, which the board has determined to be material, the matter should be dealt with at a board meeting, where independent non-executive directors [refer to Direction 3(2)(iv) of these Directions] who have no material interest in the transaction, are present. Further, a director shall abstain from voting on any board resolution


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in relation to which he/she or any of his/her close relation or a concern in which a director has substantial interest, is interested and he/she shall not be counted in the quorum for the relevant agenda item at the board meeting.

3(1)(xiii) The board shall have a formal schedule of matters specifically reserved to it for decision to ensure that the direction and control of the bank is firmly under its authority.

3(1)(xiv) The board shall, if it considers that the bank is, or is likely to be, unable to meet its obligations or is about to become insolvent or is about to suspend payments due to depositors and other creditors, forthwith inform the Director of Bank Supervision of the situation of the bank prior to taking any decision or action.

3(1)(xv) The board shall ensure that the bank is capitalised at levels as required by the Monetary Board in terms of the capital adequacy ratio and other prudential grounds.

3(1)(xvi) The board shall publish in the bank’s Annual Report, an annual corporate governance report setting out the compliance with Direction 3 of these Directions.

3(1)(xvii) The board shall adopt a scheme of self-assessment to be undertaken by each director annually, and maintain records of such assessments.

3(2) The Board’s Composition

3(2)(i) The number of directors on the board shall not be less than 7 and not more than 13.

3(2)(ii) (A) The total period of service of a director other than a director who holds the position of chief executive officer shall not exceed nine years, and such period in office shall be inclusive of the total period of service served by such director up to 01 January 2008.

(B) In this context, the following transitional provisions shall apply: a) In the event that there is only one director on the board who has served more than nine

years as at 01 January 2008, he/she shall be deemed to have vacated the office as a director as at 31 December 2008.

b) In the event that there are two or more directors on the board who have served more than nine years as at 01 January 2008, the following provisions shall apply:

I. Of those directors whose period of service has exceeded nine years, the longest serving director, shall be deemed to have vacated office as a Director on 31 December 2008.

II. Thereafter, at the end of each succeeding year, the remaining directors shall be deemed to have vacated office in sequence, at least one director each year, (on the basis of the longest to the shortest length of service as a director), until all directors who have served a period in excess of nine years as at 01 January 2008, have been deemed to have vacated office. Provided also, that all directors of the bank who have served more than nine years as at 01 January 2008 shall be deemed to have vacated their office by or before 31 December 2011.

c) In the event there are any directors who are due to complete nine years of service between 01 January 2008 and 31 December 2010, such directors shall also be deemed to have vacated office, in sequence, at least one director each year, (on the basis of the longest to the shortest length of service as a director), after the directors as set out in Direction 3(2)(ii)(B)(b) have vacated their office as directors. Provided, however, that all such directors covered by this sub-direction (c) shall also be deemed to have vacated their office by or before 31 December 2011.

3(2)(iii) An employee of a bank may be appointed, elected or nominated as a director of the bank (hereinafter referred to as an “executive director”) provided that the number of executive directors shall not exceed one-third of the number of directors of the board. In such an event, one of the executive directors shall be the chief executive officer of the bank.

3(2)(iv) The board shall have at least three independent non-executive directors or one third of the total number of directors, whichever is higher. This sub-direction shall be applicable from 01 January 2010 onwards.


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A non-executive director shall not be considered independent if he/she:

a) has direct and indirect shareholdings of more than 1 per cent of the bank;

b) currently has or had during the period of two years immediately preceding his/her appointment as director, any business transactions with the bank as described in Direction 3(7) hereof, exceeding 10 per cent of the regulatory capital of the bank.

c) has been employed by the bank during the two year period immediately preceding the appointment as director;

d) has a close relation who is a director or chief executive officer or a member of key management personnel or a material shareholder of the bank or another bank. For this purpose, a “close relation” shall mean the spouse or a financially dependant child;

e) represents a specific stakeholder of the bank;

f) is an employee or a director or a material shareholder in a company or business organization: I. which currently has a transaction with the bank as defined in Direction 3(7) of these

Directions, exceeding 10 per cent of the regulatory capital of the bank, or II. in which any of the other directors of the bank are employed or are directors or are

material shareholders; or III. in which any of the other directors of the bank have a transaction as defined in

Direction 3(7) of these Directions, exceeding 10 per cent of regulatory capital in the bank;

3(2)(v) In the event an alternate director is appointed to represent an independent director, the person so appointed shall also meet the criteria that applies to the independent director.

3(2)(vi) Non-executive directors shall be persons with credible track records and/or have necessary skills and experience to bring an independent judgment to bear on issues of strategy, performance and resources.

3(2)(vii) A meeting of the board shall not be duly constituted, although the number of directors required to constitute the quorum at such meeting is present, unless more than one half of the number of directors present at such meeting are non-executive directors. This sub-direction shall be applicable from 01 January 2010 onwards.

3(2)(viii) The independent non-executive directors shall be expressly identified as such in all corporate communications that disclose the names of directors of the bank. The bank shall disclose the composition of the board, by category of directors, including the names of the chairman, executive directors, non-executive directors and independent non-executive directors in the annual corporate governance report.

3(2)(ix) There shall be a formal, considered and transparent procedure for the appointment of new directors to the board. There shall also be procedures in place for the orderly succession of appointments to the board.

3(2)(x) All directors appointed to fill a casual vacancy shall be subject to election by shareholders at the first general meeting after their appointment.

3(2)(xi) If a director resigns or is removed from office, the board shall: (a) announce the director’s resignation or removal and the reasons for such removal or resignation including but not limited to information relating to the relevant director’s disagreement with the bank, if any; and (b) issue a statement confirming whether or not there are any matters that need to be brought to the attention of shareholders.

3(2)(xii) A director or an employee of a bank shall not be appointed, elected or nominated as a director of another bank except where such bank is a subsidiary company or an associate company of the first mentioned bank.


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3(3) Criteria to assess the fitness and propriety of directors

In addition to provisions of Section 42 of the Banking Act, No.30 of 1988, the criteria set out below shall apply to determine the fitness and propriety of a person who serves or wishes to serve as a director of a bank. Non-compliance with any one of the criteria as set out herein shall disqualify a person to be appointed, elected or nominated as a director or to continue as a director.

3(3)(i) The age of a person who serves as director shall not exceed 70 years.

(A) Where a director who is currently serving at a bank is over 70 years of age as at 01 January 2008, the following transitional provisions shall apply, subject however to the provisions as set out in Direction 3(2)(ii) hereof. a) If a director is over 75 years of age as at 01 January 2008, such director may continue

to serve as a director for a further period that shall not extend beyond 31 December 2008, and shall be deemed to have vacated office on 31 December 2008;

b) If a director is between 70 and 75 years of age as at 01 January 2008, such director may continue to serve as a director for a further period that shall not extend beyond 31 December 2009, and shall be deemed to have vacated office on 31 December 2009.

(B) Where a director who is currently serving at a bank reaches the age of 70 years, between 01 January 2008 and 31 December 2009, such director may, subject to the provisions as set out in Direction 3(2)(ii) hereof, continue to serve as a director for a further period that shall not extend beyond 31 December 2010 and shall be deemed to have vacated office on 31 December 2010.

3(3)(ii) A person shall not hold office as a director of more than 20 companies/entities/institutions inclusive of subsidiaries or associate companies of the bank. Of such 20 companies/entities/ institutions, not more than 10 companies shall be those classified as Specified Business Entities in terms of the Sri Lanka Accounting and Auditing Standards Act, No. 15 of 1995.

3(4) Management functions delegated by the Board

3(4)(i) The directors shall carefully study and clearly understand the delegation arrangements in place.

3(4)(ii) The board shall not delegate any matters to a board committee, chief executive officer, executive directors or key management personnel, to an extent that such delegation would significantly hinder or reduce the ability of the board as a whole to discharge its functions.

3(4)(iii) The board shall review the delegation processes in place on a periodic basis to ensure that they remain relevant to the needs of the bank.

3(5) The Chairman and Chief Executive Officer

3(5)(i) The roles of chairman and chief executive officer shall be separate and shall not be performed by the same individual.

3(5)(ii) The chairman shall be a non-executive director and preferably an independent director as well. In the case where the chairman is not an independent director, the board shall designate an independent director as the Senior Director with suitably documented terms of reference to ensure a greater independent element. The designation of the Senior Director shall be disclosed in the bank’s Annual Report.

3(5)(iii) The board shall disclose in its corporate governance report, which shall be an integral part of its Annual Report, the identity of the chairman and the chief executive officer and the nature of any relationship [including financial, business, family or other material/relevant relationship(s)], if any, between the chairman and the chief executive officer and the relationships among members of the board.

3(5)(iv) The chairman shall: (a) provide leadership to the board; (b) ensure that the board works effectively and discharges its responsibilities; and (c) ensure that all key and appropriate issues are discussed by the board in a timely manner.


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3(5)(v) The chairman shall be primarily responsible for drawing up and approving the agenda for each board meeting, taking into account where appropriate, any matters proposed by the other directors for inclusion in the agenda. The chairman may delegate the drawing up of the agenda to the company secretary.

3(5)(vi) The chairman shall ensure that all directors are properly briefed on issues arising at board meetings and also ensure that directors receive adequate information in a timely manner.

3(5)(vii) The chairman shall encourage all directors to make a full and active contribution to the board’s affairs and take the lead to ensure that the board acts in the best interests of the bank.

3(5)(viii) The chairman shall facilitate the effective contribution of non-executive directors in particular and ensure constructive relations between executive and non-executive directors.

3(5)(ix) The chairman, shall not engage in activities involving direct supervision of key management personnel or any other executive duties whatsoever.

3(5)(x) The chairman shall ensure that appropriate steps are taken to maintain effective communication with shareholders and that the views of shareholders are communicated to the board.

3(5)(xi) The chief executive officer shall function as the apex executive-in-charge of the day-to-day-management of the bank’s operations and business.

3(6) Board appointed Committees

3(6)(i) Each bank shall have at least four board committees as set out in Directions 3(6)(ii), 3(6)(iii), 3(6)(iv) and 3(6)(v) of these Directions. Each committee shall report directly to the board. All committees shall appoint a secretary to arrange the meetings and maintain minutes, records, etc., under the supervision of the chairman of the committee. The board shall present a report of the performance on each committee, on their duties and roles at the annual general meeting.

3(6)(ii) The following rules shall apply in relation to the Audit Committee:

a) The chairman of the committee shall be an independent non-executive director who possesses qualifications and experience in accountancy and/or audit.

b) All members of the committee shall be non-executive directors. c) The committee shall make recommendations on matters in connection with: (i) the

appointment of the external auditor for audit services to be provided in compliance with the relevant statutes; (ii) the implementation of the Central Bank guidelines issued to auditors from time to time; (iii) the application of the relevant accounting standards; and (iv) the service period, audit fee and any resignation or dismissal of the auditor; provided that the engagement of the Audit partner shall not exceed five years, and that the particular Audit partner is not re-engaged for the audit before the expiry of three years from the date of the completion of the previous term.

d) The committee shall review and monitor the external auditor’s independence and objectivity and the effectiveness of the audit processes in accordance with applicable standards and best practices.

e) The committee shall develop and implement a policy on the engagement of an external auditor to provide non-audit services that are permitted under the relevant statutes, regulations, requirements and guidelines. In doing so, the committee shall ensure that the provision by an external auditor of non-audit services does not impair the external auditor’s independence or objectivity. When assessing the external auditor’s independence or objectivity in relation to the provision of non-audit services, the committee shall consider: I. whether the skills and experience of the audit firm make it a suitable provider of the

non-audit services; II. whether there are safeguards in place to ensure that there is no threat to the objectivity

and/or independence in the conduct of the audit resulting from the provision of such services by the external auditor; and


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III. whether the nature of the non-audit services, the related fee levels and the fee levels individually and in aggregate relative to the audit firm, pose any threat to the objectivity and/or independence of the external auditor.

f) The committee shall, before the audit commences, discuss and finalise with the external auditors the nature and scope of the audit, including: (i) an assessment of the bank’s compliance with the relevant Directions in relation to corporate governance and the management’s internal controls over financial reporting; (ii) the preparation of financial statements for external purposes in accordance with relevant accounting principles and reporting obligations; and (iii) the co-ordination between firms where more than one audit firm is involved.

g) The committee shall review the financial information of the bank, in order to monitor the integrity of the financial statements of the bank, its annual report, accounts and quarterly reports prepared for disclosure, and the significant financial reporting judgments contained therein. In reviewing the bank’s annual report and accounts and quarterly reports before submission to the board, the committee shall focus particularly on: (i) major judgmental areas; (ii) any changes in accounting policies and practices; (iii) significant adjustments arising from the audit; (iv) the going concern assumption; and (v) the compliance with relevant accounting standards and other legal requirements.

h) The committee shall discuss issues, problems and reservations arising from the interim and final audits, and any matters the auditor may wish to discuss including those matters that may need to be discussed in the absence of key management personnel, if necessary.

i) The committee shall review the external auditor’s management letter and the management’s response thereto.

j) The committee shall take the following steps with regard to the internal audit function of the bank: I. Review the adequacy of the scope, functions and resources of the internal audit

department, and satisfy itself that the department has the necessary authority to carry out its work;

II. Review the internal audit programme and results of the internal audit process and, where necessary, ensure that appropriate actions are taken on the recommendations of the internal audit department;

III. Review any appraisal or assessment of the performance of the head and senior staff members of the internal audit department;

IV. Recommend any appointment or termination of the head, senior staff members and outsourced service providers to the internal audit function;

V. Ensure that the committee is appraised of resignations of senior staff members of the internal audit department including the chief internal auditor and any outsourced service providers, and to provide an opportunity to the resigning senior staff members and outsourced service providers to submit reasons for resigning;

VI. Ensure that the internal audit function is independent of the activities it audits and that it is performed with impartiality, proficiency and due professional care;

k) The committee shall consider the major findings of internal investigations and management’s responses thereto;

l) The chief finance officer, the chief internal auditor and a representative of the external auditors may normally attend meetings. Other board members and the chief executive officer may also attend meetings upon the invitation of the committee. However, at least twice a year, the committee shall meet with the external auditors without the executive directors being present.

m) The committee shall have: (i) explicit authority to investigate into any matter within its terms of reference; (ii) the resources which it needs to do so; (iii) full access to information; and (iv) authority to obtain external professional advice and to invite outsiders with relevant experience to attend, if necessary.

n) The committee shall meet regularly, with due notice of issues to be discussed and shall record its conclusions in discharging its duties and responsibilities.


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o) The board shall disclose in an informative way, (i) details of the activities of the audit committee; (ii) the number of audit committee meetings held in the year; and (iii) details of attendance of each individual director at such meetings.

p) The secretary of the committee (who may be the company secretary or the head of the internal audit function) shall record and keep detailed minutes of the committee meetings.

q) The committee shall review arrangements by which employees of the bank may, in confidence, raise concerns about possible improprieties in financial reporting, internal control or other matters. Accordingly, the committee shall ensure that proper arrangements are in place for the fair and independent investigation of such matters and for appropriate follow-up action and to act as the key representative body for overseeing the bank’s relations with the external auditor.

3(6)(iii) The following rules shall apply in relation to the Human Resources and Remuneration Committee:

a) The committee shall determine the remuneration policy (salaries, allowances and other financial payments) relating to directors, Chief Executive Officer (CEO) and key management personnel of the bank.

b) The committee shall set goals and targets for the directors, CEO and the key management personnel.

c) The committee shall evaluate the performance of the CEO and key management personnel against the set targets and goals periodically and determine the basis for revising remuneration, benefits and other payments of performance-based incentives.

d) The CEO shall be present at all meetings of the committee, except when matters relating to the CEO are being discussed.

3(6)(iv) The following rules shall apply in relation to the Nomination Committee:

a) The committee shall implement a procedure to select/appoint new directors, CEO and key management personnel.

b) The committee shall consider and recommend (or not recommend) the re-election of current directors, taking into account the performance and contribution made by the director concerned towards the overall discharge of the board’s responsibilities.

c) The committee shall set the criteria such as qualifications, experience and key attributes required for eligibility to be considered for appointment or promotion to the post of CEO and the key management positions.

d) The committee shall ensure that directors, CEO and key management personnel are fit and proper persons to hold office as specified in the criteria given in Direction 3(3) and as set out in the Statutes.

e) The committee shall consider and recommend from time to time, the requirements of additional/new expertise and the succession arrangements for retiring directors and key management personnel.

f) The Committee shall be chaired by an Independent Director and preferably be constituted with a majority of Independent Directors. The CEO may be present at meetings by invitation.

3(6)(v) The following rules shall apply in relation to the Integrated Risk Management Committee:

a) The committee shall consist of at least three non-executive directors, chief executive officer and key management personnel supervising broad risk categories, i.e., credit, market, liquidity, operational and strategic risks. The committee shall work with key management personnel very closely and make decisions on behalf of the board within the framework of the authority and responsibility assigned to the committee.

b) The committee shall assess all risks, i.e., credit, market, liquidity, operational and strategic risks to the bank on a monthly basis through appropriate risk indicators and


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management information. In the case of subsidiary companies and associate companies, risk management shall be done, both on a bank basis and group basis.

c) The committee shall review the adequacy and effectiveness of all management level committees such as the credit committee and the asset-liability committee to address specific risks and to manage those risks within quantitative and qualitative risk limits as specified by the committee.

d) The committee shall take prompt corrective action to mitigate the effects of specific risks in the case such risks are at levels beyond the prudent levels decided by the committee on the basis of the bank’s policies and regulatory and supervisory requirements.

e) The committee shall meet at least quarterly to assess all aspects of risk management including updated business continuity plans.

f) The committee shall take appropriate actions against the officers responsible for failure to identify specific risks and take prompt corrective actions as recommended by the committee, and/or as directed by the Director of Bank Supervision.

g) The committee shall submit a risk assessment report within a week of each meeting to the board seeking the board’s views, concurrence and/or specific directions.

(h) The committee shall establish a compliance function to assess the bank’s compliance with laws, regulations, regulatory guidelines, internal controls and approved policies on all areas of business operations. A dedicated compliance officer selected from key management personnel shall carry out the compliance function and report to he committee periodically.

3(7) Related party transactions

3(7)(i) The board shall take the necessary steps to avoid any conflicts of interest that may arise from any transaction of the bank with any person, and particularly with the following categories of persons who shall be considered as “related parties” for the purposes of this Direction:

a) Any of the bank’s subsidiary companies; b) Any of the bank’s associate companies; c) Any of the directors of the bank; d) Any of the bank’s key management personnel; e) A close relation of any of the bank’s directors or key management personnel; f) A shareholder owning a material interest in the bank; g) A concern in which any of the bank’s directors or a close relation of any of the bank’s

directors or any of its material shareholders has a substantial interest.

3(7)(ii) The type of transactions with related parties that shall be covered by this Direction shall include the following:

a) The grant of any type of accommodation, as defined in the Monetary Board’s Directions on maximum amount of accommodation,

b) The creation of any liabilities of the bank in the form of deposits, borrowings and investments,

c) The provision of any services of a financial or non-financial nature provided to the bank or received from the bank,

d) The creation or maintenance of reporting lines and information flows between the bank and any related parties which may lead to the sharing of potentially proprietary, confidential or otherwise sensitive information that may give benefits to such related parties.

3(7)(iii) The board shall ensure that the bank does not engage in transactions with related parties as defined in Direction 3(7)(i) above, in a manner that would grant such parties “more favourable treatment” than that accorded to other constituents of the bank carrying on the same business. In this context, “more favourable treatment” shall mean and include treatment, including the:

a) Granting of “total net accommodation” to related parties, exceeding a prudent percentage of the bank’s regulatory capital, as determined by the board. For purposes of this sub-direction:


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I. “Accommodation” shall mean accommodation as defined in the Banking Act Directions, No.7 of 2007 on Maximum Amount of Accommodation.

II. The “total net accommodation” shall be computed by deducting from the total accommodation, the cash collateral and investments made by such related parties in the bank’s share capital and debt instruments with a maturity of 5 years or more.

b) Charging of a lower rate of interest than the bank’s best lending rate or paying more than the bank’s deposit rate for a comparable transaction with an unrelated comparable counterparty;

c) Providing of preferential treatment, such as favourable terms, covering trade losses and/or waiving fees/commissions, that extend beyond the terms granted in the normal course of business undertaken with unrelated parties;

d) Providing services to or receiving services from a related-party without an evaluation procedure;

e) Maintaining reporting lines and information flows that may lead to sharing potentially proprietary, confidential or otherwise sensitive information with related parties, except as required for the performance of legitimate duties and functions.

3(7)(iv) A bank shall not grant any accommodation to any of its directors or to a close relation of such director unless such accommodation is sanctioned at a meeting of its board of directors, with not less than two-thirds of the number of directors other than the director concerned, voting in favour of such accommodation. This accommodation shall be secured by such security as may from time to time be determined by the Monetary Board as well.

3(7)(v) a) Where any accommodation has been granted by a bank to a person or a close relation of a person or to any concern in which the person has a substantial interest, and such person is subsequently appointed as a director of the bank, steps shall be taken by the bank to obtain the necessary security as may be approved for that purpose by the Monetary Board, within one year from the date of appointment of the person as a director.

b) Where such security is not provided by the period as provided in Direction 3(7)(v)(a) above, the bank shall take steps to recover any amount due on account of any accommodation, together with interest, if any, within the period specified at the time of the grant of accommodation or at the expiry of a period of eighteen months from the date of appointment of such director, whichever is earlier.

c) Any director who fails to comply with the above sub-directions shall be deemed to have vacated the office of director and the bank shall disclose such fact to the public.

d) This sub-direction, however, shall not apply to a director who at the time of the grant of the accommodation was an employee of the bank and the accommodation was granted under a scheme applicable to all employees of such bank.

3(7)(vi) A bank shall not grant any accommodation or “more favourable treatment” relating to the waiver of fees and/or commissions to any employee or a close relation of such employee or to any concern in which the employee or close relation has a substantial interest other than on the basis of a scheme applicable to the employees of such bank or when secured by security as may be approved by the Monetary Board in respect of accommodation granted as per Direction 3(7)(v) above.

3(7)(vii) No accommodation granted by a bank under Direction 3(7)(v) and 3(7)(vi) above, nor any part of such accommodation, nor any interest due thereon shall be remitted without the prior approval of the Monetary Board and any remission without such approval shall be void and of no effect.

3(8) Disclosures

3(8)(i) The board shall ensure that: (a) annual audited financial statements and quarterly financial statements are prepared and published in accordance with the formats prescribed by the supervisory and regulatory authorities and applicable accounting standards, and that (b) such statements are published in the newspapers in an abridged form, in Sinhala, Tamil and English.


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3(8)(ii) The board shall ensure that the following minimum disclosures are made in the Annual Report:

a) A statement to the effect that the annual audited financial statements have been prepared in line with applicable accounting standards and regulatory requirements, inclusive of specific disclosures.

b) A report by the board on the bank’s internal control mechanism that confirms that the financial reporting system has been designed to provide reasonable assurance regarding the reliability of financial reporting, and that the preparation of financial statements for external purposes has been done in accordance with relevant accounting principles and regulatory requirements.

c) The external auditor’s certification on the effectiveness of the internal control mechanism referred to in Direction 3(8)(ii)(b) above, in respect of any statements prepared or published after 31 December 2008.

d) Details of directors, including names, fitness and propriety, transactions with the bank and the total of fees/remuneration paid by the bank.

e) Total net accommodation as defined in 3(7)(iii) granted to each category of related parties. The net accommodation granted to each category of related parties shall also be disclosed as a percentage of the bank’s regulatory capital.

f) The aggregate values of remuneration paid by the bank to its key management personnel and the aggregate values of the transactions of the bank with its key management personnel, set out by broad categories such as remuneration paid, accommodation granted and deposits or investments made in the bank.

g) The external auditor’s certification of the compliance with these Directions in the annual corporate governance reports published after 01 January 2010.

h) A report setting out details of the compliance with prudential requirements, regulations, laws and internal controls and measures taken to rectify any material non-compliances.

i) A statement of the regulatory and supervisory concerns on lapses in the bank’s risk management, or non-compliance with these Directions that have been pointed out by the Director of Bank Supervision, if so directed by the Monetary Board to be disclosed to the public, together with the measures taken by the bank to address such concerns.

3(9) Transitional and other general provisions

3(9)(i) Compliance with this Direction shall commence from 01 January 2008 onwards and all licensed commercial banks shall fully comply with the provisions of this Direction by or before 01 January 2009 except where extended compliance dates have been specifically provided for in this Direction.

3(9)(ii) In respect of the banks that have been incorporated by specific statutes in Sri Lanka, the boards as specified in such statutes shall continue to function in terms of the provisions of the respective statutes, provided they take steps to comply with all provisions of this Direction that are not inconsistent with the provisions of the respective statutes.

3(9)(iii) This Direction shall apply to the branches of the foreign banks operating in Sri Lanka to the extent that it is not inconsistent with the regulations and laws applicable in such bank’s country of incorporation. The branch of a foreign bank shall also publish its parent bank’s annual corporate governance report together with its annual report and accounts of the branch operations in Sri Lanka.

3(9)(iv) In the event of a conflict between any of the provisions of this Direction and the Articles of Association (or Internal Rules) pertaining to any bank, the provisions of this Direction shall prevail. However, if the Articles of Association of an individual bank set a more stringent standard than that specified in this Direction, such provisions in the Articles of Association may be followed.


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Ref. No. : 02 / 04 / 0012 / 002Bank Supervision Department

12 April 2005

To : CEOs of all Licensed Commercial Banks and all Licensed Specialised Banks;

Dear Sirs,

APPOINTMENT OF DIRECTORS OF BANKS

I refer to my letter of 31 March 2005 on the above subject, enclosing the affidavit and the declaration to be submitted in respect of directors of banks.

Enclosed please find a fresh affidavit which incorporates the Committee stage amendments to the Banking (Amendment) Bill. Please replace the affidavit attached to the above letter with this version.

Yours faithfully,



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AFFIDAVIT TO BE SUBMITTED IN TERMS OF SECTION 42(2) OF THE BANKING ACT

I, …………………………………………………….. of ……………………………. Being a [Buddhist / Hindu solemnly, sincerely and truly declare and affirm / Christian / Catholic / Muslim make oath and state] as follows :

(a) I am the [affirmant / deponent] above named and I [am a director / have been elected as a director / have been nominated as a director] of ……………………………… which is a licensed commercial bank / licensed specialised bank, licensed under the Banking Act, No.30 of 1988.

(b) I [affirm/state] that I possess the following academic and / or professional qualifications :

(c) I [affirm/state] that the effective experience that I possess in banking, finance, business or administration or of any other relevant discipline is as follows :

(d) I [affirm/state] that there is no finding of any regulatory or supervisory authority, professional association, any Commission of Inquiry, tribunal or other body established by law in Sri Lanka or abroad, to the effect that I have committed or have been connected with the commission of, any act which involves fraud, deceit, dishonesty or any other improper conduct;

(e) I [affirm/state] that as such I am not subject to any investigation or inquiry consequent upon being served with notice of a charge involving fraud, deceit, dishonesty or other similar criminal activity, by any regulatory authority, supervisory authority, professional association, Commission of Inquiry, tribunal or other body established by law, in Sri Lanka or abroad;

(f) I [affirm/state] that I have not been convicted by any Court in Sri Lanka or abroad in respect of a crime committed in connection with financial management or of any offence involving moral turpitude;

(g) I [affirm/state] that I am not an undischarged insolvent nor have I been declared a bankrupt in Sri Lanka or abroad;

(h) I [affirm/state] that I have not failed, to satisfy any judgment or order of any court whether in Sri Lanka or abroad, or to repay a debt;

(i) I [affirm/state] that I have not been declared by a court of competent jurisdiction in Sri Lanka or abroad, to be of unsound mind;


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(j) I [affirm/state] that I have not been removed or suspended by an order of a regulatory or supervisory authority from serving as a director, Chief Executive Officer or other officer in any bank or financial institution or corporate body, in Sri Lanka or abroad;

(k) I [affirm/state] that I have not been a director, Chief Executive Officer or held any other position of authority in any bank or financial institution –

(i) whose license has been suspended or cancelled; or

(ii) which has been wound up or is being wound up, or which is being compulsorily liquidated;

whether in Sri Lanka or abroad.

(l) I [affirm/state] that to the best of my knowledge I am a fit and proper person [to hold office as a director / to be appointed, nominated or elected as a director] of a licensed commercial bank / licensed specialised bank in terms of the provisions of Section 42 of the Banking Act as amended by Banking (Amendment) Act, No. 2 of 2005.

The averments contained herein ]were read over to the [affirmant/deponent ]who having understood the contents ] hereof and having accepted same as ] Before metrue, swore to and placed his / her signature ]at Colombo on this ……………… day ]of ……………… ]

JUSTICE OF THE PEACE


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1Ref. No. : 02 / 04 / 002 / 0012 / 002


31 March 2005

To : The CEOs of all Licensed Commercial Banks (Domestic) and all Licensed Specialised Banks

Dear Sirs,

APPOINTMENT OF DIRECTORS OF BANKS(SECTION 42 OF THE BANKING ACT, NO.30 OF 1988 AS AMENDED)

In terms of Section 42(1) of the Banking Act a person who is to be appointed, elected or nominated as a director of a licensed commercial bank or who continues as a director of such bank must be a fit and proper person to hold such office and should not be prevented from doing so by the provisions of the Banking Act or by any other written law. The Act also sets out specific matters to be taken into consideration in determining whether a person is fit and proper.

Further, in terms of Section 42(4) of the Act, all banks are required to notify the Director of Bank Supervision, details of proposed/appointed/elected/nominated directors for approval under Section 42(5). Boards of licensed commercial banks should ensure that adequate information relating to any person who is to be appointed, elected or nominated to the Board of Directors is made available to the Board before such appointment, election or nomination takes place. Furthermore, it is necessary that relevant information in respect of current directors should also be available to the Board of Directors.

For this purpose we annex hereto a draft affidavit to be obtained from all directors and persons nominated for election or appointment as directors of the bank or to be nominated to the Board. In addition to the affidavit, a declaration may also be obtained from such person to enable the bank to ascertain compliance by directors of the bank with other provisions of the Act. For this purpose a draft declaration as in Annex 2 may be used. The Secretary of each bank shall submit a copy of the affidavit and the declaration in respect of each such person to be appointed, to the Director of Bank Supervision, together with the information specified in sub-section (4) of Section 42, by the bank when approval for appointment, election or nomination of a director is sought.

With respect to current directors, the declaration and affidavit should be obtained and copies furnished to the Central Bank in respect of each director holding office, by 30 April 2005. Thereafter, the declaration and affidavit should be obtained and copies furnished to the Central Bank annually, before the Annual General Meeting of the respective bank in respect of every continuing director.

Yours faithfully,


cc – Mr. Upali De Silva Secretary-General – Sri Lanka Bankers’ Association Level 8, Ceylinco House, 69, Janadhipathi Mawatha Colombo 01.


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1Affidavit to be submitted in terms of Section 42(2) of the Banking Act

I, …………………………………………………….. of ……………………………. Being a [Buddhist solemnly, sincerely and truly declare and affirm / Christian / Catholic make oath and state / Muslim make oath and state] as follows :

(a) I am the [affirmant / deponent] abovenamed and I [am a director / have been elected as a director / have been nominated as a director] of ……………………………… which is a licensed commercial bank / licensed specialized bank, licensed under the Banking Act, No.30 of 1988.

(b) I [affirm / state] that I possess the following academic and/or professional qualifications :

(c) I [affirm / state] that the effective experience that I possess in banking, finance, business or administration or of any other relevant discipline is as follows :

(d) I [affirm / state] that there is no finding of any regulatory or supervisory authority, professional association, any Commission of Inquiry, tribunal or other body established by law in Sri Lanka or abroad, to the effect that I have committed or have been connected with the commission of, any act which involves fraud, deceit, dishonesty or any other improper conduct;

(e) I [affirm / state] that as such I am not subject to any investigation or inquiry in Sri Lanka or elsewhere by any regulatory authority, or supervisory authority, professional association, any Commission of Inquiry, tribunal or other body established by law in Sri Lanka or abroad, that I have committed or have been connected with the commission of, any act which involves fraud, deceit, dishonesty or any other improper conduct;

(f) I [affirm / state] that I have not been convicted by any Court in Sri Lanka or abroad in respect of a crime committed in connection with financial management or of any offence involving moral turpitude;

(g) I [affirm / state] that I am not an undischarged insolvent nor have I been declared a bankrupt in Sri Lanka or abroad;


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1 (h) I [affirm / state] that I have not failed, to satisfy any judgment or order of any court whether in Sri Lanka or

elsewhere, or to repay a debt;

(i) I [affirm / state] that I have not been declared by a competent court in Sri Lanka or abroad, to be of unsound mind;

(j) I [affirm / state] that I have not been removed or suspended by an order of a regulatory or supervisory authority from serving as a director, Chief Executive Officer or other officer in any bank or financial institution or corporate body, in Sri Lanka or abroad;

(k) I [affirm / state] that I have not been a director, Chief Executive Officer or held any other position of authority in any bank or financial institution –

(i) whose license has been suspended; or

(ii) which has been wound up or is being wound up, or which is being compulsorily liquidated; whether in Sri Lanka or elsewhere.

(l) I [affirm / state] that to the best of my knowledge I am a fit and proper person [to hold office as a director / to be appointed, nominated or elected as a director] of a licensed commercial bank / licensed specialised bank in terms of the provisions of Section 42 of the Banking Act as amended by Banking (Amendment) Act, No. 2 of 2005.

The averments contained herein ]were read over to the [affirmant/deponent ]who having understood the contents ] hereof and having accepted same as ] Before metrue, swore to and placed his/her signature ]at Colombo on this ……………… day ]of ……………………… ]

JUSTICE OF THE PEACE


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1Annex 2

Name of Bank: …………………………………………………

Declaration to be submitted in terms of Section 42 of the Banking Act by persons proposed to be / appointed / elected / nominated as a Director of a Licensed Bank

(with enclosures as appropriate as of ………………….)

1. Personal Details

1.1 Full name:

1.2 NIC No. / Passport No.:

1.3 Permanent Address:

1.4 Present Address:

1.5 Occupation:

2. List of close relations in terms of Section 86 of the Banking Act:

2.1 Name in full of spouse:

NIC No./Passport No. :

2.2 Names of dependent children:

Full Name NIC No. / Passport No.

1.

2.

3.

4.

3. List of entities in which director / prospective director has a substantial interest in terms of Section 86 of the Banking Act

4. Name/s of Licensed Bank/s in which he / she is or has been a member of the Board of Directors (give details of period during which such office was held)


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1 5. Accomodation, if any, presently availed by him / her or by his close relations at 2 above, and by entities at 3 above from the bank, and collateral

Declaration:

I confirm that the above information is to the best of my knowledge and belief true and complete. I undertake to keep the bank fully informed, as soon as possible, of all events which take place subsequently which are relevant to the information provided above.

Signature:

Date:

Any other explanation / information in regard to the information furnished above and other information considered relevant for assessing the suitability of the proposed / appointed director.

Remarks of Board of Directors of the Bank

Date: Signature of Company Secretary


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1My No. : 02 / 17 / 800 / 0005 / 01


20 August 2008


Dear Sirs,

PERMITTING LICENSED COMMERCIAL BANKS TO TRADE INTHE INTERNATIONAL SOVEREIGN BONDS ISSUED IN 2007 BY

THE GOVERNMENT OF SRI LANKA

This is to inform you that the Monetary Board of the Central Bank of Sri Lanka with the concurrence of the Minister of Finance and Planning has authorised, in terms of the provisions of the Banking (Off-shore Banking Scheme) Order 2000 made under sections 23, 25 and 26 of the Banking Act, No.30 of 1988 as amended, for licensed commercial banks (LCBs) to invest in the international sovereign bonds issued by the Government of Sri Lanka in 2007, in the secondary market.

Yours faithfully,

B D W A SilvaDirector of Bank Supervision


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1Ref. No. : 02 / 17 / 600 / 0009 / 001


12 September, 2008

To : The CEOs of all Licesed Commercial Banks

DESIGNATED FOREIGN CURREINCIES

This is to inform you that the Monetary Board of the Central Bank of Sri Lanka, with the approval of the Minister of Finance and Planning, has specified the New Zealand Dollar as a designated currency for foreign exchange transactions in both Domestic Banking Units and Off-shore Banking Units of Licensed Commercial Banks.

Accordingly, the Banking (Off-Shore Banking Scheme) Order 2000 dated 7th April, 2000, made under sections 23, 25 and 26 of the Banking Act, No. 30 of 1988, is hereby amended to include the New Zealand Dollar as a designated currency for off-shore banking business carried out by licensed commercial banks, and to remove the Deutsche Mark, the French Franc and the Netherlands Guilder from the Schedule of Designated Foreign Currencies.

The Banking Act, Order No. 1 of 2008 which contains the amended Schedule of Designated Foreign Currencies, is attached.

Yours faithfully,

B D W A SilvaDirector of Bank Supervision


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1Order made by the Monetary Board of the Central Bank of Sri Lanka with the approval of the

Minister made under Section 23, 25 and 26 of the Banking Act No. 30 of 1988, as amended.


Chairman of the Monetary Board /Governor of the Central Bank of Sri Lanka

Colombo12 September 2008.

BANKING ACT, Order NO.1 OF 2008Banking (off-Shore Banking Business Scheme) Order

Citation. This order may be cited as the Banking Act Order No. 1 of 2008. The Sections referred to in this order will be those of the Banking Act No. 30 of 1988, as amended.

1. The following foreign currencies set out in the Schedule to this Order are determined as the Designated Foreign Currencies under the Banking (Off-Shore Banking Business Scheme) Order.

2. The Schedule referred to in this Order, replaces the Schedule in the Banking (Off-Shore Banking Business Scheme) Order 2000, dated 7th April 2000.

schedule

Designated Foreign Currencies

(i) Australian Dollar (ii) Canadian Dollar (iii) Danish Kroner (iv) Euro (v) Hong Kong Dollar (vi) Japanese Yen (vii) New Zealand Dollar (viii) Norwegian Kroner (ix) Pound Sterling (x) Singapore Dollar (xi) Swedish Kroner (xii) Swiss Franc (xiii) United States Dollar

Designated Foreign Currencies.


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1Banking Act, No. 30 of 1988 as Last Amended by

Banking (Amendment) Act, No.33 of 1995

Banking (Off-shore Banking Scheme) Order, 2000

Order relating to off-shore banking business carried on by licensed commercial banks, made under sections 23, 25 and 26 of the Banking Act, by the Monetary Board, with the approval of the Minister.

Sgd. A. S. JayawardenaGovernor


Colombo 7th April, 2000

BANKING (OFF-SHORE BANKING SCHEME) ORDER, 2000

1. This Order may be cited as the Banking (Off-shore Banking Scheme) Order, 2000.

2. (1) An off-shore unit may, subject to this Order and to any other written law, carry on all or any of the businesses specified in paragraphs (a) to (e) of Section 25 of the Act.

(2) In accepting any contingent liability under Section 25(c) of the Act, an off-shore unit shall only engage in any or all of the following transactions–

(a) establish, open or advise letters of credit expressed in any designated foreign currency;

(b) issue or renew guarantees, indeminities or similar undertakings expressed in any designated foreign currency;

(c) acceptances expressed in any designated foreign currency.

3. Funds of an account maintained with an off-shore unit shall not be withdrawable by cheque.

4. (1) An off-shore unit may, subject to this Order and any other written law, engage in off-shore banking business specified in paragraph 2 with any one or more of the following residents–

(a) the Central Bank of Sri Lanka;

(b) a licensed commercial bank;

(c) subject to sub paragraph (3), a BOI enterprise;

Citation.

Authorised Businesses.

Withdrawal of funds.

Authorised Business with Residents.


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1

Assets and liabilities of an off-shore unit.

Particulars of executive officers and undertaking.

Books etc. off-shore units.

(d) any other resident approved by the Monetary Board in the interest of national economy, subject to such conditions as the Monetary Board may impose.

(2) Without prejudice to the rights conferred under this Order on a resident specified in subparagraph (1), an off-shore unit may, subject to any other written law, grant loans in any designated foreign currency to any resident, being an exporter of goods and services from Sri Lanka or to any resident, being a supplier of accessories to such exporter as may be approved by the Monetary Board and may discount export bills expressed in any designated foreign currency for such an exporter.

(3) An off-shore unit shall not grant a loan in foreign currency to a BOI enterprise unless the off-shore unit is satisfied that the BOI enterprise has the capacity to repay the loan in foreign currency.

5. An account maintained by a non-resident in an off-shore unit shall only be credited with funds received on inward remittances in any designated foreign currency.

6. The total assets and liabilities of an off-shore unit shall not exceed such amount as may be determined by the Monetary Board.

7. A licensed commercial bank shall–

(a) prior to commencement of off-shore banking business, furnish to the Director of Bank Supervision the names, qualifications and banking experience of all executive officers of the off-shore unit of the bank and notify forthwith any changes, if any, in such particulars thereafter; and

(b) in the case of a commercial bank incorporated outside Sri Lanka, furnish the Director of Bank Supervision, if required by the Monetary Board, a written undertaking from its Head Office stating that such bank shall provide such funds in such designated foreign currency as may be necessary to meet all obligations and liabilities incurred in carrying on of its off-shore banking business.

8. Books, other documents and records maintained by the off-shore unit of a licensed commercial bank shall be kept separate from other books, documents and records maintained by the bank and the off-shore unit shall, if so required by the Monetary Board, furnish the Central Bank information from such books, documents and records maintained by the off-shore unit.

9. In this Order–

“ BOI Enterprise” means a company with which an agreement has been entered into by the Board of Investment of Sri Lanka under Section 17 of the Board of Investment of Sri Lanka, Law No. 4 of 1978 and which has been granted approval to transact business with any off-shore unit;

Permitted deposits in an account of a non-resident.

Interpretation.


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1“ designated foreign currency” means the foreign currency set out in

the Schedule to this Order;

“ off-shore unit” means an off-shore unit of a licensed commercial bank carrying on off-shore banking business of the bank under this Act and includes any unit which carried on off-shore banking operations under the “Foreign Currency Banking Scheme” established by the Monetary Board;

“ resident” and “non-resident” shall have the same meaning assigned to them in Section 86 of the Banking Act, No. 30 of 1988.

schedule

Designated Foreign Currencies

1. Australian Dollar 2. Canadian Dollar 3. Danish Kroner 4. Deutsche Mark 5. Euro 6. French Franc 7. Hongkong Dollar 8. Japanese Yen 9. Netherland Guilder10. Norwegian Kroner11. Pound Sterling12. Singapore Dollar13. Swedish Kroner14. Swiss Franc15. United States Dollar


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1Operating Instructions

Ref. No. : EC / 04 / 2000 (D)

Department of Exchange ControlCentral Bank of Sri Lanka61 Janadhipathi MawathaP.O. Box 883Colombo 1.

7th April, 2000


OFF-SHORE BANKING BUSINESS

1. Licensed commercial banks are hereby permitted to carry on, subject to these instructions, off-shore banking business in accordance with the Banking (Off-shore Banking Scheme) Order 2000 issued under the Banking Act, No.30 of 1988 and amended by Banking (Amendment) Act, No.33 of 1995 (hereinafter referred to as the “Order”).

2. Any loan granted under paragraph 4(2) of the Order in any designated foreign currency by an off-shore unit of a licensed commercial bank to a resident, being an exporter of goods and services from Sri Lanka, other than a BOI Enterprise, or to a resident, not being a BOI Enterprise, who is a supplier of accessories to such exporter, shall be in accordance with the instructions to Authorised Dealers No. ECD/02/97 (C&F) and ECD/03/97 (C&F) dated 03.01.1997 and EC/02/98 (C&F) dated 31.07.1998* relating to foreign currency loans to direct and indirect exporters issued under the Exchange Control Act and shall not exceed such limits as may be imposed by the Central Bank of Sri Lanka and communicated to each licensed commercial bank by the Chief Accountant of the Central Bank and any reference in these operating instructions to Foreign Currency Banking Units shall be a reference to Off-Shore Units.

3. (a) An accommodation extended to a resident under paragraph 4(1) of the Order, not being an exporter or supplier of goods to such an exporter referred to in paragraph 2 of these instructions, by an off-shore unit which is authorised to engage in off-shore banking business with such resident under the Order, shall be extended solely for the operations of such resident in Sri Lanka and for no other purpose whatsoever.

(b) An accommodation granted under sub-paragraph (a) to a resident, being a licensed commercial bank or any other resident approved by the Monetary Board under paragraph 4(1)(d) of the Order, shall not exceed such amount as may be determined by the Central Bank.

4. Where under paragraph 2(2) of the Order or under paragraph 4 of that Order, an off-shore unit is authorised –

(a) to open, establish, or advise a Letter of Credit, such letter shall be opened, established or advised on behalf of a non-resident or a resident specified in paragraph 4 of the Order;

(b) to issue or renew a guarantee, indemnity or similar undertaking, such guarantee, indemnity or undertaking shall be given on behalf of a non-resident or a resident specified in paragraph 4 of the Order; and

* and EC/0�/2000 of �th April 2000 and ECD/F/D 1�88 of �th April 2000 [see chapter 1� of Foreign Exchange Manual]


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1 (c) to receive an acceptance, such acceptance shall be received for a non-resident or a

resident specified in paragraph 4 of the Order.

5. An off-shore unit shall, if so required by the Central Bank, furnish to the Central Bank, such statements or returns as may be deemed necessary in respect of any transactions carried on by such off-shore unit under these instructions.

6. In these instructions, the expressions “BOI Enterprise”, “designated foreign currency”, “off-shore unit”, “resident” and “non-resident" shall have the same meaning assigned to them in paragraph 9 of the Order.

7. (a) Previous Operating Instructions and Circulars issued in relation to the Foreign Currency Banking Scheme established by the Monetary Board and specified in the Schedule hereto are hereby revoked.

(b) All other Operating Instructions and Circulars in relation to the Foreign Currency Banking Scheme established by the Monetary Board and not revoked by sub-paragraph (a) shall continue in force and any reference in these instructions and circulars to the Foreign Currency Banking Unit shall be read and construed as if it were a reference to an Off-Shore Unit.

(c) The revocation effected by sub-paragraph (a) shall not affect -

(i) any offence committed or any penalty or liability incurred under those instructions and circulars prior to the revocation; and

(ii) any action, proceeding or thing pending or incomplete on the date of revocation, but every such action, proceeding or thing may be carried on and completed as if those instructions and circulars continue to be in force.

M. B. Dissanayake H. A. G. Hettiarachchi Chief Accountant Controller of Exchange

Schedule

(1) Circular No. 380 (FCBS 1/79) dated 02.05.1979. (2) Circular No. 381 (FCBS 2/79) dated 17.05.1979. (3) (FCBS 3/79) and Operating Instructions BC 29/79 dated 28.09.1979. (4) (FCBS 4/79) dated 29.10.1979. (5) (FCBS 5/79) dated 02.11.1979. (6) (FCBS 6/79) – BC/F 1049/79 and Operating Instructions BD 40/79 dated 10.01.1980 (7) (FCBS 7/80) – BC/F 1049/79 and Operating Instructions BD 18/80 dated 30.04.1980. (8) (FCBS 8/80) – BC/F 1049/79 and Operating Instructions BD 21/80 dated 14.05.1980. (9) (FCBS 9/84) – BC/F 1049/79 and Operating Instructions BD 23/84 dated 13.11.1984.(10) (FCBS 10/89) – BC/F 1049/79 and Operating Instructions BD 01/89 dated 31.01.1989.(11) Operating Instructions BD/15/93 dated 24.11.1993.


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1Ref. No. : 02 / 17 / 402 / 0079 / 001


May 02, 2006


Dear Sirs,

IMPLEMENTATION OF THE PROVISIONS OF PART IX (SECTIONS 72 TO 76)OF THE BANKING ACT ON ABANDONED PROPERTY

As intimated to you at the meeting of the CEOs of Licensed Commercial Banks and Licensed Specialised Banks held on 24.11.05, in terms of Section 73(1) of the Banking Act, all licensed commercial banks (LCBs) are hereby required to report “Abandoned Property” referred to in Section 72 of the Banking Act in the format determined by the Monetary Board given in Annex 1. In implementing the provisions of the Banking Act on Abandoned Property LCBs are requested to follow the guidelines at Annex 2.

The provisions of the Banking Act do not require the licensed specialized banks (LSBs) to report Abandoned Property. However, the LSBs too are requested to identify the articles that could be considered abandoned as described in Section 72 of the Banking Act and to report them using the format at Annex 1 till such time these provisions are made applicable to LSBs as well.

The first Report should contain property that would have been presumed abandoned up to 31.12.2005.


Yours faithfully,

Singed on 02/05/2006


Encl:


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1Annex 2

Guidelines on the implementation of Part IX (Section 72 to 76) of the Banking Act on Abandoned Property

The Central Bank of Sri Lanka has decided to implement the provisions of Part IX of the Banking Act with effect from 31 December 2005. These guidelines establish the procedures for handling such property.

1. IdentificationofAbandonedProperty

a. All licensed commercial banks (LCBs) should identify articles presumed to be abandoned property as described in Section 72 of the Banking Act. In general abandoned property includes the following articles in respect of which no activity has been evidenced for a period of ten years.

• Any general deposit (demand, savings or matured time deposit) with an LCB with any interest or dividend but excluding any lawful charges.

• Any funds paid towards the purchase of shares or other interests in an LCB with any interest or dividend but excluding any lawful charges.

• Any sum payable on cheques or other instruments for which the LCB is directly liable.• Any intangible personal property and any income or interest thereon held in a fiduciary capacity.• The contents of safe deposit boxes upon which the rental period has expired and of which notice has been sent by

registered post to the last known address of the lessee and the lessee has failed to respond within three years.

b. Activity in this regard is evidenced by any action taken by an owner with respect to his property, which indicates that the owner does not intend his property to be considered abandoned. Such action would include a deposit or a withdrawal in the case of a customer account, notification of change of address, payment of a safe deposit rental charge, any other written correspondence, presenting the pass book for updating etc.

2. Filing of the Report on Abandoned Property with the Central Bank of Sri Lanka (CBSL)a. All LCBs holding any abandoned property should submit a report to CBSL within six months of the end of each financial

year. The first Report should cover property that would have been presumed abandoned up to 31.12.2005. In the case of LCBs whose financial year ends on 31 March, the first report may cover the position as at 31.03.2006.

b. All reporting of abandoned property should be in accordance with the format approved by the Monetary Board given at Annex 1. Information should be recorded in alphabetical order of the owners’ last name, to the extent possible, and branchwise. Minors accounts should be reported separately. The process of identifying and completing the Report is expected to be automated by LCBs.

c. While the banks should report all property that falls within the definition of abandoned property, if there are special considerations attached to such property, e.g.: the owner having migrated or left the country for an infinite period with notice to the bank, such special consideration should be reported to CBSL.

d. Where an LCB does not hold any abandoned property to be reported as required by Section 73 of the Banking Act, the respective bank is expected to formally communicate it to CBSL. Such communication will be considered as a “Negative Report”.

e. Prior to reporting abandoned property to CBSL, the banks should make notification of it to the owner of such abandoned property, by registered mail, to the last known address of the owner giving a reasonable period to respond. Such notice should include a description of the property, a statement explaining the statutory requirements of abandoned property and the intended date that the property will be reported to CBSL if there is no response. In the case of Minors’ accounts where the banks are of the view that it is not reasonable to consider a particular account as abandoned due to its intrinsic characteristics, banks need not notify the owners/guardians of such accounts. However, the banks should report all Minors’ accounts that fall within the definition of abandoned property to CBSL with specific mention why they should not be considered as abandoned property.

f. Pursuant to the filing of a Report on Abandoned Property, a bank should maintain documents necessary to prove information submitted in the Report for a period of at least six years from the date of submitting the Report.

3. Delivery of Abandoned Property to CBSLAny further action to be taken in terms of Subsections (2) and (3) of Section 73 of the Banking Act will be notified to all LCBs in due course.

4. Publication of Notice of Abandoned Property

a. In accordance with Section 74 of the Banking Act a bank should, within thirty days of submission of the Report, required under paragraph 2.a above,• publish a notice in the Sinhala, Tamil and English daily newspapers stating the name of the owner and particulars

concerning the property; and


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1• should dispatch by registered post, a notice containing particulars of the property to the last known address of the

owner.

b. With regard to Minors’ accounts, the procedure stated in paragraph 2e. above should be followed.

5. Drilling/Opening of safe deposits

a. The bank should prepare a Safe Deposit Inventory Sheet to record details of safe deposit boxes opened. Opening of the safe custody lockers should be carried out in the presence of two responsible officers who are, inter-alia, specifically assigned with such task and one of whom should be at least at Senior Executive Level. All items found in safe deposit boxes presumed to be abandoned should be included in the Inventory Sheet without exceptions. No item should be sold, destroyed or disposed.

b. The format at Annex 3 may be used for this purpose. The Inventory Sheet should be signed by the staff conducting the inventory and returned to CBSL along with the Report on Abandoned Property.

c. All items contained in the safe deposit boxes should be itemised and kept in safe custody after the drilling/opening of safe deposit boxes.

6. The costs

The banks should attempt to comply with these guidelines in the most cost efficient manner. These costs should be charged to the owners of abandoned property only if it has been made known to the customers in a valid, enforceable and written contract between the bank and the customer, specifying the amount of the fee and the customer is notified of the charging of such fee.

7. Submission of information by licensed specialized banks (LSBs)

The provisions of the Banking Act do not require LSBs to identify and report Abandoned Property. However, LSBs are requested to identify the articles that could be considered abandoned as described in Section 72 of the Banking Act and to report them to CBSL using the format at Annex 1.

Instructions for completing the Report of Abandoned Property at Annex 1

Information should be recorded in alphabetical order of the owners’ last name, to the extent possible, and branchwise. A seperate sheet should be used for Minors accounts.

Name of Bank: Enter the name of the reporting bank.

Reporting Date: Enter the date as at when the reporting is done.

Column A: Enter the owner’s last name followed by full first name and full middle name/s. Enter information that would aid in identification such as Miss, Mr., Mrs., after the middle name.

If a single item has two or more owners, the names of all such owners must be reported with the relationship. If your records do not show an owner name for an item, enter the owner as “unknown”.

Column B: Enter the complete address available in your records. If no address is available indicate so. In the case of several owners if the address is same, the address may be entered once and indicated that it is same for others.

Column C: Enter the owner’s National Identity Card No., Passport No., date of birth or any other information that will assist in identification of an owner. These will be essential in paying claims and if known, they must be included in the Report.

Column D: Enter the description of item with sufficient detail.

Column E: Enter your identification number for each item such as Account No., Cheque No. etc.

Column F: Indicate whether the item is interest bearing.

Column G: Indicate the date when the last deposit, withdrawal or contact was made by the owner. It could also be the date a dividend became payable, cheque or draft was issued, certificate was purchased.

Column H: Indicate the nature of the last activity.

Column I: Indicate the total amount due to the owner including all interest, dividend, earned up to the reporting date without deducting any service charges.

In the case of safe deposit boxes or oth er items held for safekeeping, identify the contents and include the description of any item that has a value. For all safe deposit boxes include an inventory sheet as in Annex3.


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1Column J: Enter the amount of deductions made which should include only any lawful charges.

Column K: Indicate the nature of deduction made such as service charges, tax etc.

Column L: Indicate the net amount due after the deductions mentioned.

Column M: Indicate the terms agreed with the owner such as interest rate, payment instructions etc., that will be essential in case of payment of claims.

Also indicate any special considerations attached to such property and the date of maturity in case of term deposits.

Total: Total the Column L and enter at the bottom of each page. On the last page enter the page total and the grand total for the entire Report.

Annex 3Safe Deposit Box Inventory Sheet

Name of Bank: …………………………………………………………………………………………………………………

Reporting Year: …………………………………………………………………………………………………………………

Name of Box Owner(s): ………………………………………………………………………………………………………

Box Number: ………………………… Date Drilled: ………………………… Vault Location: ……………..………

quantity Detailed Description of Contents Any other Relevant Information

We certify that the above information is true and that no items have been removed or destroyed.

Date of Inventory:

-------------------------------- --------------------------------- ------------------------------ Signature of Bank Official Name of Official Designation

-------------------------------- --------------------------------- ------------------------------ Signature of Bank Official Name of Official Designation

Instructions for completing the Safe Deposit Box Inventory Sheet at Annex 3

Name of Bank: Enter the name of the reporting bank.

Reporting Date: Enter the date as at the date of reporting.

Name of the Box Owner(s): Indicate the full name(s) of the owner(s) including information useful for owner identification.

Box Number: Enter the safe deposit box number.

Date Drilled: Enter the date the safe deposit box was opened.

Vault Location: Indicate where the vault containing the safe deposit is located.

quantity & Detailed Description: Indicate the nature of each item contained in the safe deposit box with the quantities.

Date of Inventory: The date on which the inventory was taken.


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1Ref. No. : BS/14/88 Vol. IV

16 October, 1990


IMPLEMENTATION OF PART V OF BANKING ACT

All commercial banks are hereby informed that the Honourable Minister of Finance has announced, in the Gazette Extraordinary No.628/10 dated 18th September 1990, 20th September 1990 as the date on which the provisions of Part V of the Banking Act No.30 of 1988 shall come into operation.

The formats to be used by commercial banks in the preparation of Balance Sheets and Profit & Loss Accounts specified under section 38(3) of the Banking Act will be forwarded to you shortly.

Yours faithfully,

Sgd. P. T. Sirisena



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1Ref. No. : BS/38/90

Bank Supervision DepartmentCentral Bank of Sri Lanka8th Floor – Renuka Building41 Janadhipathi MawathaColombo 1.

30 April 1998.


Dear Sir,

LIST OF qUALIFIED AUDITORS

S.38 A OF THE BANKING ACT NO.30 OF 1988 AS AMENDED BY ACT NO.33 OF 1995

We refer to section 38a of the Banking Act, No.30 of 1988 as amended by Act No.33 of 1995 and enclose herewith a list of qualified auditors compiled in accordance with S.38 A(1) of the Act.

Your attention is drawn to S.38a (2) and S.39(1) of the Act which requires that the appointment of an auditor to audit the accounts of your Bank from the list transmitted to you under S.38a(1) by the Director of Bank Supervision.

You are required to comply with this provision when you next appoint an auditor in terms of S.39 of the Banking Act, No.30 of 1988 as amended by Act No.33 of 1995.


Yours faithfully,




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1ListofQualifiedAuditors

S 38 A (1) of the Banking Act, No. 30 of 1988 as amended by Act, No.33 of 1995

Name Address

1. Ernst & Young 201 De Saram Place P.O. Box 101 Colombo 10.

2. K P M G Ford Rhodes Thornton & Co. 32A Sir Mohamed Macan Marker Mawatha P.O. Box 186 Colombo 3.

3. Pricewaterhouse Coopers P.O. Box 918 100, Braybrooke Place Colombo 2.

4. SJMS Associates 2 Castle Lane Colombo 4.

5. H L B Edirisinghe & Co. 45 Braybrooke Street Colombo 2

6. B R de Silva & Co. 22/4 Vijaya Kumaratunga Mawatha Colombo 5.

7. Kreston MNS & Co. P.O. Box 210 50/2 Sir James Peiris Mawatha Colombo 2.

8. BDO Hathy ‘Charter House’ 65/2 Sir Chittampalam A Gardiner Mawatha P.O. Box 962 Colombo 2.

9. B V Fernando & Co. 78-3 1/1 Rodney Street Colombo 8

10. Tissa Fernando 519/2B Elvitigala Mawatha Colombo 5.


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1Ref. No. : BS/38/90

Bank Supervision Department8th Floor, Renuka Building 41, Janadhipathi MawathaColombo 01.

2nd June, 1998

Dear Sir,

PREPARATION OF ANNUAL AUDITED ACCOUNTS – SECTION 38(4)OF THE BANKING ACT NO. 30 OF 1988 AS AMENDED BY

BANKING AMENDMENT ACT NO. 33 OF 1995

We refer to Section 38(3) of Part V of the Banking Act in terms of which, the Monetary Board is empowered to specify the form of the Balance Sheet and Profit & Loss Account of Licensed Commercial Banks in Sri Lanka.

In this regard, Licensed Commercial Banks are informed that the Central Bank of Sri Lanka has revised the Prescribed Format for the preparation and publication of Annual Audited Accounts of Licensed Commercial Banks by incorporating SLAS 23. The Revised Prescribed Format has already been sent to you for your comments/observations.

I wish to advise you that in terms of Part V of the Banking Act, Licensed Commercial Banks are required to prepare and exhibit their annual audited accounts according to this revised format. The revised Prescribed Format which is effective from 1st January, 1998 is enclosed herewith.


Yours faithfully,




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1ProfitandLossAccountfortheyearended31stDecember19......

BANK GROUP

Note Curr. Yr. Prev. Yr. Curr. Yr. Prev. Yr. 19…… 19…… 19…… 19……

(Rs.) (Rs.) (Rs.) (Rs.)

Income 2 …………… …………… …………… …………… ======== ======== ======== ========

Interest Income 3 …………… …………… …………… ……………

Interest Expense 4 …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

Net Interest Income

Other Income 5 …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

Less : Operating Expenses 6 Personnel Costs …………… …………… …………… …………… Premises, Equipment and Establishment Expenses …………… …………… …………… …………… Fee and Commission Expenses …………… …………… …………… …………… Loan Loss Provision …………… …………… …………… …………… Provision for Staff Retirement Benefits …………… …………… …………… …………… Other Overhead Expenses …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

OperatingProfits

Share of Associate Companies Profits before Taxation 7 …………… …………… …………… ……………

Profit on Ordinary Activities before tax Less : Tax on profits on Ordinary Activities 8 …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

Profits on Ordinary Activities after tax Less : Minority Interests …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

Extraordinary Items 9 …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

Retained Profit/(Accumulated Loss) brought forward …………… …………… …………… ……………

Prior Year Adjustments 10 …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

ProfitAvailableforAppropriation

Appropriations

Transfers to Reserves …………… …………… …………… ……………

Transfer to Reserve Fund …………… …………… …………… ……………

Dividends 11 …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

Retained Profit Carried Forward

======== ======== ======== ========

Earnings per share 12

======== ======== ======== ========


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1Balance Sheet as at 31st December 19……

BANK GROUP

Note Curr. Yr. Prev. Yr. Curr. Yr. Prev. Yr. 19…… 19…… 19…… 19……

(Rs.) (Rs.) (Rs.) (Rs.)

ASSETS

Cash and Short Term Funds 13 …………… …………… …………… ……………Balances with Central Bank 14 …………… …………… …………… ……………Treasury Bills and other bills eligible for rediscounting with Central Bank 15 …………… …………… …………… ……………Government and other securities held for dealing purposes 16 …………… …………… …………… ……………Placements with and loans to other Banks and Finance Companies 17 …………… …………… …………… ……………Bills of Exchange 18 …………… …………… …………… ……………Loans and Advances 19 …………… …………… …………… ……………Lease Rentals Receivable 20 …………… …………… …………… ……………Investment Securities 22 …………… …………… …………… ……………Investments in Associates and subsidiaries 23 …………… …………… …………… ……………Group Balances Receivable 24 …………… …………… …………… ……………Fixed Assets 25 …………… …………… …………… ……………Other Assets 26 …………… …………… …………… ……………Intangible Assets 27 …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ========

LIABILITIES

Deposits 28 …………… …………… …………… ……………Borrowings 29 …………… …………… …………… ……………Bills & Other Acceptances Payable …………… …………… …………… ……………Group Balances Payable 30 …………… …………… …………… ……………Deferred Tax 31 …………… …………… …………… ……………Other Liabilities 32 …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

SHAREHOLDERS’ FUNDS

Share Capital / Assigned Capital 33 …………… …………… …………… ……………Statutory Reserve Fund 34 …………… …………… …………… ……………Reserves 35 …………… …………… …………… ……………

––––––––– ––––––––– ––––––––– –––––––––

TOTAL LIABILITIES & SHAREHOLDERS’ FUNDS ======== ======== ======== ========

Commitments and Contingencies 36 ======== ======== ======== ========


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1Cash Flow Statement for the Year Ended 31st December 19……

BANK GROUP

Curr. Yr. Prev. Yr. Curr. Yr. Prev. Yr. 19…… 19…… 19…… 19……

(Rs.) (Rs.) (Rs.) (Rs.)Cash Flows from Operating ActivitiesInterest received …………… …………… …………… ……………Fees and Commission Receipts …………… …………… …………… ……………Interest Payments …………… …………… …………… ……………Exchange Income …………… …………… …………… ……………Receipts from other Operating Activities …………… …………… …………… ……………Cash Payments to Employees and Suppliers …………… …………… …………… ……………Payments on Other Operating Activities …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––Operating Profit before Changes in Operating Assets

(Increase)/Decrease in Operating Assets :Funds Advanced to Customers …………… …………… …………… ……………Other Short-term Securities …………… …………… …………… ……………

Increase/(Decrease) in Operating Liabilities :Deposits from Customers …………… …………… …………… ……………Negotiable Certificates of Deposit …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

Net Cash from Operating Activities before Income Tax

Income Tax Paid …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––Net Cash from Operating Activities ======== ======== ======== ========

Cash Flows from Investing ActivitiesDividends Received …………… …………… …………… ……………Proceeds from Sales of Non-Dealing Securities …………… …………… …………… ……………Purchase of Non-Dealing Securities …………… …………… …………… ……………Purchase of Property, Plant & Equipment …………… …………… …………… ……………Proceeds from Sale of Property, Plant and Equipment …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––Net Cash from Investing Activities ======== ======== ======== ========

Cash Flows from Financing ActivitiesIssue/(Redemption) of Shares …………… …………… …………… ……………Increase/(Decrease) of Long Term Borrowings …………… …………… …………… ……………Net Increase in Other Borrowings …………… …………… …………… ……………Dividends Paid …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––Net Cash from Financing Activities ======== ======== ======== ========

Net Increase in Cash and Cash Equivalents …………… …………… …………… ……………Cash and Cash Equivalents at Beginning of the year …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––Cash and Cash Equivalent at end of the year ======== ======== ======== ========Reconciliation of Cash and Cash Equivalents At Beginning of the year At End of the yearCash and Short Term Funds …………… …………… …………… ……………Balances with Central Bank …………… …………… …………… ……………Government of Sri Lanka Treasury Bills …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ========


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1NOTES TO THE ACCOUNTS AS AT31st December 19……

1. SIGNIFICANT ACCOUNTING POLICIES

1.1 GENERAL

1.1.1 Accounting Convention The Balance Sheet, Profit & Loss Account and Cash Flow Statement are prepared in conformity with generally accepted ac-

counting principles and the Sri Lanka Accounting Standards (SLAS) laid down by the Institute of Chartered Accountants of Sri Lanka (ICASL) applied consistently on a historical cost/modified historic cost basis. Where appropriate, the policies are explained in the succeeding notes.

1.1.2 Basis of Consolidation (a) The Group Financial Statements include the consolidated results, assets and liabilities of the Bank and its subsidiaries

and associates made upto their respective financial year ends. The interests of outside shareholders of the subsidiar-ies in the net assets, and their proportion of the results are grouped separately in the Consolidated Balance Sheet and Profit & Loss Account respectively, under the heading minority interests. (SLAS.26)

(b) In the Group Financial Statements, investments in associate companies are accounted for on the equity method of accounting. Under the equity method of accounting the Group’s share of profits and losses of the investee companies is accounted for in the Consolidated Profit and Loss account for the year. The car-rying value of the investment in the Consolidated Balance Sheet is thereby increased or decreased to recog-nise the Group’s share of retained profits and losses of the investee companies since the date of acquisition. (SLAS 27)

1.1.3 Foreign Currency Translation (SLAS 21) (a) Assets and liabilities in foreign currencies are translated at the middle rate of exchange ruling on the date of the Bal-

ance Sheet except as indicated in (b) below. Translation gains and losses are dealt with through the Profit & Loss Ac-count.

(b) Forward exchange contracts are valued at the forward market rates ruling on the date of the Balance Sheet. Unreal-ized losses are dealt with through the Profit & Loss Account whereas unrealized gains are deferred in other liabilities.

1.1.4 Taxation Provision for taxation is made on the basis of the profit for the year as adjusted for taxation purposes in accordance with the

provisions of the Inland Revenue Act, No.28 of 1979 and amendments thereto (SLAS 14).

1.1.5 Deferred Taxation Deferred taxation is provided on the liability/deferral (whichever is applicable) method and the balance of the Deferred

Taxation Account represents income tax applicable to the difference between the written down values for tax purposes of the assets on which depreciation allowances are claimed and the net book value of such assets. (SLAS 14).

1.2 Assets and Bases of their Valuation

1.2.1 Advances to Customers (a) Advances to customers are stated in the Balance Sheet net of provisions for possible loan losses and also net of inter-

est which is not accrued to revenue. (b) Specific provisions for possible loan losses are based on a continuous review of all advances. These provisions relate

to identified bad and doubtfl advances.

1.2.2 Investments (SLAS 22) Specify the accounting policy followed on valuation of dealing and investment securities in accprdance with SLAS 22.

1.2.3 Fixed Assets (SLAS 18) (a) Fixed Assets are recorded at cost or valuation together with any incidental expenses thereon. The assets are stated at

cost less accumulated depreciation which is provided for on the basis specified in (b) below. (b) Depreciation is provided at the following rates on a straight-line basis over the estimated lives of different types of as-

sets. Leasehold Properties Over the period of lease

Buildings ... per annum Motor Vehicles ... per annum Computer Equipment ... per annum Office Equipment, Furniture & Fittings ... per annum Full depreciation is provided on the assets purchased and used during the year. Depreciation is not provided for freehold land.


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1 1.3 Liabilities and Provisions

1.3.1 Commitments & Contingencies All discernible risks are accounted for in determining the amount of other liabilities.

1.3.2 PensionsandRetirementBenefits(SLAS16) The bank has a non-contributory pension scheme for the members of the staff. The bank’s policy is to fund the pension re-

serve annually from post tax profits by appropriating a sum which, in the management’s opinion, is sufficient to meet future pension commitments. An actuarial valuation, at least every five years, is undertaken to ascertain the full liability and any shortfall of the pension fund would be adjusted accordingly.

OR The bank operates an approved pension fund for the payment of pensions and monthly contributions are made to the pen-

sion fund based on a percentage of the gross emoluments excluding certain allowances. The percentage of contributions was determined by an independent actuary and retirement benefits are provided for all members of the permanent staff.

OR Provisions are not made in the accounts for gratuities to employees, who complete 5 or more years of continuous service,

payable under the payment of Gratuities Act, No.12 of 1983, as the bank has its own non-contributory pension scheme in force.

1.4 ProfitandLossAccount

1.4.1 Revenue Recognition Interest Income Interest income is recognised on an accrual basis. Interest ceases to be taken into revenue when the recovery of interest or

principal is in arrears for over three (3) months. Thereafter, interest on advances is accounted for on a cash basis. Lease Income All leases are financial leases. As such, the income recognised is the interest component of the lease rentals receivable dur-

ing the year. The excesses of aggregate rentals receivable over the cost of the leased asset constitutes the total unearned income. The un-

earned income is taken into revenue over the term of the lease, commencing from the month in which the lease is executed, in proportion to the remaining balance of the lease.

1.4.2 TerminalBenefits Pension costs are charged to the Profit and Loss Account in the year in which such costs are determined. The actual amounts paid as pensions and retirement gratuities are charged to the Pension Fund.

1.4.3 Extraordinary Items Extraordinary items are those derived from events or transactions outside the ordinary course of business and which are ma-

terial and are not expected to recur frequently or regularly.

2. INCOME BANK GROUP Curr. Yr. Prev. Yr. Curr. Yr. Prev. Yr. (Rs.) (Rs.) (Rs.) (Rs.)

Gross Income …………… …………… …………… …………… Less : Turnover based taxes …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– ––––––––– ======== ======== ======== ========

Interest Income (3) ............... ............... ............... .............. Other Income (5) ............... ............... ............... .............. ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ========

3. INTEREST INCOME

Loans and Advances …………… …………… …………… …………… Treasury Bills & Placement with Other Banks …………… …………… …………… …………… Other Interest Income …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ========


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1 4. INTEREST EXPENSE

BANK GROUP Curr. Yr. Prev. Yr. Curr. Yr. Prev. Yr. (Rs.) (Rs.) (Rs.) (Rs.)

Deposits …………… …………… …………… …………… Borrowings and Refinance …………… …………… …………… …………… Treasury bills repurchased …………… …………… …………… …………… Others …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ======== 5. OTHER INCOME

Net Foreign Exchange Gain …………… …………… …………… …………… Dividend Income from Securities : Quoted …………… …………… …………… …………… Unquoted …………… …………… …………… …………… Dividend Income from Investments in Associates/Subsidiaries: Quoted …………… …………… …………… …………… Unquoted …………… …………… …………… …………… Fee and Commission Income …………… …………… …………… …………… Gains/Loss from dealing securities …………… …………… …………… …………… Gains/Loss from Investment Securities …………… …………… …………… …………… Others …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ======== 6. OPERATING EXPENSES

Operating Expenses include the following: Directors’ Emoluments …………… …………… …………… …………… Auditors’ Remuneration …………… …………… …………… …………… Depreciation …………… …………… …………… …………… Expenses on litigation …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ========

7. SHARE OF ASSOCIATE COMPANIES PROFITS BEFORE TAX - BREAK UP

Name of Company GROUP

Current Previous Holding Year Year

(Rs.) (Rs.)

…………… …………… …………… …………… …………… …………… ––––––––– –––––––––

======== ======== 8. TAX ON PROFITS ON ORDINARY ACTIVITIES


(a) Charge to Taxation is as follows :– Taxation based on profits for the year …………… …………… …………… …………… Transfer to/from Deferred Taxation …………… …………… …………… …………… (Over)/under Provision in Previous years …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ========

Income tax on profits has been computed at the rate of …… on the taxable income of the Bank plus a surcharge of …… on the in-come tax payable.


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1 (b) In computing the liability to taxation, credit has been taken for investment relief amounting to Rs. ………… granted under

Section(s) ………… of the Inland Revenue Act, No. 28 of 1979 in respect of the following investments :

..............................................

..............................................

..............................................

If the investments mentioned are disposed of (other than by the dissolution or cessation of business by the Investor Company) on or before …………………, the Company may be liable to an additional assessment of income tax of the said amount in respect of the year(s) of assessment ………………………

OR

Investment relief amounting to Rs. ……………… granted under Section(s) …………… of the Inland Revenue Act, No. 28 of 1979 in respect of the following investments has been credited to the Investment Relief Reserve :

..............................................

..............................................

If the investments mentioned are disposed of (other than by the dissolution or cessation of business by the Investor Company) on or before ....................., the Company may be liable to an additional assessment of income tax of the said amount in respect of the year(s) of assessment ...............

9. EXTRAORDINARY ITEMS The nature, particulars and amount of extraordinary items.

10. PRIOR YEAR ADJUSTMENTSThe details of any restatement of retained profits brought forward on account of prior year adjustments.

11. DIVIDENDS

Inteirm Final 19…… Paid Proposed Total (%) (%) (Rs.) (Rs.) Net dividends …………… …………… …………… …………… Tax deducted at source …………… …………… …………… ……………

––––––––– ––––––––– ––––––––– –––––––––

Gross Dividends ======== ======== ======== ========

12. EARNINGS PER SHARE

Earnings per share has been calcultaed by dividing profit after taxation and minority interest but before extraordinary items by the ordi-nary shares in issue as at 31st December 19……

13. CASH AND SHORT TERM FUNDS


Cash in Hand and Balances with Banks …………… …………… …………… …………… Money at Call and Short Notice …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ========

14. BALANCES WITH CENTRAL BANK

Cash balance is required to be maintained with the Central Bank of Sri Lanka according to statutory requirements. At present the mini-mum cash reserve requirement is 12% of the deposit liabilities.

15. TREASURY BILLS AND OTHER BILLS ELIGIBLE FOR REDISCOUNTING WITH THE CENTRAL BANK

Treasury bills held under repurchase agreements …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ========


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116. GOVERNMENT AND OTHER SECURITIES HELD FOR DEALING PURPOSES


Quoted …………… …………… …………… …………… Unquoted …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– ––––––––– Total ======== ======== ======== ======== 16.1 quoted No. of Cost Market No. of Cost Market Ordinary Current Value Ordinary Previous Value Shares Year Curr. Yr. Shares Year Prev. Yr. (a) Bank …………………………… …………… …………… …………… …………… …………… …………… …………………………… …………… …………… …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ======== ======== ======== (b) Group …………………………… …………… …………… …………… …………… …………… …………… …………………………… …………… …………… …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ======== ======== ======== 16.2 Unquoted No. of Cost Market No. of Cost Market Ordinary Current Value Ordinary Previous Value Shares Year Curr. Yr. Shares Year Prev. Yr. (a) Bank …………………………… …………… …………… …………… …………… …………… …………… …………………………… …………… …………… …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ======== ======== ======== (b) Group …………………………… …………… …………… …………… …………… …………… …………… …………………………… …………… …………… …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ======== ======== ========

17. PLACEMENTS WITH AND LOANS TO OTHER BANKS AND FINANCE COMPANIES


Banks …………… …………… …………… …………… Finance Companies …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ========18. BILLS OF EXCHANGE

Export Bills …………… …………… …………… …………… Import Bills …………… …………… …………… …………… Local Bills …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– ––––––––– Less : Provision for Bad Debts …………… …………… …………… …………… Interest in Suspense …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ========


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119. LOANS AND ADVANCES BANK GROUP Curr. Yr. Prev. Yr. Curr. Yr. Prev. Yr. (Rs.) (Rs.) (Rs.) (Rs.)

Overdrafts …………… …………… …………… …………… Trust Receipt Loans …………… …………… …………… …………… Staff Loans …………… …………… …………… …………… Refinance Loans …………… …………… …………… …………… Other Loans …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– ––––––––– Less : Loan Loss Provision …………… …………… …………… …………… Interest in Suspense …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ========

20. LEASE RENTALS RECEIVABLES

Total Rentals Receivable …………… …………… …………… …………… Less : Unearned Income …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– ––––––––– Less : Provision for Bad & Doubtful …………… …………… …………… …………… Interest in Suspense …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ========

21. MOVEMENTS IN THE PROVISIONS FOR LOAN LOSSES Provisions against advances Suspended

Specific General Total Interest (Rs.) (Rs.) (Rs.) (Rs.) As at 01/01/19… …………… …………… …………… …………… Amounts written off …………… …………… …………… …………… Recoveries of advances written off in previous year …………… …………… …………… …………… Charged to the profit & Loss A/c. …………… …………… …………… …………… Interest suspended during the year …………… …………… …………… …………… Suspended interest recovered …………… …………… …………… …………… As at 31/12/19… …………… …………… …………… ……………

21.1 Analysis of provision for loan losses and interest in suspense Loan Loss Interest in

Provision Suspense (Rs.) (Rs.) Bills of Exchange …………… …………… …………… …………… Loans and Advances …………… …………… …………… …………… Lease Rental Receivable …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ========

21.2 Non performing assets included in the Bills of Exchange, loans and advances and lease rentals receivables on which interest is not being accrued are as follows:


Bills of Exchange …………… …………… …………… …………… Loans and Advances …………… …………… …………… …………… Lease Rental Receivable …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ========


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1 21.3 Concentration of Credit Risk

Sectorwise analysis of bank’s credit portfolio given below reflects the bank’s exposure to credit risk in the various sectors of the economy.

Current year Previous Year (Rs.) (Rs.)

Food, Beverages and Tobacco ………………… ………………… Agriculture, agro business and fisheries ………………… ………………… Textiles and wearing apparel ………………… ………………… Wood and paper products ………………… ………………… Rubber and leather products ………………… ………………… Metals, chemicals and engineering ………………… ………………… Hotels ………………… ………………… Services ………………… ………………… Other ………………… …………………

22. INVESTMENT SECURITIES


Quoted …………… …………… …………… …………… Unquoted …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– ––––––––– Total ======== ======== ======== ======== 22.1 quoted

No. of Cost Market No. of Cost Market Ordinary Current Value Ordinary Previous Value Shares Year Curr. Yr. Shares Year Prev. Yr. (a) Bank …………………………… …………… …………… …………… …………… …………… …………… …………………………… …………… …………… …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ======== ======== ======== (b) Group …………………………… …………… …………… …………… …………… …………… …………… …………………………… …………… …………… …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ======== ======== ========

22.2 Unquoted

No. of Cost Market No. of Cost Market Ordinary Current Value Ordinary Previous Value Shares Year Curr. Yr. Shares Year Prev. Yr. (a) Bank …………………………… …………… …………… …………… …………… …………… …………… …………………………… …………… …………… …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ======== ======== ======== (b) Group …………………………… …………… …………… …………… …………… …………… …………… …………………………… …………… …………… …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ======== ======== ========


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123. INVESTMENTS IN ASSOCIATES AND SUBSIDIARIES

23.1 Investment in subsidiaries – By Bank

Subsidiary Principal % Cost Market % Cost Market Company Activity Holding Current Value Holding Previous Value Year Curr. Yr. Year Prev. Yr. ………………………… ……………………………… ………… ………… ………… ………… ………… ………… ………………………… ……………………………… ………… ………… ………… ………… ………… ………… ––––––– ––––––– ––––––– ––––––– ––––––– –––––––

====== ====== ====== ====== ====== ====== 23.2 Investments in Associate Companies

(a) By Bank

Principal % Cost Market % Cost Market Company Activity Holding Current Value Holding Previous Value Year Curr. Yr. Year Prev. Yr. ………………………… ……………………………… ………… ………… ………… ………… ………… ………… ………………………… ……………………………… ………… ………… ………… ………… ………… ………… ––––––– ––––––– ––––––– ––––––– ––––––– –––––––

====== ====== ====== ====== ====== ====== (b) By the Group As at Inrease in Share of Profits As at 01.01. …… Investment Net of Dividend Received 31.12. …… Company (Rs.) (Rs) (Rs) (Rs.) ………………………………… ……………… ……………… ………………………………… ………………… ………………………………… ……………… ……………… ………………………………… ………………… ………………………………… ……………… ……………… ………………………………… …………………

24. GROUP BALANCES RECEIVABLE BANK GROUP Name of Company Curr. Yr. Prev. Yr. Curr. Yr. Prev. Yr. (Rs.) (Rs.) (Rs.) (Rs.) ……………………………………………………………………… …………… …………… …………… …………… ……………………………………………………………………… …………… …………… …………… …………… ……………………………………………………………………… …………… …………… …………… ……………

25. FIXED ASSETS

(a) Bank

Land and Equipment/ Motor Total Buildings Furniture Vehicles 31. 12. …… 31. 12. …… (Rs.) (Rs.)

Cost/Valuation Balance as at ....... (Previous year) …………… …………… …………… …………… ……………Additions for the year …………… …………… …………… …………… ……………

Disposals during the year …………… …………… …………… …………… ……………Excess on Revaluation …………… …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– ––––––––– –––––––––Accumulated DepreciationBalance as at ....... (Previous year) …………… …………… …………… …………… ……………Charge for the year …………… …………… …………… …………… ……………Disposals (…………..) (…………..) (…………..) (…………..) (………….)Revaluation adjustment …………… …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– ––––––––– –––––––––Net Book Value as at 31.12. …… – Current Year …………… …………… …………… …………… ……………Net Book Value as at 31.12. …… – Previous Year …………… …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ======== ========Capital Work-in-Progress ======== ======== ======== ======== ========


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1 (b) Group

Land and Equipment/ Motor Total Buildings Furniture Vehicles 31. 12. … 31. 12. … (Rs.) (Rs.)

Cost/Valuation Balance as at ....... (Previous year) …………… …………… …………… …………… ……………Additions for the year …………… …………… …………… …………… ……………

Disposals during the year …………… …………… …………… …………… ……………Excess on Revaluation …………… …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– ––––––––– –––––––––Accumulated DepreciationBalance as at ....... (Previous year) …………… …………… …………… …………… ……………Charge for the year …………… …………… …………… …………… ……………Disposals (…………..) (…………..) (…………..) (…………..) (………….)Revaluation adjustment …………… …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– ––––––––– –––––––––Net Book Value as at 31.12. …… – Current Year …………… …………… …………… …………… ……………Net Book Value as at 31.12. …… – Previous Year …………… …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ======== ========Capital Work-in-Progress ======== ======== ======== ======== ========

Optional Notes

25.1 Leasehold Premises of Rs. ………… shown under land & buildings, is amortised over the period of lease of ……… years.

25.2 The Bank carried our a revaluation of its ……………… by ……………………, a professional valuer on ………… 19… .

26. OTHER ASSETS BANK GROUP Curr. Yr. Prev. Yr. Curr. Yr. Prev. Yr. (Rs.) (Rs.) (Rs.) (Rs.)

Deposits & Prepayments …………… …………… …………… …………… Others …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ========

27. INTANGIBLE ASSETS

Goodwill …………… …………… …………… …………… Deferred Expenditure …………… …………… …………… …………… Others …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ========

28. DEPOSITS

Demand Deposits …………… …………… …………… …………… Savings Deposits …………… …………… …………… …………… Time Deposits …………… …………… …………… …………… Certificates of Deposit …………… …………… …………… …………… Others …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ========


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1 BANK GROUP Curr. Yr. Prev. Yr. Curr. Yr. Prev. Yr. (Rs.) (Rs.) (Rs.) (Rs.)

Deposits from Non-bank customers …………… …………… …………… …………… Deposits from Banks …………… …………… …………… …………… Deposits from Finance Companies …………… …………… …………… …………… Other Money Market Deposits …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ========

29. BORROWINGS

Call Money Borrowings …………… …………… …………… …………… Borrowings under Repos …………… …………… …………… …………… Refinance Borrowings …………… …………… …………… …………… Debentures …………… …………… …………… …………… Other borrowings …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ========

Due within one year …………… …………… …………… …………… 1-5 years …………… …………… …………… …………… After five years …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ========

29.1 Assets Pledged as SecurityDisclose the aggregate amount of secured liabilities and the nature and carrying amount of the assets pledged as security.

30. GROUP BALANCES PAYABLE

Name of Company ……………………………………………………………………… …………… …………… …………… …………… ……………………………………………………………………… …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ========

31. DEFERRED TAXATION

Balance B/F …………… …………… …………… …………… Increase/(Decrease) in Provision …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ========

32. OTHER LIABILITIES

Accrued Expenditure …………… …………… …………… …………… Dividends Payable …………… …………… …………… …………… Current Taxation …………… …………… …………… …………… Provision for Gratuities …………… …………… …………… …………… Others …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ========


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133. SHARE CAPITAL BANK GROUP Curr. Yr. Prev. Yr. Curr. Yr. Prev. Yr. (Rs.) (Rs.) (Rs.) (Rs.)

Authorised ……… Ordinary Shares of Rs. 10/- each …………… …………… …………… …………… ======== ======== ======== ========

Isued & Fully Paid

Balance B/F ……… Ordinary Shares of Rs. 10/- each …………… …………… …………… ……………

Issued during the year ……… Ordinary Shares of Rs 10/- each …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ========

34. STATUTORY RESERVE FUND

Balance as at 1st January 19…… …………… …………… …………… …………… Add : Transfers during the year …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– ––––––––– Balance as at 31st December 19…… ======== ======== ======== ========

35. RESERVES Disclose the movement in all reserve balances.

36. COMMITMENTS AND CONTINGENCIES

(a) In the normal course of business, the Bank makes various commitments and incurs certain contingent liabilities with legal recourse to its customers. No material losses are anticipated as a result of these transactions.

(b) Acceptances …………… …………… …………… …………… Stand by letters of credit …………… …………… …………… …………… Guarantees …………… …………… …………… …………… Bonds and Warranties …………… …………… …………… …………… Documentary Credit …………… …………… …………… …………… Bills for Collection …………… …………… …………… …………… Forward Exchange Contracts (Net) …………… …………… …………… …………… Others …………… …………… …………… …………… ––––––––– ––––––––– ––––––––– –––––––––

======== ======== ======== ========

(c) Litigations against the Bank

(d) Capital expenditure approved by the Board of Directors, for which provision has not been made in these accounts, amounted to approximately –

Approved and Contracted for …………… …………… …………… …………… ======== ======== ======== ========

Approved but not Contracted for …………… …………… …………… …………… ======== ======== ======== ========

37. POST BALANCE SHEET EVENTS (SLAS 12)

38. DIRECTORS’ INTEREST IN CONTRACTS

39. RELATED PARTY TRANSACTIONS Disclose the related party transactions in accordance with the requirements of SLAS 30 and SLAS 23.

40. MATURITY ANALYSISAn analysis of the interest bearing assets and liabilities based on the remaining period at the Balance Sheet date to the respective contrac-tual maturity dates is as follows :


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1 Upto 3 to 12 1 to 3 3 to 5 More than 3 Months Months Years Years 5 years (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) __________ ________ _________ _________ _________

Placements with and loans to other Banks and Finance Companies

Bills of ExchangeLoans and AdvancesLease Rental Receivables

DepositsBorrowings

41. TRUST ACTIVITIESDisclose the significant trust activities undertaken by the Bank and an indication of the extent of those activities and the potential liability if it fails in its fiduciary duties.

42. SIGNIFICANT RISKS ASSOCIATED WITH THE BANK’S OPERATIONS

I. A statement enumerating the following risks to which the bank is exposed :– (a) Credit risk, including concentration of credit risk, credit risk to bank counterparties and related party credit risk (b) Foreign Exchange Risk (c) Interest rate risk (d) Liquidity Risk (e) Any other material risks associated with the bank’s operations.

The statement should include a brief description of the way in which the banking risks specified above are managed and controlled and should cover the following aspects :–

(a) an explanation of the nature of the risk and the activities of the Bank which give rise to that risk; (b) a general description of the methods used to identify and monitor exposure to the risk, including the frequency with which ex-

posures are monitored; and (c) a general description of the systems and procedures for controlling the risk, including, where applicable, whether exposure

limits are employed, any policies with respect to collateral or other security, and any policies on the use of Financial Instru-ments to mitigate or hedge risks.

II. Disclosure is also required, to the effect that directors are responsible for maintaining a proper system of internal controls to meet the following objectives :

1. efficiency and effectiveness of operations (operational objectives) 2. reliability and completeness of financial and management information (information objectives); and 3. compliance with applicable laws and regulations (compliance objective)

An outline of the procedures that the directors have established and which are designed to provide an effective internal control system, apart from the procedures described under risk management, should also be given.


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1Ref. No. : 02 / 05 / 006 / 0100 / 001

Bank Supervision Department28th October 2003


Dear Sir / Madam,

DISPLAY OF INTEREST RATES AND EXCHANGE RATES

The Central Bank of Sri Lanka welcomes the efforts made by banks to publish their deposit and lending rates. You would no doubt appreciate that adequate market information is vital for improving market efficiency and in promoting healthy competition.

As another step forward in this direction, all licensed commercial banks and specialised banks are requested to compile a representative list of their interest rates on deposits and advances and their buying and selling rates for foreign currencies and to display such information to the general public in all branches and other banking outlets. You would recall that we agreed at an earlier Bank Managers’ Meeting to follow this practice, but it is observed that not all banks adequately do so.

All licensed commercial banks and specialised banks are informed that the display of interest rates and exchange rates of banks should commence from 1st January, 2004 the latest. A format suggested for the display of information is enclosed herewith.

Please forward a copy of the list of interest rates and exchange rates displayed to this Department periodically as and when it is revised.

Yours faithfully,Director of Bank Supervision

Suggested Format for the Display of Interest Rates and Exchange Rates

Bank ………………………………

Interest Rates on Deposits [per cent per annum] Rate as at ……

Savings Deposits Fixed Deposits - 12 months Interest payable monthly Interest payable at maturity NRFC Savings Deposits - US Dollar - Sterling Pound NRFC One Year Fixed Deposits - US Dollar - Sterling Pound Interest Rates on Advances [per cent per annum] Rate as at ……

Export Bill Finance - Rupee FacilitiesImport Bill Finance - Rupee FacilitiesLease FinanceLending to Medium Scale Industries (up to 5 years)Residential Housing PawningUS Dollar Loans to Exporters

Rate : Rupees per unit of Foreign Currency as at ………

Exchange Rates Currency Traveller’s Cheques

Buying Rate Selling Rate Buying Rate Selling Rate

US DollarSterling PoundYenEuroAustralian DollarSingapore DollarIndian Rupee


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1Ref. No. : 02 / 04 / 003 / 0401 / 001


24 March 2006


Dear Sirs,

INADEqUATE / INCORRECT DISCLOSURES / PRESS STATEMENTS BY BANKS

As intimated to you at the Chief Executive Officers meeting held on 23 March 2006, there have been several instances where banks have attempted to mislead the public by publishing incorrect statements/data or by not publishing certain aspects of information with regard to non-compliance with statutory regulations.

Such attempts by banks to mislead the general public totally negate the efforts of the regulator to educate the public on the true state of the banks in the industry, and it would be futile to further enhance our efforts in this regard, if immediate action is not taken by the regulator to stop such deception. The Central Bank of Sri Lanka (CBSL) will be faulted for permitting the banks to misrepresent their financial condition to the public.

It is incumbent on bank management, in the discharge of their fiduciary responsibility, to project the true picture of their financial condition to the public.

Therefore, in the interest of providing accurate information to the public for making informed decisions, all banks are required, in making statements to the press, and in publishing the financial results of banks, to ensure that adequate publicity is given to non-compliance, if any, with the prudential ratios and the measures being taken by the bank to meet these ratios.

Where banks, which are not compliant with regulatory requirements, do not make such disclosures to the public in press interviews or statements, the CBSL, as the regulator will be compelled to correct such information in the public domain.

Yours faithfully,


Copy to : Secretary-General, SLBA


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1Ref. No. : 02 / 04 / 003 / 0401 / 001


21 February 2006

To : The CEOs of all Licensed Commercial Banks and all Licensed Specialised Banks

Dear Sirs,

PUBLICATION OF AUDITED FINANCIAL STATEMENTS OF BANKS IN THE PRESS

Further to the circulars issued with regard to the publication of financial statements of banks in the press, dated 30 September 2005 and 26 January 2006.

Considering the representations made by the banks with regard to the practical difficulties faced by them with regard to the time period for publication of audited financial statements of banks in the press, in order to qualify for exemption from publishing the last quarter unaudited results, all licensed banks are informed as follows:

o If the bank publishes its annual audited financial statements within three months from the end of the financial year, the requirement to publish the financial statements for the fourth quarter in terms of the circular dated 30 September 2005 would not be mandatory.

o The licensed commercial banks incorporated abroad may publish the latest available key performance indicators relating to the global operations of such bank on a quarterly basis, and the ratios based on audited financial information along with the audited financial statements of the parent bank.

o With regard to the format for publication of audited financial statements, all banks should use the format issued on 30 September 2005 for the publication of quarterly financial statements.

Yours faithfully,



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1Ref. No. : 02 / 04 / 003 / 0401 / 001


26 January 2006

To : CEOs of all Licensed Banks

Dear Sirs,

PUBLICATION OF qUARTERLY FINANCIAL STATEMENTS OF BANKSIN THE PRESS

By circular No. 02/04/003/0401/001 dated 30 September 2005, all banks were informed of the requirements with regard to the publication of quarterly financial statements of banks in the press, which was applicable for the publication of financial statements from the 3rd Quarter of 2005 onwards.

Several discrepancies were observed with regard to the publications in respect of the 3rd Quarter of 2005. Therefore all banks are informed that they should comply with all the requirements in the above circular. The following points should be noted:

1. The time frame for publication is within two months from the end of each quarter.

2. The publication should be made in a Sinhala, English and Tamil daily newspaper – This requirement is to inform the public of the financial condition of the banks and is uniformly applicable to all banks.

3. The format specified by the circular should be conformed to. If a ‘nil’ balance has to be reported in respect of an item in the format, such items should be reported as ‘nil’, instead of deleting the entire row from the format.

4. The key performance indicators should be computed according to the definitions provided by the BSD.

With regard to the publication of accounts by licensed commercial banks incorporated abroad, the publication of global accounts is mandatory on an annual basis, while the banks may publish information relating to the latest available period on a quarterly basis. However, all such banks should publish quarterly, the selected performance indicators such as capital adequacy ratio, return on assets, return on equity, and the non-performing advances ratio of the parent bank for the respective quarter.

Yours faithfully,



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1Ref. No. : 02 / 04 / 003 / 0401 / 001


30 September 2005

To : The CEOs of all Licensed Commercial Banks and all Licensed Specialised Banks

Dear Sirs,

PUBLIC DISCLOSURE BY PUBLICATION OFqUARTERLY FINANCIAL STATEMENTS OF BANKS IN THE PRESS

As discussed at the meeting of the CEOs of LCBs held on 28 July 2005, the format for publication of quarterly financial statements in the press has been revised in consultation with the representative of banks, and is attached herewith, along with the suggested Sinhala and Tamil translations.

2. The revision is aimed at increasing the transparency of banking operations, and to align the publication requirements with those of other regulators. Accordingly, the formats have been drafted incorporating the disclosure requirements of the Securities and Exchange Commission (SEC)(in respect of listed banks) and the Sri Lanka Accounting Standards, as far as possible. In addition, selected performance indicators, including key prudential ratios have been included, as agreed with the banks.

3. The information published should be in respect of the entire bank, i.e., including the off-shore banking unit and in the case of LCBs incorporated in Sri Lanka, any branches abroad.

4. The new format contains two parts viz;

• Part I : The format for the summarized balance sheet, income statement, and the statement of changes in equity and reserves and selected performance indicators 1/

• Part II : Instructions for Preparation of Bank Accounts for publication in the press1/

5. Balance Sheet information should be reported as at end of the relevant quarter. Comparative figures to be published should be based on the audited financial statements for the previous financial year.

5.1 The reporting period in respect of the income statement should be the cumulative position as at the end of the relevant quarter in the financial year. Comparative figures should be in respect of the same reporting period in the previous financial year.

5.2 In the case of selected performance indicators, the relevant ratios as at the reporting date should be reported while the comparative ratios should be based on the audited financial statements for the previous financial year.

6. The publication should be made within two months from the end of each quarter, at least once in an English, Sinhala and Tamil newspaper. If the bank publishes its annual audited financial statements within two months from the end of the financial year, the requirement to publish the financial statements for the fourth quarter in terms of these instructions would not be mandatory.

7. The licensed commercial banks incorporated abroad may report information pertaining to the global operations of the parent bank, in the column for reporting the information on the Group. Such information may be reported in the currency of the home country or in US Dollars. In view of the heterogeneous


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1character of group accounts of foreign banks, the banks are requested to make every endeavour to publish all items given in the agreed format.

8. The disclosure requirements contained herein specify the minimum requirements to be adopted by the banks and all banks are encouraged to make additional disclosures for the benefit of the general public. In addition, the banks listed on the Colombo Stock Exchange should comply with any additional regulations imposed by the SEC with regard to publication of financial information.

9. The revised publication format will be effective for publication of banks’ financial statements from the 3rd quarter of 2005 onwards.

9.1 The codes indicated in the formats are for cross reference with the definitions in the instructions and not for publication.

10. The circular dated 30 January 2003 on the publication of quarterly financial statements is hereby rescinded.

Please acknowledge receipt of this circular.

Yours faithfully,



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1Format-Summerised Balance Sheet

Name of Bank :- …………………………………………………………………………………………Rupees Thousands

Summarised Balance Sheet

Code Item

Bank Group CurrentPeriod

PreviousPeriod

CurrentPeriod

PreviousPeriod

As atDD/MM/YY

(Audited)

As atDD/MM/YY

As atDD/MM/YY

As atDD/MM/YY

(Audited) On-Balance Sheet Assets

1.1.1.0.0 Cash in Hand1.1.2.0.0 Balances with Central Bank of Sri Lanka/Other

Central Banks1.1.3.0.0 Due from Banks and Other Financial Institutions1.1.4.0.0 Investments - Trading Account1.1.4.1.0 Government Securities1.1.4.2.0 Other Securities1.1.5.0.0 Investments - Held-to-Maturity (Net of provisions

made for decline in value of investments)1.1.5.1.0 Government Securities1.1.5.2.0 Other Securities1.1.5.3.0 Less: Provision for decline in value of Investments 1.1.6.0.0 Investments in Associates and Subsidiaries1.1.7.0.0 Total Loans and Advances 1.1.7.1.0 Total Performing loans and Advances1.1.7.1.1 Bills of Exchange1.1.7.1.2 Overdrafts1.1.7.1.3 Lease Rentals Receivable1.1.7.1.4 Other Loans1.1.7.2.0 Total Non-performing loans and Advances1.1.7.2.1 Bills of Exchange1.1.7.2.2 Overdrafts1.1.7.2.3 Lease Rentals Receivable1.1.7.2.4 Other Loans1.1.7.2.5 Interest Receivables1.1.7.3.0 Total Gross Loans and Advances

Less:1.1.7.4.0 Interest in Suspense1.1.7.5.0 Specific Loan Loss Provisions 1.1.7.6.0 General Loan Loss Provisions 1.1.7.4.0 Net Loans and Advances1.1.8.0.0 Other Assets1.1.9.0.0 Intangible assets1.1.10.0.0 Investment properties1.1.11.0.0 Fixed Assets (Net of accumulated depreciation)

1.1.10.0.0 Total on Balance Sheet Assets


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1Code Item


PreviousPeriod

CurrentPeriod

PreviousPeriod

As atDD/MM/YY

(Audited)

As atDD/MM/YY

As atDD/MM/YY

As atDD/MM/YY

(Audited) On-Balance Sheet Liabilities

1.2.1.0.0 Total Deposits 1.2.1.1.0 Demand Deposits1.2.1.2.0 Savings Deposits 1.2.1.3.0 Time Deposits 1.2.1.4.0 Margin Deposits1.2.1.5.0 Other Deposits1.2.2.0.0 Total Borrowings 1.2.2.1.0 Borrowings from CBSL 1.2.2.2.0 Borrowings from Banks and Financial Institutions in

Sri Lanka1.2.2.3.0 Borrowings from Banks and Financial Institutions

Abroad1.2.2.4.0 Securities sold under repurchase agreements 1.2.2.5.0 Subordinated Term Debt 1.2.2.6.0 Other Borrowings

1.2.3.0.0 Deferred taxation1.2.4.0.0 Current Taxation1.2.5.0.0 Other Liabilities

1.2.6.0.0 Total on Balance Sheet Liabilities

1.3.0.0.0 Minority Interests

1.4.0.0.0 Equity Capital and Reserves1.4.1.0.0 Share Capital/Assigned Capital1.4.2.0.0 Statutory Reserve Fund1.4.3.0.0 Total Other Reserves

1.5.0.0.0 Total On-Balance Sheet Liabilities and Equity Capital and Reserves

1.6.0.0.0 Off-Balance Sheet Items and Contra Accounts1.6.1.0.0 Contingencies1.6.2.0.0 Commitments and Contra Accounts

1.7.0.0.0 Memorandum Information1.7.1.0.0 Number of Employees 1.7.2.0.0 Number of Branches


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1Rupees housands

Summarised Income Statement

Code Item


PreviousPeriod

CurrentPeriod

PreviousPeriod

FromDD/MM/YY

toDD/MM/YY

FromDD/MM/YY

toDD/MM/YY

FromDD/MM/YY

toDD/MM/YY

FromDD/MM/YY

toDD/MM/YY

2.1.0.0.0 Interest Income2.1.1.0.0 Interest Income on Loans and Advances2.1.2.0.0 Interest Income on Other Interest Earning Assets

2.2.0.0.0 Less: Interest Expenses

2.2.1.0.0 Interest Expense on Deposits

2.2.2.0.0 Interest Expense on Other Interest Bearing Liabilities

2.3.0.0.0 Net Interest Income

2.4.0.0.0 Non - Interest Income

2.4.1.0.0 Foreign Exchange Income2.4.2.0.0 Other Income

2.5.0.0.0 Less: Non - Interest Expenses

2.5.1.0.0 Personnel Costs2.5.2.0.0 Provision for Staff Retirement Benefits2.5.3.0.0 Premises, Equipment and establishment Expenses2.5.4.0.0 Loss on Trading/Investment Securities2.5.5.0.0 Amortization of Intangible Assets2.5.6.0.0 Other Operating Expenses

2.6.0.0.0 Less: Provision for Bad and Doubtful Debts and Loans Written Off

2.6.1.0.0 Provisions - General2.6.2.1.0 Provisions - Specific2.6.3.2.0 Recoveries (-)2.6.4.3.0 Loans Written Off

2.7.0.0.0 Less: Provision for Decline in Value of Investments (Net)

2.8.0.0.0 OperatingProfit onOrdinaryActivitiesBeforeTaxes

2.9.0.0.0 Less: Value Added Tax on Financial Services

2.10.0.0.0 OperatingProfit onOrdinaryActivitiesBeforeCorporate Tax

2.11.0.0.0 Share of Subsidiaries/Associate Companies' Profit

2.12.0.0.0 OperatingProfitBeforeCorporateTax

2.13.0.0.0 Less: TaxonProfitsonOrdinaryActivities

2.14.0.0.0 OperatingProfitforthePeriod


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1Selected Performance Indicators

Code Item

Current Period

Previous Period

Current Period

Previous Period

As at DD/MM/YY

As at DD/MM/YY

(Audited)

As at DD/MM/YY

As at DD/MM/YY

(Audited) 4.1.0.0.0 Regulatory Capital Adequacy Bank (Solo Basis) Group4.1.1.0.0 Core Capital (Tier 1 Capital), Rs. Mn.4.1.2.0.0 Total Capital Base, Rs. Mn.4.1.3.0.0 Core Capital Adequacy Ratio, as % of Risk Weighted

Assets (Minimum Requirement, 5%)4.1.4.0.0 Total Capital Adequacy Ratio, as % of Risk Weighted

Assets (Minimum Requirement, 10%)

4.2.0.0.0 Assets quality (quality of Loan Portfolio)

4.2.1.0.0 Gross Non-Performing Advances Ratio, % (net of Interest in Suspense)

4.2.2.0.0 Net Non-Performing Advances Ratio, %(net of interest in suspense and provisions)

4.3.0.0.0 Profitability

4.3.1.0.0 Interest Margin, %4.3.2.0.0 Return on Assets (before Tax), %4.3.3.0.0 Return on Equity, %

4.4.0.0.0 Regulatory Liquidity

4.4.1.0.0 Statutory Liquid Assets, Rs. Mn.4.4.2.0.0 Statutory Liquid Assets Ratio, %

(Minimum Requirement, 20%) Domestic Banking Unit Off-Shore Banking Unit

CERTIFICATION:We, the undersigned, being the Chief Executive officer and the Financial Controller / Compliance Officer of .............................................. Bank certify jointly that:–

(a) the above statements have been prepared in compliance with the format and definitions prescribed by the Central Bank of Sri Lanka;

(b) the information contained in these statements have been extracted from the unaudited financial statements of the bank unless indicated as audited.

(Name) (Name)

(Sgd.) Chief Executive Officer (Sgd.) Financial Controller or Compliance Officer

Date: DD/MM/YY Date: DD/MM/YY


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1Part II+

INSTRUCTIONS

for

Preparation of Bank Accounts for Publication in the Press

30/09/2005

Bank Supervision Department Central Bank of Sri Lanka

DETAILED INSTRUCTIONS

1. Balance Sheet – Amounts in Rupees Thousands

Line Code Line Item Instructions On-Balance Sheet Assets

1.1.1.0.0 Cash in Hand Local and foreign currency notes and coins held by tellers, in ATMs and in vault.

1.1.2.0.0 Balances with Central Bank of Sri Lanka/Other Central Banks

Balance at Central Bank of Sri Lanka/other Central Banks for reserve requirement and other transactions.

1.1.3.0.0 Due from Banks and Other Financial Institutions

Sub-total of items 1.1.3.1.0 to1.1.3.9.0

1.1.3.1.0 Cash Items in Process of Collection (CIPC)

Local/foreign drafts, cheques and other cash equivalent items such as stocks of valid usable stamps held for customer services, money orders, postal orders and traveler's cheques purchased by bank and payable immediately on presentation.

1.1.3.2.0 Cash advances (net) through Electronic Cards

Cash withdrawn from the bank’s ATMs by cardholders (e.g., credit/debit) of other banks less cash withdrawn from ATMs of other banks by cardholders of the bank.

1.1.3.3.0 Gold bullion in hand Gold bullion held in the vaults of the bank. 1.1.3.4.0 Balances with Licensed Commercial

Banks (LCBs) in Sri LankaCurrent accounts maintained at Licensed Commercial Banks (LCBs) in Sri Lanka.

1.1.3.5.0 Balances with Banks and Financial ins t i tu t ions Abroad (Nostro Accounts)

Balances with Banks and Financial Institutions abroad in Nostro accounts (as per Bank’s Books) maintained to route foreign currency transactions.

1.1.3.6.0 Balances with Head office, branches abroad (Nostro Accounts)

Balances with Head Office and Branches abroad in Nostro accounts (as per Bank's Books) maintained to route foreign currency transactions.

1.1.3.7.0 Placements with Banks and Financial institutions in Sri Lanka

Overnight placements and short term placements (< 12 Months) at banks and financial institutions in Sri Lanka.

1.1.3.8.0 Placements with Banks and Financial institutions Abroad

Overnight placements and short term placements (< 12 Months) at banks and financial institutions abroad.

1.1.3.9.0 Placement with Head office, branches abroad

Overnight placements and short term placements (< 12 Months) Head office and branches abroad.

1.1.3.10.0 Reverse Repurchase Agreements with Financial institutions

Lending to Central Bank, Commercial and Specialized Banks, Primary Dealers and Finance Companies against debt instruments such as Treasury Bills and Bonds, Commercial Paper, Promissory Notes and Debentures.

1.1.3.11.0 Others Any other relevant balance not specifically mentioned in any of the above account headings.


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11.1.4.0.0 Investments – Trading A/C Sub-total of items 1.1.4.1.0 and 1.1.4.2.0. 1.1.4.1.0 Government Securities Sub-total of following items. 1.1.4.1.1 Treasury Bills Cost of Treasury Bills or Market Value If investment in treasury bills in

the trading portfolio are marked to market and carried at that value in the balance sheet.

1.1.4.1.2 Treasury Bonds Cost of Treasury Bonds or Market Value If investment in treasury bonds in the trading portfolio are marked to market and carried at that value in the balance sheet.

1.1.4.1.3 Sri Lanka Development Bonds Cost of Sri Lanka Development Bonds. 1.1.4.1.4 Other Government Securities Cost or market value, whichever is lower, of all other government

securities held. 1.1.4.2.0 Other Securities Sub-total of items 1.1.4.2.1 to 1.1.4.2.4 1.1.4.2.1 Shares & Unit Trusts – publicly

listedCost or market value, whichever is lower, of ordinary and preference shares and shares in unit trusts.

1.1.4.2.2 Shares & Unit Trusts – not listed Cost or market value, whichever is lower, of unlisted equity shares and unlisted shares in unit trusts.

1.1.4.2.3 Debt Securities Lower of cost or amount of principal owing on debt instruments; show net of any unearned interest or discount.

1.1.4.2.4 Others Cost or market value, whichever is lower, of all other securities held. 1.1.5.0.0 Investments – Held-to-Maturity “Held-to-maturity” securities are securities purchased with the

intention of holding to maturity. Sub-total of items 1.1.5.1.0, 1.1.5.2.0 and 1.1.5.3.0

1.1.5.1.0 Government Securities Sub-total of items 1.1.5.1.1 to 1.1.5.1.4 1.1.5.1.1 Treasury Bills Cost of Treasury Bills 1.1.5.1.2 Treasury Bonds Cost of Treasury Bonds 1.1.5.1.3 Sri Lanka Development Bonds Cost of Sri Lanka Development Bonds 1.1.5.1.4 Other Government Securities Cost of all other government securities held. 1.1.5.2.0 Other Securities Sub-total of items 1.1.5.2.1 to 1.1.5.2.4 1.1.5.2.1 Shares & Unit Trusts – publicly

listedCost of ordinary and preference shares and shares in unit trusts.

1.1.5.2.2 Shares & Unit Trusts – not listed Cost of unlisted equities and unlisted shares in unit trusts. 1.1.5.2.3 Debt Securities Lower of cost or amount of principal owing on debt instruments; show net

of any unearned interest or discount. 1.1.5.2.4 Others Cost of all other securities held. 1.1.5.3.0 Less: Provision for decline in

value Total Provision made for decline in value of investments.

1.1.6.0.0 Investments in Associates and Subsidiaries

Total amount of investment in associate and subsidiary companies.

1.1.7.0.0 Total Loans & Advances Not need to show values under here. 1.1.7.1.0 Total Performing Loans &

Advances (Gross)Sub-total of items 1.1.7.1.1 to 1.1.7.1.4

1.1.7.1.1 Bills of Exchange Total amount of all type of performing bills of exchange. 1.1.7.1.2 Overdrafts Total amount of all performing overdrafts. 1.1.7.1.3 Lease Rentals Receivable Total amount of all type of performing lease receivables net of Unearned

lease income and VAT recoverable. 1.1.7.1.4 Other Loans Total amount of all type of performing other loans. (Term loans, Block

loans, Packing credits, Pledge loans, Lending to customer other than financial institutions against debt instruments (Reverse Repo) such as Treasury Bills and Bonds, Commercial Paper, Promissory Notes and Debentures and other loans)

Line Code Line Item Instructions


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1Line Code Line Item Instructions 1.1.7.2.0 Total Non-Performing Loans &

Advances (Gross) Sub-total of items 1.1.7.2.1 to 1.1.7.2.5

1.1.7.2.1 Bills of Exchange Total amount of all type of non-performing bills of exchange. 1.1.7.2.2 Overdrafts Total amount of all non-performing overdrafts. 1.1.7.2.3 Lease Rentals Receivable Total amount of all type of non-performing lease receivables. (net of

Unearned lease income and VAT recoverable) 1.1.7.2.4 Other Loans Total amount of all type of non-performing other loans. (Term loans,

Block loans, Packing credits, Pledge loans, Lending to customer other than financial institutions against debt instruments and Debentures and other loans)

1.1.7.2.5 Interest Receivable Uncollected interest due that has not been debited to respective loan/advance accounts

1.1.7.3.0 Total Gross Loans & Advances The aggregate outstanding amounts (capital and interest) of total performing and non-performing loans and advances.

1.1.7.4.0 Interest in Suspense Interest in suspense which is included in principal balances of loans and advances or interest receivable as per CBSL Directions.

1.1.7.5.0 Specific Loans Loss Provisions Provisions that have been set aside from earnings before tax for specifically identified loan losses as per CBSL Directions.

1.1.7.6.0 General Loans Loss Provisions Provisions that have been set aside from earnings before tax for general loan losses.

1.1.7.7.0 Total Net Loans & Advances Loans & Advances after netting of interest in suspense and all loan loss provisions from gross loans and advances.

1.1.8.0.0 Other Assets Sub-total of items 1.1.8.1.0 to 1.1.8.7.0. 1.1.8.1.0 Prepayments and Expendable

SuppliesRental deposits, utility deposits, prepaid expenses applicable to future period, deposits/advance payments for work in progress, consumable stocks.

1.1.8.2.0 Suspense Account Any unidentified differences in account balances and un-reconciled account balances

1.1.8.3.0 Accrued Interest Receivable on placements and Securities

Interest that has accrued but is not yet collected on interest-bearing placements and securities.

1.1.8.4.0 Accounts receivable Expenses paid on behalf of customers pending reimbursement (not relating to credit exposures), rental receivable, charges and VAT. Any expense incurred on behalf of borrowers should be included under loans unless they are charged to the profit and loss account as an expense.

1.1.8.5.0 Corporate tax paid in advance Tax paid but has not yet been set off against tax payable. 1.1.8.6.0 Inter branch/Head office balances

“due from” (Local) Net balances (or amalgamated balance) of several accounts such as account maintained with head office and branches for claim vouchers, branch advices and transactions with branches and the head office.

1.1.8.7.0 Others Any other asset account balances not included in any of the above account headings.

1.1.9.0.0 Intangible Assets Value of Goodwill, Trade mark/patent, Product development cost and any other intangible assets

1.1.10.0.0 Investment Properties Total amount of investment properties after adjustment of any additions and disposals during the period and net of Provision for fall in value but does not include foreclosure properties.

1.1.11.0.0 Fixed Assets (net) Sub-totaloffixedassetsnetofdepreciation.1.1.11.1.0 Land and Buildings Cost of land, buildings and improvements or fixtures thereto used for

banking operations. 1.1.11.2.0 Movable Property, etc. Cost of all movable property including equipment, vehicles, office

machines, depreciable software, etc. 1.1.11.3.0 Provision for depreciation Total of amounts set aside as depreciation of Fixed Assets.


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1Line Code Line Item Instructions 1.1.10.0.0 Total on Balance Sheet Assets Total of all on-balance sheet assets

On-Balance Sheet Liabilities and Equity Capital and Reserves

1.2.1.0.0 Total Deposits Sub-total of items 1.2.1.1.0 to 1.2.1.5.0. 1.2.1.1.0 Demand Deposits Credit balances of all type of demand deposits (gross amount without

setting off debit balances). 1.2.1.2.0 Savings Deposits Totals of all type of savings deposits. 1.2.1.3.0 Time Deposits Term deposits, savings certificates, call deposits etc. 1.2.1.4.0 Margin deposit accounts Cash advances pledged by bank’s customers as security for off balance

sheet credit facilities and/or loans not yet released to customers. 1.2.1.5.0 Other Deposits Any other deposit account balances not included in the above account

headings.1.2.2.0.0 Total Borrowings Sub-total of items 1.2.2.1.0 to 1.2.2.6.0. 1.2.2.1.0 Borrowings from CBSL Total of all borrowings from or indebtedness to CBSL (Other than REPO

borrowings). 1.2.2.2.0 Borrowings from Banks and

Financial Institutions in Sri LankaAll type of borrowings from banks and financial institutions in Sri Lanka (Other than REPO borrowings).

1.2.2.3.0 Borrowings from Banks and Financial Institutions Abroad

All types of borrowings from foreign Banks and other Financial Institutions abroad.

1.2.2.4.0 Securities sold under Repurchase Agreements

All Borrowings against bank’s Treasury bills, bonds and other securities with an agreement to settle prior to the maturity of underlying securities.

1.2.2.5.0 Subordinated Term Debt Subordinated term debt approved by the Central Bank, as eligible to be considered for capital adequacy purposes and other subordinated term debt.

1.2.2.6.0 Other Borrowings Any other types of borrowings which are not indicated above. 1.2.3.0.0 Deferred Taxation Deferred tax due to timing differences. 1.2.4.0.0 Current Taxation Total tax payable amount. 1.2.5.0.0 Other Liabilities Sub-total of items 1.2.5.1.0 to 1.2.5.7.0. 1.2.5.1.0 Charges recovered in advance Any revenue received in advance, that would be appropriated over a future

period of time. 1.2.5.2.0 Taxes Payable 1.2.5.2.0 Accrued Interest Payable on

DepositsInterest that has accrued but has not yet been credited to customers’ LKR-denominated deposit accounts.

1.2.5.3.0 Accrued Interest Payable on Borrowings

Interest that has accrued but has not been paid on LKR-denominated borrowings.

1.2.5.4.0 Other Accrued Expenses and Accounts Payable

Provisions for utility expenses, fines, any taxes in respect of customer accounts or transactions, deposits on safety lockers, excess pawning advances, advance rental deposits, EPF, ETF contributions payable, etc.

1.2.5.6.0 Suspense accounts Any unidentified differences in account balances and un-reconciled account balances, and cheques sent for clearing but not credited to respective customer accounts.

1.2.5.6.0 Inter branch/Head office balances “due to” (local)

Net balances of several accounts such as accounts maintained at head office for claim vouchers, branch advises and other transactions with branches and the head office.

1.2.5.7.0 Others Any other liability not stated above. 1.2.6.0.0 Total on Balance Sheet liabilities Sub-total of items 1.2.1.0.0, 1.2.2.0.0, 1.2.3.0.0, 1.2.4.0.0 and 1.2.5.0.0 1.3.0.0.0 Minority Interest 1.4.0.0.0 Equity Capital and Reserves Sub-total of items 1.4.1.0.0 to 1.4.3.0.0 1.4.1.0.0 Share Capital/Assigned Capital Voting and non-voting ordinary shares Issued and fully/partly paid and

Preference shares issued and fully/partly paid or capital assigned by the Head Office. (Figure must agree to total equity capital as stated in Statement of Changes In Equity and Reserves)


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1Line Code Line Item Instructions 1.4.2.0.0 Statutory Reserve Fund Statutory Reserve Fund created in terms of S.20 of the Banking Act.

(Figure must agree to Total Statutory Reserve Fund as stated in Statement of Changes in Equity and Reserves)

1.4.3.0.0 Total Other Reserves Total value of reserves other than Statutory reserve fund. (Figure must agree to total other reserves as stated in Statement of Changes In Equity and Reserves)

1.5.0.0.0 Total On-Balance Sheet Liabili-ties plus Equity Capital and Reserves

Total of lines 1.2.6.0.0, 1.3.0.0.0 and 1.4.0.0.0

1.6.0.0.0 Off-Balance Sheet Items Total of contingencies, commitments and contra account. 1.6.1.0.0 Contingencies Sub-total of items 1.6.1.1.0 to 1.6.1.10.0 1.6.1.1.0 Letters of Credit The amount of valid, unutilised amount of sight and usance Letter of Credit

opened by the bank 1.6.1.2.0 Guarantees, Bonds Duty guarantees, financial guarantees, performance bonds and bid bonds

issued by the bank and remaining in force as at date. 1.6.1.3.0 Shipping Guarantees Shipping Guarantees issued for LC Bills and non-LC Bills. 1.6.1.4.0 Acceptances Import bills released to customers against drafts maturing at a later date. 1.6.1.5.0 Underwrit ing of Shares and

SecuritiesBank’s undertaking to buy shares, commercial papers and other securities if not subscribed by the general public

1.6.1.6.0 Securitisation and Securities Guaranteed/Endorsed

Total amount of loans and advances securitised with recourse and securities guaranteed or endorsed by the bank.

1.6.1.7.0 Forward Contracts Foreign exchange forward contracts including both purchase and sale agreements.

1.6.1.8.0 Spot Contracts Foreign exchange spot contracts including both purchase and sale agreements.

1.6.1.9.0 Derivatives Show value of all derivative contracts including futures, options on interest-rate, foreign-currency and equity related instruments.

1.6.1.10.0 Others Any other off-balance sheet contingencies. 1.6.2.0.0 Commitments and

Contra AccountsSub-total of items 1.6.2.1.0 and 1.6.2.1.0

1.6.2.1.0 Commitments Commitments assumed by bank such as Un-drawn credit lines and any other off-balance sheet commitments.

1.6.2.1.0 Contra Accounts All types of contra accounts such as bills /cheques sent for collection, travelers’ cheques on hand and any other off-balance sheet contra accounts.

1.7.0.0.0 Memorandum Information 1.7.1.0.0 Number of Employees Total Number of staff. (Permanent, casual etc.) 1.7.2.0.0 Number of Branches Number of branches operated by the Bank.

2. Income Statement – Amounts in Rupees Thousands

Line Code Line Item Instructions 2.1.0.0.0 Interest Income Sub-total of items 2.1.1.0.0 and 2.1.2.0.0 2.1.1.0.0 Loans and Advances Interest income received or accounted as receivable from customers for

different types of credit facilities. 2.1.2.0.0 Interest Income on Other Interest

Earning AssetsInterest income received or accounted as receivable for different types of all other interest related assets.

2.2.0.0.0 Interest Expenses Sub-total of items 2.2.1.0.0 and 2.2.2.0.0 2.2.1.0.0 Deposits Interest expenditure paid or accounted as payable on all deposits

products.


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1Line Code Line Item Instructions 2.2.2.0.0 Interest Expense on Other Interest

Bearing LiabilitiesInterest expenditure paid or accounted as payable on all types of other interest bearing liabilities.

2.3.0.0.0 Net Interest Income Net position of interest income (2.1.0.0.0) and Interest expenses (2.2.0.0.0)

2.4.00.0 Non-Interest Income Sub-total of items 2.4.1.0.0 and 2.4.2.0.02.4.1.0.0 Foreign Exchange Income Sub-total of Items 2.4.1.1.0 to 2.4.1.4.0 2.4.1.1.0 Net Gain/(Loss) on Foreign

Currency TransactionsNet gains or losses realised on foreign exchange trading.

2.4.1.2.0 Commissions and Fees on Foreign Currency Transactions

Any commission income or fees on foreign currency transactions.

2.4.1.3.0 Net gain/(loss) on FC revaluation Exchange gain or loss on revaluation of foreign currency denominated assets and liabilities such as spot and forward positions.

2.4.1.4.0 Others Any other type of Foreign Exchange income not included above. 2.4.2.0.0 Other Income Sub-total of Items 2.4.2.1.0 to 2.4.2.9.0 2.4.2.1.0 Divident Income from Investments Dividend income received or accounted as receivable for all types of

equity investments. 2.4.2.2.0 Gains on Trading/

Investment SecuritiesIncome derived by selling trading/investment securities above their purchase price

2.4.2.3.0 Capital gain on Treasury Bonds Amortized amount of income derived by buying treasury bonds at discounted prices.

2.4.2.4.0 Net Gain/(Loss) onRupee Derivatives

Profit recognized as income on sale of fixed assets.

2.4.2.5.0 Commission on off-balance sheet credit facilities

Commission received or accounted as receivable on issue of LC, LG, SG, export LC advising, guarantees and other off-balance sheet credit facilities.

2.4.2.6.0 Other Commission and Fees Any commission income for services rendered to customers or on behalf of third parties.

2.4.2.7.0 Charges on services Income earned in the form of charges on services to customers 2.4.2.8.0 Profit on sale of Fixed Assets Profit recognized as income on sale of fixed assets. 2.4.2.9.0 Others Any other income not mentioned above. 2.5.0.0.0 Non-Interest Expenses Sub-total of Items 2.5.1.0.0 to 2.5.6.0.0 2.5.1.0.0 Personnel Costs All types of expenses such as salaries, reimbursements, and EPF/ETF

contribution incurred in respect of employees, excluding cost of training. 2.5.2.0.0 Provision for Staff Retirement

BenefitsProvision made for Staff Retirement Benefits.

2.5.3.0.0 P r e m i s e s , E q u i p m e n t a n d Establishment Expenses

All type of expenses on premises, equipment and administrative expenses.

2.5.4.0.0 Losses on trading/investment securities

Any loss incurred in selling trading/investment securities below the book value.

2.5.5.0.0 Amortization of Intangible Assets Total value of amortization of intangible assets. (Goodwill/(Negative Goodwill etc.)

2.5.6.0.0 Other Operating Expenses Any other operating expenditure. 2.6.0.0.0 Provision for Bad and Doubtful

Debts and Loans Written off Sub-total of Items 2.6.1.0.0 to 2.6.4.0.0

2.6.1.0.0 Provisions - General General provision made out of profits for possible loan losses irrespective of performance of the loans.

2.6.2.0.0 Provisions - Specific Specific provision made out of profits for possible loan losses as per CBCL direction.

2.6.3.0.0 Recoveries (-) Recoveries made during the reporting period in respect of loans written off or provided for.


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1Line Code Line Item Instructions 2.6.4.0.0 Loans Written off All loans written off from the credit portfolio during the reporting period. 2.7.0.0.0 Provision for decline in value of

investments (net)Provision for potential fall in the market value of investments.

2.8.0.0.0 Operating Profit on Ordinary Activities before Taxes

Sub-total of total of net interest income, non-interest income, non interest expenses, Loan loss provisions, Provision for decline in value of investments (net). (2.3.0.0.0 + 2.4.0.0.0 – 2.5.0.0.0 – 2.6.0.0.0 – 2.7.0.0.0)

2.9.0.0.0 Value Added Tax on Financial Services

VATonprofitsandothers.

2.10.0.0.0 Operating Profit on Ordinary Activities before Corporate Tax

Operating Profit on Ordinary Activities Before Taxes (2.8.0.0.0) – Value Added Tax on Financial Services (2.9.0.0.0)

2.11.0.0.0 Share of Subsidiaries/Associate Companies’Profit

Totalshareofsubsidiaries/AssociateCompanies’Profits.

2.12.0.0.0 OperatingProfitbeforeCorporate Tax

Sub total of item 2.10.0.0.0 and 2.11.0.0.0

2.13.0.0.0 TaxonProfitsonOrdinaryActivities

Taxpayableontaxableprofits.

2.14.0.0.0 OperatingProfitsfortheperiod OperatingProfitBeforeCorporateTax(2.12.0.0.0)–TaxonProfitsonOrdinary Activities (2.13.0.0.0).

3. Statement of Changes in Equity and Reserves – Amounts in Rupees Thousands

Line Code Line Item Instructions3.1.0.0.0 Opening Balance Closingbalancesofthepreviousfinancialyear.3.2.1.0.0 Issue of Share/Increase of assigned

capital Voting and non-voting ordinary shares, preference shares issued and fully/partly paid or increase of assigned capital by the Head Office during the period.

3.2.2.0.0 Bonus Issue Bonus issue during the period. 3.2.3.0.0 Rights Issue Rights issue during the period. 3.2.4.0.0 Surplus on revaluation of property Amounts recognized over cost on revaluation of fixed assets during the

period. 3.2.5.0.0 Net profit/Loss for the period Profit or loss for the reporting period. 3.2.6.0.0 Transfer to reserves during the

periodStatutory and other transfers made to respective reserve accounts during the period.

3.2.7.0.0 Dividend Paid for the year (YYYY)

Distribution of Profit after tax among shareholders.

3.2.8.0.0 Profits Transfer to Head office Applicable only for foreign banks. 3.2.90.0 Others Show any other items which are directly impacted on equity and reserves.

Indicate these items separately. 3.3.0.0.0 Closing Balance Closing balances as at reporting period.


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14. Selected Performance Indicators

Line Code Line Item Instructions4.1.0.0.0 Regulatory Capital Adequacy 4.1.1.0.0 Core Capital (Tier 1) Indicate the aggregate amount of core capital as per capital adequacy

requirement. (Indicate the amounts on bank only basis (solo) and group basis separately)

4.1.2.0.0 Total Capital Base Indicate the aggregate amounts of total capital base as per capital adequacy requirement.(Indicate the amounts on bank only basis (solo) and group separately)

4.1.3.0.0 Core Capital Ratio (Tier 1), % Tier 1 CapitalRisk - Weighted Assets, * 100As per capital adequacy Direction. (Indicate the ratios on bank only basis (solo) and group basis separately)

4.1.4.0.0 Total Capital Adequacy Ratio, % Total Capital BaseRisk-Weighted Assets, * 100As per capital adequacy Direction.(Indicate the ratios on bank only basis (solo) and group basis separately)

4.2.0.0.0 Assets quality(quality of Loan Portfolio)

4.2.1.0.0 Gross Non-Performing Advances Ratio, %

(Total Gross Non-Performing Loans & Advances – Total Interest in Suspense) (Total Gross Loans & Advances – Total Interest in Suspense) (Bank only)

4.2.2.0.0 Net Non-Performing Advances Ratio, %

(Total Gross Non-Performing Loan & Advances – Total Interest in Suspense-Total Provisions) (Total Gross Loans & Advances – Total Interest In Suspense) (Bank Only)

4.3.0.0.0 Profitability4.3.1.0.0 Interest Margin, % Net Interest Income (annualised)

Average Value of Total Assets * 100Net Interest Income: Interest Income less Interest expenses (annualised). Average Value of Total Assets: Monthly average for the reporting date. (Bank only)

4.3.2.0.0 Return on Assets (Before Tax), % Profits After Tax (annualised) Average Value of Total Assets * 100Net operating profit on ordinary activities after tax (annualised). Average Value of Total Assets: Monthly average for the reporting date. (Bank only)

4.3.3.0.0 Return on Equity, % Profits After Tax (annualised)Average Value of Capital Funds *100Net operating profit on ordinary activities after tax (annualised). Average Value of Capital Funds: Monthly average for the reporting date. (Bank only)

4.4.0.0.0 Regulatory Liquidity 4.4.1.0.0 Statutory Liquid Assets Indicate the aggregate amount of average liquid assets as per statutory

liquid assets requirement.(For LCBs: Indicate the amounts on the basis of Domestic banking Unit (DBU) and Off-shore Banking Unit (OSBU) separately as per Statutory Liquid Assets requirement)

4.4.2.0.0 Statutory Liquid Assets Ratio, % For LCBs: Average Liquid Assets Liabilities Base

* 100

Indicate the ratio on the basis of Domestic banking Unit (DBU) and Off-shore Banking Unit (OSBU) separately as per Statutory Liquid Assets requirement. For LSBs: Average Liquid Assets Total Deposits

* 100

As per Statutory Liquid Assets requirement.


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1Ref. No. : BS / 62 / 97


10th September, 2001


Dear Sir,

PUBLIC DISCLOSURE BY PUBLICATION OF BANK ACCOUNTS IN THE PRESS

Your attention is drawn to our circular No.BS/62/97 dated 29.01.1999 on the above subject.

If the audited accounts of banks are published in the newspapers stating that they are audited without any reference to any audit qualifications, where there are such qualifications, it could mislead the public. Therefore, banks should include a brief description of any audit qualifications when they publish the audited accounts in the newspapers.

Further, I wish to inform you that banks are expected to publish their annual audited accounts in newspapers within six months of the end of their financial year and their half yearly un-audited accounts within three months of the end of the half-year.

Yours faithfully



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1Ref. Nos. : 02 / 04 / 002 / 0105 / 001 & 02 / 04 / 002 / 0151 / 001


20th March, 2001

To : All Licensed Commercial Banks and Licensed Sepcialised Banks

Dear Sir,

PUBLICATION OF CAPITAL ADEqUACY STATEMENT IN THE ANNUAL REPORT

You may be aware that the CBSL guidelines permit consolidation of subsidiaries for the purpose of computing capital adequacy ratios of banks but have not specified the nature of subsidiaries to be consolidated. The CBSL is presently reviewing the policy on consolidation of subsidiaries by banks for capital adequacy purposes.

It is observed that there had been no uniformity among banks in presenting the capital adequacy statement in their Annual Reports. While few banks publish the statement on a ‘solo’ basis others present it on a ‘consolidated’ basis.

With a view to giving a true picture to the readers, it is recommended that the basis of computation of the capital adequacy and the inclusion of non banking and non-financial subsidiaries in the computation of the capital adequacy ratio, be disclosed as a footnote to the capital adequacy statement, if published in the Annual Report of the bank.

Yours faithfully

P. T. Sirisena



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13 February 2006


Dear Sirs,

SUBMISSION OF AUDITED FINANCIAL STATEMENTS BY BANKS

I wish to draw your attention to Section 38(1) and 38(2) of the Banking Act, No.30 of 1988 as amended by the Banking (Amendment) Act, No.33 of 1995 and No.2 of 2005, in terms of which:

1. All Licensed Commercial Banks (LCB) incorporated or established within Sri Lanka shall transmit within five months after the close of its financial year to the Director of Bank Supervision, its audited balance sheet as at the close of the financial year, and its profit and loss account for such financial year in respect of its business in and outside Sri Lanka including its off-shore banking business.

2. All LCBs incorporated outside Sri Lanka shall transmit to the Director of Bank Supervision, within five months after the close of its financial year, its audited balance sheet as at the close of the financial year and its profit and loss account for such financial year in respect of its business in Sri Lanka including its off-shore banking business.

You are kindly reminded to submit the audited financial statements for 2005, in the prescribed format as per circular No. BS/38/90 of 02.06.98.

Your attention is also drawn to Section 30(2) of the Banking Act, in terms of which a copy of the audited financial statements (OSBU) is required to be submitted. The above format should be used for the submission of the OSBU accounts as well.

Accordingly, you are advised to transmit the annual audited financial statements for 2005 according to the above requirements within the stipulated time frame.

Yours faithfully,



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1Ref. No. : BS/38/90

Bank Supervision DepartmentCentral Bank of Sri Lanka8th Floor, Renuka Building41, Janadhipathi MawathaColombo 1.

20 May 1998

To : All approved External Auditors of Licensed Commercial Banks

Dear Sir,

As you are aware, the Central Bank of Sri Lanka, as the supervisory authority for licensed commercial banks and specialised banks in Sri Lanka, is charged with the responsibility of ensuring that there is a great degree of consistency of bank audits and standard procedures which can be followed by approved auditors. Accordingly, we enclose herewith a set of “Guidelines for External Auditors relating to their statutory duties under Section 39 of the Banking Act No.30 of 1988, as amended by Banking Act No.33 of 1995”.

Since your Firm is on the panel of approved auditors of the Central Bank, you are required to ensure that the audit of licensed commercial banks/licensed specialised banks, are in conformity with these guidelines, with effect from the financial year 1998.

Please note that wherever the expression “licensed commercial banks” appears in the guidelines, it would also include “licensed specialised banks”.

Please acknowledge receipt of this letter and the enclosures.

Yours faithfully,




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1GUIDELINES FOR EXTERNAL AUDITORS RELATING TO THEIR STATUTORY DUTIES UNDER

SECTION 39 OF THE BANKING ACT NO. 30 OF 1988 AS AMENDED BYBANKING ACT NO. 33 OF 1995

1. In terms of Section 39 of the Banking Act, the Central Bank of Sri Lanka, as the supervisory authority for licensed commercial banks in Sri Lanka, is charged with the responsibility of ensuring that the audits of banks are conducted satisfactorily. Accordingly, External Auditors of licensed commercial banks in Sri Lanka are informed of the following guidelines which have been formulated in recognition of the fact that Auditors are specially qualified to undertake :–

(a) The verification of prudential returns;

(b) The evaluation of control systems;

(c) The expression of opinions on provisioning policies; and

(d) The monitoring of the fiduciary activities of Banks.

2. The auditing guidelines envisaged by the Central Bank for the audit of licensed commercial banks in Sri Lanka do not seek to provide an exhaustive listing of the procedures and practices to be used in an audit. Rather, they seek to stress special audit considerations for instance concerning related party transactions, or the risks they assume resulting from the use of electronic data processing and electronic fund transfer systems connected to the specific characteristics of Banks. These guidelines acknowledge the audit objectives which are of particular importance in relation to the typical items in a Bank’s financial statement and encourage substantive audit procedures for the evaluation of loan loss provisions, income recognition, etc. It is hoped that these guidelines will encourage a greater degree of consistency in Bank audits and set standard procedures which can be followed by Auditors in Sri Lanka.

3. With a view to ensuring that the interests of depositors are not at risk because of adverse changes in the financial position or in the management or other resources of an institution, External Auditors, in performing their statutory duties under the Banking Act and in recognizing the dependence of the Central Bank on prudential returns and other information submitted by licensed commercial banks, shall ensure :–

(a) that the institution has not breached, or is in the process of currently breaching, or is likely to breach, the capital ratio set by the Central Bank;

(b) that the institution has not breached by a material amount for a significant period, or has been frequently breaching by any amount, the liquidity ratio laid down by the Central Bank;

(c) that the institution holds adequate provisions for bad and doubtful debts, expected losses on contingents and tax liabilities, in accordance with accepted accounting standards;

(d) that the accounting and other records and systems of control of the institution are commensurate with the size and nature of business, or the way in which the business is structured, organized and managed;

(e) that the business, or a significant component of the business, is not effectively being directed or has been directed for any period of time, by only one individual;

(f) that there is evidence which calls into question the appropriateness of actions or decisions taken by the management which are significant for prudential purposes.

4. In formulating these guidelines the Central Bank has recognized that in an industry environment of high dependence on information technology, auditors should devote sufficient resources to assess the soundness of the EDP processes which are vital to the institution’s operations and to the effectiveness of internal EDP controls. External Auditors should accordingly, refer in their annual management letters to any shortcomings and imperfections which have come to their attention in the course of their examination of this specified field. The Central Bank recognizes that the risks which characterize an EDP environment and the security and control procedures it requires are :–

(a) Improper disclosure of information;

(b) Error;

(c) Fraud;

(d) Interruption of business due to hardware or software failure;

(e) Ineffective planning and risks associated with end-user computing operations.

5. The Central Bank of Sri Lanka would also require auditors, under certain conditions, to discuss with the supervisory authorities the activities of their banking clients. In doing so, the Central Bank recognises that it is important that Auditors


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1act in a manner that will preserve their professional relationship with their client at all times. They would be therefore expected to draw the attention of the Bank’s management immediately in certain situations, reference to which shall be contained in their annual Management Letter. The situations envisaged in this regard are :–

(a) Where it has come to the Auditor’s attention that there is an extreme situation, such as evidence of imminent financial collapse;

(b) Where the Auditor has evidence of an occurrence which has led or is likely to lead to a material diminution of the institution’s assets;

(c) When there appears to the Auditor to be a material contravention of one or more of the provisions of the Banking Act or of the regulations, directives, or guidelines issued to licensed commercial banks by the Central Bank;

(d) When the Auditor forms the opinion that the management has reported financial information to the Supervisor which is misleading or when he becomes aware that management has failed, does not intend to, report something and such failure to report is, or would be, materially misleading; or

(e) When the Auditor forms the opinion that there has been a significant failure of, or that there is significant weakness in, the accounting and other records or internal control systems of the institution.

6. The Central Bank believes that these guidelines would require Auditors to enlarge the scope of their audit work. The Central Bank expects that only when Auditors become aware in the ordinary course of their audit work of such an occurrence that they would expect them to make detailed enquiries with the statutory provisions/directives/regulations/guidelines specifically in mind. These guidelines do not cast an obligation on Auditors to seek out ground for making a report nor do they place an obligation on them to conduct their work in such a way that there is reasonable certainty that they will discover a breach of the criteria set out in these guidelines.

Detailed operational guidelines to auditors are annexed.

OPERATIONAL GUIDELINES TO EXTERNAL AUDITORS RELATING TO THEIR STATUTORY DUTIES UNDER SECTION 39 OF THE BANKING ACT NO. 30 OF 1988 AS AMENDED BY

BANKING ACT NO. 33 OF 19951. These auditing guidelines on Bank audits are intended to assist the Auditors of Licensed commercial banks in Sri Lanka

to comply with generally accepted auditing standards when carrying out their audit work and in preparing their report on the financial statements of Banks. These guidelines are supplementary to and should be read in conjunction with the Sri Lanka Accounting Standards Nos. 23 and 30 and any other relevant Standards referred to therein on the audit of licensed commercial banks in Sri Lanka.

2. It is particularly important that Auditors of a Bank undertake an audit engagement only after considering their own competence and the adequacy of their resources (including relevant experience) to carry out their duties. In assessing their competence and, resources the Auditors should bear in mind the type and range of the Banks activities and the nature of its systems. For example highly specialized computer systems will require different skills from those necessary to evaluate manual systems.

3. These guidelines have been drawn up in recognition of the fact that the maintenance of adequate records and systems in a licensed commercial bank is of paramount importance and that an institution cannot be regarded as conducting its business in a prudent manner unless it maintains adequate accounting and other records as well as adequate systems of control of its business and records to enable the business of the institution to be prudently managed and to comply with the duties imposed on it by or under the statutes relevant to its operations.

4. These guidelines do not attempt to describe in detail the manner, in which a particular institution should maintain its accounting and other records and internal control systems. Rather it emphasizes the need to ensure that the scope and nature of the financial information which the accounting and other records must be designed to capture, contain the required information.

Planning and Audit

5. When planning the audit of a Bank, Auditors are required to consider the following :– (a) The overall financial environment in which the Bank operates and its type of business; (b) The extent of computer systems and the reliance placed on these systems by the Bank; (c) The legal framework in which the Bank operates; (d) The audit risk involved, the assessment of which is crucial and should be undertaken very carefully, particularly

where the circumstances and management of the Bank indicate that the engagement is likely to be high risk;


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1 (e) Key audit areas, in particular, individual areas where there is a high risk of material misstatement. These should be

identified at an early stage of audit to ensure that work is concentrated on this area; (f) The adequacy and scope of the internal audit or inspection function; (g) The timing and nature of the audit work to be carried out;

(h) The use of staff with adequate training and experience.

6. Auditors should also consider the following additional matters when planning the audit :–

(a) Compliance with the requirements of any guidelines issued by the CBSL;

(b) Any formal communications between the CBSL and the Bank, including all correspondence, minutes or notes of meetings relevant to the examination of the accounting and other records, internal control systems and CBSL returns used for prudential purposes.

Scope of Audit – Accounts and Other Records

7. The scope and nature of the accounting and other records which are required for the business of a Bank to be conducted in a prudent manner should be commensurate with the manner in which the business is structured, organized and managed, as well as the volume, nature and complexity of its transactions and commitments. Auditors are thus required to ensure that the accounting and other records of a Bank meet the following general requirements :–

(a) capture and record on a timely basis and in an orderly fashion every transaction and commitment which the institution enters into with sufficient information to explain :–

(i) its nature and purpose; (ii) any asset and/or liability, actual and contingent, which respectively arises or may arise from it; and

(iii) any income and/or expenditure, current and/or deferred which arises from it;

(b) provide details, as appropriate, for each transaction and commitment, showing :– (i) the parties, including, in the case of a loan, advance or other credit exposure, whether it is sub-participated

and if so to whom it is sub-participated; (ii) the amount and currency; (iii) the contract, rollover, value and settlement or repayment dates; (iv) the contracted interest rates of an interest rate transaction or commitment; (v) the contracted exchange rate of a foreign exchange transaction or commitment; (vi) the contracted commission or fees payable or receivable together with any other related payment or

receipt; (vii) the nature and current estimated value of any security for a loan or other exposure; the physical location

and documentary evidence of such security; and (viii) in the case of any borrowing, whether it is subordinated; if secured, the nature and book value of any asset

upon which it is secured;

(c) maintain the accounting and other records in such a manner that financial and business information can be extracted promptly to enable management to :–

(i) monitor the quality of the institution’s assets and safeguard them, including those held as custodian; (ii) identify, quantify, control and manage its exposures by related counter-parties across all products; (iii) identify, quantify, control and manage its exposures to liquidity risk and foreign exchange and other

market risks across all products; (iv) monitor the performance of all aspects of its business on an up-to-date basis; and

(v) make timely and informed decisions;

(d) contain details of exposure limits authorized by management which are appropriate to the type, nature and volume of business undertaken. These limits should, where relevant, include counterparty, industry sector, country, settlement liquidity, interest rate mismatch and securities position limits as well as limits on the level of intra-day and overnight trading positions in foreign exchange, futures, options, future (or forward) rate agreements (FRAs) and swaps; provide information which can be summarized in such a way as to enable actual exposures to be readily, accurately and regularly measured against these limits;

(e) contain details of the factors considered, the analysis undertaken and the authorization or rejection by management of a loan, advance or other credit exposure; and


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1 (f) provide on a memorandum basis details of every transaction entered into in the name of or on behalf of another party

on an agency or fiduciary (trustee) basis where it is agreed that the institution itself is not legally or contractually bound by the transaction.

Internal Control Systems

8. A system of internal controls in a Bank is deemed to be;

‘the whole system of controls, financial and otherwise, established by management in order to carry on the business of the enterprise in an orderly and efficient manner, ensure adherence to management policies, safeguard the assets and secure as far as possible the completeness and accuracy of the records.’

9. In evaluating the adequacy of internal control systems in a bank, auditors are required to assess the internal control systems only to the extent that they wish to place reliance on those systems in arriving at their opinion as to whether the financial statements give a true and fair view. A careful evaluation of these systems would include computer based accounting and information systems and their relationship with the risk of material misstatement in the financial statements will be essential. If the Auditors conclude that they can rely on the system of controls they may be able to limit the level of substantive tests required to form their opinion on the financial statements.

10. For the purpose of identifying relevant controls, the principal activities of banks may be classified as follows :–

(a) loans, advances, trade finance and related income and expense;

(b) customer accounts, cash, transfer of funds, nostro accounts and related income and expense;

(c) inter bank deposits and related income and expense;

(d) dealing in foreign exchange, futures, options, commodities, bullion and related income, expense, gains and losses;

(e) investments, dealing securities and related income, expense, gains and losses; and

(f) trustee and advisory activities (including portfolio management) and related income and expense.

11. The overall audit objective should always be to ensure that the financial statements give a true and fair view of the state of the Bank’s affairs at a given date and of the results for the year ended, and comply with statutory and other relevant requirements.

12. Audit steps likely to be required to satisfy this overall objective, can be identified as follows :–

(a) to determine the reliability of the bank’s systems of internal control;

(b) to ensure that all material balances exist, are complete, and are fairly stated at the balance sheet date;

(c) to ensure that all income and expenditure, gains and losses are properly accounted for;

(d) to ascertain the recoverability and hence the realizability at the balance sheet date, of any loans, investments and other related credit exposures;

(e) in relation to trustee activities, to ascertain whether controls exist to give reasonable assurance that the bank has fulfilled its fiduciary duties; and

(f) to ensure that all material commitments and liabilities, contingent or otherwise, are identified, provided for, or adequately disclosed in the financial statements.

Automation

13. As a result of the large number of transactions undertaken and records held by banks and the need for swift and accurate information processing and retrieval, many banking functions are often highly automated, including : funds transfer systems, the accounting function, the processing and recording of retail customer transactions, the dealing room and the supply of dealing and management information.

14. The Auditors should assess the extent, nature and impact of automation within the bank and plan and perform their work accordingly.

(a) the required level of technical computer knowledge and skills is likely to be extensive and may require the auditor to obtain advice and assistance from staff with specialist skills;

(b) bank audits are particularly suitable for the use of audit software and other types of Computer Assisted Audit Techniques; and


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1 (c) reliance on internal controls for audit purposes is likely to require the evaluation and testing of general controls

relating to the environment within which computer based systems are developed, maintained and operated.

Branches

15. Many branches operate a network of branches. The Auditors’ approach to such branches will principally be determined by the degree of Head Office control over the business and accounting functions at each branch and by the scope and effectiveness of the bank’s inspection and/or internal audit visits. The extent and impact of visits from regulators should also be considered. Where branches maintain separate accounting records, the extent of audit visits and work on each branch will also be dependent on the materiality of, and risks associated with, the operations of each branch and the extent to which controls over branches are exercised centrally. Where the branch accounting records are centralized, the auditors should obtain reasonable assurance that the systems of control over branches are operating satisfactorily either by visiting branches, or by ensuring that an adequate system of branch inspection by internal auditors exists. Particular attention should be paid both to the difficulties of exercising Head Office control and to the differences in nature and degree of risk that may arise in overseas branches. In the case of smaller branches, attention should focussed upon the exceptions to a bank’s normal control procedures caused by staffing levels (e.g. the greater difficulty of ensuring adequate segregation of duties) and to the consequent need for an increased level of control from outside the branch.

Review of Financial Statements

16. When reviewing the financial statements of the Bank the Auditor should carry out such a review of the financial statements as is sufficient, in conjunction with the conclusions drawn from the other audit evidence obtained, to give him a reasonable basis for his opinion on the financial statements. Such a review should include :–

(a) Large deposits or loan repayments received shortly before the year end which are repaid or re-advanced shortly afterwards. This will require a good deal of judgement to identify any window-dressing transactions;

(b) Transfers between the trading security and investment security portfolios which take advantage of different valuation policies;

(c) The reclassification of hedging and trading transaction/positions to take advantage of different timing of profit and loss recognition;

(d) The reclassification of assets within liquidity profiles or under balance sheets headings.

17. Auditors should consider whether the accounts comply with all relevant statutory requirements, and whether the accounting policies adopted will enable them to express an unqualified opinion on the financial statement, in respect of the following:–

(a) loans, advances and trade finance;

(b) customer accounts, cash, transfer of funds and NOSTRO accounts;

(c) market deposits;

(d) foreign exchange, futures, options and commodities dealings;

(e) investments and dealing securities.

18. Auditors should ensure that the following controls are compliance tested :–

(a) Segregation of duties wherever these controls are deemed necessary;

(b) Physical controls wherever they are deemed necessary;

(c) Authorization and approval wherever they are deemed necessary;

(d) Arithmetical and accounting accuracy and controls where they are deemed necessary;

(e) Supervision controls where they are deemed necessary;

(f) Substantive tests to prove the adequacy of these controls.

19. Application and general control over the computer environment would entail :–

(a) The organization of the relevant Bank departments.

(b) Management review of activities.

(c) Recompute processing of the transactions.

(d) Input and processing of transactions by computer.


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1 (e) Maintenance of computer files of transactions and balances.

(f) Post processing actions on output and computer systems.

(g) Reconciliation of computerized records with related assets.

20. The general controls relating to the development, maintenance and operation of computer systems that are designed to control the following risks :–

(a) Risks arising in the development and enhancement of new computer systems;

(b) Risks or errors during data processing, development and amendment to programmes;

(c) Risks of loss including being unable to continue operation or recover from a breakdown or disaster - business interruption;

(d) Risks relating to unauthorized access to the computer system, its application and data files.

21. Other controls which affect a number of areas :–

(a) controls over the authorization and correct recording of : (i) nostro transactions; and (ii) transactions using funds transfer systems.

(b) Control over financial planning and budgeting.

(c) Controls governing the provision of adequate management accounting information.

(d) Controls over the documentation and communication of : (i) accounting policies ; and (ii) operational procedures and controls.

(e) controls over effective personnel selection routines.

(f) Controls over establishing, monitoring and reporting risk.

(g) Controls over management review of systems, e.g. internal audit.

(h) Controls over communication with the CBSL and other regulatory authorities. (i) Computer controls.


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27 April 2004

To : All Approved External Auditors

Dear Sir,

GUIDELINES FOR EXTERNAL AUDITORS RELATING TOTHEIR STATUTORY DUTIES IN TERMS OF SECTION 39 OF

THE BANKING ACT NO. 30 OF 1988 AS AMENDED BYTHE BANKING ACT NO. 33 OF 1995

The Central Bank of Sri Lanka as the Supervisory and regulatory authority of banking institutions strives continually to mitigate and manage the attendant risks in the banking sector in Sri Lanka. The CBSL recognizes the important role played by the External Audit firms in this regard and is working towards improving the quality and the integrity of bank audits.

Significant developments and changes have taken place in the global financial architecture since the introduction of the first guidelines to External Auditors by the CBSL. As you are aware, the Sarbanes-Oxley Act of the US has attempted to address some of these issues. Accordingly, the Monetary Board of the Central Bank of Sri Lanka has approved the attached Addendum to the Guidelines issued on 20 May 1998. The CBSL believes that these additional guidelines will address some of these concerns and contribute towards the improvement of bank audits in Sri Lanka.

Since your Firm is on the panel of approved auditors of the Central Bank, you are required to ensure that your firm is in compliance with these guidelines, which are operative with immediate effect.


Yours faithfully,


Encl.


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1Annex I

GUIDELINES FOR EXTERNAL AUDITORS RELATING TO THEIR STATUTORY DUTIES IN TERMS OF SECTION 39 OF THE BANKING ACT NO. 30 OF 1988

AS AMENDED BY THE BANKING ACT NO. 33 OF 1995

ADDENDUMNon-Audit Services

1. Qualified External Auditors shall not undertake any consultancy or other non-audit services with a bank contemporaneously with the external audit. The restricted non-audit services are:• Book keeping or other services related to the accounting records or financial statements of the audit client;• Financial information systems design and implementation;• Appraisal or valuation services, fairness options, or contribution-in-kind reports;• Actuarial services;• Internal audit outsourcing services;• Management functions, human resources and payroll services;• Broker or dealer, investment adviser, or investment banking services; and • Legal services and expert services related to the audit.

This restriction also applies to services provided by entities where a partner of an Audit Firm is a Director or has a significant share holding.

Management Letter

2. External Audit firms are requested to submit the Management Letter, which is a non-statutory report by the Auditor to the management of the Bank, together with the published audited accounts to the Banks they audit, within five months of the end of the financial year. If the auditors are unable to finalize the Management Letter, they should submit an interim report with their major findings within the said period. This will enable the Banks and the Regulator to identify significant and systemically important risks in a timely manner.


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28 July 2006


Dear Sirs,

IMPLEMENTATION OF THE NEW WEB BASEDOFF-SITE SURVEILLANCE SYSTEM

Further to our circular dated 17 March 2006 and the discussions at the meeting of the CEOs of licensed banks held on 04.07.2006 and 22.06.2006, on the above subject, all licensed banks are hereby informed that the submission of periodical returns in manual form will be discontinued from the reporting period ending June 2006. The new ‘web-based returns’ will be implemented from the reporting period commencing July 01, 2006. The lists of web-based returns are given in the Annex 1. Existing returns that are not replaced with the web-based returns should continue to be submitted in manual form.

Banks are further informed that statement of certification relating to returns submitted on a weekly/monthly, quarterly and annual basis should be submitted as specified in Annex 2, Annex 3, Annex 4 and Annex 5, respectively, within 3 days from the end of the reporting period.

Yours faithfully,



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1

Weekly ReturnsInterest Rates BSD-WF-13-IR – Interest Rates (“Bank Only” Totals)Monthly ReturnsAssets and Liabilities – DBU BSD-MF-01-BD – Balance Sheet (DBU and Bank Only Operations)Assets and Liabilities – FCBU BSD-MF-01- BF – Balance Sheet (FCBU Operations)Income and Expenditure – DBU (Note) BSD-MF-02-PD – Profit & Loss (DBU and Bank Only Operations)Income & Expenditure – FCBU (Note) BSD-MF-02- PF – Profit & Loss (FCBU Operations)Classified Advances – DBU (Note) BSD-MF-03-CD – Classification of Loans & Advances

(DBU Operations)Classified Advances – FCBU (Note) BSD-MF-03-CF – Classification of Loans & Advances

(FCBU Operations)Statutory Liquid Assets – DBU BSD-MF-04-LD – Statutory Liquid Asset Ratio (DBU Operations)Statutory Liquid Assets – FCBU BSD-MF-04- LF – Statutory Liquid Asset Ratio

(FCBU Operations)Commercial Paper/Promissory Notes BSD-MF-16-CP – Commercial Papers/Promissory NotesOverdue Export Credit(DBU & FCBU)

BSD-MF-17-CS – Overdue Export Credit (Enhanced Interest Charge on Settlements)

BSD-MF-17-CO – Overdue Export Credit (Outstanding)– BSD-MF-15-GE – Government Exposure

(“Bank Only” Totals) (New)Quarterly ReturnsAccommodation Granted to a Bank Director and/or Close Relation – Domestic Banks

BSD-qF-06-RC – Related Party Exposures (Accommodation Granted by the Bank to Directors and/or Close Relatives – “Bank Only” Totals)

Accommodation Granted to Bank Directors and Concerns where the Director has a Substantial Interest - Domestic Banks

BSD-qF-06-RS – Related Party Exposures (Accommodations Granted by the Bank to Concerns where a Director of the Bank has a Substantial Interest – “Bank Only” Totals)

Investments in Shares (Section 17A(1) of the Banking Act, No.30 of 1988 as amended by (Amendment) Act, No.33 of 1995)

BSD-qF-07-IE – Investment in Equity(“Bank Only” Totals)

Capital Adequacy - Solo BSD-qF-11-C1-C4 – Capital Adequacy (“Bank Only” Solo Basis Totals)

Capital Adequacy - Consolidated BSD-qF-11-C5-C8 – Capital Adequacy (Consolidated Totals)

Interest Spread BSD-qF-14-SP – Interest Spread– BSD-qF-05-LN – Large Exposures

(Performing & Non Performing – “Bank Only” Totals) (New)– BSD-qF-08-FE – Foreign Currency Exposures

(DBU Operations Only) (New)

Annex 1

The List of Returns implemented under New Web-based Off-site Surveillance System

Licensed Commercial Banks

Existing Manual Return New web-based Return to replace the Manual Return


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– BSD-qF-09-GA – Maturity Gap Analysis (“Bank Only” Totals) (New)

– BSD-qF-10-IS – Interest Rate Sensitivity (“Bank Only” Totals) (New)

– BSD-qF-12-SC – Sector Wise Credit Exposures (“Bank Only” Totals) (New)

Annual Returns – As per Audited AccountsAssets and Liabilities – DBU BSD-AF-01-BD – Balance Sheet (DBU and Bank Only Operations)Assets and Liabilities – FCBU BSD-AF-01-BD & BF – Balance Sheet (FCBU Operations)Income and Expenditure – DBU BSD-AF-02-PD – Profit & Loss (DBU and Bank Only Operations)Income and Expenditure – FCBU BSD-AF-02-PF – Profit & Loss (FCBU Operations)Capital Adequacy - Solo BSD-AF-11-C1-C4 – Capital Adequacy (“Bank Only” Solo Basis

Totals)Capital Adequacy - Consolidated BSD-AF-11-C5-C8 – Capital Adequacy (Consolidated Totals)

Note: Frequency has been changed form quarterly to monthly.

Annex 2

StatementofCertificationofWeekly/MonthlyReturnsApproved/Submitted

Existing Manual Return New web-based Return to replace the Manual Return

Return Due DateSubmitted Approved

DateYes NoMonthly ReturnsBSD-MF-01-BD – Balance Sheet - Domestic Banking Unit Operations (DBU) and Bank

15/MM/YY

BSD-MF-01-BF – Balance Sheet - Foreign Currency Banking Unit Operations (FCBU)

15/MM/YY

BSD-MF-02-PD – Profit & Loss - Domestic Banking Unit Operations (DBU) and Bank

15/MM/YY

BSD-MF-02-PF – Profit & Loss - Foreign Currency Banking Unit Operations (FCBU)

15/MM/YY

BSD-MF-03-CD – Classification of Loans & Advances - Domestic Banking Unit Operations (DBU)

15/MM/YY

BSD-MF-03-CF – Classification of Loans & Advances - Foreign Currency Banking Unit Operations (FCBU)

15/MM/YY

BSD-MF-04-LD – Statutory Liquid Asset Ratio - Domestic Banking Unit Operations (DBU)

15/MM/YY

BSD-MF-04-LF – Statutory Liquid Asset Ratio - Foreign Currency Banking Unit Operations (FCBU)

15/MM/YY

BSD-MF-16-CP – Commercial Papers/Promissory Notes 15/MM/YYBSD-MF-17-CS – Overdue Export Credit - Enhanced Interest Charged on Settlement

15/MM/YY

BSD-MF-17-CO – Overdue Export Credit - Outstanding 15/MM/YYBSD-MF-15-GE – Government Exposure (New) 15/MM/YYBSD-WF-13-IR – Interest Rates – 1st Week DD/MM/YY


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1BSD-WF-13-IR – Interest Rates – 2nd Week DD/MM/YYBSD-WF-13-IR – Interest Rates – 3rd Week DD/MM/YYBSD-WF-13-IR – Interest Rates – 4th Week DD/MM/YYBSD-WF-13-IR – Interest Rates – 5th Week DD/MM/YY

We certify that the information contained in the above returns has been extracted from and is in accordance with the books of accounts of the bank.

(Name) (Name)

………………………. ………………………………………….

(Sgd) Finance Controller (Sgd) Compliance Officer/Administrator


Annex 3

StatementofCertificationofQuarterlyReturnsApproved/Submitted

Quarterly ReturnsBSD-qF-05-LN – Large Exposures (New) 21/MM/YYBSD-qF-06-RC – Related Party Exposures - Accommodation granted by the Bank to Directors and/or Close Relatives

21/MM/YY

BSD-qF-06-RS – Related Party Exposures - Accommodation Granted by the Bank to Concerns where a Director of the Bank has a Substantial Interest

21/MM/YY

BSD-qF-07-IE – Investment in Equity 21/MM/YYBSD-qF-08-FE – Foreign Currency Exposures (New) 21/MM/YYBSD-qF-09-GA – Maturity Gap Analysis (New) 21/MM/YYBSD-qF-10-IS – Interest Rate Sensitivity (New) 21/MM/YYBSD-qF-12-SC – Sector Wise Credit Exposures (New) 21/MM/YYBSD-qF-14-SP – Interest Spread 21/MM/YY


(Name) (Name)

………………………. ………………………………………….




DateYes No


DateYes No


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Annex 4StatementofCertificationofAnnualReturnsApproved/Submitted

Annual ReturnsBSD-AF-01-BD – Balance Sheet (DBU and Bank Only Operations)

30/MM/YY

BSD-AF-01-BD & BF – Balance Sheet (FCBU Operations) 30/MM/YYBSD-AF-02-PD – Profit & Loss (DBU and Bank Only Operations)

30/MM/YY

BSD-AF-02-PF – Profit & Loss (FCBU Operations) 30/MM/YY


(Name) (Name)

………………………. ………………………………………….



Annex 5

StatementofCertificationofQuarterly/AnnualReturnsApproved/Submitted

(Only for Capital Adequacy)

Quarterly ReturnsBSD-qF-11-C – Capital Adequacy – Bank Only (SOLO basis)

30/MM/YY

BSD-qF-11-C – Capital Adequacy – Consolidated 30/MM/YY

We certify that –

(1) The information submitted in the above return is, to the best of our knowledge and belief, correct;

(2) The capital adequacy ratio was, at any time during the quarter/year under review, not less than the ratio determined by the Monetary Board, in terms of section 19(7)(a) of the Banking Act, No.30 of 1988 as amended by Banking Act, No.33 of 1995 and Act, No.2 of 2005.

………………………………………. ……………………………..

Chief Accountant/Authorised Officer Chief Executive

………………………………………. ……………………………..

Name Name

Date:…………………………. Date:………………………….


DateYes No


DateYes No


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17 March 2006

To : CEOs of all Licensed Commercial Banks and all Licensed Specialised Banks

Dear Sirs,

NEW WEB-BASED OFF-SITE SURVEILLANCE SYSTEM

We refer to the discussion at the Bank Managers’ Meeting held on 26 January 2006 and the previous correspondence on the above subject and write to inform you that the testing of, and familiarization with, the above system with the use of information submitted by the banks for the month of September 2005, through the web-based application, has been completed. The next step is to go “live” with the above system and this exercise will start in parallel with the existing manual system till June 2006. Once the system is fully tested, the existing manual returns submission system will be discontinued.

Therefore, we shall be thankful if you will make arrangements to forward the information in the new returns, from January 2006 onwords, through the above web-based system, in addition to the present system of “manual returns submission” to this Department. Your co-operation in this regard will be much appreciated.

Yours faithfully,



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18 February 2005

To : The CEOs of all Licensed Commercial Banks and Licensed Specialised Banks

Dear Sirs,

SUBMISSION OF THE MONTHLY & qUARTERLY COMPLIANCE REPORTS

I refer to the BSD Circular dated 26 October 2001 and the discussion on the above subject at the meeting of the CEOs of Licensed Commercial Banks (LCBs) and Licensed Specialised Banks (LSBs) held on 17.02.2005.

As agreed, all banks are hereby informed that the CEO of the respective bank should sign the Compliance Reports submitted to this Department on a monthly and quarterly basis.

This will be effective for the Compliance Reports to be submitted for the month of February 2005 onwards.

Yours faithfully,


cc – Secretary-General/SLBA


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1BANKING ACT NO. 30 OF 1988

AS AMENDED BY BANKING (AMENDMENT) ACT NO. 33 OF 1995

Conditions determined, by the Monetary Board of the Central Bank of Sri Lanka, under section 83A of the Banking Act No.30 of 1988 as amended by the Banking (Amendment) Act No.33 of 1995 relating to business of pawn broking.


GovernorColombo07 September 1998

LICENSED COMMERCIAL BANKS (PAWNING) CONDITIONS 1998

1. (1) These Conditions may be cited as the Licensed Commercial Banks & (Pawning) Conditions, 1998

(2) These Conditions shall apply to the business of pawn broking, (hereafter referred to as pawning) carried on by a licensed commercial bank or any branch or agency of such bank (hereafter referred to as the “pawnee”).

2. In these Conditions, “pawning” means the lending of money on the security of personal articles made of gold (hereafter referred to as the “article”) accepted as a pledge for a period not exceeding an initial period of 12 months.

3. (1) A pawnee shall not accept an article as a pledge where the pawnee has reasonable grounds to believe that the person who gives the article as a pledge is not the owner or the authorised agent of the article.

(2) A person who gives an article as a pledge or redeems an article shall establish the identity of the person to the satisfaction of the pawnee.

4. Pawning shall be carried on by a pawnee –

(a) between the opening and closing hours of business for the public in its capacity as a licensed commercial bank; and

(b) on such other dates and times as may be specified in a notice displayed in a conspicuous place at the place of business of the pawnee.

5. A pawnee shall, for the purpose of testing and valuing articles for pawning, have staff with sufficient training and competency in and the equipment for assaying the gold content of an article.

Citation & Application.

Interpretation.

Ownership of pledge.

Dates & Times of Pawning.

Competence of Staff and equipment.


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16. (1) The standard measurement for the determination of the

quality of an article shall be a carat.

(2) The standard measurement of weight used in the valuation of an article shall be a gram.

(3) An article measuring less than 9 carats shall not be accepted as a pledge.

(4) In valuing an article, the pawnee shall have regard only to the value of gold in the article.

(5) A pawnee shall, in accepting an article as a pledge, inform the person delivering the article, the value of the article determined in accordance with this paragraph.

7. (1) The rate of interest chargeable on the money lent on the security of an article accepted as a pledge for pawning shall be fixed by the pawnee.

(2) A pawnee shall display in a conspicuous place in its place of business a notice specifying –

(a) the daily market value of sovereign gold;

(b) the rate or rates of interest fixed under subparagraph (1) or subparagraph (3).

(c) The maximum percentage of the value of an article lent on each carat of the article.

(3) Where an article given as a pledge for pawning is not redeemed within the redeemable period calculated under paragraph 11, a pawnee may, subject to paragraph 10(2), levy interest on the money lent at a rate higher than the rate levied during the redeemable period, (such higher rate referred to as “enhanced interest”) from the date immediately following the redeemable period.

8. (1) A pawnee shall keep for its business –

(a) a pledge book in the Form set out in the First Schedule;

(b) a sale book of pledges in the Form set out in the Second Schedule.

(2) A pawnee shall, after due inquiry, enter in each book kept under the subparagraph (1), the particulars specified therein in respect of each article taken as a pledge.

9. (1) Subject to subparagraph (6), a pawnee shall execute, in respect of every article accepted as a pledge for pawning, a pawn ticket.

(2) A pawn ticket shall be in foil and counterfoil and shall be in the Form set out in the Third Schedule.

Interest Rates.

Books to be maintained.

Pawn Ticket.

Standard Measurement.


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1 (3) The counterfoil of the pawn ticket shall, after its is filled

up by the pawnee, be signed by the person giving the article as a pledge (hereafter referred to as the “pawner”) or, if the pawner is unable to sign the name, be marked with the left thumb impression of the pawner.

(4) The foil of the pawn ticket shall be filled up and signed by the pawnee.

(5) The pawnee shall, after compliance with sub paragraph (4), hand over the foil of the pawn ticket to the pawner.

(6) When a pawner gives more than one article as pledge on the same occasion, the pawnee may execute one pawn ticket for all such articles, unless the pawner requests otherwise.

10. (1) Where an article is redeemed within the first fourteen days of a month, the interest chargeable for that month shall be one half interest chargeable for that month.

(2) Where the business of a pawnee remains closed on the last date of the redeemable period without reasonable and adequate notice, enhanced interest may be levied only from the day immediately succeeding the first day on which the business thereafter remains open.

11. (1) Every article given as a pledge shall be redeemable within a period of 12 months commencing from the date of pawning (in these Conditions referred to as the “redeemable period”).

(2) In calculating the period of 12 months under subparagraph (1) the date of pawning shall be disregarded.

12. (1) Subject to the other provisions of this paragraph, a pawner may redeem an article given as a pledge, by delivering to the pawnee the foil of the pawn ticket in relation to that article and by placing the signature or the left thumb imprint, as the case may be, of the pawner on the foil in the presence of the pawnee or an authorised agent or employee of the pawnee.

(2) A person authorised in writing by the pawner may redeem an article given as a pledge by delivering to the pawnee the foil of the pawn ticket in relation to the article, duly endorsed by the signature or the left thumb imprint of the pawner and by placing on the foil the person’s signature or left thumb impression in the presence of the pawnee or an authorised agent or employee of the pawnee.

(3) Where by reason of the death or disability of the pawner, an article given as a pledge cannot be redeemed under subparagraph (1) or subparagraph (2), a holder of the foil of the pawn ticket in relation to the article may redeem the article by delivering to the pawnee the foil together with a declaration in the form set out in the Fourth Schedule signed by the holder and by a person identifying the holder and made before a Justice of Peace.

Computation of Interest.

Redeemable period.

Procedure for redemption of a pledge.


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1 (4) Where a foil in relation to an article given as a pledge

is lost, stolen, mislaid, destroyed or has been obtained by a person not entitled to it, the pawner, the person or the holder referred to in subparagraphs (1), (2), or (3) may redeem the article by making a declaration in the Form set out in the Fifth Schedule signed by the pawner, person or holder, as the case may be, and a person identifying the pawner, person or holder and made before a Justice of the Peace and in that event the pawner, person or holder, as the case may be, shall place the signature or the left thumb impression on the counterfoil of the pawn ticket in the presence of the pawnee, or an authorised agent or employee of the pawnee.

(5) Subject to subparagraphs (1), (2),(3) and (4) the pawnee of an article given as a pledge shall, on payment of the money lent on the security of the article together with the interest due thereon by the person entitled to redeem the article under those subparagraphs, deliver, subject to subparagraph (6), the article to such person.

(6) Where a pawnee has reasonable grounds to believe that a person delivering a foil of a pawn ticket under subparagraphs (1), (2) or (3) has stolen or otherwise illegally obtained possession of it, the pawnee may refuse to deliver the article in relation to that foil.

(7) The pawnee shall in delivering under subparagraph (4) an article given as a pledge, issue to the person redeeming the article a receipt for the money paid in the Form set out in the Sixth Schedule.

13. (1) Where an article given as a pledge is lost, destroyed or damaged while in the custody of the pawnee, the pawnee shall be liable, on demand by a person entitled to redeem it within the redeemable period, to pay the person the value of the article determined under paragraph 6 less any sum due as money lent and interest thereon.

(2) Every pawnee shall insure the business of pawn broking to the value of the articles taken as pledges.

14. Every pawnee shall retain in the possession of the pawnee –

(a) the counterfoil of each pawn ticket for a period of 12 months from the date of redemption of the article relating that pawn ticket or, when the article is sold under paragraph 15 from the date of sale.

(b) foil of every such pawn ticket referred to in paragraph (a) for a period of 12 month from the date of redemption where the foil is delivered to the pawnee;

(c) each declaration made under paragraph 12 for a period of 12 months from date of redemption of the article in respect of which the declaration is made.

(d) the duplicate copy of the receipt issued under paragraph 12 (7) for a period of 12 months from the date of issue of the receipt.

Loss or destruction of pledge.

Period of retention of documents.


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115. (1) Where an article delivered as a pledge is not redeemed

within the redeemable period calculated under paragraph 11, a pawnee may sell the article by public auction and the provisions of this paragraph and the Seventh Schedule shall apply to such sale.

(2) The auctioneer at a public auction conducted under subparagraph (1) shall be a senior officer of the pawnee of a rank not below the rank of a Branch Manager.

(3) A pawnee shall give to each pawner of an article liable for sale under subparagraph (1) not less than 14 days notice of the auction.

(4) The notice under subparagrah (3) shall state the date, time and place of the auction and shall be sent to the pawner by registered post to the address stated in the pledge book and the cost of such postage shall be borne by the pawner.

(5) Where a notice sent by registered post to a pawner is returned undelivered to the pawnee, the notice of the auction published pursuant to the Seventh Schedule shall be a sufficient notice to the pawner.

(6) A pawnee may bid for and purchase at an auction conducted under subparagraph (1) an article delivered to the pawnee as a pledge and liable to be sold under that subparagraph and on such purchase shall be deemed to be the absolute owner of the article.

(7) Where at an auction conducted under subparagraph (1) an article is sold for an amount exceeding the money lent on the security of that article together with interest thereon, the pawnee shall –

(a) forthwith give notice to the pawner of that article by registered post to the address stated in the pledge book of the amount for which the article was sold and of the amount lying to the credit of the pawner after deducting the cost of postage and the charges of the auction;

(b) on demand made by the pawner within 12 months from the date of dispatch of the notice, pay to the pawner the sum lying to the pawner’s credit;

(c) if no demand is made within the period specified in clause (b) above, deposit forthwith after the expiration of that period such amount in a savings account opened in the name of the pawner or transfer the said amount to an un claimed balance account maintained by the pawnee.

(8) A pawnee shall keep proper records of the unclaimed balance account maintained under subparagraph (7)(c) and pay to the pawner the amount due to the pawner if a claim is made thereto by the pawner.

Sale of Pledges.


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116. A pawnee shall at the end of every quarter carry a physical

check to be made of the articles delivered as pledges and held in stock by the pawnee.

17. A pawnee shall not –

(a) accept an article as a pledge from any person appearing to be under the age of 16 years or to be under the influence of alcohol;

(b) accept an article as a pledge without giving the pawner of the article the foil of the pawn ticket;

(c) purchase or take as security or exchange the foil of a pawn ticket issued by another pawnee;

(d) purchase any article given to the pawnee as a pledge except at a public auction conducted under paragraph 15;

(e) allow any article delivered as a pledge to be redeemed with the view to purchasing it by the pawnee;

(f) agree with the pawner to purchase, sell, or dispose within the redeemable period an article delivered by the pawner as a pledge;

(g) sell or otherwise dispose of an article delivered as a pledge except at such time and in such manner as is authorised under these Conditions.

(h) make any false entry in a pledge book or any other document required to be kept under these Conditions or fail to make therein any entry required to be entered under these Conditions.

18. (1) A pawnee shall be responsible for the safe custody of articles delivered as pledges.

(2) Articles delivered to a pawnee as pledges shall be placed –

(a) In safes which are under dual control;

or

(b) In steel cabinets under dual control kept inside a vault.

(3) A pawnee shall establish a dual control team of which the Head of the pawning division shall be a member.

Physical check of pledges.

Safe custody of articles.

Acts prohibited.


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119. (1) A pawnee may formulate rules which are not inconsistent

with these Conditions for the conduct of its pawn broking business.

(2) A pawnee shall forward to the Director of the Bank Supervision Department of the Central Bank a copy of the rules formulated under paragraph (1) and display a copy of those rules in a conspicuous place at its place of business.

Rules.


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1 [ PARAGRAPH 8 ] First Schedule

PLEDGE BOOK

Pledge Book of .......................................................... Pawnee of .............................................................................................

SerialNo. of

pledge in the month

Date No. of the Issued

Pawn Ticket

Nameof

Pawner

Address*of

Pawner

Nameof Owner if other

thanPawner

Descriptionof each Article

Pawned

[ PARAGRAPH 8 ] Second Schedule

SALE BOOK OF PLEDGES

Date and Place of Sale : ..................................................................................................................................

Name and Address of Auctioneer : ..................................................................................................................

Weight of Article if Jewellery

Value of each Article in term of

para (6)(Rs. cts.)

Amount of Loan upon each Article

(Rs. cts.)

Profit or interest charged upon each

Article(Rs. cts.)

Name & Address

ofPerson

redeeming

Date of redemption

* New address if original is changed

Dateof

Pawning

No. of pledge as in

pledge Book

Nameof

Pawner

Amount of

Loan

Amount of

Interest due

Amount for which each Pledge was

Sold by Auctioneer

Name & Address of Purchaser


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1[ PARAGRAPH 9 ] Third Schedule

PAWN TICKET

Counterfoil No. ……………

(To be retained by Pawnee)

Date : ………

Name and address of pawnee

……………………………………………………………………………………………………

I, the undersigned, …………………… of (*address of pawner) ……………………… have this day pawned with the aforesaid pawnee……………………………… worth Rs. ………………………………………… for Rs. ……………………………

(Value as determined in terms of para (6) of the condition)

Signature of pawner, or Left thumb impression of Pawner if unable to write Name.

Signature of pawnee

Foil. No. ………………

Date : …………

……………………………………………………………………………………………… (name and *address of pawner) has this day pawned with the undersigned …………………………………………… (name and address of pawnee) worth Rs……………… for Rs. ……………………………

(Value as determined in terms of para (6) of the condition)

Signature of Pawnee

Signature of Pawner or left thumb impression

Pawner agrees

1) where an article delivered as a pledge is not redeemable within the redeemable period calculated under paragraph 11 of the condition under paragraph 11 of the conditions of pawning, a pawnee may sell the article by public auction.

2) where a notice sent by registered post to a pawner is returned undelivered to the pawnee, the notice of auction published in the newspapers shall be sufficient notice to the pawner.

* Change of address to be notified


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1[ PARAGRAPH 12 ] 4th Schedule

DECLARATION WHERE THE FOIL OF THE PAWN TICKET IS SURRENDERED

WITHOUT THE SIGNATURE

OF THE PAWNER ENDORSED THEREON

I, A. B., …………………………… , of ………………………………………… , do solemnly and sincerely declare that …………………………………… pledged at ……………………………, Pawnee, the article/s described below and received the foil of a pawn ticket for the same and that for the purpose of redeeming the pledge I am unable to surrender the foil of the pawn ticket to the pawnee with the signature of the said .……….........

(pawner) duly endorsed thereon, because the said ………………………………………………

(pawner) is dead/under a disability, to wit ………………………………………………

(nature of disability).

The article/s above referred to is/are …………………………………………………………………

I, C. D., ………………………… do solemnly and sincerely declare that I know the person now making the foregoing declaration to be A. B., of …………………………………

Declared before me this ……………………… day of ……………………………………, 19………

Signature of A. B., ………………………………

Signature of C. D., ………………………………

……………………Justice of Peace

[ PARAGRAPH 12 ] 5th Schedule

DECLARATION WHERE THE FOIL OF THE PAWN TICKET IS LOST &C.

Take notice, if this declaration is false the person making it is punishable.

I, A. B., ……………………………………… , of ………………………………… , do solemnly and sincerely declare that …………………………………… pledged at …………………………, Pawnee, the article (or articles) described below, …………………………………………………, property, and received the foil of the pawn ticket for the same, which has since been ……………, by ……………, and that the foil of the pawn ticket has not been sold or transferred to any person by …………… to ……………knowledge or belief.

The article (or articles) above referred to is (or are) the following : .....…………….....

And, I, C. D., ……………………… do solemnly and sincerely declare that I know the person now making the foregoing declaration to be A. B., of …………………………………

Declared before me this ……………………… day of ……………………………………, 19………

……………………Justice of Peace


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1[ PARAGRAPH 12 ] 6th Schedule

RECEIPT NO.

Date : …………

Received on redemption of Pledge No. ………………………

Rs. Cts. Amount of loan

Profit or interest

Total

==============

……………………Signature of Pawnee

[ PARAGRAPH 15 ] 7th Schedule

REGULATIONS RELATING TO AUCTIONS OF PLEDGES

1. The pawnee shall cause all pledges to be exposed to public view.

2. The pawnee shall display catalogues of the pledges, stating – (a) the pawnee’s name and place of business; (b) the month in which each pledge was pawned; (c) the number of each pledge as entered at the time of pawning in the pledge book.

3. The pledges of each pawnee in the catalogue shall be separate from any pledges of any other pawnee.

4. The auctioneer shall insert in a daily newspaper in all three languages an advertisement giving notice of the sale, and stating –

(a) the pawnee’s name and place of business; (b) the months in which the pledges were pawned; (c) the place of auction; (d) the date and time of auction.

5. The advertisement shall be inserted on two separate days in the same newspaper, and the second advertisement shall be inserted at least ten clear days before the first day of sale.

6. Where a pawnee bids at a sale, the auctioneer shall not take the bidding in any other form than that in which he takes the biddings of other persons at the same sale; and the auctioneer on knocking down any article to a pawnee shall forthwith declare audibly the name of the pawnee as purchaser.

7. The auctioneer shall, within fourteen days after the sale, deliver to the pawnee a copy of the catalogue, or of so much thereof as relates to the pledges of that pawnee, filled up with the amount for which the several pledges of that pawnee were sold, and authenticated by the signature of the auctioneer.

8. The pawnee shall preserve every such catalogue for two years at least after the date of the auction.


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1Ref. No. : 02/04/002/005/001

Bank Supervision Department8th Floor, Renuka Building41, Janadhipathi MawathaColombo 01.

01 December 1999

To : All Licensed Commercial Banks & all Licensed Specialised Banks

Dear Sir / Madam,

SECRECY OF BANKING TRANSACTIONS IN TERMS

OF SECTION 77 OF THE BANKING ACT

In terms of Section 77 of the Banking Act, No.30 of 1988 as amended by Banking (Amendment) Act, No.33 of 1995, Banks are required to observe strict secrecy in respect of all banking transactions.

Innovations in the field of Information Technology have changed the environment of the Banking Industry and it has been observed that staff of outside computer firms also have access to confidential customer information of Banks.

In the above circumstances all Licensed Commercial Banks and all Licensed Specialised Banks are hereby required to adhere to the following:

(i) Inclusion of a special clause/condition in software maintenance agreements or service agreements with outside software companies, requiring them to observe strict secrecy in respect of all transactions of the bank, its customers and the state of accounts of any person and all matters relating thereto.

(ii) Obtain declarations of secrecy from all persons and organisations who perform services in terms of such maintenance or service agreements.

Yours faithfully,

Sgd. Dr. Anila Dias Bandaranaike



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1Ref. No. : 02 / 04 / 001 / 0105 / 002


06 April 2005

To : All Licensed Commercial Banks Licensed Specialised Banks;

Dear Sirs,

EXTENDING / RESTRICTING OF BANKING HOURS BY THE BANKS

It has been observed that the Licensed Commercial Banks and Licensed Specialised Banks have made requests from time to time to extend and restrict their banking hours. There is no legal provision that governs banking hours of the licensed banks. However, as there can be certain repercussions arising under certain laws if banking hours are extended to bank holidays and/or normal business hours are restricted, it is important that banks satisfy themselves with the legal implications and liabilities, if any, arising out of these arrangements.

All licensed banks are hereby informed that the Central Bank of Sri Lanka has no objection to the extension or restriction of banking hours subject to the above concerns being met. All banks should ensure that customers are informed of such changes well in advance to avoid inconvenience to them.

Yours faithfully,

Sgd, Director of Bank Supervisioncc: Mr. Upali de Silva Secretary-General Sri Lanka Banks’ Association (Gte) Ltd. Level 8, Ceylinco House Colombo 1.


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1Ref. No. : BS/33/93

1st July, 1993.

NOTICE TO BANKS – 1/93

INCENTIVE SCHEMES FOR MOBILIZING DEMAND DEPOSIT ACCOUNTS

The following guidelines should be followed by all Commercial Banks when framing incentive schemes to mobilize demand deposits.

1. First preference to be given to schemes that promote service oriented facilities such as –

(a) permitting withdrawals of funds from any branch office;

(b) extended banking hours;

(c) reducing time taken for the encashment of cheques; and

(d) reducing the minimum deposit required to open an account.

2. Where any other form of incentive is offered, the scheme should :

(a) be within the legal framework and accepted banking practices;

(b) promote banking habits or any other broader objective in the economy;

(c) not have adverse revenue implications for the Government;

(d) not have an adverse impact on the profitability of the bank through excessive increase in costs of mobilizing deposits;

(e) bestow on the depositor a real benefit and not something illusory;

(f) not lead to unfair and unethical banking practices;

(g) not weaken the monetary policy tools or prudential requirements; and

(h) be operated directly by the bank or, where it is undertaken in association with another company, the company providing the benefit should not be an affiliate/subsidiary company of the bank concerned or part of Group to which the bank belongs.

The prior approval of the Director of Bank Supervision should be obtained before such deposit incentive schemes are implemented.

Yours faithfully

Sgd. P. T. Sirisena



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1INTRODUCTION OF PRODUCTS BASED ON ISLAMIC PRINCIPLES1/

The recent amendments to the Banking Act permit banks to introduce banking products based on Islamic principles. Several banks have requested permission from CBSL in this regard.

In order to ensure that all banking operations, be it conventional banking or Islamic Banking, are conducted in a prudential manner, the following regulatory framework will apply:

1. The Islamic Banking operations should be conducted strictly within the existing regulatory framework applicable to the licensed banks.

2. The respective banks should maintain separate books of accounts for their Islamic Banking Operations.

3. Data on Islamic Banking should be included under a separate column in the statutory returns submitted to CBSL in order to enable a clear demarcation between the accounts relating to conventional banking and Islamic Banking.

4. The prudential regulations that apply to conventional banking operations will apply equally to Islamic Banking business and banks are advised to strictly follow the existing regulations. If any deviations are observed, such banks will be required to immediately cease the continuation of the relevant operations.

The CBSL will write individually to the banks that have inquired in this regard.

1/ Distributed at the meeting of the CEOs of LCBs and LSBs held on 19 May 2005


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31 December 2004

To : CEOs of Licensed Commercial Banks Secreatary-General/SLBA

Dear Sirs,

WITHDRAWALS ON SAVINGS ACCOUNTS

This is to inform you that the restriction on payment of interest for a particular month, on savings accounts in respect of which there had been more than 4 withdrawals per month, in terms of Circular No. BS/6/81 dated 29 June 1990, has been removed with immediate effect.


Yours faithfully,



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1Ref. No. : BS/6/81

29, June 1990.


WITHDRAWALS ON SAVINGS ACCOUNTS AND7 DAY CALL DEPOSIT ACCOUNTS

It has been observed that some commercial banks operate savings accounts and 7 day call deposit accounts for their customers in the manner of current accounts, i.e., permitting almost daily withdrawals on these accounts, whilst paying interest on them. This is tantamount to the payment of interest on demand deposits and is contrary to established banking practice in Sri Lanka.

To ensure the element of notice on withdrawals from savings accounts, it has been the practice to permit only once-a-week withdrawals on these accounts. 7 day call deposits by their very name ensure that a deposit is not uplifted before 7 days for the payment of interest.

In order to ensure the savings character of these accounts and with a view to ensuring uniformity in the practice prevailing in the commercial banking system in Sri Lanka, commercial banks are hereby informed that they should, with immediate effect, conform strictly to established banking practice in Sri Lanka in the operation of savings accounts and 7 day call deposit accounts for their customers, through their savings pass books or through automated teller machines.

Where any commercial bank has deviated from the above practice, a press notice drawing the attention of its customers to the correct procedure in the operation of these accounts is required.

Sgd. P. T. Sirisena



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1BANKING ACT

Determination made by the Monetary Board of the Central Bank of Sri Lanka under Section 48a of the Banking Act, No.30 of 1988 as amended by Banking (Amendment) Act, No.33 of 1995.


GovernorColombo22 August 1997

DETERMINATION

1. By virtue of the provision of section 48A of the Banking Act, No.30 of 1988 as amended by Banking (Amendment) Act, No.33 of 1995, the Monetary Board has determined that a licensed commercial bank shall not purchase or in any other way acquire any immovable property or any right therein, exceeding in the aggregate fifteen percent of its capital funds.


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1Ref. No. : PS / 21 / 98

Bank Supervision Department14 September 1998


Dear Sirs,

APPOINTMENT OF COMPLIANCE OFFICERS

Your attention is drawn to the discussion held at the Bank Managers’ Meeting of 13 August 1998, where it was agreed that the banks should establish an independent compliance function to ensure compliance in respect of banking and other statutory requirements.

As compliance failures affect integrity and reputation of banking institutions, it is imperative, that banks have in place adequate policies and procedures to ensure compliance with laws and regulations.

Such a compliance function would be most appropriately addressed, by appointing a Compliance Officer whose terms of reference, would broadly encompass the following:–

1. Develop policies and procedures designed to eliminate or minimize the risk of breach of regulatory requirements and of damages to the bank’s reputation and to ensure these policies and arrangements are adhered to in letter and spirit.

2. Promote throughout the business the belief that compliance is not a negative process but a positive contribution to the success of the Bank, so that the principles and importance of compliance are clearly understood by all.

3. Secure early involvement in the design and structuring of new products and systems, to ensure that they conform to local regulatory requirements and internal compliance and ethical standards.

4. Maintain regular contact and good working relationship with regulators based upon clear and timely communication and a mutual understanding of the regulators’ objectives.

5. Ensure that reviews are undertaken at appropriate frequencies to assess compliance with regulatory rules and internal compliance standards.

6. Promote, across the compliance network, best practices developed in the area of compliance.

7. Understand and apply all new legal and regulatory developments relevant to the business of the Bank.

8. Represent the compliance function on relevant internal and external committees.

9. Ensure that compliance policies and procedures are clearly communicated to management and members of staff.

10. Provide timely reports to management, including senior management, which will highlight regulatory developments, changes in the law, and other developments insofar as they give rise to compliance issues relevant to the Bank’s business.


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111. Highlight serious or persistent compliance problems and where appropriate, work with

management to ensure that they are rectified within an acceptable time.

12. Liaise with the Bank’s Audit function to ensure that:

(a) Auditors are familiar with local regulatory and ethical requirements, so that they are able to ensure that compliance issues are properly addressed.

(b) Compliance weaknesses identified as a result of audits are followed up.

You are requested to make early arrangements to appoint a Compliance Officer with sufficient seniority and also communicate the name of the officers and his contact telephone number for our records.


Yours faithfully,

Sgd, Y. A. Piyatissa

Director of Bank Supervisioncc: Mr. C.A.P. Leonard, Chairman Sri Lanka Banks’ Association (Gte) Ltd. 17 1/B, Standard Chartered Bank Building Janadhipathi Mawatha Colombo 1.


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1Ref. No. : 02 / 04 / 008 / 0002 / 001


06 May, 2008

To : All CEOs of Licensed Commercial Banks and Licensed Specialised Banks

Dear Sir/Madam,

ENHANCING LENDING TO AGRICULTURE SECTOR

As you are aware, international food prices have risen in an unprecedented manner in the recent past and these price escalations could have far reaching effects on Sri Lanka and indeed on almost every country in the world. As you also know, a significant portion of the current inflation in Sri Lanka is driven by these large increases in food prices. This clearly demonstrates the importance of enhancing food production and food security in the country.

Hence, as conveyed by the Governor at the Bank Managers’ Meeting held on 24 April 2008, there is a need to sustain and expand lending to the Agriculture sector. While we note that some banks have already achieved the target set out in the Budget 2006, there are others who are yet below such level of lending to the sector. Hence, banks which are yet to expand their Agriculture lending to reach 10% of their lending portfolio, are requested to take steps to do so, and also to inform us of their plans to expand agricultural loans, in particular for cultivation of food crops.

In view of the present national requirement in expanding food production and increasing agricultural productivity, your urgent attention and cooperation to channel lending to this sector is solicited.

Yours faithfully,

Sgd. Actg. Director of Bank Supervision


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21 August 2006

To : CEOs of all Licensed Commercial Banks All Licensed Specialised Banks;

Dear Sirs,

MANDATORY LENDING TO AGRICULTURE SECTOR

We refer to the discussion on the above subject at the meeting of the CEOs of Licensed Commercial Banks (LCBs) and Licensed Specialised Banks (LSBs) held on 11 August 2006.

As announced, all banks are requested to inform us of the advances granted to the different sub-sectors in the agriculture sector on the basis of definition provided at the meeting held on 04 July 2006 (copy enclosed for reference). You are also requested to include any other advances that are not captured in the above definition but are connected with agricultural purposes, separately, indicating the purpose.

We shall be thankful if you will make arrangements to provide the information on or before 31 August 2006.

Yours faithfully,

Sgd, Actg. Director of Bank Supervision


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1MANDATORY LENDING TO THE AGRICULTURE SECTOR

The attention of the CEOs is drawn to the discussion on the proposed implementation of the budget proposal on mandatory lending to the agriculture sector. The CEOs were requested to send in their suggestions in this regard.

The BSD has presented a paper in this regard to the Monetary Board, and the following has been approved:

1. Thedefinitionofagriculture

Cultivation, processing and purchasing of tea, rubber, coconut, paddy, minor export crops, livestock and dairy farming, fisheries, minor food crops, horticulture, forestry and bee keeping etc. as well as processing of products for value addition for export purposes.

Within the above definition, the following could be construed as mandatory lending to the agriculture sector.

(a) Direct finance to farmers to undertake the agricultural activities specified above and

(b) Indirect finance for:

• Purchase of agricultural implements

• Purchase of farm machinery (tractors, trailers, power tillers, tractor accessories and providing funds to Cooperative societies to provide agricultural equipments and tractors on concessional rental basis to farmers)

• Purchase of vehicles for the transport of agricultural inputs and farm products including lease facilities

• Developing the national irrigation potential (e.g.: implementing multipurpose irrigation schemes, construction of tanks, tube wells etc. and purchase of drilling units)

• Reclamation and developing land for cultivation

• Construction of farm buildings and structures (Bullock sheds, farm sheds, implement sheds, tractor and truck sheds)

• Construction and running of storage facilities (warehouses, silos and loans granted for establishing cold storages for storing produce)

• Production and processing of hybrid seeds for crops (e.g.: developing state owned seed research farms and seed production farms)

• Obtaining fertilizer (Establishing a fertilizer factory to supply fertilizer at cheaper prices and providing essential insecticides and weedicides through Cooperatives at competitive prices)

• Agricultural advisory services and research activities (reviving schools of Agriculture and University faculties, training farmers and equipping them with required technological and other skills)

• Purchase of Agricultural produce (granting loans at concessionary rates to rehabilitate the small and medium scale paddy mills and establishing Rice Processing Villages)

• Developing plantations, horticulture, forestry, dairy, fisheries, piggery, poultry, bee keeping etc. and providing loans for allied activities (Providing incentives for introducing new varieties and value addition, conducting research, boosting exports, modernizing factories, providing assistance for obtaining equipment and new technology, launching projects to preserve crops, add value to market crops as processed/packed foods and store the produce, establishing Regional distribution Centres and arranging to store produce in fully equipped cool rooms etc.).

In addition, it is proposed that funding provided under the credit schemes operated by the Regional Development Department of CBSL, also be considered as agricultural credit. The schemes presently in operation are as follows:

• Tea Development Project – Established for the purpose of increasing tea small holders’ income on a sustainable basis, improving the natural environment in the project area and developing the necessary infrastructure in the sector. (2,678 loans amounting to Rs.2,963mn had been granted as at end 2005)

• Second Perennial Crops Development Project – Set up to commercialise the perennial crop sector, increase production, develop nurseries, handle post harvest processing and marketing. (6,250 loans amounting to Rs.1,453 mn had been granted as at end 2005)


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1• New Comprehensive Rural Credit Scheme – Provision of working capital requirement of small farmers; short term

production loans, production of seeds and plant material and purchase of agricultural commodities under forward sales contracts. (70,196 loans amounting to Rs.1,620mn had been granted during 2005)

• Small Farmers and Landless Credit Project – To establish a cost effective and sustainable micro credit delivery system to generate employment and improve savings habits among the low income receiving people (106,632 loans amounting to Rs.1,513Mn had been granted as at end 2005).

2. Proposed time frame

In implementing the proposals, it is suggested that the banks be required to increase their lending to the agricultural sector to 10% of total advances as follows:

• 3% by end 2007, 6% by end 2008 and 10% by 31 December 2009.


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27 June 2006

To : CEOs of Licensed Banks Panel of Approved Auditors

Dear Sirs,

PAYMENT OF TAXES BY THE BANKING AND FINANCIAL SECTOR

The Inland Revenue Department has drawn the attention of the CBSL to the deviations observed in the payment of taxes (income tax, VAT – including VAT on financial activities, PAYE, Debit Tax and Economic Service Charge) by the banking sector.

Licensed Banks are therefore informed that payment of all taxes such as income tax, VAT (including VAT on financial activities), PAYE, Debit Tax and Economic Service Charge payable to the Department of Inland Revenue should carry a certification by the External Auditors of the bank, when such payment is made, that the relevant tax is in conformity with the provisions of the relevant Inland Revenue regulations in that regard.

Yours faithfully,


cc: Secretary-General/SLBA


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1Ref. No. : 02 / 17 / 800 / 0007 / 001


06 November 2008

To All the CEOs of Licensed Commercial Banks and Licensed Specialised Banks

Dear Sirs,

MISLEADING AND UNETHICAL ADVERTISEMENTS

It has been observed on several occasions that banks are publishing misleading and unethical advertisements, e.g., 15% on US Dollar deposits, interest rate of 30% on Fixed deposits, mega bonus return of 300% or bonus interest of 200% etc., in the media and in bill boards displayed in public places. These advertisements are very misleading and cause much negative misinterpretation of the economic situation of the country. There have been complaints from the public about being misled by these advertisements too. Whilst we understand that good marketing strategies are necessary in a competitive market, we wish to emphasise that they should be ethical, with clear policies.

Therefore, we hereby request all the licensed banks to refrain from publishing misleading and unethical advertisements with immediate effect and to ensure that all important information is highlighted in a visible manner to enable the general public to understand clearly the nature of the products and the effective interest rates applicable.

Yours faithfully,


cc: Secretary-General / SLBA


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1Ref. No. : 02 / 01 / 00 / 0002 / 001


31 December 2007


Dear Sirs/Madam,

GUIDELINES FOR EMPLOYMENT OF EXPATRIATE STAFF IN BANKS

As announced at the meeting of the Chief Executive Officers of licensed banks on 22 November 2007, the Guidelines for employment of expatriate staff in banks, which have been developed to facilitate the introduction of new banking products and risk management of banks, are sent herewith.

Please acknowledge receipt of this Circular.

Yours faithfully,

Signed 31.12.2007

B.D.W.A. Silva

Acting Director of Bank Supervision

Encl.


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1Guidelines for Employment of Expatriate Staff in Banks

1. Current Policy

1.1 At present, the Central Bank of Sri Lanka (CBSL) recommends to Immigration and Emigration Department resident visas for expatriate staff of foreign banks to enable the banks to employ them as follows.

(i) Maximum of three officers without any restriction. (ii) Permission for any officers exceeding 3 is granted on a case-by-case-basis for a specific period not exceeding

one year subject to condition that local staff should be trained to handle the work initiated/undertaken by such expatriate officers.

1.2 The objective of developing this policy is to provide local staff with the training and opportunities to take on positions held by the expatriate officers.

1.3 In the case of local banks, there has not been such a policy since local banks generally do not employ foreign personnel. However, four local banks have employed foreign consultants to undertake specific assignments.

2. Need for a Revision of the Policy

The following factors are considered favourably to relax the current policy to permit more expatriate officers and to encourage domestic banks to employ foreign experts.

(i) Expansion of business operations of some foreign banks. (ii) Foreign banks now tend to expand business in Sri Lanka, especially infrastructure projects, through funds borrowed

from their respective head offices and branches.

(iii) The active presence of foreign banks with internationally experienced professionals will help improve Sri Lanka’s image and investment promotion internationally.

(iv) Tendency to introduce international banking products such as securitization, loan syndication, foreign loan raising, infrastructure funding and derivative products.

(v) Banks in Sri Lanka mainly depend on conventional deposit and loan products. Introduction of innovative banking products indicate the development of the financial sector and the economy. International banking know-how is necessary to introduce new banking products, especially to attract foreign capital to Sri Lanka.

(vi) Banks will need to employ risk management specialists to implement advanced approaches of Basel II in the medium term and there may be a need to look for such specialists from countries which implement Basel II.

(vii) The proposed adoption of IAS/IFRS also will require bankers who have practical experience in adopting IAS/IFRS.

(viii) In general, banking industry needs experts who have global banking experience if Sri Lankan banks are to introduce modern banking products, technology and risk management techniques.

3. Policy Guidelines

3.1 For Foreign Banks

(i) The maximum number of expatriate officers permitted will be as follows: (a) 3 for banks whose staff strength is less than 75. (b) 5 for banks with staff strength of 75 to 400. (c) 10 for banks with staff strength of more than 400.

(ii) In the case of Indian banks, agreement as per on-going negotiations of the Comprehensive Economic Partnership Agreement (CEPA) will be adopted as the minimum criteria.

(iii) Approval for expatriate officers in excess of the above limits will be considered on a case-by-case-basis taking into consideration the specific skills of the nominated expatriates and specific assignments given to them. The banks should submit projections for specific business or deliverables expected from expatriate officers.

(iv) Validity period of the approval will be two years for expatriates under the normal quota and one year for others (case-by-case-basis criteria).

(v) In the case of expatriate officers under the normal quota except for CEO, approval may be renewed for another term of two years after assessing the performance of respective expatriate officer. For CEOs, approval may be extended for two terms (4 more years) on the basis of performance records. The renewal for the term of expatriates permitted in excess of the normal quota (case-by-case basis) will be considered only for extension of the projects/assignments or new projects/assignments.


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1 (vi) Approving authority for expatriate officers under normal quota will be the Director of Bank Supervision. The

Deputy Governor will approve expatriate officers in excess of the normal quota.

3.2 For Locally Incorporated Banks

Permission will be granted on a-case-by-case basis taking into consideration the specific needs of the banks. Special attention will be given to employment of foreign experts in the following fields:

(a) Basel II-based risk management (b) International Accounting Standards (c) Risk modeling and data warehouse (d) Structuring of derivative products (e) Corporate governance


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1Ref. No. : 02 / 04 / 003 / 0400 / 001

Department of Bank Supervision

19 January, 2004

To : All Chief Executive Officers of LCBs and LSBs

GUIDELINES ON CREDIT RATING OF BANKING INSTITUTIONS

I refer to the discussions on the above subject at the meetings of the Chief Executive Officers of Licensed Commercial Banks (LCBs) and Licensed Specialised Banks (LSBs) held on 20.11.2003 and 18.12.2003 and the agreement of the Chief Executive Officers to obtain ratings for banks.

All LCBs and LSBs are hereby required to observe the following guidelines in this regard.

1. All LCBs and LSBs (both local and foreign) are hereby required to obtain a Credit Rating on or before 30 June 2004.

2. All ratings should be from an independent rating agency acceptable to the Central Bank of Sri Lanka.

3. Local Branches of foreign banks may disclose their parent bank’s rating.

4. With effect from July 2004, all banks are required to disclose their rating in all their advertise-ments soliciting deposits and other debt instruments. The fact that a bank has not obtained a rating should also be disclosed, if that is the case.

5. Credit Ratings should be updated annually and the rating report should be submitted to the Central Bank of Sri Lanka within one month from the date of the report.

Please acknowledge the receipt of this letter.

Yours faithfully,



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2Operating Instructions No. : 35/01/005/0007/03

Domestic Operations Department

26 November 2008


RESERVE REqUIREMENTS

Your attention is invited to the Notification made by the Monetary Board of the Central Bank of Sri Lanka under Sections 10(c), 93, 94, 96 and 97 of the Monetary Law Act (Chapter 422 of Ceylon Legislative Enactments) as amended by Monetary Law (Amendment) Act, No.32 of 2002 and published in the Gazette Extraordinary of the Democratic Socialist Republic of Sri Lanka No.1577/7 of 26 November 2008, on the above subject.

2. The Licensed Commercial Banks are hereby informed that in accordance with the said notification, they should maintain reserves against deposit liabilities denominated in Sri Lanka Rupees at an amount equal to seven point seven five per centum (7.75%) of the total of such deposit liabilities.

3. The above amendments take effect from 28 November, 2008. All other instructions contained in our Operating Instructions No.35/01/005/0007/01 of 20 March, 2003 will continue to apply.

Director



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16 October 2008



Your attention is invited to the Notification made by the Monetary Board of the Central Bank of Sri Lanka under Sections 10(c), 93, 94, 96 and 97 of the Monetary Law Act (Chapter 422 of Ceylon Legislative Enactments) and published in the Gazette Extraordinary of the Democratic Socialist Republic of Sri Lanka No.1571/12 of 16 October, 2008.

2. The Licensed Commercial Banks are hereby informed that in accordance with the said Notification, they should maintain reserves against deposit liabilities denominated in Sri Lanka Rupees at an amount equal to nine point two five per centum (9.25%) of the total of such deposit liabilities.

3. The above amendments take effect from 17 October, 2008. All other instructions contained in our Operating Instructions No.35/01/005/0007/01 of 20 March, 2003 will continue to apply.

Director

Domestic Operations

issued to Licensed Commercial Banks �0�

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20 March 2003



1. (i) Your attention is invited to the notification made by the Monetary Board of the Central Bank of Sri Lanka under Sections 10(c), 93, 94, 96 and 97 of the Monetary Law Act (Chapter 422 of Ceylon Legislative Enactments) as amended by Monetary Law (Amendment) Act, No.32 of 2002 and published in the Gazette Extraordinary of the Democratic Socialist Republic of Sri Lanka No.1280/7 of 20th March, 2003 on the above subject.

(ii) In terms of the provisions of Section 93 of the Monetary Law Act, commercial banks operating in Sri Lanka shall maintain reserves against all deposit liabilities denominated in Sri Lanka rupees.

2. (i) In terms of the provisions of Section 94 of the Monetary Law Act, the reserves required to be held by commercial banks against their deposit liabilities specified in Regulation (1) above shall be an amount equal to 10 per centum of the total of such deposit liabilities.

(ii) The reserves required to be held by a commercial bank against the deposit liabilities specified in Regulation (1) above shall take the form of Rupee deposits in the Central Bank provided that an amount over and above two per centum of the average of rupee deposit liabilities specified in Regulation (3) below but not exceeding four per centum thereof may be maintained as a part of its required reserves in the form of Sri Lanka currency notes and coins held by such bank as its assets.

3. The computation of the reserves required to be maintained by a commercial bank shall be made each Thursday on the basis of the daily average of rupee deposit liabilities at the close of the business on each day of the week ending the preceding Tuesday. The reserves permitted to be maintained by way of Sri Lanka currency notes and coins held by a commercial bank shall be the average of the holdings at the end of each day of such week.

4. The reserves computed as specified in Regulation (3) above shall be maintained as an average for the week commencing the Friday following the day of computation to Thursday of the following week. Such average shall be calculated based on the balances at the close of business on each day of such week.

5. Interest at the rate of one tenth of one per centum per day shall be paid by a commercial bank to the Central Bank on any deficiency in reserves. Such interest shall be paid not later than the Friday next following the Thursday on which such required reserves were computed under Section 96 of the Act.

6. A notice issued under the hand of the Director, Domestic Operations or any officer authorized by him in that behalf, stating –

(a) That the reserves of such commercial banks are below the amount of the required reserves;

(b) The week in respect of which there was a deficiency of such reserve;

(c) The amount of such deficiency; and

�0� Directions, Circulars, Guidelines and Operating Instructions

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2 (d) The amount of interest payable on the amount of the deficiency shall be deemed to be sufficient

notice to such bank of the interest due from such bank.

7. Every commercial bank shall not later than 12 noon on each Thursday furnish to the Director, Domestic Operations, Central Bank of Sri Lanka, a return substantially in the form prescribed in the schedule A hereto.

8. These Regulations shall come into force on 03 April 2003, upon which the Regulation D published in the Sri Lanka Government Gazette Extraordinary No.804/16 of 3rd February 1994, as amended from time to time shall cease to have any force or effect.

In this regulation unless the context otherwise requires–

“Deposit liabilities” shall mean all those liabilities of a commercial bank being: demand deposits, special deposits, savings deposits, time deposits, placements made by any institution other than a commercial bank in the inter-bank call - money market, margins against letters of credit and special deposit schemes if any, such as pension funds, children’s deposit schemes and other schemes of a similar nature, and assets held in trust or on behalf of its constituents consequent to deposits made by the denominated in Sri Lanka currency, but does not include inter-commercial bank deposits.

“demand deposits” shall mean all those deposit liabilities of a commercial bank which are denominated in Sri Lanka Rupees, subject to payment in legal tender upon demand by cheque, draft or order; but does not include any such liability if it is subject to payment upon conditions.

“special deposits” shall means all those deposit liabilities of a commercial bank arising out of monies deposited in any special account under Section 10 of the Inland Revenue Act, No.28 of 1979. “savings deposits” shall mean all deposit liabilities denominated in Sri Lanka currency other than demand deposits, time deposits, and special deposits as defined above.

“time deposits” shall mean all deposit liabilities denominated in Sri Lanka currency accepted for a period of maturity and not withdrawable on demand and repaid with interest.

The above regulation takes effect from 03 April, 2003 and as from this date every commercial bank shall furnish a return substantially in the form prescribed in the Schedule A attached hereto, to the Director, Domestic Operations of the Central Bank of Sri Lanka not later than 12 noon on each Thursday (if Thursday is a holiday, on the working day last preceding).

Director Domestic Operations


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2Schedule A

FORM OF REPORTWEEKLY REPORT OF DAILY AVERAGE DEPOSIT LIABILITIES

(RUPEE DEPOSIT LIABILITIES)

Name of Bank : …………………………….

For the week from Wednesday (…………….) to Tuesday (…………………) (date) (date)

To: Director Domestic Operations Department Central Bank of Sri Lanka Colombo 01.

The average amounts of deposit liabilities reported below are based on the deposit balances shown by the books of the Bank at the close of business of the seven days of the week specified above.

IDemandDeposits

IITime Deposits andSavings Deposits

IIIAll other deposit liabilities

(including special deposits, margins against letters of credit, etc.)*1

IVTotal

REqUIRED RESERVES

For week commencing Friday, ………………………………………

1. ………………. % of Rs. ……………………….. Rs. ………… (Daily Average of total Rupee Deposit Liabilities)

2. Average of Sri Lanka Currency Notes and Coins held over and above 2% of average deposit liabilities, but not exceeding 4% Rs. …………

3. Total Reserves required to be held on deposit with the Central Bank (1-2) Rs. …………

We / I hereby certify that the above statement is correct and is in accordance with the books of this bank and that the figures shown above are accordance with the regulations prescribed by the Monetary Board of the Central Bank of Sri Lanka for the purpose.

Date : ………………… ………………………. Official Signature

*1. In the case of Certificates of Deposit the amount declared should be the paid up value.

Note – (a) Demand deposits are the total of credit balances in current accounts without deducting debit balances in respect of overdraft allowed.

(b) Deposits and placements made by National Development Bank, DFCC bank, National Savings Bank, other Financial Institutions and E.P.F. should be accounted for maintenance of required reserves at prescribed ratios.

(c) All amounts should be shown to the nearest rupee.


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15 August 2003


CENTRAL BANK’S RATE OF INTEREST ON ADVANCES

Licensed commercial banks are hereby informed that with effect from 15 August, 2003, the rate of interest on advances by the Central Bank to licensed commercial banks secured by the pledge of –

a) Government and government guaranteed securities; and

b) Usance Promissory Notes relating to commercial and production loans

will be fifteen (15) per centum per annum.

D. S. Wijesinghe A. S. Jayawardena Director Governor


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28 August 2003

To : All Commercial Banks and Primary Dealers

The Central Bank cheque book facility granted to commercial banks and primary dealers to effect their transactions against the settlement accounts maintained with the Central Bank will be withdrawn with the implementation of the Real Time Gross Settlement (RTGS) System with effect from 8th September, 2003. Commercial Banks and primary dealers will be allowed to use Central Bank cheques only when the Central Bank declares an ‘emergency/contingency’ event due to an incident that interrupts or has the potential to interrupt the operations of the RTGS System for a prolonged period.

From 8th September, 2003, all payments which were hitherto effected by way of Central Bank cheques should be effected on the RTGS System. Commercial Banks and primary dealers have already been issued with the System Rules that will be applicable upon the establishment of LankaSettle. Banks and primary dealers should comply with the rules contained therein relating to the RTGS in participating in the RTGS System and should comply with the procedures relating to the payment instructions contained in such Rules.

Accordingly, commercial banks and primary dealers are instructed,

(i) not to use Central Bank cheques on or after 8 September, 2003 for any transactions except in an emergency/contingency event declared by the Central Bank.

(ii) to retain one cheque book to be used in an emergency/contingency event and return the balance, if any, along with a list of such cheque books to the undersigned on or before 8th September, 2003; and

(iii) to issue payment instructions in respect of their settlement accounts in accordance with procedures laid down in LankaSettle Rules issued to the commercial banks and primary dealers on 21st August, 2003.

D.S.Wijesinghe Director


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3 May 2004

To : All Licensed Commercial Banks and Primary Dealers

OPERATING INSTRUCTIONS ON OPEN MARKET OPERATIONS OF THE CENTRAL BANK OF SRI LANKA

IN SCRIPLESS GOVERNMENT SECURITIES

This has reference to my Circular No. 35/01/005/006/04 dated 27 January 2004 on the above Operating Instructions.

Clauses 10 and 13 of item A [Repurchase Transactions (RP) under the Auction System], clause 15 of item B [Reverse Repurchase Transactions (RRP)], clauses 5 and 8 of item C(a) [Repurchase Facility (RP)] and clause 11 of item C(b) [Reverse Repurchase Facility (RRP)] and clause 7 of item D [Outright Sale of Treasury Bills and Treasury Bonds] and clause 7 of item titled Outright Purchase of Treasury Bills/Treasury Bonds of the said Operating Instructions are hereby amended with immediate effect to read as follows:

A. Repurchase Transactions (RP) under the Auction System

10. Successful PIs should ensure that sufficient funds are available in their Settlement Account in LankaSettle to settle the Purchase Price of securities in full at or before 1245 hours. If a PI fails to settle a RP transaction in full, before the close of business of LankaSecure on the same day, the PI shall be liable to pay damages to the CBSL in a sum equivalent to the difference between the sale value (Purchase Price) and the repurchase value (Repurchase Price) calculated as provided in these Operating Instructions. Such damages shall be debited to the PI’s Settlement Account with the CBSL on the next business day. If the transaction involves securities carrying more than one International Securities Identification Number (ISIN), each such ISIN will be treated as a separate RP transaction, for the purposes of this clause.

13. PIs should ensure the availability of Purchased Securities in their Domestic Operations Repurchase (DOP) Account in LankaSecure on the Repurchase Date at the time specified in clause 11 above to enable the reversal of a repurchase transaction in full. In the event of there being insufficient securities in the Domestic Operations Repurchase (DOP) Account of a PI to enable the reversal of a repurchase transaction in full on the Repurchase Date at the specified time, the PI shall be liable to pay damages to the CBSL as set out in clause 10 above. Such damages shall be debited to the PI’s Settlement Account with the CBSL on the next business day.

B. Reverse Repurchase Transactions (RRP)

15. In the event of a PI failing to maintain sufficient funds in its Settlement Account to pay the Repurchase Price in full, before the close of business of LankaSecure on the Repurchase Date, the Central Bank shall be entitled to treat the RRP transaction as an outright purchase by the Central Bank and in addition, recover from the PI damages calculated as set out in clause 14 above. Such damages shall be debited to the PI’s Settlement Account with the CBSL on the next business day. If the transaction involves securities carrying more than one ISIN, each such ISIN will be treated as a separate RRP transaction, for the purposes of this clause.


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2C. Standing Facility

(a) Repurchase Facility (RP)

5. PIs should ensure that sufficient funds are available in its Settlement Account to settle the Purchase Price of securities in full. If a PI fails to settle a transaction in full, before the close of business of LankaSecure on the same day, PI shall be liable to pay damages to the CBSL in a sum equivalent to the difference between the sale value (Purchase Price) and the repurchase value (Repurchase Price) calculated in accordance with these Operating Instructions. Such damages shall be debited to the PI’s Settlement Account with the CBSL on the next business day. If the transaction involves securities carrying more than one ISIN, each such ISIN will be treated as a separate RP transaction, for the purposes of this clause.

8. PIs should ensure the availability of Purchased Securities in their Domestic Operations Repurchase (DOP) Account in LankaSecure on the Repurchase Date at the time specified in clause 6 above to enable the reversal of a repurchase transaction in full. In the event of there being insufficient securities in the Domestic Operations Repurchase (DOP) Account of a PI to enable the reversal of a repurchase transaction in full on the Repurchase Date at the specified time, the PI shall be liable to pay damages to the CBSL as set out in clause 5 above. Such damages shall be debited to the PI’s Settlement Account with the CBSL on the next business day.

(b) Reverse Repurchase Facility (RRP)

11. In the event of a PI failing to maintain sufficient funds in its Settlement Account to pay the Repurchase Price before the close of business of LankaSecure on the Repurchase Date, the Central Bank shall be entitled to treat the RRP transaction as an outright purchase and in addition, recover from the PI damages calculated as provided in clause 10 above. Such damages shall be debited to the PI’s Settlement Account with the CBSL on the next business day. If the transaction involves securities carrying more than one ISIN, each such ISIN will be treated as a separate RRP transaction, for the purposes of this clause.

D. Outright Sale of Treasury Bills or Treasury Bonds

7. The acceptance by the CBSL of a bid of a PI is binding on the PI and the failure to honour the transaction (purchase by PI) before the close of business of LankaSecure on the settlement date will render the PI liable to pay damages to the CBSL equivalent to the interest component on the purchase price for the remaining period to maturity at the rate quoted by the PI. Such amount shall be debited to the PI’s Settlement Account with the CBSL on the next business day following the settlement date.

Outright Purchase of Treasury Bills / Treasury Bonds

7. The acceptance by the CBSL of a bid of a PI is binding on the PI and the failure to honour the transaction (sale by PI) before the close of business of LankaSecure on the settlement date will render the PI liable to pay damages to the CBSL equivalent to the interest component on the sale value for the remaining period to maturity at the rate quoted by PI. Such amount shall be debited to the PI’s Settlement Account with the CBSL on the next business day following the settlement date.

DirectorDomestic Operations Department


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27 January 2004


OPERATING INSTRUCTIONS ON OPEN MARKET OPERATIONS OF THE CENTRAL BANK OF SRI LANKA

IN SCRIPLESS GOVERNMENT SECURITIES

The Operating Instructions relating to Open Market Operations of the Central Bank of Sri Lanka in scripless government securities are outlined in this circular. These Operating Instructions shall come into effect with the implementation of LankaSecure on 2 February 2004.

The Central Bank of Sri Lanka (CBSL) will conduct Open Market Operations (OMO) with Licensed Commercial Banks and Primary Dealers in government securities, hereinafter referred to as the Participating Institutions (PIs), in order to maintain the stability of interbank interest rates within an interest rate corridor. The interest rate corridor defined in terms of the Repurchase Rate (lower bound) and the Reverse Repurchase Rate (upper bound) declared by the CBSL will be announced, reviewed and changed, if necessary, on monthly intervals.

On the basis of an assessment of daily market liquidity situation, Market Operations Committee (MOC) of the CBSL will decide whether to absorb liquidity from or to inject liquidity to the market and the amount and the type of transaction under which such absorption or injection of liquidity would be made. The CBSL will announce its decision to the market through the on-line electronic bidding system and Reuter screen or any other effective means of communication. The auction system will be used to conduct OMO. The OMO will consist of ‘repurchase transactions (RP), ‘reverse repurchase transactions (RRP)’, ‘ outright purchases’ and ‘outright sales’. Repurchase and reverse repurchase facilities will also be available at the prevailing repurchase rate and the reverse repurchase rate respectively on an overnight basis as standing facilities for PIs which failed to meet their liquidity requirements at the auctions. The collateral used in these transactions will be Treasury Bills and Treasury Bonds.

All Repurchase and Reverse Repurchase Transactions carried out between a PI and the CBSL in terms of Parts A, B and C of these Operating Instructions are subject to the provisions of the Master Repurchase and Reverse Repurchase Agreement entered into between such PI and the Monetary Board of the Central Bank of Sri Lanka. The terms used in these Operating Instructions shall have the same meanings assigned to them in the Master Repurchase and Reverse Repurchase Agreement.

The CBSL reserves the right to amend, revise or vary any term and/or condition or any part thereof of these Operating Instructions with prior notice to PIs.

A. Repurchase Transactions (RP) under the Auction System

1. The tenure of Repurchase Transactions, until further notice, will be one day (overnight).

2. The Market Operations Committee (MOC), after assessing the daily liquidity position in the money market will call for quotations (bids) from PIs by 1030 hours by way of an announcement on the on-line electronic bidding system and/or Reuter screen. It will also announce the quantum on offer.

3. A PI who wishes to invest under RP facility is required to submit its bids to the OMO Division of the Domestic Operations Department of the CBSL on or before 1100 hours the same day giving the amount and the interest rate.


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24. Bids should be submitted through the on-line electronic bidding system installed for this purpose. Bids by telephone will be entertained only in the event of a failure of the on-line bidding system. Bids submitted via telephone should be confirmed by fax signed by two authorized officers within 15 minutes. The original of the fax should be sent to the Domestic Operations Department before the close of business on the same day.

5. A PI can submit up to a maximum of three bids for each tender. The minimum amount of a bid shall be Rupees one million and bids should be in multiples of Rupees one million. Any bid at or above the CBSL reserve repurchase rate will be rejected.

6. Results of the auction will be announced at 1130 hours via the on-line electronic bidding system and/or Reuter screen giving the total amount accepted and the Weighted Average RP rate (WARP).

7. Each successful bidder will be informed of the acceptance of its bid/s and allotment through the electronic bidding system at 1130 hours. The allotment will be made at the rates quoted by the successful bidder. For each successful bid, scripless securities will be allocated at the Official Prices determined on the basis of current market prices, for the amount requested.

8. A confirmation of RP transaction to each successful PI will be issued electronically through the electronic bidding system within one hour after the release of results. The confirmation shall substantially be in the form at Annexure I. The PIs are advised to promptly view the confirmation and retain a hard copy of the confirmation for their records. In the event a PI is unable to view or print the confirmation due to a technical failure in accessing the electronic bidding system, PSD will fax a copy of such confirmation to the PI on request.

9. The settlement of the transactions will be on a delivery versus payment (DVP) basis through the Matched Trade Feed facility available in LankaSettle. A Matched Trade Feed file will be submitted to LankaSettle at or before 1245 hours, on the basis of which the system will settle the transaction by transferring the allocated securities (Purchased Securities) to the Domestic Operations Repurchase (DOP) Account of the successful PI in LankaSecure against the receipt of funds (amount accepted) for the sale value of securities (Purchase Price) to the Settlement Account of the CBSL. The PI is not required to submit any settlement instructions in this regard to the system. Purchased Securities transferred to the Domestic Operations Repurchase (DOP) Account should not be traded in by the PI.

10. Successful PI should ensure that sufficient funds are available in their Settlement Account in LankaSettle to settle the Purchase Price of Securities in full at or before 1245 hours. If a PI fails to settle a RP transaction in full, the PI shall be liable to pay damages to the CBSL in a sum equivalent to the difference between the sale value (Purchase Price) and the repurchase value (Repurchase Price) calculated as provided in these Operating Instructions.

11. On the maturity date (Repurchase Date), a Matched Trade Feed file will be submitted to LankaSettle at or before 0830 hours to pay the Repurchase Price of securities to the Settlement Account of the PI against the delivery of the Purchased Securities to the Own Account of the CBSL in LankaSecure, in the same manner as outlined in clause 9 above.

12. Repurchase Price will consist of the Purchase Price (amount accepted) plus the interest component which will be calculated at the rate quoted by the PI.

13. PIs should ensure the availability of Purchased Securities in their Domestic Operations Repurchase (DOP) Account in LankaSecure on the Repurchase Date at the time specified in clause 11 above to enable the reversal of a repurchase transaction in full. In the event of there being insufficient securities in the Domestic Operations Repurchase (DOP) Account of a PI to enable the reversal of a repurchase transaction in full on the Repurchase Date, the Central Bank shall withhold the payment of the Repurchase Price to the Counterparty and in addition, recover from the PI damages as set out in clause 10 above.


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214. In the event of there being bids at the same rate in excess of the amount offered, the available quantum of Treasury Bills/Bonds will be allocated among such bidders on a ‘pro rata’ basis. Accordingly, the bids at the cut off rate may be partially accepted.

15. If the Repurchase Date in respect of any repurchase transaction is a bank holiday, any obligation of a party to such repurchase transaction arising on such day shall be carried out by such party on the immediately succeeding business day.

16. The CBSL has the right to hold additional auctions later in the same day, as it deems necessary.

17. The CBSL reserves the right to accept or reject a bid of a PI.

B. Reverse Repurchase Transactions (RRP)

1. Tenure of Reverse Repurchase Transactions, until further notice, will be one day (overnight).

2. The MOC, after assessing the daily liquidity position in the money market, will call for quotations (bids) from PIs by 0930 hours by way of an announcement on the on-line electronic bidding system and/or Reuter screen or any other effective means of communication. It will also announce the quantum on offer.

3. A PI who wishes to borrow under this facility should submit its bid/s to the Open Market Operations (OMO) Division of the Domestic Operations Department of CBSL on or before 1000 hours on the same day giving the amount and interest rate.

4. The bids should be submitted through the on-line electronic bidding system installed for this purpose. Bids by telephone will be entertained only in the event of a failure of the on-line electronic bidding system. Bids submitted via telephone should be confirmed by fax signed by two authorized officers within 15 minutes. The original of the fax should be sent to the Domestic Operations Department before the close of business on the same day.

5. A PI can submit up to a maximum of three bids for each tender. The minimum amount of a bid should be Rupees one million and bids should be in multiples of Rupees one million. Any bid at or below the repurchase rate of the CBSL will be rejected. PIs are required to submit International Securities Identification Numbers (ISINs) of securities together with their bids.

6. The results of the auction will be announced at 1030 hours on the same day via the on-line electronic bidding system and/or Reuter screen giving the total amount accepted and the Weighted Average RRP Rate ( WARRP).

7. Each successful PI will be informed of the acceptance of its bid/s and allotment through the electronic bidding system at 1030 hours. The allotment will be made at the rates quoted by the successful bidder.

8. A confirmation of the RRP transaction to the PI will be issued electronically through the electronic bidding system within one hour after the release of results. The confirmation shall substantially be in the form at Annexure I. The PIs are advised to promptly view the confirmation and retain a hard copy of the confirmation for their records. In the event a PI is unable to view or print the confirmation due to a technical failure in assessing the electronic bidding system, PSD will fax a copy of the confirmation to the PI on request.

9. The settlement of the transactions will be through the Matched Trade Feed Facility available in LankaSettle. Match Trade Feed file will be submitted to LankaSettle at or before 1145 hours, on the basis of which the system will settle the transaction by crediting the Settlement Account of the PI with


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2the Purchase Price against the receipt of the Purchased Securities in the Domestic Operations Reverse Repurchase (DRP) Account of CBSL in LankaSecure. The PI is not required to submit any settlement instructions in this regard to the system.

10. The Purchase Price of the Treasury Bills/Bonds accepted by the CBSL will be calculated based on the official prices determined by the Central Bank for such purposes. The Official Prices of Treasury Bills/Bonds shall be determined on a daily basis based on the current market prices, taking into consideration market developments. Such Official Prices are recorded in LankaSecure.

11. On the sell back date (Repurchase Date), a Matched Trade Feed file will be submitted to LankaSettle at 1100 hours, on the basis of which the system will transfer the Purchased Securities to the PIs Own Account in LankaSecure, against the receipt of payment to the Settlement Account of CBSL for the sell back value (Repurchase Price) of the Purchased Securities in the same manner as outlined at clause 9 above.

12. The sell back value (Repurchase Price) will consist of Purchased Price plus the interest component which will be calculated at the rate quoted by the PI.

13. If the Repurchase Date in respect of any Reverse Repurchase transaction is a bank holiday, any obligation of a party to a Reverse Repurchase Agreement arising on such day shall be carried out by such party on the immediately succeeding business day.

14. If a PI fails to honour a Reverse Repurchase transaction after acceptance of its bid/s by the CBSL, the PI shall be liable to pay to the CBSL as damages an amount equivalent to the difference between the Purchase Price and the Repurchase Price of the underlying securities computed in accordance with these Operating Instructions.

15. In the event of a PI failing to maintain sufficient funds in its Settlement Account to pay the Repurchase Price in full on the Repurchase Date, the Central Bank shall be entitled to treat the RRP transaction as an outright purchase by the Central Bank and in addition, recover from the PI damages as set out in clause 14 above.

16. The Central Bank may suspend a PI from engaging in RRP transactions in the event of the failure of such PI to honour a RRP transaction.

17. In the event of there being bids at the same rate in excess of the amount offered, the available quantum will be allocated among such bidders on a ‘pro-rata’ basis. Accordingly, the bids at the cut off rate may be partially accepted.

18. The CBSL reserves the right to hold additional auctions later in the day, as it deems necessary.


C. Standing Facility

(a) Repurchase Facility (RP)

1. The RP will be available on an overnight basis.

2. The PIs who wish to use the RP facility under the Standing Facility are required to inform the OMO Division of the Domestic Operations Department (DOD) by telephone or fax, the amount required and confirm the deal electronically by submitting the same through the facility available in the on line electronic bidding system within 30 minutes of the deal but not later than 1400 hours, the same day.


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23. PSD will allocate securities at the Official Prices for the amount requested in the deal. A confirmation will be issued to the PI electronically through the electronic bidding system within one our after the confirmation of the deal by the PI, but not later than 1500 hours the same day. The confirmation shall substantially be in the form of Annexure I. PIs are advised to promptly view the confirmation and to retain a hard copy of the confirmation for their records. In the event a PI is unable to view or print the confirmation due to a technical failure in accessing the electronic bidding system, PSD will fax a copy of the confirmation to the PI on request.

4. A Matched Trade Feed file will be submitted to LankaSettle at or before 1500 hours on the basis of which the system will settle the transaction by transferring the allocated securities to the PI’s Domestic Operations Repurchase (DOP) Account in LankaSecure against the receipt of funds (amount accepted) for the Purchased Price of securities to the Settlement Account of the CBSL. The PI is not required to submit any settlement instruction in this regard to the system.

5. PIs should ensure that sufficient funds are available in its Settlement Account to settle the Purchase Price of securities in full. If a PI fails to settle a transaction in full, PI shall be liable to pay damages to the CBSL in a sum equivalent to the difference between the sale value (Purchase Price ) and the repurchase value (Repurchase Price) calculated in accordance with these Operating Instructions.

6. On the Repurchase Date (maturity date), a Matched Trade Feed file will be submitted to the system at or before 0830 hours to pay the Repurchase Price of securities to the PI on receipt of Purchased Securities to the Own Account of the CBSL in LankSecure in the same manner as outlined in clause 4 above.

7. Repurchase Price (sell back value) will consist of the Purchase Price plus the interest component which will be calculated at the prevailing repurchase rate determined by the Central Bank.

8. PIs should ensure the availability of Purchased Securities in their Domestic Operations Repurchase (DOP) Account in LankaSecure on the Repurchase Date at the time specified in clause 6 above to enable the reversal of the repurchase transaction in full. In the event of there being insufficient securities in the Domestic Operations Repurchase (DOP) Account of a PI to enable the reversal of the repurchase transaction in full on the Repurchase Date, the Central Bank shall withhold the payment of the Repurchase Price to the Counterparty and in addition, recover from the PI damages as set out in clause 5 above.

(b) Reverse Repurchase Facility (RRP)

1. The RRP will be available on an overnight basis.

2. Under the RRP, the CBSL will purchase Treasury Bill/s and/or Treasury Bond/s from PIs at an agreed price (Purchased Price) with an agreement to sell back on an agreed date at an agreed price (Repurchase Price).

3. The PIs who wish to use the RRP facility are required to inform the OMO Division of the Domestic Operations Department by telephone or fax the details of the deal including the amount requested. The deal should thereafter be confirmed electronically by submitting the amount required, details of the scripless securities, through the facility available in the on line electronic bidding system within 30 minutes of the deal but not later than 1400 hours the same day.

4. A Confirmation of RRP deal will be issued to the PI electronically through the electronic bidding system within one hour after the confirmation of the deal by the PI but not later than 1500 hours on the same day. The confirmation shall substantially be in the form at Annexure I. The PI is advised to promptly view such confirmation and retain a hard copy of the confirmation for its records. In the event a PI is unable to view or print the confirmation due to a technical failure in accessing the bidding system, PSD will fax a copy of the confirmation to the PI on request.


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25. A Matched Trade Feed file will be submitted to LankaSettle at or before 1515 hours, on the basis of which the system will settle the transaction by crediting the Settlement Account of the PI for the Purchase Price of Securities (amount accepted) against the receipt of Purchased Securities to the Domestic Operations Reverse Repurchase (DRP) Account of CBSL in LankaSecure. The PI is not required to submit any settlement instructions in this regard to the system.

6. The Purchase Price of the Treasury Bill/Bonds accepted by the CBSL will be calculated based on the Official Prices determined by the Central Bank for such purpose. The Official Prices of Treasury Bills/Bonds shall be determined on a daily basis based on the current market prices, taking into consideration market developments. Such Official Prices are recorded in LankaSecure.

7. On the sell back date, a Matched Trade Feed file will be submitted to LankaSettle at or before 1100 hours on the basis of which the system will transfer the Purchased Securities to the PIs Own Account in LankaSecure, against the receipt of Purchase Price to the Settlement Account of CBSL for the sell back value (Repurchase Price) of securities following the same procedures as outlined at clause 5 above.

8. The sell back value (Repurchase Price) will consist of Purchase Price plus the interest component which will be calculated at the prevailing reverse repurchase rate determined by the CBSL.

9. If the sell back date (Repurchase Date) for any Reverse Repurchase transaction, is a bank holiday, an obligation of a party to a Reverse Repurchase Agreement arising on such day will be carried out by such party on the immediately succeeding business day.

10. If a PI fails to complete a Reverse Repurchase transaction, after entering into a confirmed deal, it is liable to pay to the CBSL as damages the difference between the Purchase Price and the Repurchase Price of the underlying securities computed in terms of these Operating Instructions.

11. In the event of a PI failing to maintain sufficient funds in its Settlement Account to pay the Repurchase Price on the Repurchase Date, the Central Bank shall be entitled to treat the RRP transaction as an outright purchase and in addition, recover from the PI damages calculated as provided in clause 10 above.

12. The Central Bank may suspend a PI from engaging in RRP transactions in the event of the failure of such PI to honour a Reserve Repurchase transactions.

D. Outright Sale of Treasury Bills or Treasury Bonds

1. The CBSL will announce when necessary on the on-line electronic bidding system and/or Reuter screen that it intends to sell Treasury Bills/Bonds giving the amount and details of the securities to be sold and call for quotations (bids) from the PI. Quotations are accepted between 1300 hours and 1400 hours on the date of auction.

2. A PI who wishes to purchase any Treasury Bills/Bonds from CBSL shall submit up to a maximum of six bids containing the face value of the Treasury Bills/Bonds to be purchased, the required maturity period of Treasury Bills/Bonds to be purchased, interest rate (yield rate) and price expected on or before 1400 hours to the OMO Division of the Domestic Operations Department through the on-line electronic bidding system. Only in the event of a failure of the electronic bidding system, bids may be submitted in writing within 15 minutes, but not later than 1400 hours. No bids will be entertained thereafter under any circumstances.

3. Minimum amount of a bid should be Rupees one million and bids should be in multiples of Rupees one million.


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24. PIs whose bids are accepted will be informed of such acceptance and the relevant sale price of securities through the electronic bidding system, by fax or telephone by 1430 hours on the same day. The settlement would be on the next business day.

5. On the settlement date a Matched Trade Feed file will be submitted to LankaSettle at or before 0830 hours on the basis of which the system will settle the transaction by transferring securities sold to the respective Own Accounts of the successful bidders against the receipt of funds to the Settlement Account of the CBSL for the discounted value of the securities sold.

6. The discounted value of securities sold will be calculated on the basis of the rate/price of Treasury Bills or Treasury Bonds as the case may be, quoted by respective successful bidder and the maturity date of the Treasury Bill/Bond.

7. The acceptance by the CBSL of a bid of a PI is binding on the PI and the failure to honour the transaction (purchase by PI) will render the PI liable to pay damages to the CBSL equivalent to the interest component on the purchase price for the remaining period to maturity at the rate quoted by the PI. Such amount shall be debited to the PI’s Settlement Account with the CBSL on the settlement date.

8. In the event of there being bids in excess of the amount offered at the same rate, the available quantum would be allocated among such bidders on a ‘pro-rata’ basis.


Outright Purchase of Treasury Bills/Treasury Bonds

1. The CBSL will announce, when necessary, on the on-line electronic bidding system and/or Reuter screen that it intends to buy Treasury Bills/Bonds giving the amounts and maturities. Quotations are accepted between 1300 hours and 1400 hours on the date of auction.

2. The PIs who wish to sell any Treasury Bills/Bonds of the maturities indicated by CBSL should submit their bids to the Open Market Operations (OMO) Division of the Domestic Operations Department of the CBSL on or before 1400 hours on the same day with the following details;

i. Face value of Treasury Bills/Bonds to be sold

ii. Coupon Rate and Coupon Date, in the case of Treasury Bonds

iii. Interest Rate (Yield Rate) and Price expected

iv. Maturity dates of Treasury Bills/Bonds offered for sale.

3. The PIs should submit their bids through the on-line electronic bidding system. In the event of a failure of the on line electronic bidding system, bids may be submitted by telephone and confirmed in writing within 15 minutes. No bids will be entertained thereafter under any circumstances.

4. The PIs may submit up to a maximum of six bids. Minimum amount of a bid should be Rupees one million and bids should be in multiples of Rupees one million.

5. The PIs whose offers are accepted will be informed of such acceptance through the electronic bidding system by 1430 hours on the same day. The settlement would be on the next business day.

6. A Matched Trade Feed file will be submitted to LankaSettle at or before 0830 hours on the basis of which the system will credit the respective Settlement Accounts of successful bidders in RTGS for the purchased value of securities against the receipt of Purchased Securities in the Own Account of the CBSL in LankaSecure.


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27. The acceptance by the CBSL of a bid of a PI is binding on the PI and the failure to honour the transaction (sale by PI) will render the PI liable to pay damages to the CBSL equivalent to the interest component on the sale value for the remaining period to maturity at the rate quoted by the PI. Such amount shall be debited to the PI’s Settlement Account with the CBSL on the settlement data.

8. In the event of there being bids in excess of the amount offered at the same rate, the available quantum would be allocated among such bidders on a ‘pro-rata’ basis.

9. The CBSL reserves the right to accept or reject any bid for a sale of Treasury Bills/Treasury Bonds by a PI.

Director Domestic Operations Department


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28 April 2005


OPERATING INSTRUCTIONS ON PROVISION OFINTRA-DAY LIqUIDITY FACILITY (ILF)

AGAINST SCRIPLESS GOVERNMENT SECURITIES ON LANKASETTLE

Further to my Circular No. 35/01/005/006/05 dated 27 January 2004, conveying the above Operating Instructions.

Participating Institutions (PI) are hereby informed that, notwithstanding the provisions contained in the aforesaid Operating Instructions on provision of additional drawdowns of ILF during the Business Day at three designated times, ILF would be provided on the same terms and conditions, at the request of a PI, on case by case basis, even in between the designated times to meet any urgent intra-day liquidity requirements of a PI.

Accordingly clause 8 of the aforesaid circular is hereby amended by the insertion of the following paragraph immediately after the existing clause 8 :–

Provided, however, that not withstanding anything contained herein or in clause 10, the Central Bank may, at its discretion, at the request of a PI, permit additional drawdowns of ILF even in between such designated times to meet any urgent intra-day liquidity requirements of a PI.



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3 May 2004


OPERATING INSTRUCTIONS ON PROVISION OF INTRA-DAY LIqUIDITY FACILITY (ILF)


This has reference to my circular No. 35/01/005/006/5 dated 27 January 2004 on the above Operating Instructions.

Clause 16 of the said Operating Instructions is hereby amended with immediate effect to read as follows:

16. If a PI fails, for any reason whatsoever, to settle in full to the Central Bank the amount outstanding under the ILF before the close of business of LankaSecure on the same day, the PI shall be deemed to be in default for the full sum so outstanding and shall become liable to pay default interest as set out in clause 18 below. Such default interest shall be debited to the PI’s Settlement Account with the CBSL on the next business day.



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27 January 2004


OPERATING INSTRUCTIONS ON PROVISION OFINTRA-DAY LIqUIDITY FACILITY (ILF)


As provided for in the System Rules of ‘LankaSettle,’ the Central Bank of Sri Lanka (Central Bank) may, at its discretion, provide funds under Intra-day Liquidity Facility (ILF) to eligible Participating Institutions (PIs) on LankaSettle to facilitate smooth operation of the Real Time Gross Settlement (RTGS) System. Ordinarily, all Direct Participants on LankaSettle other than Designated Non-Dealer Bidders are eligible for ILF.

The Operating Instructions pertaining to the provision of ILF by the Central Bank of Sri Lanka (Central Bank) against scripless Government securities are outlined below. These Operating instructions come into effect on 2nd February, 2004 and may be amended or varied by the Central Bank from time to time with reasonable notice to the PIs.

1. Funds under ILF are provided free of charge upon the PI transferring eligible securities to the Central Bank in accordance with these Operating Instructions on the condition that the said securities shall be repurchased by the PI by repaying the outstanding ILF on or before the time specified for repayment of ILF in these Operating Instructions.

2. In order to become eligible for ILF, all eligible PIs should sign an ILF Agreement in a prescribed form with the Central Bank.

3. The Central Bank shall determine, at its discretion, the types of Eligible Securities that will be accepted as security for ILF. At present, all Scripless Treasury Bills and Scripless Treasury Bonds issued by the Government of Sri Lanka shall be eligible to be used as security for ILF.

4. A PI who wishes to obtain ILF should reposition a sufficient quantity of Eligible Securities in its Participant’s ILF Account in LankaSecure at or before 4.00 p.m. on the previous Business Day. The Central Bank will provide ILF only to the extent of the value (determined as provided in clause 6 below) of Eligible Securities available in the participant’s ILF Account at such time.

5. At the beginning of each Business Day, Eligible Securities available in the Participant’s ILF Account will be automatically transferred to the Central Bank’s ILF Account in LankaSecure and the value of Eligible Securities calculated based on the Official Prices determined by the Central Bank for such purpose will be credited to each PI’s Settlement Account in the RTGS at or before 8.00 a.m.

6. The Official Prices of Eligible Securities referred to in clause 5 above shall be determined by the Central Bank on a daily basis, based on the current market prices and taking into account market developments. Such Official Prices are recorded in LankaSecure. A list of such official Prices will be available with the Domestic Operations Department (DOD) of the Central Bank for the information of the PIs on request.

7. In exceptional circumstances, the Central Bank has the right to revise the Official Prices during the Business Day and revalue the securities provided as collateral based on the revised Official Prices.


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2If such revaluation results in a PI having to replenish the securities provided as collateral, the Domestic Operations Department shall request the PI to make such replenishment by transferring additional Eligible Securities to the Central Bank’s ILF Account to the value determined by the Central Bank. In such event, the PI shall transfer such additional securities to the Central Bank’s ILF Account within 1 hour of such request.

In the event a PI being unable to provide replenishment as required by the Central Bank, the Central Bank reserves the right to debit the PI’s Settlement Account in RTGS to the extent of the unsecured amount of the funds granted under ILF.

8. The Central Bank may, at its discretion, at the request of a PI, permit additional drawdowns of ILF during the Business Day at designated times in the event that the ILF obtained at the start of the Business Day is insufficient to meet its payment obligations, subject to a maximum of three (3) additional drawdowns per PI per day. Designated times for additional drawdowns are 10.00 a.m., 12.00 a.m. and 2.00 p.m.

9. Requests for additional drawdowns should be made to the Director/Domestic Operations Department of the Central Bank by telephone at or before 1.30 p.m. and if such additional drawdowns are permitted, the PI must reposition an adequate amount of Eligible Securities in its Participant’s ILF Account in LankaSecure to be used as security for such additional drawdowns of ILF at or before the applicable designated time.

10. Upon receipt of such a request the Central Bank will arrange for such additional drawdown of ILF at the applicable designated time/s. The Central Bank reserves the right to recover the cost of providing such additional drawdowns form the PI.

11. PIs may return the funds borrowed under ILF fully or partially and regain whole or part of the securities provided as collateral before the time specified for repayment of ILF in these Operating Instructions by prior agreement with the Central Bank. PIs who wish to return the funds borrowed under ILF before the specified time should inform the OMO Division of the Domestic Operations Department the details of such return, i.e. the amount and the details of securities, by telephone at or before 2.00 p.m. Such request should immediately be followed by a written confirmation by facsimile duly signed by two authorized officers.

A Participant shall be permitted to repay funds borrowed under ILF in whole or in part during the Business Day (i.e. before the time specified for repayment of ILF in these Operating Instructions) only once in each Business Day.

12. Upon receipt of such confirmation, the Domestic Operations Department will transmit the request to Director/Payments and Settlements Department to arrange for the recovery of whole or part of the outstanding funds under ILF and to return the relevant portion of the underlying securities. The standard DVP procedure for the reversal of a reverse repurchase transaction will be followed in respect of such repayments, i.e. Payment and Settlements Department will input a DVP message and the PI shall input a RVP message at or before 2.30 p.m. which will be matched by the system and settled.

13. Substitution of securities provided as collateral for ILF shall not be permitted.

14. All outstanding ILF balances should be settled by the PIs at or before 3.15 p.m. on each Business Day. For this purpose, PIs must ensure that sufficient funds are available in their Settlement Accounts in the RTGS at the specified time to enable the Central Bank to recover any outstanding ILF.


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215. The process of recovery of outstanding ILF is automatically initiated by the system at 3.15 p.m.

It will generate returns of securities from central Bank’s ILF Account to the Participant’s ILF Account. A settlement request will be submitted to RTGS on DVP terms which will be matched with an instruction to transfer securities from the Central Bank’s ILF Account to the Participant’s ILF Account. The reversal of ILF will be done at the original price and original transaction value.

16. If a PI fails, for any reason whatsoever, to settle in full to the Central Bank the amount outstanding under the ILF at the time specified in clause 14 above, the PI shall be deemed to be in default for the full sum so outstanding and shall become liable to pay default interest as set out in clause 18 below.

17. Where a PI is deemed to be in default as set out in (16) above, such PI should repay in full the amount in default before the close of business on the next Business Day. For this purpose, such PI must submit a RVP message to the System at or before 12 noon on the next Business Day which will be matched by a DVP message submitted to the System by the OMO Settlements Division of the Payments and Settlements Department. The PI should ensure the availability of sufficient funds in its Settlement Account for the repayment in full of the amount in default on or before the close of business on the next Business Day.

In the event the PI fails to settle in full the amount in default before the end of business on the next Business Day, the Central Bank shall retain the securities against which such funds were provided and deal with them in its own right.

18. On the first occasion of such default the PI shall be charged default interest at a rate equivalent to the Bank Rate announced by the Central Bank from time to time and on each succeeding occasion of default during a calendar year, such default interest rate shall be increased by 100 basis points, provided that where such default occurs more than once in a one month period the Central Bank shall have the right to retain the securities against which ILF was granted and to deal with them as the Central Bank deems fit, in addition to the right to charge default interest as stipulated in this clause. In the event of repeated default, the Central Bank may withdraw the availability of ILF to the PI for a period of time determined by the Central Bank.

19. Notwithstanding the other provisions of these Operating Instructions and notwithstanding the fact that default has not occurred more than once in a one month period, the Central Bank may, at its sole discretion, taking into consideration the circumstances of a default, decide to retain the securities and to deal with them as the Central Bank deems fit.

20. Notwithstanding the other provisions of these Operating Instructions, the Central Bank may at its sole discretion, taking into consideration the circumstances of a default, withdraw the availability of ILF to a PI permanently or for a period of time determined by the Central Bank.

Director Domestic Operations Department


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2Circular No. : 35/01/005/0010/11


05 December 2008


MARGIN REqUIREMENTS AGAINST LETTERS OF CREDIT

This has reference to our Circulars No. 35/01/005/0010/09 and 35/01/005/0010/10 dated 04.11.2008, on the Margin Requirements against Letters of Credit.

All Licensed Commercial Banks are hereby informed that the Schedule A - titled List of Items Requiring 200 per cent Margin Deposit Against Letters of Credit and Schedule A1 - titled List of Items Requiring 100 per cent Margin Deposit Against Letters of Credit referred to in our aforesaid Circulars are replaced with the Schedules A and A1 dated 05.12.2008 (under the same titles) attached hereto, respectively, with effect from 05.12.2008.

Licensed Commercial Banks are also informed that margin deposit requirements are not applicable to the goods which are imported for re-export purposes under the Entrepot Trade subject to the following conditions:

a. Goods imported to be stored in a Custom Bonded Warehouse until such goods are re-exported to a third country;

b. Re-packing/labelling/simple processing of goods imported to be carried out in a Custom Bonded Warehouse before re-exporting to a third country;

c. Exportation of goods directly from a second country to a third country without the goods physically arriving in the trader’s country;


DirectorDomestic Operations


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2Schedule A

05.12.2008

List of Items Requiring 200 per cent Margin Deposit against Letters of Credit

H.S. Code DescriptionMotor vehicles for the transport of ten or more persons, including the driver

With compression-ignition internal combustion piston engine (diesel or semi-diesel) :

8702.10.10 Motor vehicles for the transport of less than 13 persons (adults) including the driver, not more than three and half years old

8702.10.20 Motor vehicles for the transport of less than 13 persons (adults) including the driver, more than three and half years old

8702.10.30 Motor vehicles for the transport of 13 or more persons (adults) but less than 17 persons (adults) including the driver, not more than five years old

8702.10.40 Motor vehicles for the transport of 13 or more persons (adults) but less than 17 persons (adults) including the driver, more than five years old

Other :8702.90.10 Motor vehicles for the transport of less than 13 persons (adults) including the driver,

not more than three and half years old8702.90.20 Motor vehicles for the transport of less than 13 persons (adults) including the driver,

more than three and half years old8702.90.30 Motor vehicles for the transport of 13 or more persons (adults)

but less than 17 persons (adults) including the driver, not more than five years old8702.90.40 Motor vehicles for the transport of 13 or more persons (adults)

but less than 17 persons (adults) including the driver, more than five years old

Motor cars and other motor vehicles principally designed for the transport of persons (other than those of heading 87.02), including station wagons and racing cars

Vehicles specially designed for travelling on snow; golf cars and similar vehicles :8703.10.10 Not more than three and half years old8703.10.20 More than three and half years oldOther vehicles, with spark-ignition internal combustion reciprocating piston engine :

Of cylinder capacity not exceeding 1,000 cc :8703.21.60 Motor cars including station wagons and racing cars, not more than three and half years old8703.21.70 Motor cars including station wagons and racing cars, more than three and half years old


Of a cylinder capacity exceeding 1,000 cc but not exceeding 1,500 cc :8703.22.50 Motor cars including station wagons and racing cars, not more than three and half years old8703.22.60 Motor cars including station wagons and racing cars, more than three and half years old8703.22.70 Other, not more than three and half years old8703.22.80 Other, more than three and half years old

(Contd.)


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2Of a cylinder capacity exceeding 1,500 cc but not exceeding 3,000 cc :Motor cars including station wagons and racing cars of a cylinder capacity not exceeding 2,000 cc, not more than three and half years old :

8703.23.51 Of a cylinder capacity not exceeding 1,600 cc8703.23.59 Other8703.23.60 Motor cars including station wagons and racing cars of a cylinder capacity






Other vehicles, with compression-ignition internal combustion piston engine (diesel or semi-diesel) :Of a cylinder capacity not exceeding 1,500 cc :

8703.31.70 Motor cars including station wagons and racing cars, not more than three and half years old8703.31.80 Motor cars including station wagons and racing cars, more than three and half years old


Of a cylinder capacity exceeding 1,500 cc but not exceeding 2,500 cc :Motor cars including station wagons and racing cars of a cylinder capacity not exceeding 2,000 cc, not more than three and half years old

8703.32.51 Of a cylinder capacity not exceeding 1,600 cc 8703.32.59 Other8703.32.60 Motor cars including station wagons and racing cars of a cylinder capacity



exceeding 2,000 cc, more than three and half years old

(Contd.)

Schedule A (Contd.)



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2Other :



Other :8703.90.30 Other electric, not more than three and half years old8703.90.40 Other electric, more than three and half years old8703.90.50 Other, not more than three and half years old8703.90.60 Other, more than three and half years old

Motor vehicles for the transport of goods.with compression-ignition internal combustion piston engine (diesel or semi-diesel) :

vehicles of g.v.w. less than 1,500 kg :8704.21.81 Not more then five years old8704.21.82 More then five years old

Other :8704.21.91 Not more then five years old8704.21.92 More then five years oldOther, with spark-ignition internal combustion piston engine :

Other vehicles of g.v.w. less than 1,500 kg :8704.31.71 Not more then five years old8704.31.72 More then five years old

Other :8704.31.91 Not more then five years old8704.31.92 More then five years oldOther :8704.90.30 Electric, not more than five years old8704.90.40 Other electric, more than five years old8704.90.50 Other, not more than five years old8704.90.60 Other, more than five years old

Chassis fitted with engines, for the motor vehicles of headings 87.01 to 87.05 :8706.00.20 New chassis fitted with engines for other motor vehicles of heading 87.028706.00.40 Other new chassis fitted with engines for other motor vehicles8706.00.50 Used chassis fitted with engines

Schedule A (Contd.)


(Contd.)


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2Bodies (including cabs), for the motor vehicles of headings 87.01 to 87.05 :

8707.10 For the vehicles of heading 87.03

8707.90.10Other bodies and cabs incorporating attachments left over in the process of separating same from the main vehicle by cutting, but not meriting classification elseware by virtue of those left over attachments

8707.90.90 Other

Parts and accessories of the motor vehicles of headings 87.01 to 87.05 :8708.29.10 “Cut-portions” of bodies and cabs8708.70.10 Rims fitted with tyres, showing signs of wear8708.70.20 Other, rims fitted with tyres8708.99.20 Other new chassis not fitted with engines, but with or without fittings8708.99.30 Other used chassis not fitted with engines, but with or without fittings8708.99.40 “Cut-portions” of motor vehicles

Trailers and semi-trailers; other vehicles, not mechanically propelled; parts thereof :Trailers and semi-trailers of the caravan type, for housing or camping :8716.10.01 Not more than five years old8716.10.02 More than five years old

Schedule A (Contd.)



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2Schedule A1

05.12.2008

List of Items Requiring 100 per cent Margin Deposit against Letters of Credit




Beer 2203




3307.10, 3307.20, 3307.30, 3307.41, 3307.49 and 3307.90.90














Locks and padlocks 8301.10, 8301.20, 8301.30, 8301.40 and 8301.50

(Contd.)


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2Fans 8414.51 and 8414.59.10Air conditioners All HS Codes under 8415













��0 Directions, Circulars, Guidelines and Operating Instructions

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04 November, 2008



This has reference to our Circular Nos. 35/01/005/0010/01 and 35/01/005/0010/07 dated 22.10.2004 and 31.10.2008 respectively, on the Margin Requirements against Letters of Credit.

Licensed Commercial Banks are hereby informed that the Schedule A referred to in our Circular No. 35/01/005/0010/01 dated 22.10.2004 is replaced with Schedule A, titled List of Items Requiring 200 per cent Margin Deposit Against Letters of Credit (attached), with immediate effect.

Director

Domestic Operations

issued to Licensed Commercial Banks ��1

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04 November, 2008



This has reference to our Circular No. 35/01/005/0010/08 dated 31.10.2008, on the Margin Requirements against Letters of Credit.

Licensed Commercial Banks are hereby informed that the Schedule A1 referred to in the aforesaid Circular is replaced with Schedule A1, titled List of Items Requiring 100 per cent Margin Deposit Against Letters of Credit (attached), with immediate effect.

Director

Domestic Operations


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2Circular No. : 35/01/005/0010/08


31 October 2008



Commercial Banks are hereby informed that with immediate effect Letters of Credit (LCs) should not be opened by commercial banks for the importation of the items specified in Schedule A1 (attached), unless such LCs are covered by a minimum cash margin of 100 per cent of import value deposited with the LC opening banks at the time such LCs are opened.

In the case of existing LCs covering the importation of the goods mentioned in Schedule A1, no increase in the value of such LCs should be permitted by banks except on the terms prescribed in the above paragraph.

The Banks should not grant any advance to their import customers for the purpose of enabling such customers to provide the minimum margin requirements imposed by this circular. However, interest may be paid on margin deposits.

Banks should endorse the relevant invoice to the effect that the margin deposit as per this circular, has been obtained.

Banks are required to comply with this direction until further notice.

Director, Domestic Operations

Authorised Signatory of the Monetary Boardof the Central Bank of Sri Lanka


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11 October 2006



This has reference to our Circular No. 35/01/005/0010/01 dated 22 October 2004, on the above subject.

Licensed commercial banks are hereby informed that they should not grant any advance to their import customers for the purpose of enabling such customers to provide the minimum margins required to be deposited when opening Letters of Credit for importing the items specified in the above circular.

Director


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06 July 2006



This has reference to our Circular No: 35/01/005/0010/01 dated 22 October 2004, on the above subject.

Licensed commercial banks are hereby informed that the Central Bank has no objections to them paying of interest on the cash margin deposits held for the purpose of the above circular.

Director / Domestic OperationsAuthorised Signatory of the

Monetary Board of theCentral Bank of Sri Lanka


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21 March 2006



This has reference to our Circular No: 35/01/005/0010/01 dated 22 October 2004, on the above subject.

The Monetary Board has decided to exempt imports of vehicles which are eligible for duty concessions from the margin deposit requirement on letters of credit for imports of such vehicles imposed by our Circular No: 35/01/005/0010/01 dated 22 October 2004.

Director / Domestic OperationsAuthorised Signatory

of the Monetary Board of theCentral Bank of Sri Lanka


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22 October 2004



In view of the increased import expenditure arising out of high oil prices, the Monetary Board of the Central Bank has decided to adopt a temporary monetary measure in containing the increase in imports.

Accordingly, in terms of the provisions of Section 103 of the Monetary Law Act (Cap. 422 of the CLE), the Monetary Board has made order directing commercial banks that with effect from the close of business on 22 October 2004 letters of credit (LCs) should not be opened by commercial banks for the importation of the vehicles specified in Schedule A (attached) unless such LCs are covered by a minimum cash margin of 100 per cent deposited with the LC opening banks at the time such LCs are opened.

In the case of existing letters of credit covering the importation of the goods mentioned in Schedule A, no increase in the value of such letters of credit should be permitted by banks except on the terms prescribed in the above paragraph.

Commercial banks are required to comply with the direction of the Monetary Board.

Director / Domestic OperationsAuthorised Signatory

of the Monetary Board of theCentral Bank of Sri Lanka

Schedule A List of Items Requiring 100 per cent Margin on Letters of Credit

I II III

H.S.Heading H.S. Code Description

87.02 Motor vehicles for the transport of ten or more persons, including the driver.8702.10 With compression-ignition internal combustion piston engine (diesel or semi-diesel).8702.10.01 Ten seated passenger vans of the Nissan Patrol, Mitsubishi Pajero, Toyota Land Cruiser, Range

Rover and similar type of vehicles not more than three years old. 8702.10.02 Ten seated passenger vans of the Nissan Patrol, Mitsubishi Pajero, Toyota Land Cruiser, Range

Rover and similar type of vehicles more than three years old. 8702.10.03 Other with a normal seating capacity of not more than fifteen including the driver not more than

five years old.8702.10.04 Other with a normal seating capacity of not more than fifteen including the driver more than five

years old.


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28702.90 Other8702.90.01 Ten seated passenger vans of the Nissan Patrol, Mitsubishi Pajero, Toyota Land Cruiser, Range

Rover and similar type of vehicles not more than three years old.8702.90.02 Ten seated passenger vans of the Nissan Patrol, Mitsubishi Pajero, Toyota Land Cruiser, Range

Rover and similar type Of vehicles more than three years old.

87.03 Motor cars and other motor vehicles principally designed for the transport of persons (other than the items described under HS Heading 8702 of Customs Guide), including station wagons and racing cars

8703.10 Vehicles specially designed for travelling on snow; golf cars and similar vehicles8703.10.01 Not more than three and half (3 ½) years old8703.10.02 More than three and half (3 ½) years old

Other vehicles, with spark ignition internal combustion reciprocating piston engine8703.21 Of cylinder capacity not exceeding 1,000 cc.8703.21.05 Other specialized transport vehicles not more than three and half (3 ½) years old8703.21.06 Other specialized transport vehicles more than three and half (3 ½) years old8703.21.12 Other not more than three and half (3 ½) years old8703.21.13 Other more than three and half (3 ½) years old8703.22 Of a cylinder capacity exceeding 1,000 cc. but not exceeding 1,500 cc.8703.22.07 Other not more than three and half (3 ½) years old8703.22.08 Other more than three and half (3 ½) years old8703.23 Of a cylinder capacity exceeding 1500 cc., but not exceeding 3,000 cc.8703.23.07 Other of a cylinder capacity not exceeding 2,000 cc. not more than three and half (3 ½) years

old8703.23.08 Other of a cylinder capacity not exceeding 2,000 cc. more than three and half (3 ½) years old8703.23.10 Other not more than three and half (3 ½) years old8703.23.11 Other more than three and half (3 ½) years old8703.24 Of a cylinder capacity exceeding 3,000 cc.8703.24.07 Other not more than three and half (3 ½) years old8703.24.08 Other more than three and half (3 ½) years old.

Other vehicles with compression ignition internal combustion piston engine (diesel or semi diesel)

8703.31 Of a cylinder capacity not exceeding 1,500 cc.8703.31.07 Motor cars including station wagons and racing cars not more than three and half (3 ½) years

old8703.31.08 Motor cars including station wagons and racing cars more than three and half (3 ½) years old8703.31.10 Van type vehicles not more than five (5) years old8703.31.11 Van type vehicles more than five (5) years old8703.31.12 Other not more than three and half (3 ½) years old8703.31.13 Other more than three and half (3 ½) years old8703.32 Of a cylinder capacity exceeding 1,500 cc but not exceeding 2,500 cc.8703.32.05 Van type vehicles not more than five (5) years old8703.32.06 Van type vehicles more than five (5) years old8703.32.07 Motor cars including station wagons and racing cars of a cylinder capacity not exceeding 2,000

cc. not more than three and half (3 ½) years old8703.32.08 Motor cars including station wagons and racing cars of a cylinder capacity not exceeding 2,000

cc. more than three and half (3 ½) years old.8703.32.10 Other of a cylinder capacity not exceeding 2,000 cc. Not more than three and half (3 ½) years

old


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2 8703.32.11 Other of a cylinder capacity not exceeding 2,000 cc. more than three and half (3 ½) years old8703.32.12 Motor cars including station wagons and racing cars of a cylinder capacity exceeding 2,000 cc.

not more than three and half (3 ½) years old.8703.32.13 Motor cars including station wagons and racing cars of a cylinder capacity exceeding 2,000 cc.

more than three and half (3 ½) years old8703.32.14 Other not more than three and half (3 ½) years old8703.32.15 Other more than three and half (3 ½) years old8703.33 Of a cylinder capacity exceeding 2,500 cc.8703.33.05 Motor cars including stations wagons and racing cars not more than three and half (3 ½) years

old8703.33.06 Motor cars including station wagons and racing cars more than three and half (3 ½) years old8703.33.07 Van type vehicles not more than five (5) years old8703.33.08 Van type vehicles more than five (5) years old8703.33.10 Other not more than three and half (3 ½) years old8703.33.11 Other more than three and half (3 ½) years old8703.90 Other8703.90.01 Electric, not more than three and half (3 ½) years old8703.90.02 Electric, more than three and half (3 ½) years old8703.90.03 Other not more than three and half (3 ½) year old8703.90.04 Other more than three and half (3 ½) years old

87.04 Motor vehicles for the transport of goodsOther with compression-ignition internal combustion piston engine (diesel or semi diesel)

8704.21 g.v.w. not exceeding five (5) tons8704.21.01 Jeep type vans of g.v.w. not exceeding 3,000 kg not more than five (5) years old8704.21.02 Jeep type vans of a g.v.w. not exceeding 3,000 kg more than five (5) years old8704.21.12 Other not more than five (5) years old8704.21.13 Other more than five (5) years old

Other, with spark ignition internal comubustion piston engines8704.31 g.v.w. not exceeding five (5) tons8704.31.01 Jeep type vans of a g.v.w. not exceeding 3,000 kg. not more than three (3) years old.8704.31.02 Jeep type vans of a g.v.w. not exceeding 3,000 kg. more than three (3) years old.8704.31.10 Other, not more than five (5) years old8704.31.11 Other, more than five (5) years old


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31 October, 2008

To : All Licensed Commercial Banks and Primary Dealers.

REVERSE REPURCHASE FACILITY

This has reference to our Circular No.35/01/005/0006/19 dated 13 October 2008, on the above subject.

The Licensed Commercial Banks and Primary Dealers (Participating Institutions - PIs) are hereby informed that the limit on the number of times a particular PI could avail itself of the Reverse Repurchase Facility (RRF) of the Central Bank at its Reverse Repurchase Rate during a calendar month will be reduced from its current limit of ten (10) times to three (3) times a month with effect from 1 November, 2008.

Director

Domestic Operations


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13 October 2008



This has reference to our Circular No.35/01/005/0006/18 dated 30 September 2008, on the above subject.

The Licensed Commercial Banks and Primary Dealers (Participating Institutions - PIs) are hereby informed that the limit on the number of times a particular PI could avail itself of the Reverse Repurchase Facility (RRF) of the Central Bank at its Reverse Repurchase Rate during a calendar month will be increased from its current limit of six (6) times to ten (10) times a month with effect from 15 October, 2008.

Director

Domestic Operations


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21 February 2008

To : All Licensed Commercial Banks and Primary Dealers,


The Central Bank will adopt the following procedures in granting Reverse Repurchase Facility (RRF) to Participating Institutions (PIs i.e., Commercial Banks and Primary Dealers), from 22 February 2008. Item 5, 6, 7, 8, 9, 10, 11 and 12 of the Section C(b) of our Circular No. 35/01/005/006/04 dated 27 January 2004 will be applicable with regard to the settlement of the RRF. (A copy of our Circular attached for easy reference).

1. The RRF will not be available on the days when there is a liquidity surplus as per CBSL estimates and the CBSL conducts repurchase auctions to absorb liquidity.

2. When there is a liquidity shortage as per the CBSL estimates, RRF will be available to cover the full amount of the shortage in the system.

3. DOD will announce on electronic bidding system the total amount of RRF available under standing facility at or before 0930 hours on days in which there is a shortfall in the market.

4. PIs who wish to use the facility are required to inform their requirements to the OMO Division of the Domestic Operations Department by telephone or fax message before 1030 hours.

5. The DOD will allocate the total amount offered on the basis of amount requested by each PI. If the total amount requested is higher than the total amount offered, an allocation will be made on a pro rata basis.

6. The results will be informed to each PI by telephone or fax at or before 1100 hours.

7. PIs are requested to submit the amount accepted and details of the scripless securities through the facility available in the on-line electronic bidding system (standing facility) before 1200 hours.

8. RRF will be available for a participant subject to the following conditions:–

a. The RRF will be available to a particular PI only up to three (3) times per calendar month at the prevailing Central Bank Reverse Repo Rate.

b. The RRF is available only as the last resort to address an urgent liquidity requirement of the particular participant.

c. Participants seeking the facility on a particular day should not be a net lender in the money market on the same day, and

d. Funds borrowed under RRF should not be used to build up excess reserves in the reserve account of a commercial bank with the CBSL on that particular day.

9. The RRF at a Penal Rate of 19 per cent will be available on days when:

a) There is liquidity shortage in the system as per the CBSL estimates. This will be in addition to


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2the RRF made available under 2 above, and all PIs including those who exceed the limit of three times per calendar month will be eligible.

b) Liquidity is broadly in balance in the system and the CBSL does not conduct repurchase auctions to absorb liquidity.

PIs are advised to seek the CBSL RRF only as a last resort to address the urgent liquidity requirements and be cautious in seeking the facility.



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26 December 2006

To : All Licensed Commercial Banks,


The Reverse Repurchase Facility (RRF) of the Central Bank is available to the commercial banks to address their urgent liquidity issues and is designed to be accessed as a last resort. However, certain banks have resorted to the use of the RRF as a regular source of funding. The ill effects of regular borrowings from RRF of the Central Bank were explained to banks individually and collectively over the past six months by the Central Bank and the banks were requested to arrange alternative sources of funding, without relying on the RRF regularly.

It is also noted that when the commercial banking system has a liquidity surplus, there will be no necessity for any licensed commercial bank which has a liquidity shortage to resort to the RRF of the Central Bank since such a shortage could be met out of the overall surplus in the system.

Hence, with effect from 1 January 2007, the RRF of the Central Bank will not be available on days when there is a liquidity surplus in the commercial banking system, as per the Central Bank estimates. The days when the RRF is not made available on such grounds, will be notified through the online Money Market Information System/Electronic Bidding System on that day at 9.30 a.m.

Actg. DirectorDomestic Operations Department


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12 March 2008

To : All Licensed Commercial Banks and Primary Dealers,

OPERATING INSTRUCTIONS ON ISSUING CENTRAL BANK SECURITIES INSCRIPLESS FORM UNDER OPEN MARKET OPERATIONS OF

THE CENTRAL BANK OF SRI LANKA

The Market Operations Committee (MOC) of the Central Bank of Sri Lanka will decide, as and when it is deemed necessary, to issue Central Bank Securities (CBSL securities) under Section 91(1)(b) of the Monetary Law Act (Chapter 422), as a part of open market operations to absorb excess rupee liquidity. The main features of these securities are as follows:

i. CBSL Securities will be issued in scripless form.

ii. CBSL Securities are negotiable.

iii. The terms and regulations applied to the operations of Scripless Securities Settlement System (SSSS) and Central Depository System (CDS) will be applied on transferring and the settlement of CBSL securities.

iv. CBSL securities are marketable. However, these securities are not eligible as a collateral for Intra-day liquidity facility or reverse repurchase transactions with the CBSL.

v. Similar to government Treasury Bills, CBSL securities will be issued on a discount basis.

vi. All commercial banks and primary dealers (PIs) are eligible to purchase these securities from the Central Bank. The general public may purchase them in the secondary market from commercial banks or primary dealers.

vii. Similar to government securities, the primary issue of these securities is subject to the current 10 per cent withholding tax on interest income.

viii. CBSL securities will be issued to PIs,

a) on an auction basis and/or

b) as placements at a pre-determined interest rate (yield rate).

ix. The tenure (maturity period) of CBSL securities will be decided by the Central Bank, taking into consideration the market conditions prevailing at the time of issuing the Securities.

The CBSL reserves the right to amend, revise or vary any term and/or condition or any part thereof of these Operating Instructions with prior notice to PIs.

A. Issue of Central Bank Securities under the Auction System

1. The Central Bank will announce, when necessary, through the on-line electronic bidding system/ Money Market Monitoring System and / or any other means of communication that it intends to


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2conduct an auction to issue CBSL securities. The auction announcement giving the amount and the maturity period of the securities to be sold, date and the time of the auction and the settlement date will be made either on the auction day or one business day prior to the auction date.

2. The auction will be conducted through the existing on-line electronic bidding system under the option for outright sale auctions. PIs are invited to submit bids, giving the amount (face value of securities expected to purchase) and interest rate (yield rate) on the auction date during the time indicated in the auction announcement.

3. The rates quoted by PIs, shall be the yield rate with tax.

4. Bids should be submitted through the on-line electronic bidding system (under outright sales auction option). Bids by telephone will be entertained only in the event of a failure of the on-line bidding system. Bids submitted via telephone should be confirmed by fax signed by two authorized officers within 15 minutes. The original of the fax should be sent to the Domestic Operations Department (DOD) before the close of business on the same day. A PI can submit up to a maximum of six bids for each maturity. The minimum amount of a bid shall be Rupees one million and bids should be in multiples of Rupees one million.

5. PIs whose bids are accepted will be informed of such acceptance through the on-line electronic bidding system after a half an hour of the close of the auction. The allotment will be made at the rates quoted by the successful bidders.

6. Results of the auction will be announced through the on-line electronic bidding system and/or any other means of communications after a half an hour of the close of the auction giving the total amount accepted and the weighted average yield rate of successful bids.

7. In the event of there being bids in excess of the amount offered at the same rate, the available quantum would be allocated among such bidders on a ‘pro-rata’ basis. Accordingly, the bids at the cut off rate may be partially accepted.

8. The sale value (sale price including withholding tax) of each successful bid will be calculated by discounting the face value of securities at the rate quoted by the respective PI adjusted for the withholding tax (after tax rate) for the maturity period of the securities.

9. The settlement of the transaction will be made through a Matched Trade Feed file on the basis of which, the system will settle the transaction by transferring securities sold to the respective Own Account of the successful bidders against the receipt of funds to the settlement account of the CBSL for the sale value (price with withholding tax) of the securities. PIs are not required to submit any settlement instructions in this regard to the system.

10. In those cases where the settlement is on the auction date itself, Matched Trade Feed file will be submitted to LankaSecure after two hours of the close of auction. If the settlement is on a following day, a Matched Trade Feed file will be submitted to LankaSecure on or before 0830 hours on the settlement date.

11. The acceptance by the CBSL of a bid of a PI is binding on the PI and the failure to honour the transaction (purchase by PI) before the close of business of LankaSecure on the settlement date will render the PI liable to pay damages to the CBSL equivalent to the interest component on the purchase price for the maturity period at the rate quoted by the PI. Such amount shall be debited to PI’s Settlement Account with the CBSL on the next business day following the settlement date.

12. On the maturity date, the system will automatically initiate the settlement by transferring securities to the CBSL own account and maturity proceeds to RTGS A/c of PIs that held relevant securities on the business day prior to the maturity date.


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213. The CBSL has the right to hold additional auctions on the same day, as it deems necessary.


B. Issue of CBSL Securities at a Pre-Determined Rate

1. The Central Bank may issue, CBSL securities to PIs at a pre-determined yield rate.

2. The maturity period, the yield rate (with withholding tax) and the settlement date of CBSL securities to be issued at a pre-determined rate will be decided by the MOC and announced through on-line electronic bidding system / Money Market Monitoring System or/and any other means of communication, inviting PIs to purchase them between 1100 hours to 1430 hours on each business day entering into a deal with the OMO Division of DOD.

3. The PIs who wish to purchase CBSL securities at the pre-determined rates are required to inform the OMO Division of the DOD by telephone or fax message, the amount required to purchase (face value) not later than 1430 hours of the same day.

4. PIs are requested to submit the amount required to purchase (face value) to the electronic bidding system (under standing facility, outright sale option) on or before 1500 hours.

5. A minimum amount of a transaction shall be Rupees one million and bids should be in multiples of Rupees one million.

6. PIs whose deals were accepted could view such acceptance through the on-line electronic bidding system (under standing facility outright sale option) by 1500 hours on the same day.

7. In those cases where the settlement is on the deal date itself, Matched Trade Feed file will be submitted to LankaSecure on or before 1500 hours of the deal date. If the settlement is on a following day, a Matched Trade Feed file will be submitted to LankaSecure on or before 0830 hours on the settlement date.

8. The settlement of the transactions will be on a delivery versus payment (DVP) basis through the Matched Trade Feed facility available in LankaSecure. The system will settle the transaction by transferring securities sold to the respective Own Accounts of the PIs against the receipt of funds to the Settlement Account of the CBSL for the discounted value of the securities sold. The PIs are not required to submit any settlement instruction in this regard to the system.

9. The sale value (sale price including withholding tax) will be calculated by discounting the face value of securities sold by the applicable interest rate adjusted for the withholding tax (after tax rate) for the maturity period of the security.

10. The acceptance by the CBSL of a bid of PI is binding on the PI and the failure to honour the transaction (purchase by PI) before the close of business of LankaSecure on the settlement date will render the PI liable to pay damages to the CBSL equivalent to the interest component on the purchase price for the maturity period at the pre-determined rate. Such amount shall be debited to the PI’s Settlement Account with the CBSL on the next business day following the settlement date.

11. On the maturity date, the system will automatically initiate the settlement by transferring securities to the CBSL own account and maturity proceeds to RTGS A/c of PIs that held relevant securities on the business day prior to the maturity date.


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212. The Central Bank reserves the right to change the yield rate and the maturity period of CBSL

securities to be issued under a pre-determined rate as and when it is deemed necessary and such changes will be notified to PIs through on-line electronic bidding system/Money Market Monitoring System or any other means of communication on or before 0930 hours on the day it will become effective.

C. Early Retirement of CBSL Securities

The MOC may decide, as and when it is deemed necessary, to retire CBSL securities prior to the maturity date. The retirement of CBSL securities will be made either on,

a. an auction basis or

b. at a pre-determined rate.

The terms and conditions on which these securities will be retired on an auction basis and at a pre-determined rate are outlined in sections C1 and C2.

(C1) Retirement of CBSL Securities under the Auction System

1. The CBSL will announce as and when necessary, on the on-line electronic bidding system that it intends to retire (purchase) CBSL securities prior to the maturity date, on an auction basis.

2. The auction announcement giving details of the securities to be retired i.e. the amounts (face value), maturity date and ISIN of securities will be made either on the auction day or one business day prior to the auction date, through on-line electronic bidding system/Money Market Monitoring System or/and any other means of communication, and PIs are invited to submit offers, giving the amount and interest rate (yield rate) during 1300 hours to1400 hours on the auction date. The settlement date will be on the business day following the auction date.

3. Offers should be submitted through the on-line electronic bidding system (under outright purchase auction option). Offers by telephone will be entertained only in the event of a failure of the on-line bidding system. Offers submitted via telephone should be confirmed by fax signed by two authorized officers within 15 minutes. The original of the fax should be sent to DOD before the close of business on the same day. A PI can submit up to a maximum of six offers for each maturity. The minimum amount of an offer shall be Rupees one million and offers should be in multiples of Rupees one million.

4. Each successful PI will be informed of the acceptance of its offers and the relevant purchase price of the CBSL securities through the on-line electronic bidding system at 1430 hours.

5. In an event of there being offers in excess of the amount offered at the same rate, the available quantum would be allocated among such PIs on a ‘pro-rata’ basis. Accordingly, the offers at the cut off rate may be partially accepted.

6. The purchase value (price) of each successful offer will be calculated by discounting the face value of securities purchased at the rate offered by the respective PI, for the maturity period of the securities.

7. On the settlement date, a Matched Trade Feed file will be submitted to LankaSecure at or before 0830 hours on the basis of which, the system will credit the purchase price to the respective settlement account of each successful PI in RTGS against the receipt of securities retired (purchased) into the own account of the CBSL in LankaSecure. PIs are not required to submit any settlement instruction in this regard to the system.


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28. The acceptance by the CBSL of a offer of a PI is binding on the PI and the failure to honour the

transaction (sale by PI) before the close of business of LankaSecure on the settlement date will render the PI liable to pay damages to the CBSL equivalent to the interest component on the sale value for the remaining period to maturity at the rate quoted by the PI. Such amount shall be debited to the PI’s Settlement Account with the CBSL on next business day following the settlement date.

9. The CBSL has the right to hold additional auctions on the same day, as it deems necessary.

10. The CBSL reserves the right to accept or reject any offer of a PI.

(C2) Retirement of CBSL Securities at a Pre-Determined Rate

1. The Central Bank will announce that it intends to retire (purchase) CBSL securities at a pre-determined rate through on-line electronic bidding system/ Money Market Monitoring System or/and any other means of communication, giving the rate and the maturity date and ISIN of the CBSL securities to be retired prior to the maturity date and invite PIs to place their offers on the same day.

2. The settlement date will be on the business day following the dealing date.

a. The PIs who wish to sell CBSL Securities at the pre-determined rates are required to inform the OMO Division of the DOD by telephone/fax message the amount expected to sell not later than 1500 hours, the same day.

b. PIs are requested to submit the amount required to sale to the electronic bidding system (under standing facility outright purchase option) on or before 1530 hours of same day.

c. The minimum amount of a transaction shall be Rupees one million and deals should be in multiples of Rupees one million.

d. PIs whose deals are accepted could view such acceptance through the on-line electronic bidding system (under standing facility outright purchase option) by 1530 hours on the same day.

3. The settlement of the transactions will be on a delivery versus payment (DVP) basis through the Matched Trade Feed facility available in LankaSecure. The Matched Trade Feed file will be submitted to LankaSecure at or before 0830 hours on the settlement date on the basis of which, the system will credit the respective settlement accounts of the PIs for the purchased value of securities against the receipt of the securities purchased into the own Account of the CBSL in Lankasecure. The PIs are not required to submit any settlement instruction in this regard to the system.

4. The purchase value (price) will be calculated by discounting the face value of securities purchased by the pre-determined rate for the remaining period to maturity of the security.

5. The acceptance by the CBSL of an offer of a PI to sell CBSL securities at a pre-determined rate is binding on the PI and the failure to honour the transaction (sale by PI) before the close of business of LankaSecure on the settlement date will render the PI liable to pay damages to the CBSL, equivalent to the interest component on the sale value for the remaining period to maturity at the pre-determined rate. Such amount shall be debited to the PI’s Settlement Account with the CBSL on the next business day following the settlement date.

A KamalasiriDirector



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2Circular No. : 35 / 01 / 005 / 0006 / 18

Domestic Operations Department21 May 2008


OPERATING INSTRUCTIONS ON LONG TERM REPO TRANSACTIONS (LTRP)UNDER THE AUCTION SYSTEM

We refer to the Operating Instructions Circular No. 35/01/005/006/04 on Open Market Operations of the Central Bank of Sri Lanka in Scripless Government Securities dated 27 January 2004 and in particular to paragraph A(1) thereof. The Central Bank has decided that, in addition to the one day (overnight) repurchase transactions, the Central Bank would also engage in long term repurchase transactions with Participating Institutions (PIs).

All Repurchase Transactions carried out between a PI and the CBSL in terms of these Operating Instructions are subject to the provisions of the Master Repurchase and Reverse Repurchase Agreement entered into between such PI and the Monetary Board of the Central Bank of Sri Lanka. The terms used in these operating instructions shall have the same meaning assigned to them in the Master Repurchase and Reverse Repurchase Agreement.

In the event of any inconsistency or conflict between these Operating Instructions and the Master Repurchase and Reverse Repurchase Agreement, these Operating Instructions shall prevail.

The terms and conditions and procedures applicable to such transactions are given below–

1. The Market Operations Committee (MOC), will announce as and when necessary auctions for Long Term Repo Transactions (LTRP), on the on-line electronic bidding system. The announcement will include the amount offered, maturity date (the tenure) auction date and the settlement date.

2. The auction announcement will be made one working day in advance to the auction date and Participating Institutions (PIs) are invited to submit their bids, giving the amount and interest rate during 1300 hours and 1400 hrs on the auction date. The settlement date will be the succeeding business day.

3. Bids should be submitted through the on-line electronic bidding system installed for this purpose. Bids by telephone will be entertained only in the event of a failure of the on-line bidding system. Bids submitted via telephone should be confirmed by fax signed by two authorized officers within 15 minutes.

The original of the fax should be sent to the Domestic Operation Department before the close of business on the same day.

4. A PI can submit up to a maximum of six bids for each tender. The minimum amount of a bid shall be Rupees one million and bids should be in multiples of Rupees one million.

5. Results of the auction will be announced at 1430 hours on the auction date via the on-line electronic bidding system and/or any other means of communication giving the total amount accepted and the Weighted Average Yield Rate (WAYR).


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26. Each successful bidder will be informed of the acceptance of its bid/s and allotment through the

electronic bidding system at 1430 hours. The allotment will be made at the rates quoted by the successful bidder. For each successful bid, scripless securities will be allocated at the Official Prices determined on the basis of current market prices, for the amount requested.

7. A confirmation of Repurchase transaction to each successful PI will be issued electronically through the electronic bidding system within one hour after the release of results. The confirmation shall substantially be in the form at Annexure I. The PIs are advised to promptly view the confirmation and retain a hard copy of the confirmation for their records. In the event a PI is unable to view or print the confirmation due to a technical failure in accessing the electronic bidding system, PSD will fax a copy of such confirmation to the PI on request.

8. On the settlement date the transactions will be settled on a delivery versus payment (DVP) basis through the Matched Trade Feed Facility available in LankaSettle. Matched Trade Feed file will be submitted to LankaSettle at or before 0830 hours of the settlement date, on the basis of which the system will settle the transaction by transferring the allocated securities (Purchased Securities) to the Domestic Operations Repurchase (DOP) Account of the successful PI in LankaSecure against the receipt of funds (amount accepted) for the sale value of securities (Purchase Price) to the Settlement Account of the CBSL. The PI is not required to submit any settlement instructions in this regard to the system.

9. Securities transferred to the DOP Account of PI in terms of these Operating Instructions may be traded by a PI only under a repo agreement. The maturity date of such a repo shall not be later than one working day before the maturity date of the repo transactions with the CBSL. The substitutions of securities is not permitted.

10. Successful PI should ensure that sufficient funds are available in the Settlement Account in LankaSettle to settle the Purchase Price of Securities in full at or before 0830 hours of the settlement date. If a PI fails to settle a repo transaction in full, before the close of business of LankaSecure the PI shall be liable to pay damages to the CBSL in a sum equivalent to the difference between the sale value (Purchase Price) and the repurchase value (Repurchase Price) calculated as provided in these Operating Instructions. Such damages shall be debited to the PI’s Settlement Account with the CBSL on the next business day. If the transaction involves securities carrying more than one International Securities Identification Number (ISIN), each such ISIN will be treated as a separate repo transaction, for the purpose of this clause.

11. On the maturity date (Repurchase Date), Matched Trade Feed file will be submitted to LankaSettle at or before 0830 hours to pay the Repurchase Price of securities to the Settlement Account of the PI against the delivery of the Purchased Securities to the Own Account of the CBSL in LankaSecure, in the same manner as outlined in clause 8 above.

12. Repurchase Price will consist of the Purchase Price (amount accepted) plus the interest component, which will be calculated at the rate quoted by the PI.

13. PIs should ensure the availability of Purchased Securities in their DOP Account in LankaSecure before close the business of LankaSecure on the working day immediately preceding the Repurchase Date to enable the reversal of a repurchase transaction in full at the time specified in clause 11 above. In the event of there being insufficient securities in the DOP Account of a PI to enable the reversal of a repurchase transaction in full on the Repurchase Date, the Central Bank shall act as set out in clause 14 below.

14. If a PI fails to settle a repo transaction entered into in terms of these Operating Instructions in full as set out in clause 13 above the CBSL at its discretion shall convert the defaulted repo


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2transaction to an outright sale transaction at the official price. If the official price is higher than the purchase price of such securities, PI shall be liable to pay to the CBSL as sum equivalent to the difference between the official price and the purchase price of the securities and their interest component referred to in clause 12 above (different between the purchase price and the repurchase price). If the official price is equal or lower than the Purchase Price, PI is liable to pay to the CBSL the interest component referred to above. Payments calculated on the above basis and due from a PI shall be debited to the PI’s settlement account with the CBSL on the next business day. In addition, at the discretion of the CBSL, the facility provided to the PI to participate in repo transactions with the CBSL shall also be withdrawn.

15. In the event of there being bids at the same rate in excess of the amount offered, the available quantum of Treasury Bills/Bonds will be allocated among such bidders on a ‘pro rata’ basis. Accordingly, the bids at the cut off rate may be partially accepted.

16. If the Repurchase Date in respect of any repurchase transaction is a bank holiday, any obligation of a party of such repurchase transaction arising on such day shall be carried out by such party on the immediately succeeding business day.


The CBSL reserves the right to amend, revise or vary any term and or condition or any part thereof of these Operating Instructions with prior notice to PIs.



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2

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3Ref. No. : EC/19/80 (D)

Dept. of Exchange ControlCentral Bank of Ceylon,P.O. Box 883,Colombo 1.

1980.05.14

OPERATING INSTRUCTIONS TO AUTHORISED DEALERS

Dear Sirs,

RESIDENT NON-NATIONALS’ FOREIGN CURRENCY ACCOUNTS

It has been decided that facilities be provided for resident non-nationals to maintain accounts in designated foreign currencies with the commercial banks in Sri Lanka.

2. Authorised Dealers are hereby informed that they may, without the prior approval of this Control, open and maintain Resident Non-Nationals’ Foreign Currency Accounts for non-nationals who are resident, either temporarily or permanently, in Sri Lanka on Residence Visas.

3. The following conditions will apply to these accounts :–

(i) These accounts may be opened in any commercial bank in Sri Lanka by non-nationals who are resident in this country, either temporarily or permanently, in the following designated currencies –

French Francs Swiss Francs Swedish Kroner Japanese Yen United States Dollars Singapore Dollars Netherlands Guilders West German Marks Hongkong Dollars Pounds Sterling

(ii) These accounts may be current, Savings or Deposit Accounts, but no withdrawals of funds from these accounts by cheques may be permitted.

(iii) Interest on the outstanding balances in Savings and Deposit Accounts may be paid in the same currency as that in which the accounts are held.

(iv) These accounts may be operated by the domestic units of the commercial banks and not by the Foreign Currency Banking Units.

(v) Credits and debits to these accounts should be restricted to the following:–

CREDITS : (a) Inward remittances received in any of the designated currencies listed at (i) of para 3

above. (b) Amounts in Sri Lanka rupees authorized by the Controller of Exchange for remittance

abroad, converted at the rate of exchange obtaining on the day of credit.

DEBITS : (a) Outward remittances n any of the currencies listed at (i) of para 3 above. (b) Payments in foreign currency converted into Sri Lanka Rupees.

Conversions in respect of (b) under Credits and Debits above would be subject to the normal rules, including submission of returns, reporting details of transactions which result in purchases of foreign currency by the bank with which the account is maintained.

Yours faithfully,

Controller of Exchange.


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3Ref. No. : EC/08/88 (D)

Department of Exchange ControlCentral Bank of Sri Lanka,P.O. Box 883,Colombo.

1988.05.05

OPERATING INSTRUCTIONSTO AUTHORISED DEALERS

Dear Sirs,

NON-RESIDENT FOREIGN CURRENCY ACCOUNTS

(NRFC ACCOUNTS)

The provisions of Operating Instructions bearing No. EC/41/84(D) of 84.09.18 are hereby rescinded by the substitution of the following in lieu therefor.

2. Authorised Dealers are hereby informed that they are permitted to open and maintain, without reference to the Exchange Control Department, Non-Resident Foreign Currency Accounts for nationals of Sri Lanka, who are or have been employed abroad and for Non-Nationals of Sri Lankan origin, who are resident outside Sri Lanka, subject to the following conditions:–

2.1 Opening of Accounts

(a) Accounts under this scheme should be opened only in the domestic banking unit in the name of Sri Lankan nationals or non-nationals who had at any time been a Sri Lanka national, while they are resident abroad or within 90 days of their return to Sri Lanka after employment abroad.

(b) These accounts should be in United States Dollars, Pounds Sterling, Deutsche Marks, French Francs, Swiss Francs and Japanese Yen or in such other currencies as may be intimated by the Exchange Control Department from time to time.

(c) These accounts may be maintained in the form of current, savings or fixed deposit accounts.

(d) These accounts may be held jointly, provided all joint account holders conform to conditions set out in paragraph 2.1(a) above.

(e) Before opening an account the following information and documents should be obtained in respect of each account holder:–

(i) Full name, nationality, foreign address and occupation.

(ii) The number of his/her passport and date of issue and validity.

(iii) His/Her date of departure from Sri Lanka.

(iv) Nature of employment abroad.

(v) The name and address of his/her employer.


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3(vi) In the case of a non-national, documentary evidence indicating that he/she was a

national of Sri Lanka previously.

2.2 Credits

Credits to these accounts should be confined to the following:–

(a) Inward remittances in foreign currency received through any Authorised Dealer.*

(b) Foreign exchange brought into the country by the account holder provided Customs confirmation on passport or Customs Declaration Card is produced.

(c) Interest payable in foreign currency on funds held in the Account.

2.3 Debits

(a) Debits to these accounts may be freely allowed, whether it be for remittances abroad or for transfers from one NRFC Account to another or for payments in Sri Lanka. (converted to Sri Lanka Rupees at the prevailing rate of exchange.)

(b) Letters of Credit need not be opened for import of cars for which payment is effected from NRFC Accounts. (Para 2 of Operating Instructions bearing No. EC/49/81(B) of 1981.12.09 will not apply for import of cars.)

(c) Travellers Cheques and currency notes may be issued to holders of NRFC Accounts against funds held in such accounts for travel abroad, subject to production of travel tickets. In such cases, Authorised Dealers are required ‘to endorse’ and authenticate in the passport of the account holder the value of travellers cheques and currency notes issued and that exchange released is out of NRFC funds. Release of foreign currency notes should be restricted to 20 per cent of the total amount of foreign exchange to be taken out of country for travel purposes.

(d) Travellers Cheques may be issued against NRFC funds lying to the credit of the account holder to the extent of the Duty Free Entitlement Allowance for purchase of goods at the Duty Free Shopping Complex. Such travellers cheques should be duly endorsed to the effect that they are for purchases at the Duty Free Shopping Complex and be authenticated by the Authorised Dealers.

3. Monthly Returns

You are required to furnish monthly, the total balance in NRFC Accounts maintained by you under this scheme to reach this Department not later than the 10th day of the month following that in respect of which the statement relates.

Yours faithfully,

Additional Controller of Exchange

* Foreign exchange for such purpose would be deemed to be only such currency as specified in the order of the Minister of Finance published in Gazette No.187/2 of 1975.10.27.

D/225 vol. II


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3Ref. No. : EC/04/89 (D)

Central Bank of Sri Lanka,P.O. Box 883,Colombo 1.

1989.01.19


Dear Sirs,

SCHEME FOR THE OPENING OF SPECIAL ACCOUNTS WITH

FOREIGN EXCHANGE REMITTANCES

The provisions of Operating Instructions bearing No. EC/39/85 (D) dated 1985.07.30 are hereby rescinded by the substitution of the following in lieu therefor :–

2. Authorized Dealers are hereby informed that they may open and maintain without reference to the Exchange Control Department Special Accounts in favour of Sri Lankans employed abroad for deposit to such accounts, after conversion to Sri Lanka Rupees of foreign exchange remitted by such persons to Sri Lanka.

3. The following conditions will apply to the operation of these accounts :–

3.1. These accounts may be held in the form of Current, Savings or Fixed Deposit Accounts.

3.2. Credits

Credits should be confined to rupee conversions of inward remittances of foreign exchange received through banking channels or of foreign currency brought into the country by the account holders and declared to the Customs. (Savings arising from employment abroad)

3.3. Authorized Dealers are requested to note that interest earned on these Accounts which is exempt from income tax interms of Section 10(d) of the Inland Revenue Act No. 28 of 1979, does not qualify for credit to these Accounts.

Similarly, income earned by the account holder on investments made by him with funds lying to his credit in these Accounts with the approval of the Central Bank interms of Section 15(b) of the same Act does not also qualify for credit to these Accounts.

3.4. Debits

Debits to Special Accounts in respect of local disbursements may be freely allowed without reference to the Exchange Control Department.

3.5. Authorized Dealers are also requested to note that notwithstanding the provisions of any other Operating Instructions, sums lying in these Accounts including sums withdrawn therefrom should not be reconverted to foreign currency either for outward remittances or for credit to Non-Resident Foreign Currency Accounts. (N.R.F.C. Accounts)


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33.6. Statements

Credits referred to at 3.2 above should be reported as usual in the purchase schedules, to the International Finance Division of the Economic Research Department.

Additionally, Authorized Dealers are required to forward half yearly statements as at June and December each year to Branch ‘D’ of the Exchange Control Department as per format annexed.

4. Tax Incentives

In as much as income accruing to the account holders on sums held in Special Accounts is exempt from income tax, income derived from investments made by them with the approval of the Exchange Control Department with sums lying to their credit in such Accounts is also exempt from income tax in terms of Section 15 (b) of the Inland Revenue Act No. 28 of 1979.

Yours faithfully,

Additional Controller of Exchange

D/190/Vol. III

Attention of Branch ‘D’

STATEMENT OF ‘SPECIAL ACCOUNTS’ FOR THE HALF YEAR ENDING …………………

Name of Authorised Dealer : ……………………………………………

Branch : ……………………………………………

Our Reference : ……………………………………………

(1)Name of

Account Holder

(2)Account

No. (indicate whether Current,

Savings or Deposit)

(3)Opening Balance (at the

beginningof the

six month period)

Rs.

(4)During the six month Period

(6)Closing Balance (at the

end of the six month

period)

Rs.

Credits (5)Local

Disburse-ments

Rs.

(a)Name of Foreign

Currency

(b)Equivalent in Rupees

Rs.

II. Grand Total

I hereby certify that the information given in this statement is true and correct.


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3Ref. No. : EC/52/91 (D)

Exchange Control DepartmentP.O. Box 883,Central Bank of Sri Lanka,Colombo 1.

1991.08.01OPERATING INSTRUCTIONSTO AUTHORISED DEALERS

Dear Sirs,

RESIDENT FOREIGN CURRENCY ACCOUNTS (RFCA)

Authorised Dealers are hereby informed that they are permitted to open and maintain Resident Foreign Currency Accounts (RFCA) in their domestic units in designated currencies* in the form of savings and/or term/fixed deposits in respect of –

Category A : Individuals (other than Category C below) whether citizens or non citizens resident in Sri Lanka who are in a position to deposit foreign currency to a minimum of US$ 500 or its equivalent in other designated currencies out of inward remittances and/or currencies brought into the country on a declaration to Customs, without the prior approval of the Controller of Exchange.

Category B : Other Sri Lankan residents who hold designated foreign currencies to the value of over and above US$ 500 per person in Sri Lanka with the prior approval of the Controller of Exchange; and

Category C : Exporters of goods and services who have increased their export earnings in foreign exchange terms over the previous year ending 31st December, upto a 5 per cent of the annual increase, taking into account the year ending 31st December 1990 as the base year, without the prior approval of the Controller of Exchange, with effect from 1st January, 1992.

These accounts are subject to the following terms and conditions ;

Category A :

1.1 Opening and maintaining of accounts

(a) Accounts should be opened only with a minimum balance of US$ 500 or its equivalent in other designated foreign currencies.

* Designated Currencies :

Pound Sterling Belgium Franc US Dollar Danish KorneDeutsche Mark French Franc Japanese Yen Swiss FrancNetherlands Guilder Canadian Dollar Norwegian Krone Swedish KroneAustralian Dollar

Or any other currency authorised by the Central Bank

(b) These accounts may be held jointly provided the minimum balance of US$ 500 or its equivalent in other designated currencies per person is maintained.


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31.2 Credits

Credits to these accounts should be confined to the following :

(a) Inward remittances received and foreign currency brought into the country on a declaration to Customs other than proceeds for export of goods and services and remittances to the credit of NGOs.

(b) Interest earned in foreign currency on these accounts.

1.3 Debits

Debits to these accounts are freely allowed whether it be for remittances abroad or for transfers from one RFC Account to another or for payments in Sri Lanka (converted to Sri Lanka Rupees at the prevailing rate of exchange) provided account holders maintain a minimum balance of US$ 500 or its equivalent per person.

1.4 Closing of the account

If an account holder fails to maintain a balance of US$ 500 or its equivalent in other designated currencies, Authorised Dealer should close such accounts immediately and pay the balance in Sri Lanka Rupees.

Category B :

Opening and maintaining of the accounts should be in accordance with instructions of the Controller of Exchange.

Category C :

1.1 Opening and maintaining of accounts

(a) Before opening an account, the following information and documents should be obtained in respect of each applicant: i. Full name and address of the exporter. ii. Export registration number issued by the EDB. iii. The aggregate values of foreign exchange brought into the country being proceeds

of exports with supported bank confirmations (original bank receipts/advices) in respect of the base year 1990 (ending 31st December ) and subsequent years (ending 31st December) .

iv. An affidavit confirming that the exporter has not opened any other RFC Account with any other Authorised Dealer in Sri Lanka.

(b) The applicant should be a person not black-listed by the Controller of Exchange or/and the Controller of Import and Export.

(c) These accounts cannot be held jointly.

1.2 Credits

Credits to these accounts should be confined to the following :

(a) 5% of the annual increase in foreign exchange receipts being the proceeds of exports.

The annual increase for a particular year (ending 31st December) is the increment in the export proceeds of that year over the previous year (ending 31st December) or over the base year 1990 (ending 31st December) whichever is lower.


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3 An example is given below :

Year

Export Proceeds received

US $

Annual Incrementover the

previous year

Annual incrementfor the computation of 5% entitlement

5% entitlement to be credited

to RFCA

1990(Base Year) 50 – – –

1991 45 (45 - 50) = -5 (45 - 50) = Nil Nil1992 60 (60 - 45) = +15 (60 - 50*) = 10 0.5

* Base year.

(b) In the case of export proceeds received through other Authorised Dealers, for the purpose of computing the annual increase, the Authorised Dealer who opens RFCA should obtain certificates from other Authorised Dealers confirming the following details : i. Name and address of exporter. ii. Registration number issued by the EDB. iii. The total value of exports received in foreign exhange terms and connected bill numbers

and description of goods, etc. iv. Dates of receipts of export proceeds.

(c) Authorised Dealer who opens RFCA is authorised to sell foreign exchange only upto the entitlement of 5% of the annual increase in export proceeds in foreign exchange terms of the account holder.

(d) In the computation of export earnings in foreign exchange terms, the rate of exchange prevalent at the date of receipt of export proceeds should be taken into account.

(e) Where the export proceeds are received in currencies other than the currency in which the RFCA is maintained for the computing of 5% entitlement, proceeds received in other currencies should be converted at the middle cross rate prevailing at the receipt of export proceeds.

1.3 Debits

As mentioned in the item 1.3 of the Category A.

1.4 Closing of the Account

Controller of Exchange retains the right to close such accounts if an exporter is found delaying the repatriation of export proceeds willfully beyond the stipulated period or has committed any other exchange malpractices.

Monthly Returns

You are requested to furnish monthly statements indicating the following details in regard to the operation of the RFC Accounts in respect of each category to the Monitoring Unit of this Department not later than the tenth day of the following month : i. Number of accounts opened as at beginning of the month. ii. Number of accounts opened during the month. iii. Number of accounts closed as at end of the month. iv. Total number of accounts in operation as at the end of the month. v. Total credits/debits made to the accounts in operation as at end of the month. vi. Total outstanding balance of the accounts as at end of the month.

Yours faithfully,

Controller of Exchange


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3Ref. No. : EC/41/93 (D)

Department of Exchange ControlCentral Bank of Sri Lanka,P.O. Box 883,Colombo 1.

1993.03.29


Dear Sirs,

REMOVAL OF SURRENDER REqUIREMENT IN RESPECT OF EXPORT PROCEEDS AND RELAXATIONS OF RESTRICTIONS ON

CURRENT ACCOUNT TRANSACTIONS

A. Removal of Surrender Requirement in Respect of Export Proceeds:

Authorised Dealers are hereby informed that the surrender requirement imposed on exporters in terms of Section 6 (2) (a) of the Exchange Control Act, has been rescinded in respect of the proceeds of exports effected by exporters of goods and services on or after 18th March, 1993.

Authorised Dealers are also informed that exporters may either repatriate and have such proceeds credited to any type of rupee or foreign currency account in the form of current/savings/fixed deposits in the Domestic Banking Unit (DBU) of any commercial bank in Sri Lanka or to retain the proceeds abroad. These funds cannot be credited to any account which qualifies for tax exemption or amnesty.

The Resident Foreign Currency Account (RFCA) facility granted to exporters for crediting 5% of the incremental value of the export earnings currently in operation is withdrawn with immediate effect and no further credits should be permitted.

B. Current Account Transactions –

Relaxations of Exchange Restrictions:

(i) Authorised Dealers are hereby informed that with immediate effect they are permitted to issue foreign exchange to persons resident in Sri Lanka at their judgement and discretion for the following purposes:

(a) Travel Expenses for Holiday & Pilgrimage, Business (including Conferences, Seminars, Workshops, Sports, etc.) and medical.

(b) Travel expenses for employment abroad.

(c) Education expenses abroad including living expenses.

(d) Remittances for miscellaneous purposes of a bona-fide nature.

(e) Issue of foreign currency notes to travellers:

Authorised Dealers are requested to use their discretion in the issue of foreign currency notes for travel purposes.


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3 For purposes of keeping a record of unusually large transactions, Authorised Dealers

should keep the Controller of Exchange informed of all transactions exceeding US$ 20,000 per transaction.

Authorised Dealers are permitted to refuse the issue of Exchange or refer the matter to the controller of Exchange if they feel that it is to be used for purposes other than that applied for or if the amounts requested are unreasonably large or relate to illegal transactions.

(ii) Export Promotion :

(a) Forward Sales and Purchases of Foreign Exchange:

Authorised Dealers are permitted to enter into contracts for the sale/purchase of foreign exchange forward for a period up to 360 days irrespective of the purpose.

(b) International Credit Cards:

Authorised Dealers are free to issue International Credit Cards and effect payment against such Cards, subject to whatever rules and regulations laid down by them.

(c) Removal of Limits on the Export of Non-Commercial Items:

Authorised Dealers are free to permit the export of gifts, trade samples, personal jewellery, personal effects and other non-commercial items without any restriction.

(iii) Other:

(a) Imports on D/A Terms:

Authorised Dealers may permit the import of any item on D/A terms subject, however, to the establishment of Letters of Credit for such imports.

(b) Remittance of Pensions:

Authorised Dealers are permitted with immediate effect to remit the full pension of pensioners living abroad.

(c) Exchange Allowance to Emigrants from Sri Lanka:

Authorised Dealers are free to permit reasonable amounts as exchange allowance to emigrants from Sri Lanka to be carried on person on the production of documents confirming emigrant status at the time of departure.

Authorised Dealers are requested to note that these Operating Instructions supersede all previous Operating Instructions issued on the following :–

1) The Surrender of Export Proceeds in respect of the Export of Goods and Services to Authorised Dealers.

2) Release of Basic Exchange Allowance for Travel Abroad (Holiday & Pilgrimage).

3) Release of Exchange for Business Travel, Conferences, Seminars, Sports, etc.

4) Release of Exchange for Medical Treatment.

5) Release of Exchange to Sri Lankans for Education Abroad.

6) Basic Exchange Allowance for Travel Abroad on Employment.

7) Forward Sales and Purchases of Foreign Exchange.


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3 8) International Credit Cards to Persons Travelling Abroad.

9) Establishment of Letters of Credit for Imports on Deferred Payment (DA) Terms.

10) Gifts and Trade Samples, Non-Commercial Exports of Jewellery and Personal Effects and Other Non-Commercial Items.

11) Issue of Exchange in the Form of Currency Notes for Travel Abroad.

12) Remittance of Pensions.

13) The Section on Exchange Allowance to Emigrants in the Operating Instructions on Emigration.

Yours faithfully,


GUIDELINES TO AUTHORISED DEALERS

ON OPERATING INSTRUCTIONS NO. EC/41/93 DATED 29.03.1993

(A) Removal of surrender requirement

Exports should be effected on Form EC/EXP 1 on a license issued by an Authorised Dealer. The original of the Form EC/EXP 1 would be forwarded to the Exchange Control Department by the Sri Lanka Customs, once the shipment is effected. The duplicate copy will have to be forwarded to the Exchange Control Department by the Authorised Dealers, if the documents are negotiated and the triplicate copy, if proceeds are received in Sri Lanka.

Export proceeds if repatriated, should not be credited to any existing Foreign Currency Accounts such as FCBU, NRFC, RFC, RNNFC and Special Accounts.

However, Authorised Dealers are notified that the proceeds of exports of goods and services effected prior to 18th March, 1993 should be repatriated and surrendered to Authorised Dealers in conformity with the undertaking given by the exporters of such goods and services.

(B) Current Account transactions – Relaxations of Restrictions

[1] Travel

In releasing foreign exchange for travel abroad Authorised Dealers may permit travel for any purpose without any restrictions to applicants who are permanently resident in Sri Lanka, on the frequency of travel and the selection of airline subject to the production of a valid visa and return air ticket. The definition of a resident Sri Lanka should be in terms of the ministerial order published in the Government Gazette Extraordinary No. 15007 dated 21st April, 1972 (a copy of which is attached).

You are also requested not to permit hereafter the credit to RFC Account any unexpended balances of foreign exchange issued in Sri Lanka and brought back by Travellers on their return from abroad.

Authorised Dealers should also note that exchange should not be granted to Sri Lankan Nationals, who have been granted dual citizenship and permanently resident abroad and to those in possession of emigrant visas or permanent resident visas permitting indefinite stay abroad.

Exchange for travel purposes should in future be released on applications made on Form E in duplicate. Forms T, T1, T2 and EA need not be used for the release of exchange for travel and education abroad. The duplicate copy of Form “E” together with the supporting documents should be forwarded to the Exchange Control Department, within a week of such release of exchange.


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3[2] Employment abroad

Foreign exchange for employment abroad may be released on production of the contract of employment, visa and one way air ticket. Exchange should be released on Form “E” in duplicate. The duplicate copy of the Form “E” together with the supporting documents should be forwarded to the Exchange Control Department, within a week of such release of Exch-ange.

[3] Education abroad

In respect of tuition fees, text books etc. amounts not exceeding those specified by the University/Education Institution supported by documentary evidence may be allowed.

Remittances in respect of tuition fees should be made only to the relevant University or Educational Institution.

In regard to living expenses, Authorised Dealers may permit the exchange for education including living expenses, on Form “E” in duplicate. The duplicate copy of the Form “E” should be forwarded to this Department, within a week of such release of exchange. Form EA is withdrawn.

[4] Remittances for miscellaneous purposes of a bona-fide nature supported by relevant documentation

Subscriptions for membership of professional bodies or institutions outside Sri Lanka, subscriptions or remittances for the purchase of books, journals, magazines, newspapers and other publications published outside Sri Lanka, advertising charges, T.V. documentarians etc., may be permitted where invoices or bills in support of same are furnished.

Exchange is to be released on Form “E” in duplicate. The duplicate copy of Form “E” together with the supporting documents should be forwarded to this Department, within a week of such release of exchange.

[5] Removal of limits on the Export of Non-commercial and personal items

Export of gifts of Sri Lankan products, trade samples, personal jewellery, personal effects and other non-commercial items may be permitted without restrictions. While applications for export of gifts should be on Form “HG”, trade samples, personal jewellery, personal effects and other non-commercial items may be permitted on Form “NC” in duplicate. Permits issued for the export of personal jewellery should be endorsed on the passport of the applicant. The duplicates of Forms “HG” and “NC” together with the supporting documents should be forwarded to the Exchange Control Department, within a week of the issue of such permits.

[6] Imports on Documents on Acceptance (D/A) terms

Import of any item into Sri Lanka, may be permitted on D/A terms subject to the establishment of Letters of Credit (L/C) for such imports. Applications should be on Form “E2” in duplicate. The duplicate copy of Form “E2” together with the supporting documents should be forwarded to this Department, within a week of such approval being granted.

[7] Release of Exchange in Currency notes to travellers

Authorised Dealers may release reasonable amounts in the form of currency notes depending on the nature and purpose of the request.

[8] International Credit Cards

Subscriptions or deposit for the purchase of International Credit Cards and Payment of Bills or invoices for expenses relating to travel may be permitted.

[9] Emigration

Authorised Dealers may permit exchange allowance upto a maximum of US$ 2,000/- per person. Personal effects upto a reasonable amount.

Capital transfers including jewellery however, should be on the basis of Operating Instructions issued previously.

[10] Remittance of Pensions

Full Pensions of pensioners living abroad whether on migration or temporarily may be permitted on production of documentary evidence confirming that they are resident abroad.

Applications should be made on Form “E” in duplicate. The duplicate copy together with the supporting documents and a request by the applicant should be forwarded to this Department.


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3Ref. No. : EC/D/GL/1994/2


1994.03.18

GUIDELINES TO AUTHORISED DEALERS ON

REMOVAL OF EXCHANGE CONTROL RESTRICTIONS ON

CURRENT (NON-CAPITAL) TRANSACTIONS

The following guidelines are issued with regard to dealing in foreign exchange on current (non-capital) transactions. An explanatory note on the nature of current and capital transactions is attached.

(1) TRADE PAYMENTS

A. Merchandise Exports

It is the policy of the Central Bank of Sri Lanka to encourage merchandise exports which generate foreign exchange earnings for the country. Accordingly, merchandise exports are permitted without restriction, subject to the trade policy of the Government.

By Gazette Notification No.759/15 dated 26th March, 1993, exporters are exempted from the requirement to ensure that export proceeds are repatriated within 6 months, as required under Section 22(4) of the Exchange Control Act.

Exporters have also been exempted from the requirement of surrendering export proceeds to an Authorised Dealer as required under Section 6 (2) (a) of the Exchange Control Act.

Hence, exporters are now free either to repatriate export proceeds to Sri Lanka and have such proceeds credited to any Rupee Account or an "Exporter's Foreign Currency Account" (EFCA) in the form of Current/Savings/Fixed Deposit with the Domestic Banking Unit (DBU) of any commercial bank in Sri Lanka, or to retain the export proceeds abroad in any commercial bank provided the monies in such accounts are not used for the acquisition of property or other capital assets outside Sri Lanka. These export proceeds cannot be credited to any bank account in Sri Lanka which qualifies for tax exemptions or amnesty, such as Non Resident Foreign Currency (NRFC) or Resident Foreign Currency (RFC) Accounts.

The earlier facility by which exporters were permitted to credit 5% of the incremental value of export earnings has been withdrawn and no further credits should be permitted to those accounts.

Authorised Dealers may permit the remittance of commissions to agents abroad, of a reasonable percentage of the FOB value of exports, which has been repatriated to Sri Lanka.

General Policy.

Export Proceeds.

Commissions and Claims.


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3Authoriscd Dealers may also permit the remittance of a reasonable sum on claims by foreign buyers in respect of quality and quantity deficiencies of goods exported, where the export proceeds have been received in Sri Lanka. In this regard, Authorised Dealers could be guided by appropriate documents such as survey reports from an internationally reputed firm of surveyors or a copy of an arbitration award.

Authorised Dealers may issue and renew guarantees for export purposes and make payment in respect of claims on such guarantees.

Forward purchase of export proceeds by Banks is no longer obligatory.

B. Merchandise Imports

Payments for imports of goods and services are permitted without any restrictions, subject to the trade policy of the Government.

For the time being and for statistical purposes, Letters of Credit have to be opened for imports in the manner prescribed in the Special Import Licence Regulations (SIL) No. 1 of 1977, except for,

(a) Import of raw materials by the export processing industries;

(b) Board of Investment (BOI) enterprises;

(c) Duty Free Shops;

(d) Import for commercial purposes on Documents on Payment (D/P) terms where the value of the consignment does not exceed US$ 7,500 c.i.f., Sri Lanka; and

(e) Import of goods for the personal use of the importer, raw materials for industry and spare parts for machinery (not in commercial quantities) where the value of the full consignment does not exceed US$ 3,000 c.i.f., Sri Lanka or its equivalent in any foreign currency.

Authorised Dealers may enter into contracts for the forward sale of foreign exchange for a period upto 360 days. Authorised Dealers may also enter into cross currency contracts for a period upto 360 days.

C. Service Payments

Payments for services falling under current (non-capital) transactions are permitted freely.

Authorised Dealers may issue foreign exchange for travel abroad for any purpose, including education and medical treatment abroad, on verifying the bona-fides of the request.

International Credit Cards could be issued to any person.

Authorised Dealers may reconvert into foreign exchange of any unexpended Sri Lanka Rupees of foreign passport holders on the production of relevant encashment receipts issued by an Authorised Dealer.

Issue and Renewal of Guarantees.

Forward Purchase of Exchange.

General Policy.

Letters of Credit.

Forward Sales.

General Policy.

Travel, Education, Medical.

International Credit Cards.

Reconversion of Unexpended Rupees.


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3All purchases of foreign exchange by way of inward remittances in excess of US$ 10,000 (Ten Thousand) or its equivalent should be reported on Form ‘2’.

Authorised Dealers may (without reference to Exchange Control) return inward remittances received in Sri Lanka but unutilised, and later recalled by the sender.

Authorised Dealers may release foreign exchange to persons to enable them to maintain members of their families who are resident abroad.

Remittances for miscellaneous current (non-capital) payments inclusive of profits, dividends, interest and rental income, could be made where the supporting documents relevant to such purposes are furnished.

Authorised Dealers may permit credits of payments received for freight and passage collections to a Rupee Account and outward remittances of funds in such accounts in respect of shipping, airline agencies and freight forwarders on production of relevant documents such as cargo or freight manifests, passage collections, air-way bills in respect of credits and disbursement accounts, debit notes, tax clearance certificates in respect of outward remittances.

The External Rupee Account facility granted to Shipping and Airline Agencies is withdrawn with immediate effect and balances in such accounts should be treated as ordinary rupee accounts.

D. General

For purposes of keeping a record of large foreign exchange transactions for service payments, Authorised Dealers should keep the Controller of Exchange informed of all transactions exceeding US$ 20,000 (Twenty Thousand) Per transaction. Such transactions should be reported on Form ‘1’.

Authorised Dealers may decline the release of foreign exchange :–

(a) If the amounts requested are unreasonably large; or

(b) If they have reasons to believe that the exchange applied for is to be used for a purpose other than that applied for; or

(c) If they have reasons to believe that it relates to an illegal transaction.

Inward Remittances.

Return or Cancellation of Inward Remitances.

Remittances to Dependants.

Remittances of Profits, Dividends, Interest, Rental Income, etc.

Shipping, Airline and Freigh Forwarding.

Large Payments.

Discretion of Authorised Dealers.


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3Ref. No. : EC/06/94


1994.03.18


Dear Sirs,

REMOVAL OF EXCHANGE CONTROL RESTRICTIONS ON

CURRENT (NON-CAPITAL) TRANSACTIONS

1. Authorized Dealers are permitted to release foreign exchange without restriction for all current (non-capital) transactions, exercising their judgement and discretion after satisfying themselves with the bona-fides of the requests. Foreign exchange releases related to capital transactions will continue to need my prior approval. However, certain capital transactions are already freely permitted subject to Operating Instructions issued by me. Guidelines with regard to the implementation of these Exchange Control relaxations (current transactions) are annexed.

2. All previous Operating Instructions pertaining to exports and imports of merchandise goods (other than the Letter of Credit requirement imposed in terms of the Special Import License Regulations under the Imports and Exports Control Act), and exports and imports of services including shipping, airline services and other facilities for travel abroad are hereby rescinded.

3. Authorized Dealers are also advised to use the new Form 1 for sales of foreign exchange and Form 2 for purchases of foreign exchange, as soon as possible, but not later than 30th June, 1994. Specimens of these forms are attached. All other exchange control forms for sales and purchases of foreign exchange will cease to be valid after 30th June, 1994. The Form 1 shall also be used by those who have been specially authorized to issue travellers’ cheques.

4. Authorized Dealers should forward copies of completed Form 1 to this department on a weekly basis in respect of all sales of foreign exchange. They should forward copies of Form 2 on a weekly basis in respect of purchases of foreign exchange in excess of US$ 10,000. (Ten Thousand) or its equivalent. In addition, Authorized Dealers should also forward on a weekly basis, a consolidated statement of a total of all purchases of foreign exchange less than US$ 10,000 on a single Form 2 to be completed by the Authorized Dealer in respect of all such purchases.

Yours faithfully,



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3To: All Authorised Dealers

An Explanatory Note on Current and Capital Transactions

Generally, in transfers of foreign exchange between countries, capital transactions relate to payment or receipts which involve the transfer of real or financial assets, by purchase or sale. Current transactions relate to payments or receipts which involve trade in goods and services. The following is a list of transactions which would assist Authorised Dealers in identifying whether a particular transaction is of a capital or current nature. For any clarification, Authorised Dealers are requested to consult with the Controller of Exchange.

1. CURRENT TRANSACTIONS

1.1 Import and Export of Goods and Services

1.1.1 Merchandise

1.1.1.1 General merchandise, which includes movable goods.

1.1.1.2 Goods for processing, which includes exports and imports of goods for processing and subsequent re-export or re-import of such goods.

1.1.1.3 Export or import of goods for repairs.

1.1.1.4 Goods procured in ports by carriers, such as fuels, provisions, stores and supplies.

1.1.2 Services

1.1.2.1 Transportation expenses, relating to services involving the carriage of passengers, the movement of goods (freight) and related supporting activities.

1.1.2.2 Travel and other expenses, related to business, education, medical treatment, holiday, pilgrimage, seminars, conferences, sports, etc.

1.1.2.3 Communication services, which include postal, courier, radio and tele-communication services.

1.1.2.4 Construction services, which include design, construction and installation of projects.

1.1.2.5 Insurance services, which include marine insurance, re-insurance and other insurance, subject to local regulations relating to insurance.

1.1.2.6 Financial services, which include fees, commissions, brokerage, under-writing charges and other intermediary service fees.

1.1.2.7 Computer and information services, which include transactions related to computer and information services.

1.1.2.8 Royalties and licence fees.

1.1.2.9 Other business services, which include merchanting (entrepot) and other trade related services, rentals for charters of ships, aircraft, containers, etc. and business, professional and technical services.


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3 1.1.2.10 Personal, cultural, and recreational services, which include audio-visual and

related services and other personal, cultural and recreational services.

1.1.2.11 Government services, which include all services between Governments, international and regional organisations, such as embassy expenses and membership subscriptions.

1.2 Income

1.2.1 Payments to expatriate employees, which include wages, salaries and other benefits paid by employers. This also includes inward remittances, by Sri Lankans working abroad and outward remittances for maintenance of families living abroad.

1.2.2 Investment income, which includes dividends, interest, rent and profits.

1.3 Other Transfers

This includes government and private transfers relating to gifts of food, clothing and other consumer goods, medical supplies, etc. associated with relief efforts.

2. CAPITAL TRANSACTIONS

2.1 Capital Transfers

2.1.1 Remittances involving transfers of ownership of fixed assets.

2.1.2 Transfers of funds linked to or conditional upon, acquisition or disposal of fixed assets.

2.1.3 Cancellation of debt without any counterpart being received in return.

2.1.4 Migrants’ transfers.

2.2 Acquisition and Disposal of Assets which include tangible assets such as land and intangible assets such as patents, copyrights, trade marks, franchises, etc. and leases and other transferable contracts.

2.3 Direct Investments Abroad by Residents and in Sri Lanka by Non-Residents.

2.4 Portfolio Investments Abroad by Residents and in Sri Lanka by Non-Residents.

2.5 Foreign Borrowing by Residents and Domestic Borrowing by Non-Residents.

2.6 Other Investments Abroad by Residents and in Sri Lanka by Non-Residents, including Deposits and Other Assets.

2.7 Contracts Abroad by Residents and in Sri Lanka by Non-Residents.


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3Ref. No. : EC/02/95(D)


1995.02.22

Operating Instructionsto Authorised Dealers

Dear Sirs,

SPECIAL ACCOUNTS

This is with reference to Section (2) of our Operating Instructions bearing reference No.EC/04/89(D) dated 1989.01.19.

Authorised Dealers are hereby informed that they should open ‘Special Accounts’ in favour of Sri Lankans employed abroad only if approval of the Controller of Exchange had been obtained for the opening of such accounts prior to the remittance of funds to Sri Lanka. ‘Special Accounts’ should not be opened by transfer of funds from existing N.R.F.C. Accounts. This is in compliance with the provisions of Section 10(d) and 15(b) of the Inland Revenue Act, No. 28 of 1979.

A revised circular would be issued in due course.

Yours faithfully,



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3Ref. No. : 06/04/05/2003

Dept. of Exchange ControlCentral Bank of Sri Lanka,P.O. Box 883,30, Janadhipathi Mawatha,Colombo 1.


Dear Sirs,GUARANTEES

Authorised Dealers are hereby informed that they may without the prior approval of this department issue or renew guarantees or similar undertaking of the nature set out below in respect of obligations undertaken by a person resident in Sri Lanka (whether a bank/trading organization or an individual) the discharge of which would involve a payment in foreign exchange remittable to a person resident outside Sri Lanka.

i. Bid Bonds in favour of persons resident outside Sri Lanka without a limit in respect of exports and other service contracts, subject to conditions stipulated in the tender or quotation.

ii. Performance Bonds in favour of persons resident outside Sri Lanka without a limit in respect of exports or other service contracts subject to proof of the award of the contract and conditions stipulated in the contract.

iii. Letters of guarantees for purposes other than those referred to in item (i) and (ii) above up to a value of US$ 500,000 subject to the following conditions:

(a) Furnishing of evidence in proof of the underlying transaction, which should be a transaction permitted in terms of our Operating Instructions to you or specifically authorised by us.

(b) The guarantee containing a clause to the effect that claims under the guarantee would be limited to the amount outstanding to the beneficiary of the guarantee.

(c) Any claim under the guarantee should be received in Sri Lanka on or before the expiry date of the guarantee.

2. In the cases where the principal obligor is a person resident outside Sri Lanka and the guarantee is to be given by his agent in Sri Lanka, letters of guarantee up to the value of US $ 500,000 may be issued at the request of the agent subject to obtaining a counter guarantee or counter indemnity on identical terms from the principal resident outside Sri Lanka in addition to conditions (a), (b) and (c) of (iii) above.

3. Authorised Dealers are also permitted to make outward remittances arising from valid claims in respect of the guarantees referred to above without reference to the Exchange Control Department.

4. Operating Instructions No. EC/81/92(D) dated 7th August 1992 is hereby rescinded.

Yours faithfully,

Controller of Exchange.Copies to – Governor AGGs D/IOD DG(N) D/ER CA DG(W) D/BS


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3Ref. No. : 06/02/03/2003

Dept. of Exchange ControlCentral Bank of Sri Lanka,P.O. Box 883,30, Janadhipathi Mawatha,Colombo 1.


Dear Sirs,

FOREIGN CURRENCY LOANS TO EXPORTERS

I refer to my Operating Instructions No. ECD/02/97(C&F) dated 3rd January 1997 and EC/5/2000(D) dated 7th April 2000 on the above subject, whereby permission was granted to extend foreign currency loans from off shore units and domestic units of commercial banks to exporters of goods and services.

2. You are now hereby informed that in the case of default of foreign currency loans granted in terms of above Operating Instructions, all efforts should be made to realize proceeds of the sale of domestic assets on enforcement of the mortgage in the foreign currency of the transaction. If such efforts fail, rupee proceeds may be converted up to the extent of the amount required for the settlement of the outstanding balance of the loan without my prior approval.

3. However, you should obtain and retain with you satisfactory evidence that attempts to sell the assets against foreign currency to another party have failed and that assessment of credit risk at the time of granting the loan has been properly done.

Yours faithfully,


Copies to – Governor DG(N) DG(W) AGGs D/ER D/BS D/IOD CA


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3Ref. No. : 06/04/11/2003

Dept. of Exchange ControlCentral Bank of Sri Lanka,P.O. Box 883,Colombo 1.

09th December 2003OPERATING INSTRUCTIONSTO ALL AUTHORISED DEALERS

Dear Sirs,

REPATRIATION OF SALE PROCEEDS OF PROPERTIES PURCHASED AND/OR DEVELOPED THROUGH INWARD REMITTANCES OF FOERIGN CURRENCY

BROUGHT INTO THE COUNTRY

The attention of all authorized dealers are drawn to the notification under Section 7 of the Exchange Control Act published in the Extraordinary Gazette Notification 1312/9 dated 28th October 2003 (Annex 1).

General permission has been granted in this Gazette Notification for the following transactions:

(a) The payment in Sri Lanka Rupees of the purchase price payable in respect of any residential property in Sri Lanka to a person who is the owner of the property being sold, but who is resident outside Sri Lanka or to the heir of such a person resident outside Sri Lanka provided there is evidence to establish that the property had originally been acquired and/or developed by the owner resident outside Sri Lanka by way of inward remittances brought into the country in convertible foreign currency.

(b) The repatriation by authorized dealers without reference to the Exchange Control Department to the person resident outside Sri Lanka or to the heir of such person of such amount of the purchase price paid in Sri Lanka Rupees in such circumstances, as described in (a) above, as is equal to the amount brought in by way of inward remittances in convertible foreign currency for the original acquisition and/ or development of the property on production of documentary evidence to that effect, Any amount remaining after such repatriation should be deposited in a non resident blocked rupee account in Sri Lanka in the name of the owner or the heir of such property.

Yours faithfully,


Copies to – S/G, DG(N), DG(W), AGG, DER, DBS, D/IOD


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3Annex I

The Gazette of the Democratic Socialist Republic of Sri LankaEXTRAORDINARY

No.1312/9 – TUESDAY, OCTOBER 28, 2003(Published by Authority)

PART I: SECTION (I) – GENERAL

Central Bank of Sri Lanka Notices

THE EXCHANGE CONTROL ACT, (CHAPTER 423)

NotificationunderSection7

Permission is hereby granted–

(a) for the payment in Sri Lanka Rupees, of the purchase price payable in respect of any residential property in Sri Lanka, to a person who is the owner of the property being sold but who is resident outside Sri Lanka or to the heir of such person resident outside Sri Lanka: Provided that such property had originally been acquired or developed by the owner resident outside Sri Lanka and payment for the same was made by way of inward remittances in convertible foreign currency; and

(b) for the repatriation of such amount of the purchase price paid in Sri Lanka Rupees in such circumstances as is described in (a) above, as is equal to the amount paid by way of inward remittances in convertible foreign currency for the original acquisition or development of the property. Any amount remaining after such repatriation shall be deposited in a non-resident blocked rupee account in Sri Lanka in the name of the owner or the heir of such property.

h. a. G. hettiaRachchi,Controller of Exchange.

Colombo,28th October, 2003.

11-184


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3Ref. No. : 06/04/12/2003

Dept. of Exchange ControlCentral Bank of Sri Lanka,P.O. Box 883,Colombo 1.

10th December 2003OPERATING INSTRUCTIONSTO ALL AUTHORISED DEALERS

Dear Sirs,

LOANS AND ADVANCES IN FOREIGN CURRENCY TO SRI LANKANSEMPLOYED ABROAD AGAINST THE PLEDGE OF BALANCES IN

NON-RESIDENT FOREIGN CURRENCY (NRFC) ACCOUNTS

As a further measure of liberalising Exchange Controls and to give the benefit of lower interest rates presently prevailing in respect of foreign currency facilities to Sri Lankans employed abroad, it has been decided to permit Authorised Dealers to grant loans and advances in foreign Currency to be utilized for any purpose in Sri Lanka against the pledge of their NRFC balances provided they are in a position to service such loans in foreign currency. These loans should be granted subject to the following terms and conditions:

(1) The loan should be granted only up to 90% of the funds available in the NRFC account of a Sri Lankan employed abroad on pledging his NRFC accounts as a collateral for the loan.

(2) The foreign currency proceeds of the loan will be released in Sri Lanka Rupees to the borrower by the bank, which grants the loan, purchasing the foreign exchange.

(3) The tenure of the loan should be decided based on the borrower’s probable tenure of employment abroad and should not exceed 5 years.

(4) The loans should be repaid in foreign currency and in the event of the loan being in arrears for over 3 instalments, the bank should recover the loan from the balance in the borrower’s NRFC account.

(5) Under no circumstances, should the borrower be permitted to settle any outstanding balance of the loan in rupees.

Yours faithfully,


Copies to – S/G DG(N) DG(W) AGG DER DBS D/IOD


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3Ref. No. : 06/04/03/2004


July 16, 2004To Primary Dealers Appointed as Designated Agents forSri Lanka Development Bonds andAll Authorised Dealers in Foreign Exchange

Dear Sirs,

SRI LANKA DEVELOPMENT BONDS (SLDBs)

Permission is hereby granted in terms of Section 17 of the Exchange Control Act, to both Authorised Dealers in foreign exchange and Primary Dealers who have been appointed by the Superintendent of Public Debt of the Central Bank of Sri Lanka (Superintendent of Public Debt) as designated agents for the purpose of purchasing and marketing Sri Lanka Development Bonds (SLDBs) issued by the government of Sri Lanka (Government) to acquire, hold or transfer SLDBs on which capital and interest are payable in U.S. Dollars.

2. Permission is also hereby granted to such designated agents to maintain the following two special accounts in U.S. Dollars for the said purpose, with a commercial bank appointed as an Authorised Dealer in foreign exchange (Authorised Dealers).

(i) A U.S.Dollar interest bearing account titled ‘Sri Lanka Development Bond Investment Account (SLDBIA)’ maintained on behalf of the Government to credit funds payable to the Government and received from the categories of investors specified in paragraph 3, who directly purchase SLDBs from the Government. The funds in this account belong to the Government.

(ii) A U.S.Dollar account titled ‘Dollar Account for Bond Investment (DABI)’ which may be maintained on an interest bearing basis (in the case of such designated agent who is an Authorised Dealer in foreign exchange, the maintenance of this account is not mandatory), for the purpose of purchasing SLDBs from the Government and dealing in SLDBs with the categories of investors specified in paragraph 3.

3. Categories of Investors

(i) Citizens of foreign states whether resident in Sri Lanka or outside Sri Lanka;

(ii) Citizens of Sri Lanka who have made their permanent abode outside Sri Lanka;

(iii) Citizens of Sri Lanka who have proceeded outside Sri Lanka to take up employment or to set up in business or in a profession and are residing abroad;

(iv) Bodies corporate or unincorporated established under the laws of a country other than Sri Lanka.

(v) Companies who have entered into agreements in terms of Section 17 of the Board of Investment of Sri Lanka Law No.4 of 1978 with full exemption from the provisions of the Exchange Control Act provided that all purchases of SLDBs are made against debits to foreign


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3currency accounts maintained only for the purpose of crediting earnings from exports of such companies.

4. Sri Lanka Development Bond Investment Account (SLDBIA)

The credits and debits to this account shall be confined to the following :–

(i) Credits

Remittances received in US Dollars from investors specified in paragraph 3 above for the purchase of SLDBs from the Government.

(ii) Debits

(a) To make payment to the Government for purchasing SLDBs by investors specified in paragraph 3 above. (This payment should be made in accordance with instructions given by the Superintendent of Public Debt and is payable to the ‘Public Debt Subscription US Dollar Account (PDSDA)’ maintained by the Superintendent of Public Debt with the Central Bank of Sri Lanka).

(b) To effect remittances by way of refund on the instructions of the Superintendent of Public Debt to investors specified in paragraph 3 above.

(c) For any other purpose on the instructions of the Superintendent of Public Debt.

Note: The monies received in to this account should be transferred to the Government strictly in accordance with instructions given by Superintendent of Public Debt.

5. Dollar Account for Bond Investment (DABI)

The credits and debits to the account should be confined to the following :–

(i) Credits

(a) US Dollars procured or assigned for the purpose of purchasing SLDBs.

(b) Sale proceeds received from investors specified in paragraph 3 above on the sale of SLDBs to them.

(c) Amounts received as repayment of principal and payment of interest on SLDBs held by the account holders.

(ii) Debits

(a) For payments to the Government for the acquisition of SLDBs. Such payments should be made payable to the aforesaid PDSDA.

(b) For making Payment to sellers of SLDBs from whom SLDBs are purchased by the account holder in the secondary market.

(c) Any other sums payable to the Superintendent of Public Debt, such as fees payable for sub-division and consolidation of bonds etc. These too should be made payable to the aforesaid PDSDA.

(d) For selling foreign exchange in the account in excess of the account holder’s requirements to purchase SLDBs, to an Authorised Dealer.


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36. Authorised Dealers with whom the above accounts are maintained should furnish statements of such accounts for each month, indicating details of debits and credits, to the Exchange Control Department (D Branch), on or before the 15th day of the following month.

7. Permission is also hereby granted in terms of Section 5 of the Exchange Control Act to Designated Agents who are primary dealers to purchase US Dollars from an Authorised Dealer subject to the condition that such purchases are limited to the extent necessary to purchase SLDBs from the Government or from a holder of SLDBs. Where any sums procured are not necessary for the purchase of SLDBs, the primary dealer shall forthwith sell the foreign exchange to an Authorised Dealer.

Yours faithfully,


Copies to – S/G, DG(W) DG(J) AG(K) AG(W) AG(F) AG(V) DER DBS DIO SPD


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3Ref. No. : 06/04/01/2005Exchange Control DepartmentCentral Bank of Sri Lanka,P.O. Box 883,Colombo 1.

14/02/2005

Operating Instructions toAll Authorised Dealers andNational Savings Bank

Dear Sirs,

OPERATING INSTRUCTIONS TO AUTHORISED DEALERS

All Authorised Dealers are hereby informed that with effect from 15/02/2005 all remittances received from foreign persons and entities including foreign governments to the Non Governmental Organisations (NGOs) operating in Sri Lanka should be channelled through a Special Account titled “Post Tsunami Inward Remittances Account” (PTIRA) subject to the following terms and conditions:

1) The account should be maintained only in Sri Lanka (SL) Rupees.

2) When opening the account Authorised Dealer should exercise his due diligence to satisfy the bona fides of the NGO and credential of signatories to the account of the NGO, in terms of Know Your Customer (KYC) guidelines.

3) Credits to the account should be restricted only to SL Rupee proceeds realised out of inward remittances received in convertible foreign currencies from foreign persons, entities and governments etc. and interest accrued to the account.

4) Debits to the account should be permitted freely for any local disbursement.

5) There should be no restriction to open and maintain more than one account if any NGO intends to open more than one account with different banks and with different branches of a bank depending upon its locality of operation and the project requirement.

6) Monthly statements in respect of all such accounts opened by Authorised Dealers, indicating debits and credits made to the account should be forwarded to the Exchange Control Department on or before 7th day of the following month.


cc: SG, DG(W), DG(J), AG(D), AG(K), AG(W), AG(F), AG(J), AG(C), DBS, DIOD


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3Ref. No. : 06/04/03/2005Exchange Control DepartmentCentral Bank of Sri Lanka,P.O. Box 883,Colombo 1.

09 May 2005

OPERATING INSTRUCTIONS TO AUTHORISED DEALERSAND THE NATIONAL SAVINGS BANK

Dear Sirs,

POST TSUNAMI INWARD REMITTANCES ACCOUNT (PTIRA)

Your attention is drawn to the item (2) of attached Operating Instructions No. 06/04/01/2005 dated 14.02.2005, you are hereby requested to rely on the following documentary evidence in exercising due diligence to identify the bona-fide of a NGO at the time of opening an account for the NGO and permitting transactions to be continued through the account.

(i) The certificate of registration granted by the “National Secretariat for NGOs” under the Voluntary Social Service Organisations (Registration and Supervision) Act, No. 31 of 1980; or

(ii) In the absence of above (i) the recommendation made by the “Centre for Non Governmental Sector” (CNGS) of the Ministry of Finance for registration of the NGO.

You are also hereby requested to send to me on or before 28 May 2005, the names and addressed of NGOs maintaining bank accounts with you without submission of the above evidence.

Yours faithfully,


Encl.

cc: G DGG AGG DBS DER D/IO


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3Ref. 06/08/06/2005

Exchange Control DepartmentCentral Bank of Sri LankaColombo 1.

23/09/2005


MONITORING SCHEME ON FOREIGN EXCHANGE DRAWINGS AGAINSTINTERNATIONAL ELECTRONIC CREDIT, DEBIT OR

ANY OTHER FUND TRANSFER CARDS

It has been brought to our notice that with the rapid expansion of the use of Electronic Fund Transfer Cards (EFTCs) with global access, reported instances of abuse of such cards for making payments in foreign exchange have significantly increased in the recent past. Therefore, it order to prevent such abuses in the future, it has been decided to strengthen the existing monitoring scheme introduced in terms of our operating instructions issued under Ref. No. EC/09/99 (D) dated 1999/12/17 and Ref. No. EC/02/2000 (D) dated 2000/02/03. Accordingly, the Notice at Annex 1 granting permission to make payments in foreign exchange on an EFTC subject to certain terms and conditions has been published in the Extraordinary Gazette No. 1411/5 of 19th September 2005.

1.1 It is important that Authorised Dealers make available the said notice to customers for perusal when issuing EFTCs and that the customer’s confirmation of having perused the said notice be obtained in the customer’s undertaking illustrated in Annex II and this undertaking be incorporated in the agreement that you enter into with cardholder.

1.2 In the case of existing EFTC holders authorized dealers should make arrangements to ensure that all possible attempts have been made to inform the requirements of the general permission granted in the aforesaid gazette notification to the existing cardholders.

1.3 Authorised Dealers should also include a condition in the customer’s undertaking that if reasonable grounds exist to suspect that unauthorized foreign exchange transactions are being carried out on an EFTC the Authorised Dealer retains the right to immediately suspend availability of foreign exchange on the EFTC and to report the matter to the Controller of Exchange. Authorised Dealers should also retain the right to obtain information on transactions carried out by a cardholder in foreign exchange on an EFTC.

2. EFTCs should be issued to residents in Sri Lanka

2.1 EFTCs could however, be issued to holders of NRFC, RNNFC, RFC accounts of Domestic Banking Unit and Off Shore accounts in the Off Shore Banking Unit irrespective of their residential status provided that the expenditure incurred on an EFTC will be debited only to an aforesaid account. In cases where foreign currency funds lying to the credit of such an account are not adequate to make the debits, no debits should be made to a Rupee Account of the cardholder without my permission. All EFTC holders must be made aware of this requirement.


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32.2 The issue of EFTCs should also be subject to a condition that if the cardholder leaves Sri Lanka either for good or for employment or permanent residence abroad, the card issued to him/her should be surrendered to the Authorised Dealer unless such card was issued for making settlement for foreign exchange drawings on an EFTC out of funds lying to the credit of a NRFC, RFC, RNNFC account and an Off Shore account.

3. All Authorised Dealers should strictly monitor accounts used by EFTC holders for making payments in foreign exchange and exercise due diligence to prevent the unauthorized transactions. If there are reasonable grounds to suspect that any cardholder incurs expenditure in foreign exchange for any unauthorized transactions, action should be taken immediately to suspend foreign exchange payment on his/her EFTC and bring the matter to the notice of the Controller of Exchange.

4. Periodic Statements to Exchange Control Department

4.1 Authorised Dealer should be able to identify each cardholder’s expenditure incurred in foreign exchange separately.

4.2 A monthly detailed report in the format of Annex III containing information on cardholders who have incurred expenditure in foreign exchange, inclusive of cash drawings in foreign currency exceeding US$ 5,000/- or its equivalent in any other foreign currency, in any one month and who have incurred expenditure for a single transaction exceeding US$ 3,000/- should be forwarded to the “Investigation Unit”, Exchange Control Department, Central Bank of Sri Lanka, Colombo 01, not later than the 7th day of the following month after emailing these information to [email protected].

4.3 Operating instructions previously issued under Ref. No. EC/09/99 (D) dated 1999/12/17 and Ref. No. EC/02/2000 (D) dated 2000/02/03 on the above subject are hereby rescinded.


Cc: DGG AGG Consultants SG


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3Annex I

The Gazette of the Democratic Socialist Republic of Sri Lanka

EXTRAORDINARY

No.1411/5 – Monday, September 19, 2005

PART 1: SECTION (1) – GENERAL


NOTICE UNDER EXCHANGE CONTROL ACT (CHAPTER 423 OF THE CLE)

Permission in terms of Section 7 and Section 8 of the Exchange Control Act(Chapter 423 of the CLE)

1. Permission is hereby granted for the purpose of Section 7 and 8 of the Exchange Control Act (Chapter 423 of the CLE) for a person in or resident in Sri Lanka to make payments in foreign exchange to a person resident outside Sri Lanka on his Electronic Fund Transfer Card (EFTC) subject to the following terms and conditions.

2. (a) A payment on an EFTC to a person or an entity resident outside Sri Lanka may be made only for the following purposes:

i) Payment to be made abroad by a cardholder for services of a personal nature including travel, accommodation, medical, living and educational expenses.

ii) Payment for purchase of goods abroad for personal use.

iii) Payment for import of goods into Sri Lanka for personal use subject to a limit of US$ 3,000 (c.i.f) or its equivalent in any other foreign currency per consignment.

iv) Payment of registration fees, examination fees and annual subscription fees of a personal nature payable to a foreign professional body or academic institution.

v) Payment to be made in respect of insurance premium only for travel and health insurance of personal nature.

(b) Any payment in foreign currency on an EFTC for any transaction which falls outside the purview of paragraph 2(a) shall require the prior written permission of the Controller of Exchange, unless such payment is in respect of a permitted transaction made out of the funds lying to the credit of a Non Resident Foreign Currency Account (NRFC), a Resident Foreign Currency Account (RFC), a Resident Non National Foreign Currency Account (RNNFC) or an Off Shore account in an Off Shore Banking Unit of a licensed commercial bank.

3. For the purpose of this Gazette notification, unless the context otherwise requires; “Electronic Funds Transfer Card (EFTC) means a card or device that enables the user to transfer value in credit, debit or any other form and includes credit cards, debit cards and stored value cards.

And,

“Personal use” means for the use of the holder of the card, his spouse and children and parents and does not include use for any commercial purpose.


Colombo,19th September 2005.


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3Annex II

(To be included in the EFTC application or EFTC agreement that the cardholders enter/s into with the bank)

CENTRAL BANK OF SRI LANKA

Declaration by the Applicant/s for Electronic Fund Transfer Cards

To: The Controller of Exchange

(To be filled by the Applicant/s to obtain foreign exchange against Credit/Debit or any other Electronic Fund Transfer Card)

I/We ................................................................(Basic Cardholder/Supplementary Cardholder), ..........................................................................(Basic Cardholder/Supplementary Cardholder) declare that all details given above by me/us on this form are true and correct.

I/We hereby confirm that I/We am/are aware of the conditions imposed under the Exchange Control Act in the Notice published in the Extraordinary Gazette No: 1411/5 of 19th September 2005 subject to which the card may be used for transactions in foreign exchange and I/We hereby undertake to abide by the said conditions.

I/We further agree to provide any information on transactions carried out by me/us in foreign exchange on the card issued to me/us as ………………………………… bank may require for the purpose of Exchange Control Act.

I/We also affirm that I/We undertake to surrender the Credit Card/s to .............................................bank, if I/We migrate or leave Sri Lanka for employment abroad.

I/We am/are aware that the Authorised Dealer is required to suspend availability of foreign exchange on EFTC if reasonable ground exist to suspect that unauthorized foreign exchange transactions are being carried out on the EFTC issued to me/us.

......................... .........................................................DD.MM.YY Signature of the Basic Cardholder

......................................................... Signature of the Supplementary Cardholder

I, as the Authorized Officer have carefully examined the information together with relevant documents given by the applicant/s and satisfied with the bona-fide of these information and documents. I undertake to exercise due diligence on the transactions carried out by the cardholder on his/her EFTC in foreign exchange and to suspend the availability of foreign exchange on the EFTC if reasonable grounds exist to suspect that unauthorized foreign exchange transactions are being carried out on the EFTC in violation of the undertaking and to bring the matter to the notice of the Controller of Exchange.

............................. ..........................................................


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3DD.MM.YY Signature of the Authorized Officer

Annex III

To: Controller of Exchange (Attention : Investigation Division) Exchange Control Department Central Bank of Sri Lanka Colombo 1.


The Monthly Report in respect of accounts who have incurred cumulative expenditure in foreign currency exceeding US$ 5,000 and an expenditure over US$ 3,000 for a single transaction during the month of ........... of the year .......... in compliance with the Paragraph (4.2) of the Operating

Instructions Ref. No.06/08//06/2005 of 2005/09/23 issued in terms of Section (3) of the Exchange Control Act No.24 of 1953

Part A – Details of Cardholders who have utilized foreign exchange in excess of US$ 5,000 per month and in excess of US$ 3,000 per transaction.

Name of the Cardholder &

Address(in block letters)

N.I.C. No.

Passport No.

Card No.

Amount paid

to the Merchant in foreign currency

Name of the Merchant/Merchant Category

Code

The country in which transac-

tion taken place

Whether the

payment is

through Internet

SignatureoftheOfficerauthorisedbythebank Stamp of the Bank/Authorised Dealer

Date: ............................. MM/DD/YY

The total expenditure incurred by all EFTC holders in foreign currency for the Month .................... of the year ....................

Total No. of Cards issuedfor the Month

Types of Cards Total Value of foreign exchange expenditure incurred by allEFT Card holders in US$

SignatureoftheOfficerauthorisedbythebankStamp of the Bank/Authorised Dealer

Date: .............................MM/DD/YY


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3Operating Instructions No. : 06/07/02/2006

Exchange Control Department

June 19, 2006

To : All Authorized Dealers

SALE AND PURCHASE OF FOREIGN EXCHANGE – SUBMISSION OF FORM 1 AND FORM 2

The attention of Authorized Dealers is invited to my Operating Instructions bearing reference No.EC/07/98 (MU) dated 24th December, 1998. It has been observed that some Authorized Dealers have not forwarded Form 1 and Form 2 on a regular basis and continue to submit incomplete forms without even the signature and the designation of the authorized officer and the stamp of the authorized dealer. Authorized Dealers are hereby reminded therefore, that they should strictly comply with the instructions conveyed in the above circular with regard to the submission of Form 1 and Form 2 and that information provided in the forms should be complete.

Authorized Dealers are also informed that in addition to submission of Form 1 and Form 2 to this Department, they should transmit information on line in respect of all foreign exchange sales (Form 1) and purchases (Form 2) irrespective of the value of transactions to this Department, using Wide Area Network connecting head offices of all Authorized Dealers. Necessary software in this regard has already been made available to all Authorized Dealers and they should make arrangements to install the same in all branches for speedy transmission of information. In case of transmission of data via e-mail, authorized dealers could make use of our e-mail address: [email protected].

If any clarification is required, you may contact Mr. H. E. Dayaratna, Senior Assistant Controller of Exchange on 2477658 or Mr. C.B.P. Fernando, Assistant Controller of Exchange on 2477243.


Cc : Governor, DG(W) DG(J) AGG DER DBS DIO CA


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3Ref. No. : 06/04/02/2008

Exchange Control DepartmentCentral Bank of Ceylon,P.O. Box 883,Colombo 1.

May 06, 2008

DIRECTIONS TO AUTHORISED DEALERS

Dear Sirs,

INVESTMENT IN TREASURY BILLS BY FOREIGN INVESTORS

Authorised Dealers are hereby informed that citizens of foreign states, corporate bodies incorporated outside Sri Lanka and foreign institutional investors such as foreign country funds, mutual funds and regional funds may now purchase, sell or transfer Treasury bills, provided that all such investments in aggregate do not exceed 10% of the outstanding Treasury bill stock.

1. Method of Payment

Citizens of foreign states or corporate bodies incorporated outside Sri Lanka or foreign institutional investors who invest in Treasury bills shall make payments for purchase of Treasury bills by inward remittance through banking system and channelled through a special rupee account named “Treasury bill Investment External Rupee Account” (TIERA-2) opened in the name of the investor. These accounts may be held by eligible individual investors or jointly by two or more eligible investors.

2. Permitted Credits to TIERA-2

Accounts may be credited with :–

(a) Proceeds of inward remittances received from abroad through banking system;

(b) Proceeds realized out of sale or transfer or maturity proceeds of Treasury bills or any income realized by way of capital gain thereof.

3. Permitted Debits to TIERA-2

Accounts may be debited in respect of:–

(a) Payments for investment in Treasury bills;

(b) Payments to Primary Dealers;

(c) Payments of relevant bank charges;

(d) Local expenses of the foreign investor;

(e) Outward remittance of sale or transfer or maturity proceeds of Treasury bills or any income realized by way of capital gain thereof;


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34. Reporting Requirement

Authorised Dealers are required to furnish to this Department information on a daily basis via existing on-line system as per the attached format.

Yours faithfully,


Name of the Authorised Dealer : …………………………………………..

Daily Statement of Treasury bill Investment External Rupee Account (TIERA-2)

as at ………………………………………….

Rs.Mn.

Item Amount

01. Opening Balance

(Previous day’s closing Balance)

02. Inflows

(a) Capital gain

(b) Remittance from abroad

03. Withdrawals

(a) Local withdrawals

(b) Remittance abroad

04. Closing Balance

Contact Details: “D” BranchTel No. : 2477242E.mail No. : [email protected]


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3Ref. : 06/04/10/2007

Department of Exchange ControlCentral Bank of Sri LankaP.O. Box 883Colombo 1.

December 06, 2007

Operating Instructions to Authorized Dealers

Dear Sirs,

INVESTMENT IN RUPEE DENOMINATED TREASURY BONDS BY FOREIGN INVESTORS

(INCREASE OF THE HOLDING LIMITS OF FOREIGN INVESTORS IN THE RUPEE DENOMINATED TREASURY BONDS FROM 5% TO 10%)

This has reference to our Operating Instructions dated 22nd January, 2007 bearing reference number 06/04/03/2007 on the above subject.

The Government has decided to further increase the current permitted level of 5% of the outstanding value of Rupee Denominated Treasury Bonds (T-bonds) as at any given point of time that could be purchased and held by foreign country funds, regional funds or mutual funds approved by the Securities and Exchange Commission of Sri Lanka, Corporate Bodies incorporated outside Sri Lanka and citizens of foreign countries, upto 10% of the outstanding value of T-bonds.

Authorized Dealers are hereby permitted to open and operate Treasury Bond Investment External Rupee Accounts (TIERA), in accordance with the above decision, in the names of the categories of foreign investors mentioned in paragraph 3 of the Operating Instructions dated 22nd January, 2007 referred to above, subject to the guidelines stipulated therein.

Yours faithfully,


cc: Governor DG(W) DG(J) AG(SM) SPD


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3Ref. : 06/04/03/2007


January 22, 2007


Dear Sirs,

INVESTMENT IN RUPEE DENOMINATED TREASURY BONDS BY FOREIGN INVESTORS

The Government has decided to permit foreign country funds, regional funds or mutual funds approved by the Securities and Exchange Commission of Sri Lanka, corporate bodies incorporated outside Sri Lanka and citizens of foreign states to purchase and hold Rupee Denominated Treasury Bonds (T-bonds) not exceeding 5% of the total value of T-bonds outstanding at any given point of time. Therefore, the above categories of foreign investors are permitted to purchase, hold and transfer T-bonds through both primary and secondary markets utilizing existing public debt system. Foreign investor who purchased such a T-bond is in a position to sell or transfer this T-bond to any person, whether a resident in Sri Lanka or a resident outside Sri Lanka, in the secondary market without any holding period.

2. In order to give effect to this decision, general permission has been granted by me in a notice published in the Gazette Extraordinary No. 1481/1 of 22.01.2007 (Pl see Annex 1).

3. Accordingly, Authorized Dealers are hereby permitted to open and operate Treasury Bond Investment External Rupee Accounts (TIERA) in the names of following categories of foreign investors,

(a) Foreign country funds, regional funds or mutual funds approved by the Securities and Exchange Commission of Sri Lanka;

(b) Corporate bodies incorporated outside Sri Lanka; and

(c) Citizens of foreign states

subject to the following guidelines for the purpose of facilitating their investments in T-bonds.

I) Credits and debits to the account should be confined to the following:

Credits:

i) Inward remittances of the foreign investor and/or transfers from Share Investment External Rupee Account (SIERA) opened by foreign investor for investment in shares.

ii) Sale proceeds of T-bonds and principal received on the maturity date.

iii) Payment of interest on T-bonds held by the account holder.

Debits:

i) Payments for investments in T-bonds.

ii) Transfers to SIERA of the foreign investor.


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3iii) Payments for primary dealers and bank charges.

iv) Local expenses of the foreign investor.

v) Repatriation of sale proceeds of T-bonds.

vi) Repatriation of interest earned on T-bonds.

II) Reporting Requirement

i) Authorized Dealers are required to furnish statements of TIERA for each month indicating details of debits and credits to the Exchange Control Department (C&F Branch) on or before the 15th day of the following month.

ii) Authorized dealers are also required to furnish details of credits and debits made to each TIERA at the end of the day via online using the online system already installed for reporting investment in shares through SIERAs.

4. Operating Instructions previously issued under Ref:06/04/07/2006 dated 01.11.2006 on the above subject are hereby rescinded.

Yours faithfully


Encl.

cc: Governor DG(W) DG(J) AGG

GUIDELINES TO AUTHORISED DEALERS ON OPERATING INSTRUCTIONS NO. 06/04/03/2007 DATED 22.01.2007 IN RESPECT OF INVESTMENT IN RUPEE DENOMINATED TREASURY BONDS BY FOREIGN INVESTORS

(A) Foreign investors permitted to invest in Treasury Bonds (T-Bonds)




(B) Account through which investment in T-bonds is permitted

Investments in T bonds should be made only out or into a Special Rupee Account named “Treasury Bond Investment External Rupee Account (TIERA)” opened in any commercial bank in the name of the above categories of foreign investors.


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3(C) Reporting TIERA transactions online

i) Foreign investors already having SIERA

In the existing online system for reporting investment in shares, activate the icon “Add New Account” and then entering an account number by adding TIERA in front open a TIERA account. Both accounts should carry identical account holder’s name.

ii) Foreign investor without having SIERA

Using existing online system for reporting investment in shares open new account named TIERA by entering a new account number inserting (TIERA) in front.

(D) Credits and Debits to TIERA

Credits and debits to TIERA should be strictly in accordance with the instructions given in the Operating Instructions. Under no circumstance transactions relating to share investments should be recorded in TIERA.


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3Ref. 06/04/07/2006


November 01, 2006


Dear Sirs,

INVESTMENT IN RUPEE DENOMINATED TREASURY BONDSBY FOREIGN INVESTORS

The Government has decided to permit foreign country funds, regional funds or mutual funds approved by the Securities and Exchange Commission of Sri Lanka, corporate bodies incorporated outside Sri Lanka and citizens of foreign states to purchase and hold Rupee Denominated Treasury Bonds (T bonds) not exceeding 5% of the total value of T bonds outstanding at any given point of time. Therefore, the above categories of foreign investors are permitted to purchase, hold and transfer T bonds with a minimum remaining maturity period of two years from the date of purchase through both primary and secondary markets utilising existing public debt system.

2. In order to give effect to this decision, general permission has been granted by me in a notice published in the Gazette Extraordinary No. 1469/25 of 01.11.2006. (Pl see Annex 1).

3. Accordingly, Authorized Dealers are hereby permitted to open and operate Treasury Bond Investment External Rupee Accounts (TIERA) in the names of following categories of foreign investors,




subject to the following guidelines for the purpose of facilitating their investments in T bonds.

I) Credits and debits to the account should be confined to the following:

Credits:

i) Inward remittances of the foreign investor and/or transfers from Share Investment External Rupee Account (SIERA) opened by foreign investor for investment in shares.

ii) Sale proceeds of T bonds and principal received on the maturity date.

iii) Payment of interest on T bonds held by the account holder.


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3Debits:

i) Payments for investments in T bonds.

ii) Transfers to SIERA of the foreign investor.

iii) Payments for primary dealers and bank charges.

iv) Local expenses of the foreign investor.

v) Repatriation of sale proceeds of T bonds.

vi) Repatriation of interest earned on T bonds.

II) Reporting Requirement

i) Authorized Dealers are required to furnish statements of TIERA for each month indicating details of debits and credits to the Exchange Control Department (C&F Branch) on or before the 15th day of the following month.

ii) Authorized dealers are also required to furnish details of credits and debits made to each TIERA at the end of the day via online using the online system already installed for reporting investment in shares through SIERAs.

Yours faithfully,


Encl.

Cc: Governor DG(W) DG(J) AGG

GUIDELINES TO AUTHORISED DEALERS ON OPERATING INSTRUCTIONS NO. 06/04/07/2006 DATED 01.11.2006 IN RESPECT OF INVESTMENT IN RUPEE DENOMINATED TREASURY BONDS BY FOREIGN INVESTORS

[A] Foreign investors permitted to invest in Treasury Bonds (T Bonds)



(c) Citizens of foreign states.

[B] Account through which investment in T Bonds is permitted

Investments in T Bonds should be made only out or into a special Rupee Account named “Treasury Bond Investment External Rupee Account (TIERA)” opened in any commercial bank in the name of the above categories of foreign investors.


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3[C] Reporting TIERA transactions online

i) Foreign investors already having SIERA

In the existing online system for reporting investment in shares, activate the icon “Add New Account” and then entering an account number by adding TIERA in front open a TIERA account. Both accounts should carry identical account holder name.

ii) Foreign investor without having SIERA

Using existing online system for reporting investment in shares open new account named TIERA by entering a new account number inserting TIERA in front.

[D] Credits and Debits to TIERA

Credits and debits to TIERA should be strictly in accordance with the instructions given in the Operating Instructions. Under no circumstance transactions relating to share investments should be recorded in TIERA.


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3Ref. : 06/04/08/2006


November 16, 2006


FOREIGN CURRENCY ACCOUNT FOR PROFESSIONAL SERVICES PROVIDERS (FCAPS)

Authorized Dealers are hereby informed that they are permitted to open and maintain without reference to the Exchange Control Department, foreign currency account titled 'Foreign Currency Account for Professional Services Providers' (FCAPS) for individuals, firms or companies resident in Sri Lanka who are providing services to residents outside Sri Lanka and/or to local firms or companies who earn foreign exchange.

2. Opening of accounts

(a) Accounts, under this scheme should be opened only in the domestic banking unit, and should be in the form of current, savings or fixed deposit accounts.

(b) An undertaking should be obtained from the individual, all partners and the Board of Directors as the case may be, to the effect that the individual/firm/company is already engaged in providing professional services and that only the payments received in foreign exchange for the provision of such services will be credited to the account.

3. Permitted credits

Credits to these accounts should be confined to the following:

(a) Inward remittance received in convertible foreign currency through an Authorized Dealer for providing professional services to residents outside Sri Lanka.

(b) Payment received in foreign exchange by way of bank draft or bank transfer for professional services rendered to firms/companies who earn their revenue in foreign exchange.

4. Permitted debits

Debits to the account should be confined to the following:

(a) Payment in foreign exchange to residents outside Sri Lanka on account of Current Account transactions of the individual/firm/company.

(b) Disbursement in Sri Lanka Rupees is freely permitted. However, such withdrawals in Sri Lanka Rupees shall not be eligible for conversion into foreign currency and for re-crediting to the account.

(c) Payment to another FCAPS on account of professional services provided.


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35. Under any circumstance current account opened under this scheme should not be overdrawn.

6. Reporting requirement

Authorized Dealers are required to furnish to the ‘D’ Branch of the Exchange Control Department, quarterly statements of each FCAPS within 15 days of the following quarter, ending March, June, September and December.

For purposes of this Operating Instructions a list of “professional services” is provided in the Annexure.


Annexure

Professional Services for the purposes of the Operating Instructions

No. 06/04/08/2006

1) Legal Services 2) Accounting, Auditing and Book Keeping Services 3) Taxation Services 4) Architectural Services 5) Engineering Services 6) Medical and Dental Services 7) Veterinary Services 8) Services provided by, Physiotherapists and Paramedical personnel 9) Software development services10) Data processing services11) Database development services12) Research & development services on natural sciences, social sciences and humanities13) Advertising services14) Management consulting services15) Scientific and technical consulting services16) Photographic services17) Packaging services18) Printing & publishing services19) Convention services20) Hotels registered with the Tourist Board21) Entertainment services (including theatre, live bands)22) Services of fashion designers, modellers of clothes, hats, etc.23) Any other professional services permitted by the Central Bank


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3Ref. : 06/04/10/2006


December 05, 2006


FOREIGN CURRENCY ACCOUNT FOR SUPPLIERS OF INPUTS (FCASI)

Authorized Dealers are hereby informed that they are permitted to open and maintain without reference to the Exchange Control Department, foreign currency account titled, 'Foreign Currency Account for Suppliers of Material Inputs' (FCASI) for any company earning foreign exchange including Board of Investment (BOI) companies.

2. Opening of accounts

(a) Accounts, under this scheme should be opened only in the domestic banking unit, and should be in the form of current, savings or fixed deposit accounts; and

(b) An undertaking should be obtained from the Board of Directors of the company to the effect that the company is already engaged in supplying material inputs to a company earning foreign exchange and that only the proceeds received on such supply of material inputs will be credited to the account.

3. Permitted credits


Payment received in foreign exchange by way of bank draft or bank transfer, for material inputs supplied to any company.

4. Permitted debits

Debits to the account should be confined to the following:

(a) Payment in foreign exchange to residents outside Sri Lanka on account of Current Account transactions of the company.

(b) Payment in foreign exchange towards cost of material inputs purchased from the companies.

(c) Disbursement in Sri Lanka Rupees is freely permitted. However, any such withdrawals in Sri Lanka rupees shall not be eligible for conversion into foreign currency and re-crediting to the accounts.

5. Reporting requirement

Authorized Dealers are required to furnish to the D Branch of the Exchange Control Department, quarterly statements of each FCASI within 15 days of the following quarter ending March, June, September and December.



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3Ref. : 06/04/01/2007


January 08, 2007

OPERATING INSTRUCTIONS TO AUTHORIZED DEALERS

FOREIGN CURRENCY FIXED DEPOSIT ACCOUNTSFOR DUAL CITIZENSHIP APPLICANTS

The Government of Sri Lanka has decided to introduce a foreign currency fixed deposit scheme for ex-Sri Lankans/Sri Lankans living abroad who would apply for dual citizenship status. Under this scheme, a family unit or an individual is exempted from payment of any fee charged on granting dual citizenship, if the principal applicant makes a fixed deposit of US$ 50,000 with an Authorized Dealer for a minimum period of 3 years; while a fee of Rs.200,000 is charged per family unit or an individual applicant if the principal applicant makes a fixed deposit of US$ 25,000 with an Authorized Dealer for a minimum period of 3 years.

2. For the purpose of accepting such foreign currency deposits, Authorized Dealers are hereby permitted to open fixed deposit accounts in favour of dual citizenship applicants in their domestic banking units.

3. These accounts may be opened with minimum deposits of either US$ 50,000 or US$ 25,000 (or equivalent in any other convertible foreign currency) on production of a letter issued by the Controller of Immigration and Emigration recommending that a foreign currency deposit account be opened in the name of the principal applicant for dual citizenship.

4. Operation of these accounts shall be subjected to the following conditions:

a. Credits

i. Inward remittances in convertible foreign currency received through Authorized Dealers or foreign currency brought into the country and tendered by the account holder during his temporary visit to Sri Lanka.

ii. Funds transferred from existing Non-Resident Foreign Currency (NRFC) account of the account holder.

iii. Interest paid in foreign currency on funds held in the account.

b. Debits

i. Interest accrued on the deposits

5. Interest accrued on the deposits may be freely remittable, transferred to NRFC account of the account holder or converted into Sri Lanka Rupees for the account holder’s local expenses.

6. Withdrawals of the deposit or any part thereof should not be permitted before the maturity period of the deposit without obtaining prior permission from the Controller of Exchange.


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37. Reporting Requirement

Authorized Dealers are required to furnish to the ‘D’ Branch of the Exchange Control Department and copy to the Controller of Immigration & Emigration, the following information in respect of each foreign currency fixed deposit account opened under the scheme within a week of opening the account:

(a) Date of opening of the account and the name and address of the account holder; and

(b) Amount of funds deposited and the date of maturity of the deposit.



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3Ref. : 06/04/06/2007


March 19, 2007


RESIDENT GUEST SCHEME – SPECIAL ACCOUNTS

The Government of Sri Lanka introduced Resident Guest Scheme in 1991, as a part of a package of incentives for prospective foreign investors and professionals who would contribute to the economic and socio-cultural development of the country. Under this scheme, foreign investors and professionals are required to remit funds for investment purposes and their upkeep in Sri Lanka as follows:

Investors

A sum of US$ 250,000 or an equivalent amount in any convertible foreign currency for investment in Sri Lanka and a further sum of US$ 35,000 per person for the upkeep in Sri Lanka of the investor and each dependant accompanying the investor.

Professionals

A sum of US$2,000 per month for living expenses of the professional intending to reside in Sri Lanka and US$1,000 per month for each dependant including spouse.

2. For the purpose of depositing the funds brought into the country by the investors and professionals under this scheme, Authorized Dealers are hereby permitted to open the under-mentioned special accounts in their domestic units with the prior approval of the Controller of Exchange:

(I) Special Accounts for Investors

(i) Resident Guest Foreign Currency Accounts (RGFCA)

Credits

These accounts should be opened for the purpose of depositing the minimum initial sum of US$ 250,000 or an equivalent amount in any convertible foreign currency brought into the country through banking channels or on declaration to Sri Lanka Customs for investment in Sri Lanka.

Debits

(A) Withdrawals from this account may be permitted without prior approval of the Controller of Exchange for the following:

(a) Investment in “approved projects” subject to production of documentary proof of obtaining relevant approvals.


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3 “Approved projects” for the purpose of this scheme are:

(i) New ventures approved by the Board of Investment in Sri Lanka or a relevant authority;

(ii) Existing or new companies engaged in projects approved by a relevant authority; and

(iii) Shares listed in the Colombo Stock Exchange

(b) Funds in excess of US$ 250,000 or equivalent in other convertible foreign currencies brought into the country and held in the account unutilised.

(B) Withdrawals for any purpose other than investment should be with the prior approval of the Controller of Exchange which will be granted with the concurrence of the Implementing Agency of the scheme.

Authorized Dealers are permitted to pay interest initially for a period of 2 years on the unutilised balance in this account, provided that the rate of interest does not exceed the rate of interest payable to Non-Resident Foreign Currency (NRFC) accounts. Such interest payment should be transferred to the investor’s Resident Guest Rupee Current Account referred below.

No interest should be paid after the expiry of the initial two-year period without the prior approval of the Controller of Exchange.

(II) Resident Guest Rupee Current Account – Investors (RGRCA – Investors)

These accounts may be opened with a minimum deposit of US$ 35,000 or equivalent in other convertible foreign currency brought into the country and converted into Sri Lanka Rupees, after obtaining prior approval from the Controller of Exchange:

Credits


(i) Rupee proceeds of foreign currency brought into the country by the investor for his living expenses and that of his dependants;

(ii) Interest paid on funds held in the investor’s Resident Guest Foreign Currency Account (RCFCA) having converted into Sri Lanka Rupees.

(iii) Incomes from investment (dividends, profits), sale proceeds of shares received from the investments made out of funds from the RGFCA.

Debits

(a) Debits to this account should be confined to the following:

(i) Local expenses of the investor and his dependents:

(ii) Investment in approved projects mentioned in paragraph 2(I)(i)(A)(a) above;

(iii) Outward remittances for payments for current international transactions of the investor and/or his dependents resident in Sri Lanka.

(b) Withdrawals for any purpose other than those mentioned in items (i), (ii) and (iii) above should be with the prior approval of the Controller of Exchange which will be granted with the concurrence of the Implementing Agency of the scheme.


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3(III) Resident Guest Rupee Current Account – Professionals (RGRCA – Professionals)

These accounts may be opened in the name of foreign professionals with a minimum deposit of US$ 2,000 or any other convertible foreign currency brought into the country and converted into Sri Lanka Rupees, after obtaining prior approval from the Controller of Exchange.

Credits


(i) Rupee proceeds of foreign currency brought into the country for the living expenses of the account holder and of his dependents; and

(ii) Salary, consultancy fees, etc. received for the provision of professional services in Sri Lanka by the account holder.

Debits

(a) Debits to this account should be confined to the following:

(i) Local expenses of the account holder and his dependents; and

(ii) Outward remittances for payments on account of current international transactions of the professional and/or his dependents resident in Sri Lanka.

(b) Withdrawals for any purpose other than those mentioned in a(i) and (ii) above should be with the approval of the Controller of Exchange which will be granted with the concurrence of the Implementing Agency of the Scheme.

3. All Authorized Dealers should furnish to “D” branch of the Exchange Control Department quarterly statements of these accounts within 15 days of the lapse of each quarter ending March, June, September and December.

4. Operating Instructions previously issued under Ref.No.ECD/08/91(C&F) dated 20.02.1991 on the above subject is hereby rescinded.

Yours faithfully



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3Ref. : 06/04/08/2007


June 14, 2007


ISSUANCE OF FOREIGN CURRENCY NOTES TOSRI LANKANS TRAVELLING ABROAD

As a further measure of liberalising current international transactions and giving benefits to Sri Lankans travelling abroad, it has been decided to increase the issuance of foreign currency notes as a part of the travel allowance for Sri Lankans travelling abroad from its present level of US$ 500 to US$ 1,000 or its equivalent in any other convertible foreign currency. However, travel allowances should be issued by exercising due diligence and discretion after satisfying the bona fides of the request.



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3Ref. : 06/04/09/2007


June 15, 2007


PERMISSION FOR THIRD PARTY FOREIGN EXCHANGE DEPOSITS IN NRFC ACCOUNTS

As a further measure to enhance worker remittances to the formal sector, it has been decided to grant permission to Authorised Dealers and Specialised Banks, which are permitted to open and maintain Non-Resident Foreign Currency (NRFC) Accounts, to accept foreign currency to the credit of NRFC Accounts from an immediate family member of the account holder. Foreign currency so collected from such a family member of the account holder should not exceed US$ 1,000 or its equivalent in other convertible foreign currency per transaction.

The immediate family member of the account holder is considered to be his/her wife/husband, mother or father, brother or sister, son or daughter. Account holder is required to nominate his/her immediate family member/s who will be permitted to make foreign currency deposits to his/her NRFC account if he/she intends to utilise this facility. To avoid possible malpractices and abuses arising from this facility, banks are required to obtain the following particulars of the immediate family member/s of existing NRFC Account holders. In the case of new NRFC account holders, this information should be obtained at the time of opening accounts.

1. Names and addresses of the family member/s who will be permitted to make deposits;

2. Relationship to the account holder;

3. Nationality;

4. National Identity Card or passport number of the family member/s; and

5. Contact telephone number/s of the family member/s.



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3Ref. No. : 06/04/05/2008

Exchange Control DepartmentCentral Bank of Ceylon,61, Janadhipathi MawathaColombo 1.

June 02, 2008DIRECTIONS TO AUTHORISED DEALERS

Dear Sirs,

FOREIGN INVESTMENT DEPOSIT ACCOUNTS (FIDA)

The general permission is hereby granted in terms of provisions of the Exchange Control Act to Authorized Dealers to accept investments in deposits at their Domestic Banking Units (DBUs) from persons resident outside Sri Lanka under the following procedure:

(i) Investors eligible to open accounts: Citizens of foreign states, Sri Lankan citizens resident outside Sri Lanka, corporate bodies incorporated outside Sri Lanka and foreign institutional investors such as country funds, mutual funds and regional funds. Accounts may be held jointly with two or more eligible investors.

(ii) Type of accounts: Time deposits or savings deposits in designated foreign currencies or in Sri Lanka Rupees.

(iii) Permitted credits:

(a) Proceeds of inward remittances received from abroad through banking system for the purpose of investment in such deposits.

(b) Foreign Currency in the form of travellers’ cheques, bank drafts or currency notes brought into the country by the account holder on declaration to Sri Lanka Customs as applicable during his temporary visits to Sri Lanka and tendered in person to the Authorized Dealer, provided that the travellers’ cheques have been issued outside Sri Lanka and the bank drafts endorsed in the name of the account holder.

(c) Interest accruing on the funds held in the account.

(iv) Permitted debits: Outward remittances, transfers to other FIDAs, disbursements of the account holder in Sri Lanka and relevant statutory payments such as debit tax.

(v) Minimum account balance: US$ 10,000 or equivalent in other designated foreign currencies or Sri Lanka Rupees.

(vi) Ceiling for total balances in FIDAs: Total liabilities on FIDAs of an authorized dealer should not exceed 20% of total deposit liabilities of its DBU.

(vii) Risk management: Authorised Dealers should assess the potential risks such as liquidity risk and exchange rate risk relating to FIDAs separately from risks relating to their other businesses and implement specific risk management systems. Information to access the effectiveness of such risk management systems should be made available to the officials of the Bank Supervision Department for examination if and when required.

(viii) Reporting: Authorised Dealers are required to furnish to this Department information on a quarterly basis as per the attached format not later than 15th day of the following quarter.

Yours faithfully,



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3Ref. No. : 06/04/07/2008

Exchange Control DepartmentCentral Bank of Sri Lanka,P.O. Box 883,Colombo 1.

July 02, 2008

Directions to Authorised Dealers

Dear Sirs,

NON-RESIDENT BLOCKED ACCOUNTS

Authorised Dealers are hereby granted permission for outward remittance of the total balance standing to the credit of existing non-resident blocked accounts as at 01st July, 2008 to the account holders or their legitimate beneficiaries subject to the following:–

(i) Submission by the Authorised Dealer of the details of such blocked accounts, i.e., name, amount, address in the country of residence of the account holder, to the Controller of Exchange and receiving an acknowledgement from the Controller of Exchange for the same prior to release of the balance; and

(ii) Submission by the account holder to the Authorised Dealer of a Tax Clearance Certificate from the Department of Inland Revenue in respect of the amount under remittance.

2. Any outward remittance to or on behalf of an emigrant should be made through the blocked account maintained in the name of the emigrant.

3. Permission is also granted for the following transactions with regard to deposits made after 01st July 2008 in existing blocked accounts or new blocked accounts opened and maintained in terms of the relevant provisions of the Exchange Control Act.

(i) Outward remittance of funds equivalent to a maximum of US$ 20,000 per annum out of capital or any income derived by blocked account holders from all sources such as investments in real and financial assets, superannuation benefits, claims on insurance policies and rent received etc.. on production of relevant documentation regarding the source of income of the account holder, provided that such remittance in aggregate of all blocked accounts maintained with all Authorised Dealers by the account holder shall not exceed US$ 20,000 per annum and the account holder shall submit an Affidavit duly stamped and attested by a Justice of Peace declaring that no remittance has been made or will be made in excess of the permitted limit of US$ 20,000 per annum.

(ii) Disbursement in Sri Lanka for any purpose including investments in Sri Lanka.

4. The permissions granted above shall not be applicable to any accounts or amounts that have been blocked or that will be blocked in terms of instructions specifically issued by the Controller of Exchange.

5. The Authorised Dealers may pay interest on balances in blocked accounts as per agreement with the account holders.


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36. The Authorised Dealers are requested to submit the completed Form 4 to the Exchange Control

Department on a weekly basis in respect of sale of foreign exchange for outward remittances and a consolidated statement of outward remittance of foreign exchange under blocked accounts on a monthly basis not later than the 1st week of the following month as per the attached format.

7. Operating Instructions previously issued relating to Non-Resident Blocked Accounts are hereby rescinded.

8. Interpretation–

‘blocked account’ here means accounts opened and maintained with an Authorised Dealer for making a payment or placing of any sum to the credit of a non-resident in terms of section 31 of the Exchange Control Act.

Yours faithfully,


Consolidated Statement of Outward Remittance of Blocked Account Fundsfor the Month of ………………….

in USD

Item Amount

1. Total remitted from 2nd July 2008 to end of the month……………...

2. Total remitted during the month*………...

* Includes outward remittance of the balance as at July 1, 2008 and subsequent remittances subject to the annual limit of US$ 20,000.

Authorised Officer : ……………………..

Name & Address of theAuthorised Dealer : ………………………

Contact Details:“D” BranchExchange Control DepartmentTel. No. : 2477242E-mail No. : [email protected]


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3Ref. No. : 06/04/08/2008

Exchange Control DepartmentCentral Bank of Sri Lanka,P.O. Box 883,Colombo 1.

July 02, 2008

Directions to Authorised Dealers

Dear Sirs,

SALE OF FOREIGN EXCHANGE TO EMIGRANTS

Authorised Dealers are hereby granted permission to sell foreign exchange in designated foreign currencies for outward remittance to emigrants up to a maximum value equivalent to US$ 150,000 per family or per individual not accompanying a family at the time of their departure from Sri Lanka subject to the following procedure.

(i) The maximum value of remittance will include funds legally acquired from all sources and expected to be remitted consequent to emigration including proceeds of any real or financial assets, amount of claim or income received in Sri Lanka and the value of personal effects including personal jewellery exported by emigrants.

(ii) The maximum value US$ 150,000 includes sale of foreign exchange by any one or all Authorised Dealers to an emigrant family or individual not accompanying a family.

(iii) Submission of an affidavit duly stamped and attested by a Justice of Peace declaring the emigrant’s final and irrevocable decision to leave Sri Lanka for permanent residence in the country of destination on a proposed date of departure and that there is no legal impediment to the remittance.

(iv) Submission of Tax Clearance Certificate from the Department of Inland Revenue in respect of the amount of funds under remittance.

(v) Submission of valuation from National Gem & Jewellery Authority in case of export of personal jewellery.

(vi) Submission of valid passport and photocopies of Immigrant Visa.

(vii) Crediting of any funds belonging to emigrants in excess of the US$ 150,000 limit to relevant blocked accounts opened and maintained in terms of Directions to Authorised Dealers, No. 06/04/07/2008 dated July 2, 2008 on ‘Non-Resident Blocked Accounts’.

(viii) Processing of application for remittance shall be within 3 months of the emigrant’s proposed date of departure from Sri Lanka.

(ix) Where the remittance is made in more than one instalment, the remittance of all installments shall be made through the same Authorised Dealer.

(x) Making an endorsement by the Authorised Dealer on the passport indicating the amount of foreign exchange sold and purpose of remittance.

(xi) Application for outward remittance of funds by emigrants subsequent to their departure from Sri Lanka shall be referred to the Exchange Control Department for approval.


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3 (xii) Submission of the completed Form 4 on a weekly basis by the Authorised Dealer to the

Exchange Control Department in respect of sale of foreign exchange to emigrants and a consolidated statement of foreign exchange sales to emigrants on a monthly basis not later than the 1st week of the following month as per the attached format.

2. Operating Instructions previously issued relating to sale of foreign exchange to emigrants are hereby rescinded.

Yours faithfully,


Consolidated Statement of Foreign Exchange Sales to Emigrantsfor the Month of ………………….

in USD

Item No. / Amount

1. No. of remittances

2. Total remitted from 2nd July 2008 to end of the month……………...

3. Total remittances during the month………...

Authorised Officer : ……………………..

Name & Address of theAuthorised Dealer : ………………………

Contact Details:“D” BranchExchange Control DepartmentTel. No. : 2477242E-mail No. : [email protected]


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3THE CEYLON GOVERNMENT GAZETTE

No. 15,007 – Friday April 21, 1972

The Exchange Control Act

DIRECTION given by the Minister of Finance, under section 37 (1) of the Exchange Control Act (Chapter 423), as amended by Act No.17 of 1971.

Bernard Soysa

Acting Minister of Finance

Colombo, 4th April, 1972.

DIRECTION

For the purpose of determining the residential status of persons under the Exchange Control Act the following provisions shall apply –

1. The following shall be treated as “resident in Ceylon” :–

(i) Citizens of Ceylon or citizens of foreign countries married to citizens of Ceylon, if the permanent place of abode of such person is Ceylon.

(ii) Citizens of Ceylon referred to in paragraph 1 (i) above, who have proceeded outside Ceylon temporarily on holiday, business or medical treatment, or for any other similar reason.

(iii) (a) The Diplomatic Representative, Consul or Trade Commissioner of the Government of Ceylon resident outside Ceylon (by whatever name or title designated);

(b) any person who is a citizen of Ceylon, if he is a member of the staff of any person referred to in sub-paragraph (a) above, or a member of the staff of a Government Corporation, Institution or a Statutory Board incorporated in Ceylon, serving abroad, except those recruited abroad;

(c) any member of the family of any person treated as being resident in Ceylon under sub-paragraph (a) or (b) of paragraph 1 (iii).

(iv) Citizens of foreign countries who are in Ceylon, except passengers in transit to other countries or visitors touring the country for pleasure or business.

(v) Offices and Branches in Ceylon of companies, Firms, Banks or any other Organisations whether owned by citizens of Ceylon or foreigners.


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32. The following shall be treated as “resident outside Ceylon” :

(i) All persons whose permanent place of abode is outside Ceylon including citizens of Ceylon who have made their permanent abode outside Ceylon.

(ii) Citizens of Ceylon who have emigrated from Ceylon or who have proceeded outside Ceylon for taking up employment or setting up in business or profession.

(iii) (a) The Diplomatic Representative, Consul or Trade Commissioner in Ceylon (by whatever name or title designated) of the Government of any foreign country.

(b) Any member of the staff of any person referred to in sub-paragraph (a) who is a citizen of the country represented by such Diplomatic Representative, Consul or Trade Commissioner, and is not a person who carries on or exercises in Ceylon any other employment, trade, business, profession or vocation.

(c) Any expert, adviser, technician or official whose salary or principal emolument is not payable by the Government of Ceylon and who is brought to Ceylon through any specialized Agency of the United Nations Organisation or any organisation approved by the Minister.

(d) Any official of the United Nations Organisation, I.M.F., World Bank, I.B.R.D., A.D.B. or other similar Organisation, who is in Ceylon, excluding citizens of Ceylon who have been recruited locally.

(e) Any member of the family of any person treated as being resident outside Ceylon under sub-paragraph (a), (b), (c) or (d) of paragraph 2 (ii).

(f) Any trainee from abroad who is sent to Ceylon under any of the Technical Co-operation Programme of the United Nations Organisation and its Specialised Agencies or of the Colombo Plan Organisation or of any other organisation approved by the Minister.

(g) Personal Representatives, including Attorneys, Administrators, when acting solely in that capacity for a deceased person, who at the date of death was resident, for Exchange Control purposes, in a country outside Ceylon.

(h) Ceylon Trustees of will trusts or inter-vivos settlements when acting solely in that capacity where the deceased at the time of death, or the settler at the time the settlement was made, was resident, for Exchange Control purposes, outside Ceylon.


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3The Gazette of the Democratic Socialist Republic of Sri Lanka

EXTRAORDINARY

No.1227/11 – SATURDAY, MARCH 16, 2002

(Published by Authority)


GovermentNotifications

NOTICE UNDER EXCHANGE CONTROL ACT(CHAPTER 423 OF THE CLE)

1. Import and export of Sri Lanka currency:

General permission is hereby granted in terms of the provisions of sub-section 1(a) of section 22, and sub-section 1(a) of section 21 of the Exchange Control Act, No.24 of 1953, to all Sri Lankans to export and import on their persons Sri Lanka currency notes in sum not exceeding Rs.5,000 when they travel abroad or return to Sri Lanka, as the case may be.

2. Possession of unutilized foreign currency:

(a). General permission is hereby granted under section 6A and section 48 of the Exchange Control Act, No. 24 of 1953, for a person resident in Sri Lanka to retain in the possession of such person foreign currency in the form of travellers cheques and foreign currency notes purchased by such person from an authorised dealer for travel abroad and unutilized on such travel abroad, provided the currency so retained shall not exceed US$ 2,000 or its equivalent in other convertible foreign currencies, of which not more than US$ 500 or its equivalent shall be in foreign currency notes.

(b). General permission is also hereby granted in terms of section 22 and section 48 of the Exchange Control Act for such a person referred to in (a) above to export on his/her person when travelling abroad such currency as is retained in his/her possession in terms of (a) above.

h. a. G. hettiaRachchi,


16th March, 2002.


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EXTRAORDINARY

No.1232/14 – FRIDAY, APRIL 19, 2002



GovermentNotifications


Permission in terms of Sections 7, 10, 11, 15 and 30(5) of the Exchange Control Act, (Chapter 423 of the CLE)

1. PERMISSION is hereby granted for the purposes of sections 10, 11, 15 and sub-section 5 of Section 30 as applicable of the Exchange Control Act (Chapter 423 of the CLE), for the issue and transfer of shares in a company upto 100% of the issued capital of such company, to approved country funds, approved regional funds, corporate bodies incorporated outside Sri Lanka and individuals resident outside Sri Lanka (inclusive of Sri Lankans resident out side Sri Lanka) subject to the exclusions, limitations and conditions hereinafter set out.

2. Exclusions – The permission hereby granted shall not apply in respect of shares of a company proposing to carry on or carrying on any of the following business:

(i) Money Lending,

(ii) Pawn broking,

(iii) Retail trade with a capital of less than One Million US Dollars,

(iv) Providing personal services other than for the export or tourism sectors,

(v) Coastal fishing.

3. Limitations – (a) The permission is hereby granted shall apply in respect of shares in a company carrying on or proposing to carry on any of the following business only up to 40% of the issued capital of such company, or if approval has been granted by the Board of Investment of Sri Lanka for a higher percentage of foreign investment in any company, only up to such higher percentage.

(i) Production of goods where Sri Lanka’s exports are subject to internationally determined quota restrictions;

(ii) Growing and primary processing of tea, rubber, coconut, cocoa, rice, suger and spices;

(iii) Mining and primary processing of non renewable national resources;

(iv) Timber bases industries using local timber;

(v) Fishing (deep sea fishing);

(vi) Mass communications;

(vii) Education;

(viii) Freight forwarding;


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3 (ix) Travel agencies;

(x) Shipping agencies;

(b). The permission hereby granted shall apply in respect of the shares of a company carring on or proposing to carry on any of the businesses set out below only upto the percentage of the issued capital of the company for which percentage either general or special approval has been granted by the Government of Sri Lanka or any legal or administrative authority set up for the approval of foreign investment in such businesses.

(i) Air transportation;

(ii) Coastal shipping;

(iii) Industrial undertaking in the Second Schedule of the Industrial Promotion Act, No.46 of 1990, namely – and industry manufacturing arms, ammunitions, explosives, military vehicles and equipment aircraft and other military hardware;

Any industry manufacturing poisons, narcotics, alcohols, dangerous drugs and toxic, hazardous or carcinogenic materials;

Any industry producing currency, coins or security documents;

(iv) Large scale mechanized mining of gems;

(v) Lotteries;

4. Conditions – (a) A person resident outside Sri Lanka who is a party to a transaction permitted hereunder shall make a declaration to the effect that such person is resident outside Sri Lanka on the share transfer form or share application form as applicable.

(b) The payment for shares in any issue or transaction permitted hereunder shall be made only out of or into a Share Investment External Rupee Account opened in a commercial bank of Sri Lanka in accordance with directions given by the Controller of Exchange in that behalf to commercial banks.

(c) A commercial bank, a licensed share broker or any other person entrusted with the payment of capital monies such as sale proceeds of shares, dividends and commissions in respect of any transactions permitted hereunder shall make such payment only into or out of Share Investment External Rupee account referred to in sub-paragraph (b) above.

(d) The Secretary/ Registrar to a company in which the issue or transfer of shares to a persons resident outside Sri Lanka are limited under paragraph 3 shall not register the name of any person resident outside Sri Lanka or a citizen of a foreign state or their nominee as a share holder in such company if by such registration the limits specified in paragraph 3 shall be exceeded.

5. Permission is also hereby granted –

(a) Under Section 11 of the Exchange Control Act for the transfer by approved country funds, approved regional funds, corporate bodies incorporated outside Sri Lanka and individuals resident outside Sri Lanka (inclusive of Sri Lankans resident outside Sri Lanka of shares acquired in terms of paragraph 1 subject to the conditions stipulated in paragraph 4(a), 4(b) and 4(c);

(b) Under section 7 of the Exchange Control Act for making any payment to or for the credit of a person resident outside Sri Lanka in respect of a transaction permitted hereunder in accordance with the provisions of paragraph 4(c).

6. General – Nothing contained in this order shall be construed as affecting or having a bearing on–

(a) enterprises as defined in the Board of Investment of Sri Lanka Law, No.4 of 1978 in respect of which exemptions have been granted from the Exchange Control Act, to the extent of such exemption;


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3(b) the provisions of any other written law.

7. Interpretation – For the purpose of this Order –

(i) “ issued capital” shall have the same meaning as in the Companies Act, No. 17 of 1982;

(ii) “persons resident outside Sri Lanka” shall have same meaning as in Order published under the Exchange Control Act in Gazette No. 15007 dated 21.04.1972.

8. The notice published in Gazette Extraordinary No. 721/4 of 29.06.1992 and Gazette No. 1122/12 of 07.03. 2000 granting permission for purposes of section 7, 10, 11, 15 and sub-section 5 of section 30 of the Exchange Control Act are hereby rescinded.



Colombo,19th April, 2002.


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EXTRAORDINARY

No.1263/10 – FRIDAY, NOVEMBER 22, 2002




EXCHANGE CONTROL NOTICE

Exchange Control Act

PERMISSION required in terms of Sections 5, 21, and 22 of the Exchange Control Act:–

1. Subject to paragraph (4) below, general permission is hereby granted in terms of Sections 5, 21, and 22 of the Exchange Control Act read with Sections 3 and 48 of the said Act for the purpose of–

(i) Buying gold in Sri Lanka;

(ii) Selling gold in Sri Lanka by any person who is resident in Sri Lanka;

(iii) Importing into Sri Lanka or exporting from Sri Lanka of gold by any person subject to the conditions specified in paragraphs (2) and (3) below.

2. Every importer of gold under paragraph (1) (iii) shall before clearance of gold from Sri Lanka Customs and every exporter of gold under paragraph (1) (iii) shall at or before the time of export of gold from Sri Lanka, declare to the Director General of Customs on such forms as may be provided by the Director General; the quantity and value of gold and the purpose for which the gold is imported or exported.

3. Every importer/exporter of gold under paragraph (1)(iii) shall comply with the provisions of the Import and Export Control Act and regulations made thereunder regulating the import and export of goods.

4. (1) Gold shall not be imported into Sri Lanka on consignment account basis by any person other than–

(a) a licensed commercial bank; or

(b) a limited liability company approved by the Controller of Exchange

(i) which is primarily engaged in trading of gold or manufacturing gold jewellery or other gold products for exports;

(ii) which has a paid up capital of not less than Rs. 10 million;

(iii) which has a good financial track record for not less than three years; and

(iv) which has experience in gold trading for not less than three years.

provided that for purposes of (iii) and (iv) above in the case of a company that has not been in existence for three years, the financial track record and experience of the group of companies to which such company belongs will be taken into account.


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3 (2) Importation of gold on consignment account basis in terms of the preceding provisions shall be

subject to such terms and conditions as may be imposed by the Controller of Exchange from time to time.

5. The Notice published in the Government Gazette Extraordinary No. 1186/18 of 30th May, 2001 is hereby revoked.




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3 The Gazette of the Democratic Socialist Republic of Sri Lanka

EXTRAORDINARY

No.1312/9 – TUESDAY, OCTOBER 28, 2003




THE EXCHANGE CONTROL ACT, (CHAPTER 423)

NotificationunderSection7

Permission is hereby granted–

(a) for the payment in Sri Lanka Rupees, of the purchase price payable in respect of any residential property in Sri Lanka, to a person who is the owner of the property being sold but who is resident outside Sri Lanka or to the heir of such person resident outside Sri Lanka: Provided that such property had originally been acquired or developed by the owner resident outside Sri Lanka and payment for the same was made by way of inward remittances in convertible foreign currency; and

(b) for the repatriation of such amount of the purchase price paid in Sri Lanka Rupees in such circumstances as is described in (a) above, as is equal to the amount paid by way of inward remittances in convertible foreign currency for the original acquisition or development of the property. Any amount remaining after such repatriation shall be deposited in a non-resident blocked rupee account in Sri Lanka in the name of the owner or the heir of such property.


Colombo,28th October, 2003.

11-184


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EXTRAORDINARY

No.1411/5 – MONDAY, SEPTEMBER 19, 2005





Permission in terms of Section 7 and Section 8 of the Exchange Control Act,(Chapter 423 of the CLE)

1. PERMISSION is hereby granted for the purpose of Section 7 and 8 of the Exchange Control Act (Chapter 423 of the CLE) for a person in or resident in Sri Lanka to make payments in foreign exchange to a person resident outside Sri Lanka on his Electronic Fund Transfer Card (EFTC) subject to the following terms and conditions.

2. (a) A payment on an EFTC to a person or an entity resident outside Sri Lanka may be made only for the following purposes :

(i) Payment to be made abroad by a card holder for services of a personal nature including travel, accommodation, medical, living and educational expenses.

(ii) Payment for purchase of goods abroad for personal use.

(iii) Payment for import of goods into Sri Lanka for personal use subject to a limit of US $ 3,000 (c.i.f.) or its equivalent in any other foreign currency per consignment.

(iv) Payment of registration fees, examination fees and annual subscription fees of a personal nature payable to a foreign professional body or academic institution.

(v) Payment to be made in respect of insurance premium only for travel and health insurance of personal nature.

(b) Any payment in foreign currency on an EFTC for any transaction which falls outside the purview of paragraph 2 (a) shall require the prior written permission of the Controller of Exchange, unless such payment is in respect of a permitted transaction made out of the funds lying to the credit of a Non Resident Foreign Currency Account (NRFC), a Resident Foreign Currency Account (RFC), a Resident Non National Foreign Currency Account (RNNFC) or an Off Shore account in an Off Shore Banking Unit of a licensed commercial bank.

3. For the purpose of this Gazette notification, unless the context otherwise requires; ‘Electronic Fund Transfer Card (EFTC)’ means a card or device that enables the user to transfer value in credit, debit or any other form and includes credit cards, debit cards and stored value cards.

And,

‘Personal use’ means for the use of the holder of the card, his spouse and children and parents and does not include use for any commercial purpose.




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EXTRAORDINARY

No.1481/1 – MONDAY, JANUARY 22, 2007





Permission in Terms of Sections 7, 10, 11 and 15 of the Exchange Control Act

1. PERMISSION is hereby granted for the purposes of Sections 7, 10, 11 and 15 as applicable of the Exchange Control Act (Chapter 423 of the CLE) to foreign country funds, regional funds or mutual funds approved by the Securities and Exchange Commission of Sri Lanka, corporate bodies incorporated outside Sri Lanka and citizens of foreign states for purchasing, transferring and making payments in respect of transactions of Sri Lanka Rupee Denominated Treasury Bonds (T-bonds) subject to the conditions hereinafter set out.

2. Conditions.–(a) Any T-Bonds to be purchased by the above categories of foreign investors should be through the

primary and secondary markets by utilising existing public debt system. Foreign investor who purchased such a T-bond is in a position to sell or transfer this T-bond to any person, whether a resident in Sri Lanka or a resident outside Sri Lanka, in the secondary market without any holding period.

(b) The payment for T-bonds issued by the Government of Sri Lanka in any issue or transaction permitted hereunder shall be made only out of or into a “Treasury Bond Investment External Rupee Account” (TIERA) opened in a commercial bank in Sri Lanka in the name of the foreign investor.

(c) A commercial bank, or a licensed primary dealer or a broker or any other person entrusted with the payment of capital monies such a sale proceeds of T-bonds and interest on such T- bonds in respect of any transaction permitted hereunder shall make such payment only into or out of a Treasury Bond Investment External Rupee Account referred to in sub-paragraph (b) above.

(d) Funds in a TIERA is freely remittable without any restriction after meeting local liabilities of the account holder, if any.

Interpretation : For purpose of this general permission;“foreign investors” shall include the following categories of investors:(a) Foreign country funds, regional funds or mutual funds approved by the Securities and

Exchange Commission of Sri Lanka;(b) Corporate bodies incorporated outside Sri Lanka; and(c) Citizens of foreign states.

d. Wasantha,Controller of Exchange.

Colombo,22nd January, 2007.


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EXTRAORDINARY

No.1516/19 – TUESDAY, SEPTEMBER 25, 2007



GovernmentNotifications


IN exercise of powers conferred by section 6 and 6A of the Exchange Control Act read with sections 3 and 48 of the said Act, permission is hereby granted to possess and retain foreign exchange as specified below.

Possession and retention of foreign exchange

1. (a) An authorized dealer may possess and retain foreign exchange acquired in the normal course of business and within the terms of his authorization.

(b) An authorized person may possess and retain foreign currency received or acquired in the normal course of business and within the terms of his authorization.

(c) A person resident in Sri Lanka may retain in his possession foreign currency in the form of currency notes, and/or travellers’ cheques, the aggregate value of which does not exceed US$ 2,000 or its equivalent in other foreign currencies:

Provided that such foreign currency represents –

(i) foreign currency purchased by him from an authorized dealer or an authorized person for travel abroad and brought back unutilized while returning to Sri Lanka, or

(ii) foreign currency received by him outside Sri Lanka as remuneration for services rendered by him to a person resident outside Sri Lanka.

(d) A person resident outside Sri Lanka may in Sri Lanka retain in his possession without limit foreign currency if such foreign currency was acquired by him whilst he was outside Sri Lanka.

Period for retention of foreign exchange

2. (a) A person resident in Sri Lanka who obtains foreign currency from an authorized dealer or authorized person for a purpose mentioned in an application made by him to the authorized dealer or authorized person does not use it for such purpose shall not retain such foreign currency for a period exceeding 90 days from the date of receipt of such foreign currency without converting into Sri Lanka Rupees.

(b) A person resident in Sri Lanka who obtains foreign currency from an authorized dealer or authorized person for a purpose mentioned in an application made by him to the authorized dealer or authorized person thereafter brings back to Sri Lanka said foreign currency or part thereof, such person shall not retain such foreign currency for a period exceeding 90 days from the date of repatriation without converting into Sri Lanka Rupees.

(c) A person resident in Sri Lanka who proceeds outside Sri Lanka for taking up employment, professional work or setting up in business earns or receives foreign currency from such


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3employment, profession or business and brings back to Sri Lanka, such person shall not be entitled to retain such foreign currency for a period exceeding 90 days from the date of its repatriation without converting into Sri Lanka Rupees or crediting into a foreign currency account opened and/or maintained by such person in accordance with directions issued to authorized dealers under the Exchange Control Act for opening and maintaining of foreign currency accounts.

(d) Time period referred to in sub-paragraphs (b) and (c) of this paragraph does not apply to a person resident in Sri Lanka who retains foreign currency in his possession in accordance with sub-paragraph (c) of paragraph 1 of this notice.

Interpretationforpurposesofthisnotification

3. In this notice, unless the context otherwise requires –

(i) “authorized dealer” means, a commercial bank for the time being authorized under Section 4 of the Exchange Control Act for the purposes of the Act as an authorized dealer in relation to gold or any foreign currency;

(ii) “authorized person” means, any person other than an authorized dealer for the time being authorized by the Central Bank under section 5 of the Exchange Control Act;

(iii) “foreign currency” shall have the same meaning as given in the Exchange Control Act;

(iv) “currency” shall have the same meaning as given in the Exchange Control Act;

(v) “foreign exchange” shall have the same meaning as given in the Exchange Control Act;

(vi) “person resident in Sri Lanka” or a “person resident outside Sri Lanka” shall have the same meaning as given in the Direction issued by the Minister of Finance under Section 37 (1) of the Exchange Control Act and published in the Government Gazette, No.15,007 dated 21st April, 1972.

4. Revocation of earlier notices:

The notice published in Gazette Extraordinary, No. 1227/11 dated March 16, 2002 is hereby revoked.

5. The contents of this Gazette shall come into operation with effect from 5th October, 2007.


Colombo,21st September, 2007.


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EXTRAORDINARY

No.1516/24 – THURSDAY, SEPTEMBER 27, 2007



GovernmentNotifications

NOTICE UNDER EXCHANGE CONTROL ACT(CHAPTER 423 OF THE CLE)

IN exercise of powers conferred by sub-sections 1 (a) and (b) of section 21 and sub-sections 1 (a) and (b) of section 22 of the Exchange Control Act read with Sections 3 and 48 of the said Act, permission is hereby granted to export from and import into Sri Lanka of Sri Lanka currency notes or foreign currency as specified below:–

Export and Import of Sri Lanka Currency

1. A citizen of Sri Lanka or a person resident in Sri Lanka –

(a) who proceeds outside Sri Lanka to take up an employment or for education or on a temporary visit on holiday, business or medical treatment, or for any other similar reasons may export on his person or in his baggage, Sri Lanka currency notes not exceeding Rs.5,000/- per person;

(b) who returns to Sri Lanka after employment or education abroad or a temporary visit outside the country on holiday, business or medical treatment, or for any other similar reason may import into Sri Lanka on his person or in his baggage, Sri Lanka currency notes not exceeding Rs.5,000/- per person.

Import and Export of Foreign Currency

IMPORT OF FOREIGN CURRENCY:

2. A person may –

(a) send to Sri Lanka through normal banking channels without limit foreign currency legally acquired from any place outside Sri Lanka;

(b) transmit into Sri Lanka by post, money orders or postal orders expressed in foreign currency subject to any limit of amount or other limits prescribed under the Post Office Ordinance;

(c) bring into Sri Lanka on his person and/or in his baggage any foreign currency subject to the requirements of the Order made by the Minister of Finance in relatin to prescribed currencies and published in the Government Gazette, No.10, 564 dated 14th August, 1953, as amended, and the Order made by the Minister of Finance in relation to prescribed currencies brought in by passengers travelling in transit through a port and published in the Government Gazette, No.790/8 dated 27th October, 1993:

Provided that upon importing foreign currency into Sri Lanka by such person (not being a passenger travelling in transit through the port and remains in any area reserved or demarcated for use by transit passengers in such port), shall make a declaration on his arrival in Sri Lanka to Sri Lanka Customs in the “Passenger Baggage Declaration: Inward” form if the value of foreign currency brought into Sri Lanka exceeds US$ 15,000 in aggregate or its equivalent in other foreign currencies:


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3 Provided further that it shall be necessary to declare to the Sri Lanka Customs foreign currency

notes brought in by such person, if he intends to take back foreign currency notes exceeding the US$ 5,000 or its equivalent in other currencies.

Export of Foreign Currency:

3. (a) An authorized dealer may send out of Sri Lanka foreign currency which has been acquired in the normal course of business and within the terms of his authorization;

(b) A person resident in Sri Lanka may –

(i) take or send out of Sri Lanka foreign currency obtained by him from an authorized dealer or an authorized person in accordance with the provisions of the Exchange Control Act or the regulations, notifications or directions made or issued under the Act;

(ii) take out of Sri Lanka foreign currency retained by him in his possession in accordance with the notice issued by the Controller of Exchange for the possession and retention of foreign currency and published in the Government Gazette No. 1516/19 dated 25.09.2007;

(c) A person resident outside Sri Lanka may take out of Sri Lanka unutilized foreign currency in a sum not exceeding the amount brought in by him on his last arrival in Sri Lanka:

Provided that taking or sending of foreign currency out of Sri Lanka by a person in or resident in Sri Lanka shall be subject to the condition that such person (not being a passenger travelling in transit through the port and remains in any area reserved or demarcated for use by transit passengers in such port) makes a declaration to Sri Lanka Customs in the “Passenger Baggage Declaration : Outward” form, or any other form prescribed by the Sri Lanka Customs for that purpose, if –

(i) the value of foreign currency taken or sent out of Sri Lanka exceeds US$ 10,000 in aggregate or its equivalent in other foreign currencies; and/or

(ii) the value of foreign currency taken or sent out of Sri Lanka in the form of currency notes exceeds US$ 5,000 in aggregate or its equivalent in other foreign currencies.

Interpretationforpurposesofthisnotification

4. In this notice, unless the context otherwise requires –(a) “authorized dealer” means, a commercial bank for the time being authorized under section 4 of

the Exchange Control Act for the purposes of the Act as an authorized dealer in relation to gold or any foreign currency;

(b) “authorized person” means, any person for the time being authorized by the Central Bank under section 5 of the Exchange Control Act;

(c) “foreign currency” shall have the same meaning as given in the Exchange Control Act;(d) “currency” shall have the same meaning as given in the Exchange Control Act;(e) “person resident in Sri Lanka” or a “person resident outside Sri Lanka” shall have the same

meaning as given in the Direction issued by the Minister of Finance under Section 37 (1) of the Exchange Control Act and published in the Government Gazette, No.15,007 dated 21st April, 1972.

5. The contents of this Gazette shall come into operation with effect from 5th October, 2007.


Colombo,21st day of September, 2007.


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4Our Ref. : 37/01/016/001/007

Financial Intelligence UnitTel. No. : 2477125Fax No. : 2477692E-mail : [email protected]

20th August 2007

To : All Compliance Officers of Licensed Banks & Registered Finance Companies

Dear Sir / Madam,

COMPLIANCE WITH KYC/CDD RULES FOR NEW CUSTOMERS AND

EXISTING CUSTOMERS – STATE OF READINESS

In order to assess the state of readiness of licensed banks and registered finance companies to comply with the mandatory KYC/CDD Rules issued to the industry in June 2007 and which will become effective as follows:-

New Customers – October, 2007Existing Customers – March, 2008

Please provide the following information to the FIU within 2 weeks from the date of receipt of this letter:-

• Operational Plans in place to give effect to the above time thresholds;

• Mileposts set i.e., As of September, 2007 – December, 2007 – March, 2008

• If the March, 2008 time frame cannot be met, the reasons there for, and the mileposts set thereafter for completion of the phase in.

• Please note that the three year period for phase in expires in March, 2009.

Yours faithfully,

Actg. Director (FIU)

Copy to: - Director, Bank Supervision, CBSL

Director, Supervision of Non-Bank Financial Institutions, CBSL

In terms of Section 23 of the FTRA, I shall thank you to report the status of compliance with the KYC/CDD Rules issued to the institutions coming under your purview taking into account the timelines set for full compliance as indicated above.


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4Our Ref. : 37/04/001/0001/007


21 June 2007

To : The Chief Executive Officers of all Commercial Banks

Dear Sir / Madam,

MANDATORY REPORTING REqUIREMENT – ELECTRONIC FUND

TRANSFERS

Your immediate attention is drawn to the mandatory reporting requirement of electronic funds transfers in excess of Rs.500,000 or its equivalent in any foreign currency in terms of the Gazette Order No.1437/25 of 23rd March, 2006.

I shall thank you to ensure that the following transactions too as at 30th June, 2007 and thereafter for the reporting periods, are captured in the mandatory reporting format for this purpose:–

Electronic Funds Transfers inclusive of

• Inwards & Outward Remittances

• SLIP Transfers

• RTGS Transactions

• Credit Card Transactions

• Debit Card Transactions (If applicable)

• Transactions relating to NRFC’s & RFC’s,

and, any other transactions that are transferred electronically above the mandatory threshold.

Yours faithfully,

Actg. Director FIU

Copies to :– All Compliance Officers The Sri Lanka Banks’ Association The Approved Panel of Auditors The Director, Bank Supervision Department, Central Bank of Sri Lanka


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4Ref. : 037/01/023/0001/008

30th June 2008

To : Chief Executive Offcers of all Licensed Banks and Registered Finance Companies

Dear Sir / Madam,

COMPLIANCE WITH THE REPORTING REqUIREMENTS UNDER

THE FINANCIAL TRANSACTIONS REPORTING ACT, NO.6 OF 2006

Further to our Circular No. 4 of 15th September 2006 on the above subject.

In terms of the Order and Regulations published in Gazette Extraordinary No.1555/9 dated 25th June 2008 by His Excellency the President under the Provisions of the Section 6 of the Financial Transactions Reporting Act, No.6 of 2006, the reporting threshold for cash and electronic fund transfers has been revised to Rs.1,000,000/- or its equivalent in foreign currency with effect from 01st June 2008.

You are hereby informed to ensure compliance with the above regulatory provisions embodied in the Gazette aforementioned.

Please acknowledge the receipt.

Yours faithfully,

H. A. KarunarathneDirectorFinancial Intelligence Unit

Copies to : All Compliance Officers of Licensed Banks and Registered Finance Companies Director, Bank Supervision Department Director, Department of Supervision of Non-Bank Financial Institutions


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4Our Ref. : 37/04/001/0001/007


23rd May 2007

To : All Licensed Banks / Registered Finance Companies

Dear Sir / Madam,

COMPLIANCE WITH THE REPORTING REqUIREMENTS UNDER

THE FINANCIAL TRANSACTIONS REPORTING ACT, NO.6 OF 2006

Further to our Circular No. 4 dated 15th September 2006 on the above subject, I wish to draw your attention to the following;

As per clause (a) and (b) of the said circular please ensure that your reports are forwarded to the FIU on a fortnightly basis, in the specimen formats given to you.

E.g.: Reports for the period 1st to 15th of each month should be forwarded to the FIU on or before the 30th of the month.

Reports for the period 16th to 31st of each month should be forwarded to the FIU on or before 15th of the subsequent month.

You are hereby requested to ensure compliance with the above.

Yours faithfully,

Actg. Additional Director (FIU)


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4Circular No. 4


15th September 2006

To : All Licensed Banks

COMPLIANCE WITH THE REPORTING REqUIREMENTS UNDER THE

FINANCIAL TRANSACTIONS REPORTING ACT, NO.6 OF 2006

Your attention is drawn to the provisions of the Financial Transactions Reporting Act, No. 6 of 2006 (FTRA) which imposed duties on every “Institution” as defined in Section 33 of the FTRA to report the Financial Intelligence Unit of the Central Bank established by order made by His Excellency the President under the provisions of the FTRA.

(a) Under Section 6 (a) of the FTRA, cash transactions of amounts exceeding Rs. 500,000/- or its equivalent in foreign currency.

(b) Under Section 6 (b) of the FTRA, electronic fund transfers done at the instance of a customer of Rs. 500,000/- or its equivalent in foreign currency.

(c) Under Section 7 of the FTRA:–

i. any suspected transaction or attempted transaction may be related to the commission of any unlawful activity or other criminal offcence; or

ii. information that it suspects may be relevant to an act preparatory to an offence under the provisions of the Convention on the Suppression of Financing of Terrorism Act, No. 25 of 2005; to an investigation or prosecution of a person or persons for an act constituting an unlawful activity, or may otherwise be of assistance in the enforcement of the Money Laundering Act, No.5 of 2006 and the Convention on the Suppression of Terrorist Financing Act, No.25 of 2005.

You are hereby informed to ensure compliance with the above statutory provisions. The reporting formats in respect of (a), (b) and (c) are attached for those banks that have not yet received this.

Yours faithfully,

Actg. CEO (FIU)

Copies to : 1. Governor, CBSL 2. DG (J), DG (W) 3. Director of Bank Supervision 4. External Auditors of Licensed Banks 5. Secretary /SLBA 6. Compliance Officers of Licensed Banks.


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4Our Ref. : 037/01/016/0001/008


23rd May 2008

To : The Chief Executive Officers of Licensed Banks

Dear Sir / Madam,

COMPLIANCE WITH THE RULES ON

CUSTOMER DUE DILIGENCE FOR FINANCIAL INSTITUTIONS

This refers to the Rules issued by the FIU on 18th May 2007 on the above subject.

It has been observed that certain banks have adopted inadequate customer due diligence procedures in opening customer accounts and facilitating customer transactions leading to unfair competition among the banking industry. This will adversely affect the credibility of the banking institution and unity of the banking industry leaving the doors open for criminals to exploit our financial system. Therefore banking institutions are hereby advised to strictly adhere to the KYC/CDD Rules issued by the FIU and make arrangements to safeguard their own banking institutions contributing for the nation's effort in combating money laundering and countering the financing of terrorism.

Further, I wish to indicate that any contravention or non-compliance will be liable to the penalties under the Financial Transactions Reporting Act, No. 06 of 2006.

Yours faithfully,

H A KarunaratneDirectorFinancial Intelligence Unit

Cc : All Compliance Officers of Licensed Banks Sri Lanka Banks’ Association Director, Bank Supervision / CBSL


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4Our Ref. : 37/04/001/0001/007

Circular No. 11Financial Intelligence UnitTel. No. : 2477125Fax No. : 2477692E-mail : [email protected]

18th May 2007

To : The Chief Executive Officers of All Licensed Banks and Registered Finance Companies

Dear Sir / Madam,

FINANCIAL TRANSACTIONS REPORTING ACT, NO.6 OF 2006 (FTRA) –

KNOW YOUR CUSTOMER AND CUSTOMER DUE DILIGENCE RULES

PRESCRIBED IN TERMS OF SECTION 2(3) OF THE FTRA

Detailed guidance and rules based on the Financial Actions Task Force and the Basle Committee on Bank Supervision on Customer Due Diligence, incorporating recommendations, where relevant, by the Sri Lanka Banks’ Association, are enclosed.

You are advised to ensure that a proper policy framework and operational guidelines to give effect to the guidance and the rules so prescribed are put in place within a specific AML/CFT policy developed by your institution for this purpose.

You are also required to ensure that your institution is fully compliant with these rules before 31st March 2008. With regard to new customers the rules will have immediate effect.

Any contravention or non-compliance with the rules so prescribed will be liable to penalties as prescribed in the relevant provisions of the Act.

Yours faithfully,

Actg. Additional Director (FIU)

Copies to :– All Compliance Officers The Sri Lanka Banks’ Association The Finance Houses Association The Approved Panel of Auditors The Director, Bank Supervision Department, CBSL The Director, Supervision of Non-Bank Financial Inst. Dept., CBSL


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4RULES ON CUSTOMER DUE DILIGENCE FOR FINANCIAL INSTITUTIONS

AND NON-BANK FINANCIAL INSTITUTIONS

Introduction

Publicconfidenceinfinancialinstitutions,andhencetheirstability,isenhancedbysoundbankingpracticesthatreducefinancialriskstotheiroperations.Moneylaunderingandterroristfinancingcanharm the soundness of a country’s financial system, aswell as the stability of individualfinancialinstitutions,inmultipleways.Customeridentificationandduediligenceproceduresalsoknown as “know your customer” (KYC) rules, are part of an effective AML/CFT regime. These rules are not only consistent with, but also enhance, the safe and sound operation of banking and othertypesoffinancialinstitutions.

Whilepreparingoperationalguidelinesoncustomeridentificationandduediligenceprocedures,financial institutions are advised to treat the information collected from the customer for thepurposeofopeningofaccounts,asconfidentialandnotdivulgeanydetailsthereofforcross-sellingor for any other purposes, and that the information sought is relevant to the perceived risk, is not intrusive and is in conformity with the rules issued hereunder.

These rules are issued under Section 2(3) of the Financial Transactions Reporting Act, No.6 of 2006 and any contravention of, or non-compliance with the same will be liable to the penalties under the relevant provisions of the Act.

Actg. Additional DirectorFinancial Intelligence Unit,Central Bank of Sri Lanka 18th May 2007

PART I – GENERAL GUIDANCEA. Natural Persons

1. For natural persons the following information should be obtained, where applicable:

• legal name and any other names used (such as maiden name); • correct permanent address (the full address should be obtained; a Post Office box number is not sufficient); • telephone number, fax number, and e-mail address; • date and place of birth; • nationality; • occupation, public position held and/or name of employer; • an official personal identification number or other unique identifier contained in an unexpired official document

(e.g. passport, identification card, residence permit, social security records, driving license) that bears a photograph of the customer;

• type of account and nature of the financial institution in relationship; • Signature.


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42. The financial institution should verify this information by at least one of the following methods:

• confirming the date of birth from an official document (e.g. birth certificate, passport, identity card, social security records);

• confirming the permanent address (e.g. utility bill, tax assessment, bank statement, a letter from a public authority); • contacting the customer by telephone, by letter or by e-mail to confirm the information supplied after an account has been

opened (e.g. a disconnected phone, returned mail, or incorrect e-mail address should warrant further investigation); • confirming the validity of the official documentation provided through certification by an authorized person (e.g. embassy

official, notary public).

3. The examples quoted above are not the only possibilities. In particular jurisdictions there may be other documents of an equivalent nature which may be produced as satisfactory evidence of customers' identity.

4. Financial institutions should apply equally effective customer identification procedures for non-face-to-face customers as for those available for interview.

5. From the information provided in paragraph 10, financial institutions should be able to make an initial assessment of a customer’s risk profile. Particular attention needs to be focused on those customers identified thereby as having a higher risk profile and additional inquiries made or information obtained in respect of those 0customers to include the following:–• evidence of an individual’s permanent address sought through a credit reference agency search, or through independent

verification by home visits; • personal reference (i.e. by an existing customer of the same institution); • prior bank reference and contact with the financial institution regarding the customer; • source of wealth; • Verification of employment, public position held (where appropriate).

6. for one-off or occasional transactions where the amount of the transaction or series of linked transactions does not exceed an established minimum monetary value, it might be sufficient to require and record only name and address in instances where:–

• reliable information on the customer is publicly available to the bank/financial institution;• the financial institution is dealing with another bank whose AML/CFT controls it is well familiar with by virtue of a previous

course of dealings;

7. It is important that the customer acceptance policy is not so restrictive that it results in a denial of access by the general public to banking services, especially for people who are financially or socially disadvantaged.

B. Institutions

8. The underlying principles of customer identification for natural persons have equal application to customer identification for all institutions. Where in the following the identification and verification of natural persons is involved, the foregoing guidance in respect of such persons should have equal application.

9. The term institution includes any entity that is not a natural person. In considering the customer identification guidance for the different types of institutions, particular attention should be given to the different levels of risk involved.

C. Corporate Entities

10. For corporate entities (i.e. corporations and partnerships), the following information should be obtained: • name of institution; • principal place of institution's business operations; • mailing address of institution; • contact telephone and fax numbers; • some form of official identification number, if available (e.g. tax identification number); • the original or certified copy of the Certificate of Incorporation and Memorandum and Articles of Association; certificate

of partnership or certificate of registration, where appropriate;• the resolution of the Board of Directors to open an account and identification of those who have authority to operate the

account; • Nature and purpose of business and its legitimacy.

11. The financial institution should verify this information by at least one of the following methods: • for established corporate entities - reviewing a copy of the latest report and accounts (audited, if available); • conducting an enquiry by a business information service, or an undertaking from a reputable and known firm of lawyers

or accountants confirming the documents submitted;


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4• undertaking a company search and/or other commercial enquiries to see that the institution has not been, or is not in the

process of being, dissolved, struck off, wound up or terminated; • utilizing an independent information verification process, such as by accessing public and private databases; • obtaining prior bank references; • visiting the corporate entity, where practical; • Contacting the corporate entity by telephone, mail or e-mail.

12. The financial institution should also take reasonable steps to verify the identity and reputation of any agent that opens an account on behalf of a corporate customer, if that agent is not an officer of the corporate customer.

C1. Corporations/Partnerships

13. For corporations/partnerships, the principal guidance is to look behind the institution to identify those who have control over the business and the company’s/partnership's assets, including those who have ultimate control. For corporations, particular attention should be paid to shareholders, signatories, or others who inject a significant proportion of the capital or financial support or otherwise exercise control. Where the owner is another corporate entity or trust, the objective is to undertake reasonable measures to look behind that company or entity and to verify the identity of the principals. What constitutes control for this purpose will depend on the nature of a company, and may rest in those who are mandated to manage funds, accounts or investments without requiring further authorization, and who would be in a position to override internal procedures and control mechanisms. For partnerships, each partner should be identified and it is also important to identify immediate family members that have ownership control.

14. Where a company is listed on a recognized stock exchange, or is a subsidiary of such a company, then the company itself may be considered to be the principal to be identified. However, consideration should be given to whether there is effective control of a listed company by an individual, small group of individuals or another corporate entity or trust. If this is the case then those controllers should also be considered to be principals and identified accordingly.

D. RetirementBenefitPrograms

15. Where an occupational pension programme, employee benefit trust or share option plan is an applicant for an account the trustee and any other person who has control over the relationship (e.g. administrator, programme manager, and account signatories) should be considered as principals and the financial institution should take steps to verify their identities.

E. Mutual / Friendly Societies, Co-operatives and Provident Societies

16. Where these entities are an applicant for an account, the principals to be identified should be considered to be those persons exercising control or significant influence over the organization’s assets. This will often include board members plus executives and account signatories.

F. Charities, Clubs and Associations

17. In the case of accounts to be opened for charities, clubs, and societies, the financial institution should take reasonable steps to identify and verify at least two signatories along with the institution itself. The principals who should be identified should be considered to be those persons exercising control or significant influence over the organization’s assets. This will often include members of a governing body or committee, the President, any board members, the treasurer, and all signatories.

18. In all cases independent verification should be obtained that the persons involved are true representatives of the institution. Independent confirmation should also be obtained of the purpose of the institution.

G. Trustsnomineeandfiduciaryaccounts

19. Financial institutions should establish whether the customer is taking the name of another customer, acting as a “front” or acting on behalf of another person as trustee, nominee or other intermediary. If so, a necessary precondition is receipt of satisfactory evidence of the identity of any intermediaries and of the persons upon whose behalf they are acting, as well as details of the nature of the trust or other arrangements in place. Specifically, the identification of a trust should include the trustees, settlers/grantors and beneficiaries.

When opening an account for a trust, the financial institution should take reasonable steps to verify the trustee(s), the settler(s) of the trust (including any persons settling assets into the trust) any protector(s), beneficiary(ies), and signatory(ies). Beneficiaries should be identified when they are defined. In the case of a foundation, steps should be taken to verify the founder, the managers/directors and the beneficiaries.

H. BeneficialOwners

20. The financial institution should be able to justify the reasonableness of the measures taken, having regard to the circumstances of each case. The financial institution may also consider obtaining an undertaking or declaration from the customer on the identity of, and the information relating to, the beneficial owner.


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4I. Professional Intermediaries

21. When a professional intermediary such as a lawyer, notary, other independent legal professional or accountant, opens a client account on behalf of a single client that client must be identified. Professional intermediaries will often open “pooled” accounts on behalf of a number of entities. Where funds held by the intermediary are not co-mingled but where there are "sub-accounts" which can be attributable to each beneficial owner, all beneficial owners of the account held by the intermediary should be identified. Where the funds are co-mingled, the financial institution should look through to the beneficial owners; however, there may be circumstances which should be set out in supervisory guidance where the financial institution may not need to look beyond the intermediary (e.g. when the intermediary is subject to the same due diligence standards in respect of its client base as the financial institution).

22. Where such circumstances apply and an account is opened for an open or closed ended investment company, unit trust or limited partnership which is also subject to the same due diligence standards in respect of its client base as the financial institution, the following should be considered as principals and the financial institution should take steps to identify: • the fund itself; • its directors or any controlling board where it is a company; • its trustee where it is a unit trust; • its managing (general) partner where it is a limited partnership; • account signatories; • any other person who has control over the relationship e.g. fund administrator or manager.

23. Where other investment vehicles are involved, the same steps should be taken as in paragraph 22 where it is appropriate to do so. In addition all reasonable steps should be taken to verify the identity of the beneficial owners of the funds and of those who have control of the funds.

24. Intermediaries should be treated as individual customers of the financial institution and the standing of the intermediary should be separately verified by obtaining the appropriate information drawn from the itemized lists included in paragraphs 10-11 above.

J. Other Types of Institutions

25. For the account categories referred to in the aforementioned paragraphs, the following information should be obtained in addition to that required to verify the identity of the principals: • name of account; • mailing address; • contact telephone and fax numbers; • some form of official identification number, if available (e.g. tax identification number); • description of the purpose/activities of the account holder (e.g. in a formal constitution); • copy of documentation confirming the legal existence of the account holder (e.g. register of charities).

26. The financial institution should verify this information by at least one of the following: • obtaining an independent undertaking from a reputable and known firm of lawyers or accountants confirming the

documents submitted; • obtaining prior bank references; • Accessing public and private databases or official sources.

K. Introduced Business

27. For expediency, it has become customary for financial institutions to rely on the procedures undertaken by other financial institutions or introducers when business is being referred. In doing so financial institutions risk placing excessive reliance on the due diligence procedures that they expect the introducers to have performed. Relying on due diligence conducted by an introducer, however reputable, does not in any way remove the ultimate responsibility of the recipient bank to know its customers and their business. In particular financial institutions should not rely on introducers that are subject to weaker standards than those governing the financial institutions’ own KYC procedures or that are unwilling to share copies of due diligence documentation.

28. Financial institutions that use introducers should carefully assess whether the introducers are “fit and proper” and are exercising the necessary due diligence in accordance with the standards set out in this paper. The ultimate responsibility for knowing customers always lies with the financial institution. Financial institutions should use the following criteria to determine whether an introducer can be relied upon:• it must comply with the minimum customer due diligence practices identified in this paper;• the customer due diligence procedures of the introducer should be as rigorous as those which the financial institution

would have conducted itself for the customer;


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4• the financial institution must satisfy itself as to the reliability of the systems put in place by the introducer to verify the

identity of the customer;• the financial institution must reach agreement with the introducer that it will be permitted to verify the due diligence

undertaken by the introducer at any stage; and• all relevant identification data and other documentation pertaining to the customer’s identity should be immediately

submitted by the introducer to the financial institution who must carefully review the documentation provided. Such information must be available for review by the supervisor and the financial intelligence unit or equivalent enforcement agency, where appropriate legal authority has been obtained;

• in addition, financial institutions should conduct periodic reviews to ensure that an introducer which it relies on continues to conform to the criteria set out above.

PART II – SPECIFIC GUIDANCE

Allfinancialinstitutionsarerequiredtocomplywiththefollowing:–

1) Opening of Accounts

a. Individual Accounts: Information to be obtained

– Full name as appearing in the identification document.– Identification document to be specified as, national identity card, unexpired passport, official driving license. – Permanent address as appearing on the identification document. Any other address to be accepted should be

supported by a utility bill not over three months old. Utility bills are to be specified as electricity bill, water bill and telecom or any fixed line operator’s bill. No post-box number should be accepted. In the case of ‘C/o’, property owner’s consent and other relevant address verification documents are required to be obtained.

– Telephone number, fax number, and e-mail address.– Nationality– Occupation, business, public position held and the name of the employer.– Purpose for which the account is opened.– Expected turnover / volume of business.– The reason for choosing to open the account in a foreign jurisdiction in case of NRFC / NRRAs.– Satisfactory reference.– Signature

Documents to be obtained (each copy should be duly certified by the authority issuing same)– Mandate / Account Opening form– Copy of identification document.– Copy of address verification documents.– Copy of the valid visa / permit in the case of RNNFC / NRRA / RGFC accounts for non-nationals.– Business registration if the account is opened for such purpose.

b. Proprietorship / Partnership Accounts: Information to be obtained

– Full name as appearing in the registration document.– Personal details of the proprietor/partners as in the case of individual accounts. – Registered address or the principle place of business and the permanent address of the proprietor/partners.– Contact telephone, fax numbers.– Tax file number.– Satisfactory reference.– Signature.– The extent of the ownership controls.– Other connected business interests.

Documents to be obtained – Mandate / Account Opening form


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4– Business registration document.– Proprietors’ / partners’ information document.– Copy of identification and address verification documents.

c. Corporations / Limited Liability Company: Information to be obtained

- Registered name of the institution.– Principle place of institution’s business operations.– Mailing address, if any.– Nature and purpose of business.– Telephone / Fax / E-mail.– Income tax file number.– Bank references.– Personal details of all Directors as in the case of individual customers. – Major share holders and their financial interests and control.– List of subsidiaries / associates and other business connections. – Signatures.

Documents to be obtained

– Mandate / Account Opening form.– Original or certified copy of the Certificate of Incorporation and Memorandum of Articles of Association.– Board Resolution authorizing the opening of the account.– Directors’ information document including their other business interests. – Copy of Form 48.– Copy of Form 36.– Board of Investment Agreement if a BOI approved company.– Export Development Board (EDB) approved letter if EDB approved company.– Certificate to commence business if a public quoted company.– Certified copy of business registration (if a partnership/sole trader) – Latest audited accounts if available.– The above documents should apply to a company registered abroad as well.– The non-documentary methods in the absence of the above documents would entail a search at the Credit Information

Bureau (CRIB), bank references, site visits and visiting the business website of the customer.

d. Clubs, Societies, Charities, Associations and NGOs: Information to be obtained

– Registered Name and address as appearing in Charter, Constitution etc.. – Detailed information of at least two office bearers, signatories, administrators, members of the governing body

or committee or any other person who has control and influence over the operations of the entity as in the case of individual accounts.

– The purpose for which the account is opened, the objectives and the areas of activities.– The source and level of income / funding.– Other connected institutions / associates / organizations.– Telephone / Fax numbers / e-mail address.

Documents to be obtained – The registration document / constitution, charter etc.. – Customer information form as in the case of individual accounts.– Mandate / Account Opening Form.


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4 e. Trust, Nominees, and Fiduciary Accounts: Information to be obtained

– Identification of all trustees, settlers / grantors and beneficiaries in case of trustees.– Whether the customer is acting as a ‘front’ or acting as a trustee, nominee, or other intermediary.

Documents to be obtained:– Mandate / Account Opening Form.– Trust Deed.– Particulars of all individuals.

2) Maintenance of Accounts: 1. Unless and until adequate identity of the prospective client is obtained no account should be opened. If any discrepancy

in information is detected subsequently the account should be stopped until the veracity of such information is confirmed.

2. The general customer information to be recorded at the outset should include customer’s business / profession, level of income, economic profile, business associates and other connections, source of funds, and the purpose for which the account is opened.

3. Copies of all identification and address verification documents should be retained in terms of the law. 4. Where the permanent address given in the application is at a location far away from that of the branch which receives the

account opening request, the request must be discouraged/turned down and the prospective client be requested to open the account at the closest branch to his residence or his business, unless an acceptable and a valid reason is given. Such exceptions should be recorded in file. If change of address is made after the opening of the account, the account should be transferred to the nearest branch of the particular bank.

5. When two or more accounts are opened in the same bank, the specific purpose for which the account is opened may be should recorded to assist continued due diligence of all accounts.

6. Check whether the prospective customers appear on any list of any known suspected terrorist list or alert list issued by national / government authorities such as the Controller of Immigration, Customs, Central Bank etc.

7. When instructions are received from clients to transfer funds from one account to another both account numbers should be recorded internally to aid future reference.

8. When RNNFC, RGFC as well as temporary rupee accounts are opened for non-nationals / foreign passport holders who are resident in Sri Lanka, a local address should be obtained as their permanent address during their stay in the Island. A copy of the passport, visa with validity period, foreign address and the purpose for which the account is opened should be made available in the file. On the expiry of the visa, the account should cease to operate unless and otherwise appropriate instructions are received. On leaving the Island the account should either be closed or be converted into a non-resident account. Financial institutions must ensure that a valid visa is held at all times by the clients during the continuation of the account with them.

9. When rupee accounts (NRRA) are opened and maintained for non-residents (foreign passport holders), a foreign address may be used as a permanent address and for all correspondence. The reason for choosing to open the account in a foreign jurisdiction should be recorded in the file.

10. All rupee accounts for resident non-nationals should carry a Sri Lankan address. A foreign address may be used temporarily until the account holder is resident abroad. Bank must ensure to update the address on the client’s return, under the ongoing due diligence. In the case of joint accounts a foreign address may be used only when all parties are domiciled abroad. If any one party remains in the Island, the local address needs to be maintained.

11. Bank accounts for charitable and aid organizations and NGOs should be opened only with the registration of the NGO Authority and with other appropriate credentials. Due regard should be paid to specific directions governing their operations i.e. issued by the Department of Bank Supervision / Controller of Exchange.

12. Opening of accounts for ‘politically exposed persons’ (PEP) should have authorization of senior management. PEPs are defined as “individuals in Sri Lanka or abroad who are, or have been, entrusted with prominent public functions” e.g. Heads of State or of government, senior politicians, senior government, judicial or military officials, senior executives of State owned corporations, important political party officials. Business relationships with family members or close associates of PEPs involve reputational risks similar to those with PEPs themselves. The definition is not intended to cover middle ranking or more junior officials in the forgoing categories.

13. All cash deposits made into savings and current accounts over Rs.500, 000/- by third parties should have on record, the identity of the depositor. The required details are, the name, address, ID number, purpose and the signature. However, clerks, accountants and employees of business houses who are authorized to deal with the accounts do not come within the definition of ‘third parties’.

14. When outward remittances/wire transfers are made out of NRFC / RFC accounts it is mandatory that a complete application be forwarded to the financial institution incorporating important and meaningful originator information such


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4as name, address, account number, identification number together with a brief account of the purpose for such transfers. This is applicable to domestic wire transfers as well.

15. No wire transfers should be permitted out of currency deposits made into these NRFC / RFC accounts unless they are brought into the country by the account holder with evidence. No undeclared1/ currency notes brought into the country be accepted into these accounts. If regular currency notes are deposited into foreign currency accounts, the financial institution should be satisfied and be aware of the legitimacy of such deposits.

16. Financial institutions must ensure that no ATM external withdrawals exceeding the mandatory threshold2/ are made without the express approval of the financial institution. If, regular withdrawals are made by customers in small amounts in order to circumvent the reporting limit, the withdrawal facility in such events must be suspended forthwith and reported as a suspicious transaction. Financial institutions must exercise due diligence to prevent any misuse of this facility. This is applicable to both rupee accounts and foreign currency accounts.

17. No transfer of funds from RFC to NRFC accounts should be permitted although fund transfers from NRFC to RFC accounts are permitted as per exchange control regulations.

18. A proper customer identification or relationship has to be established when import documents on collection basis are released to non customers of financial institutions. Identification should include the correct address of the person or the business.

19. The updating of all accounts with relevant information should be completed by 31st March 2008 by all financial institutions.

20. Accounts which record frequent transactions below the threshold limit of Rs.500,000/1 in an attempt to circumvent the mandatory reporting requirement should be reported to the financial institution’s Compliance Officer for appropriate action.

21. Financial institutions must ensure that account activities are consistent with the customer profile on record. Any inconsistency should be inquired into and the correct position recorded. All unexplainable activities should be reported to the financial institution’s compliance officer for appropriate action.

22. Introduction of new technologies – financial institutions should pay special attention to any money laundering threats that may arise from new or developing technologies, including internet banking that might favour anonymity and take measures, if needed, to prevent their use in money laundering schemes. Financial institutions should be mindful of a variety of Electronic Cards that are used by customers for buying goods and services, drawing cash from ATMs and for the electronic transfer of funds. Pre-loading of credit cards in particular can be resorted to, inter-alia, for money launderingandterroristfinancingpurposesandshouldnotbepermittedastodosowouldbetantamounttotheabuse of credit cards.

23. Additional KYC and CDD on existing and new credit card merchant bases with a special focus on the nature of business of credit card merchants, should be undertaken and appropriate measures taken in terms of the provisions of the FTRA against any customer, transaction or merchant involved in any unlawful activity. Payments made through the internet by credit card customers in particular warrant very close attention to ensure that payments are not made for unlawful activities;

24. Where marketing of credit cards is done through agents financial institutions should ensure that appropriate KYC procedures are duly applied to the customers as well as to the agents.

25. When applications for opening of accounts are received by mail or e-mail due care should be exercised to record the true identity of the client prior to opening the accounts or activating them. In no case should the financial institutions short-circuit the required identity procedures just because the prospective client is unable to present himself in person.

26. It is mandatory for financial institutions to preserve SWIFT messages that accompany inward remittances for a period of six years as they contain important customer details.

27. When financial institutions maintain accounts for money changers / money remitters they need to be aware that such clients are engaged exclusively in the money changing / money remitting business in compliance with the terms and conditions of the permit issued to them. Since money changers are covered by the provisions of the Prevention of Money Laundering Act (PMLA) and the Financial Transactions Reporting Act (FTRA), it is the duty of the financial institutions to ensure that they fully comply with the requirements of law. Any unauthorized illegal engagement in financing transactions should be brought to the notice of the financial institution’s compliance officer for appropriate action.

28. Alternative Remittance Systems (Hundi, Hawala etc.) Extra vigilance is required by financial institutions to distinguish between formal money transmission services and

other money or value transfer systems through which funds or value are moved from one geographic location to another through informal and unsupervised networks or mechanisms. To ascertain the sources of funds thus becomes an imperative.

29. Correspondent Banks and Shell Banks - Prior to commencing banking relationships with ‘correspondent Banks / financial institutions’, financial institutions should gather sufficient information with regard to their management, major business activities, and their money laundering prevention and detection efforts. It is also the duty of the financial

1/ In excess of the prescribed threshold2/ The Bank specific threshold of ATM withdrawals


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4institutions to ensure that the purpose of the account is exclusively for correspondent banking activities and that the bank is effectively supervised by the relevant authorities for their due diligence and AML standards in that country. The financial institutions should refuse to enter into, or conduct business and provide services to, financial institutions that are located in jurisdictions that have poor KYC standards or have been identified as being ‘non-co-operative’ in the fight against ML and TF. It is also imperative that the financial institutions ensure that their correspondent financial institutions do not undertake business with shell financial institutions. No accounts for‘shell’financial institutions should be opened without the proper approval of the Controller of Exchange.

3) General

1. All financial institutions are required to appoint a complianceofficer in terms of Section 14 of the FTRA, who shall be responsible for ensuring the institution’s compliance with the requirements of the relevant laws. These officers must be at the senior management level.

2. In terms of the Section 14(1)c of the FTRA, every bank must establish an audit function to test its procedures and systems for compliance.

3. All financial institutions are required to make its officers and employees aware of the laws relating to money laundering and financing of terrorism and to train its officers, employees and agents to recognize suspicious transactions. Financial institutions are also required to screen all persons before hiring them as employees.

4. Financial institutions should ensure that its domestic and foreign branches, and subsidiaries adopt and observe measures to the extent that local laws and regulations are applicable and where the foreign branches / subsidiaries are unable to adopt and observe such measures in jurisdictions which do not, or insufficiently apply, the FATF recommendations, such matter should be reported to the financial institution’s Compliance officer for appropriate action.

5. All financial institutions should scrutinize and examine the background of all their relatively large transactions that are complex, unusual or have no apparent economic and lawful purpose and retain a written record of such examination.

6. Treasury Dealings With regard to dealings in Forex, money market, bonds, securities, precious metals etc. confirmations should be obtained

from the counter-parties on their adherence to AML / CFT guidelines to prevent transactions with non-compliant countries / entities.

7. Trade Finance / Letters of Credit and other contingencies Trade-basedmoneylaunderingandterroristfinancing usually involves invoice manipulation and uses trade finance

routes and commodities to avoid financial transparency, laws and regulations. The use of these facilities needs to be reviewed from time to time. Facilities requested by customers who have borrowing facilities or large deposits with other institutions should be brought under close scrutiny. Other examples are the assignment of proceeds to an apparently unconnected third party, the use of pro forma invoices without description of goods and reticence to provide goods description and other appropriate supporting documentation.


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4Circular No. 8


To : CEOs of All Commercial Banks

LIGHT A MILLION CANDLES CAMPAIGN

The urgent attention of all commercial banks is drawn to interpretation clause 33 of the Financial Transactions Reporting Act, No.6 of 2006 which lists “offences against children” as an unlawful activity in terms of the law.

In this regard it has been brought to our attention that child pornography websites are being contributed to by customers through electronic payments systems and internet transactions. It is felt that credit cards remain the most common method of on-line payment used by consumers and utilized by purveyors of pornographic material.

A task force of the Sri Lanka Commercial Banks established for this purpose, in collaboration with the FIU, is working on a modus operandi to eradicate the commercial viability of child pornography.

The Financial Intelligence Unit, in its commitment to this noble cause and in giving effect to the provisions of the FTRA, invites the immediate attention of all commercial banks to the following imperatives:–

• To initiate, with immediate effect, additional KYC and CDD on existing and new credit card merchant bases with a special focus on the nature of business;

• Report immediately to the FIU, in the form of a Suspicious Transaction Report, in terms of Section 7(1)(a) of the FTRA, any customer, transaction or merchant involved in offences against children, as illustrated above.


Actg. Additional Director

Financial Intelligence Unit

4th April 2007

Copy to :– All Compliance Officers Mr. Upali de Silva, SLBA Director, Bank Supervision Dept.


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4Circular No. 5


To : CEOs of All Licensed Banks,


The attention of all licensed banks is drawn to the provisions of Section 14 of the FTRA and the procedures and systems required to be established in respect of:

i) Customer identification requirements under Section 2

ii) Record keeping and retention requirements under Section 4

iii) Continuous customer due diligence under Section 5

(c) The need to establish an audit function to test its procedures and systems for Compliance with the provisions of this Act;

(d) Train its officers, employees and agents to recognize suspicious transactions;

Your immediate attention is also invited to Section 14 (iv) of the FTRA which requires the external auditor of the Bank to ensure compliance by the Bank with the reporting requirements specified in Section 6, 7 and 8 and Section 22 of the FTRA.

Please ensure, accordingly, that the annual audit of the books of the Bank for 2006 provides, in the scope of the audit, for your institution’s compliance with the specific requirements in this regard relating to auditors, at Section 14 (IV) of the FTRA.

Actg. CEO (FIU)

15th September 2006

Copies to: Governor, CBSL DG (J), DG (W) Director of Bank Supervision External Auditors of licensed banks Secretary / SLBA Compliance Officers of licensed banks


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4Circular No. 4/1


To : CEOs of All Licensed Banks,


SUBMISSION OF DATA

I would thank you to confirm that, in terms of the rules prescribed under Section 2 (3) of the FTRA and the Gazette Order No.1437/25 dated 23rd March, 2006 in this same regard, the data required to be submitted thereunder is in respect of the whole Bank and its Branches.

Any exceptions to this Order should be notified to the FIU in detail, giving reasons for non-compliance and the time frame within which compliance will be ensured.

Actg. CEO (FIU)

15th September 2006

Copies to: 1. Secretary / SLBA 2. Compliance Officers of licensed banks 3. Director of Bank Supervision


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4Circular No. 2


To : CEOs of All Banks

SECTION 312 & 319 OF THE PATRIOT ACT

In January 2006, the Department of the Treasury through the bureau of the Financial Crimes Enforcement Network (FINCEN the US equivalent of the FIU) issued rules implementing the Section 312 of the USA Patriot Act. The rules required enhanced due diligence requirements for correspondent accounts. (Nostro Accounts for Sri Lanka Financial Institutions). The section requires each US Financial Institutions that administers correspondent accounts in the United States for a non US person to establish enhanced due diligence policies, procedures and controls to detect and report instances of suspected money laundering. For this reason, Nostro accounts require to be closely monitored to ensure that activities on these accounts exclusively support trade finance and connected ancillary foreign transactions that too with low risk counterparties.

The enhanced due diligence rules for US banks among others include an assessment of the Money Laundering risks presented by the correspondent account based on factors such as the institution business, markets, AML Regime, the type of activities on the account, the jurisdiction of any company that is an owner of the foreign financial institution.

Section 319 of the Patriot Act also allows US Treasury to forfeit monies held in a correspondent account of a foreign bank where the person that the authorities seek the forfeiture against has funds in the foreign branch of that bank.

Due diligence measures imposed on the host bank and failure to these can result both in huge fines on the host bank, forfeiture of funds held in the correspondent account and its closure with the host bank. This measure could have serious implication for banks that are engaged in International Trade and business.

Thus it is imperative that banks take note of the due diligence measure directed to the host bank as noted in para 2 in this regard.

CEO (FIU)

4th September 2006


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4Financial Intelligence UnitTel. No. : 2477125Fax No. : 2477692E-mail : [email protected]

18th August, 2006

TO ALL LICENSED BANKS:

In terms of the provisions of the Financial Transactions Reporting Act, the immediate and urgent attention of all licensed banks is drawn to the legal requirement for necessary due diligence to be carried out in respect of all remittances received into customer accounts and transfers there from. In this regard the banks are required to revert to circular instructions issued by the Director of Bank Supervision of the Central Bank as follows:–

Circular dated 07th March,2006 – reporting of post-tsunami remittances received through NGOs and Non-NGOs to the Central Bank of Sri Lanka which stated, inter alias, as follows:–

The banks are requested to adhere strictly to the “Know Your Customer Guidelines” and implement adequate systems and controls to monitor all such remittances to ensure that customer due diligence on transactions relating to such remittances is carried out. This is an imperative in the context of the Anti-money Laundering legislation that has just been passed by Parliament and which will soon be operative.

Circular dated 31st May, 2006 – Conduct of NGO accounts by licensed banks which stated as follows:–

The immediate attention of all licensed banks is drawn to the need to observe strict due diligence and the “Know your Customer” (KYC) Rules with regard to inward remittances and outward transfers or withdrawal of funds from accounts operated by NGOs.

In this regard the attention of all licensed banks is drawn to the provisions of Section 15 subsection (2) of the Financial Transactions Reporting Act, No.6 of 2006 and Section 3 of the Convention on the Suppression of Terrorist Financing Act, No.25 of 2005 which are annexed for ease of reference.

Circular dated 16th June, 2006 – Conduct of NGO accounts by licensed banks which stated as follows:–

In order to scrutinize the legitimacy of financial transactions undertaken by NGOs who receive funding assistance from external sources, the Ministry of Finance & Planning has requested the relevant line Ministries to establish a proper monitoring procedure and ascertain the work undertaken by them.

Accordingly all licensed banks are requested to obtain a clearance letter from the relevant line Ministry and External Resourced Department before releasing such funds to the respective NGOs, where it is evident that such NGO is operating outside its scope of activity. Copy of clearance letter may be forwarded to the Central Bank of Sri Lanka.

Where a licensed bank is found not to have complied with the above requirements in respect of any such transaction, the provisions of Section 15 of the FTRA will be invoked.

The attention of all banks is drawn to the provisions of Sections 15(3) and (4) of the FTRA in this regard.

CEO (FIU)


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4 24th June 2008

To:ChiefExecutiveOfficersofLicensedBanks

Dear Sir / Madam,

INCLUSION OF THE WORLD TAMIL MOVEMENT AMONG THE

LIST OF TERRORIST ORGANISATIONS IN CANADA

The Government of Canada has listed the “World Tamil Movement (WTM)”, the LTTE front organization as a terrorist group with effect from 13 June 2008, pursuant to the Criminal Code of Canada.

The official notification by the Office of the Superintendent of Financial Institutions, Canada and the announcement by the Office of the Canadian Minister of Public Safety Hon. Stockwell Day are attached.

The listing of the WTM prohibits all persons in Canada and all Canadian citizens overseas from dealing with the WTM, its assets owned or controlled by them. It is considered illegal also to knowingly participate, contribute or facilitate any activity of a listed entity such as the WTM.

Accordingly, please monitor and report us details on remittances facilitated/to be facilitated by World Tamil Movement through your bank immediately, including the dates, beneficiaries and the amounts involved.

Yours faithfully,

DirectorFinancial Intelligence Unit


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5Operating Instructions No. : BC 6 / 78

Ref. No. : BC / F922 / 77Banking DepartmentCentral Bank of CeylonP.O. Box 590Colombo.

01 March 1978


NON-RESIDENT FOREIGN CURRENCY ACCOUNTS FOR SRI LANKA NATIONALS

The attention of all commercial banks is invited to letter No. D/255 dated January 5, 1978 issued by the Controller of Exchange authorizing the maintenance of Non-Resident Foreign Currency Accounts (hereinafter called “NRFC Accounts”) for Sri Lanka Nationals.

2. Subject to paragraph 5 below, transactions involving NRFC Accounts should not be reported to the Central Bank on the Daily Return forms DR1 and DR2 or on the Non-Resident Return forms NR1 and NR2. The balance of NRFC Accounts may be held in commercial banks working balances abroad within the prescribed limits.

3. Banks may sell to the Central Bank foreign currency notes accepted for deposit of proceeds to NRFC Accounts. The Central Bank will buy such notes at its buying rates for such currency notes prevailing on the date of purchase. The rupee proceeds of such sales to the Central Bank should be converted into US Dollars or Pound Sterling at the Central Bank’s spot rates prevailing on the same day (if necessary, by actual purchase from the Central Bank) for the purpose of crediting the NRFC Accounts. This may result in a credit to an NRFC Account being less than the face value of the currency notes received from the account holder. The shortfall should not be made good by the acceptance of Sri Lanka Rupees in an amount equivalent to the balance required to bring the foreign currency deposit to the face value of the foreign currency notes received. In this connection, please see the Controller’s letter, which stipulates that, apart from interest payable on funds deposited, credit to NRFC Accounts should be confined to the proceeds of inward remittances in foreign currency and the proceeds of foreign exchange brought into the country and declared on Customs “D” forms.

4. On the last working day of June and December each year, commercial banks may, if they wish buy from the Central Bank at its spot rates for that day such amounts of foreign currency as they require for the purpose of crediting interest to NRFC Accounts held by them. When, in order to close an NRFC Account, it is required to credit interest to that account on any day of the year other than the last working day of June or December, a commercial bank may, if it wishes purchase the necessary foreign currency from the Central Bank at the Central Bank’s spot rate prevailing on that day.

5. The purchases (from account holders) of foreign currency notes accepted for deposits to NRFC Accounts and the sales (to the Central Bank) of such notes, referred to in paragraph 3 above, should be reported to the Central Bank in the manner in which purchases and sales of foreign currency notes are now reported.


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6. As at the end of each month, every commercial bank should send a statement to the Chief Accountant, Central Bank of Ceylon, Colombo, showing, in the following form, aggregate figures relating to the NRFC Accounts held by it.

To : The Chief Accountant Central Bank of Ceylon

NON-RESIDENT FOREIGN CURRENCY ACCOUNTS (MONTH)

Return for end ..................... 19..…. (Operating Instructions No. BC/6/78)

Currency No. of Accounts

Total of Balances in Foreign Currency after application of

interest, if any

Rates of interest payable if any

Total amount interest credited

during the month

(1) (2) (3) (4) (5)US Dollar

Pound Sterling

H. PremaratneChief Accountant

Copy to: Controller of Exchange


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5Ref No. : BD / FX / LIBT / 90

30 July 1990

Dear Sir / Madam,

INFORMATION ON LOCAL INTER-BANK FOREIGN EXCHANGESPOT TRANSACTION

I refer to letter No. ER/IF/KF/4 dated May 17, 1990 addressed to you by the Director of Economic Research of the Bank on the above subject.

In view of the useful information that have been obtained from the returns made available by commercial banks in response to our request, the Central Bank has decided that information be obtained from commercial banks on a continuous basis to cover Cash, TOM and Spot Foreign Exchange transactions in the local inter-bank foreign exchange market against Sri Lanka Rupees. Accordingly, the format of the daily report which was furnished to the Central Bank from commercial banks from May 21, to June 21, 1990 have been amended to include Cash and TOM transactions, in addition.

It would be necessary for the daily report in the amended form be completed and furnished to the office of the Chief Accountant of the Central Bank by 5.00 p.m. on the day of transaction in order to facilitate the processing of the information as early as possible. Such information could, therefore, be forwarded on the Telefax machine (No. 540353) or by delivering to the Banking Department, so that any delays could be avoided.

It is proposed that the reporting on the annexed form commence on August 01, 1990.

If you have any queries or clarification regarding the information requested, please contact Mr. R. G. Jayarathne, Deputy Chief Accountant (Telephone: 422654) or Mrs. P. Liyanage, Chief Dealer (Telephone: 26952) of the Banking Department.

I seek your fullest co-operation in obtaining this information on a regular basis in the future to enable the Central Bank to make effective use of such information.

Yours faithfully,

N. A. DharmabanduChief Accountant


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Circular No. : 4157Banking DepartmentCentral Bank of Sri LankaP.O. Box 590Colombo 01.

27 December 1995To : All Commercial Banks

COMMERCIAL BANKS BORROWING FROM ABROAD

Commercial Banks are hereby permitted to borrow abroad from sources acceptable to the Central Bank of Sri Lanka up to a maximum of five per cent (5%) of their capital funds, i.e., paid up capital plus reserves, provided that the all inclusive cost of such borrowings will not exceed six months LIBOR plus 2 per cent per annum. The total of such loans outstanding and the overdrawn balances, if any, of their Nostro Accounts at any time should not exceed the five per cent of their total capital funds referred to above. The maturity period of these borrowings should not be more than six months.

2. The above borrowing is subject to prior approval of the Chief Accountant who will determine the limits of borrowing and the terms of the borrowing. The commercial banks shall follow the procedure given below in this regard –

(i) Commercial banks shall submit an application to the Chief Accountant indicating the following information with regard to the proposed borrowing: –

a) Name and address of the lender

b) Amount of loan and the currency

c) Terms of borrowing, including interest rate and all other fees, repayment period, collateral and any other conditions.

d) Capital funds of the borrowing bank as at the last day of the previous month, i.e., paid up capital plus reserves in the case of a commercial bank registered in Sri Lanka and assigned capital and reserves in the case of a branch of a commercial bank located in Sri Lanka but registered abroad.

(ii) After the borrowing has been permitted, the commercial banks shall submit the following information with regard to the borrowing to the Chief Accountant on a daily basis :–

a) Capital funds as on the reporting date

b) Amount of loan/loans borrowed during the month

c) Overdrawn balances in the Nostro Account

d) Amount outstanding of the loans permitted as on the reporting date

e) Terms of repayment and interest rate applicable for the respective borrowings

f) Due date/s of repayment/s

3. The Central Bank of Sri Lanka reserves the right (a) to reject any application for borrowing without giving any reason therefor, and (b) to amend, revise, delete or withdraw any part or part thereof this circular at any time without prior notice.

M. B. Dissanayake A. S. Jayawardena Chief Accountant Governor


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5My No. : BD / FX / 196

Banking DepartmentCentral Bank of Sri LankaP.O. Box 883Colombo 01.

13 January, 1997

Dear Sir/Madam,

FOREIGN CURRENCY LOANS TO NON-BOI EXPORTERS ANDINDIRECT EXPORTERS

Further to Circular Nos. ECD/02/97 (C & F) and No. ECD/03/97 (C & F) dated 03.01.1997 issued by the Department of Exchange Control, you are advised that the following guidelines are to be followed in granting foreign currency loans to Non-BOI exporters and indirect exporters by the Domestic Banking Unit (DBU) and the Foreign Currency Banking Unit (FCBU) of your bank.

1. The total of all outstanding credit to Non-BOI exporters and indirect exporters approved by the Controller of Exchange and granted from the FCBU, should not exceed the limit specified by the Central Bank from time to time. In the case of your bank, the maximum limit of such credit outstanding shall be US Dollars ............. million.

2. The total of all outstanding foreign borrowings of the DBU including any borrowings from the FCBUs, should not exceed fifteen per cent (15%) of the capital funds, i.e., paid up capital plus reserves in the case of a commercial bank registered in Sri Lanka, and assigned capital plus reserves in the case of a branch of a commercial bank located in Sri Lanka, but having its head office abroad.

3. Separate accounts should be maintained in respect of foreign currency loans granted to Non-BOI exporters and indirect exporters from either the DBU or FCBU.

4. The following information should be furnished to the undersigned on a weekly basis, in the reporting format attached: such information should be made available not later than two working days following the week in respect of which the information is furnished:

i. Total value of foreign currency loans granted during the week

ii. Outstanding level of foreign currency loans at the end of the week

iii. Monthly statement giving the amounts of any non-performing advances arising from foreign currency loans so granted

5. Circular No. 4157 dated 27.12.1995 is hereby withdrawn.

Yours faithfully,

M. B. DissanayakeChief Accountant


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Foreign Currency Loans to Non-BOI Exporters and Indirect Exporters

Weekly Report

1. Name of Bank : ……………………………………………………………………………

2. Reporting Period: Week ending : ……………………………………………………………………………

US $ mn

SourcesTotal

DBU FCBU

3. Amount granted during the reporting period :–

Maturity Period

(a) Below one year

(i) Amount

(ii) Average interest rate p.a. (%)

(b) Above one year

(i) Amount

(ii) Average interest rate p.a. (%)

4. Amount outstanding as at end of reporting period

5. Amount of non-performing loans at end of ……

……………………..Authorised Officer


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5Operating Instructions No. : BD / 03 / 98

Ref. No. : BD / FCBS / 1 / 98 Ref. No. : EC / 03 / 98(D)

Banking Department Exchange Control Department

12 November, 1998

Operating Instructions to Commercial Banks

INTRODUCTION OF THE EUROPEAN SINGLE CURRENCY – THE “EURO”

1. The European Union decided to introduce a single currency called the “euro” for its member countries with effect from 01.01.1999, on which date the conversion rates of participating countries’ national currencies are expected to be locked irrevocably against the new currency. Eleven European countries, namely, Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxemburg, Netherlands, Portugal and Spain have agreed to accept the proposed single currency against their national currencies. During the transition period from 01.01.1999 to 31.12.2001, the Euro will co-exist with the national currencies of the above participating member countries. From 01.01.2002, such national currencies will cease to exist.

2. On the eve of the introduction of the Euro, we would like to draw your attention to the need for commercial banks to examine their business processes in order to ensure they are ready to conduct normal business operations in the new currency from 1st January, 1999. Some important implications that need to be examined include those on deal conversion, re-denomination, payment system, price sources and continuity of contracts. In this connection, a copy of the policy statement issued by the International Chamber of Commerce (ICC) is attached herewith. You are requested to closely follow the instructions contained in it as well as other statements issued by the ICC from time to time, with regard to the international practices arising from the introduction of the Euro.

3. In this connection, the Central Bank of Sri Lanka wishes to inform all commercial banks that it has no objection to –

a) the opening and maintenance of Nostro Accounts in Euro currency by commercial banks operating in Sri Lanka to effect payments or receipts beginning from 01.01.1999; and

b) the designation of the Euro as a foreign currency for Foreign Currency Banking Units (FCBU), Non-Resident Foreign Currency (NRFC) Accounts, Resident Non-National Foreign Currency (RNNFC) Accounts, Resident Foreign Currency (RFC) Accounts, Exporters Foreign Currency (EFC) Accounts with effect from 01.01.1999 for the purposes mentioned in our Circular Nos. FCBS 1/79 of 02.05.1979, BC/F-922/77 of 01.03.1978, and Operating Instructions Nos. EC/08/88(D) of 05.05.1988, EC/22/90(D) of 30.03.1990, EC/19/80(D) of 14.05.1980, EC/52/91(D) of 01.08.1991 and EC/41/93(D) of 29.03.1993.

4. Commercial banks should take the full responsibility for maintenance, operation of relevant accounts and honouring of such contracts entered into with their customers in euro, or in national currencies of the participating member countries referred to above, and are required to provide details to the Central Bank of Sri Lanka on the current reporting schedules with regard to any operation in euro or national currencies of the participating member countries carried out by them.

Chief Accountant Controller of Exchange


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Policy Statement

THE IMPACT OF THE EUROPEAN ECONOMIC AND MONETARY UNION ON MONETARY OBLIGATIONS RELATED TO TRANSACTIONS INVOLVING ICC RULES

Prepared by the Commission on Banking Technique and Practice

The International Chamber of Commerce (ICC) is the world business organization, based in Paris. The ICC Commissions on Banking Technique & Practice, International Commercial Practice, and Insurance, develop and maintain uniform rules for international trade, including the Uniform Rules for Contract Guarantees (URCG 325), Uniform Rules for Demand Guarantees (URDG 458), Uniform Customs and Practice for Documentary Credits (UCP 500), Uniform Rules for Collections (URC 522), Uniform Rules for Contract Bonds (URCB 524), Uniform Rules for Bank to Bank Reimbursements (URR 525), (hereinafter referred to collectively as “ICC Rules”).

The introduction of the EURO, the European single currency, shall not have the effect of altering, discharging or excusing performance under any instrument subject to ICC Rules. This “Policy Statement” emphasized the need to correctly interpret and apply ICC Rules. Consequently, ICC National Committees and associated organizations are strongly urged to distribute this Policy Statement as widely as possible to help ensure the future smooth running of the instruments issued under ICC Rules. This Policy Statement does not amend any articles of ICC Rules in any way, but merely indicates the correct interpretation thereof.

1. General

1.1 As of 1 January 1999, the EURO will be substituted for the national currencies of those European Union member states participating in European Economic and Monetary Union (hereinafter “EMU-Participating States”) which are to be designated in May 1998. During the transitional period running from 1 January 1999 to 31 December 2001, the EURO (1 Euro - 100 Cents) will also be divided into the national currency units of the EMU-Participating States according to conversion rates which are to be irrevocably fixed by the Council of the European Union as of 1 January 1999 (“conversion rates”).The term “national denomination” as used below refers to the currency of any EMU-Participating State before 1 January 1999.

During the transition period persons are free to use either the EURO or the national denomination, but will not (unless otherwise agreed) be obliged to receive or make payment in EURO. However, any amount denominated either in EURO or in a national denomination of a given EMU-Participating State and payable within that state by crediting an account of the creditor, may be paid by the debtor either in EURO or in that national denomination with any necessary conversion being affected at the conversion rate.

As of 1 January 1999 the ECU will be replaced by the EURO at the rate of one EURO to one ECU.

1.2 As from 1 January 2002 the national denominations will cease to exist and the EURO will be the only legal currency in the EMU-Participating States; all payments must be in EURO.

1.3 Continuity of contract will not be affected by the introduction of the EURO.

1.4 The above principles affecting national denominations are legally binding in all member states of the European Union, and apply equally to payment to be made in a national denomination by persons located outside the European Union, due to the generally accepted legal principle


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5that the definition of what constitutes legal tender is governed by the law of the country whose currency is involved (sometimes referred to as the lex monesae principle).

2. Consequences of the introduction of the EURO on practice under various ICC Rules:

2.1 UCP 500 for Documentary Credits (including standby letters of credit)

Below are the different possible cases and the relevant rules of interpretation.

2.1.1. Documentary Credits issued and payable before 1 January 1999 in a national denomination – Payment must be made and documents denominated in the currency of the credit.

2.1.2. Documentary Credits issued before 1 January 1999 and payable before 1 January 2002 in a national denomination – Payment must be made in the currency of the credit, but documents may be presented either in the currency of the credit or in the EURO equivalent; however, where payment is to be made in the currency of an EMU-Participating State and by crediting an account located in such member state, payment may at the debtor’s (e.g. issuing bank’s) option be effected in the EURO equivalent.

2.1.3. Documentary Credits issued in a national denomination before 1 January 1999 and payable on or after 1 January 2002 - Payment must be made in EURO, but documents may be presented either in the currency of the credit or in the EURO equivalent (for documents issued on or after 1 January 1999); Documents issued on or after 1 January 2002 must be denominated in the EURO.

2.1.4. Documentary Credits issued and payable on or before 1 January 1999 and before 1 January 2002 in a national denomination or in EURO – Payment must be made in the currency of the credit but documents may be presented in the currency of the credit or in the EURO equivalent or in the equivalent cross value in the national denomination at the beneficiary’s place of business; however, where the currency of the credit is a national denomination and payment is to be made in the currency of a particular EMU-Participating State by crediting an account located in such member state, payment may at the debtor’s (e.g. issuing bank’s) option be effected in EURO.

2.1.5. Documentary credits issued on or after 1 January 1999 but before 1 January 2002 in a national denomination or in EURO and payable on or after 1 January 2002 – Payment must be made in EURO, but documents may be presented either in the currency of the credit or, as the case may be, in EURO or in the currency of the beneficiary’s place of business, provided always that documents issued on or after 1 January 2002 must be denominated in EURO.

2.1.6 For purposes of examples 2, 3, 4 and 5 above, documents (including insurance documents) mentioned in UCP Art. 34(f) are not considered as being inconsistent with one another, if, within a single presentation of documents, any documents are denominated in the currency of the credit and/or in EURO and/or the currency of the place of business of the beneficiary.

2.1.7 Documentary credits issued and payable on or after 1 January 2002 – Credits cannot be issued in a national denomination and must be issued in EURO and payment must be made and documents (issued on or after 1 January 2002) denominated in EURO.

2.1.8 The guidelines set forth in this Policy Statement apply equally to transferable credits. Transferable credits issued in a national denomination and to be transferred during the transitional period – The transferring bank may convert the currency and amount of the credit into the Euro equivalent.


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2.2 URCG 325/URDG 458/URCB 524 – Guarantees and Bonds

The principles set forth above also apply to guarantees and bonds

2.3 URC 522 Collections

Collections must be made in the currency stipulated in the collections instructions. However, if a collection instruction stipulates a national denomination of an EMU – Participating State, as of 1 January 1999 payment may be made in the EURO equivalent and as of 1 January 2002, payment must be made and accepted in the EURO equivalent.

2.4 URR 525 Bank to Bank Reimbursements

Reimbursement claims must be made and honoured in the currency of the reimbursement authorization or reimbursement undertaking. However, if such currency is the national denomination of an EMU-Participating State, as from 1 January 1999 they may be made and honoured in the EURO equivalent, and as from 1 January 2002 they must be made and honoured in the EURO equivalent.


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5Operating Instructions No. : 01 / 2002

Ref. No. : 06 / 04 / 15 / 2001 Ref. No. : 33 / 03 / 011 / 0013 / 001

Exchange Control Department International Operations Department Central Bank of Sri Lanka Colombo 1.

20th February 2002



Further to the Operating Instructions issued on 28.11.2001 signed by the Controller of Exchange and the Chief Accountant, we wish to provide you with the following information pertaining to the Euro Currency Cash Conversions.

Euro Legacy Currency Cash Conversion Timeline

01 January 2002 – Euro notes and coins acceptable as legal tender throughout the Euro-zone

– Legacy currency notes and coins can be converted to Euro at Euro-zone banks

01 March 2002 – Legacy currency notes and coins will NO LONGER be acceptable as legal tender anywhere in the Euro-zone.

You may also refer to the attachment received from one of our counterparties with regard to the last dates for acceptance of legacy currencies and last dates for exchanging legacy currencies by individual member countries of Euro-zone. Further details can be obtained from the website of the European Central Bank at www.europa.eu.int.

Controller of Exchange Director, International Operations


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Operating Instructions No. : 01 / 02 / 005 / 0018 / 22

Ref. No. : 06 / 04 / 15 / 2001 Ref. No. : 01 / 04 / 001 / 0013 / 001

Exchange Control Department Banking Department

28 November, 2001



1. Further to our operating instructions No. BD/03/98 and EC/03/98(D) dated 12.11.1998 on the above subject (copy attached).

2. All Licensed Commercial Banks are hereby informed that Euro currency which was introduced on 01.01.1999 would come into circulation as bank notes and coins on 01.01.2002. The Euro area national currency notes and coins that were in use in the Euro zone will be withdrawn from the system during the period 01.01.2002 - 30.06.2002. The period of dual circulation will last until 30.06.2002. Please note that all Euro area national currency notes and coins that were in circulation will be totally withdrawn from the system by 01.07.2002 and will no longer be treated as legal tender.

3. Please also note that on 01.01.2002, the Euro area national currencies will cease to exist as book entries, and all transactions and accounts and future contracts will be automatically converted into Euros from that date.

4. The commercial banks are, therefore, advised to take necessary early action to exchange their stocks of Euro area national currency notes and coins for Euros, and place orders for the requirements of new currency notes and coins through their respective agents. Commercial banks should also advise their customers who hold Euro area national currency notes and coins to make necessary arrangements to exchange the old currency notes and coins for new Euro currency notes and coins before 30.06.2002.

5. Since the Euro area national currencies will cease to exist, even as book entries from 01.01.2002, all such currencies will be withdrawn from the list of designated currencies for different foreign currency deposit schemes with effect from that date. All foreign currency accounts such as Foreign Currency Banking Unit (FCBU) Accounts, Non-Resident Foreign Currency (NRFC) Accounts, Resident Foreign Currency (RFC) Accounts, Resident Non-National Foreign (RNNFC) Currency Accounts, Exporters Foreign Currency (EFC) Accounts and any other special foreign currency accounts permitted to be maintained in such currencies will have to be maintained in Euros or any other designated currency other than Euro area national currencies which will be withdrawn from the list of designated currencies.

Controller of Exchange Chief Accountant


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5Circular No. : 4634

Banking DepartmentCentral Bank of Sri LankaP.O. Box 590Colombo 01.

7th August, 2000To : All Licensed Commercial Banks

WEEKLY REPORT ON FOREIGN CURRENCY DEPOSIT LIABILITIES

Licensed Commercial Banks are hereby requested to submit with effect from 11 August, 2000 a weekly report on the total deposit liabilities denominated in foreign currencies converted into US Dollar, as at the close of business on Wednesday is a bank holiday, on the working day last preceding it, each week.

The Banking Department will intimate to all Licensed Commercial Banks on every Wednesday the US Dollar rates that shall be applied for conversion of various foreign currencies into US Dollar for the above purpose.

The above weekly report should reach the Chief Accountant, Banking Department of the Central Bank of Sri Lanka not later than 12.00 noon on Friday or last working day of each week.

The above information is required for the purpose of monitoring the external reserves position of the country and implementation of monetary and exchange rate policies more effectively.

Y.M.W.B. WeerasekeraChief Accountant


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Circular No. : 4665Banking Department

15th November, 2000To : Treasury Managers of all Licensed Commercial Banks

DAILY INTER-BANK FOREIGN EXCHANGE TRANSACTIONS REPORT

Further to our Circular No. BD/FX/LIBT/90 dated 30.07.1990, please be good enough to report all your inter-bank FOREX transactions carried out until 4.00 p.m. each day to this department immediately after 4.00 p.m. the same day on fax number 346282/346284 with effect from 15.11.2000. Transactions done after 4.00 p.m. must also be reported on the same day as usual.

Your co-operation in providing this information on time is very much appreciated.

Yours faithfully,



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5Ref. No. : 01 / 01 / 002 / 0035 / 001

Banking Department

22 January, 2001

…………………………………………………………………………………………………………………………………………

Dear Sir,

LIMIT ON DAILY WORKING BALANCES IN FOREIGN CURRENCIES

You are hereby informed that in terms of the Provisions of Section 77 of the Monetary Law Act, the Monetary Board has determined, with effect from 23 January, 2001, a sum equivalent to US$ ............. mn. (US Dollars ............... million only) as the maximum amount of the working balances in all foreign currencies your bank should hold at the end of each working day. Any amounts in excess of these limits at the end of each working day could be sold to the Central Bank.

2. Please continue to report to me the daily foreign exchange position of your bank at the end of each day, as set out in Annexure. Accuracy of such reports should be confirmed by a senior officer of your bank authorized for the purpose.

Yours faithfully,



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Annexure IDirectorInternational Operations DepartmentCentral Bank of Sri LankaJanadhipathi MawathaColombo 1.Fax No. : 2346282 / 2346284

DAILY FOREIGN EXCHANGE POSITION REPORTDATE : ……………………

1. Net position as at the beginning of the day : Rs. Rs. USD USD (i) Foreign currency assets ………… ………… (ii) Foreign currency liabilities ………… ………… (iii) Net position of foreign currency assets / liabilities (i) – (ii) ………… ………… (iv) Net TOM / SPOT position ………… ………… (any TOM / SPOT transactions not included in the opening balance) ………… ………… ………… ………… (v) Net forward position ………… ………… (vi) Overall position 1. (iii) + (iv) + (v) ………… …………

2. Cash / Tom / Spot transactions of the day : (i) Sales to Central Bank of Sri Lanka ………… ………… (ii) Purchases from Central Bank of Sri Lanka ………… ………… (iii) Net position with Central Bank of Sri Lanka ………… ………… (iv) Sales to other banks (cash) ………… ………… (v) Purchases from other banks (cash) ………… ………… (vi) Net position with other banks (cash) ………… ………… (vii) Sales to other banks (Tom / Spot) ………… ………… (viii) Purchases from other banks (Tom / Spot) ………… ………… (ix) Net position with other banks (Tom / Spot) ………… ………… (x) Sales to other customers : a) Against imports ………… ………… b) Other ………… ………… (xi) Purchases from customers : a) Against exports ………… ………… b) Other ………… ………… (xii) Net position with customers ………… ………… (xiii) Total transactions – Cash / Tom / Spot (Net) of the day 2. (iii) + (iv) + (xi) + (xii) ………… …………

3. Forward transactions of the day : (i) Sales to Central Bank of Sri Lanka ………… ………… (ii) Sales to other banks (iii) Purchases from other banks (iv) Net forward with other banks (v) Sales to customers (vi) Purchases from customers (vii) Net forward with customers (viii) Total transactions (Net) of the day 3. (i) + (iv) + (vii)

4. Net position at end of the day 1. (vi) + 2. (xiii) + 3. (viii)

Date : …………………


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5Annexure II

DAILY FOREIGN EXCHANGE POSITION REPORT

DATE : ……………………

1. Net Position at the beginning of the day : (Opening Position) (i) Foreign Currency Assets – (DBU) Credit balances with overseas banks Foreign currency placements / investments Foreign currency notes and coins in hand / in-transit Drafts purchased, export bills Import bills Foreign currency loans given to customers (ii) Foreign Currency Liabilities – Overseas bank balances, overdrawn position if any, Foreign loans, Various foreign currency deposit schemes, RFC, NRFC, etc. (iii) Net Position of Foreign Currency Assets / Liabilities – (i) - (ii) (iv) Net Tom / Spot Position (any Tom / Spot transactions not included in the opening balance) (v) Net forward position (vi) Overall position 1. (iii) + (iv) + (v)

2. Cash / Tom / Spot transactions of the day : (i) Sales to Central Bank of Sri Lanka (ii) Purchases from Central Bank of Sri Lanka (iii) Net position with Central Bank of Sri Lanka (iv) Sales to other banks (cash) (v) Purchases from other banks (cash) (vi) Net position with other banks (cash) (vii) Sales to other banks (Tom & Spot) (viii) Purchases from other banks (Tom & Spot) (ix) Net position with other banks (Tom & Spot) (x) Sales to Customers : a) Against Imports b) Other (Drafts, TTs, TCs, MTs, Credit Cards, Cash etc.) (xi) Purchases from Customers : a) Against Imports b) Other (Drafts, TTs, MTs, TCs, Transfers from EFC A/S & FCBU’s) (xii) Net position with customers (xiii) Total transactions – Spot / Tom / Cash (Net) of the day 2. (iii) + (vi) + (ix) + (xii)

3. Forward Transactions of the day : (i) Sales to Central Bank of Sri Lanka (ii) Sales to other banks (iii) Purchases from other banks (iv) Net forward with other banks (v) Sales to customers (vi) Purchases from customers (vii) Net forward with customers (viii) Total transactions (Net) of the day 3. (i) + (iv) + (vii)

4. Net position at end of the day 1. (vi) + 2. (xiii) + 3. (viii)


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ANNOUNCEMENTS

To : All commercial banks

LIMIT ON DAILY WORKING BALANCES IN FOREIGN CURRENCIES

Please be informed that the maximum amount of the working balances in all foreign currencies the commercial banks should have at the end of each working day has been revised with effect from 1 September 2003. This has been communicated to all commercial banks by our letter No.33/04/014/0009/001 dated 28 August 2003.

Y.M.W.B. WeerasekeraDirector, International Operations


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5Operating Instructions No. : 01 / 2004

Ref. No. : 33 / 05 / 031 / 0004 / 001

International Operations Department

11 October 2004


GUIDELINES TO COMMERCIAL BANKS ONFOREIGN EXCHANGE SWAPS (USD/LKR)

Commercial banks are hereby informed that offering of foreign exchange (USD/LKR) swaps to domestic corporate clients holding Exporters’ Foreign Currency (EFC) Accounts is allowed subject to the following conditions:

(a) Foreign exchange (USD/LKR) swaps being permitted only with exporters of merchandise who maintain their export proceeds in EFC Accounts with a commercial bank operating locally and such swaps being done only against funds lying in the EFC accounts;

(b) Foreign exchange (USD/LKR) swaps being done by those who qualify to enter into forward contracts under the exchange control regulations. At least one leg of a swap arrangement must be based on a permitted underlying transaction with the amounts involved in that leg of the swap corresponding to the amounts involved in the underlying transaction;

(c) The period of a foreign exchange swap not exceeding 120 days;

(d) Both legs of swap transactions being reported to the International Operations Dept. daily in the “Daily Foreign Exchange Position Report” and they being within the exposure limits given to the banks;

(e) Adequate internal control measures applicable to treasury operations being put in place to prevent operational risk; and

(f) Banks maintaining adequate capital to meet the Capital Adequacy Ratio by risk weighting these exposures at 100% risk weight.

P. LiyanageActg. Director, International Operations


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Ref. No. : 33 / 01 / 002 / 0086 / 002

21 December 2005


DIRECTIONS ON FINANCIAL DERIVATIVE PRODUCTS (REVISED)

This circular revises and supersedes our circular on Directions on Financial Derivative Products dated 12th August 2005. The revised directions will be effective as from 1st January 2006, and will be in force regarding all matters relating to the derivative transactions in foreign exchange (not involving LKR) that are permitted by CBSL for commercial banks appointed to act as Authorized Foreign Exchange Dealers. These directions shall be read together with the explanatory note to the directions annexed herewith.

1. Permitted Products

Derivative transactions permitted under these direction include:

1.1 Interest Rate Swaps (IRS)

1.2 Interest Rate Options (IRO)

1.3 Forward Rate Agreements (FRA)

1.4 Cross Currency Swaps (CCS)

1.5 Currency/Commodity Options (CCO)

2. The above products can be used only in respect of transactions of current nature and in the case of capital transactions, those permitted in terms of current exchange control regulations.2/

3. Purpose of Permitted Derivative Products

Permitted derivative products shall only be used for the purpose of hedging the risks arising from its own assets or liabilities or for altering its risk profile but not for speculative purposes. Only the Authorised Dealers are allowed to maintain open exposures and such exposures shall be subject to the exposure position limits specified by the Central Bank of Sri Lanka (CBSL). Authorized Dealers who are qualified under 4.1 of these directions and those who wish to engage in derivative transactions shall inform the International Operations Department of the CBSL, their interest to engage in derivative transactions. These transactions will be subject to the supervision and scrutiny of the CBSL.

4. Eligibility and Permissible Activity

4.1 The commercial banks that have a capital adequacy ratio of more than 11% be permitted to engage in derivative transactions.

4.2 Authorized Dealer shall ensure that each IRS/IRO/FRA/CCS/CCO is made only in respect of a permitted underlying transaction or capital/current exposure.

4.3 Authorized Dealers shall ensure that each option, currency swap is made only in respect of a underlying current transaction such as payment and receipt in foreign exchange in respect

2/ Exchange Control Department Circular Nos. EC/0�/9�, EC/D/GL/199�/2 dated 18.0�.199�.


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5of goods and services on trade, permitted capital transaction such as investment and foreign currency loans2/ and permitted foreign currency deposits.3/

4.4 Importers are allowed to enter into derivative transactions to hedge their exposure arising out of underlying transactions relative to goods and services in trade or genuine balance sheet exposures.

4.5 Under any circumstances, IRS, IRO, FRA, CCS and CCO shall not be permitted through a bank abroad or a correspondent foreign bank to its customers in Sri Lanka in respect of any foreign currency deposit permitted to retain abroad.

4.6 In the case of permitted foreign currency loans, the notional principal amount of the IRS/IRO/FRA/CCS/CCO shall not exceed the outstanding amount of the foreign currency loan or the balance of the foreign currency deposit of the permitted persons/institutions.

4.7 Authorized Dealers can use the product for the purpose of hedging trading books and balance sheet exposure.

4.8 The currency of the hedge is left to the choice of the customer.

4.9 The notional principal amount of the CCO and CCS shall not exceed the outstanding foreign currency obligations.

4.10 Authorized Dealers shall offer option contracts only in respect of a transaction, which normally qualifies for forward foreign exchange contract and to hedge such risks arising out of genuine balance sheet exposures.

4.11 The Authorized Dealers shall take steps to hedge their risk exposure with their correspondent overseas banks or any other domestic bank.

4.12 Authorized Dealers are permitted to run open positions within the limits specified by the management of respective banks and approved by the CBSL.

4.13 The parties involved are free to use any Benchmark rate on mutual agreement.

4.14 All the conditions applicable for rolling over, cancellation and rebooking of forward contracts would be applicable to option contracts as well.

5. Eligible Foreign Currencies

Transactions relating to the permitted derivative products are limited to the following currencies:–

USD, GBP, EUR, JPY, CAD, AUD and CHF.

6. Tenor

The maturity period of a derivative instrument shall not exceed ten (10) years or the remaining life of the underlying transactions, whichever is less.

7. Risk Management

1. The Authorized Dealers shall be required to ensure that adequate measures are taken to mitigate credit risk, market risk and operational risk and also its compliance with the provisions of the minimum capital adequacy requirements permitting to derivative transactions.

2/ Exchange Control Department Circular No. �

�/ Exchange Control Department Circular Nos. EC/0�/9�, EC/D/GL/199�/2 dated 18.0�.199�.


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2. Authorized Dealers are permitted to lend in foreign currency only to direct exporters, indirect exporters, enterprises approved by Board of Investment (BOI), enterprises with full exemption from the Exchange Control Act (ECA) and any other party approved by the Controller of Exchange (CE) for a specific purpose.

3. Foreign currency deposits are permitted to exporters, BOI companies, exempted from Exchange Control Law and any other party approved by the CE.

8. Reporting

8.1 Authorized Dealers are required to report to the International Operations Department of the CBSL on a monthly basis the transactions undertaken within the month indicating product type, amounts, rates, maturities, currency, details of counterparty and details of underlying transactions/exposure etc.

8.2 Bank must make adequate disclosures in their Audited Annual Accounts with regard to the derivative transactions that they have undertaken during the financial year under review at least to the extent required in the Sri Lanka Accounting Standards (SLAS) or International Financial Reporting Standards (IFRS).

9. Accounting Treatment and Valuation

Accepted accounting standards and mark to market valuation shall be done on a daily basis.

10. Documentation

The bank shall ensure the use of the International Swap Dealers Association (ISDA) agreement with the counterparty for the interest of both parties.

11. Miscellaneous Requirements

11.1 Authorized Dealers shall obtain an undertaking from customers interested in using the derivative products that they have clearly understood the nature of the products and their inherent risks.

11.2 Authorized Dealers shall provide adequate information on the transaction especially with regard to the conditions and clauses to be incorporated into the product-determined benchmark interest rate, strike price, premia if any and risks involved to their customers and ensure highest level of transparency.

Mrs. P. Liyanage H. A. G. Hettiarachchi Director of International Operations Controller of Exchange

EXPLANATORY NOTES ON SOME OF THE SECTIONS OF DIRECTIONS ON

FINANCIAL DERIVATIVE PRODUCTS

These explanatory notes form part of the directions on Financial Derivative Transactions and shall be read together with the Directions.

1. Financial Derivatives

“Derivative contract under reference means” a financial contract of which the value is determined by reference to one or more underlying assets or indices. Derivative transactions permitted under these directions are Interest Rate Swaps (IRS), Interest


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5Rate Options (IRO), Forward Rate Agreements (FRA), Cross Currency Swaps (CCS), Currency/Commodity Options (CCO) such as gold and other precious/industrial metals options.

2. Authorized Dealers

These directions include both Domestic Banking Units (DBUs) and Foreign Currency Banking Units (FCBUs) of commercial banks. Only the commercial banks authorized to act as authorized dealers under the Exchange Control Act are permitted to engage in DMM transaction specified in section 4(c) of this explanation.

When conducting Derivative Transactions, Authorized Dealers shall comply with all relevant regulations, such as foreign exchange regulations and other regulations issued, from time to time, by the Central Bank of Sri Lanka.

3. Permitted Products

(a) Interest Rate Swap is an agreement between two parties to exchange a stream of interest payments based upon a specified notional principal amount on multiple occasions during a specified term. The cash payments are based on fixed/floating or floating/fixed rates are exchange by the parties from one another. In either case, there is no exchange of principal.

(b) Forward Rate Agreement is an interest rate contract between two parties that allows an entity to position itself in the interest rate market. The parties enter into a contract at a rate for a notional principal amount. On the settlement date, the transactions are net settled against a predetermined benchmark or reference rate.

(c) Cross Currency Swaps: Cross currency swap is an agreement between two parties to exchange interest payments denominated in two different currencies for a specified term. One interest payment is typically calculated using a floating rate index such as USD LIBOR. The other interest payment is based upon a fixed rate or another floating rate index denominated in a different currency. Unlike a single currency swap, a Cross Currency swap sometimes (but not always) involves an exchange of principal. The initial principal exchange occurs at the beginning of the swap with a re-exchange at maturity. The principal amounts are based on initial spot exchange rates.

(d) Currency Option are contract that give the buyer the right but not the obligation to exchange (buy/sell) an amount of currency for another at a specific price on or before a pre specified date. For this right, the buyer pays a premium. The right to buy is known as a Call Option while the right to sell is known as Put Option. If such right can be exercised only on a specific maturity date, the option is said to be a European Option. If such option can be exercised on any date prior to its maturity, the option is called an American Option.

(e) Interest Rate Options: is an option where the underlying is not an asset but an interest rate. An interest rate Call Option is an option that grants the holder the right to make a fixed or known interest payment while an interest rate Put Option is an option that grants the holder the right to make a variable or unknown interest payment and receive a fixed or known interest payment. In an interest rate Cap for example, the seller agrees to compensate the buyer for the amount by which an underlying short-term rate exceeds a specified rate on a series of dates during the life of the contract. In an interest rate Floor, the seller agrees to compensate the buyer for a rate falling bellow the specified rate during the contract period. A Collar is a combination of a long (short) cap and short (long) floor, struck at different rates payment while an interest rate related to the change in an interest rate.

(f) Commodity Options are similar to Currency Options and Gold, Copper and Oil are identified as commodities for possible derivative transactions.

4. Transaction Types

Authorized Dealers engage in derivative transactions in three main forms:

(a) Transactions for the purpose of hedging the banks own assets or liabilities for altering its risk profile. These are known as End User deals (EUD).

(b) Transactions executed by authorized dealers with its customers with intention of making a spread. In these transactions the commercial bank does not take any market risk on its own books and covers the transaction on the same day on back-to-back basis. These types of transactions are known as Non-Market Maker deals (NMM).

(c) Transactions those involve derivative trading services to customers and require financial institutions to quote prices to other customers/institutions while taking the market risk on bank’s own books. Such transactions are known as Derivatives Market Maker deal (DMM).

5. Eligibility and Permissible Activity;

(a) Only the commercial banks with capital adequacy ratio of more than 11% are permitted to engage in derivative transactions. This Capital Adequacy Ratio is inclusive of derivative positions and the directions of the Director Bank Supervision (DBS) on risk weighted capital should be followed in determining the Capital Adequacy Ratio.


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(b) Authorized Dealers should ensure that each of the transactions covered under these directions is made only in respect of risk or exposures arising from permitted underlying transactions or genuine balance sheet exposures. This is mandatory for customer transactions.

(c) Under any circumstances, derivative transactions covered under these directions should not be permitted through a bank abroad or a correspondent foreign bank to its customers in Sri Lanka in respect of any foreign currency exposures or risks arising from currency deposit/export earnings kept outside Sri Lanka.

(d) Authorized Dealers should offer option contracts only in respect of a transaction and such risks arising from genuine balance sheet exposures. This includes forward contracts involving precious metals.

(e) Authorized Dealers should take steps to hedge their risk exposure with their correspondent overseas banks or any other domestic bank.

(f) In order to develop and add liquidity to the market, Authorized Dealers are permitted to run open positions with the limits specified by the management of the respective banks and approved by the CBSL.

(g) At the initial stage the derivatives denominated only in foreign exchange (not involving LKR) will be allowed to be traded.

6. Risk ManagementAuthorized Dealers should be required to ensure that adequate measures are taken to mitigate credit risk, market risk and operational risk and also its compliance with the provisions of the minimum capital adequacy requirements pertaining to derivative transactions. Appropriate policy limits, approved by the Bank management should be in place. The net cash flow arising from these transactions should be booked as income and expenditure and reconciled as an exchange position wherever applicable. This is not always the case as all open positions should be marked to market and its value should be captured in the P& L and the Balance sheet.

(a) Applicable for Currency Options (i) All NMM and DMM transactions need to be covered on back-to-back basis on the same day without allowing

them to carry any open exposures as they may result in increased market risks to the bank. However DMM, in order to cover its foreign exchange position, may be allowed to trade in Vanilla Foreign Currency Options.

(ii) Such foreign currency options need to be included on a net delta weighted basis in the net foreign exchange exposure position reporting and shall be within such limits specified for the bank.

(iii) DMM must cover all such transactions on a back-to-back basis. The transaction may be undertaken with a bank outside Sri Lanka, an internationally recognized option exchange or with another DMM in Sri Lanka.

(iv) Option contracts offered/designed as cost effective risk reduction structures or packaged contracts shall not result in any net inflow of premium to the customers or increase in risk in any manner. Customers may unwind or sell back hedge if they consider such hedge is no longer required.

(v) Option contracts cannot be used to hedge contingent or derived exposures except in case of exposures arising from submission of tender bids in foreign exchange or such risks arising from genuine balance sheet exposures.

(b) For All the Derivative Products Covered Under the Directions (i) The notional principal amount and the maturity of the hedge shall not exceed the outstanding amount and/or

unexpired maturity of the underlying asset/liability.

(ii) A customer may enter into a hedge with any DMM irrespective of exposure being booked in that DMM or not.

(iii) DMM can use these products for the purpose of hedging trading books and balance sheet exposures.

(iv) All payments to be exchanged may be net settled i.e. only the difference between the payable and receivable amount is exchanged, provided such net settlement is allowed in the original agreement between the parties.

(v) In case on insolvency, if the claim of the counterparty provides for the netting of the mutual transaction between the insolvent and the creditor. The amount payable by one party could be set off against the amount payable by the other party and only the net balance is paid or received.

(vi) NMM and DMM shall obtain an undertaking from customers that their total value of hedges do not exceed the value of the risk that is being hedged.

(vii) Banks should put in place necessary systems for marking to market the portfolio on a daily basis. Banks may agree upon a common industrial gathering such as SLFA to publish daily matrix of polled implied volatility estimates, implied zero, forward and swap rates, which market participants can use for marking to market their portfolio.

(viii) Banks should train their staff adequately and put in place necessary risk management and internal control and processing systems before undertaking any of these derivative transactions.


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5Ref. No. : 33 / 03 / 0011 / 0035 / 001 28 November 2006


DIRECTIONS TO COMMERCIAL BANKS ON LKR BASED FX OPTIONS

All commercial banks appointed to act as Authorised Foreign Exchange Dealers are hereby informed that offering of Rupee (LKR) based cross currency options to domestic corporate clients is allowed subject to the following conditions:1. The LKR based FX Option can be used only in respect of transactions of current nature permitted in

terms of current exchange control regulations.1/

2. Only the Authorised Dealers engaged in Derivative Market Maker deals are allowed maintaining open exposures and such exposures shall be subject to the exposure position limits specified by the Central Bank of Sri Lanka (CBSL). Authorized Dealers who are qualified under 4.1 of these directions and those who wish to engage in LKR based FX Options shall obtain the consent of the International Operations Department of the CBSL by informing in writing their interest to engage in such transactions together with an undertaking by the management on the adequacy of internal risk management system in place to engage in FX options. These transactions will be subject to the supervision and scrutiny of the CBSL.

3. Transaction Types Authorized Dealers engage in Option transactions in following main forms:

(a) Transactions executed by authorized dealers with its customers with intention of making a spread. In these transactions the commercial bank does not take any market risk on its own books and covers the transaction on the same day on back-to-back basis. These types of transactions are known as Non-Market Maker deals (NMM).

(b) Transactions those involve derivative trading services to customers and require financial institutions to quote prices to other customers/institutions while taking the market risk on bank’s own books. Such transactions are known as Derivatives Market Maker deals (DMM).

4. Eligibility and Permissible Activity4.1 Only the commercial banks with capital adequacy ratio of more than 11% are permitted to engage

in LKR based FX Options. This Capital Adequacy Ratio is inclusive of LKR based FX Option positions. The directions of the Director Bank Supervision (DBS) on risk weighted capital should be followed in determining the Capital Adequacy Ratio.

4.2 Authorized Dealers should ensure that each LKR based FX Option is made only in respect of risk or exposures arising from permitted underlying current transactions which normally qualifies for forward foreign exchange contract such as payment and receipt in foreign exchange in respect of goods and services on trade.

4.3 Under any circumstances, LKR based FX Option should not be permitted through a bank abroad or a correspondent foreign bank to its customers in Sri Lanka in respect of any foreign currency exposures or risks arising from currency deposit/export earnings kept outside Sri Lanka.

4.4 The notional principal amount of the LKR based FX Option shall not exceed the outstanding amount of the foreign currency obligations.

4.5 Authorized Dealers shall offer option contracts only in respect of a transaction, which normally qualifies for forward foreign exchange contract.

4.6 The transaction shall be based on individual transactions and not on pooling several into one currency option.

4.7 The parties involved are free to use any publicly available benchmark rate on mutual agreement.5. Eligible Foreign Currencies Transactions relating to the LKR based FX Options are limited to the following currencies. USD, GBP, EUR, JPY, CAD, AUD and CHF.1/ Regulations/Directions issued by the Exchange Control Department under the Exchange Control Act, No.2� of 19��.


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6. Risk Management6.1 The Authorized Dealers shall be required to ensure that adequate measures are taken to mitigate

credit risk, market risk and operational risk and also its compliance with the provisions of the minimum capital adequacy requirement permitting to LKR based FX Options. Appropriate policy limits approved by the management of the bank should be in place. All positions arising from these transactions shall be marked to market daily and the relevant values shall be captured in the Profit & Loss Account and the Balance Sheet.

6.2 All Transactions need to be covered on back-to-back basis on the same day without allowing them to carry any open exposures as they may result in increased market risks to the bank. However, in order to cover its foreign exchange position, Authorised Dealers are allowed to trade in Vanilla Foreign Currency Options.

6.3 Such foreign currency options need to be included on a net delta weighted basis in the net foreign exchange exposure position reporting and shall be within such limits specified for the bank.

6.4 Customers may unwind or sell back hedge if they consider such hedge is no longer required. However, the Option contracts offered/designed as cost effective risk reduction structures or packaged contracts shall not result in any net inflow of premium to the customers or increase in risk in any manner.

6.5 Option contracts cannot be used to hedge contingent or derived exposures.6.6 A customer may enter into a hedge with any DMM irrespective of the exposure being booked in that

DMM or not.6.7 DMM shall obtain an undertaking from customers that their total value of hedges do not exceed the

value of the risk that is being hedged.6.8 Banks should put in place necessary systems for marking to market the portfolio on a daily basis.6.9 Banks should train their staff adequately and put in place necessary risk management and internal

control and processing systems before undertaking any of these transactions.7. Tenure The maturity period of LKR based FX option shall not exceed ten (10) years or the remaining life of

the underlying transaction, whichever is less.8. Reporting8.1 Authorized Dealers are required to report to the International Operations Department of the CBSL

on a monthly basis the transactions undertaken within the month indicating the amounts, rates, maturities, currency, details of counterparty and details of underlying transactions/exposure etc.

8.2 Bank must make adequate disclosures in their Audited Annual Accounts with regard to such transactions that they have undertaken during the financial year under review at least to the extent required in the Sri Lanka Accounting Standards (SLAS) or International Financial Reporting Standards (IFRS).

9. Documentation The bank shall ensure the use of the International Swap Dealers Association (ISDA) agreement with

the counterparty for the interest of both parties in all possible instances.10. Miscellaneous Requirements

10.1 Authorized Dealers shall obtain an undertaking from customers interested in using the LKR based FX Option that they have clearly understood the nature of the product and its inherent risks.

10.2 Authorized Dealers shall provide adequate information on the transaction especially with regard to the conditions and clauses to be incorporated into the product-determined benchmark interest rate, strike price, premia and risks involved to their customers and ensure highest level of transparency.

These directions will be effective from 1st December 2006.

Mrs. P. Liyanage D. Wasantha Director of International Operations Controller of Exchange


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6General Direction No. : 01 / 2007

Payment and Settlement Systems Act, No.28 of 2005

General Direction made by the Monetary Board of the Central Bank of Sri Lanka under Section 44 of the Payment and Settlement Systems Act, No.28 of 2005.

Dr. Ranee JayamahaDeputy Governor

Central Bank of Sri LankaColombo14 November, 2007

GENERAL DIRECTION ON THE PARTICIPATING INSTITUTIONS’SERVICE NORMS AND STANDARD TIMES FOR ACCEPTING

CHEqUE DEPOSITS FROM CUSTOMERS AND CREDITING CHEqUE PROCEEDS TO CUSTOMERS’ ACCOUNTS UNDER THE CHEqUE IMAGING

AND TRUNCATION SYSTEM

The Cheque Imaging and Truncation System, which was introduced in May 2006 has substantially increased the speed of cheque clearing process, reducing cheque realization time span to one day (T+1, where T is the day of receiving the cheque for clearing at LankaClear Pvt. Ltd. or its regional centers and 1 is the following business day). But it was observed that, due to numerous reasons some bank branches have not been able to adhere to T+1.

2. Having considered the public policy objective of facilitating the customer to receive cheque proceeds within T+1, the National Payment Council at its meeting held on August 9, 2007, expressed the view that the Central Bank of Sri Lanka (CBSL) shall mandate all licensed commercial banks (LCBs) to publish in the newspapers or display in the bank branches a notice indicating the cut-off times for cheque deposits:

(i) to facilitate T+1; or

(ii) to facilitate crediting proceeds of cheques in ….days (indicate number of days), where (i) above is not possible; and

(iii) the number of days a particular bank would take to credit proceeds of the cheques deposited at off site ATMs etc., on realization.

Accordingly, this General Direction on the Participating Institutions’ Service Norms and Standard Times for Accepting Cheque Deposits from Customers and Crediting Cheque Proceeds to Customers’ Accounts under the Cheque Imaging and Truncation System is issued to all participating institutions (PIs) of the Cheque Imaging and Truncation System, in terms of Section 44 of the Payment and Settlement Systems Act, No.28 of 2005. This General Direction will come into effect from December 03, 2007.

3. The PIs shall adhere to the following minimum cut-off times for collection of cheque deposits at bank counters and in collecting boxes and shall present such collected cheques to LankaClear for clearing on the same business day (T):


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6 Location of the Bank Branch Minimum Cut-off Time for Accepting Cheque Deposits on the Business Day (T)

(i) In the Colombo District 1.30 p.m.

(ii) In the districts other than the Colombo District 12.00 noon

4. In the normal course as per the inward return data/report provided by the LankaClear, PIs shall credit proceeds of cleared cheques to customers’ accounts on the next business day (i.e., on T+1, the day that the settlement clearing takes place). Each PI that has Automated Teller Machines (ATMs) shall credit proceeds of cleared cheques to customers’ accounts enabling the customers to withdraw funds on the next business day through ATMs up to the limit stipulated by the PI.

5. Each PI shall formulate procedures and norms on: cheque collection; crediting cheque proceeds to customers’ accounts; and the modalities for handling customer complaints. Such procedures and norms shall ensure that the obligations of the PIs to the customers and the rights of the customers are established and observed in practice.

6. The PIs shall ensure that:

(i) wide publicity is given to the contents in Paragraph 5 and times of cheque collection and crediting of customers’ accounts by:

(a) displaying prominently on the notice board in the banking hall in their branches and cheque collecting boxes, so that it attracts the customers’ attention as well as that of the employees for adherence; and

(b) printing a message on the monthly current account statement; and (c) posting it on their web-sites before December 31, 2007.

(ii) any changes to procedures and norms or time of cheque collection and crediting of customers’ accounts are duly informed to the customers;

(iii) procedures are clearly laid down to assess staff accountability for any delays. In order to take necessary action to improve customer services, a special register shall be introduced to record: the cheques collected before the cut off time and not sent for clearing on the same business day; cheques of which the proceeds not credited on T+1; and reasons for delays;

(iv) periodic evaluations on the compliance with this Direction are conducted on half-yearly basis with a view to upgrade the quality of customer services and submit a half-yearly report to the Director, Payments and Settlements Department of CBSL, within two weeks from the end of the relevant period; and

(v) the grieved parties have a right to approach authority designated by the PI for handling the grievances.

7. The cheque collection procedures, norms and times of cheque collection and crediting of customers’ accounts of each PI shall be published in Sinhala, Tamil and English newspapers in clear print and conveyed to the Director, Payments and Settlements Department of CBSL before December 31, 2007.

8. Further, each PI shall also review their existing arrangements for cheque collection and take an effort to extend the cut off time for cheque collection and reducing the time required for crediting proceeds to customers’ accounts after receiving the Cheque Return Notification (CRN) and/or inward return data reports of the settlement clearing.


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6Ref. No. : 034 / 01 / 001 / 0008 / 004

General Direction No. : 01 / 2006

Payment and Settlement Systems Act, No.28 of 2005

General Direction given by the Monetary Board of the Central Bank of Sri Lanka under Section 44(g) of the Payment and Settlement Systems Act, No.28 of 2005.

Dr. Ranee JayamahaDeputy Governor

Central Bank of Sri LankaColombo10 May, 2006

GENERAL DIRECTION

This direction is issued in terms of section 44(g) of the Payment and Settlement Systems Act, No.28 of 2005, for the proper and efficient implementation, administration and enforcement of the provisions of the aforesaid Act. This Direction may be cited as the general direction in respect of Cheque Imaging and Truncation System No. 01/2006 and shall apply to LankaClear (Pvt) Ltd. and the participants of the Cheque Imaging and Truncation System, and shall come into operation on May 11, 2006, immediately upon the enactment of the Payment and Settlement Systems Act. This Direction is in addition to and not in derogation of any other written law, and rules, regulations, terms and conditions to which LankaClear (Pvt) Ltd. and participants are subject to and/or may be subjected to from time to time.

Without prejudice to the generality of the above paragraph, this direction shall not be construed to limit any obligation or responsibility imposed by the Payment and Settlement Systems Act, No.28 of 2005.

Introduction

In exercising the powers conferred under Section 112b of the Monetary Law Act (Chapter 422), in 2002, the Central Bank of Sri Lanka (CBSL) authorized LankaClear (Pvt) Ltd (LankaClear), a company incorporated under Companies Act, No.17 of 1982 to provide clearing facilities under Section 98(1) of the Monetary Law Act to commercial banks operating in Sri Lanka, subject to the conditions as CBSL may from time to time impose. The Cheque Imaging and Truncation (CITS) System will be launched on May 11, 2006 and will be operated by LankaClear to provide image based cheque clearing facilities.

Under the CITS System, image of the physical cheque is captured and will be converted to a digital form. Such captured images will be presented to the Main Processing Centre of LankaClear for clearing of images and electronic information. Accordingly, the physical movement of the cheque will be truncated at the source itself which is either the Regional Centre or the presenting bank which may or may not be directly linked to the CITS. The bank-wise sorted and cleared images and electronic information will be presented to the paying bank.

(1) Definitions

1.1 “Articles” shall mean cheques, pay orders, managers’ cheques and demand drafts complying with specifications and standards as laid down by LankaClear, and drawn on banks in Sri Lanka and payable in Sri Lanka rupees and any other such instrument as the Central Bank of Sri Lanka


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6(CBSL) may prescribe; and Image Return Documents or Cheque Return Notifications which are presented.

1.2 “Balancing” shall mean the matching of the total of the values of all individual items in a batch of CITS Items against the aggregated values in header (known as Batch Ticket) of that batch of CITS Items.

1.3 “Bank” shall mean

(i) a company or body corporate licensed under the Banking Act, No.30 of 1988 to carry on banking business in Sri Lanka; and

(ii) the Central Bank of Sri Lanka in the capacity of a CITS participant.

1.4 “Business Day” shall mean a day on which banks are open for business in Sri Lanka.

1.5 “CITS Clearing” shall mean the process of receiving, bank-wise sorting and exchanging of CITS Image Items among CITS participants, balancing of the amounts expressed in articles thus exchanged and consequently deriving the net balances.

1.6 “CITS” shall mean ‘Cheque Imaging and Truncation System’ which includes LankaClear systems, processes and procedures for the electronic clearing and archiving of CITS Items and non clearing items, if any.

1.7 “CITS Data File” shall mean an electronic file containing CITS Data Items.

1.8 “CITS Data Item” shall mean a CITS Item in text and/or non-image data format, which may include MICR, payee information, amount payable, unique identification codes, Presenting Bank particulars, and other information and data derived from Articles, and complying with such data format and content requirements, specifications and other requirements issued by LankaClear and amended by LankaClear from time to time.

1.9 “CITS File” shall mean a CITS Data File or CITS Image File or both, and may include an Inward CITS File, an Outward CITS File, an Inward Return CITS File and/or an Outward Return CITS File.

1.10 “CITS Image File” shall mean an electronic file containing CITS Image Items.

1.11 “CITS Image Items” shall mean CITS Items in image format, including electronic images of Articles, and complying with such format, content and image quality requirements, specifications and other requirements specified by LankaClear from time to time.

1.12 “CITS Items” shall mean MICR code line, unique identification codes and other information and data derived from Articles, and electronic images of Articles, all of which are captured and/or generated by CITS participants and/or LankaClear Regional Centres on behalf of CITS participants and shall comprise as appropriate Inward CITS Items, Outward CITS Items, Inward Return CITS Items and/or Outward Return CITS Items.

1.13 “CITS System” shall mean systems operated and maintained by LankaClear for CITS including without any limitation, receiving, processing, clearing and archival of CITS Items, and receipt, and for access by CITS participants through Regional Centres and/or through direct connectivity with CITS.

1.14 “CITS Participant” shall mean all licensed commercial banks operating in Sri Lanka; and the Central Bank of Sri Lanka in the capacity of a participating bank in the CITS System.

1.15 “Computer Readable Record” shall mean a computer readable magnetic tape, diskette or Compact Disk Read Only Memory (CD ROM) or other computer readable material in accordance with the LankaClear specifications as revised from time to time by LankaClear.


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61.16 “Cut-off Times” shall mean times specified with respect to action to be undertaken or effected

in relation to CITS as may be notified by CBSL to LankaClear; and by LankaClear to CITS participants from time to time.

1.17 “Image Return Document” or“ChequeReturnNotification” shall mean the Image Return Document defined in the Section 34(1) and (2) of the Part III of the Payment and Settlement Systems Act, No.28 of 2005.

1.18 “Inward CITS File” shall mean a CITS File generated by LankaClear through the CITS System for retrieval or collection by a Paying Bank containing Inward CITS Items in respect of such Paying Bank based on the Outward CITS Files.

1.19 “Inward CITS Items” shall mean CITS Items which have been generated by LankaClear through the CITS in respect of a Paying Bank based on the Outward CITS Files.

1.20 “Inward Return CITS File” shall mean a CITS File generated by LankaClear through the CITS System for retrieval or collection by a Presenting Bank containing Inward Return CITS Items in respect of such Presenting Bank, based on the Outward Return CITS Files.

1.21 “Inward Return CITS Items” shall mean Return CITS Items which have been generated by LankaClear through the CITS in respect of a Presenting Bank based on the Outward Return CITS Files.

1.22 “LankaClear” shall mean LankaClear (Pvt) Ltd., incorporated under Companies Act, No.17 of 1982 and its network of Regional Centres.

1.23 “CBSL” shall mean the Central Bank of Sri Lanka as established under the Monetary Law Act (Chapter 422).

1.24 “MICR” shall mean the data known as “Magnetic Ink Character Recognition” data, encoded on Articles in accordance with the specifications and standards as laid down by LankaClear and as from time to time amended by LankaClear.

1.25 “Non-Clearing Articles” shall mean carrier envelopes, missing CITS Image Files of previously transmitted or provided CITS Data File, replacement CITS Image Files for previously transmitted or provided defective CITS Image Files and virus infected or any other Articles which are not cleared through CITS System and which have no bearing on the net settlement positions of CITS participants.

1.26 “Non-Clearing Items” shall mean unique identification codes and other information and data derived from Non-Clearing Articles, and electronic images of Non-Clearing Articles, all of which are captured by the Regional Centres/CITS and/or generated by a CITS participant.

1.27 “Optional Services of CITS” in respect of CITS participants, shall mean providing any services which are appropriate and useful for the efficient operation of CITS System by LankaClear in addition to the Standard Services of CITS.

1.28 “Outward CITS File” shall mean a CITS File generated by a Presenting Bank containing its Outward CITS Items, provided or transmitted to LankaClear through the CITS System for clearing.

1.29 “Outward CITS Items” shall mean CITS Items of an Outward CITS File generated by a Presenting Bank and provided or transmitted to LankaClear.

1.30 “Outward Return CITS File” shall mean a CITS File generated by a Paying Bank containing its Outward Return CITS Items, (Dishonoured Items) provided or transmitted to LankaClear through the CITS System for return.

1.31 “Outward Return CITS Items” shall mean Return CITS Items of an Outward Return CITS File generated by a Paying Bank.


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61.32 “Paying Bank” in respect of a CITS Item shall mean a CITS participant to whom an Article is

drawn.

1.33 “Presenting Bank” in respect of a CITS Item shall mean a CITS participant which presents or represents the Articles for clearing through the CITS System.

1.34 “Regional Centres” shall mean one or more Regional Centres setup and maintained by LankaClear for imaging of Articles in the CITS System at identified regional locations and electronically connected to the main processing centre of LankaClear.

1.35 “Return CITS Items” shall mean CITS Items that are submitted to LankaClear as returned CITS Items by Paying Banks due to any of the return reasons as specified by LankaClear from time to time.

1.36 “Settlement Statement”

(i) Shall mean in relation to any Business Day, the statement setting out the CITS Settlement positions of CITS participants by way of a CITS file. The LankaClear should submit this file to CBSL before the cut-off time.

(ii) If requested by CBSL, a computer readable record in a format agreed between CBSL and LankaClear and such other aggregate statistical information that CBSL requires in respect of CITS Clearing.

(iii) The settlement positions provided by LankaClear shall be prima facie evidence of the respective settlement positions of the relevant CITS participants.

1.37 “Standard Services of CITS” in respect of Presenting Banks shall mean:

(i) receiving Outward CITS Files transmitted via a system or through a means specified by LankaClear or provided to LankaClear before the cut off times by each Presenting Bank;

(ii) bank-wise sorting and clearing via the CITS, Outward CITS Items recorded on the Outward CITS Files;

(iii) generating via the CITS System, an Inward Return CITS File in respect of each Presenting Bank based on the Outward Return CITS Files received from Paying Banks;

(iv) making available its respective Inward Return CITS Items at LankaClear for retrieval by each Presenting Bank;

(v) making available at LankaClear for retrieval by CITS participants, CITS reports showing their net clearing positions and other relevant reports as produced by LankaClear; and

(vi) receiving CITS Items for archival and subsequent retrieval, in accordance with procedures and standards prescribed by LankaClear.

1.38 “Standard Services of CITS System” in respect of Paying Banks shall mean: (i) generating via the CITS System, an Inward CITS File in respect of each Paying Bank

based on the Outward CITS Files received from Presenting Banks; (ii) making available its respective Inward CITS Items at LankaClear for retrieval by each

paying bank; (iii) receiving Outward Return CITS Files submitted by each Paying Bank via a system or

through a means specified by LankaClear or provided to LankaClear; (iv) bank-wise sorting and clearing, via the CITS, Outward Return CITS Items recorded on

the Outward Return CITS Files; and (v) making available at LankaClear for retrieval by CITS participants, CITS reports showing

their net clearing positions and other relevant reports as produced by LankaClear.


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61.39 “Value Date” shall mean the next business date following the Business Day.

(2) Electronic Presentment of Cheques

(a) A banker may present a cheque for payment from another banker on whom it is drawn by transmitting by electronic means, an image and the stipulated electronic payment information of the cheque instead of the cheque itself, but preserve the right for a banker on whom the cheque is drawn to demand that the cheque itself be presented instead.

(b) For the purpose of electronic presentment of a cheque: the image of the cheque shall comprise the front view and the back view of the cheque; and electronic payment information of the cheque shall comprise the following:

(i) the serial number of the cheque;

(ii) the code which identifies the branch and bank on whom the cheque is drawn;

(iii) the account number of the drawer of the cheque;

(iv) the amount for which the cheque is drawn as entered by the drawer of the cheque; and

(v) any other matters as may time to time be prescribed by regulation.

(c) LankaClear shall be the sole operator of CITS System. All CITS participants and LankaClear shall adhere to the specifications set out by LankaClear with the concurrence of CBSL, in respect of the cheque and image of the cheque to ensure image clarity and standards.

(d) All CITS participants and LankaClear shall adhere to the agreements between them in respect of electronic presentment, including those in the form of rules, procedures or similar arrangements prescribed by LankaClear and may revise from time to time with the concurrence of CBSL.

(e) CITS participants shall not engage in any arrangement or a system other than CITS System to transmit and or exchange images of Articles for clearing purposes.

(3) Responsibilities of LankaClear

LankaClear shall provide standard services and or optional services to CITS participants and shall be responsible for:

(a) Operating CITS daily on business days, at its registered office and its Regional Centres announced with the concurrence of CBSL.

(b) The installation, set-up, maintenance, operation, security and access control of the CITS, Regional Centres and any other systems necessary to establish and maintain connectivity between the CITS and the CITS Communication Network.

(c) Setting out clear and comprehensive system rules, procedures and Cut-off Times, value dates to be followed by LankaClear and CITS participants of each mode of participation in the CITS System; and complying with such rules, procedures, Cut off times and value dates.

(d) Ensuring that all CITS Items, CITS Files, Non-Clearing Items, receipts transmitted or provided by it are:

(i) accurate, complete, valid, current, and conformed to the data formats and specifications;

(ii) complying with security measures to ensure secure and authenticated transmission; and

(iii) archived in accordance with the requirements and specifications.

(e) Recommending, designating where necessary the security measures for the communication infrastructure of CITS System and to ensure secure and authenticated transmission of all CITS Files, CITS Items and any Non-Clearing items.


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6 (f) Ensuring that it completes the bank-wise sorting and clearing of Outward CITS Items recorded

on the Outward CITS Files received from each Presenting Bank before the Cut-off Time on the value date.

(g) Making available for retrieval Inward CITS Files and Inward Return CITS Files in respect of Inward CITS Items at LankaClear by the Paying Banks and Presenting Banks respectively before the Cut-off Time on the relevant value date.

(h) Making available at LankaClear for retrieval the respective CITS clearing positions for CITS participants before the Cut-off Times.

(i) Making available to CBSL the CITS Settlement Statement setting out net clearing position of each participant in the Main, Settlement and Adjustment clearings before the Cut-off Times set out by CBSL and such other aggregated statistical information that the CBSL may require in respect of CITS clearing and operations.

(j) Setting up the procedures for rewinding a clearing and recasting the net clearing positions of CITS participants as may be directed by CBSL; fully complying with and taking all necessary actions as may be required to satisfy such procedure for rewinding and recasting; and making available to CBSL such recasted CITS Settlement Statement.

(k) Entering and termination of agreements and contracts with any party relating to CITS System, archiving and destroying of CITS Articles, files or items with the concurrence of CBSL.

(l) Observe and perform its duties, obligations and undertakings in respect of CITS Clearing in accordance with the standard of competence, skill and knowledge, and the standard of prudence, care and diligence.

(m) Developing CITS System Rules and the operational procedure manual in association with CITS participants and with the concurrence of CBSL. Such rules and operational procedure manual of CITS System shall be laid down clearly and comprehensively. Rules and operational procedure manual issued by LankaClear shall govern the operations and administration of the CITS System and shall be binding between LankaClear and CITS participants. Such operational procedure manual shall not be revised, added to or revoked in whole or in part by LankaClear without the approval of the CBSL and shall not be in conflict or inconsistent with the relevant sections in the Payment and Settlement Systems Act, No.28 of 2005 and any other instructions, directions, terms and conditions imposed on LankaClear and CITS participants by CBSL from time to time. Essential areas to be covered in the operational procedure manual are:

(i) Rules, procedures, roles, responsibilities, duties and functions of LankaClear and CITS participants under each mode of participation in CITS System;

(ii) Powers of LankaClear to design, specify rules, procedures and cut-off times etc., change such rules, procedures and cut-off times with the concurrence of CBSL;

(iii) Standards and specifications of clearing and or any non clearing Articles, items, images, security, replicated backups, software, hardware, communication links of the CITS System;

(iv) Entering and termination of any contract entered into with any entity to discharge its obligations relating to CITS System, archiving, storing of CITS Articles, files and/or items;

(v) Procedure for exclusion and reinstating of participants from/to CITS System as directed by CBSL;

(vi) Standard and Optional Services provided in the CITS System; (vii) Procedures with regard to Main, Settlement and Adjustment clearings; (viii) Procedure in accepting or rejecting CITS files, CITS items and duplicate CITS files

etc., in normal and exceptional circumstances;


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6 (ix) Procedure for ensuring confidentiality, particularly on information of customers of

CITS participants, application software, security, documentation, specifications and any other areas coming under banking secrecy and the instances and procedure for disclosing of such information;

(x) Responsibility of LankaClear as the operator of CITS System to provide information and reports to participants and CBSL and the procedure for providing such information and reports etc.;

(xi) Liabilities of LankaClear and CITS participants, liability limits and any exception to such liabilities;

(xii) Procedure for handling disputes and actions to be taken against a participant who has been in breach or non-observance of rules, regulations and procedures of CITS System;

(xiii) Procedure for: archiving and storing of CITS files and CITS items by LankaClear and/or contracting with a depository service provider for archiving and storing of such Articles and Items; making available for retrieval or obtain such stored files and items by CITS participants; secure and duly destruction of such stored files and items after the expiry of the retention period; and extension of such retention period;

(xiv) Procedure for preparing and printing an Image Return Document or a Cheque Return Notification with information, features, formats, technical and security specifications of LankaClear;

(xv) Procedure for delivering Image Return Documents or Cheque Return Notifications to presenting banks and customers and presenting and representing of such Articles;

(xvi) Procedure for cheque image returns with the list of representable and non-representable return codes giving respective reasons agreed between CITS participants and LankaClear;

(xvii) Procedure for handling bad images, encoding errors and scheduling errors; (xviii) Conditions for presentment and re-presentment including clearing cycle, maximum

time period for re-presentment and maximum number of times permitted for re-presentment;

(xix) Procedure for rewinding of a clearing and recasting of net clearing position of each CITS participant as may be directed by CBSL;

(xx) Procedure in handling physical cheque clearing; (xxi) Procedures and arrangements to mitigate various risks in CITS System; (xxii) Business Continuity Plan and the procedure for handling contingency events; and (xxiii) Fees and charges on standard and optional services of CITS System.

(n) Establishing and maintaining a Help Desk to assist participants when using the CITS System or any other matter arises there from and to address any service difficulties encountered. The Help Desk shall be available throughout the business day and Help Desk contact details must be given in the operational procedure manual.

(o) Updating the operational procedure manual where any amendment/revision/addition is made and providing such updated manual on the request of CBSL or any CITS participant.

(p) Conducting training, awareness and education programmes on CITS System on continuous basis to CITS participants and the general public.

(4) Business Continuity Planning

(a) LankaClear and all CITS participants shall have well defined business continuity plans for CITS operations endorsed by the respective Board of Directors to ensure a very high level of system


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6availability which is required for a system-wide important clearing system, i.e., the recovery and resumption of critical functions of CITS System within the same business day. Business Continuity Plan (BCP) shall ensure that agreed service levels are met in the event that one or more components of the CITS fails. Moreover BCP shall envisage a widespread and prolonged disruption to their infrastructure and critical services. LankaClear and participants shall have equipped disaster recovery sites (DRS) and well trained disaster management and business recovery teams for CITS System. CITS System shall have adequate measures to replicate data which ensures that DRS is accessible to all required information to resume business operations immediately after a disruption, to continue and complete the ongoing clearing process within the same business day. BCP arrangements should be tested periodically and such testing schedules should be informed to CITS participants and CBSL.

(b) LankaClear shall have a skilled and trained backup staff in respect of core functionalities of the CITS System to be deployed in contingency situations including labour disputes in order to ensure carrying out the clearing functions without any interruption.

(c) If LankaClear experiences any technical or operational problem that prevents it from performing its functions in the CITS System, it must be conveyed to CBSL within 15 minutes of becoming aware of the problem. In the event of an unrecoverable failure at the principal site, LankaClear shall immediately inform it to CBSL and commence clearing operations at DRS and submit the Settlement Statement to CBSL on the same business day. In the event of a prolonged unrecoverable failure at both primary and DRS, LankaClear should inform CBSL immediately and should use alternative methods of clearing and make available to CBSL the Settlement Statement.

(d) Each CITS participant shall be responsible for making regular backups of its databases and all its information and data relating to CITS System, and for establishing and maintaining data redundancy and recovery procedures in the event of system failure or data corruption or loss, in order to meet Cut-off Times.

(5) Responsibilities of CITS Participants

Each CITS participant shall be responsible for:

(a) (i) use and issue only such Articles which meet the standards, requirements and specifications laid down by LankaClear;

(ii) use only Articles printed with MICR code line consisting of fields specified by LankaClear and as amended from time to time; and

(iii) adhere to technical, legal, administrative, security and other requirements specified by LankaClear.

(b) Entering into such agreements specified by LankaClear and approved by CBSL for the proper and efficient operation of CITS System.

(c) Ensuring and maintaining integrity, performance, security and proper functionality of any component or any system related to their role in the CITS System and all software, hardware, communication equipment, lines and connections, routers and other systems used in relation thereto.

(d) Ensuring that all CITS Items, CITS Files, Non-Clearing Items, receipts transmitted or provided by it are: accurate, complete, valid, current, and conformed to the data format and specifications; and created, transmitted or provided and archived in accordance with the requirements and specifications, as spelt out by LankaClear and amended from time to time.

(e) Following procedures prescribed by LankaClear in the operational procedure manual approved by CBSL and circulars issued from time to time by LankaClear. Each participant of CITS


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6System is bound to abide by such operational procedure manual, terms and conditions and directions issued by CBSL for implementation, administration and enforcement of provisions of the Payment and Settlement Systems Act.

(f) Complying with any instruction and security measures designated by LankaClear for the communication infrastructure of CITS System and to ensure, secure and authentic transmission of all CITS Files, CITS Items, Non-Clearing items.

(g) Complying with applicable laws, instructions and procedures specified by LankaClear or any other direction issued by CBSL in relation to the return of Articles and or Image Return Document or Cheque Return Notification in respect of Return CITS Items.

(h) Each CITS participant as a Presenting Bank shall be responsible for:

(i) verifying the apparent authenticity of an Article prior to the creation of a CITS Item in respect of such Article;

(ii) ensuring that all CITS Items, CITS Files and Non-Clearing Items comply with such specifications, standards and authentication requirements set out by LankaClear;

(iii) generating an Image Return Document or Cheque Return Notification for each of its Inward Return CITS Items for return to its customer or other relevant party in respect of the relevant Articles, which Image Return Document or Cheque Return Notification shall comply with Section 7 of this direction and such specifications, standards and security features and other requirements as specified by the LankaClear;

(iv) returning the physical Article to its customer or other relevant party in respect of the relevant Article where the Article has such attributes as may be specified by LankaClear and provided always that the presenting bank shall have the option not to provide an Image Return Document or a Cheque Return Notification instead to return the physical article to its customer or other relevant party in respect of the Article;

(v) ensuring that Image Return Document or Cheque Return Notification which is presented satisfy all conditions for presentment specified by LankaClear prior to the creation of a CITS item in respect of such Image Return Document or Cheque Return Notification;

(vi) verifying the accuracy and correctness in relation to the relevant Articles of all its outward CITS items and ensuring that each outward CITS Item is transmitted in the form of both a CITS Data Item and a CITS image item that comply with the standards and the communication means specified by LankaClear where applicable;

(vii) adhere to standards, specifications, rules, communication means, procedures and other requirements specified by LankaClear in respect of sending Non-Clearing Articles or any other CITS Item to LankaClear;

(viii) ensure that the Outward CITS Files are transmitted or provided to LankaClear before the Cut-off Times on the Business Day;

(ix) ensure that all Outward CITS items within each and every Outward CITS File are Balanced; and

(x) ensure that the Inward Return CITS Files are retrieved from the CITS System before the Cut-off Time on the relevant Value Date.

(i) Each CITS participant as a Paying Bank shall be responsible for:

(i) ensuring that all Outward Return CITS Items and Outward Return CITS Files comply with specifications and other requirements specified by LankaClear;

(ii) ensuring that the Outward Return CITS Files are transmitted via the CITS System or provided to LankaClear before the Cut-off Time on the relevant Business Day; and


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6 (iii) ensuring that the Inward CITS Files are retrieved or collected from LankaClear before the

Cut-off Time on the Value Date.

(6) ImageReturnDocumentorChequeReturnNotification

(a) CITS System requires a Presenting Bank to whom a cheque or an article was first presented by the holder, to issue to the holder an Image Return Document or a Cheque Return Notification where the cheque is dishonoured by non-payment by the Paying Bank, unless the Presenting Bank returns the physical cheque itself or the holder requests the return of the physical cheque itself. The Image Return Document or Cheque Return Notification may be presented for payment by the holder to the Presenting Bank which issued that document as of that document was the cheque to which it relates. The Image Return Document or Cheque Return Notification will be deemed to be a cheque for the purpose of such payment.

(b) For the purpose of Section 34(2) of Part III of the Payment and Settlement Systems Act, an Image Return Document or a Cheque Return Notification shall contain the following essential particulars:

(i) Presenting Bank’s name;

(ii) image of the cheque which has been dishonoured;

(iii) essential electronic payment information of the cheque which has been dishonoured;

(iv) reasons for the dishonour;

(v) history of dishonour;

(vi) conditions for subsequent presentment specified by LankaClear including the period within which the presentment must be carried out; and

(vii) signature/signatures of a person/s who is/are authorized to issue the document on behalf of the Presenting Bank.

(c) Image Return Document or Cheque Return Notification shall be generated by LankaClear or a Presenting Bank with direct connectivity to CITS System, strictly following LankaClear’s instructions and standards prescribed, including standard size of the Image Return Document or Cheque Return Notification, security paper specifications, running serial number and signature/s of the authorized signatory/signatories of the Presenting Bank.

(7) Information on CITS System

For the purposes of CITS System:

(a) LankaClear and all CITS participants shall subject themselves jointly and severally to the control, supervision, regulation and oversight of CBSL in the exercise of any or all its functions and powers from time to time vested by law or otherwise, on the operation of CITS and shall comply with all orders and directions of CBSL thereto.

(b) In furtherance of and without prejudice to the foregoing, CBSL may from time to time and at any time require LankaClear and CITS participants to provide such information in respect of CITS System.

(c) All reports and information from LankaClear to CBSL in respect of CITS pursuant to the provisions of this direction shall deemed to be accurate and correct.

(8) Offences

Where any person fails to comply with this direction or any directive, instruction or rule hereunder shall be guilty of an offence under the Payment and Settlement Systems Act, No.28 of 2005.


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6LankaSettle

SRI LANKA REAL TIME GROSS SETTLEMENT ANDSCRIPLESS SECURITIES DEPOSITORY SYSTEM

SYSTEM RULES

Issued in August 2003(incorporating amendments upto 30th April, 2008)

VOLUME 1 – INTRODUCTION

TABLE OF CONTENTS

1. SYSTEM OVERVIEW 1.1 Real Time Gross Settlement (RTGS) 1.2 LankaSecure Scripless Securities Depository System 1.3 System Components 1.3.1 S.W.I.F.T FIN Y-Copy Service 1.3.2 SWIFT FIN 1.3.3 LankaSettle Browser Interface 1.3.4 Central System

2. GENERAL PROVISIONS 2.1 Interpretation 2.2 Purpose of the System Rules 2.3 Qualification for Participation 2.4 Restrictions, Suspension and Termination 2.5 Access to System Functions 2.6 Mandate Agreement and S.W.I.F.T 2.7 Inconsistency with Mandate Agreement or S.W.I.F.T. 2.8 Amendments to the System Rules 2.8.1 Amendments to the System Rules by Central Bank 2.8.2 Amendments requested by Participants 2.8.3 Issue of System Rule Changes to Participants 2.9 Associated User and S.W.I.F.T. Documentation 2.10 Governing Legislation 2.11 Suspension of System Rules 2.12 Assignment 2.13 Confidentiality

3. DISCLAIMERS AND LIMITATION OF LIABILITY 3.1 Force Majeure 3.2 Limit of Liability 3.3 Consequential Losses 3.4 Indemnity 3.5 Netting on Insolvency


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61. SYSTEM OVERVIEW

LankaSettle consists of Real-time Gross Settlement (RTGS) and Scripless Securities Depository System (LankaSecure).

1.1 Real Time Gross Settlement (RTGS)

The concept of RTGS is to enforce the processing and settlement of payments and other inter-bank transactions on a gross basis in real-time. This minimizes the settlement and systemic risks associated with pre-existing arrangements wherein settlement was deferred and conducted on a net basis. RTGS ensures irrevocable receiver finality – a potentially significant consumer advantage.

Not all transactions need to be subjected to the disciplines of RTGS. RTGS will co-exist with deferred net settlements of obligations arising from the exchange of low value-high volume payment types (e.g., cheques and low value electronic transactions). These net settlements will be processed in batches periodically over LankaSettle.

1.2 LankaSecure Scripless Securities Depository System

LankaSecure operates alongside RTGS in LankaSettle. Its functions are to provide:

• an electronic storage facility for holdings of Government and Central Bank securities issued in scripless form;

• a central record of ownership of and interests in securities;

• a mechanism for transferring securities between accounts without a corresponding funds transfer in the RTGS (Deliver Free) and

• a mechanism for settling scripless securities transactions using the facilities of the RTGS to achieve real-time Delivery-versus-Payment.

1.3 System Components

LankaSettle uses three main components:

(i) S.W.I.F.T., including the FIN Y-Copy Service, the FIN Network and Participants’ S.W.I.F.T. interfaces;

(ii) the Participant Browser Interface; and

(iii) the central system at the Central Bank comprising RTGS and LankaSecure.

The diagram over page shows an overview of the system together with a brief description of its components. The functions of each component are described in more detail in Volumes 2 and 3.

Figure 1 - LankaSettle System Overview

1.3.1 S.W.I.F.T FIN Y-Copy Service

LankaSettle uses the S.W.I.F.T. network for the exchange of all Settlement Instructions and Securities Instructions. All LankaSettle Participants, including the Central Bank, are connected to S.W.I.F.T. via SWIFT interfaces.

For the exchange of RTGS payments, the SWIFT FIN Y-Copy Service is used. S.W.I.F.T. monitors the payments traffic of Participants and will direct any payments designated as RTGS payments to the FIN Y-Copy Service. FIN Y-Copy will extract


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6information from the original Settlement Instruction to create a new message. This message holds only enough information to allow settlement across accounts of the sending and receiving Participants at the Central Bank. Y-Copy holds the original Settlement Instruction pending receipt of an authorisation or rejection message from the Central Bank. On receipt of a positive authorisation, FIN Y-Copy forwards the settled Settlement Instruction to the receiving Participant.

The basic process flow is depicted below.

S.W.I.F.TY-Copy

Sender Receiver

RTGS

MT10�

MT09�

MT10�

MT09�

1.3.2 SWIFT FIN

LankaSecure uses the standard SWIFT network to exchange Securities Instructions. These messages are sent directly to LankaSecure. LankaSettle also uses the FIN network for the exchange of a limited range of non-value messages, e.g., enquiries and confirmations.

1.3.3 LankaSettle Browser Interface

Each Participant must have a LankaSettle Browser Interface. LankaSettle uses the Browser Interface and the CBSLNet network to support commands and enquiries with each of RTGS and LankaSecure.

The LankaSettle Browser Interface supports access to non-value functions including:

• on-line access to account balance and activity information;

• on-line access to queued payment information;

• on-line access to perform reprioritisation or cancellation of queued payments; and

• monitoring of LankaSettle Central System operational status.

1.3.4 Central System

The Central System has two components, RTGS and LankaSecure. The two systems interact in two ways, viz:

• To obtain funds to settle securities trades, LankaSecure submits transactions to RTGS. Securities are ear-marked in LankaSecure and these transactions are processed in RTGS when funds are available. Securities are only released in LankaSecure following successful completion of the RTGS leg of the settlement.

• To assist Participants to manage their positions in the RTGS environment, the Central Bank provides an Intraday Liquidity Facility. This facility credits funds to Participant's Settlement Accounts against transfer to the Central Bank of securities earmarked in LankaSecure as collateral.

2. GENERAL PROVISIONS

2.1 Interpretation

In these rules, unless the context otherwise requires:

“Accession Agreement” means an agreement in the form at Schedule 1 to these Rules executed between a Participant and the Central Bank.

“Accounts” mean the Settlement Account and Securities Accounts.

“Account Transfers” means Settlement Account Transfers and Securities Account Transfers.

“Account Types” mean the various types of Securities Accounts required by Regulations and these Rules to be maintained by a Participant, or categories of Participants in LankaSecure.

MT10�MT10�

MT09� MT09�

S.W.I.F.TY-Copy


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6“Back-up facilities” means the systems and procedures that a Participant is required to maintain in terms of the System Rules to

deal with a failure or a breakdown or other problem in the Browser Interface or the SWIFT Interface or any part thereof.

“Browser Interface” means the PC-based interface used by a participant to gain access to the services on LankaSettle.

“Business Day” means a day on which the Central Bank is open for the settlement of transactions on LankaSettle and LankaSettle is operating to process Instructions and Account Transfers.

“Central Bank” means the Monetary Board of the Central Bank of Sri Lanka established in terms of the Monetary Law Act.

“Customer” has the meaning assigned to the term in the Registered Stocks and Securities Ordinance and the Local Treasury Bills Ordinance.

“Designated Non-Dealer Bidder” means a person appointed by the Central Bank in terms of the Registered Stock and Securities Ordinance and the Local Treasury Bills Ordinance to participate in the Primary Auction, but which can hold and transact in Scripless securities only for its own account.

“Dispute” means a dispute or difference between the Central Bank and the Participant arising out of, or in any way connected with these Rules but shall not include any dispute or matter arising from or connected to any act or thing done or carried out or purported to be done or carried out by the Central Bank under or by virtue of its powers, authority or functions under any written law in its capacity as the supervisor or the regulator of a Participant.

“Direct Participant” means a Licensed Commercial Bank, a Primary Dealer and any other person appointed as a Direct Participant by the Central Bank in terms of the Registered Stock and Securities Ordinance and the Local Treasury Bills Ordinance.

“Final Cut Off” means the time specified for close of business in the Daily Operating Schedule in the System Rules.

“Government Securities” mean Treasury Bills and Treasury Bonds issued by the Government of Sri Lanka.

“Gridlock” means a situation that can arise in LankaSettle in which the failure of some Instructions to be executed (because the necessary funds or securities balances are unavailable) prevents a substantial number of other Instructions from other Participants from being executed.

“Instruction” means a Payment Instruction or a Securities Instruction.

“Intraday Liquidity Facility” or “ILF” means the provision of funds to a Participant by the Central Bank in terms of an ILF Agreement for the duration of a Business Day of an amount based on the Official Prices of securities provided as security by the Participant.

“ILF Agreement” means an agreement in the form at Schedule II executed by a Participant with the Central Bank.

“LankaSecure” means the Scripless Securities Depository System established by the Central Bank under the Monetary Law Act.

“LankaSettle” means the Sri Lanka Real-Time Gross Settlement and Scripless Securities Depository System established in terms of the Monetary Law Act.

“Licensed Commercial Bank” means a bank licensed under the Banking Act, No.30 of 1988 as amended from time to time to carry on banking business as defined in that Act.

“Local Treasury Bills Ordinance” means the Local Treasury Bills Ordinance, No.8 of 1923 as amended from time to time.

“Mandate Agreement” means the Agreement entered into by a Participant with the Central Bank for the maintenance and operation of such Participant’s Settlement Account and Securities Accounts maintained by it.

“Matching” means the process of comparing the trade or settlement details/instructions transmitted by parties to a transaction to ensure that they agree with respect to the terms of the transaction.

“Minimum Balance Requirement” means the minimum balance, if any, required to be maintained in a Settlement Account of a Participant at all times in terms of the System Rules.

“Monetary Board” means the Monetary Board of the Central Bank of Sri Lanka established under the Monetary Law Act.

“Monetary Law Act” means the Monetary Law Act, No.58 of 1949 as amended from time to time.

“Multilateral Net Settlement Batch” or “Net Settlement Batch” means a Settlement Account Transfer involving multiple debits and credits, initiated by the Central Bank to settle net obligations arising from the conduct of a payment or securities clearing system as described in the System Rules.

“Open Market Operations” or “OMO” mean transactions carried out under Part v of Chapter V of the Monetary Law Act.

“Official Prices” mean the prices determined by the Central Bank on a daily basis for the purpose of valuing securities offered as security for ILF and recorded in LankaSecure.


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6“Payment Instruction” means an instruction initiated by a Participant to debit its Settlement Account and credit the Settlement

Account of another Participant on LankaSettle in a form and manner provided for in the System Rules.

“Participant” means a person who has been admitted to participate in LankaSettle or RTGS having executed an Accession Agreement.

“Person resident in Sri Lanka” shall have the meaning as assigned to it in the Exchange Control Act, No. 24 of 1953 or any other Act which replaces it.

“Person resident outside Sri Lanka” shall have the meaning as assigned to it in the Exchange Control Act, No. 24 of 1953 or any other Act which replaces it.

“Pledge” has the meaning assigned to it in Regulations.

“Primary Auction” means the allocation and issue of Scripless Securities by the Government to Primary Dealers and Designated Non Dealer Bidders against payment.

“Primary Dealer” means an institution appointed as a primary dealer by the Central Bank under the Local Treasury Bills Ordinance and the Registered Stock and Securities Ordinance to participate in the Primary Auctions and to hold and transact in Scripless Securities for itself and for others.

“Real-Time Gross Settlement” or “RTGS” means the processing and settlement of payment obligations in real time on a gross basis.

“Registered Stock & Securities Ordinance” means the Registered Stock & Securities Ordinance, No.7 of 1937 as amended from time to time.

“Regulations” mean Regulations made under the Monetary Law Act, the Registered Stock and Securities Ordinance and the Local Treasury Bills Ordinance applicable to LankaSettle and its operations.

“Repurchase Agreement” or “Repo” means an agreement by which one party agrees to sell scripless securities to another on an undertaking to buy back such securities on an agreed date on agreed terms.

“Reverse Repurchase Agreement” or “Reverse Repo” means an agreement by which one party agrees to buy Scripless Securities from another on an undertaking by such party to sell back such securities on an agreed date on agreed terms.

“Scripless Securities” mean Scripless Treasury Bills, and Scripless Treasury Bonds issued under the Local Treasury Bills Ordinance and Registered Stock and Securities Ordinance respectively and Central Bank securities issued in scripless form under the Monetary Law Act.

“Scripless Treasury Bills” mean the Treasury Bills issued in scripless form under the Local Treasury Bills Ordinance.

“Scripless Treasury Bonds” mean the Treasury Bonds issued in scripless form under the Registered Stock and Securities Ordinance.

“Securities Account” means an account maintained in LankaSecure by a Participant for the recording of title to and interests in Scripless Securities of such Participant, and if such Participant is a Dealer Direct Participant of its Customers, in accordance with the Regulations and the System Rules.

“Securities Instruction” means an instruction in a form and manner provided for in the System Rules, initiated by a Participant to transfer specified Scripless Securities from a Securities Account maintained by the Participant to a Securities Account maintained by another Participant or the Central Bank or to reposition specified Scripless Securities between Securities Accounts maintained by the Participant.

“Settlement” means, in respect of a Payment Instruction, Settlement Account Transfer, Securities Instruction or Securities Account Transfer, the successful posting for value of debits and credits to the relevant Accounts of the amounts notified in the Payment Instruction, Settlement Account Transfer, Securities Instruction or Securities Account Transfer.

“Settlement Account” means an account maintained by a Participant with the Central Bank in terms of the Monetary Law Act for the maintenance of deposit reserves, clearance of payments and the settlement of balances among Participants and for the settlement of payments for Scripless Securities transactions among Participants, or for any one or more of such purposes as applicable to such Participant.

“Settlement Account Transfer” or “Central Bank Settlement Account Transfer” means the credit or debit of a Settlement Account of a Participant initiated by the Central Bank.

“System Rules” mean these rules which are issued in terms of the Monetary Law Act, as may be amended from time to time.

“SWIFT” means the Society for Worldwide Inter-bank Funds Transfer.

“SWIFT Interface” means the computer-based terminal via which a Participant transmits Payment Instructions and Securities Instructions to LankaSettle.

“Value Date” means on the date on which the Settlement of a transaction is to be effected.


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6In this Agreement:

(a) words importing one gender include the other genders;

(b) the plural number includes the singular and vice versa;

(c) headings are inserted for convenience of reference and do not alter the interpretation of these Rules;

(d) a reference to any legislation includes any statutory regulations, rules, orders or instruments made or issued pursuant to that legislation and any amendments to, re-enactment of, or replacement of that legislation.

2.2 Purpose of the System RulesThe purpose of these System Rules is to stipulate the duties, obligations and rights of the Central Bank and of Participants in the LankaSettle system. These System Rules also describe how the Central Bank and Participants will interact at a business level.

Each Participant has been admitted to participate in LankaSettle by having entered in to an Accession Agreement and is bound to abide by these System Rules.

2.3 QualificationforParticipationPersons who are appointed as Direct Participants by the Central Bank under the Registered Stock and Securities Ordinance and the Local Treasury Bills Ordinance qualify for participation in LankaSettle provided they satisfy the requirements for participation as set out in these rules.

Licensed Commercial Banks and Primary Dealers qualify to be appointed as Direct Participants by virtue of their status as Licensed Commercial Banks and Primary Dealers respectively. Other persons may be appointed as Direct Participants at the discretion of the Central Bank in terms of the Registered Stock and Securities Ordinance and the Local Treasury Bills Ordinance.

A person, other than a Direct Participant, who maintains a Settlement Account with the Central Bank in terms of any law may be admitted as a Participant for the limited purpose of RTGS at the discretion of the Central Bank provided it satisfies such criteria as may be determined by the Central Bank for the purpose and the technical and other requirements for participation in RTGS as set out in these Rules.

The Central Bank will also participate in LankaSettle.

2.4 Restrictions, Suspension and TerminationThe Mandate Agreement sets out the circumstances in which the participation on LankaSettle by a Participant may be restricted, suspended or terminated. Each Participant acknowledges and accepts that its participation may be restricted, suspended or terminated in accordance with the Mandate Agreement.

2.5 Access to System Functions

Restrictions on access to facilities and functions in LankaSettle shall apply to Participants based on their institutional status (for example, only Participants appointed as Primary Dealers and Designated Non-Dealer Bidders shall have access to facilities and functions related to Primary Auctions, and only Participants appointed as Dealer Direct Participants shall have access to facilities and functions related to holding and transferring Scripless Securities on behalf of Customers).

2.6 Mandate Agreement and S.W.I.F.T

Participants must have entered into Mandate Agreement with the Central Bank of Sri Lanka to participate in LankaSettle. Participants must also have subscribed to the S.W.I.F.T. network and the RTGS Y-Copy and LankaSecure Closed User Groups.

2.7 Inconsistency with Mandate Agreement or S.W.I.F.T.

If a provision of these System Rules is inconsistent with the Mandate Agreement, the provisions of the Mandate Agreement will prevail.

These System Rules describe in some sections the requirements of the S.W.I.F.T. network and FIN Y-Copy service. These requirements may change. In the event that a provision in the System Rules is inconsistent with any mandatory requirements of S.W.I.F.T., the S.W.I.F.T. requirement will prevail to the extent of that inconsistency.

2.8 Amendments to the System Rules

2.8.1 Amendments to the System Rules by Central Bank

The Participant expressly consents that the System Rules may be amended by the Central Bank from time to time and that the amended System Rules will be binding on the Participant, provided that


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6(a) the Participant is notified of any such amendment in advance of its taking effect with sufficient notice as to allow

reasonable time for the amendment (if any is required) of the Participant’s internal systems and procedures; and

(b) the Central Bank makes a reasonable effort to consult with Participants in respect of any procedural change likely to impact on the Participants' systems and internal procedures.

The requirement to give advance notice and to consult with Participants will not apply where an amendment to the System Rules if necessary to deal with an emergency situation.

2.8.2 Amendments requested by Participants

Participants may submit proposals for changes to the System Rules to the Central Bank directly or via any appropriate consultative committees established by the Central Bank for that purpose from time to time. Such proposals should be in writing and fully describe the purpose and benefits of the change being proposed. The Central Bank will consider such proposals but will retain sole discretion as to the implementation of any procedural or system change.

2.8.3 Issue of System Rule Changes to Participants

A record of the date on which changes to System Rules are advised and become effective will be maintained by the Central Bank and included in advices to Participants. Amendments or updated versions of these System Rules will be issued to Participants from time to time.

2.9 Associated User and S.W.I.F.T. Documentation

These System Rules describe how Participants will interact at a business level with each other and the Central Bank. Separate documentation describes how the LankaSettle and S.W.I.F.T. systems support these interactions at the operator level. Participants should make reference to the following associated documentation as necessary.

• S.W.I.F.T. FIN Copy Service Description March 2000

• S.W.I.F.T. User Handbooks

• LogicaCMG© LCSS/CAS Functional Specification – Participants’ Interfaces Volume 2.1 - SWIFT Y-Copy and V-Copy

• LogicaCMG © LCSS/CSS Functional Specification Appendix A: SWIFT Messages

2.10 Governing Legislation

These System Rules are issued in terms of the Monetary Law Act as amended by the Monetary Law (Amendment) Act, No.32 of 2002.

2.11 Suspension of System Rules

(a) The Central Bank may suspend the operation of the System Rules in whole or part in circumstances where continued operation of the System Rules would undermine the operation and stability of the System.

(b) During a suspension of the operation of the System Rules the Central Bank and Participants must attempt to continue operations, to the extent possible, in accordance with the System Rules.

(c) During the suspension of System Rules operations will be conducted as determined by the Central Bank following reasonable consultation with the Participants.

(d) The Central Bank will restore operation of the System Rules as soon as practicable under immediate advice to the Participants.

2.12 Assignment

Subject to the provisions of Section 112B of the Monetary Law Act, neither the Central Bank nor the Participant may assign or transfer its rights or obligations under these System Rules without the prior written consent of the other party.

2.13 Confidentiality

(a) The Central Bank and the Participant shall maintain confidentiality in respect of all information relating to Instructions, Account Transfers, Accounts, Participants and Customers of Participants in accordance with the applicable law.

(b) The Participant requests and authorises the Central Bank to release information concerning the Participant’s activities in the System for audit purposes to such persons as the Participant may notify to the Central Bank.

(c) Subject to clause 2.11 (a), each of the Central Bank and the Participant may disclose or publish:

(i) aggregate or summary data on the operation of the System;

(ii) educational and descriptive information about the System.


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6(d) The Participant authorises the Central Bank to release information concerning the Participant’s activities in the

System to auditors acting for the Central Bank.

(e) The Participant and Central Bank acknowledge that subject to any applicable law the release of information must be made in the event of the issue of a valid Court order requiring such release or if required by law.

(f) The provisions of this clause will survive the termination of the Participant’s participation in the System.

3. DISCLAIMERS AND LIMITATION OF LIABILITY

3.1 Force Majeure

(a) Neither the Central Bank nor the Participant will be liable for any act, omission or failure to fulfill its obligations under the System Rules if and to the extent that such act omission or failure arises from any cause reasonably beyond its control which prevents compliance with its obligations under these Rules, (called a “Force Majeure Event”).

(b) An event is not a Force Majeure Event if:

(i) the effect of the event could have been avoided had the Central Bank or the Participant, as the case may be, performed its obligations under the System Rules;

(ii) the effect of that event could have been prevented or avoided by exercising a reasonable standard of care; or

(iii) it is an event for which the Central Bank or the Participant, as the case may be, or their respective employee or agent is directly responsible.

(c) If the Central Bank or a Participant is unable to fulfill its obligations due to a Force Majeure Event, the Central Bank or such Participant will immediately:

(i) notify the other in writing of the Force Majeure Event which has resulted in its failure to fulfill its obligations, the extent to which the Force Majeure Event prevents compliance with the its obligations, the reasons why, and the expected duration of the Force Majeure Event; and

(ii) use all reasonable endeavours to avoid or remove the cause of the Force Majeure Event and perform its obligations as soon as possible and in the meantime, to mitigate the effect of such Force Majeure Event.

3.2 Limit of LiabilityThe Central Bank will not be liable for any act or failure to act in the performance of its obligations under the System Rules, nor for the consequences of such acts or omissions and will therefore not be liable to the Participant for any loss, loss of opportunity, profit, market, goodwill, interest, expense, costs, claims, demands or other direct or indirect damages suffered or incurred by the Participant, arising out of the System Rules or the performance of them, unless such liability arises from the proven gross negligence, willful default, fraud or theft by the Central Bank or any of its employees or agents (in which case the Central Bank will be liable only for the amount of any funds lost or the value of the securities, as the case may be, from the Participant’s Account as a direct result of such proven gross negligence, willful default, fraud or theft which is not reasonably able to be recovered by the Participant (taking reasonable steps to do so without delay) and provided that the immediate cause of any such loss from the Participant’s Account is not due to any act or omission on the part of the Participant or any of its employees or agents).

3.3 Consequential LossesFor the avoidance of doubt, it is expressly agreed that in no event will the Central Bank be liable to the Participant for any indirect, special, incidental or consequential loss or damages of any kind and however arising (including loss of revenues or profits, lost data, business interruptions, or loss arising from errors, or breaches of security, in the Participant’s own systems) even if advised of the possibility of such.

3.4 IndemnityThe Participant shall indemnify the Monetary Board of the Central Bank, its members, employees and agents against all expenses, claims damages and liabilities whatsoever arising directly or indirectly from the actions or omissions of the Participant or its employees or agents (whether or not authorised by the Participant) and/or failure of the Participant to comply with the System Rules insofar as such actions or omissions affect the Central Bank in its capacity as operator of the System, and the Participant agrees that such indemnity shall survive any termination of the Participant's participation in the System.

3.5 Netting on InsolvencyFor purposes of clause (a) of subsection (8) of Section 62A of the Monetary Law Act as amended by Monetary Law (Amendment) Act No. 32 of 2002 if winding up proceedings have commenced in respect of a Participant, obligations incurred by such Participant to other Participants in respect of which Instructions have been entered in the System shall be netted against the obligations owed by other Participants to such Participant in respect of which Instructions have been entered in the System irrespective of whether such obligations have matured or not.

Volume 2 of the System Rules describes the functions of RTGS. Volume 3 deals with LankaSecure.


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6VOLUME 2

PAYMENTS AND SETTLEMENTS

TABLE OF CONTENTS

1. PAYMENTS MESSAGING IN RTGS 1.1 S.W.I.F.T. FIN Y-Copy 1.2 Closed User Group (CUG) Administration 1.3 CUG Member Details 1.4 Participant Bank Identifier Codes (BIC) 1.5 LankaSettle RTGS Y-Copy Service Identifier 1.6 Message Types Accepted in the LankaSettle RTGS Closed User Group 1.7 LankaSettle RTGS Settlement Messages 1.8 Abort Notification (MT019) and Abort Reason Codes 1.9 Sender Notifications (MT012) 1.10 SWIFT Charges and Reverse Billing 1.11 Other S.W.I.F.T. messages used by LankaSettle

2. RTGS-SPECIFIC MESSAGE CONTENT REqUIREMENTS 2.1 Customer Beneficiary Identification 2.2 Transaction References 2.3 Value Dates and Payments Warehousing 2.4 Currency 2.5 Branch Identification

3. INCORRECTLY PROCESSED PAYMENTS 3.1 Return of a Settled Payment Sent in Error 3.2 Payments Unable to be Applied

4. SETTLEMENT ACCOUNT TRANSFERS

5. qUEUE MANAGEMENT 5.1 Testing for Funds Availability 5.2 Queues 5.3 First-in-First-Out Queue Order 5.4 Priorities Assigned to Transaction 5.5 Changing the Order of Payments Already in the Queue 5.6 Cancelling Payments from the Queue 5.7 Gridlock Resolution 5.8 Treatment of Unsettled Transactions at End-of-Day

6. INTRADAY LIqUIDITY FACILITIES (ILF) 6.1 Overview 6.2 Eligible Securities 6.3 ILF Agreement

7. MINIMUM BALANCE REqUIREMENTS

8. MULTI-LATERAL NET SETTLEMENT BATCHES 8.1 Mandate to Act on Third Party Settlement Obligation Advices 8.2 Conduct of Net Settlements over LankaSettle Settlement Accounts 8.3 Settlement Batch Suspension or Failure Due to Insufficient Funds

9. INTER-PARTICIPANTS TRANSACTIONS 9.1 Forward Value Transactions 9.2 Same Day Value Transactions


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61. PAYMENTS MESSAGING IN RTGS

1.1 S.W.I.F.T. FIN Y-Copy

Payment Instructions exchanged and settled in LankaSettle are sent using the S.W.I.F.T. network. The Central Bank shall have entered into a contract with S.W.I.F.T. for the provision of FIN Y-Copy services to support the settlement of LankaSettle RTGS Payment Instructions exchanged between Participants.

The FIN Y-Copy service uses the facilities of the FIN messaging service, which it enhances by copying selected information to the Central Bank for settlement authorisation. This Store-Copy-Authorise-Forward facility is based on a relationship between Participants of a Closed User Group (CUG).

A FIN Y-Copy CUG consists of:

• sending and receiving institutions (Participants); and

• a central institution (the Central Bank).

The sending Participant prepares its message for transmission to the receiver using FIN in the usual way. The sender adds a code, indicating that the message is to be copied and transmits it. FIN Y-Copy intercepts the FIN message and then copies selected components to the Central Bank. FIN Y-Copy holds the message in a temporary queue until the Central Bank sends the appropriate authorisation or rejection, after which the message is either delivered to the receiver or the sender receives an abort notification.

1.2 Closed User Group (CUG) Administration

The Central Bank will administer the FIN Y-Copy Service, including the determination of the membership of the CUG, the message types to be supported by the CUG and various other aspects of the FIN Y-Copy service.

1.3 CUG Member Details

A Participant must seek Central Bank approval prior to submitting any requests to S.W.I.F.T. for any amendment to its S.W.I.F.T. identity or capabilities that may impact on its participation in the LankaSettle CUG.

1.4 ParticipantBankIdentifierCodes(BIC)

Each Participant must maintain a single Bank Identifier Code (BIC) for use in LankaSettle. This is the BIC to which payments should be addressed and to which all LankaSettle payments will be routed to after settlement in RTGS.

Each Participant may nominate only one BIC as a destination for LankaSettle payments.

Bank Identifier Codes of LankaSettle Participants are shown in Attachment A.

Participants must advise the Central Bank prior to initiating any changes to its BIC with S.W.I.F.T.

1.5 LankaSettleRTGSY-CopyServiceIdentifier

A sending Participant must include a three character Service Identifier Code in an outgoing S.W.I.F.T. Payment Instruction for it to be intercepted and copied by the S.W.I.F.T. Y-Copy service.

The Service Identifier Code (placed in Field 103 of the user header) for LankaSettle RTGS is LKB.

1.6 Message Types Accepted in the LankaSettle RTGS Closed User Group

The following S.W.I.F.T. message types (Payments Instructions) will be available for use in the LankaSettle CUG.

MT102 Multiple Customer Credit Transfer

MT103 Single Customer Credit Transfer

MT202 General Financial Institution Transfer

MT205 FI Transfer Execution

Message formats are contained in the S.W.I.F.T. User Handbook. S.W.I.F.T. Messaging in LankaSettle is described in LogicaCMG© LCSS/CAS Functional Specification - Participants’ Interfaces Volume 2.1 - S.W.I.F.T. Y-Copy and V-Copy.

1.7 LankaSettle RTGS Settlement Messages

The FIN Y-Copy service uses the following message types to carry out the settlement leg of the process.

MT096 FIN Copy to Central Institution MessageMT097 FIN Copy Message Authorisation/Refusal Notification


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6The incoming Payment Instruction will be intercepted, copied and stored pending receipt of a positive or negative response from LankaSettle. The LankaSettle Y-Copy service operates in “partial” copy mode, i.e. only some information is included in the MT096 sent to LankaSettle for settlement processing (Field Tags 20 and 32A being transaction reference, value date, currency code and amount). Header and Trailer information is also copied.

LankaSettle will process the MT096 and respond to FIN Y-Copy with an MT097.

FIN Y-Copy will forward the successfully settled Payment Instruction (eg. MT103) to the receiving Participant with settlement details contained in the header block of the message. If an MT096 fails, LankaSettle testing processes, a negative MT097 rejection response will be returned to FIN Y-Copy.

1.8 AbortNotification(MT019)andAbortReasonCodes

Where FIN Y-Copy is unable to complete processing of a Payment Instruction it will send an Abort Notification (MT019) to the sending Participant, advising the reason for the rejection.

Reasons for rejection will be assigned a two-digit Abort Reason Code. This will appear in Field 432 of the Abort Notification (MT019). The Abort Reason Code may be assigned by S.W.I.F.T. or RTGS depending on the reason and point in the process at which rejection occurred.

These Abort Reason Codes are contained in S.W.I.F.T. Fin-Copy Service Description and the LogicaCMG© LCSS/CAS Functional Specification - Participants' Interfaces Volume 2.1 - S.W.I.F.T. Y-Copy and V-Copy.

1.9 SenderNotifications(MT012)

On receipt of a positive MT097 Authorisation response from RTGS, FIN Y-Copy will send a Sender Notification (MT012) to the sending Participant.

1.10 SWIFT Charges and Reverse Billing

Each Participant shall be directly responsible to pay to S.W.I.F.T. the messaging costs associated with FIN Y-Copy treatment of Payment Instructions initiated by them according to charges determined by S.W.I.F.T. in accordance with applicable agreements.

Each Participant shall also be responsible to pay to S.W.I.F.T. the messaging costs associated with Instructions initiated by them to effect transactions in LankaSecure.

Each Participant shall also be responsible to pay S.W.I.F.T. directly costs of messages sent to them by RTGS and LankaSecure under a “Reverse Billing” arrangement, i.e. S.W.I.F.T. charges are usually levied against the sender of a S.W.I.F.T. message.

The messages that may be sent to them by LankaSettle under a Reverse Billing arrangement are described in:

• LogicaCMG© LCSS/CAS Functional Specification – Participants’ Interfaces Volume 2.1 - SWIFT Y-Copy and V-Copy; and

• LogicaCMG © LCSS/CSS Functional Specification Appendix A: SWIFT Messages

1.11 Other S.W.I.F.T. messages used by LankaSettle

The non-value message types used by RTGS are described in the LogicaCMG© LCSS/CAS Functional Specification - Participants’ Interfaces Volume 2.1 - S.W.I.F.T. Y-Copy and V-Copy.

2. RTGS-SPECIFIC MESSAGE CONTENT REqUIREMENTS

2.1 CustomerBeneficiaryIdentification

Customer beneficiaries of Payment Instructions are to be identified by Participants using both account name and number.

2.2 Transaction References

Participants must ensure that all Payment Instructions contain a reference number. This reference must be unique within any calendar year.

2.3 Value Dates and Payments Warehousing

If a Payment Instruction is received by LankaSettle that has a Value Date that has already passed it will be rejected.

LankaSettle is able to accept and warehouse Payment Instructions for settlement on future Value Dates. The System will accept Payment Instructions for settlement up to ten (10) calendar days in advance of current date. Transactions with future Value Dates greater than ten calendar days in advance will be rejected.


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6At the start of each day LankaSettle checks whether each stored Payment Instruction has a valid value date. If a stored Instruction has a Value Date that has already passed it will be rejected.

In the event that a Business Day is “cancelled”, e.g., a day on which due to extraordinary circumstances the Central Bank is not open for business, it is the responsibility of the Participant to cancel warehoused Payment Instructions for that Value Date or re-send them following rejection with a new Value Date.

2.4 Currency

All LankaSettle Payment Instructions shall be denominated in Sri Lanka Rupee and shall be settled in Sri Lanka Rupees.

2.5 BranchIdentification

Each Participant will, wherever possible, identify the branch of the bank at which the beneficiary account is domiciled.

3. INCORRECTLY PROCESSED PAYMENTS

3.1 Return of a Settled Payment Sent in Error

Sending Participants can withdraw unsettled Payment Instructions from their settlement queues, but once a payment has been settled across the LankaSettle Settlement Accounts, the sending Participant has no ability to recall.

A Participant may request from the receiving Participant the return of a payment by facsimile or by telephone with facsimile confirmation. The receiving Participant must make its own assessment of whether it should comply with such a request.

3.2 Payments Unable to be applied

A receiving Participant must return to the sending Participant a received and settled payment in the event of being unable to apply the payment, i.e.

• the receiving Participant is unable to apply the payment due to incorrect or inconsistent end beneficiary account details; or

• the end beneficiary account designated in the payment is closed.

Participants must return such payments to the sending Participant on the same Business Day in the case of bank-to-bank payments (MT202 and MT205) and by the end of the next Business day in the case of customer payments (MT102 and MT103).

A return payment must be initiated as a new MT202 bank-to-bank Payment Instruction. The return instruction must contain the reference number of the original instruction and clearly indicate “Return Payment”.

The returning Participant may claim costs reasonably incurred in returning the payment from the sending Participant.

4. SETTLEMENT ACCOUNT TRANSFERS

Settlement Account Transfers are debits and credits to a Participant's Settlement Account initiated by the Central Bank directly. These direct account operations are undertaken for the purposes provided for in the Mandate Agreement.

Participants will receive debit and credit notifications via S.W.I.F.T. (MT900 and MT910) in respect of these transactions.

5. qUEUE MANAGEMENT

5.1 Testing for Funds Availability

All Payment Instructions to debit a Participant's Settlement Account in LankaSettle will be tested for funds availability. Transactions will not be processed unless there are sufficient available funds in the account at the time of testing. Availability of funds will be determined with reference to account balance as well as any other parameters set on the account, i.e. minimum balance requirements, account limit (if any).

If there are sufficient available funds, the accounts of two Participants will be debited and credited and required message outputs will be issued.

5.2 queues

Payment Instructions for which there are insufficient available funds will be queued. Queued Payment Instructions are retested when account conditions change, e.g. when an account has been credited with funds.

5.3 First-in-First-Out queue Order

All Payment Instructions will be queued based on the priority assigned to each transaction and re-submitted for funds availability testing on a First-in-First-Out (FIFO) basis within the assigned priority, i.e. all Payment Instructions of a similar priority will


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6be queued in the order in which they were received and the “oldest” transaction in each Participant’s queue will be tested first. Only the transaction at the head of each Participant’s queue will be tested for funds availability.

The FIFO order of queues will only be overridden by use of the queue management facilities described below.

Participants acknowledge and authorise re-ordering of their queued Payment Instructions as a result of the operation of the queue management facilities described below.

5.4 Priorities Assigned to Transaction

Priorities are assigned to Payment Instructions by way of numbers in the range between 0 and 99 where zero is the highest priority and 99 the lowest. Priorities in the range 12 to 98 are available for Participant use. Priorities 0-11 and 99 are reserved for system or Central Bank use.

Central Bank Account Transfers are accorded highest priority in all situations. Intraday Liquidity Facility transactions are accorded a high priority of 5 to ensure timely delivery and return of ILF funds.

If a Participant submits a Payment or Securities Instruction without a priority number, it will be accorded a default priority of 98, ie. it will be sent to the back of the Participant's queue.

5.5 Changing the Order of Payments Already in the queue

A sending Participant will be able to change priorities of Payment Instructions made by him by promoting individual payments. This is a Browser Interface facility.

The Central Bank may intervene to change the priority of a queued Payment Instruction. This would be an exceptional measure taken to clear queue blockages and resolve System problems.

5.6 Canceling Payments from the queue

A sending Participant may cancel any of its Payment Instructions held in its queue using the LankaSettle Browser Interface.

A Participant cannot cancel a Settlement Account Transfer from its queue. The Central Bank is able to cancel Settlement Account Transfers.

5.7 Gridlock Resolution

LankaSettle provides the Central Bank with tools to resolve significant backlogs of queued Payment Instructions. This is called gridlock resolution.

LankaSettle will apply an algorithm to select those Payment Instructions that can be settled on an off-set basis. Participants acknowledge that this will change the FIFO ordering of settlement.

Gridlock resolution can be scheduled for automatic activation at set times or intervals as specified by the Central Bank and can also be manually invoked by the Central Bank.

5.8 Treatment of Unsettled Transactions at End-of-Day

Payment Instructions that are not settled by the end of the operating day will be rejected. The submitter will receive a S.W.I.F.T. Message advising of the rejection.

6. INTRADAY LIqUIDITY FACILITIES (ILF)

6.1 Overview

To assist Participants to meet their intra-day liquidity requirements under RTGS, the Central Bank may, at its discretion, extend Intra-day Liquidity Facility (ILF) to eligible Participants. ILF will ordinarily be available to all Direct Participants other than Designated Non-Dealer Bidders. ILF will be available to a Designated Non-Dealer Bidder only if so determined by the Central Bank in its sole discretion.

ILF is provided by way of Repurchase transactions and must be fully secured by eligible securities. A Participant who is eligible for ILF must enter into an ILF Agreement with the Central Bank in the form at Schedule II and must comply with Operating Instructions that may be issued by the Central Bank in that behalf from time to time.

6.2 Eligible Securities

All Scripless Treasury Bills and Scripless Treasury Bonds shall be considered Eligible Securities for the purposes of ILF. However, the Central Bank may, at its sole discretion, make changes in the eligibility of securities with seven (7) days prior notice to participants. Participants must not include any ineligible securities in their ILF collateral after expiration of this notice period.


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6Dealer Direct Participants shall not use securities owned by their Customers as ILF collateral.

6.3 ILF Agreement

The terms and conditions applicable to ILF are more fully described in the ILF Agreement and in the event of any inconsistency between these Rules and the provisions of the ILF Agreement; the provisions of the ILF Agreement shall prevail.

7. MINIMUM BALANCE REqUIREMENTS

The Central Bank may at some point in the future with reasonable notice to Participant impose a Minimum Balance Requirement on LankaSettle. In the event such a requirement is imposed, the participants acknowledge that transactions that would reduce the balance in their Settlement Account below the stipulated minimum balance would not be settled and would be queued in the RTGS for later re-testing.

8. MULTI-LATERAL NET SETTLEMENT BATCHES

8.1 Mandate to Act on Third Party Settlement Obligation Advices

Participants authorise the Central Bank to debit or credit their Settlement Accounts to meet their obligations under various payments clearing arrangements. For some clearings, the amounts to be debited and credited will be advised to the Central Bank by a third party clearing operator. Participants authorise the Central Bank to act on these advices. The Central Bank accepts no liability for any errors made by any third party clearing operator.

8.2 Conduct of Net Settlements over LankaSettle Settlement Accounts

A Net Settlement Batch is a Settlement Account Transfer involving multiple debits and credits, initiated by the Central Bank to settle net obligations arising from the conduct of a payment or securities clearing system.

The following net settlement batch arrangements are currently in operation:

• SLIPS Clearing (operated by LankaClear Pvt Ltd.)• Main Cheque Clearing (operated by LankaClear Pvt Ltd.)• Rupee Draft Clearing (operated by LankaClear Pvt Ltd.)• Adjustment Clearing (operated by LankaClear Pvt Ltd.)• Settlement Clearing (operated by LankaClear Pvt Ltd.)

The Central Bank may approve additional clearing settlements at its discretion.

The Net Settlement Batches will occur at the times indicated in the Daily Operating Schedule (Volume 4).

8.3 SettlementBatchSuspensionorFailureDuetoInsufficientFunds

Participants must ensure that there are sufficient available funds in their Settlement Account to allow immediate processing of a Net Settlement Batch. In the event that any one or more Participants with a net debit clearing figure does not have sufficient funds in its Settlement Account to allow the debit to be made, the entire batch will be suspended. No debits or credits will be made in a Net Settlement Batch unless all Participants with a net debit clearing figure have sufficient funds to allow the debits to be made. Upon a Net Settlement Batch Instruction being entered into the System, the Central Bank shall have the right to earmark funds in a Participant’s Settlement Account up to a Participant’s net debit clearing figure and to withhold the processing of Instructions to debit such account until the Batch Settlement is effected.

However, it shall be the responsibility of each Participant to ensure that sufficient funds are available in its Settlement Account at the times stipulated in the Daily Operating Schedule for processing of a Net Settlement Batch until such settlement is effected. The non-availability of sufficient funds in the Settlement Account of a Participant with a net debit clearing figure to allow the debit to be made will render him liable to a default charge as follows:

Rs.100,000/= for the first hour or any part thereof; Rs.200,000/= for the next hour or any part thereof; An additional sum of Rs.500,000/= if the insufficiency of funds extends beyond two hours.

The default charge shall accrue from the time that the clearing batch is first submitted for settlement to the RTGS up to the time of settlement of the batch. However, if a defaulting Participant infuses sufficient funds to its Settlement Account to meet its failed payment obligations prior to the actual settlement and maintains such funds, in addition to meeting its other payment obligations as they become due on the RTGS, the default charge shall accrue only up to the time of the infusion of such funds to the Settlement Account.

The Central Bank may initiate a retry of a failed Net Settlement Batch at any time after the failure subject to other scheduled net settlement arrangements on the RTGS. This is done at the discretion of the Central Bank and it is not obligatory on the Central Bank to initiate a retry before the times indicated in the Daily Operating Schedule.


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6The default charge shall be debited from the Settlement Account on the next business day after the business day on which the default occurred and shall be credited to the Central Bank. Ten percent (10%) of each default charge so credited shall be deducted as an administrative charge by the Central Bank and the balance shall be available for utilization for training of bankers and shall be paid for such purpose upon an application being made by the Sri Lanka Banks’ Association (Guarantee) Ltd. to the Central Bank in a prescribed manner.

If a participant defaults on more than one occasion during a period of one year, the Central Bank may, notwithstanding the fact that such a requirement has not been imposed on other participants, require such participant to maintain a stipulated minimum balance in its RTGS Settlement Account for the purpose of settling clearing balances at the stipulated times.

Each Participant must nominate a senior officer that the Central Bank may contact in the event that a Net Settlement Batch is suspended as a result of insufficient funds. Upon being so informed, a Participant must make immediate arrangements to fund its Settlement Account to enable the settlement to be completed. It is, however, not obligatory on the Central Bank to inform a Participant of insufficiency of funds and a Participant is fully responsible for ensuring the sufficiency of funds in its Settlement Account.

If a Net Settlement Batch is still suspended at close of business, all transactions in the batch will be rejected.

Any default charge imposed shall not be in substitution or derogation of, or preclude the exercise by the Central Bank or any Participant of, any right or claim which the Central Bank or the Participant has or is entitled to in any action, suit or proceeding in a court of law arising from the failure of any Participant to settle an obligation in a Net Settlement Batch.

9. INTER-PARTICIPANT TRANSACTIONS

9.1 Forward Value Transactions

Money market and foreign exchange transactions (rupee leg) entered into between participants for future value dates should be settled early on the value date in the LankaSettle System. Accordingly, the paying participants should ensure settlement of such transactions by 10.00 a.m. on the value date.

9.2 Same Day Value Transactions

The paying participants should ensure the settlement of the same day value transactions for money market and foreign exchange transactions (rupee leg), in the LankaSettle System within two hours of entering into such transactions.


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6VOLUME 3

LankaSecureSCRIPLESS SECURITIES DEPOSITORY SYSTEM

Table of Contents

1. OVERVIEW 1.1 Functions and Architecture of LankaSecure 1.2 Role of the Central Bank

2. PARTICIPANTS AND CUSTODIAL OBLIGATIONS 2.1 Participants 2.2 Custodial Responsibilities

3. SCRIPLESS SECURITIES 3.1 Legislative Authority to Issue in Scripless Form 3.2 Securities held in LankaSecure 3.2.1 Treasury Bills (T-Bills) 3.2.2 Treasury Bonds (T-Bonds) 3.3 Co-existence with Physical Securities 3.4 ISIN Securities Numbers 3.5 Unit Size and Minimum Marketable Parcels

4. SECURITIES ACCOUNTS 4.1 Account Definition and Structure 4.2 Account Types Available in LankaSecure

5. TRADE PROCESSING AND SETTLEMENT 5.1 Trading Activities are External to the System 5.2 Transaction Types 5.3 Securities Account Transfers made by the

Central Bank 5.4 S.W.I.F.T. Messages 5.4.A. Recording of repositioning transaction through

Central Bank of Sri Lanka Wide Area Network (CBSLNet)

5.5 LankaSecure S.W.I.F.T. Bank Identifier Codes (BIC)

5.6 S.W.I.F.T. Message Data Requirements 5.7 Securities Instructions to Follow Agreement of

Trade Terms 5.8 Forward Dated Transactions 5.9 Trade Matching 5.10 Repo and Reverse Repo Transactions 5.11 Cancellation Instructions 5.12 Delivery-versus-Payment Settlement

Processing

5.13 Queues in LankaSecure 5.14 Gridlock Resolution in LankaSecure 5.15 Treatment of Unsettled LankaSecure

Transactions at Day End

6. PRIMARY AUCTIONS 6.1 Interaction of LankaSecure with Primary

Auction System and Guidelines 6.2 Primary Auction Batch Settlement 6.3 Primary Auction Batch Failure

7. MATURITIES 7.1 Maturity Payment Processing 7.2 Securities with Optional Maturity Dates 7.3 Maturity Dates falling on a Holiday 7.4 Payment of Maturities at Record Date 7.5 Duty to Apply Maturity Proceeds to Owner 7.6 Inability to Apply Maturity Proceeds to Owner

8. INTEREST 8.1 Interest Payment Processing 8.2 Interest Payment Dates Falling on a Holiday 8.3 Payment of Interest at Record Date 8.4 Duty to Apply Interest Payment to Customer

Owner 8.5 Inability to Apply Interest Payment to Owner

9. CUSTOMER STATEMENTS 9.1 Recording Customer Information 9.2 Customer Statement of Holdings 9.3 Customer Statement of Interest and Maturity

Payments 9.4 Incorrect Address Records

10. PLEDGING 10.1 Recording Pledges 10.2 Statements and Confirmation of Pledges 10.3 Obligation of Participants to Enforce Pledges

11. INTRADAY LIqUIDITY FACILITY


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61. OVERVIEW

1.1 Functions and Architecture of LankaSecure

LankaSecure is an integral part of LankaSettle. LankaSecure is established and operated by the Central Bank in accordance with the Monetary Law Act. LankSecure operates in conjunction with RTGS to handle the:

• issue of ScriplessSecurities in electronic form;• maintenance of a central record of ownership and of other interests in scripless securities;• payment of interest and maturity proceeds over the Settlement Accounts of Participants in the RTGS;• settlement of security trades on a Delivery-versus-Payment basis, whereby transfer of securities and settlement of funds

only occurs if both are available in the respective accounts of Participants;• transfer of securities between accounts on a Deliver Free/Receive Free basis; and• provision of Securities Account facilities to allow segregation of holdings according to ownership and purpose of

holding.

The overall architecture of LankaSettle is described in Volume 1 – Introduction. The main elements relating to LankaSecure are:

• the Logica CSS application that runs the LankaSecure facilities;• S.W.I.F.T. FIN that provides the communications network over which Securities Instructions are exchanged;• a Browser Interface facility that provides Participants with enquiry and queue management facilities;• the CBSLNet Wide Area Network that connects the Browser Interfaces to the LankaSecure; and• an interface to the RTGS application which handles the funds leg of LankaSecure transactions.

1.2 Role of the Central Bank

The Central Bank performs a number of roles in respect of LankaSecure and scripless securities. The Central Bank:• acts as an agent of the Government of Sri Lanka to administer the issue of new securities, the conduct of the Primary

Auction and the payment of interest and maturity obligations on Government Securities;• issues its own securities in scripless form• is a counterparty in its own right to trades and settlements in scripless securities issued by the government, particularly

in respect of its conduct of Open Market Operations;• is the provider of liquidity support facilities to Participants via the Intraday Liquidity Facility;• is the operator of LankaSecure and provider of its depository facilities; and is• the regulator of the market for Government securities and its participants as provided for in the Local Treasury Bills

and Registered Stock & Securities Ordinances. This role includes monitoring the transactions of Participants in LankaSecure and the supervision of Primary Dealers and Dealer Direct Participants.

2. PARTICIPANTS AND CUSTODIAL OBLIGATIONS

2.1 Participants

Participation in LankaSecure is available to institutions appointed as “Direct Participants” by the Central Bank under the provisions of the Local Treasury Bills Ordinance and the Registered Stock & Securities Ordinance. Participants must have entered into Mandate Agreements with the Central Bank and subscribe to the S.W.I.F.T. network.

LankaSecure is structured to operate on a single tier of membership, that is:• access to the system is restricted to Participants only, there is no provision for direct access to the system by non-

Participants; and• all Participants have a Settlement Account in RTGS as well as Securities Account(s) in LankaSecure.

In general, all Participants make use of the same system facilities. The exceptions to this generality are:• Primary Dealers appointed under the Local Treasury Bills Ordinance and the Registered Stock & Securities Ordinance

(Primary Dealers) may only use the RTGS Payments facilities available to them to carry out transactions to support the activities they are authorised to conduct under Regulations issued under the provisions of the Local Treasury Bills Ordinance and the Registered Stock & Securities Ordinance; and

• Only Primary Dealers and other institutions appointed by the Central Bank as Designated Non Dealer Bidders under the Registered Stock and Securities Ordinance and the Local Treasury Bills Ordinance may participate in the Primary Auctions conducted for new issues of Government securities.

• Only institutions appointed as Dealer Direct Participants (including Primary Dealers) under the Local Treasury Bills Ordinance or the Registered Stock and Securities Ordinance, may transact in securities on behalf of others.


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6The Central Bank may restrict the availability of system functions to individual Participants or classes of Participants at its discretion.

2.2 Custodial Responsibilities

Dealer Direct Participants shall comply with applicable law, regulations and directions issued by the Central Bank in the conduct of their business as a Dealer Direct Participant.

Dealer Direct Participants act as custodians for their Customers in LankaSecure. This custodial role includes the following responsibilities:

2.2.1 to promptly and accurately record the name, address and National Identity Number, Company Registration Number or other identifying number approved by the Central Bank of their Customer in LankaSecure when the Customer obtains legal ownership of a security;

2.2.2 to promptly and accurately record in LankaSecure ownership or any change of ownership or owner details of a security within their Securities holdings and in the event of a failure to record the said transaction details, the Central Bank may in its sole discretion impose a non-recording transaction charge on the Dealer Direct Participant (DDP). Without prejudice to the generality of the foregoing, the Central Bank may take the following steps.

2.2.2.1 For the 1st instance of non-recording of transaction - severe warning

2.2.2.2 For the 2nd instance of non-recording of transaction - Rs. 5,000/- per transaction or 0.5% of the value of the transaction (face value) whichever is higher.

2.2.2.3 For the 3rd instance of non-recording of transaction - Rs. 10,000/- per transaction or 1% of the value of the transaction (face value) whichever is higher.

2.2.2.4 In the event of repeated non recording of transactions, Central Bank may suspend forthwith the DDP status of a licensed commercial bank and suspend the primary dealer status of a primary dealer as appropriate for a period of time determined by the Central Bank of Sri Lanka.

2.2.3 The amounts so charged shall be debited from the Settlement Account on the next business day of the decisions taken by the Central Bank and shall be credited to the Central Bank. If sufficient funds are not available in the Participants accounts, then it shall pay the non-recording transaction charges within 3 business days of the date of notice of the decision of the Central Bank.

2.2.4 Ten per cent (10%) of each charge so credited shall be deducted as an administrative charge by the Central Bank. The balance shall be available for utilisation for training of the staff of the banks and primary dealers and shall be paid for such purpose upon an application being made by the Sri Lanka Bank’s Association (Guarantee) Ltd. and Association of Primary Dealers to the Central Bank.

2.2.5 Any non-recording charge imposed shall not be in substitution or derogation of, or preclude the exercise by the Central Bank of any right or claim which the Central Bank has or is entitled to any action, suit or proceeding in a court of law arising from the failure of any Participant to record ownership or any change of ownership or owner details of a security within its Securities holdings.

2.2.6 to account and make payment to their Customers of any interest or maturity proceeds due to them in accordance with directions that may be issued in this regard; and

2.2.7 to effect transactions on behalf of their Customers in accordance with instructions received from Customers, provided that such transactions are legal and do not place the Participant in breach of these System Rules.

Dealer Direct Participants must comply strictly with instructions of a customer in transferring customer securities.

3. SCRIPLESS SECURITIES

3.1 Legislative Authority to Issue in Scripless Form

Scripless Treasury Bills and Scripless Treasury Bonds held in LankaSecure are issued in terms of the provisions of the Local Treasury Bills and Registered Stock & Securities Ordinances. In addition, the Central bank may issue its own Scripless securities in terms of the Monetary Law Act.

3.2 Securities held in LankaSecure

Scripless Treasury Bills, Scripless Treasury Bonds and Central Bank Securities issued in scripless form may be held in LankaSecure.

3.2.1 Treasury Bills (T-Bills)

Treasury Bills (T-Bills) are short term Government securities, typically issued with interest payable up front at discount and at maturity periods of 91, 182 and 364 days. TBills are tradable instruments. Investment yields or returns are computed based on


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6the margin between Auction or trade price and Maturity payment. Progressive interest coupons are not payable on this type of security. The maturity payment of Treasury Bills is paid on the maturity date.

3.2.2 Treasury Bonds (T-Bonds)

Treasury Bonds (T-Bonds) are longer term Government securities with maturity periods of 2 or more years. TBonds are tradable instruments.

T-Bonds typically provide for semi-annual interest payments. In the case of semi-annual payments, the first interest payment date (coupon date) will be six months after the issue date (i.e., the date of commencement of a particular series and the date from which interest starts to accrue). The second interest payment date will be six months after the first interest payment. This pattern will continue until maturity. The last interest payment will thus fall on the maturity date. Repayment of principal is made on the maturity date.

3.3 Co-existence with Physical Securities

Government Securities were, prior to the introduction of LankaSecure, issued in the form of written certificates. These physical securities may be converted to scripless securities form via a voluntary scheme for surrender and conversion in accordance with applicable laws and Regulations issued for this purpose.

Upon conversion, these System Rules will apply to the securities as though they had been issued in scripless form.

Issued securities that are not converted to scripless securities will remain in the form of written certificates until the entire stock of these securities has reached maturity.

3.4 ISIN Securities Numbers

Each issue of Scripless Securities is uniquely identified by a number constructed according to the International Securities Identification Numbering (ISIN) system.

The ISIN is 12 characters in length. Country, security type, duration and maturity dates are defined within the number. The Check digit is calculated as per ISO6166 standards.

L K Y Y M D D

Cou

ntry

Cod

e

Secu

rity

Type

Dur

atio

n

Mat

urity

Dat

e

Che

ck d

igit

Codes are used to define Security Type and duration. In Maturity Date, Month (M) is defined by a sequential letter of the alphabet (e.g., A = January, B = February, L = December.

Security Type (e.g.,)

A Treasury BillsB Treasury Bonds - With CouponsC Treasury Bonds - Without couponD Central Bank Securities issued in scripless form

Duration (e.g.,)

091 91 days182 182 days364 364 days002 2 years003 3 years010 10 years030 30 years

3.5 Unit Size and Minimum Marketable Parcels

Scripless Securities will be issued with face values expressed in multiples of one Sri Lanka Rupee.

Trades in LankaSecure will specify the securities to be transferred expressed in number of Units of a series. A Unit has a face value of one Sri Lanka Rupee.

The minimum marketable parcel is one unit i.e., a face value of one Sri Lanka Rupee.


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64. SECURITIES ACCOUNTS

4.1 AccountDefinitionandStructureLankaSecure establishes accounts on receipt of Securities Instructions that specify valid account criteria. Accounts are defined in LankaSecure using four criteria:

• Participant• Account Type• Customer Owner (if applicable)• ISIN Number

Accounts are created automatically by LankaSecure based on the information contained in each Securities Instruction as required, i.e., according to the criteria above. A separate account is created for each unique incidence of this combination of criteria.

A Securities Account maintained by a Participant is potentially made up of many individual Securities Accounts under its control. Accounts which have a Customer Owner recorded are for securities held in custody for a customer. Accounts that have no Customer owner recorded are for securities owned by the Participant itself, its “own” accounts.

4.2 Account Types Available in LankaSecureThe following Account Types are used in LankaSecure. The Central Bank may, at its discretion, restrict the Account Types that may be available to any Participant or category of Participant as well as the transaction types that may be applied to each Account Type.

Account Type Code PurposeParticipant’s / Central Bank’s Own Account OWN Holds securities owned by the Participant / Central Bank

Participant’s ILF Account ILF

Holds securities, in the case of participants, to be transferred to the Central Bank as collateral for ILF, and, in the case of the Central Bank, transferred by the participants to the Central Bank as collateral for ILF.

Pledge Account PLG

Holds securities that have been pledged to the Participant (in the case of an Approved Credit Agency) or an entity for whom the Participant is acting. The name of the Pledgor is recorded in the Owner field. Securities in these accounts cannot be traded except in accordance with applicable Regulations.

Customer Account (Resident) CSL

Holds securities owned by a “person resident in Sri Lanka” Customer of a Participant. The account is created by specifying a resident Owner in securities transactions. This Account Type is available only to Dealer Direct Participants.

Customer Account (Non-Resident) CSF

Holds securities owned by a “person resident outside Sri Lanka”. The account is created by specifying a non-resident Owner in securities transactions. This Account Type is available only to Dealer Direct Participants

Tradable Repo Account CRP

Holds securities that are transferred under a Reverse Repo Agreement by a Participant or a Customer to counterparty that are to be returned at a future date under the terms of such agreement. Securities in this Account are tradable.

Non-Tradable Repo Account REP

Holds securities that are transferred under a Reverse Repo Agreement by a Participant or a Customer to counterparty that are to be returned at a future date under the terms of such agreement. Securities in this account cannot be traded.

Tradable Customer Reverse Repurchase Account

CREHolds securities that are transferred under a Reverse Repo Agreement by a Participant or a customer to a customer that are to be reversed at a future date under the terms of such agreement. Securities in this Account are tradable.

Non-Tradable Customer Reverse Repurchase Account

CRRHolds securities that are transferred under a Reverse Repo Agreement by a Participant or a customer to a customer that are to be reversed at a future date under the terms of such agreement. Securities in this account cannot be traded.

Statutory Investment Account STI Securities that are held by Participant to meet statutory requirements imposed on the

ParticipantPrimary Auction Purchase Account PAP Holds securities purchased at Primary Auction (Primary Dealer and Designated

Non-Dealer Bidder use only)

Domestic Operations Repo Account DOP

Holds securities transferred to a Participant by the Central Bank under a repo Agreement that are to be returned to the Central Bank at a future date. Securities in this Account are not tradable.

Domestic Operations Reverse Repo Account DRP Holds securities transferred to the Central Bank by a Participant under a Reverse repo

Agreement that is to be returned to the Participant at a future date.


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65. TRADE PROCESSING AND SETTLEMENT

5.1 Trading Activities are External to the System

LankaSecure is a depository and settlement facility. It does not support any price discovery or trade negotiation activities. Its role is to accept Instructions in respect of completed deals and effect the transfers of securities and funds specified therein.

5.2 Transaction Types

LankaSecure provides for three basic types of transactions, i.e.:• Deliver / Receive Versus Payment• Deliver / Receive Free• Repositioning

Deliver / Receive Versus Payment transactions require transfers of both securities and funds to achieve finality. These transactions involve a movement in the specified securities between two Participants. These transactions are two-sided, i.e., both parties to the trade must submit a settlement instruction that must be matched prior to settlement.

Deliver Free / Receive Free transactions require only a movement of securities to achieve finality. There is no associated movement of funds in the System. These transactions involve a movement in the specified securities between two Participants. These transactions are two-sided, i.e., both parties to the trade must submit a settlement instruction that must be matched prior to settlement.

Repositioning is a Deliver Free transaction that simply moves securities between accounts of the same Participant. There is no associated movement of funds. These transactions are one-sided and do not require matching.

5.3 Securities Account Transfers made by the Central Bank

The Central Bank may debit or credit securities to Securities Accounts of Participants as provided for in the Mandate Agreement. These may also include debits or credits associated with the correction of an operational problem or error.

5.4 S.W.I.F.T. Messages

LankaSecure uses S.W.I.F.T. messages for the transfer of Securities Instructions. S.W.I.F.T. treats Participants of LankaSecure as members of a Closed User Group.

S.W.I.F.T. message types and flows are explained in LogicaCMG © LCSS/CSS Functional Specification Appendix A: S.W.I.F.T. Messages.

5.4.A. Recording of repositioning transaction through Central Bank of Sri Lanka Wide Area Network (CBSLNet)

However, Customer Repo Repositioning transaction (overnight and term repos up to one month) or a Customer Outright Repositioning transaction of value which is Rs. 5 million or below or such amount as may be decided by the Bank from time to time shall be recorded through the CBSLNet subject to the practices with regard to the operation of CBSLNet as reflected in the relevant System Rules, Operating Instructions that will be issued by the Bank from time to time. Any Customer Repo Repositioning transaction (overnight and term repos up to one month) or Customer Outright Repositioning transaction; the value of which is above Rs. 5 million or any such amount as may be decided by the Bank from time to time shall be recorded using SWIFT messaging system.

5.5 LankaSecureS.W.I.F.T.BankIdentifierCodes(BIC)

S.W.I.F.T. messages to LankaSecure must be sent to a separate BIC especially established to accept LankaSecure Instructions. LankaSecure messages must not be sent to the Central Bank’s own BIC.

The BIC for LankaSecure is CBCELKLS

Securities Instructions are sent directly to LankaSecure whereas Payment Instructions are sent to the BIC of the receiving Participant and intercepted by S.W.I.F.T. Y-Copy.

Each Participant is identified in the system by its S.W.I.F.T. BIC code. This is the same BIC code that is used to identify the Participant in RTGS.

5.6 S.W.I.F.T. Message Data Requirements

LankaSecure Instructions do not utilise all the available fields contained in the S.W.I.F.T. message formats. Only specific fields are read and utilised in LankaSecure processing. Participants must use the message format rules contained in the LogicaCMG © LCSS/CSS Functional Specification Appendix A: S.W.I.F.T. Messages.


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65.7 Securities Instructions to Follow Agreement of Trade Terms

To ensure adequate time for trade matching and the correction of any errors, Participants must input Securities Instructions to the LankaSecure as soon as practicable following agreement of trade terms with counterparties.

5.8 Forward Dated Transactions

LankaSecure will accept Securities Instructions for settlement on future Value Dates and will store such instructions until such Value Date. The system will accept Securities Instructions for up to 31 calendar days in advance of current date and Securities Instructions with future Value Dates greater than 31 calendar days in advance will be rejected.

If a Securities Instruction is received by LankaSecure that has a Value Date that has already passed it will be rejected.

At the start of each Business Day LankaSecure checks that each stored Securities Instruction has a valid Value Date. If a stored Securities Instruction has a value date that has already passed it will be rejected.

In the event that a Business Day is “cancelled”, eg a day on which due to extraordinary circumstances the Central Bank is not open for business, it is the responsibility of the Participant to cancel stored Securities Instructions for that Value Date or re-send them following rejection with a new Value Date.

5.9 Trade Matching

LankaSecure performs matching on the day of input of all Deliver / Receive against Payment Deliver / Receive Free Instructions. The exception is Repositioning Instructions that require only a single Deliver Free Instruction to be submitted.

Either side (buyer or seller) may input their Instruction first.

Instructions are matched using:

• Buyer and seller details• Reference• Security identifier• Settlement date ( Value Date)• Quantity• Total Price

Unmatched Instructions will be held in LankaSecure until a matching Instruction is received or until the Value Date in the Instruction is past.

5.10 Repo and Reverse Repo Transactions

Repo / Reverse Repo trades are settled in LankaSecure using the basic set of Instruction described at section 5.2. Each leg of the transaction must be entered as two separate Deliver / Receive against Payment Instructions. LankaSecure does not process these Instructions differently except that extra information is used in matching (repo / reverse repo date and total payment value of repo / reverse repo amount). The system recognises Repos / Reverse Repos as a separate transaction type for enquiry and reporting purposes. A separate Account Type is used to hold securities subject to Repo.

Participants must comply with regulations issued under the relevant laws in respect of Repo and Reverse Repo transactions.

5.11 Cancellation Instructions

Participants can cancel Securities Instructions using S.W.I.F.T. or the Browser Interface. Cancellations can only be made if certain conditions are met, viz:

• Trades that are being settled and settled trades cannot be cancelled;

• Unmatched trades and Repositioning may be cancelled by the originator alone; and

• Matched Instructions may only be cancelled with the consent of both parties and each must submit a cancellation instruction.

5.12 Delivery-versus-Payment Settlement Processing

Settlement of LankaSecure transactions follows the process described in the diagram over page. A Delivery / Receive versus Payment Instruction will be settled only if both securities and funds are available in the relevant Accounts in LankaSecure and RTGS respectively.

For Deliver / Receive Free transactions the process is similar, except that funds do not need to be transferred prior to delivery of securities.


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6Settlement Processing Steps

Seller submits Deliveragainst Payment

instruction

Buyer submitsReceive against

Payment instruction

Inputs validated and matched

Transaction held pendingSettlement date

Transaction queued forSettlement

Check for securitiesavailability

Securities earmarked and"frozen"

Settlement request to RTGSQueue

Check for funds availability

Debit and Credit RTGSAccount

Positive response toLankaSescure

Securities Transferred

Customer Statements Issuedas required (handled outs ide

LankaS ecure)

5.13 queues in LankaSecure

Securities Instructions will be queued in LankaSecure if the securities specified in the instruction are not available in the specified account. Securities Accounts in LankaSecure may not be overdrawn under any circumstance.

The queue is ordered by priority within settlement date. Within priority, the queue is ordered on date and time of matching, or date and time of input for single-sided instructions.


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6Participants acknowledge that this ordering may be overridden by the operation of queue clearance facilities such as Gridlock Resolution, direct Central Bank re-prioritisation of individual transactions and default priorities assigned to particular transaction types.

All Securities Instructions are subject to queuing.

Participants may adjust the priority of Securities Instructions either on or before the Value Date. Adjustments are made using the Browser Interface facilities.

Priorities are assigned by way of numbers in the range between 0 and 99 where zero is the highest priority and 99 the lowest. Priorities in the range 11 to 98 are available for Participant use. Priorities 0-10 and 99 are reserved for System or Central Bank use.

Intraday Liquidity Facility transactions are accorded a high priority of 5 to ensure timely delivery and return of ILF funds.

If a Participant submits a Payment Instruction or Securities Instruction without a priority number, it will be accorded a default priority of 98, i.e., it will be sent to the back of the Participant’s queue.

5.14 Gridlock Resolution in LankaSecure

Gridlock resolution facilities operate in LankaSecure. These are in addition to the gridlock resolution facilities in RTGS that work to resolve queues of Payment Instructions awaiting funds settlement.

LankaSecure gridlock resolution is run at regular intervals. The process identifies groups of Instructions that are held up because of the order in which they are sequenced for settlement. Gridlock resolution overrides the sequencing within an assigned priority and retries the settlement process. RTGS and DVP disciplines apply and neither Securities Accounts nor Settlement Accounts are overdrawn in the process.

Participants acknowledge that the original ordering of payments may be overridden in this process

5.15 Treatment of Unsettled LankaSecure Transactions at Day End

Unsettled Settlement Instructions will be rejected from the system at Close of Business on their value date. S.W.I.F.T. messages will issue to the transaction counterparties advising of the rejection.

6. PRIMARY AUCTIONS

6.1 Interaction of LankaSecure with Primary Auction System and Guidelines

The Central bank may issue guidelines to govern the conduct of Primary Auctions.

LankaSecure does not support the processes of tender acceptance and allocation at the Primary Auctions. The Central Bank maintains a separate system to support these processes. All financial obligations arising from the conduct of Primary Auctions must be settled through Settlement Account in RTGS.

LankaSecure will transfer scripless securities to successful bidders to their Primary auction Purchase Account against payment debited to their Settlement Account in the RTGS. Securities will be incremented to Primary Auction Purchase Accounts within the holdings of successful Bidder.

Auction dates and corresponding settlement dates are announced by the Central Bank outside the System.

6.2 Primary Auction Batch Settlement

Primary Auctions will be settled at the start of the Business day in accordance with the daily Operating Schedule on the date announced by the Central Bank

The funds settlement obligations arising from the Primary Auction shall be netted against interest and maturity payments due on the same date on Scripless Securities and on Government securities issued in scrip form that have been surrendered to the Central Bank by Participants in accordance with Treasury Bill and treasury Bond guidelines issued by the Central Bank.

This means that a single net amount will be applied to each Participants’ RTGS Settlement Account. LankaSecure reports and enquiries will enable reconciliation of the net amount with the associated securities transfers and interest and maturity payments.

If a Participant has insufficient funds to cover its net settlement obligation then securities will not be transferred to the Participant’s ownership. Section 6.3 describes the procedure that will apply in the event of a funds deficit in the Primary Auction settlement.

6.3 Primary Auction Batch Failure

In the event a Participant does not have sufficient funds to settle the Primary Auction batch at the start of day, the transactions will be queued. Participants will be given time up to 1300 hrs to fund their RTGS settlement account and settle their transactions.


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6If the transaction remains unsettled at 1300 hrs, the participant will be deemed to have failed in meeting his Primary Auction obligations. The transaction will be cancelled. The Government of Sri Lanka will be informed of the under subscription. The Central Bank will initiate an RTGS payment to credit the Participant with the interest and maturity payments due to him on the same date.

Non-payment by a bidder of an accepted tender of its net settlement obligations will result in such bidder becoming liable to sanctions as may be imposed under applicable written law

7. MATURITIES

7.1 Maturity Payment Processing

Maturity proceeds are payable on the date of maturity specified for the series.

The Participants acknowledge that where a maturity date coincides with a Primary Auction settlement date, the maturity proceeds and interest payments due to such Participant, if any, would be netted with their payment obligations, if any, in respect of their purchases at the Primary Auction.

Maturity proceeds are paid to the owner only through a Participant. On the date of maturity, a single payment will be made to the Settlement Account of each Participant in RTGS. This single payment will include all maturities of the Participants Own securities as well as its customers’ securities in the case of a Dealer Direct Participant.

The Browser Interface facility will provide detailed information of each individual maturity payment underlying the single payment.

7.2 Securities with Optional Maturity Dates

The Government may reserve the option for early redemption of securities at the time of issue in accordance with applicable law. The Central Bank will advise holders in advance of any such early redemptions.

7.3 Maturity Dates falling on a Holiday

Different rules apply to Treasury Bills and Treasury Bonds

For Treasury Bonds, if the date of maturity falls on a holiday, payment will be made on the Business Day immediately following the date of maturity without any adjustment to the amount of payment.

For Treasury Bills, if the date of maturity falls on a holiday, payment will be made on the Business Day immediately preceding the date of maturity without any adjustment to the amount of payment.

7.4 Payment of Maturities at Record Date

To remove any possibility that maturity payment is made to an incorrect beneficiary, scripless securities may not be traded after 3.00 p.m. on the Business Day prior to the maturity date. For instance, a security maturing on Friday may not be traded after 3.00 p.m. on Thursday.

7.5 Duty to Apply Maturity Proceeds to Owner

Upon receipt of maturity proceeds on behalf of a Customer, the Dealer Direct Participant must make payment of such maturity proceeds to the Customer or any person entitled thereto in terms of applicable written law within the timeframes and in accordance with directions issued by the Central Bank in that regard.

7.6 Inability to Apply Maturity Proceeds to Owner

When a Participant is unable to make payment of maturity proceeds in accordance with clause 7.5 above, such undisbursed funds must be remitted to the Central Bank (to the credit of Government Securities Unclaimed Account) within a timeframe and in accordance with the directions issued by the Central Bank in this behalf.

The Payment Instruction pertaining to such remittance should clearly identify the reason for return and the details of the original security maturity proceeds payment.

8. INTEREST

8.1 Interest Payment Processing

Interest payments fall due on the interest payment dates specified for the series.

The Participants acknowledge that where an interest payment date coincides with a Primary Auction settlement date, the maturity proceeds and interest payments due to such Participant, if any, would be netted with their payment obligations, if any, in respect of their purchases at the Primary Auction.


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6Interest payments are made to the owner of a scripless security only through a Participant. On the due date, a single payment will be made to the Settlement Account of each Participant in RTGS. This single payment will include all interest payable on its own securities as well as its Customers’ securities in the case of Dealer Direct Participants.

Reporting from the Browser Interface will provide detailed information of each individual interest payments underlying the single payment.

8.2 Interest Payment Dates Falling on a Holiday

If the date of interest payment date on Treasury Bonds falls on a holiday, payment will be made on the Business Day immediately following the interest payment date without any adjustment to the amount of payment.

8.3 Payment of Interest at Record Date

LankaSecure will effect interest payments to Participants according to the ownership of the security as recorded in the system at the end of the Business day prior to the interest payment date.

In the event that securities have been traded, but not yet settled and transferred in LankaSecure, Participants must ensure that interest payments are made to the correct beneficiary. When the securities have been traded cum-interest (i.e., trade price includes the upcoming interest payment) then the interest must be passed to the new owner of the security. It is anticipated that most trades occurring just prior to a interest date would be priced cum-interest.

If a Participant is in any doubt as to the correct beneficiary of an interest payment, the payment must be returned to the Central Bank (for credit of Government Securities Unclaimed Account) in accordance with directions, if any, issued by the Central Bank, with full explanatory details of the underlying transaction.

8.4 Duty to Apply Interest Payment to Customer Owner

Upon receipt of an interest payment on behalf of a Customer or any person entitled thereto under any applicable written law, the Participant must make payment of such interest to the Customer within the timeframes and in accordance with directions issued by the Central Bank in that regard.

8.5 Inability to Apply Interest Payment to Owner

When a participant is unable to deliver interest payments due to a customer or the person entitled thereto, such funds must be remitted to the Central Bank (to the credit of Government Securities Unclaimed Account) within the timeframes and in accordance with directions issued by the Central Bank in that regard.

The Payment Instruction should clearly identify the reason for return and the details of the original security interest payment.

9. CUSTOMER STATEMENTS

9.1 Recording Customer Information

The following information is held in the system:

Field Field length ContentOWNER 11 characters Internal reference number of holding Participant

NAME ADDRESS 4 lines of 35 characters Owner’s name and address. This will be used for statement mailing purposes.

ALTERNATIVE OWNER CODE 10 characters National Identity Number or Company Registration Number of Owner

The information recorded by the Participant in the NAME ADDRESS field will be used by the Central Bank to mail statements to the Customer owners of securities.

Participants must ensure that these details are correct and up to date at all times.

9.2 Customer Statement of Holdings

Subject to 10.2, a statement of holdings and current transactions will be sent directly to the Customer owner recorded in LankaSecure each time a holding is created or amended. This will provide Customers of Participants with a third party confirmation of their holdings. A periodic statement of holdings may also be provided.

The Central Bank will not issue statements in respect of Participants own holdings. Participants receive this information directly from LankaSecure via S.W.I.F.T. or the Browser Interface.


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69.3 Customer Statement of Interest and Maturity Payments

A statement of interest and maturity payments will be sent directly to the Customer following interest and maturity payments. This will provide Customers of Participants with a third party confirmation of the amounts due to them from their Dealer Direct Participant.

The Central Bank will not issue statements in respect of Participants own holdings. Participants receive this information directly from LankaSecure via S.W.I.F.T. or the Browser Interface.

9.4 Incorrect Address Records

If a Customer statement is returned to the Central Bank undelivered, the Central Bank will advise the Customer’s dealer Direct Participant. The Participant must correct address details held in LankaSecure for the Customer immediately. If the Participant is unable to supply new address details, the address should be deleted and replaced with the record “Unable to locate Customer”.

10. PLEDGING

10.1 Recording Pledges

A separate account type is available in the System to record pledges. This account type can only be updated by Repositioning transactions. Participants cannot buy or sell out of this account type once the account has been established.

The Central Bank may, at its discretion, specify that certain types of securities may not be pledged and LankaSecure will enforce such restrictions.

To effect a pledge, the securities are transferred to the lending Participant, if it is an approved credit agency, or to a Dealer Participant, Participant acting for a non-Participant lender. The pledgor must continue to be recorded as the owner of the securities.

A separate Owner record must be established in the system to record the interests of both the Pledgor and Pledgee by the Participant maintaining the Pledge account. The pledge information will be recorded in the fields normally used to record the owner’s name and address

Field Field length ContentOWNER 11 characters Internal reference number of holding ParticipantNAME ADDRESS Line 1 Pledgor’s name (i.e., the Owner)NAME ADDRESS Line 2 Pledgee’s nameNAME ADDRESS Line 3 Intended date of release (DDMMYY)

NAME ADDRESS Line 4 Status of pledge, e.g., this line should be used if the pledge is subject to dispute or claim, e.g., “in default”.

ALTERNATIVE OWNER CODE 10 characters National Identity Number or Company Registration Number of Owner

Interest and maturity payments would be made to the Participant in whose holding the pledge account resides. The Participant must disburse payments to the owner in accordance with these System Rules.

10.2 StatementsandConfirmationofPledges

Pledge information is recorded in LankaSecure using the fields normally reserved for mailing details. Consequently, statements will instead issue to the Participant holding the Pledge account who will be responsible for providing statements to the pledge parties, or, in the case of interest payments, to the owner.

10.3 Obligation of Participants to Enforce Pledges

Participants are responsible for enforcing and releasing pledges in accordance with the relevant Regulations.

11. INTRADAY LIqUIDITY FACILITY

The operation of the Intraday Liquidity Facility is described in Volume 2 – Payments and Settlements. LankaSecure facilities are used to position securities in the ILF accounts of Participants, i.e., by use of Repositioning instructions.


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6VOLUME 4

OPERATION AND ADMINISTRATION

TABLE OF CONTENTS

1. OPERATING CALENDAR AND SCHEDULE 1.1 LankaSettle Operating Day 1.2 Operating Hours and Sessions 1.3 Ad Hoc Changes to LankaSettle Operating Sessions and Hours

2. SECURITY 2.1 Participant’s Responsibility to Ensure Security of LankaSettle Operations 2.2 Actual or Suspected Breaches of Security 2.3 Fraudulent Activity 2.4 S.W.I.F.T. FIN Y-Copy Double Authentication 2.5 Key Exchange for LankaSecure 2.6 Frequency of Key Exchange 2.7 LankaSettle Browser Interface Security 2.8 Browser Interface User Access Control Maintenance

3. TECHNICAL, SECURITY AND BACK-UP STANDARDS 3.1 Integrity and Resilience 3.2 Outsourcing or Sharing of LankaSettle Facilities

4. CONTINGENCY EVENTS 4.1 Definition of a Contingency Event 4.2 Central Bank Back-up Facilities 4.3 Individual Participant Event 4.3.1 Advising System Outages 4.3.2 Advice to other Participants 4.3.3 Continued Processing of Inward Transactions 4.3.4 Re-establishment of CBT Connection 4.4 S.W.I.F.T Event 4.5 LankaSettle CBT Event 4.6 RTGS Application Event 4.7 LankaSecure Application Event 4.8 Other Contingency Events 4.9 Contingency Event Record 4.10 Testing of Contingency Arrangements 4.11 Contact Points 4.12 Administrative Messages 4.13 Suspension of Participant or Account 4.14 Default Participant Status

5. SYSTEM ADMINISTRATION AND USER ASSISTANCE 5.1 S.W.I.F.T. User Assistance 5.2 LankaSettle Help Desk

6. DISPUTES BETWEEN PARTICIPANTS

7. SYSTEM CHANGES AND CHANGE CONTROL 7.1 Fixes, Changes and Enhancements to the System 7.2 LankaSettle System Changes and Change Control 7.3 S.W.I.F.T. Standards Changes

8. FEES AND CHARGES

ATTACHMENT A – PARTICIPANT BIC CODESATTACHMENT B – SCHEDULE OF LANKASETTLE FEESATTACHMENT C – LANKASETTLE HELP DESK CONTACT DETAILS


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61. OPERATING CALENDAR AND SCHEDULE

1.1 LankaSettle Operating Day

LankaSettle will provide facilities to allow Participants to enquire on the next scheduled operating day and a forward calendar.

Participants are required to be able to receive and send Instructions to LankaSettle and other LankaSettle-related messages whenever LankaSettle is operating.

1.2 Daily Operating Schedule

The Central Bank will seek to operate LankaSettle to a fixed schedule during each operating day. There will be discrete sessions within the LankaSettle day. Different transactions and processes will apply during these sessions. The LankaSettle Daily Operating schedule is described in the table below.

Changes to the schedule will be advised to Participants by amendment to these Rules. In normal circumstances, Participants will be given at least 7 days notice of such changes.

TIME EVENT ACTIVITIES / TRANSACTIONS6.30 a.m. System start-up Start-up of RTGS / SSS applications.7.30 a.m. to 8.00 a.m. Start of day processing Update official prices of securities, earmarking securities for ILF.

8.00 a.m. LankaSettle System opens for business

System opens for effecting transactions.

8.00 a.m. ILF / auto reversal of Repos Grant ILF and settle second leg of Repos of OMO.

8.15 a.m. Maturities / interest payments, start of the day (SOD) file

Settlement of maturity proceeds / coupon payments of securities, effecting LankaSettle charges / penalties.

8.30 a.m. Multilateral Net Settlement Batch from LankaClear

SLIPS/Main Clearing.

8.30 a.m. Outright sales / purchases Settle OMO outright sales and purchases.11.00 a.m. Reversal of Reverse Repos Settlement of second leg of Reverse Repos under OMO.11.45 a.m. Reverse Repos (Auction) Settlement of first leg of Reverse Repos under OMO.12.45 p.m. Repos (Auction) Settlement of first leg of Repos under OMO.1.00 p.m. Closure of Primary Auction settlement Settlement of securities under Primary Auction.

2.15 p.m. Multilateral Net Settlement Batch from LankaClear

Rupee Draft Clearing.

2.45 p.m. Multilateral Net Settlement Batch from LankaClear

Settlement Clearing and Adjustment Clearing.

3.00 p.m. Primary cut-off time for third party transactions

Close for new transactions (for T + 0) in favour of third parties, except for bank-to-bank (MT2XX series).

4.00 p.m. Repos (standing) Settlement of first leg of Repos under OMO4.15 p.m. Reverse Repos (Standing) Settlement of first leg of Reverse Repos under OMO.4.15 p.m. ILF Repayment Repayment of ILF.

4.30 p.m. Final cut-off time. Close for businessNo further inputs are accepted. With the closure of system for business, queue / settlement processing will cease and any transactions still in queues will be rejected.

4.30 p.m. to 5.15 p.m. EOD processing

End-of-day (EOD) processes e.g., generate reports / GL export (EOD) file, database maintenance for billing / statement printing purposes.

5.15 p.m. System shut down Commence shutting down of RTGS / SSS application software, obtain off line backups.

1.3 Ad Hoc Changes to LankaSettle Operating Sessions and Hours

Ad hoc adjustments to the operating schedule may be required from time to time to deal with unforeseen contingencies. In such event, the Central Bank will extend or reduce operating times and sessions at its sole discretion.

Requests by Participants for an extension to an operating day or session will be considered on a case-by-case basis. Participants must provide the Central Bank with reasons in support their request. Participants must not rely on obtaining an extension.


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6The Central Bank will, as a general principle, only entertain a request for extension in critical circumstances. Participants will be advised of ad hoc changes as necessary.

2. SECURITY

2.1 Participant’s Responsibility to Ensure Security of LankaSettle Operations

Both S.W.I.F.T. and LankaSettle provide security facilities to protect data, payments in transit, and to control user access. Participants are responsible for ensuring the integrity of transactions, data and user access within their own organisations.

2.2 Actual or Suspected Breaches of Security

Any actual or suspected breach of security must be reported to the Central Bank.

2.3 Fraudulent Activity

(a) The Participant must ensure that its own systems provide appropriate protection against fraudulent activity in connection with the System.

(b) All actual or suspected fraudulent activity in connection with the System must be reported immediately to the Central Bank.

Each Participant must provide all reasonable assistance, requested by the Central Bank or any other Participant to investigate and identify the source of any actual or suspected fraud.

2.4 S.W.I.F.T. FIN Y-Copy Double Authentication

S.W.I.F.T. security and control arrangements are described in the S.W.I.F.T. FIN Copy Service Description and in the FIN Security Guide of the S.W.I.F.T. User Handbook.

To make the LankaSettle FIN Y-Copy service fully secure a double-authentication mechanism is used.

Standard FIN messages use an authentication mechanism based upon bilateral key exchange (BKE) between the sender and receiver. The resulting message authenticator is called the Message Authentication Code (MAC).

To support LankaSettle Y-Copy a second message authentication mechanism is used based on bilateral key exchange between the sender and the Central Bank and between the Central Bank and the receiver. These two FIN Y-Copy authenticators are called Proprietary Authentication Codes (PACs). PACs are calculated on a subset of the message fields (ie. LankaSettle uses a partial copy Y-Copy service), whereas MACs are calculated on the full message text.

RTGS has its own BIC for the receipt and dispatch of Y-Copy messages. This BIC is not used for any other purpose. Ordinary payments to and from the Central Bank will be exchanged via the Central Bank's own BIC (see Attachment A). The RTGS BIC address must, however, be used by Participants for bilateral key exchange with RTGS.

The RTGS BIC address is CBCELKLA.

The two authentication results are inserted into the trailer block of the user-to-user message to be sent, with the PAC trailer immediately after the MAC trailer. The PAC generated is calculated on the fields to be copied to the Central Bank and the MAC of the original message.

When generating MT097, LankaSettle will calculate a second PAC. The message finally arriving at the receiving Participant will contain a MAC calculated by the sender and a PAC calculated by LankaSettle. The second PAC is based on the fields copied, the MAC of the original message and Field 115 (Field 115 will contain settlement details appended by LankaSettle).

2.5 Key Exchange for LankaSecure

A separate BIC address is maintained for the exchange of messages between the LankaSecure and Participants.

The LankaSecure BIC address is CBCELKLS.

2.6 Frequency of Key Exchange

Key exchange between Participants and between LankaSettle and Participants will be required at yearly intervals. The Central Bank may require more frequent or ad hoc key exchanges to take place.

New keys must be exchanged immediately if there is any actual or suspected breach of key security.

2.7 LankaSettle Browser Interface Security

Participants will use workstation Browser Interfaces to access LankaSettle through the CBSL Net Wide Area Network. Browser Interfaces attached to the network will support the enquiry and queue management of LankaSettle.


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6LankaSettle will provide access security with user-IDs, passwords and functionality limitations that may be controlled by the appropriate authority in the Participant organisations. It is the responsibility of each Participant to establish and enforce appropriate user access, password protection and authorities within their organisations.

2.8 Browser Interface User Access Control Maintenance

The Central Bank will assign User Access Rights to users within Participant's organisations. Separate User Profiles will be established by the Central Bank that will define the system functions that can be accessed by a user. Applications for creation, deletion or modification of user access rights must be made in writing.

In the event of suspected fraud or misuse of the Browser Interface by a User, the LankaSettle Help Desk must be immediately informed and immediate arrangements made for the cancellation of the user rights in question.

3. TECHNICAL, SECURITY AND BACK-UP STANDARDS

3.1 Integrity and Resilience

Participants are responsible for ensuring the integrity and resilience of their own internal LankSettle processing systems and procedures. Participants must maintain, amongst other things:

• back-up facilities;• contingency plans;• physical site security;• system downtime and problem monitoring and resolution procedures,• system capacity; and• fraud prevention procedures;

those are adequate to support their activities in LankaSettle.

The Central Bank shall be entitled at any time to conduct an inspection of the premises of a Participant with the view to determining whether internal systems, controls and procedures are adequate to ensure the integrity and resilience of their LankaSettle operations. Participants must advise the Central Bank of the current location of their primary and back-up facilities.

3.2 Outsourcing or Sharing of LankaSettle Facilities

Participants may not, without the prior consent of the Central Bank, enter into arrangements to outsource, share or otherwise allow third parties to access their LankaSettle facilities.

4. CONTINGENCY EVENTS

4.1 DefinitionofaContingencyEvent

A contingency event is any event that disrupts or has the potential to disrupt the normal exchange and settlement of transactions in LankaSettle. Six main potential types of Contingency Event are envisaged:

(i) Individual Participant Event (ii) S.W.I.F.T. Event (iii) LankaSettle CBT Event (iv) RTGS Application Event (v) LankaSecure Application Event (vi) Other Contingency Events

Each type of event is dealt with in the following sections.

An inability to access the Central System using the LankaSettle Browser Interface facility for the purposes of enquiry, queue management or non-value message exchange, will not constitute a Contingency Event.

4.2 Central Bank Back-up Facilities

The Central Bank maintains full back-up facilities for LankaSettle and its S.W.I.F.T. connections. In the event of an unrecoverable failure at the primary site, the Central Bank will, under advice to Participants, move LankaSettle operations to the back-up site.

In the event that it proves necessary to move LankaSettle operations to the Central Bank’s back-up facilities, Participants will be advised of any action that needs to be taken. It is intended that the transition to the back-up site will be largely transparent to Participants. Participants will need to establish a new Logon session from their Browser Interface or server to the Central Bank’s back-up site.


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64.3 Individual Participant Event

4.3.1 Advising System Outages

If a Participant experiences any technical or operational problems that prevent it from processing payments and other LankaSettle-related messages, it must advise the Central Bank within 15 minutes of becoming aware of the problem.

Participants must immediately advise the Central Bank of any change in their situation.

4.3.2 Advice to other Participants

The Central Bank will advise other Participants at its discretion where the problem appears likely to be protracted or potentially disruptive to the overall operation of the system, eg. close to end-of-day Cut-off.

Every other Participant must make its own judgment as to whether to continue to send payments in favour of the disabled Participant.

4.3.3 Continued Processing of Inward Transactions

In the event of an outage in a Participant’s S.W.I.F.T. CBT interface, LankaSettle will continue to process any MT096 Instructions already held or subsequently received from S.W.I.F.T. Settled payments in favour of the Participant and other messages will accumulate in S.W.I.F.T. pending re-establishment of communications with S.W.I.F.T.

4.3.4 Re-establishment of CBT Connection

Participants must attempt to re-establish their S.W.I.F.T. CBT connection.

4.4 S.W.I.F.T Event

In the event of a prolonged S.W.I.F.T. outage the Central Bank will consult and communicate with Participants’ Contacts. Participants must remain logged onto their Browser Interfaces to receive Text Messages regarding the status of the event.

In the event that the Central Bank forms the view, following consultation with S.W.I.F.T. and Participants that S.W.I.F.T. will not be able to restore communications for the rest of that Business Day, the Central Bank will announce procedures that are to apply for the balance of the day.

In the event of a prolonged unrecoverable RTGS Application Event Participants will use alternate means of payment exchange, e.g., bank cheques, bilateral exchanges etc. and settle on a net basis. The Central Bank will advise Participants of the alternate means to apply.

4.5 LankaSettle CBT Event

In the event of a prolonged outage in the LankaSettle S.W.I.F.T. interface at both the Primary and Back-up sites, Central Bank will consult and communicate with Participants’ Contacts. Participants must remain logged onto their Browser Interfaces to receive Text Messages regarding the status of the event.

In the event that the Central Bank forms the view, following consultation with S.W.I.F.T. and Participants that it will not be able to restore communications for the rest of that Business Day, the Central Bank will announce the procedures to apply for the balance of the Business day.

In the event of a prolonged unrecoverable LankaSettle CBT Event Participants will use alternate means of payment exchange, e.g., bank cheques, bilateral exchanges etc. and settle on a net basis.

4.6 RTGS Application Event

An RTGS Application Event occurs when LankaSettle is unable to process transactions to Participant’s accounts. The outage will be in the RTGS Application itself rather than in its S.W.I.F.T. interface. A system event that involves both the CBT and the LankaSettle Application will be treated according to these System Rules.

In the event of a prolonged unrecoverable outage in the RTGS Application at both the Primary and Back-up sites, the Central Bank will consult and communicate with Participants.

If the Central Bank forms the view that it will not be able to restore RTGS operations for the rest of that operating day, the Central Bank will submit an emergency request to S.W.I.F.T. by Authenticated Telephone Call (as per C.2.3 and P8 of the FIN Copy Service Description) requesting S.W.I.F.T. to amend the RTGS CUG operating mode to “Closed”. This could take up to 45 minutes from authentication of the emergency call. Once transferred to “Closed” mode S.W.I.F.T. will abort any further payment instructions submitted by Participants with an MT019 Abort Notification.

In the event of a prolonged unrecoverable RTGS Application Event Participants will use alternate means of payment exchange, e.g., bank cheques, bilateral exchanges etc. and settle on a net basis.


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64.7 LankaSecure Application Event

In the event of a prolonged unrecoverable outage in the LankaSecure Application at both the Primary and Back-up sites, the Central Bank will consult and communicate with Participants. The Central Bank will announce the procedures to apply for the balance of the Business day.

If possible, RTGS will continue to operate.

4.8 Other Contingency Events

Other system disabling events may arise that must be dealt with on a case-by-case basis. In such circumstance, the Central Bank may take such measures as it considers necessary including:

• extend or shorten the LankaSettle operating days;• suspend operations of the system; and• suspend the operating procedures of the System under these System Rules.

The Central Bank will attempt to remain in contact with Participants and provide instructions to restore operations.

The Central Bank will execute such emergency measures as are necessary to resume operations with minimum delay. Participants must cooperate with the Central Bank in the execution of these measures.

4.9 Contingency Event Record

Each Participant must maintain a written record of all Contingency events and system problems. This record should include details of date, time, nature of problem, action taken to rectify and time of rectification. The Central Bank will review this record quarterly. Copies are to be forwarded to the LankaSettle Help Desk Supervisor.

4.10 Testing of Contingency Arrangements

The Central Bank will test its own contingency arrangements periodically. All Participants are required to cooperate and participate in this process.

Participants with their own back-up sites and systems may arrange, as necessary, with the Central Bank for conduct of their own contingency arrangement tests. As a minimum, the Central Bank should be advised of any testing that could affect a Participant’s ability to operate in the system.

The Central Bank may require individual Participants to conduct tests of their back-up facilities and contingency arrangements.

4.11 Contact Points

Each Participant must nominate a first contact point for responding to enquiries or exchanging information in the event of processing problems. Each Participant must nominate a second contact point to act in case of the unavailability of the first contact point. These must be advised in writing to the Central Bank. Participants must inform the Central Bank immediately in writing of any changes to Contact Point details.

4.12 Administrative Messages

Participants must attend promptly to administrative messages sent by the Central Bank. The Central Bank will not be liable for any losses of any kind arising from a Participant's failure to receive and take appropriate action in response to such messages.

4.13 Suspension of Participant or Account

The Central Bank may at its discretion assign a Suspended system status to a Participant or a Participant’s Account. This could be used in a variety of circumstances but would typically be used in a contingency situation when a Participant’s S.W.I.F.T. network connection is not working. Temporary suspension allows the Central Bank to resolve any liquidity problems that may arise as a result of a S.W.I.F.T. network connection failure.

4.14 Default Participant Status

The Central Bank may assign a Default status to a Participant. This stops all payment to and from the Participant. Unsettled transactions already in the system to or from the Participant are immediately rejected when the Participant is assigned Default status. Withdrawal of RTGS / LankaSecure facilities would occur in the circumstances described in the Mandate Agreement.


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65. SYSTEM ADMINISTRATION AND USER ASSISTANCE

5.1 S.W.I.F.T. User Assistance

Participants experiencing S.W.I.F.T.-related problems should make use of their ordinary S.W.I.F.T. Customer Support Centre facilities, in accordance with the S.W.I.F.T. User Handbook

5.2 LankaSettle Help Desk

The Central Bank will establish and maintain a LankaSettle Help Desk to assist Participants with their use of the LankaSettle system and to address any service difficulties encountered. The Help Desk will be available throughout the LankaSettle Operating Day. Help Desk Contact details are shown in Attachment C.

6. DISPUTES BETWEEN PARTICIPANTS

The Central Bank shall not have any duty to determine the legality, validity or enforceability of any transaction on the System, or whether any such transaction is contractually void or voidable. To avoid dispute Participants must ensure that all transactions are legally valid and enforceable. The Central Bank shall be entitled to regard all transactions as legal, valid and enforceable.

The Central Bank shall not have any duty to any Participant to reject or modify any transaction by reason of any error, omission, failure/defect, forgery, theft or any wrongful use of the System or S.W.I.F.T.

The Central Bank shall not have any duty to determine any claim in any dispute between Participants or between Participants and their customers or to make any adjustment to the operation of the System to uphold any claim.

In the event of any dispute or difference arising between the Participants of the System, the parties to such dispute or difference shall make every endeavour to resolve such dispute or difference amicably. If the matter cannot be resolved amicably it shall be resolved by arbitration in terms of the Arbitration Act, No.11 of 1995. The decision in such arbitration shall be binding on the parties.

For avoidance of doubt, this provision shall not be apply to a dispute arising from any action taken or purported to be taken under any law by the Central Bank in its capacity as regulator or supervisor of a Participant.

7. SYSTEM CHANGES AND CHANGE CONTROL

7.1 Fixes, Changes and Enhancements to the System

Any fixes, changes or enhancements to the System that the Central Bank considers to be necessary to:

(a) ensure the System continues to perform as designed; or

(b) meet any additional reasonable requirements of the Participants; or

(c) change the functionality of the System from the level of functionality in the System on the date of commencement of live operations;

will be implemented by the Central Bank on the condition that the Central Bank can recoup the cost of such changes or enhancements through adjustments in the fees chargeable to the Participant or Participants as the case may be.

The Central Bank will use reasonable endeavors to consult with, and take due account of the views of, the Participants if a fix is required in order to ensure the System continues to perform in accordance with its design. However, the Central Bank will not be obliged to consult with the Participant if a fix is required urgently and any delay in effecting that fix is likely to cause major inconvenience to any Participant.

7.2 LankaSettle System Changes and Change Control

The Central Bank will control planned LankaSettle changes according to the following guidelines:

• the Central Bank will issue advices and instructions to Participants prior to implementation of planned system changes;

• accompanying amendments to System Rules and other system documentation will be issued where appropriate; and

• any modifications will be tested prior to implementation in a production environment. Participants may be required to assist the Central Bank in the conduct of this testing.

7.3 S.W.I.F.T. Standards Changes

The Central Bank will review S.W.I.F.T. advance information on upcoming S.W.I.F.T. applications and standards. The Central Bank will determine whether an upcoming change is likely to impact on LankaSettle operations. The Central Bank will advise Participants of these changes and advise what action will need to be taken by Participants. Participants must implement any S.W.I.F.T. changes that impact on the operations of LankaSettle.


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68. FEES AND CHARGES

The Central Bank will calculate fees and charge in accordance with Attachment B and charge these to Participants’ Settlement Accounts in accordance with the Mandate Agreement.

Charges will be calculated at the end of each calendar month and debited to Participants’ Settlement Accounts on the third working day of the following month.

Participants will be provided with invoices providing details of LankaSettle charges. Attachment B sets out LankaSettle Fees.

Schedule IAccession Agreement

Sri Lanka Real Time Gross Settlement System And Scripless Securities Depository System(LankaSettle)

THIS Agreement is executed by and between the Monetary Board of the Central Bank of Sri Lanka a body corporate established under the provisions of the Monetary Law Act, No.58 of 1949 having its principle office at …….………………………………(hereinafter referred to as the “Central Bank”) and ……………………… , ……………………….. a …………………….. having its registered office at ……………………………… (hereinafter referred to as the “Participant”)

Whereas the said Participant has been appointed a Direct Participant in terms of the provisions of the Registered Stock and Securities Ordinance, No.7 of 1937 and the Local Treasury Bills Ordinance, No.8 of 1923

And whereas the said Participant maintains with the Central Bank a Settlement Account and Securities Accounts as provided for in the said Monetary Law Act and has entered in to a mandate agreement with the said Central Bank in respect of the operation of such accounts and matters related thereto (hereinafter called the Mandate Agreement)

Now therefore it is hereby agreed between the parties as follows–The Participant warrants that:1. it has satisfied all technical, administrative and other requirements for participation on the Sri Lanka Real Time Gross

Settlement System (RTGS) and the Scripless Securities Depository System (LankaSecure) established by the Central Bank in terms of section 62A of the Monetary Law Act ( which two systems are collectively referred to hereinafter as LankaSettle), as required by the rules of said systems (hereinafter referred to as the System Rules)

2. the execution of this Agreement and participation in LankaSettle will not violate any law, regulation, by law or rule applicable to the Participant.

3. it has taken all necessary action to authorise the execution of this Agreement; and Further agrees that it shall

(i) participate in LankaSettle from and after the date hereinafter mentioned subject to and in accordance with the System Rules, as may be amended from time to time,

(ii) make such payment of fees and other dues to the Central Bank as provided for in the System Rules; and(iii) have entered into an agreement with the Central Bank in a prescribed form to enable it to obtain intra day liquidity

from the Central Bank for the purpose of settling payments on LankaSettle (ILF Agreement)

The Central Bank, relying on the warranties so given and in consideration of the agreements so reached, hereby agrees that the Participant shall be entitled to participate in LankaSettle from the …….……… day of ……………, 2003, in accordance with the System Rules subject to the terms and conditions contained in the Mandate Agreement and the ILF Agreement hereinbefore referred to.

Executed on the …….……… day of ……………, 2003, in Colombo by ……………………………… authorised signatory of the Monetary Board Central Bank of Sri Lanka and ……………………………… , ………………… authorised signatory of …………………………

…………………………………………………… ……………………………………………………

…………………………………………………… …………………………………………………… for and on behalf of the Monetary Board for and on behalf of of the Central bank of Sri Lanka

For For[THE PARTICIPANT’S NAME] Sveriges riksbank[SIGNATURES] [SIGNATURES]

Instrument of Accession


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6Schedule II

Agreement on Intra-day Liquidity FacilityThis agreement is made and entered into between the Monetary Board of the Central Bank of Sri Lanka having its principal place of business at …………………………. (hereinafter referred to as the “Central Bank”) and …………………………………… (name of the Participant) having its registered place of business at ………………………… (hereinafter referred to as the “Participant”).

Whereas …………………………… is a participant in LankaSettle

And whereas in terms of the rules applicable to the LankaSettle (System Rules) the Central Bank may, at its discretion, provide intra-day funds to a participant by way of an Intra-day Liquidity Facility (ILF) to assist them to meet their intra-day liquidity requirements on LankaSettle, subject to such facilities being fully secured by eligible securities.

And whereas the said Participant desires to be provided with such facility and the Central Bank has agreed to provide such facility to the said Participant subject to the terms and conditions hereinafter set out.

Now the parties hereto agree as follows:

1. General

Words and expressions in this Agreement shall, unless otherwise stated or evident from the context, have the same meaning as in the System Rules.

2. Security for ILF

Funds provided under the ILF by the Central Bank shall be fully secured, in the manner hereinafter set out, by eligible securities as determined for the purpose by the Central Bank from time to time in terms of the Operating Instructions on ILF (Eligible Securities).

The Participant shall not use securities that are owned by any person other than the said Participant or securities that are in any way encumbered as security for funds obtained under the ILF.

3. Charges for ILF

The Central Bank shall not charge interest from the Participant in respect of funds provided under ILF. The Central Bank may, however, at its discretion recover the costs associated with the administration of ILF in accordance with the System Rules.

4. Mode of Providing ILF

Subject to the other terms and conditions contained in this agreement, funds under the ILF shall be provided to the Participant by the Central Bank on reverse repurchase transactions with the Central Bank in terms of which the Participant agrees to repurchase the securities on or before the time specified in the Daily Operating Schedule in the System Rules for repayment of ILF. The procedure applicable to the provision of ILF is set out in the Operating Instructions on ILF (Operating Instructions) issued by the Central Bank.

5. Valuation of securities for the purposes of ILF

The amount of funds that will be provided to the Participant under the ILF shall be determined by valuing the securities that are transferred under the reverse repurchase transactions at the applicable Official Prices referred to in the Operating Instructions and recorded in LankaSecure.

In exceptional circumstances the Central Bank reserves the right to revise the Official Prices during the Business Day and revalue the securities provided by the Participant as collateral based on the revised Official Prices. In the event of such a revaluation, where necessary, the Central Bank has the right to call for replenishment of securities from the Participant in accordance with the Operating Instructions.

In the event the Participant is unable to provide replenishment of securities as requested by the Central Bank, the Central Bank reserves the right to debit the Settlement Account of the Participant in LankaSettle to the value of such replenishment.

6. Title to Securities

The Participant acknowledges and accepts that the title to securities in the Central Banks’ ILF Account vest with the Central Bank and that the Participant has only a right of repurchase on the same day of such securities upon repayment of funds obtained against such securities, unless the Central Bank has agreed to extend the period of repayment until the next Business Day in terms of Clause 11 in which event the Participant shall have a right to repurchase the said securities before the specified time on the next Business Day at a price determined in accordance with that clause.


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67. Additional Drawdowns of ILF during the Business Day

The Central Bank shall ordinarily provide funds under the ILF only at the start of the Business Day. If, however, the Participant requires additional funds during the Business Day and a request is made for such additional funds in accordance with the Operating Instructions, the Central Bank may, at its discretion, agree to grant such additional funds under the ILF.

The Central Bank reserves the right to recover the cost of providing such additional ILF from the Participant.

8. Reversal of ILF during the Business Day

If the Participant wishes to repurchase before the end of the Business Day securities transferred to the Central Bank’s ILF Account as security for funds provided under the ILF, the Participant may, with the prior consent of the Central Bank, repurchase such securities upon payment to the Central Bank of the funds so provided. The Central Bank reserves the right to recover any costs arising from such early repurchase.

The Central Bank may, at its discretion, and at the request of the Participant release to the Participant securities that have been transferred from the Participant’s ILF Account to the Central Bank’s ILF Account if the value of the remaining securities so transferred, determined in accordance with paragraph 5, is equal to or greater than the sum outstanding from the Participant to the Central Bank under the ILF.

9. Repayment of ILF at the End of the Business Day

Funds obtained under the ILF shall be repaid by the Participant at the end of the Business Day at the time stipulated in the Daily Operating Schedule in the System Rules. The Participant hereby undertakes to maintain sufficient funds in its Settlement Account at such time for such repayment.

If there are sufficient funds in the Participant’s Settlement Account at such time the Settlement Account of the Participant will be debited by LankaSettle by the amount outstanding from the Participant under the ILF, and the securities against which such funds were provided shall be returned to the Participant in accordance with the Operating Instructions.

10. InsufficiencyoffundstorepaytheILFattheendoftheBusinessDay

If the Participant does not have sufficient funds in its Settlement Account to repay the amount outstanding under the ILF at the end of the Business Day at the time stipulated in the Daily Operating Schedule in the System Rules he would be deemed to be in default and the Central Bank shall be entitled to retain the securities against which such funds were provided to the Participant and to transact in them in its own right.

The Central Bank may, however, in its sole discretion grant time to the Participant for repayment of funds obtained under ILF up to 12 noon on the next Business Day in which event the Participant shall be liable, on the first occasion of such default, to pay interest on the outstanding amount at a rate equivalent to the Bank Rate announced by the Central Bank from time to time which rate of interest shall be increased by 100 basis points on each succeeding occasion of default.

If such default occurs four times during a 12-month period, the Participant shall be suspended from access to ILF for a week. In the event of repeated default the Participant's access to ILF may be withdrawn for a period of time determined by the Central Bank.

In the event a defaulting Participant who has been granted an extension of time for repayment of ILF does not have sufficient funds in his Settlement Account by 12 noon on the next Business Day, the Central Bank shall be entitled to retain the securities against which such funds were provided and to transact in such securities in its own right and shall debit the Settlement Account of the Participant for the applicable interest.

11. Restriction of ILF

Notwithstanding the provisions of this Agreement, the provision of ILF to the Participant may be restricted in accordance with the System Rules and the Mandate Agreement.

12. Term of the Agreement

This agreement shall come into effect upon both parties signing this Agreement and the Accession Agreement and LankaSettle coming into operation, and shall continue to be in force unless the Participant ceases to be a participant of LankaSettle in terms of the LankaSettle Rules

13. Amendments

The Participant acknowledges that ILF is provided to participants on LankaSettle on terms and conditions as determined by the Central Bank at its discretion and those terms and conditions may be amended from time to time by the Central Bank subject to notice of at least one week being given to participants. Accordingly, if any notice of a change in the terms and conditions applicable to ILF is given by the Central Bank to participants, this agreement shall stand amended in that respect upon such amendment coming into effect.


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614. Governing Law

This Agreement shall be governed by and construed according to the laws of Sri Lanka.

15. Notices

All notices and correspondence relating to any matters dealt with in this Agreement must be sent by facsimile or personal delivery for the attention of the following persons:

For the Central Bank:Director - Domestic Operations DepartmentCentral Bank of Sri LankaNo. 30, Janadhipathi MawathaColombo 1.Tel:Fax:e-mail:

For the ParticipantFor and on behalf of the Monetary Board of the Central Bank of Sri Lanka

Authorized Signatory

For and on behalf of the Participant

Authorized Signatory

ATTACHMENT A – PARTICIPANT BIC CODES

Participant BICBank of Ceylon BCEYLKLXXXXCapital Alliance Ltd. CALDLKLXXXXCentral Bank of Sri Lanka CBCELKLXXXXCentral Depository Systems Ltd. CDSPLKLCXXXCeylinco Shriram Securities Ltd. CSSLLKLXXXXCitibank N A CITILKLXXXXCommercial Bank of Ceylon PLC. CCEYLKLXXXXDeutsche Bank AG DEUTLKLXXXXDFCC Vardhana Bank Ltd. NMNJLKLXXXXEmployee Provident Fund CBCELKLXEPFFirst Capital Treasuries Ltd. FCTLLKLXXXXHabib Bank Ltd. HABBLKLCXXXHatton National Bank PLC HBLILKLXXXXHNB Securities Limited. HNBSLKLXXXXHongkong & Shanghai Banking Corp. HSBCLKLXXXXICICI Bank Limited ICICLKLXXXXIndian Bank IDIBLKLCXXXIndian Overseas Bank IOBALKLCXXXMCB Bank Ltd. MUCBLKLCXXXNations Trust Bank Ltd. NTBCLKLXXXXNatWealth Securities Limited NWSLLKLXXXXNational Development Bank PLC NDBSLKLXXXXNSB Fund Management Co. Ltd. NSBFLKLXXXXPan Asia Banking Corporation PLC. PABSLKLXXXXPeople's Bank PSBKLKLXXXXPublic Bank Berhard PBBELKLXXXXSampath Bank Ltd BSAMLKLXXXXSampath Surakum Ltd. SSAMLKLXXXXSeylan Bank PLC SEYBLKLXXXXSeylan Bank Asset Management Ltd. SBAELKLXXXXStandard Chartered Bank plc SCBLLKLXXXXStandard Chartered Bank (Pakistan) Ltd. SCBLPKKXULKState Bank of India SBINLKLXXXXUnion Bank of Colombo Ltd. UBCLLKLCXXX


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6ATTACHMENT B – SCHEDULE OF LANKASETTLE FEES AND CHARGES

The Central Bank of Sri Lanka will charge all LankaSettle participants and all inclusive per transaction fee of LKR 240/- with effect from 8th September, 2003.

For the purposes of fees and charges a “transaction” is defined as:

(1) Any settled debits to their own accounts initiated by participants within LankaSettle through the use of the following messages:

a. MT 102 – Multiple Customer Credit Transferb. MT 103 – Single Customer Credit Transferc. MT 202 – General Financial Institution Transferd. MT 205 – Financial Institution Transfer Executione. MT 541 – Receive Against Payment

(2) Any settled securities transactions initiated by participants within LankaSettle through the use of MT 540 – Receive Free message.

In addition to the transaction fees stated above, the participants will have to bear SWIFT messaging related charges. These will be independently billed by SWIFT and will have to be paid by the participants to SWIFT directly.

ATTACHMENT C – LANKASETTLE HELP DESK CONTACT DETAILS

Name Email Phone Number

RTGS System(Payments and Settlements Department)

Policy MattersMrs. K.R.M. Siriwardhane [email protected] 2477035Director/Payments and Settlements

Technical MattersMr. D.M.N.G.R. Karunaratne [email protected] 2477049Mr. B.M.A. Denzil [email protected] 2477052Alternative Number 2477055Help Desk 2387010

Systems(Information Technology Department)

Mr. H.M.P.B. Herath [email protected] 2477337Mr. K.V.K. Alwis (Vasantha) [email protected] 2477315Mr. C.P.S. Bandara (Chaminda) [email protected] 2477329

LankaSecure(Public Debt Department)

Policy MattersMr. C.J.P. Siriwardena 2477277Superintendent of Public Debt

Technical MattersMr. D.M. Rupasinghe [email protected] 2477270Mr. L.R.C. Pathberiya [email protected] 2477278

Payments from LankaSecureMr. V. Baskaran (Back Office) [email protected] 2477287

Reports and StatementsMr. D.L. Nihal (Middle Office) [email protected] 2477282

Intraday Liquidity Facility(Domestic Operations Department)

Mr. M.S.M.P. Fernando [email protected] 2477079


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6BCP Guidelines No. : 01 / 2006

29 March 2004

To : Chief Executive Officers of all Licensed Commercial Banks, Primary Dealers, Central Depository Systems (Pvt) Ltd. and LankaClear (Pvt.) Ltd.

GUIDELINES ON BUSINESS CONTINUITY PLANNING

Introduction

1. Financial sector is an interdependent network of financial institutions, markets and systems. Fast advancement of technology and sophistication of financial products and systems have made financial institutionsa/) (FIs) vulnerable to operational risk caused by inadequacies or failures of internal processes, systems and external events including natural disasters. Therefore, a failure to manage operational risks may expose the FIs to significant losses. There is a growing interest internationally among regulatory bodies and FIs to strengthen Business Continuity Planning (BCP). Basel II framework has identified operational risk of banks as a distinct risk category (in addition to credit risk, interest rate risk and liquidity risk that financial institutions take in return for an expected reward), which exists in day-to-day operations. Therefore, supervisory authorities in many developed countries and Bank for International Settlements (BIS) – Committee on Payment and Settlement Systems (CPSS) have recommended 10 Core Principles for Systemically Important Payment Systems (Principle VII – Security, Reliability & Continuity), BIS/International Organization of Securities Commissions (IOSCO) Recommendations for Securities Settlement (recommendation 11 – Operational Reliability) and Recommendations for Central Counterparties (recommendation 7 – Operational Risk) to cope effectively with the consequences of operational risk in payment and securities settlement systems.

2. Having considered the consequences of systemic risk which could be caused by disruption to operations of participating institutions (PIs) of LankaSettle System, which is the systemically important payment and settlement system, the Central Bank of Sri Lanka (CBSL) advised PIs to have proper business continuity plans in order to achieve consistent level of resilience in LankaSettle System. Accordingly, CBSL requested PIs to submit their BCPs to CBSL by end March, 2005. Since most of the BCPs forwarded by PIs were incomplete or applied a multitude of standards of their own, CBSL held one to one meeting with each PI during the period of July to August 2005 to explain the required standard of BCP, and requested to submit revised BCPs to CBSL before the end of August, 2005. Since a number of PIs requested CBSL to provide written guidelines on BCPs and the fact that CBSL also desires to develop a consistent framework for BCPs, the CBSL has prepared a set of guidelines.

3. The main objective of these guidelines is to explain the CBSL’s supervisory and oversight approach on BCP and provide guidance on sound practices, which CBSL encourages, FIs to follow in order to:

• Have workable and sound BCPs for core banking/critical businesses and systems including systemically important and system-wide important payment and securities settlement systems to ensure that the agreed service levels are met in an event that one or more business or components of a system fail. Moreover, BCPs should ensure continuity of agreed services in an event of a prolonged and widespread disruption;

• Minimize the financial, legal, and other risks arising from such disruptions; and

• Develop a consistent framework for BCPs of FIs supervised/overseen by CBSL.a/ Includes licensed commercial banks, Primary Dealers and other payment, clearing and settlement service providers supervised/

overseen by the Central Bank of Sri Lanka.


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6DefinitionofBusinessContinuityPlan(BCP)

4. ‘Business continuity planning’ refers to: planning and preparation need to be carried out in advance to identify the impact of potential risks and losses caused by a disruption or a disaster; formulating and implementing viable recovery strategies; and planning to ensure continuity of an institution’s services particularly in the area of core banking/critical businesses, payment, clearing and securities settlement; and administering of comprehensive testing and maintenance. A ‘Business Continuity Plan’ (BCP) refers to a set of processes, procedures, information and measures which are developed, compiled and maintained for critical business functions including core banking and payment and settlement, in readiness for use in an event of an emergency or a disaster which may cause inability to fulfill critical or all business operations. In contrast to BCP, a ‘contingency plan’, refers to measures, which will enable the most critical business functions to be performed in an event of a disruption. Therefore, the concept of BCP is much wider than a contingency plan.

5. Business continuity planning is a culture to be developed at all levels of staff and the required process needs to be well integrated with the day-to-day operations. The Board and the senior management of each FI should adopt a risk-based framework in BCP. Establishing a comprehensive BCP with a minimum cost without compromising risk management is a challenging task. It would seem sensible for all FIs to have BCPs on the assumption that they may have to face and manage an event of a widespread and prolonged disruption with the complete destruction of buildings and infrastructure in which the main offices of FIs are located, the loss of key staff, complete inaccessibility of the primary site, forcing the FIs to use back-up facilities for an extended period of time. Board of directors (Board) should take responsibility of BCP readiness.

6. FIs may decide to have two-tier plans – one (which would be fully developed with adequate resources to put into effect immediately) to handle short-term problems; and the other (may be a medium/long term plan) to cope with long-term issues.

7. These guidelines are not intended to prescribe step-by-step guidance as to how FIs should conduct their BCP process and it could be considered as a minimum. The following of these guidelines will contribute to building a level playing field for all FIs when implementing the BCPs and will help supervisors and overseers to evaluate the resilience of the operations of FIs.

Application of the guidelines

One of the supervisory/oversight objectives of CBSL is for FIs to have BCPs to ensure high preparedness for continuation of critical operations particularly core banking, payment, clearing and settlement in an event of a disruption. In the course of its on-site examinations, offsite reviews, oversight and meetings on prudential issues with a FI, CBSL will review implementation of the BCP on the practices set out in these guidelines particularly:

• The extent to which the FI has observed the guidelines; and

• The risk profile of the FI and its role in ensuring the stability of the financial system.

Guideline 1: Vest the primary responsibility for BCP preparedness on the Board of Directors and the management of each FI

8. The Board and the senior management of each FI should take the primary responsibility for the BCP of the institution and its effectiveness in relation to the nature and scale of its operations. The Board and the senior management should involve in business continuity management and consider FI’s business continuity, risks and mitigating measures as part of its overall risk management framework. The Board should: provide clear guidance and directions in respect of BCP; approve policy on BCP, prioritize critical banking/operations and payment system related business functions, allocate sufficient resources, review BCP test results; and ensure maintenance and periodic updating of BCP.


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69. The senior management is responsible for: establishing appropriate policies, standards, strategies and processes for BCP; getting the BCP approved by the Board; getting commitment of all staff and executing such a BCP in an event of a contingency. Senior management should endorse business continuity strategies of each system to ensure that plans are consistent with overall business objectives, risk management strategy and financial and other resources. The senior management should also evaluate the adequacy of contingency planning for each system and its periodic testing by its own staff/service providers whenever critical operations are outsourced. Resilience and recovery measures should adequately cover the level of business activity, risk tolerance and its role in preserving the systemic stability of the financial system. Such measures should be clearly stated in the BCP and regularly reviewed. Senior management should be accountable to the Board for achieving the stated objectives of each system in the BCP and submit a report to the Board at least annually indicating clearly:

• The preparedness of the institution to achieve stated objectives of each system; and

• The extent of alignment with these guidelines.

Such a report should be reviewed and updated regularly. The BCP must be reviewed at least annually by the FI’s internal auditor/or an external expert.

Guideline 2: Incorpo]rate sound practices in the BCP

10. Each FI is encouraged to consider and follow the suggested process for business continuity planning:

• Adopt clear and well defined BCP policy and strategy;

• Establish clear roles and responsibilities to oversee the BCP implementation programme. This may require setting up of a formal business continuity management team with the powers and responsibilities to coordinate planning and implementation;

• Key functions under each system should be clearly identified and processes within these functions to be categorized against their criticality. Assumptions behind these categorization need to be documented and reviewed regularly by the senior management;

• Conduct a business impact analysis to assess the impact and probability of possible disruption scenarios on all (owned, shared and external) critical banking/business, payment and settlement systems; resources and infrastructure, and formulate recovery time objectives (RTO); and resumption of critical functions;

• Each critical business/support functions should formulate its own recovery strategy on how to achieve the RTO and to deliver the minimum level of critical services derived from business impact analysis. In the case of a payment and settlement system, the best practice for a business continuity arrangement is to aim at recovery and resumption of critical operations of systemically important payment systems not later than 2 hours after the occurrence of a disruption; system-wide important payment and settlement system within the same/scheduled settlement date; and effecting a small number of critical payments (such as payment settlement on market liquidity or monetary policy) on time.

• Adopt critical and tough assumptions for each plausible disruption to: assess possible threats (external and internal), their impact and probability; and ensure that the framework would be sufficient to withstand the impact of the disruption (on each component of the system). This involves establishing a disaster recovery site (minimum one site in Sri Lanka with critical infrastructure components, required number of skilled staff, work space, software application, technology requirement, relevant SWIFT link and vital data/information compatible with recovery objectives stated in the BCP). It is important to ensure geographical separation between primary site and disaster recovery site (DRS).


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6• Determine recovery strategies and providing of each service considering the interdependency among

critical services and time frame assessment in business impact analysis.

• Establish at least the minimum BCP requirement for the provision of critical businesses. These BCP requirements should be approved by the senior management before proceeding to the development of BCP. Further, BCP requirement should be considered at the planning/development stages of new business services/products.

• The best practice is to establish ‘Disaster Management Team (DMT)’. The DMT may be a group of senior management (for example: heads of department of banking operations, IT, Back Office, building/premises, human resources and communication) who would direct the recovery operations.

• FI must develop, implement and maintain a BCP document, which provides guidance for crisis management procedure and information, which enable the senior management of FI to respond to disruption and recover critical businesses in a contingency event to avoid contagion effect on business of the FI as a whole.

• The dimension of a disruption is another important element to be considered in identifying scenarios. The best practice is for senior management to identify all plausible crisis scenarios including disasters covering a wide area, transportation, telecommunication, key personnel, payment system and other key infrastructure and develop crisis management process and procedures. Scenarios should be documented and revised when regular business impact analysis requires them to be changed. The crisis management process at a minimum should include:

– The process for ensuring early detection of an emergency/contingency and prompt notification to the DMT about the incident;

– The process for the DMT to assess the overall impact on the respective institution and to make quick decision on the appropriate action;

– Clear criteria for activation of the BCP and/or alternate sites;

– The process for obtaining information on the status of the recovery process;

– A process for timely internal and external communication; and

– A process for overseeing the recovery and restoration efforts of the affected services/facilities.

• The best practice is for each business/support function to establish a business recovery team (which may have sub teams) to carry out the business resumption process. FI should assign recovery personnel (as well as alternate personnel) with required knowledge/skills to each such team.

• Business resumption process generally has three phases:

– The mobilization phase – This phase involves notification to business recovery teams (using call-out tree, the predefined sequence of points of contact of staff for dissemination of information) and vendors to obtain required services; and follow predetermined sequence in the BCP (or revising the sequence if it is necessary);

– The alternate processing phase – This phase involves the resumption of the business/service at DRS/or in a different way than the stipulated process. This may need record reconstruction and verification, establishment of new controls, alternative manual processes and alternative ways of dealing with customers/counterparties.

– The full recovery phase – This phase involves a process for moving back to the primary site after a disaster/contingency event.


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6• The BCP should: identify and plan for activities which would be required under each phase of

business resumption process; establish clear responsibilities; and develop and include recovery task’s checklist.

• FI should pay special emphasis to ensure resilience of critical technology equipments/facilities to reduce the probability of having to activate the BCP in an inevitable disruption to business. The technology requirement for recovery of each business/support function should be specified in the recovery strategy for each function and FI should assign appropriate personnel/with alternate personnel for recovery of technical failures.

• FI may use an appropriate business continuity model to handle prolonged disruptions, based on the risk assessment of their business environment and the characteristics of their own operations.

• Each BCP should clearly identify the recovery point objectives for data losses for each of the critical system and the strategy to handle such data losses and information deemed vital for recovery of critical business/support functions in the event of a contingency/disaster. Some of the protection measures:

– Back-up vital records must be readily accessible for emergency retrieval;

– Access to back up vital records should be adequately controlled to ensure the reliability of them for the use of business resumption.

– Clear procedure indicating how and in what priority the vital records to be retrieved/created in the event that they are lost/damaged/destroyed.

– Institution should formulate a formal strategy for internal as well as external communication with key external parties (regulators, investors, customers, counterparties, service providers, the media and other stakeholders) to ensure dissemination of up-to-date and consistent information in a contingency situation.

Guideline 3: Test each aspect of the BCP regularly, completely and meaningfully

11. BCP should be tested regularly, completely and meaningfully considering qualitative and quantitative aspects, to measure its practicality and effectiveness; and to familiarize the staff with the location, recovery procedure at a disruption. This should include:

• Testing meaningfully all components of business processes including of connectivity, functionality and capacity of the infrastructure at the DRS;

• Testing the applicability of strategic planning assumptions to evaluate its applicability, particularly in respect of changes in the business scope;

• Measuring the awareness and preparedness of personnel and coordination with external parties;

• Testing of interdependencies especially with external parties. These would be the offices or service providers located outside Sri Lanka; and

• Management should participate in the tests and be familiar with their roles and responsibilities in a contingency event.

• To ensure effectiveness of a BCP, it is important to test regularly: – The whole system;– Call tree activation;– Backup site to backup site;– Shared services;– Backup tape restoration; and– Retrieval of vital records.


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6• A BCP needs to be tested at least once a year.

• A document should be prepared giving test results, lessons learned and risk mitigating measures to be adopted and submitted for the approval of the senior management.

Guideline 4: Formulate recovery strategies and set recovery time objectives for critical operations

12. Effective recovery strategies help FIs to implement their BCPs in an orderly manner as planned, minimizing disruptions and financial losses. FIs should identify their critical businesses and potential monetary as well as non-monetary losses in an event of a contingency. This process helps the FIs to prioritize critical operations and determine recovery strategies and RTO for critical business functions based on business impact analysis. Critical business functions vary among FIs but functions, which involve core banking and settlement of large value payment instructions, clearing of payment instruments, obligations on settling funds/securities and maintaining customer/investor/public confidence are critically important. The RTO is the maximum acceptable duration of time that can elapse, before the lack of a business function severely impacts on the business entity. This includes both the time before a contingency is declared and the time to perform tasks to the point of business resumption.

Guideline 5: Manage interdependency risks

13. There is a growing interest in FI to redistribute risks and processes locally, regionally or globally. This has resulted higher dependency on internal and external parties (clearing institutions, financial utility service providers, vendors and infrastructure providers). Therefore, they should understand and appropriately mitigate interdependency risks of critical business functions. Any failure to manage interdependency risk has a potential to cause operational or systemic inefficiencies or the failure of institutions. These interdependency need to be taken into consideration in a BCP and steps to be taken to establish a DRS (with SWIFT and other required communication links and systems) in Sri Lanka, and to develop recovery strategies as well as RTO to mitigate risks. A business continuity arrangement of a FI should not introduce any risk to a systemically important or system-wide important payment, clearing and settlement system, its operator or participants and each FI should have an independent BCP for widespread and prolonged disruption to its infrastructure and critical services, without relying on another participant of such systems. If any critical functions are dependent on outsourced arrangements, adequate provisions should be in place to ensure operation of services by third parties.

Guideline 6: Plan for wide-area and prolonged disruptions

14. FIs should provide measures for scenarios, which may result significant losses or inaccessibility of critical infrastructure including SWIFT and telecommunication where there is a widespread or prolonged disruption.

Guideline 7: Practice separation policy to minimize concentration risk

15. FIs should practice separation policy to mitigate concentration risk. Disruptions may result in a non-availability of critical staff, information and required telecommunication links and payment infrastructure such as SWIFT. FIs should balance and properly mitigate concentration risk, while not sacrificing the efficiency gains from centralization of business processes and staff. Accordingly, FIs should take measures to separate critical business operations by:

• Establishing primary site and DRS in different zones. One DRS with SWIFT and other required communication links should be in Sri Lanka;

• Separation of critical operations and their supporting IT operations; and

• Separation of staff/cross training of staff.


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616. FIs should adopt a change management procedure to update their BCPs in respect of changes with proper approval and documentation and also take steps to store copies of BCP at a location separate from the primary site. FI may disseminate any part of the BCP relevant to a concerned party including customers to create awareness enabling them to act in agreement with the FI. The part of the BCP available for reference of public may contain information relating to general readiness of the FI without any details of confidential nature.

17. FIs may also have insurance coverage as a mitigation strategy to minimize foreseeable risks and financial exposure in an event of a disaster. But diligence needs to be exercised with regard to the nature of insurance and the certainty of payments.

18. Each FI is required to inform Director, Payments and Settlements (DPS) of CBSL immediately if its BCP is activated. Until the FI resolves the crisis, it should send periodic progress reports to DPS.

19. Each FI is required to forward the following documents to the Director, Payments and Settlements, Level 8, Tower 1, Central Bank of Sri Lanka, Colombo 1:

(i) A copy of the revised BCP following these guidelines and approved by the Board for perusal of CBSL on or before September 29, 2006;

(ii) An annual risk management statement on or before January 15 of each year, indicating the critical systems, recovery time objective of each system and plans as well as strategies to achieve them; and

(iii) A quarterly statement within two weeks from the end of the relevant quarter, reporting contingency events (date, time and nature of the problem) occurred during the period for core banking/business and payment clearing and settlement systems; action taken in each event to rectify; and time of rectification and steps taken to avoid such failures in future.

Dr. Ranee Jayamaha

Deputy Governor


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7Reference No. : 08/24/002/005/01

DIRECTION ON SEGREGATION OFPROPRIETARY GOVERNMENT SECURITIES ACCOUNTS

This direction is issued under Section 10(2) of the Regulations made by the President, dated March 01, 2000 under the Local Treasury Bills Ordinance and the Registered Stock and Securities Ordinance and will come into effect from 1st January, 2002.

K G D D DheerasingheSuperintendent of Public Debt

ColomboDate: 10.1.2002.

1. With effect from 1st January 2002, Primary Dealers are required to classify their proprietary government securities portfolio under two categories: Investment Account and Trading Account.

2. The criteria for classifying government securities into such categories are given below:

Trading Account

(a) Government securities acquired for the specific purpose of trading on a regular basis to profit from short-term changes in market prices and yields shall be held in the Trading Account.

(b) Government securities held in the Trading Account must be revalued or “Marked to Market” on a weekly basis using the weekly report on Weighted Average Market Prices compiled by the Central Bank.

(c) Any gains or losses on securities held in the Trading Account must be taken to earnings.

Investment Account

(a) Government securities acquired with the positive intent and ability to hold to maturity shall be held in the Investment Account. The Primary Dealer should intend to earn a regular interest yield from these securities. Securities classified into the Investment Account shall be documented and authorized by the Chief Executive Officer of the Primary Dealer and this statement must be submitted to the Public Debt Department of the Central Bank of Sri Lanka with the monthly financial statements.

(b) Securities in the Investment Account may be used for repurchase transactions.

(c) Securities in the Investment Account shall be carried and reported at cost over the period of redemption, with the following exceptions;

(i) Carrying values of securities in the Investment Account may be adjusted to account for the accretion of discount (or depletion of premium). The adjustments should be amortised on a straight-line basis over the period to maturity.


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7 (ii) Carrying values of securities in the Investment Account may be written down to their fair value

to account for any diminution in value which is expected to be other than temporary (i.e. if the decline results in a permanent impairment of the value of the security).

(iii) The carrying value of securities in the Investment Account used under temporary switching transactions in repurchase and reverse repurchase transactions, may be adjusted after the reversal or “second leg” of the transaction has been concluded to reflect margin calls.

(iv) The carrying value of securities transferred from the Trading Account into the Investment Account shall be marked to market prior to the transfer. Therefore, any gains or losses due to revaluation would have been recognised in earnings prior to the transfer. The market value of the securities at the point of transfer into the Investment Account then becomes the ‘historical cost’ for accounting purposes.

ReclassificationofSecurities

(a) Transfer of securities between the Trading Account and the Investment Account must be justifiable, documented and authorized. A statement on portfolio transfers, if any, shall be signed by the Chief Executive Officer of the Primary Dealer and submitted to the Public Debt Department together with the monthly financial statements.

(b) Portfolio transfers shall only be undertaken rarely. The circumstances justifying portfolio transfers into and out of the Investment Account are given below:

(i) A change in the statutory and regulatory requirements regarding the type or level of permissible investment securities

(ii) A significant increase in the capital requirements that obliges the Primary Dealer to reduce its investment holdings

(iii) A major business occurrence that necessitates the sale of securities to maintain the Primary Dealer’s risk profile

(iv) A significant change in risk weights assigned to government securities for the purpose of computing the capital adequacy ratio.


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7Market Revaluation of Proprietary Securities Accounts

The guidelines on market revaluation and the accounting treatment of the securities accounts are given below.

Table 1

Market Revaluation of Proprietary Securities Accounts

Description Accounting Treatment

i. Investment Account Book and maintain at cost

Amortise premium or discount over period to redemption

Adjust for impairment of value expected to be other than temporary

Profit (loss) from sale prior to maturity is charged to capital

Gains (losses) on Investment Securities are taken to income

ii. Trading Account Mark to Market at least weekly using CBSL market rates

Profit (loss) from sale prior to maturity is charged to capital

Gains (losses) on Investment Securities are taken to income

iii. Securities used in financing transactions (repurchase and reverse repurchase)

Retain securities on the balance sheet

The value of securities outstanding (i.e., where the reversal of the repurchase and/or reverse repurchase transaction has not been effected) should be adjusted for margin callsBook interest income/expense, whether explicit or implicit, to the B/S; Interest Income or Interest Expense account

iv. Reclassification of securities from Trading to Investment Account Book the reclassified security at current market rate

That current market rate becomes the ‘historical cost’ of the security

v. Reclassification of securities from Investment to Trading Account

Take profit (loss) from reclassification to income as the transfer ‘in substance’ (i.e., the intention) amounts to a sale.


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7

Investment Securities

↓

Long-term investment, evidenced by positive intent & ability to hold until maturity

↓

Carry at historical (amortised) cost; revalue for evidence of permanent impairment of value only

↓

Capital gain (loss) to income if redeemed before maturity

↓

Reclassification into Trading Account only when criteria met

↓

If used for repurchase and reverse Repurchase transactions (PD is seller), retain under Investment Securities on the B/S

Trading Securities

↓

Short-term investment to take advantage fluctuations in market prices

↓

Carry at market value, marking to market at least weekly, based upon CBSL market rates

↓

Gain (loss) from revaluation taken to income

↓

Once defined, reclassification of trading securities almost never done

Accounting for Government Securities

Government Securities


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7Reference No. : 08/24/002/005/01

DIRECTION ON FINANCIAL STATEMENTS

This direction is issued under Section 10(2) of the Regulations made by the President, dated March 01, 2000 under the Local Treasury Bills Ordinance and the Registered Stock and Securities Ordinance and will come into effect from 1st January, 2002.

K G D D DheerasingheSuperintendent of Public Debt

ColomboDate: 10.1.2002.

1. With effect from 1st January 2002, Primary Dealers are required to prepare their annual financial statements, the Balance Sheet and the Profit and Loss Account in accordance with the accounting methodology specified in the Sri Lanka Accounting Standards.

2. In addition, Primary Dealers are required to maintain their proprietary government securities portfolio in one of two separate accounts, the Investment Account and the Trading Account in accordance with the Direction on Segregation of Proprietary Government Securities Accounts.

3. The annual financial statements of the Primary Dealers must be audited by an external auditor registered with the Central Bank of Sri Lanka, in accordance with the Sri Lanka Auditing Standards.

4. Audited annual financial statements of Primary Dealers are required to be submitted to the Public Debt Department of the Central Bank of Sri Lanka, within five (5) months of the end of the financial year to which it relates.

5. Primary Dealers are also required to submit unaudited annual financial statements to the Public Debt Department of the Central Bank of Sri Lanka, within three (3) months of the end of the financial year to which it relates.

6. Primary Dealers are required to publish their Balance Sheet and Profit and Loss Statement for the financial year, in Sri Lankan newspapers preferably in all three languages (Sinhala, Tamil and English) or at least in the English language newspapers within six (6) months of the end of the financial year to which they relate.

7. Primary Dealers are also required to publish their unaudited Balance Sheet and Profit and Loss Statement for each half year, in Sri Lankan newspapers preferably in all three languages (Sinhala, Tamil and English) or at least in the English language newspapers within two (2) months of the end of the half year to which they relate.


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7Reference No. : 08/24/002/005/01

Public Debt Department,No: 30, Janadhipathi Mawatha,Colombo 01.

March 11, 2002

Attention : Chief Executive Officers

To: All Primary Dealers

DIRECTION ON SECONDARY MARKET qUOTES (BID AND OFFER PRICES)

The Primary Dealers are required to be “market makers” in the secondary market for government securities, thereby improving market liquidity. Liquidity is facilitated if there are active market-makers who will undertake to make , on demand and in any trading conditions, continuous and firm (effective) two way prices. The Public should also have easy access to information on the latest bid offer prices of each Primary Dealer.

All Primary Dealers are hereby directed to submit their daily buying and selling quotes for securities with maturity upto 3 years on the screen provided by the Public Debt Department of the Central Bank of Sri Lanka (CBSL). The first quotes for the day should be submitted by at least 10.00 a.m. These quotes will be disseminated to the public via CBSL web page, Public Debt Department web page, other electronic media and published in the newspapers. Primary Dealers are also required to disseminate information on there daily two-way prices to the public through there own information dissemination systems.

This direction is issued under Section 12 of the Regulations made by the Minister of Finance dated February 1, 2002 under the Local Treasury Bills Ordinance and the Registered Stock and Securities Ordinance and will come into effect from 11th March ,2002.

Dr. H. N. ThenuwaraSuperintendent of Public Debt


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7Reference No. : 08/24/002/005/01

Public Debt DepartmentNo.30, Janadhipathi MawathaColombo 1.

April 9, 2002

DIRECTION ON NEW PRODUCTS

The direction is issued under Section 12 of the Regulations made by the President dated February 01, 2002 under the Local Treasury Bills Ordinance and the Registered Stock and Securities Ordinance and will come into effect from April 12, 2002.

K.G.D.D. DheerasingheSuperintendent of Public Debt

ColomboDate : 9.4.2002

With effect from April 12, 2002, Primary Dealers are required to inform the Public Debt Department of any new product it is intending to launch, prior to its introduction to the market. The details of the structure of the proposed product, price, interest yield, maturity and other relevant information should be submitted for consideration. Any documentation or agreements with customers relating to the proposed product should also be submitted. Primary Dealers are required to obtain the concurrence of the Public Debt Department prior to launching the new product.

This direction is being issued in the interest of consumer protection and to maintain the integrity and safety of the government securities market.

Primary Dealers are required to strictly comply with this direction.


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7Reference No. : 08/24/002/005/01


April 9, 2002

DIRECTION ON THE ESTABLISHMENT OF A BRANCH OFFICE BY PRIMARY DEALERS

The direction is issued under Section 12 of the Regulations made by the President dated February 01, 2002 under the Local Treasury Bills Ordinance and the Registered Stock and Securities Ordinance and will come into effect from April 12, 2002.



With effect from April 12, 2002, Primary Dealers are required to inform and obtain the prior concurrence of the Public Debt Department for the establishment of a branch or any other type of office which proposes to engage in trading in government securities and primary dealer business.

The following details relating to the proposed branch should be submitted to the Public Debt Department for consideration.

(1) Type of Establishment.(2) Location and Address.(3) Type of Activities.(4) Manager and Qualifications.(5) Staff Numbers and Duties.(6) Organization Structure and Internal Control System.(7) Operating Systems.(8) Risk Management Systems.(9) Proposed date for commencement of business.

Primary Dealers are required to strictly comply with this direction.


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7DIRECTION ON REPURCHASE AND REVERSE REPURCHASE AGREEMENTS

This direction is issued under Section 12 of the Regulations made by the Minister of Finance in terms of the Local Treasury Bills Ordinance and the Registered Stocks and Securities Ordinance and will come into effect from 1 June, 2002.

Sgd. K.G.D.D.Dheerasinghe


Definition and Structure

A repurchase (repo) is a sale and repurchase agreement. For example , Party A sells securities to Party B with a legally binding agreement to purchase equivalent securities from Party B for an agreed price at a specified future date, or at call. Legal ownership to the securities changes giving Party B full (“unfettered”) title to the securities. Party B may use or dispose of them as it pleases, but it has an obligation to deliver equivalent securities to Party A at the end of the repo. Party A’s spot sale and forward purchase (repo) is matched by Party B’s spot purchase and forward sale (“reverse repo”).

The interest rate implied by the difference between the sale price and “repurchase” price is the repo rate. If Party A is selling securities to Party B in order to raise finance for itself, then the repo rate is, in effect, the cost to Party A of raising secured funds. Party B can “lend” money to Party A for a “repo rate” of interest, and receive government securities. This is a “general collateral, or GC repo” (see Annex 1) and is normally initiated by the party which wants to borrow money i.e., the cash taker.

Alternatively, Party B may have a short position in a particular government security, which it covers by obtaining (reversing in, thus “reverse repo”) that security from Party A. As Party B is initiating the transaction, A has more negotiating power over the repo rate he will pay on the cash received. The repo rate may therefore be lower (and may even be zero). This allows party A to invest the cash which it receives – perhaps via GC repo – at a higher rate than he is paying B, and earn a net return. This is a “special repo”, i.e., a repo in a specific government security (see Annex 2) and is normally initiated by the cash provider.

Since the secondary market value of securities provided as “collateral” can vary, the cash taker in GC repo may give a margin to protect the cash provider against adverse movements in the market price of the collateral. For instance, if the expected price volatility of the securities used was V% over the period from initial payment of the margin to its next normal. revaluation, then a repo loan of 100 would require “collateral” of 100 plus V%.1/ The securities should be revalued every day or at least every week .

Accrued Interest and Pricing of the Securities

The market value of a security will be affected by accrued interest. In the case of coupon bonds - other things being equal – the market value including accrued interest (the “dirty” price3/ ) will increase steadily in between coupon payment dates, and drop by the amount of the coupon on coupon date. In the case of a zero coupon bond, the market value will tend to rise steadily, other things being equal, up to redemption. Similarly, the exposure of a cash lender in a repo transaction will increase over time as interest accrues on the loan.


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7In the case of most short-term repo transactions, this means that the secondary market value of the

collateral increases broadly in line with the value of the loan plus accrued interest. With longer-term transactions, particularly if the yield curve is significantly sloped (whether positively or negatively) the collateral: loan ratio can change over time. This may require a periodic adjustment in the amount of collateral provided.4/

If a coupon is payable during the life of a repo, there may be a need for a simultaneous adjustment to the level of collateral, as there will be a step adjustment to the market value of the collateral without a corresponding change to the value of the loan plus accrued interest. In practice, most short-term repo transactions will try to use securities where the coupon payment dates fall outside the period of the repo transaction.

Hold-in-custody (HIC) Repo

In some cases, the cash taker may retain the security – in a segregated account – rather than transferring it. For instance, a large bank might borrow cash by repo, but in order to reduce transactions costs and facilitate substitution (see annex 1), the repo is not registered with the (central bank’s) government securities registry/depository. While the cash provider is the beneficial owner of the securities, it is still registered in the name of the cash taker. The cash provider takes on some credit risk in order to obtain a higher overall return.

Tri-partite Repo

One of the parties in the repo may not have an account in the (dematerialised) settlement system, or may lack the necessary back-office infrastructure to manage the administration of repo. If the cash provider does not wish to assume credit risk on the cash taker by using HIC repo, he could ask a third party – perhaps a custodian bank with good credit rating, or an international clearing organisation – to stand in the middle, effectively acting as an agency broker.

Blocked Repo

Where repo is essentially being used as a form of secured lending, the securities taken as “collateral” may be put into a blocked account. Although the form of repo means that legal ownership passes to the “cash provider”, they cannot be on-sold or otherwise pledged unless there is an event of default. In this case it is necessary to clarify who has the power to un-block the securities, and in what circumstances. In the event of default, it is important that the cash provider can access the securities quickly (to minimize price risk).

Blocked repo reduces the liquidity of the transaction for the cash provider, as it is not possible in this case to on-sell or repo out the securities received. This will tend to discourage the use of longer-term contracts and may prove a major deterrent to the use of repo. In some countries blocked repo is preferred by the authorities, at least in the initial stages of the market, because it prevents a chain of transactions involving a single security, and where a default could precipitate a chain reaction. (If Bank A does not return securities to Bank B, then Bank B cannot in turn pass them back to Bank C, and so on.)

Blocked repo also prevents the cash provider from taking a short position by selling outright a security which has been repoed in. However, it is not clear that this reduces risk in the market, since any position, whether long or short, entails a measure of risk.


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7

PartyA

PartyB

PartyA

PartyB

FOOT NOTES

1/ Strictly speaking, the collateral would be 100 / (1 – V%); but for low values of V the difference is insignificant.

2/ The repo interest is calculated as size of the “loan” * interest rate (here 0.065 as the rate is 6.5%) * period of the repo (e.g. 7/365 for a 7 day repo). 100 * 0.065 * (7/365) = 0.125

3/ It is normal market practice to quote securities prices excluding accrued interest (“clean” prices), as this facilitates comparison between different securities and across time; but accrued interest is of course taken into account when calculating the actual payment for any transaction.

4/ Account must also be taken of ex-dividend dates (if these apply) when valuing the collateral.

Annex 1

FigureA:GeneralCollateralRepo(innon-specificstock)

First leg of the GC repo :

Sells 100 worth of government security1/ ⇒

⇐ pays 100 cash for the government security

1/ with a nominal value of X; or X / (1-v%) if initial margin is included.

Party A now has 100 of cash, against which it has delivered 100 worth of security to which Party B has full title.

Second leg of the GC repo :

pays 100 cash plus repo rate ⇒

of, say, 6½2/

⇐ sells X nominal of the government security

Party B has earned 6½ “interest” on its cash and Party A has paid a lower rate of “interest” for the cash than might has been the case if it had raised unsecured finance.


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7Annex 2

FigureB:SpecialRepo(inaspecificgovernmentsecurity)

First leg of the special repo:

Sells 100 worth of government security1/ ⇒

⇐ pays 100 cash for the government security

1/ with a nominal value of X

Party B now has 100 worth of government security (to cover its short position) and Party A has the use of 100 of cash.

Second leg of the special repo:

pays 100 cash plus repo ⇒

interest of, say, 2%

⇐ sells X nominal of the government security

Party A has paid only 2% on the cash received in the repo, but will have earned a higher money market rate on re-investing the cash for the duration of the repo. Party B has foregone part of the interest on its cash in order to cover its short position in the government security.

Annex 3

Classic repo vs Sell and Buy-Back

A sell and buy-back is in many respects similar to repo, though more “primitive”. The key similarities and differences, are summarised below :

• Purchase and Sale : Both involve purchase and sale, i.e., transfer of ownership, rather than the use of the security as collateral (where ownership is only transferred in the event of default).

• Margin maintenance : Sale and buy-back typically does not involve margin maintenance. While this simplifies the transaction, because there is no need to provide additional margin if the secondary market price of the security changes, it can give rise to increased credit risk – see annex 6.

• Coupon : With repo, the cash taker retains the right to any coupon payments. If a coupon is paid during the life of the repo (to the cash provider as legal owner), it must be immediately passed to the cash taker. Failure to do so would constitute an event of default. In a sell and buy-back, the value of the coupon is factored in to the repurchase price. This gives rise to credit exposure against the cash provider for the period between payment of the coupon and maturity of the repo.

• Substitution : In a repo transaction, the security repoed can in principle be substituted for another security of the same value. Assume for instance that a market-maker repos out a security, and then has demand from a client to buy that particular security. The market-maker could conclude the deal with the client, and substitute a different security for the one repoed. The client obtains the specific security he wants, and the repo cash provider still has satisfactory “collateral”. (in practice, the cash provider may charge a few basis points for the inclusion of the substitution clause, since this gives the cash taker rather than the cash provider the chance to benefit if the security goes “special”.) There is no right of substitution in sell and buy-back transactions.

• Industry-approved contract : This exists for repo, normally the PSA/ISMA contract, providing greater legal certainty to both participants. There is no standard documentation with sell and buy-back transactions.

PartyA

PartyB

PartyA

PartyB


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7CLASSIC REPO vs SELL/BUY-BACK

Repo Sell/Buy-BackPurchase and Sale X XMargin Maintenance X XCoupon passed X XCoupon added to end price Substitution X XIndustry-approved contract X X


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7Reference No. : 08/24/002/005/01


July 15, 2002Chief Executive Officer,• Ceybank Securities Ltd.• Commercial Bank Primary Dealer Ltd.• NSB Fund Management Co. Ltd.• HNB Securities Ltd.• First Capital Treasuries Ltd.• Sampath Surakum Ltd.• Seylan Bank Asset Management Ltd.• Ceylinco Shriram Securities Ltd.

DIRECTION ON SECONDARY MARKET ACTUAL RATES

The Public Debt Department is setting up a system to monitor actual secondary market rates on a real time basis. In this regard, Primary Dealers are required to submit actual buying and selling rates for all maturities of securities transacted during the day, in the format provided below. As an initial step, it is compulsory to provide actual rates of short term securities traded.

All Primary Dealers are therefore required to send actual buying and selling rates for 91 day and 364 day Treasury Bills by fax to the Public Debt Department by 4.00 p.m. daily. The fax numbers are 477718/9.

Name of Primary Dealer ………………………………

Instrument / Period Buying Yield Rate (Range) Selling Yield Rate (Range) 3 month Treasury Bill12 month Treasury Bill 2 Year Treasury Bond 3 Year Treasury Bond 4 Year Treasury Bond 5 year Treasury Bond 6 Year Treasury Bond

All Primary Dealers should strictly comply with this direction which is issued under Section 12 of the Regulations of 2002 under the Registered Stock & Securities Ordinance and the Local Treasury Bills Ordinance.



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7ATTENTION : CHIEF EXECUTIVE OFFICERS, PRIMARY DEALERS

DIRECTION ON CAPITAL ADEqUACY

This direction is issued under Section 12 of the Regulations made by the Minister of Finance dated 1 February, 2002 under the Local Treasury Bills Ordinance and the Registered Stock and Securities Ordinance and will come into effect on January 1, 2002.



1. In order to promote the safety, soundness and stability of the primary dealer system, it has been decided to introduce a capital adequacy requirement for primary dealers.

2. With effect from January 1st, 2003 primary dealer companies are required to maintain a minimum capital to assets ratio (capital adequacy) of 5% with Tier 1 capital constituting not less than 70% of total capital funds.

3. For the purpose of the Capital Adequacy Ratio, capital is defined as follows :

Tier-1 Capital

(a) Issued and paid up ordinary share capital.

(b) Issued and paid up non-cumulative preference shares (non-redeemable or redeemable at issuer’s option).

(c) Share premium account.

(d) Reserves created or increased by appropriations of retained earnings or other surpluses e.g., retained profits and other reserves (excluding fixed assets revaluation reserves and retained profits on unaudited financial statements. Retained profits on unaudited financial statements can be included if the certification of a statutory auditor is provided).

Less

Goodwill and other intangible assets accumulated losses, investments in shares of subsidiaries and affiliate companies.

Tier-2 Capital

(a) Short term subordinated debt (maturity period of more than 3 years).

(b) Long term subordinated debt (maturity period of more than 5 years).

(c) Cumulative preference shares.

(d) Perpetual subordinated debt.


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7Less

Investment in subordinated debt of other companies, debentures and any debt instrument issued by subsidiaries, associate and affiliate companies and loans and advances granted to subsidiaries, associate and affiliate companies.

4. For the purpose of this Direction, assets shall mean:

(a) Trading Securities Account – Balance Sheet Value (Market Value) (i) Treasury Bills.(ii) Treasury Bonds.

(b) Investment Securities Account – Balance Sheet Value (Amortised Value at Historical Yield Rates).

(i) Treasury Bills.(ii) Treasury Bonds.

(c) Money lent under Reverse Repurchase Agreements (Securities Purchased under Agreements to resell) – Balance Sheet Value (Leg – 1/Leg – 1 plus Accrued Interest).

(d) Cash & Bank Balances.

(e) Fixed Assets – Balance Sheet Value (Net of Depreciation).

(f) Other Assets – Those not included in the above and excluding items deducted from the capital calculation – Balance Sheet Value.

5. Returns on the Capital Adequacy position should be submitted to the Public Debt Department, at the end of each month in the format already provided by the Public Debt Department.


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7Reference No. : 08/24/002/005/01

DIRECTION ON CUSTODIAL & TRUST HOLDINGS OF SCRIP SECURITIES

This direction is issued under section 10 of the Regulations made by the President dated 1 March 2000 under the Local Treasury Bills Ordinance and the Registered Stock and Securities Ordinance and will come into effect from 1 January 2002.


ColomboFebruary 14, 2003

(1) A dealer direct participant shall deposit any securities purchased, received or retained by the dealer direct participant for the account of a customer in a custodial securities account in the name of the customer, provided that where a security purchased, received or retained by a dealer direct participant on behalf of more than one customer the dealer direct participant shall maintain accounts to show the rights of each such customer in the security and such security shall be maintained in a custodial securities account on behalf of all such customers.

(2) A dealer direct participant shall deal with securities held on behalf of a customer by the dealer direct participant only in accordance with instructions given by the customer to the dealer direct participant in writing.

(3) Where securities are physically held by a dealer direct participant on behalf of a customer such securities shall be physically segregated from the securities of the dealer direct participant or of other customers of the dealer direct participant, and shall be held in safe and secure custody.

(4) Securities held by the dealer direct participant on behalf of a customer shall be clearly identified in the records of the dealer direct participant as being held for the customer, and shall not form part of the assets of the dealer direct participant.

(5) The dealer direct participant’s records relating to securities held on behalf of customers shall be available for inspection by the Central Bank and to the customer or the customer’s authorised representative at reasonable times, subject to applicable laws.

(6) A dealer direct participant shall furnish to the Central Bank returns in respect of custodial holdings of securities on a monthly basis in the format at Schedule – I.

(7) A dealer direct participant shall issue to its customers confirmations in respect of purchases and sales of securities on behalf of the customer in the format at Schedule – II and shall, in addition, issue to the customers a monthly statement with respect to the securities held by the dealer direct participant on behalf of the customers. Where a dealer direct participant holds a security on behalf of more than one customer, the dealer direct participant shall issue a confirmation to each such customer at the time that the customer acquires a right in the security, specifying the serial number of the security due to the customer and the coupon rate, if any, payable to the customer on such security in the format at Schedule – II.


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7Schedule – 1

Register of Securities held in Custody/Trust on behalf of Customers for the month of ……….

Purchase Date

Name of Customer

Reference No. of

Confirma-tion Letter

Purchase Amount

(Face Value)

Maturity Date

T.Bill/T.Bond

Part / Full Ownership/ Beneficial Ownership

Face Value of T.Bill/Bond

Securities

In Out

Signature Date Signature Date

Schedule – II

CONFIRMATION ADVICE

Purchase of Treasury Bills under Custodial Arrangements

Reference No. :Date :Name of Customer :Address :

Dear Sir / Madam,

Purchase of Treasury Bills

With reference to your application, we confirm that the following Treasury Bill/s is/are held in our custody on your behalf. On maturity you will receive the face value of the Treasury Bill/s.

1. Face Value :2. Treasury Bill No. :3. Purchase Date :4. Yield :5. Price :6. Maturity Date :

Yours Faithfully,

…………………….. …………………………

Manager Authorised Officer


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7Schedule – II

CONFIRMATION ADVICE

Purchase of Treasury Bonds under Custodial Arrangements


Dear Sir / Madam,

Purchase of Treasury Bonds

With reference to your application, we confirm that the following Treasury Bond/s is/are held in our custody on your behalf. On maturity you will receive the face value of the Treasury Bond/s and on coupon payment dates you will receive semi-annual interest payments.

1. Face Value : 2. Treasury Bond No. : 3. Coupon Rate : 4. Yield : 5. Purchase Date : 6. Coupon Payment Dates : 7. Interest Payment Amounts : 8. Maturity Date : 9. Accrued Interest Paid :10. Clean Price : 11. Total Price Paid :

Yours Faithfully,

…………………….. …………………………


Schedule – II

CONFIRMATION ADVICE

Purchase of Treasury Bills under Trust Arrangements


Dear Sir / Madam,

Treasury Bills held in Trust

With reference to your application, we confirm that the following Treasury Bill/s is/are held in trust by us and that your beneficial ownership in the Bill/s is/are as stated in Item 1 below. On maturity you will receive the said value of the Treasury Bill/s as stated in Item 1 below.


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71. Value of Beneficial Ownership :2. Treasury Bill No. & Face Value :3. Purchase Date :4. Yield :5. Price :6. Maturity Date :

Yours Faithfully,

…………………….. …………………………


Schedule – II

CONFIRMATION ADVICE

Purchase of Treasury Bonds under Trust Arrangements


Dear Sir / Madam,

Treasury Bonds held in Trust

With reference to your application, we confirm that the following Treasury Bond/s is/are held by us in trust and that your beneficial ownership of the Bond is as stated in Item 1 below. On maturity you will receive the said value of the Treasury Bond/s as stated in Item 1 and on coupon payment dates you will receive semi-annual interest payments as stated in Item 7.

1. Value of Beneficial Ownership : 2. Treasury Bond No. and Face Value : 3. Coupon Rate : 4. Yield : 5. Purchase Date : 6. Coupon Payment Dates : 7. Value of Interest Payments : 8. Maturity Date : 9. Accrued Interest Paid :10. Clean Price Paid : 11. Total Price Paid :

Yours Faithfully,

…………………….. ………………………… Manager Authorised Officer


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7DIRECTION ON FORWARD RATE AGREEMENTS AND INTEREST RATE SWAPS

This Direction is issued under Section 12 of the Regulations made by the Minister of Finance dated February 1, 2002 under the Local Treasury Bills Ordinance and the Registered Stocks and Securities Ordinance and will come into effect from April 1, 2003.


ColomboApril 1, 2003

Financial derivatives such as Forward Rate Agreement (FRA) and Interest Rate Swaps (IRS) are useful for managing interest rates risks.

Description of the Product

1. A Forward Rate Agreement (FRA) is a financial contract between two parties to exchange interest payments for a ‘notional principal’ amount on settlement date, for a specified period from start date to maturity date. Accordingly, on the settlement date, cash payments based on contract rate (fixed) and the settlement rate, are made by the parties to one another. The settlement rate is the agreed bench-mark/reference rate prevailing on the settlement date.

2. An Interest Rate Swap (IRS) is an agreement between two parties to exchange a stream of interest payments for a ‘notional principal’ amount on multiple occasions during a specified period. Such agreements generally involve the exchange or swapping of future fixed rate interest payments for future floating rate interest payments or the exchange of future floating rate interest payments for future floating rate interest payments. Accordingly, on each payment date that occurs during the swap period, cash payments based on the fixed/floating and floating rates, are made by the parties to one another.

Participants

3. Primary Dealers (PDs) can undertake FRAs/IRSs as a product for their own balance sheet management and for market making. PDs can offer these products to Licensed Commercial Banks, Licensed Specialised Banks, Registered Finance Companies, Registered Leasing Companies, Registered Insurance Companies, institutional investors and corporates for hedging their own balance sheet exposures.

Product Policy and Internal Control System

4. Prior to undertaking FRAs/IRSs, PDs are required to inform Public Debt Department (PDD), Central Bank of Sri Lanka and abide by such reporting and any prudential requirements as prescribed by the Central Bank of Sri Lanka, from time to time.

5. PDs are required to ensure that appropriate infrastructure and risk management systems such as ability to price the product and to “mark to market” their positions, monitor and limit exposures on an ongoing basis, etc., are put in place.


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76. A copy of the document detailing Product Policy and Internal Control System should be submitted

to the Public Debt Department, Central Bank of Sri Lanka .

Types of FRAs/IRSs

7. PDs can undertake different types of basic FRAs/IRSs. Swaps having explicit/implicit option features such as caps/floors/collars are not permitted.

Bench Mark Rate

8. The benchmark rate shall be the Treasury Bill or Treasury Bond rate.

Size

9. There will be no restriction on the minimum or maximum size of ‘notional principal’ amounts of FRAs/IRSs. Norms with regard to size are expected to emerge in the market with the development of the product.

Tenor

10. There will be no restriction on the minimum or maximum tenor of the FRAs/IRSs.

Capital Adequacy

11. PDs are required to maintain capital for FRAs/IRSs, as per the stipulations contained in Annex – 1.

Exposure Limits

12. In order to set exposure limits for counterparties, PDs may apply the conversion factors to notional principal amounts as per the exposure method prescribed in Annex – 1.

13. Furthermore, while dealing with corporates and institutions other than Licensed Commercial Banks, PDs should exercise due diligence to ensure that they are undertaking FRAs/IRSs only for hedging their own rupee balance sheet exposures. PDs are advised to also obtain a certificate from the authorised signatory/signatories of corporate/s to the effect that the transactions undertaken by them are meant for hedging balance sheet exposures only, i.e., size and tenor of the transactions undertaken are not in excess of their underlying rupee exposures.

Swap Position

14. Preferably, PDs should undertake FRAs/IRSs only for hedging underlying genuine exposures. However, recognising the crucial role played by the market maker in development of the product and creating of the market itself, PDs have been allowed to undertake market making activity, which would involve at times dealing in the market without underlying exposure. However to ensure that market makers do not over extend themselves, market makers are required to place prudential limits on swap positions, which may arise on account of market making activity.

Accounting and Valuation

15. Transactions for hedging and market making purposes should be recorded separately. While transactions for market making purposes should be “marked to market” (at least at weekly intervals), those for hedging purposes could be accounted for on accrual basis. PDs should adopt accounting treatment on the basis of the International Accounting Standards (IAS 32 & 39 ). PDs may refer to Annex – 2.


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7Documentation

16. For uniformity and standardisation, PDs should use International Swap Dealers Association (ISDA) documentation, as suitably modified to comply with these Directions for undertaking FRAs/IRSs transactions. Institutions should further evaluate whether the counterparty has the legal capacity, power and authority to enter into FRAs/IRSs transactions.

Reporting

17. PDs are required to report, as per the proforma indicated in Annex – 3 their FRAs/IRSs operations on a monthly basis to Public Debt Department, Central Bank of Sri Lanka.

18. These directions are intended to form the basis for development of Rupee derivative products such as FRAs/IRSs in the country. The directions are subject to review, on the basis of development of FRAs/IRSs market.

Annex – I

Capital Adequacy for Primary Dealers on Interest Rate Contracts for Credit Risk

Primary Dealers undertaking Forward Rate Agreements and Interest Rate Swaps, will be required to fulfill the following minimum capital/capital adequacy requirements:

Over and above the minimum capital requirements and the capital adequacy ratio required by the Direction on Capital Adequacy, Primary Dealers will have to maintain additional capital at 12 per cent of Risk Weighted Assets (RWA) towards credit risk on Interest Rate Contracts.

The methodology for these off-balance sheet items will be as follows :

(i) The notional principal amount will be multiplied by the conversion factors given below to arrive at the adjusted value.

@ 0.5 per cent of notional principal value for original maturity of less than 1 year.

@ 1.0 per cent for original maturity of one year and less than two years.

@ 1.0 per cent for each additional year.

(ii) The adjusted value thus obtained shall be multiplied by the risk weight applicable to the counter party as specified below.

Primary Dealers / Licensed Commercial Banks 20 per cent.

All others 100 per cent.

Annex – 2

Accounting Norms

Accounting for Hedge Swaps

(i) Interest Rate Swap which hedges interest bearing asset or liability should generally be accounted for like the hedge of the asset or liability.

(ii) The Swap that is accounted for like a hedge should be accounted for on accrual basis except the swap designated with an asset or liability that is carried at market value or lower of cost or market value in the financial statements. In that case the swap should be marked to market with the resulting gain or loss recorded as an adjustment to the market value of designated asset or liability.

(iii) Gains or losses on the termination of swaps should be recognised when the offsetting gain or loss is recognised on the designated asset or liability. This implies that any gain or loss on the terminated swap would be deferred and recognised over the shorter of the remaining contractual life of the swap or the remaining life of the asset/liability.


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7(iv) Redesignation of Hedge Items

If a hedge is redesignated from one item of asset/liability to another item of asset/liability such redesignation should be accounted for as the termination of one hedge and acquisition of another. On the date of redesignation the swap should be marked to market and the marked to market value would be amortized over the shorter period of the remaining life of the swap or remaining life of the asset/liability. The offsetting marked to market entry adjustments would be treated as premium received or paid for hedge on the newly designated item of asset/liability and this would be amortized over the life of the redesignated asset/liability or remaining term of the swap whichever is shorter.

(v) When a PD is acting like a broker for matching parties and is not a Principal to the contract itself, then the fee should be recognised immediately as an income. In case where the bank acts like a Principal the fee should be amortized over the life of the contract.

Accounting for Trading Positions

The following should be used as general principles for accounting of trading transactions.

(i) Trading swaps should be marked to market with changes recorded in the income statement.

(ii) Income and expenses relating to these swaps should be recognised on the settlement date.

(iii) Fees should be recognised as immediate income or expenditure.

(iv) Gains or losses on the termination of the swaps should be recorded as immediate income or expenses.

Disclosures

The following should be disclosed in the note to the balance sheet:

• the notional principal of swap agreements;

• nature and terms of the swaps including information on credit and market risk and the accounting policies adopted for recording the swaps;

• quantification of the losses which would be incurred if counterparties failed to fulfil their obligation under the agreement;

• collateral required by the entity upon entering into swaps;

• any concentration of credit risk arising from the swaps. Examples of concentration could be exposures to particular industries or swaps with highly geared companies; and

• the “fair” value of the total swaps book. If the swaps are linked to specific assets, liabilities or commitments, the fair value would be estimated amount that the entity would receive or pay to terminate the swap agreements at balance date. For a trading swap the fair value would be its marked to market value.

Annex – 3

Monthly Return on Forward Rate Agreements/Interest Rate Swaps

Name of the Institution :

Month and Year :

1. Gross Notional Amount (Rs.) :

Total :

Of which for Hedging :

Market Making :


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72. FRAs / IRSs contracted during the month of ……………… 200…

Original Maturity No. of Contracts Notional Amount (Rs. )

Floating# Rate (Range)

Fixed Rate (Range)

Floating@# Rate (Range)

Upto 3 Months3 – 6 Months6 – 12 Months1-2 Years2-3 Years 3-4 Years 4-5 Years 5-6 Years6-7 Years7-8 Years8-9 Years9-10 Years10-11 Years11-12 Years12-13 Years

13-14 Years14-15 Years

# along with rates bench marks should also be mentioned in bracket.@ rate pertaining to second leg, if the swap is ‘floating to floating’ in nature.

3. FRAs / IRSs outstanding as at the end of the month of ……………… 200…

Residual Maturity/ Repricing Date*

No. of Contracts Notional Amount (Rs. )

Floating# Rate (Range)

Fixed Rate (Range)

Floating@# Rate (Range)

Upto 3 Months3 – 6 Months6 – 12 Months1-2 Years2-3 Years 3-4 Years 4-5 Years 5-6 Years6-7 Years7-8 Years8-9 Years9-10 Years10-11 Years11-12 Years12-13 Years

13-14 Years14-15 Years

* Residual maturity or repricing date, whichever is earlier, is to be reported.# along with rates bench marks should also be mentioned in bracket.@ rate pertaining to second leg, if the swap is ‘floating to floating’ in nature.


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7Reference No. : 08/24/002/0005/001


July 23, 2003Chief Executive Officer,• Ceybank Securities Ltd.• Commercial Bank Primary Dealer Ltd.• NSB Fund Management Co. Ltd.• HNB Securities Ltd.• First Capital Treasuries Ltd.• Sampath Surakum Ltd.• Seylan Bank Asset Management Ltd.• Ceylinco Shriram Securities Ltd.• People’s Bank• Hongkong & Shanghai Banking Corporation Ltd.• Capital Alliance Ltd.

DIRECTION ON FIRM TWO WAY qUOTES (BID AND OFFER PRICES)FOR BENCHMARK MATURITIES

We refer to the Direction on Secondary Market Firm Two Way Quotes issued on July 2, 2002 where PDs are required to make firm two way quotes for 12 month Treasury Bills.

In order to promote the liquidity of medium and long-term market, it is necessary to expand the firm two-way quote requirement for selected benchmark maturities.

In this regard, the Public Debt Department has selected four benchmark maturities, that cover short to medium-term securities.

All PDs are hereby required to make firm(effective) two-wayquotes for the following benchmark maturities for trading with the public.

Firm Two Way Quotes for Selected Benchmark Maturitiesa) 3 month Treasury Billsb) 12 month Treasury Billsc) 2 year Treasury Bondsd) 5 year Treasury Bonds

• All PDs are required to submit their effective buying and selling quotes for securities in the benchmark maturities to the Public Debt Department in the specimen format provided in the Annex. The firm two way quotes should be e-mailed to the Public Debt Department by at least 10.00 a.m. daily. The e-mail address is [email protected]

• All PDs are also required to put their effective buying and selling quotes for securities in the benchmark maturities on the Bloomberg Screen by 10 a.m. daily.

PDs are also encouraged to make two way quotes for securities in other maturities.


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7All PDs are required to comply with this direction with immediate effect and non compliance may result in prohibition to participate in auctions conducted by the Public Debt Department in the future.

This direction is issued under Section 12 of the Regulations made by the Minister of Finance dated February 1, 2002 in terms of the Registered Stocks and Securities Ordinance & the Local Treasury Bills Ordinance.


ANNEX

SPECIMEN FORMAT

FIRM & EFFECTIVE

TWO WAY qUOTES

Name of Primary Dealer ………………………………

Instrument / Period Buying Yield Rate (Range) Selling Yield Rate (Range) 3 month Treasury Bill12 month Treasury Bill 2 Year Treasury Bond 3 Year Treasury Bond (optional) 4 Year Treasury Bond (optional) 5 year Treasury Bond 6 Year Treasury Bond (optional)10 Year Treasury Bond (optional)15 Year Treasury Bond (optional)


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7Reference No. : 08/24/002/0005/003


August 15, 2003

Chief Executive Officer of Primary Dealers

DIRECTION ON MINIMUM SUBSCRIPTIONS LEVELS FOR TREASURY BILL AND BOND AUCTIONS

This direction is issued in terms of Section 12 of the Regulations dated February 1, 2002 issued by the Minister of Finance under the Registered Stocks and Securities Ordinance and the Local Treasury Bills Ordinance. In terms of this direction each Primary Dealer is hereby required to subscribe a minimum 10% of the amount offered for each maturity at each Treasury Bond auction and Treasury Bill auctions in order to ensure that the auctions are fully subscribed.

All Primary Dealers are required to comply with this direction with immediate effect.



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7Reference No. : 08/24/002/0005/003


November 28, 2003

Chief Executive Officers of Primary Dealers

DIRECTION ON MINIMUM CAPITAL REqUIREMENT

In terms of the direction dated December 23, 2002 issued under the section 7 of the Local Treasury Bills Ordinance and the Registered Stock and Securities Ordinance, all Primary Dealers (PDs) are required to maintain a minimum capital requirement of Rs.200 million of which a minimum of Rs.150 million should be maintained as Tier-I capital.

However, in view of the changing market conditions and viability and stability of the primary dealer system, the Central Bank of Sri Lanka has decided that the minimum capital maintained by a primary dealer should be Rs.400 million of which minimum Rs.350 million should be maintained as Tier-1 Capital. The timeframe for enhancement of minimum capital from Rs.200 million to Rs.400 million will be as follows :

Before 31/12/2004 Before 1/7/2005

Minimum Capital Funds Required Rs.350 million Rs.400 million

The composition of Tier I capital and Tier II capital for the above purpose is as follows :

Tier-I Capital


(b) Issued and paid up non-cumulative preference shares (non-redeemable or redeemable at issuer’s option).


(d) Reserves created or increased by appropriations of retained earnings or other surpluses e.g., retained profits and other reserves (excluding fixed assets revaluation reserve).

Less

Goodwill and other intangible assets accumulated losses, investments in shares of subsidiaries and affiliate companies.

Tier-2 Capital

(a) Short term subordinated debt.(b) Long term subordinated debt.(c) Cumulative preference shares.(d) Perpetual subordinated debt.



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7Reference No. : 08/24/002/0005/003


November 28, 2003


DIRECTION ON SPECIAL RISK RESERVE

In order to promote the safety, soundness and the stability of the Primary Dealer (PD) system and to build up PD capital base, with effect from July 1, 2004, Primary Dealers (PDs) are required to transfer a percentage of their profit after tax annually to a Special Risk Reserve as follows.

a. 50% of the profit after tax annually by the PDs who maintain capital funds less than Rs.400 million

b. 25% of the profit after tax annually by the PDs who maintain capital funds in excess of Rs.400 million.

This direction is issued in terms of Section 12 of the Regulations dated February 1, 2002 issued by the Minister of Finance under the Registered Stock and Securities Ordinance and the Local Treasury Bills Ordinance.




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7Reference No. : 08/24/002/0005/003

Public Debt Department

December 19, 2003

Chief Executive Officers of Primary Dealers,

DIRECTION ON ACCOUNTING FOR REPO TRANSACTIONS

All Repurchase and Reverse Repurchase transactions should be recorded to reflect the true commercial effect or substance of the transaction. As all Repo transactions are in effect collateralized borrowings / lending, they should be accounted for as follows.

1. Repurchase Transactions Dr. Cash/Bank Cr. Repurchase A/C

2. Reverse Repurchase Transactions Dr. Reverse Repurchase A/C Cr. Cash

Carrying value/Book value of securities given as Collateral for Repo borrowings should also be taken out of the Trading/Investment portfolio account and put into a separate encumbered Trading/Investment portfolio account. When preparing the Balance Sheet, Primary Dealers should report the encumbered and unencumbered securities together but a note to the accounts should disclose the value of encumbered securities included in the Trading/Investment portfolio. A note to the accounts should also disclose the market value of securities obtained as collateral on Reverse Repurchase transactions and the policy on haircuts on the collateral taken on Reverse Repurchase transactions.

K.G.D.D. Dheerasinghe

Superintendent of Public Debt


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7Reference No. : 08/24/002/0005/004


January 6, 2004


DIRECTION ON SHORT SELLING OF SECURITIES

This direction is issued in terms of Section 12 of the Regulations dated February 1, 2002 issued by the Minister of Finance under the Registered Stock and Securities Ordinance and the Local Treasury Bills Ordinance. In terms of this direction Primary Dealers (PDs) are required to refrain from short selling of securities. No PD should sell any securities without actually holding the relevant securities in its portfolio. Securities obtained as collateral on reverse repo transactions are not considered as PD’s own securities and hence they cannot be sold.




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7Reference No. : 08/24/002/0005/004


June 7, 2004


DIRECTION ON ADJUSTED TRADING (AWAY PRICES)

Primary Dealers are hereby required to refrain from having adjusted trading or using away prices for recording their transactions. They should use current market prices, for recording their transactions.

Adjusted trading is a practice involving the sale of a security at a price above the prevailing market value and the simultaneous purchase and booking of a sale or different security at a price greater than its market value. Such transactions inappropriately differ the recognition of losses on securities sold while establishing an excessive reported value for acquired securities.

This direction is issued in terms of Section 12 of the Regulations dated February 1, 2002 issued by the Minister of Finance under the Registered Stock and Securities Ordinance and the Local Treasury Bills Ordinance.

Please acknowledge the receipt of this direction.

Dr. H. N. ThenuwaraSuperintendent of Public Debt


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7Reference No. : 08/24/002/0005/005


January 18, 2005


DIRECTION ON ENHANCEMENT OF MINIMUM CAPITAL REqUIREMENT OFPRIMARY DEALERS

This direction is issued in terms of section 12 of the Regulation dated February 1, 2002 issued by the Minister of Finance under the Registered Stocks and Securities Ordinance and the Local Treasury Bills Ordinance.

In terms of the direction on Minimum Capital Requirement issued on 28th November 2003 Primary Dealers (PDs) were required to maintain Rs.350 million as minimum capital before 31 December 2004. However, some PDs were unable to meet this requirement by 31 December 2004. Considering this situation and the current market conditions, the Monetary Board decided to extend the deadline from 31 December 2004 to 1 July 2005 for the PDs to comply with the minimum capital requirement of Rs.350 million.

PDs are required to comply with the above requirement subject to the condition that any PD who wishes to declare profits as dividends during the period from 31 December 2004 to 1 July 2005 shall obtain the prior approval of the Central Bank to do so.

Dr. W M HemachandraSuperintendent of Public Debt


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7Reference No. : 08/24/002/0005/005


April 18, 2005


DIRECTION ON ENHANCEMENT OF MINIMUM CAPITAL REqUIREMENT,DIVIDEND DISTRIBUTION AND MAINTENANCE OF TIER II CAPITAL BY

PRIMARY DEALERS

This direction is issued in terms of section 12 of the Regulation dated February 1, 2002 issued by the Minister of Finance under the Registered Stocks and Securities Ordinance and the Local Treasury Bills Ordinance.

1. Primary Dealers (PDs) are required to increase minimum capital from,

a. Existing Rs.200 million to Rs.250 million from 1 July 2005 and

b. Rs.250 million to Rs.300 million from 1 July 2006

instead of Rs.350 million as per the CBSL directions on 28 November 2003 and 18 January 2005.

2. PDs who maintain a capital between Rs.250 million – Rs.300 million are allowed to declare 25% of profits as dividends with effect from 1 July 2005.

3. PDs who maintain a capital above Rs.300 million are required to allocate 25% of profits annually to a special reserve with effect from 1 July 2005. Direction on special risk reserve issued on 28 November 2003 will be lapsed after 30 June 2005.

4. PDs are allowed to maintain up to a maximum 50% of Tier – I capital as Tier – II capital with effect from 1 July 2005.

5. PDs are required to implement the Risk Weighted Capital Adequacy Framework with a minimum capital requirement of Rs.300 million with effect from 1 July 2006.

Superintendent of Public Debt


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7Reference No. : 08/24/002/0005/006


June 22, 2006

To : Chief Executive Officers of Primary Dealers,

DIRECTION ON RISK WEIGHTED CAPITAL ADEqUACY FRAMEWORK (RWCAF)FOR PRIMARY DEALERS (PDs)

This direction is issued in terms of section 12 of the Regulation No.01 of 2002 dated February 1, 2002 issued by the Minister of Finance under the Registered Stock and Securities Ordinance and the Local Treasury Bills Ordinance.

1. With effect from July 01, 2006 PDs are required to maintain:

a. A required minimum capital which is the higher of Rs.300 million (minimum capital) or the capital sufficient to meet the interest rate sensitivity of the trading portfolio including reverse repos and risk on disallowances (capital charge), and counterparty credit risk;

b. Net capital [Capital (Tier I and Tier II) minus capital for counter party risk], which should be equal to or higher than the capital charge; and

c. A minimum risk weighted capital adequacy ratio (CAR) of 8%.

The methodology of calculating sensitivity of the PD portfolios to an assumed change in yields along with the risk exposure for long/short positions (capital charge), and counterparty credit risk requirement are given in Schedule 1 & 2.

2. PDs are required to comply with the following regulatory requirements for reporting of capital adequacy with effect from July 01, 2006.

All PDs are required to report the positions of their capital adequacy in the specified format on a monthly basis, which is given in Schedule 3 in electronic format (via e-mail/soft copy). The reporting format for the respective month has to be completed by each PD and submitted to the Public Debt Department (PDD) on or before 15th of the subsequent month. These reporting formats would cover, inter alia,

a. Whether the minimum absolute capital requirement is being satisfied; and

b. Whether the CAR is above or below its required minimum capital adequacy ratio.

All PDs on a daily basis are required to maintain the above-mentioned minimum capital and capital adequacy ratio requirements including a proper mechanism to monitor those requirements.

3. Definition ofCapitalFunds,NetCapital,MinimumCapital,RequiredMinimumCapital,Capital Adequacy Ratio and Minimum Capital Adequacy Ratio

3.1 Capital Funds

Capital Funds would include the followings:

Tier-I Capital



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7(b) Issued and paid up non-cumulative preference shares (non-redeemable or redeemable at

issuer’s option).


(d) Reserves created or increased by appropriations of retained earnings or other surpluses, eg., retained profits and other reserves (excluding fixed assets revaluation reserves and retained profits on unaudited financial statements. Retained profits on unaudited financial statements can be included, if the certification of a statutory auditor is provided).

Less

Goodwill and other intangible assets, accumulated losses.

Tier-II Capital

Tier-II capital includes the following and will be limited to 50% of Tier-I capital.

(a) Medium term subordinated debt (maturity period of more than 3 years).

(b) Long term subordinated debt (maturity period of more than 5 years).

(c) Cumulative preference shares.

(d) Perpetual subordinated debt.

To be eligible for inclusion in Tier-II capital, the instrument should be fully paid-up, unsecured, subordinated to the claims of other creditors, free of restrictive clauses, and should not be redeemable at the initiative of the holder or without the consent of the Central Bank of SriLanka (CBSL). This instrument should carry a fixed maturity, and as it approaches maturity, it should be subject to progressive discount, for inclusion in Tier-II capital.

Instruments with an initial maturity period of equal or less than 3 years should not be included as part of Tier-II capital. The subordinated debt instruments included in Tier-II capital shall be subject to discount at the rates shown below:

Remaining Maturity of Instruments Rate of Discount (%)Less than one year 40.00One year and above but less than two years 20.00Two years and above but less than three years 0Three years and above 0

3.2 Net Capital

Net Capital includes Tier-I and Tier II capital, less counter party risk capital requirements.

3.3 Minimum Capital

Minimum capital is Rs. 300 million, which is imposed by the CBSL and required, to be maintained by a PD.

3.4 Required Minimum Capital

A required minimum capital is the higher of Rs.300 million (minimum capital) or the capital sufficient to meet the interest rate sensitivity of the trading portfolio plus rev.repo and capital for disallowances (capital charge), and capital for counterparty credit risk.


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73.5 Capital Adequacy Ratio

Capital Adequacy Ratio is the ratio computed by dividing available capital by the risk-weighted assets.

3.6 Minimum Capital Adequacy Ratio

Minimum Capital Adequacy Ratio is the ratio computed by dividing minimum required capital by the risk-weighted assets.

C. PremaratneSuperintendent of Public Debt

Schedule 1

MEASUREMENT OF MARKET RISK (CAPITAL CHARGE)A. Fixed Income Instruments

PDs are required to calculate capital charges based on the standardised duration based method as follows.

i. First calculate the price sensitivity of all instruments in terms of a change in interest rates of between 3.0 and 1.8 percentage points (adjusted Basle rates) depending on the duration of the instrument as per Table 1 given below. (For rev.repo portfolio, take maturity of the rev.repo instead of the security maturity)

ii. Slot the resulting sensitivity measures into a duration-based ladder with the thirteen time-bands set out in Table 1;

iii. Calculate the capital charge for trading plus rev. repo as follows;

Market value of the individual security * modified duration * assumed change in yield.

(Please see the schedule 3, Page 12 for calculation of Modified Duration for Trading and Reverse Repo)

iv. Subject the lower of the long and short positions in each time-band to a 5% capital charge towards vertical disallowance designed to capture basis risk; (Please see the schedule 3, Page 15)

v. Carry forward the net positions in each time-band for horizontal offsetting across the zones subject to the disallowances set out in Table 2. (Please see the schedule 3, Page 15)

Table - 1Assumed Yield Changes in each Maturity Category

Zone Time Period Assumed Change in Yield Weight1 1 month (or less) 3.0 0

1 to 3 months 3.0 0.23 to 6 months 3.0 0.46 to 12 months 3.0 0.7

2 1 to 2 years 2.7 1.25 2 to 3 years 2.4 1.75 3 to 4 years 2.25 2.25

3 4 to 5 years 2.25 2.75 5 to 7 years 2.1 3.25 7 to 10 years 1.95 3.7510 to 15 years 1.8 4.515 to 20 years 1.8 5.25over 20 years 1.8 6.0

Source : Basle standard bands with treble Basle yield changes


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7In line with the Basle methodology, long and short positions within the same time band may be 95% offset against each other, with 5% of the smaller of the long or short position within a time band being required as a basis reserve. The remaining position (i.e., the residual after offset) is carried through to Table 2 below, which gives the horizontal disallowances to be applied to different time bands within zones, between adjacent zones, and finally between zones 1 and 3.

Table - 2

Zone Netting Disallowance Table

Zones within the zone between adjacent zones between zones 1 and 3Zone 1 40%

40%Zone 2 30% 100%

40%Zone 3 30%

Source: Basle standard

Price sensitivity can be calculated in two different ways:

1. ModifiedDuration*Changeinyield;or

2. Explicit calculation of the price change based on the formula outlined below which will be used in the risk weighted capital adequacy calculations.

Both approaches will give the same result for small (e.g. 1 to 50bp) changes in yields; however, in the case of larger assumed changes in rates, the latter approach will be more accurate due to the impact of convexity (which measures the sensitivity of duration itself to the change in the level of yield).

The price sensitivity of any instrument may be estimated by using the formula given below, where the discount rate tobeusedisthevaluationrateusedinmarkingthatspecificsecuritytomarket.

Price Sensitivity Where

( )( )

NPV

SCNPV

i

T

ii

i

∑ ⎟⎟

⎠

⎞

⎜⎜

⎝

⎛⎟⎟⎠

⎞⎜⎜⎝

⎛

+−

=1

1

( )( )

∑ ⎟⎟

⎠

⎞

⎜⎜

⎝

⎛⎟⎟⎠

⎞⎜⎜⎝

⎛

+=

i

T

ii

i

RCNPV

1

1

∑i = Sum over all cashflows

Ci = Cashflow amount at time t

Ri = Valuation rate as derived from Public Debt Department quoted rates (interpolating and adding off-the-run spread where necessary)

Si = Valuation rate as defined above + assumed change in yield (see Table 2 below)

ti = Value date of the cashflow (expressed in days from now)

t0 = Settlement date of the security (expressed in days from now)

Ti = Time, in years, from t0 to ti calculated on an Actual/Actual basis.

B. Interest Rate Derivatives

The measurement procedure should include all interest rate derivatives and off-balance sheet instruments (e.g., forward rate agreements (FRAs), other forward contracts, interest rate swaps etc.) in the trading book, which are reacted to changes in yield rates. The following procedure outlines the general valuation procedure in the event that such activity exists. The derivatives should be converted into positions of the relevant underlying instrument and should be subject to market risk charges as described in Schedule 1.


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7 i. Forward Contracts, including Forward Rate Agreements (FRAs) These instruments are treated as combinations of long and short positions. The maturity of a FRA is the period until it

is delivered or the contract is exercised, plus – where applicable – the life of the underlying instrument. For example, a long position in a June three-month interest rate futures entered in April has to be reported as a long position in a government security with a maturity of five months and a short position in a government security with a maturity of two months.

ii. Swaps Swaps are treated as two notional positions in government securities with relevant maturities. For example, an interest

rate swap under which a PD is receiving floating rate interest and paying fixed will be treated as a long position in a floating rate instrument and a short position in a fixed-rate instrument. Tenor of the floating rate instrument is treated as equivalent to the period until the next interest fixing while the tenor of the fixed rate instrument is treated as equivalent to the residual life of the swap.

Until a direct source is available, discount rates could be derived from the bid/offer prices published by the PDD to value the swap transactions with appropriate additions for spreads, and applied similar to the bond pricing methodology described in Schedule 1. In most of the cases, an appropriate margin has to be added to the government securities yield curve to obtain an accurate curve for swap valuation.

Appropriate valuation techniques may be developed for more complex financial market products when the need arises.

CALCULATION OF GENERAL MARKET RISK FOR INTEREST RATE

RELATED INSTRUMENTS (Example extracted from Amendment to the Capital Accord to Incorporate Market Risks-Basle Committee on Banking Supervision, January 1996 page 51 & 52)

1. A bank may have the following positions:

– Qualifying bond, $ 13.33 mn market value, residual maturity 8 years, coupon 8%;

– Government bond, $ 75 mn market value, residual maturity 2 months, coupon 7%;

– Interest rate swap, $ 150 mn1/ bank receives floating rate interest and pays fixed, next interest fixing after 9 months, residual life of swap 8 years;

– Long position in interest rate future, $ 50 mn,1/ delivery date after 6 months, life of underlying government security 3.5 years.

2. Table - 3 shows how these positions are slotted into the time-bands and are weighted according to the weights given in Table 1. After weighting the positions the next steps in the calculation will be:

(a) The vertical disallowance in time-band 7-10 years has to be calculated: The matched position in this time-band is 0.5 (the lesser of the absolute values of the added (weighted) long and (weighted) short positions in the same time-band) which leads to a capital charge of 5% of 0.5 = 0.05 = $ 25,000. The remaining net (short) position is -5.125.

(b) The horizontal disallowances within the zones have to be calculated: As there is more than one position only in zone 1, a horizontal disallowance can only be calculated in this zone. In doing this, the matched position is calculated as 0.2 (the lesser of the absolute values of the added long and short positions in the same zone). The capital charge for the horizontal disallowance within zone 1 is 40% of 0.2 = 0.08 = $ 80,000. The remaining net (long) position in zone 1 is +1.00.

(c) The horizontal disallowances between adjacent zones have to be calculated: After calculating the net position within zone 1 the following positions remain: zone 1 +1.00, zone 2 +1.125, zone 3 -5.125. The matched position between zones 2 and 3 is 1.125 (the lesser of the absolute values of the long and short positions between adjacent zones). The capital charge in this case is 40% of 1.125 = 0.45 = $ 450,000.

(d) The horizontal disallowance between zones 1 and 3 has to be calculated: The remaining net (long) position in zone 1 is +1.00, in zone 3 the net (short) position is -4.00. If there were no offsetting between zones 1 and 3 allowed the capital charge would be 5.00 = $ 5,000,000. However, the horizontal disallowance between the distant zones is 100% of the matched position which leads to a capital charge of 100% of 1.00 = 1.00 = $ 1,000,000.

(e) The overall net position is 3.00 leading to a capital charge of $ 3,000,000.

1/ The position should be reported as the market value of the notional underlying depending on the current interest rate, the market value of each leg of the swap (i.e., the 8 year bond and the 9 months floater) can be either higher or lower than the notional amount. For sake of simplicity the example assumes that the current interest rate is identical with the one the swap is based on.


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7Table - 3

($ mn)

Zone 1 Zone 2 Zone 3

Time-band 0-1 1-3 3-6 6-12 1-2 2-3 3-4 4-5 5-7 7-10 10-15 15-20 over 20Months Years

Position +75 Gov.

-50Fut.

+150 Swap

+50Fut. .

-150 Swap

+13.33 Qual

Weight (%) 0.00 0.20 0.40 0.70 1.25 1.75 2.25 2.75 3.25 3.75 4.50 5.25 6.00

Position x Weight +0.15 -0.20 +1.05 +1.125 -5.625+ 0.5

Vertical Disallow.0.5 x 10%

= 0.05

Horizontal Disallow.1 0.20 x 40% = 0.08



3. The total capital charge in this example is :

– for the vertical disallowance $ 50,000– for the horizontal disallowance in zone 1 $ 80,000– for the horizontal disallowance between adjacent zones $ 450,000– for the horizontal disallowance betwen zones 1 and 3 $ 1,000,000– for the overall net open position $ 3,000,000

$ 4,580,000

Note – Vertical Disallowance under section 2(a) is 5%. Accordingly, Vertical Disallowances in the Table - 3 and capital charge in the section 3 above to be adjusted.

Weights in the Table-3 are respective price sensitivities.

Schedule 2

CAPITAL ADEqUACY FOR COUNTER PARTY CREDIT RISK

PDs are required to arrive at the credit equivalent amount for the purpose of reckoning exposure to a counter party on. For this purpose, PDs should consider the market value of respective repo/rev.repo to find out the net exposure of the investment.

Step 1

The net exposure of the repo and rev. repo find out using the following formulae.

Repo = (market value – leg 1)

Rev.repo = (leg 1 – market value)

Step 2

The net exposure thus obtained shall be multiplied by the risk weightage allotted to the relevant counter-party as specified below:


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7 1. Government/guaranteed by the government 0%

2. Banks/PDs, EPF and ETF 20%

3. Insurance companies, provident funds 50%

4. Corporates 75%

5. Others 100%

Step 3

Capital utilization by counterparty is obtained using the following formulae. It is clear that same security used for repo and rev. repo transaction would have only one-way exposure for calculation.

Repo = (market value – leg 1) * risk weight * 8%

Rev.repo = (leg 1 – market value) * risk weight * 8%

Schedule 3Risk Weighted Capital Adequacy – Calculation

Capital Charge Trading Portfolio = Table 1 , Modified Duration * Assumed Charges in yield rates% * Market Value Reverse Repo = Table 2 , Modified Duration * Assumed Charges in yield rates% * Market Value Disallowances = As Seen in Table 3

Trading Portfolio –––––––––> To calculate Modified Duration, indentical security maturity consideredReverse Repo –––––––––> To calculate Modified Duration, Rev.Repo maturity considered

Capital Utilization by Counterparty Credit Reverse Repo = Table 4 , (Leg 1 - Market Value) * Risk weight% * 8% Repo = Table 5 , (Market Value - Leg 1) * Risk weight% * 8%

Yield Rates and Counterparty Risk Weights used for calculations

1) For Capital Charge

Assumed Change in Yield (Basel)

Time Period

3.00% 1 month (or less)3.00% 1 to 3months3.00% 3 to 6 months3.00% 6 to 12 months2.70% 1 to 2 years2.40% 2 to 3 years2.25% 3 to 4 years2.25% 4 to 5 years2.10% 5 to 7 years1.95% 7 to 10 years1.80% 10 to 15 years1.80% 15 to 20 years1.80% Over years1.80%


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72) Counter Party Risk

Counter Party Risk WeightGovernment and Government guaranteed 0%Banks / PDs, EPF and ETF 20%Insurance Companies & Approved Provident Funds 50%Corporates 75%Others 100%

Name of the PD:

Capital Adequacy Report as at …………………

Amounts in Rs. million

* Risk Weighted

Assets1. Available Capital 0.0

2. Less: Capital utilization by Counterparty credit 0.0 –3. Net Capital (1+2) 0.0

4. Capital Charge for Trading & Reverse Repo 0.0

5. Capital Charge for disallowances 0.0

6. Total Capital Charge (4+5) 0.0 0.007. Regulatory Minimum Capital 300

8. Unused Capital (3 - 6) if 3>=6 0.0

9. Required minimum capital (higher of Rs.300 mn or sum of capital charge and counter party risk) 300

10. Whether the total Capital in excess of required minimum capital 0

11. NPV of Portfolio (Trading & Reverse Repo) 0.0

12. Total Risk Weighted Capital (Capital charge + Counterparty risk + capital for disallowances) 0.0

13. Risk weighted other assets (Weighted Assets in balance sheet without trading portfolio and reverse repo) 0.0

14. Total Risk Weighted Assets (2 + 6 + 13) 0.015. Risk Weighted Capital Adequacy Ratio (Minimum 8%) 1 / 14 0.0%

* Risk Weighted AssetsAmounts in Rs. million

1. Capital Charge for Trading & Reverse Repo –2. Capital Charge for Disallowances –3. Risk Weighted Assets for total Capital Charge (1+2) / 8% –4. Risk Weighted Assets for Counter Party –5. Risk Weighted other assets (Weighted Assets in balance sheet without trading portfolio and reverse repo)

–

6. Total Risk Weighted Assets 3+4+5 –7. Available Capital –8. Risk Weighted Capital Adequacy Ratio (Minimum 8%) 7/6 0.00%


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7Capital Charge

Settlement Date :Trading Portfolio :

Table 1Amounts in Rs. million

Market Value

Security Maturity

Date

Coupon Rate

Yield Rate Mduration

Remaining Maturity Days (Maturity Date

- Settlement Date)

Assumed Change in

Yield

Capital Charge (Market Value *

Mduration * Assume change in yield)

Trading Bonds

TotalTrading Bills

TotalForward Purchases

Total- Short sellings

TotalTotal NPV (Trading Bonds + Trading Bills + Forward Purchases - Short Sellings)Total Capital charge for Trading Portfolio(Trading Bonds + Trading Bills + Forward Purchases - Short Sellings) -

Reverse RepoTable 2


Market Value

Rev. Repo

Maturity Date

Security Maturity

Date

Coupon Rate

Yield Rate Mduration

Remaining Maturity Days

(Maturity Date - Settlement Date)

Assumed Change in Yield

Capital Charge (Market Value *

Mduration * Assumed change in yield)

- -

NPV of Trading & Reverse Repo -

Total Capital Charge for trading portfolio and reverse repo -


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7Example - Table 3

Capital Charge For DisallowancesAmounts in Rs.mn.

Zone 1 (Months) Zone 2 (Years) Zone 3 (Years)

Time-band0-1 1-3 3-6 6-12 1-2 2-3 3-4 4-5 5-7 7-10 10-15 15-20 over 20

<=1 3<=X>1 6<=X>3 12<=X>6 2<=X>1 3<=X>2 4<=X>3 5<=X>4 7<=X>5 10<=X>7 15<=X>10 20<=X>15 20>

Positions0 275 150 75 25 50.45 0 150 45.14 100 0 75 0

0 0 -75 -100 -275 0 0 -125 0 0 0 0 0

Weight (%) 0.00 0.20 0.40 0.70 1.25 1.75 2.25 2.75 3.25 3.75 4.50 5.25 6.00

Position * Weights0.55 0.60 0.53 0.31 0.88 4.13 1.47 3.75 3.94

-0.30 -0.70 3.44 0 -3.44

Position * Weights (ABS)

0.55 0.60 0.53 0.31 0.88 4.13 1.47 3.75 3.94

0.30 0.70 3.44 3.44

Vertical Dissallowances

Zone 1 3-6 0.3 * 5% 0.02 6-12 0.525 * 5% 0.03

Zone 2 1-2 0.313 * 5% 0.02

Zone 3 4-5 3.44 * 5% 0.172

Total Vertical Disallownces 0.23

Horizontal Disallowances (Within the Zones)


Time-band0-1 1-3 3-6 6-12 1-2 2-3 3-4 4-5 5-7 7-10 10-15 15-20 over 20

>=1 1>=3 3>=6 6>=12 1>=2 2>=3 3>=4 4>=5 5>=7 7>=10 10>=15 15>=20 <20

Position * Weights0.55 0.60 0.53 0.31 0.88 4.13 1.47 3.75 3.94

–0.30 –0.70 –3.44 0.00 –3.44

Net Total 0.00 0.55 0.30 –0.18 –3.13 0.88 0.00 0.69 1.47 3.75 0.00 3.94 0.00

Positives 0.85 0.88 9.84

Negatives –0.18 –3.13 0.00

Zone 1 0.18 * 40% 0.07

Zone 2 0.88 * 30% 0.26

Total Vertical Disallownces 0.33


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7Horizontal Disallowances (Inter Zones)


Time-band0-1 1-3 3-6 6-12 1-2 2-3 3-4 4-5 5-7 7-10 10-15 15-20 over 20

>=1 1>=3 3>=6 6>=12 1>=2 2>=3 3>=4 4>=5 5>=7 7>=10 10>=15 15>=20 <20

Position * Weights0.00 0.55 0.60 0.53 0.31 0.88 0.00 4.13 1.47 3.75 0.00 3.94 0.00

0.00 0.00 –0.30 –0.70 –3.44 0.00 0.00 –3.44 0.00 0.00 0.00 0.00 0.00

Total 0.68 –2.24 9.84

Total / (ABS) 0.68 2.24 9.84

Zone 1-2 0.68 * 40% 0.27

Zone 2-3 Remaining Zone 2 2.24 + 0.68 = -1.567 min Zone 3 9.84 (1.567 * 40%) 0.63

Total Horizontal Disallownces (Inter Zones) 0.90

Total Disallowances 1.4605

[ Vertical Disallowances + Horizontal Disallowances (Within the Zones)+ Horizontal Disallowances (Inter Zones) ]


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7Counterparty Risk for Repo and Reverse Repo

Settlement Date :Reverse Repo :


Leg 1 Value

Security Market Value

Security Maturity

Date

Remaining Maturity

(Days)Counterparty Counterpaty

Weight

Net Value (Leg 1

- Market Value)

Net Value (only

positive Values)

Risk weighted Assets for

Counterpary risk

(Net Value * Weight)

Counterparty risk

(Net Value * Weight * 8%)

0.00 0.00 –

RepoTable 5


Leg 1 Value

Security Market Value

Security Maturity

Date

Remaining Maturity

(Days)Counterparty Counterpaty

Weight

Net Value

(Market Value

- Leg 1)

Net Value (only

positive Values)

Risk weighted Assets for

Counterpary risk

(Net Value * Weight)

Counterparty risk

(Net Value * Weight * 8%)

0.00 0.00 –

Total Counterparty Risk for reverse repo and repo –Total Risk weighted Assets for Counterparty risk (repo & reverse repo) –


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7Risk Weighted Other Assets


As per Balance Sheet

Weight % Risk Weighted Assets

Balance with Central Bank 0%Cash in Hand and with Banks 0%Cash with Custodial Agent 0%Securities Purchased under agreements to resell -Trading Securities -Investment Securities 100%Trading Receivables 100%Fails to Deliver 100%Securities with Custodial Agent 100%Principal and Interest Receivable 100%Accounts Receivable 100%Loans and Advances 100%Investment in Subsidiaries 100%Fixed Assets (net of depreciation) 100%Other Assets (net) 100%Total Assets -


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7Circular No. : SSSS/01/2008

18 August 2008

To : All Participants of the LankaSettle System

AMENDMENT TO THE LANKASETTLE SYSTEM RULES ISSUED IN AUGUST 2003INTRODUCTION OF PERSONAL COMPUTER BASED PAYMENT AND SECURITIES

SETTLEMENT SYSTEM (PC BASED SYSTEM)

You are hereby informed that the Rule 2.1 in Volume 1 and Rule 4.8 in Volume 4 of LankaSettle System Rules (as amended) are amended as per Annex 1 with effect from 18 August 2008.

With this LankaSettle System Rules amendment, Central Bank of Sri Lanka (CBSL) introduces Personal Computer Based Payment and Securities Settlement System (PC Based System) as an alternative settlement system in the event of a prolonged, unrecoverable LankaSettle Application Event.

Participants shall comply with the instructions given in the Rule 4.8.1 of LankaSettle System Rules issued in August 2003 (as amended), when the CBSL declares a prolonged, unrecoverable LankaSettle Application Event.

(Mrs.) J P Mampitiya C J P Siriwardena A Kamalasiri Director Superintendent Director Payments & Settlements Public Debt Domestic Operations

Enclosed: 1. Annex 1 – Amendment to the LankaSettle System Rules issued in August 2003.

2. CD 1 – CD containing the software required under sections 3.1.1 and 3.1.2 of the Attachment D to the Annex 1.


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7Annex 1

1. Amendment to Rule 2.1 in the Volume 1 of the LankaSettle System Rules issued in August 2003

Following interpretations should be inserted in between the words “Participant” and “Person resident in Sri Lanka” to the Rule 2.1 in the Volume 1 of the LankaSettle System Rules issued.

“ “PC Based PSS” shall mean Personal Computer Based Payment Settlement System “PC Based SSS” shall mean Personal Computer Based Securities Settlement System “PC Based System” shall mean Personal Computer Based Payment and Securities Settlement System ”

2. Amendment to Rule 4.8 in the Volume 4 of the LankaSettle System Rules issued in August 2003

Rule 4.8 in the Volume 4 of the LankaSettle System Rules is hereby deleted and substituted with the following amended Rule 4.8.

“4.8 Other Contingency Events

4.8.1 LankaSettle Application Event

In an event of a prolonged, unrecoverable RTGS and LankaSecure applications failure, the Central Bank will declare a LankaSettle Application Event. Such declaration will be communicated to all Participants, LankaClear (Pvt) Ltd., the Sri Lanka Banks’ Association (Guarantee) Ltd. and Primary Dealers’ Association by an available communication means (telephone, fax, SWIFT, Reuters etc.). All Participants shall take steps stipulated in Attachment D promptly, expeditiously and in such an event, within the cut off time stipulated in such a declaration.

In an event of a LankaSettle Application Event, the existing LankaSettle System (i.e., RTGS System, Scripless Securities Settlement System and the Scripless Securities Depository) would not be available for the Participants. As an alternative to the LankaSettle System a PC Based System which will be operated by the Central Bank, will be available for Participants to settle their transactions. The Central Bank has the right to settle transactions on gross or net basis and will not make any partial settlements. If sufficient funds and/or securities are not available in Participants’ Settlement Accounts and/or Securities Accounts, the respective transaction will be queued in the System until required funds and/or securities are received to complete the transaction. Any transaction remained pending due to non-availability of funds or securities will be cancelled from the System at the end of the particular business day.

The system will not be an on-line system, but off-line where participants submit the payment/securities instructions in CD form or in diskettes. The PC Based System will not accept any forward dated transaction to be settled in respect of any type of payment.

The PC Based System consists of two independent systems:

(i) Personal Computer Based Payment Settlement System (PC Based PSS); and (ii) Personal Computer Based Securities Settlement System (PC Based SSS)

The Central Bank shall have the power to issue such other instructions/directions/circulars it may deem necessary in addition to the procedures stipulate in Attachment D.

4.8.2 Other System Disabling Events

Other system disabling events may arise, that must be dealt with on the case by case basis. In such circumstances, the Central Bank may take such measures as it considers necessary including:

• extend or shorten the LankaSettle operating days;• suspend operations of the System; and• suspend the operating procedures of the System under these System Rules.

The Central Bank will attempt to remain in the contact with Participants and provide instructions to restore operations.

The Central Bank will execute such emergency measures as are necessary to resume operations with minimum delay. Participants must co-operate with the Central Bank in the execution of these measures.”


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7Attachment D

Operational Mechanism and Procedures to be followed in the event of a LankaSettle Application Event under Rule 4.8.1 of Volume 4

1. Balances of the Participants’ Settlements Accounts in the RTGS System and Securities Settlement System

If the Central Bank decides to move to the PC Based System at the beginning of a business day, the Central Bank will open the System with the previous business day’s end of the day balances of the Participants’ Settlement Accounts in the RTGS System and Securities Accounts in LankaSecure System. If the Central Bank decides to move to the PC Based System in the middle of a business day, the Central Bank will endeavour to use the latest available balances of the Participants’ Settlements Accounts in the RTGS System and Securities Accounts in the LankaSecure System before the contingency event occurred. If the situation does not permit to do so, the Central Bank will open the System with the previous business day’s end of the day balances of the Participants’ Settlement Accounts in the RTGS System and the Securities Accounts in the LankaSecure System.

2. Fund transfers in the PC Based PSS and Securities Transfers in PC Based SSS

Inter participant fund transfers will be settled in the PC Based PSS and inter participant securities transfers will be settled in the PC Based SSS. The two systems are not interlinked to facilitate automated Delivery versus Payments (DvP) transactions relating to securities.

3. Procedure to be followed by participants with regard to PC Based PSS and PC Based SSS

Both systems recognize transactions under two categories:

(i) Inter participant transactions excluding transactions with the Central Bank; and

(ii) Transactions with the Central Bank

3.1 Inter Participant transactions excluding the transactions with the Central Bank

Inter participant transactions excluding the transactions with the Central Bank are categorized into two:

(i) Payments related transactions

(ii) Securities related transactions

3.1.1 Payment related transactions

Each Participant shall forward details of its inter participant fund transfers relating to transactions effected during hours and/or days specified by the Central Bank in its declaration, to be debited to its Settlement Account in the PC Based PSS in diskette/CD form using Excel data file (ExcelData.xls) provided by the Central Bank along with the hard copy as per Attachment D.1, duly signed by two authorized officers, to the Director, Payments and Settlements Department (PSD) of the Central Bank before the cut off time declared by the Central Bank.

3.1.2 Securities related transactions

Each Participant shall forward details of its inter participant securities related transactions effected during hours and/or days specified by the Central Bank in its declaration, to be debited/credited to its Securities Account in the PC Based SSS to the Superintendent of Public Debt (SPD), Public Debt Department (PDD) of the Central Bank in diskette/CD form using Excel data file (SecurityTxnData.xls) provided by the Central Bank along with the hard copy as per Attachment D.2, duly signed by two authorized officers. All securities related transactions shall be Deliver Free (DvF) or Receive Free (RvF) type which involves only the movement of securities. The System does not facilitate Delivery Vs Payment (DvP) transactions. Accordingly, the details of the payment relating to a purchase of securities shall be forwarded by the Participant that purchases the securities, to the PC Based PSS as explained under 3.1.1 above.


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73.2 Transactions with the Central Bank

3.2.1 Open Market Operations (OMO) – Participants are requested to deal first with the OMO Front Office of the Domestic Operations Department (DOD) of the Central Bank in respect of the following transactions with the Central Bank:

– Repurchase Transactions (Repo); – Reverse Repurchase Transactions (Reverse Repo); – Outright Sales; and – Outright Purchases

Each Participant shall inform the details of its each deal over the phone to the OMO Front Office and fax the written confirmation using the relevant format given in Attachment D.3(a) or D.3(b) or D.3(c) to the OMO Front Office of the DOD within half an hour after entering into such a deal with the DOD. A payment leg relating to an OMO transaction will be settled in the PC Based PSS and the securities leg relating to that OMO transaction will be settled in the PC Based SSS, if sufficient funds and/or securities are available in the respective Participant’s Settlement Account in the PC Based PSS and the Securities Account in the PC Based SSS, by debiting/crediting the respective Accounts.

Confirmation for each settled OMO transaction as per the relevant format given in the Attachment D.4(a) or D.4(b) will be issued by the PSD to the respective Participant.

3.2.2 Intra-day Liquidity Facility (ILF)

Funds under the ILF will be provided to the Participants by the Central Bank. Participants shall inform the details of ILF requirements over the phone to the OMO Front Office of the DOD and shall fax the written confirmation as per the format in Attachment D.5 within half an hour to the OMO Front Office of the DOD after entering into such a deal.

Each Participant is also required to transfer securities to its ILF account in the PC Based SSS as explained under 3.1.2 above, once a deal is finalized. ILF will be granted at the official price announced by the Central Bank. Each Participant shall ensure that sufficient funds are available in its Settlement Account in the PC Based PSS in order to reverse the ILF transactions within the time specified by the Central Bank.

3.2.3 Cash Deposits/Withdrawals

Each Participant has to deal directly with the Currency Department of the Central Bank and forward requests on cash deposits or withdrawals to/from its Settlement Account in the PC Based PSS at the Central Bank. Relevant entries regarding such cash deposits or withdrawals will be made by the Central Bank to the respective Participant’s Settlement Account.

3.2.4 Settlements of Primary Issues of Government Scripless Securities (T bills and T bonds)

Front Office of the PDD will conduct the auctions for government securities. On the settlement day, Back Office of the PDD will inform the successful bidders regarding net values due from each relevant primary dealer (PD). Accordingly, each PD who has purchased securities at the auction shall maintain sufficient funds in its Settlement Account and request relevant fund transfer as explained under 3.1.1 above, in the PC Based PSS, enabling the Central Bank to effect the payment in the PC Based PSS and transfer relevant securities in the PC Based SSS.

3.2.5 Maturity & Coupon Payments for Scripless Securities (T bills and T bonds)

The Central Bank will effect maturity and coupon payments for Scripless Securities (T bills and T bonds) to each relevant Participant’s Settlement Account in the PC Based PSS.


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7Attachment D.1

Name of the Participant : ………………………………

Date: ……………………………

Director,Payments & Settlements Department,Central Bank of Sri Lanka,No.30, Janadhipathi Mawatha,P.O. Box 590, Colombo 01.

PC Based Payment and Securities Settlement System (PC Based PSS)

Inter Participant Payment Related Transactions (Excluding ILF, OMO and other transactions with the Central bank)

Sender BIC………………

Value Date……………

Amount (LKR)Settlement

OrderTransaction

Ref. Receiver BIC

We certify that the above data / information are correct.

………………………… ………………………… Authorized Signature Authorized Signature (Name of the Participant) (Name of the Participant)


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7Attachment D.2


Date: ……………………………

Superintendent,Public Debt Department,Central Bank of Sri Lanka,No.30, Janadhipathi Mawatha,P.O. Box 590, Colombo 01.

PC Based Payment and Securities Settlement System (PC Based SSS)

Inter Participant Securities Related Transactions (Excluding ILF, OMO and other transactions with the Central bank)

Submitter BIC………………

Value Date……………

SettlementOrder

TransactionRef.

Delivering Participant’s

BIC

Receiving Participant’s

BIC

SourceSub

Account

Destination Sub

AccountISIN quantity

We certify that the above data / information are correct.



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7Attachment D.3 (a)


Date: ……………………………

Director,Domestic Operations Department,Central Bank of Sri Lanka,No.30, Janadhipathi Mawatha,P.O. Box 590, Colombo 01.

Confirmation of Repo deal with the Central Bank onPC Based Payment and Securities Settlement System (PC Based System)

We hereby confirm the purchase of Government of Sri Lanka Treasury Bills from Central Bank of Sri Lanka under a Repurchase agreement as per the details given below.

01. Value of the repo deal (Rs.) –

02. Date of sale –

03. Maturity date of the deal –

04. Yield rate for Repo –


* Respective Participant should inquire from the Front Office of the Domestic Operations Department of the Central Bank in respect of rates and price of relevant Treasury Bill / Bond.


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7Attachment D.3 (b)


Date: ……………………………


Confirmation of Re-repo deal with the Central Bank onPC Based Payment and Securities Settlement System (PC Based System)

We hereby confirm the sale of Sri Lanka Treasury Bills to the Central Bank of Sri Lanka under a Repurchase agreement as per the details given below.

01. Value of the repo deal (Rs.) –

02. Date of sale –


04. Yield rate for Repo –

05. Treasury Bill / Bond ISIN No. (for repo)*

ISIN No. Yield Price




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7Attachment D.3 (c)


Date: ……………………………


Confirmation of Outright Purchase / Sales deals with the Central Bank onPC Based Payment and Securities Settlement System (PC Based System)

We hereby confirm the purchase / sale of Government of Sri Lanka Treasury Bills / Bonds from / to Central Bank of Sri Lanka under a Repurchase / Re-repurchase Transaction as per the details given below.

01. Value of the outright purchase / sale deal (Rs.) –

02. Date of sale / purchase –

03. Maturity date of the security –

04. Yield Rate (Repo / Re-repo) –

05. ISIN No. (for Purchases) –




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7Attachment D.4 (a)

OMO Settlements DivisionPayments & Settlements DepartmentCentral Bank of Sri LankaNo.30, Janadhipathi MawathaP.O. Box 590, Colombo 01.

Date: ……………………………

Name of the Participant : ……………………………………………

Confirmation – Secondary Repo / Re-repo forPC Based Payment and Securities Settlement System (PC Based System)

We hereby confirm the sale / purchase of Government of Sri Lanka Treasury Bills to your institution under a Repurchase / Re-repurchase Transaction as per the details given below.

01. Treasury Bill / Bond ISIN No. –

02. Maturity Date of Treasury Bill / Bond –

03. Face value of Treasury Bill / Bond sold / purchased (Rs. Mn.) –

04. Date of sale / purchase –

05. Repurchase Date (Maturity Date) –

06. Rate of the Bill / Bond (yield), per annum –

07. Price of the Bill / Bond (Rs. per 100/-) –

08. Repo / Re-repo Rate (yield), per annum –

09. Repo / Re-repo price (as per Rs. 100/-) –

10. Payable Value (Rs.) –

11. Repayable Value (Rs.) –

………………………… Head / OMO Settlements Division Payments & Settlements Department


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7Attachment D.4 (b)

OMO Settlements DivisionPayments & Settlements DepartmentCentral Bank of Sri LankaNo.30, Janadhipathi MawathaP.O. Box 590, Colombo 01.

Date: ……………………………

Name of the Participant : ……………………………………………

Confirmation – Secondary Purchases / Sales forPC Based Payment and Securities Settlement System (PC Based System)

We hereby confirm the sale / purchase of Government of Sri Lanka Treasury Bills to your institution under a Repurchase / Re-repurchase Transaction as per the details given below.

01. Treasury Bill / Bond ISIN No. –

02. Deal Date –

03. Settlement Date –

04. Maturity Date of Treasury Bill –

05. Face value of Treasury Bill sold / purchased (Rs. Mn.) –

06. Yield Rate –

………………………… Head / OMO Settlements Division Payments & Settlements Department


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7Attachment D.5


Date: ……………………………


Confirmation of ILF deal with the Central Bank onPC Based Payment and Securities Settlement System (PC Based System)

We hereby confirm the sale of Government of Sri Lanka Treasury Bills / Bonds to the Central Bank of Sri Lanka under to obtain ILF as per the details given below.

01. Value of the deal (Rs.) –

02. Value date of ILF –

03. Value Time –


05. Details of the Treasury Bills / Bonds (for Re-repo)*

ISIN No. Yield Price




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January 23, 2007

To : All participants of the LankaSettle System

AMENDMENT TO LANKASETTLE SYSTEM RULES, AUGUST 2003

You are hereby informed that the Rule 5.4 of Volume 3 of LankaSettle System Rules issued in August 2003 is amended by inserting the Sub-Rule 5.4A.

Accordingly, Sub-Rule 5.4A, as given below, is inserted in between Rule 5.4 and Rule 5.5 of Volume 3 of LankaSettle System Rules, with effect from February 02nd, 2007.

“ 5.4.A. Recording of Repositioning through Central Bank of Sri Lanka Wide Area Network (CBSLNet)

However, Overnight Customer Repo Repositioning transactions of a value which is Rs.2 million or below or such amount as may be decided by the Bank from time to time shall be recorded through the CBSLNet subject to the practices with regard to the operation of CBSLNet as reflected in the relevant System Rules, Operating Instructions that will be issued by the Bank from time to time. Any Overnight Repo Repositioning transaction, the value of which is above Rs.2 million or any such amount as may be decided by the Bank from time to time shall be recorded using SWIFT messaging system. ”



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September 28, 2007


AMENDMENTS TO LANKASETTLE SYSTEM RULES ISSUED IN AUGUST 2003

You are hereby informed that the Rule 2.2 of Volume 3 of LankaSettle System Rules issued in August 2003 is replaced to read as follows with effect from 01 October 2007.

(a). The Rule 2.2 of volume 3 of LankaSettle System Rules issued in August 2003 is replaced by incorporating the non-recording transaction charges to read as follow.

2.2 Custodial Responsibilities

Dealer Direct Participants shall comply with applicable law, regulations and directions issued by the Central Bank in the conduct of their business as a Dealer Direct Participant.

Dealer Direct Participants act as custodians for their Customers in LankaSecure. This custodial role includes the following responsibilities:

2.2.1 to promptly and accurately record the name, address and National Identity Number, Company Registration Number or other identifying number approved by the Central Bank of their Customer in LankaSecure when the Customer obtains legal ownership of a security;

2.2.2 to promptly and accurately record in LankaSecure ownership or any change of ownership or owner details of a security within their Securities holdings and in the event of a failure to record the said transaction details, the Central Bank may in its sole discretion impose a non-recording transaction charge on the Dealer Direct Participant (DDP). Without prejudice to the generality of the foregoing, the Central Bank may take the following steps.

2.2.2.1 For the 1st instance of non-recording of transaction - severe warning

2.2.2.2 For the 2nd instance of non-recording of transaction - Rs.5,000/- per transaction or 0.5% of the value of the transaction (face value) whichever is higher.

2.2.2.3 For the 3rd instance of non-recording of transaction - Rs.10,000/- per transaction or 1% of the value of the transaction (face value) whichever is higher.

2.2.2.4 In the event of repeated non recording of transactions, Central Bank may suspend forthwith the DDP status of a licensed commercial bank and suspend the primary dealer status of a primary dealer as appropriate for a period of time determined by the Central Bank of Sri Lanka.

2.2.3 The amounts so charged shall be debited from the Settlement Account on the next business day of the decisions taken by the Central Bank and shall be credited to the Central Bank. If sufficient funds are not available in the Participants accounts, then it shall pay the non-recording transaction charges within 3 business days of the date of notice of the decision of the Central Bank.

2.2.4 Ten per cent (10%) of each charge so credited shall be deducted as an administrative charge by the Central Bank. The balance shall be available for utilisation for training of the staff of


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7the banks and primary dealers and shall be paid for such purpose upon an application being made by the Sri Lanka Bank’s Association (Guarantee) Ltd. and Association of Primary Dealers to the Central Bank.

2.2.5 Any non-recording charge imposed shall not be in substitution or derogation of, or preclude the exercise by the Central Bank of any right or claim which the Central Bank has or is entitled to any action, suit or proceeding in a court of law arising from the failure of any Participant to record ownership or any change of ownership or owner details of a security within its Securities holdings.

2.2.6 to account and make payment to their Customers of any interest or maturity proceeds due to them in accordance with directions that may be issued in this regard; and

2.2.7 to effect transactions on behalf of their Customers in accordance with instructions received from Customers, provided that such transactions are legal and do not place the Participant in breach of these System Rules.

Dealer Direct Participants must comply strictly with instructions of a customer in transferring customer securities.



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September 28, 2007


AMENDMENTS TO LANKASETTLE SYSTEM RULES ISSUED IN AUGUST 2003

You are hereby informed that the Rule 5.4 of Volume 3 of LankaSettle System Rules issued in August 2003 and subsequently amended by inserting Rule 5.4.A through Circular No: SSSS/01/2007 dated 23rd January 2007 is replaced to read as follows with effect from 01 October, 2007.

“ 5.4.A. Recording of Repositioning transaction through Central Bank of Sri Lanka Wide Area Network (CBSLNet)

However, Customer Repo Repositioning transaction (overnight and term repos up to one month) or a Customer Outright Repositioning transaction of value which is Rs.5 million or below or such amount as may be decided by the Bank from time to time shall be recorded through the CBSLNet subject to the practices with regard to the operation of CBSLNet as reflected in the relevant System Rules, Operating Instructions that will be issued by the Bank from time to time. Any Customer Repo Repositioning transaction (overnight and term repos up to one month) or Customer Outright Repositioning transaction; the value of which is above Rs.5 million or any such amount as may be decided by the Bank from time to time shall be recorded using SWIFT messaging system. ”



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January 23, 2007


CENTRAL BANK OF SRI LANKA WIDE AREA NETWORK (CBSLNET) BASED APPLICATION TO RECORD OVERNIGHT CUSTOMER REPO REPOSITIONING

TRANSACTIONS INVOLVING GOVERMENT SECURITIES

You are hereby informed that the Central Bank of Sri Lanka (CBSL) has decided to allow participants of LankaSettle to record Overnight Customer Repo Repositioning transactions of LankaSecure through the Wide Area Network of the Central Bank of Sri Lanka (CBSLNet), and accordingly amendments to the System Rules of the LankaSetttle has been made as per the Circular No. SSSS/01/2007 dated 23rd January 2007. The facility will be available with effect from 2nd of February, 2007. Operating Instructions applicable for participants of the above scheme are given below.


1. This facility will accommodate transactions relating to Overnight Customer Repo Repositionings in which, the face value is Rs.2 million or below. Transactions exceeding a face value of Rs.2 million, will not be accepted by the system. Participants should use SWIFT for Repo transactions that exceeds Rs.2 million. However there is no restriction to participants to use SWIFT for overnight Repo transactions where the face value is Rs.2 million or below.

2. Transfers of securities are allowed only from 8.00 a.m. to 4.00 p.m. on valid LankaSecure business days and any allowed transaction entered through the CBSLNet after 4.00 p.m. will not be settled.

3. Creation of a security transfer has to be done by one officer and it has to be authorized by another. CBSL will not receive security transfer instructions until a transaction is authorized.

4. Security transfer requests will be uploaded to the LankaSecure for settlement at 3.00 p.m. and 4.00 p.m. on each business day.

5. New balances will be available to participants only after the particular batch of transactions is loaded and settled in the LankaSecure.

6. Before a transaction is settled, an authorized officer of the participating institution is able to cancel the transaction if required, through the existing browser workstation.

7. Once a transaction is settled in the LankaSecure, it is irrevocable.

8. All unsettled repositioning transactions are cancelled by the system at the end of the day and CBSL is not responsible for such cancellations.

9. In a situation where the CBSLNet facility is not available due to a technical or a communication failure, participating institutions should use their SWIFT system to make above Repo transactions. CBSL would not take the responsibility for any losses that might result in due to failures of CBSLNet.


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710. A nominal fee chargeable for providing this trade input facility will be notified later.

11. Once this system is in operation, all transactions relating to Customer Repo Repositionings must be recorded in the Central Depository System (CDS) of LankaSecure.

12. The system has a facility to transfer securities between any type of account. However, participants are advised to make repositioning between OWN, CSL, CRE, CRR, CRP and REP account types described in the System Rules of the LankaSettle only.

13. Penalties for unrecorded transactions to be decided based on a formula calculated by the CBSL, which will be notified later.



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September 28, 2007


CENTRAL BANK OF SRI LANKA WIDE AREA NETWORK (CBSLNET) BASED APPLICATION TO RECORD CUSTOMER REPOSITIONING TRANSACTIONS

INVOLVING GOVERMENT SECURITIES

You are hereby informed that the Central Bank of Sri Lanka (CBSL) has decided to allow participants of LankaSettle to record both Customer Repo Repositioning transactions (overnight and term repos up to one month) and Customer Outright Repositioning transactions through the Wide Area Network of the Central Bank of Sri Lanka (CBSLNet). Accordingly, amendments to the System Rules of the LankaSetttle have been made as per the Circulars No. SSSS/04/2007 and SSSS/06/2007 dated 28 September, 2007. The facility will be available with effect from 01 October, 2007. Operating Instructions applicable for participants of the above scheme are given below.


1. This facility will accommodate transactions relating to Customer Repo Repositioning (overnight and term repos up to one month with auto reversal facility) and Customer Outright Repositioning in which, the face value is Rs.5 million or below. Repositioning transactions exceeding a face value of Rs.5 million, will not be accepted by the system. Participants should use SWIFT for Repositioning transactions that exceed Rs.5 million. However there is no restriction to participants to use SWIFT for both Customer Repo Repositioning transactions (overnight and term repos up to one month) and Customer Outright Repositioning transactions where the face value is Rs.5 million or below.

2. Transfers of securities are allowed only from 8.00 a.m. to 4.00 p.m. on valid LankaSecure business days, and, any allowed transaction entered through the CBSLNet after 4.00 p.m. will not be settled.

3. Creation of a security transfer has to be done by one officer and it has to be authorized by another. CBSL will not receive security transfer instructions until a transaction is authorized.

4. Security transfer requests will be uploaded to the LankaSecure for settlement at 9.00 a.m., 3.00 p.m. and 4.00 p.m. on each business day.

5. New balances will be available to participants only after the particular batch of transactions is loaded and settled in the LankaSecure.

6. Before a transaction is settled, an authorized officer of the participating institution is able to cancel the transaction if required, through the existing browser workstation.

7. Once a transaction is settled in the LankaSecure, it is irrevocable.

8. All unsettled repositioning transactions are cancelled by the system at the end of the day and CBSL is not responsible for such cancellations.

9. In a situation where the CBSLNet facility is not available due to a technical or a communication failure, participating institutions should use their SWIFT system to make above Repositioning


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7transactions. CBSL would not take the responsibility for any losses that might result due to failures of CBSLNet.

10. A nominal fee chargeable for providing this trade input facility will be notified later.

11. The system has a facility to transfer securities between any type of account. However, participants are advised to make repositioning between OWN, CSL, CRE, CRR, CRP and REP account types described in the System Rules of the LankaSettle only.

12. If a participant fails to record any repositioning using SWIFT messaging system or through CBSLNet in the LankaSettle, non-recording transaction charges for unrecorded transactions as per Rule 2.2 of Volume 3 of LankaSettle System Rules will apply.

• Circular No. SSSS/02/2007 in this regard issued on 23 January 2007 is hereby revoked.



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8Operating Instructions No. : RDD/2005/1

Regional Development DepartmentCentral Bank of Sri LankaP. O. Box 590No: 30, Janadhipathi Mawatha,Colombo 01.

12th January 2005Tel. : 2477447 / 2477432 / 2477452 / 2477339Fax : 2477733 / 2477734

To : All Licensed Commercial Banks All Licensed Specialised Banks All Registered Finance Companies All Registered Finance Leasing Establishments.

Dear Sir / Madam,

LOAN SCHEME TO ASSIST THE SMALL AND MEDIUM ENTERPRISES (SMES)AFFECTED BY TSUNAMI ON 26.12.2004

TSUNAMI RELIEF LOAN SCHEME (SUSAHANA)

1. Introduction

The above scheme will be introduced by the Central Bank of Sri Lanka (CBSL) with the sole purpose of providing credit facilities to resume micro, small and medium scale enterprises affected by the Tsunami waves of 26.12.2004.

1.1 Credit under the scheme will be provided to eligible sub-borrowers through all Participatory Financial Institutions (PFIs) i.e., licensed commercial and licensed specialised banks, registered finance companies, registered finance leasing establishments (PFIs).

The activities identified for financing are related to resumption of operations of any micro, small and medium sub-project affected by Tsunami waves to the level that prevailed before 26.12.2004.

2. Overall Management of the Project

The Regional Development Department (RDD) of the CBSL will be responsible for implementation of the credit scheme.

3. Role of the PFIs

Each PFI shall designate a full time senior officer as the administrator of the loan scheme at its Head Office who will be responsible for co-ordinating and supervising the PFIs’ sub-loan operations. The functions allocated to each PFI are as follows :

(i) In consultation with the CBSL, designate the appropriate branches for grant of sub-loans;

(ii) Prepare detailed guidelines for branch managers on sub-loan processing and take action to recover sub-loans;

(iii) Confirmation regarding the damages should be obtained from the relevant authorities, i.e., Police, Insurance, Leasing and Finance Companies, Divisional Secretaries and Local Government Bodies, etc. In addition, the Manager of the branch should visit the site of the damaged project to satisfy the eligibility of the project;


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8 (iv) The PFI branch should maintain a separate ledger in respect of loans granted under the

scheme.

(v) Ensure regular spot inspections of the enterprises to review the physical progress of sub-projects before disbursement of instalments;

(vi) Ensure the availability of adequate field officers for the designated branches for inspection of damages, supervision on the progress on the utilisation of the loan and recovery of sub-loans; and

(vii) Ensure that the branches implementing the scheme submit regular progress reports in respect of implementation, recovery of loans, etc. to the respective Head Offices of the PFIs.

(viii) The Head Office of the PFI should submit progress reports to the RDD of the CBSL quarterly.

4. Role of the CBSL

The CBSL will establish a system for –

(i) continuous monitoring of the progress of sub-loan processing and providing necessary assistance for PFIs in implementation and supervision of credit;

(ii) monitoring and evaluation of benefits accruing to sub-borrowers with a view to evaluating the impact of the loan scheme in relation to its planned objectives and improving its impact through the development of improved implementation procedure;

(iii) monitoring and evaluating the performance of the PFIs in the project area; and

(iv) Organizing training programmes to educate the staff of branches designated by the PFI.

5. Credit Scheme

5.1 Total Fund Allocated : Rs.5 billion

5.2 Loan : 85 per cent of the estimated restarting cost of the affected project subject to a maximum limit of Rs.100,000/- for micro projects and Rs.5 million for other SMEs.

5.3 Refinance : The CBSL will refinance loans upto 100 per cent of the amount disbursed by PFIs.

5.3.1 Micro, Small and : For the purpose of this loan scheme, micro Medium Enterprises enterprises are classified as enterprises with

capital investments, excluding land and building, of Rs.250,000/- or less and the SMEs are classified as enterprises with capital investment excluding land and building of Rs.10 million or less.

5.4 Rate of Interest on refinance loans to PFIs : 3 per cent per annum.

5.5 Rate of Interest for sub-loans : 6 per cent per annum.

5.6 Grace Period : Maximum of 1 year commencing from the date of disbursement of the last instalment subject to the nature of the sub-project.

5.7 Interest during Grace Period : No interest on sub-loans or refinance loans will be charged during the grace period.


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8 5.8 Repayment period of sub-loans : 3 – 8 years depending on the nature of the

sub-project.

5.9 Date of Implementation : The scheme will be effective from 15th January, 2005.

5.10 Areas of Operation : All districts affected by Tsunami tidal waves.

5.11 Leasing : Interest rate applicable for leasing should be 6 per cent per annum and no upfront leasing instalments, legal charges or any other charges should be levied.

6. Participating Financial Institutions

All Licensed Commercial BanksAll Licensed Specialised BanksAll Registered Finance CompaniesAll Registered Finance Leasing Establishments

7. Branches selected for implementation of the scheme

The branches of PFIs eligible for participation will be identified by the respective PFI and Code Numbers will be assigned to them by the CBSL. Any new branches selected for implementation of the scheme will be notified by the CBSL from time to time.

8. Application Procedure

8.1 Eligible sub-borrowers should apply for sub-loans on application forms designed by respective PFIs;

8.2 Sub-loan application should be made to the branch of the PFI closest to the location of projects;

8.3 The maximum amount of sub-loan shall be 85 per cent of total estimated re-starting cost of the sub-project subject to limits specified at para 5.2. (A guideline for estimation of restarting cost is given in Annex II)

9. Eligible Sub-borrowers

All micro, small and medium enterprises affected by the tidal waves are eligible for consideration. There are two broad categories of eligible borrowers.

(i) the existing borrowers; and

(ii) new borrowers.

Eligibility Criteria for Existing Borrowers

(i) Borrowers, who had not been categorised as past due borrowers by the lending institutions at the time of the disaster;

(ii) The borrower should agree to come into rescheduling arrangements for the existing loan with the PFI; and

(iii) PFIs may consider sufficient moratorium for repayment of loan instalments and interest depending on the extent of the damage to the enterprise.


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8 Eligibility Criteria for New Borrowers

(i) The borrower should be an entrepreneur proven as affected by the disaster; and

(ii) He/She should prove to the PFI with evidence acceptable to the PFI that the project has been in operation at the time of disaster.

General Eligibility Conditions for both categories

The borrower should –

(i) have equity contribution towards restarting the project at 15 per cent of the estimated cost;

(ii) be able to satisfy the PFI that the proposed project has a good repayment capacity;

(iii) be able to produce acceptable evidence such as restoration certificate issued by relevant authority; and

(iv) be able to provide collateral if any, as determined by the PFI.

10. Collateral

Any collateral acceptable to the PFIs.

11. Release of Loan

11.1 Release of sub-loan will be made in stages on the basis of an agreed disbursement schedule and subject to actual work progress. The manager of the PFI branch is required to carry out an inspection of the sub-project after release of each instalment of sub-loan.

11.2 Sub-loans for financing the purchase of equipment, tools, machinery and raw materials should be released direct to the suppliers.

12. Fishery Sub-Loans

12.1 Fisheries sub-projects, which are consistent with the objective of the scheme will be eligible for financing under the following criteria:

i. Payments should be disbursed direct to suppliers of boats, engines and fishing gears on an instalment basis, if appropriate;

ii. Sub-borrowers should be permitted to borrow for improvement of existing assets;

iii. The terms of repayment of sub loans should be determined by the PFI on the basis of economic life span and the capacity of the borrower subject to the maximum repayment period of 8 years.

iv The boats should be registered with the local Fisheries Authorities;

v. Repayment should be linked to marketing wherever possible;

vi. Insurance premium, cost of transport of boats, engine and fishing gear may be considered as components eligible for lending. Borrowers will have the choice of insurance companies.

13. Post Credit Supervision

13.1 The bank should undertake periodic inspections of the investments financed by the PFI branches to ascertain that the borrowers are engaged in the activities identified under the project.

13.2 In respect of sub-loans for acquisition of assets such as equipment, machinery, tools, raw materials and agricultural inputs, the field officer of the branch should verify the supply of same to the borrower by the supplier to whom payment was made direct on behalf of the borrower


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8soon after the loan was released and obtain an acknowledgement from the borrower for the file.

13.3 A letter of guarantee issued by the supplier for due performance of the machinery and implements and equipment supplied to the borrower should be held by the branch during the warranty periods. The borrower should be required to bring to the notice of the lending branch the manufacturing defects during the warranty period so that the branch could take up the matter with the supplier immediately for corrective action.

13.4 The field officer of the branch is required to carry out an inspection after release of every instalment to verify the utilization of the sub-loan for the intended purpose. A utilization verification report should be submitted by the field officer in respect of each instalment released. The second and subsequent instalments should be released upon submission of utilization verification reports.

13.5 The field officer of the branch should visit the sub-projects regularly with a view to maintaining close contact with the sub-borrowers for recovery of sub-loans. These visits are intended to verify the progress of investments and whether the borrowers continue to be in possession of items financed by the PFI and the investment yield the income as envisaged at the time of application. The borrowers should be advised to continue their sub-projects.

14. Recovery action

14.1 The borrowers, who have the capacity and are willing to pay during the grace period may be permitted to do so.

14.2 In case of slippage in projects or defaults in the service of sub-loans arising from reasons which are clearly justified in the opinion of the PFI, the PFI may grant a reasonable extension period not exceeding 2 years with similar adjustments in the repayment programme. In such cases, the RDD of the CBSL may grant PFIs the same extension period on the corresponding refinance loan upon receipt of new repayment programme from the PFI.

15.DisbursementofRefinance

15.1 At the time of processing the loan application, Enquiry should be registered with the RDD of the CBSL by way the Annex I attached. After the registration of the Enquiry, branch of the PFI granting sub-loan will be required to file with RDD a copy of the Appraisal Report together with the Loan Agreement through Head Office of the PFI. The Enquiry No., registered in the CBSL computer will be crucial for identification of sub-loan and for the purpose of refinance. All correspondence with RDD should carry this number. Branches of PFIs are advised to use this number on their ledger sheets for the purpose of identification of the sub-loan.

15.2 The branch of the PFI is free to submit several disbursement letters in respect of each instalment of the sub-loan or part thereof. The refinance will be released within 30 days of the receipt of each disbursement letter.

16. Repayment to the CBSL

Repayment of refinance loans by PFIs will be on half yearly basis (i.e., June 30, December 31) commencing from the end of the grace period.

Yours faithfully,

M. M. AttanayakeDirector

Regional Development DepartmentCentral Bank of Sri Lanka


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8Annex I

Loan Registration Application

(1) Name of PFI : ………………………………………………………………………………………

(2) Branch : ………………………………………………………………………………………

(3) Address of PFI : ………………………………………………………………………………………

(4) Tel. Nos. / Fax Nos. : ………………………………………………………………………………………

(5) Status of Applicant / s : ………………………………………………………………………………………

Name of Applicant / Partners Address NIC No.

i.

ii.

iii.

(6) Title of Project to be Restarted (Purpose) : ……………………………………………………………

(7) Complete Address of Project site Location : ……………………………………………………………

(8) Amount recommended / approved by the PFI : Rs. …………………………………………………………

……….………………………………….Date : ………… Signature of Branch Manager


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8ANNEX II

Draft Application for Tsunami Relief Loan Scheme Ref No. : …………

Serial No. : …………

1. Name of the Borrower : ……………………………………………………………… Bank / FI 2. Address : ……………………………………………………… 3. Contact Tel. / Fax : ……………… E-mail Nos. : ………………

4. Address of the Business : ………………………………………………………………………………………

5. District : ……………………………………………………… 6. AGA Division : …………………… 7. Business Registration Number : …………………………………………………………………………………

8. Identity Card Number / Passport Number / Driving License Number : ………………………………………..

9. Description of the business : …………………………………………………………………………………….

10. Estimate of the Damage : ………………………………………………………………………………………

11. Appraisal Report Asset Category Cost Land & Building ………………… Plant & machinery ………………… Vehicles ………………… Fixed Assets ………………… No. of Employees No. Management ………………… Production ………………… Other ………………… Financial Statements (If Available) ………………… Equity Contribution Value Land Development ………………… Fillings ………………… Fencing / Leveling ………………… Cleaning Expenses ………………… Working Capital in first Year ………………… Value of left over items ………………… Contribution by Borrower ………………… Cash ………………… Kind ………………… Labor ………………… Managerial expenses ………………… Other …………………

12. Past Borrowing Records Bank / FI Amount Outstanding …………………………… ……………… ……………… 13. Collateral : ………………………………………………………………………………...……………………

14. Repayment Cycle : ……………………………………………………………………………………………..

15. Any Assistance received from Govt. / NGOs / other organizations : ……………………..……………………

16. Recommendation : ……………………………………………………………………………………………..


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5th July 2005Tel. : 2477447 / 2477432 / 2477452 / 2477339Fax : 2477733 / 2477734

To : Bank of Ceylon Commercial Bank DFCC Bank National Development Bank Sampath Bank Ltd. Ruhuna Development Bank

Dear Sir / Madam,

SMALL BUSINESS REVIVAL PROGRAMME (SBRP) UNDER THESRI LANKA TSUNAMI AFFECTED AREAS

RECOVERY AND TAKE-OFF (STAART) PROJECT

1. Introduction

The Government of Sri Lanka (GOSL) entered into an agreement with the Japan Bank for International Co-operation (JBIC) to borrow Japanese Yen Ten Billion and Six Million (J¥10,006,000,000) as principal for the implementation of the Sri Lanka Tsunami Affected Area Recovery and Take-off Project (STAART). The project is consisted of two programmes i.e., Infrastructure Rehabilitation Programme (IRP) and Small Business Revival Programme (SBRP). The Central Bank of Sri Lanka (CBSL) on behalf of the GOSL implements the SBRP through Participating Financial Institutions (PFIs) which satisfy the eligibility criteria agreed among the JBIC, GOSL and the CBSL.

The above project will be implemented in supplement to the existing Tsunami Relief Loan Scheme, SUSAHANA, implemented by the CBSL.

1.1 Credit under the SBRP Project will be provided through eligible PFIs to eligible sub-borrowers whose businesses were affected by Tsunami waves on 26th December, 2004. The activities identified for financing should be related to resumption of operations of small and medium scale enterprises affected by Tsunami waves to the level that prevailed before Tsunami.


The Regional Development Department (RDD) of the CBSL will be responsible for implementation of the Project.

3. Role of the CBSL




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8 (ii) monitoring and evaluation of benefits accruing to sub-borrowers with a view to evaluating the

impact of the loan scheme in relation to its planned objectives and improving its impact through the development of improved implementation procedure;

(iii) monitoring and evaluating the performance of the PFIs in the project area;

(iv) Organizing training programmes to educate the staff of branches designated by the PFI and conducting of public relations campaigns to let the public know about the SBRP; and

(v) Registration of borrowers / applicants under the project

At the time of processing the loan application, Enquiry should be registered with the RDD of the CBSL by using the format given in Appendix I. The Enquiry No., registered in the CBSL will be crucial for identification of sub-loan and for the purpose of refinance. All correspondence with RDD should carry this number. Branches of PFIs are advised to use this number on their ledger sheets for the purpose of identification of the sub-loan.

3. Eligible PFIs and Role of te PFIs

3.1. Eligible PFIs

The PFIs which satisfy the eligibility criteria agreed among the JBIC, GOSL and CBSL are eligible to receive refinance loans under the project.

3.2. Role of the PFIs





(iv) The PFI branch should maintain a separate ledger in respect of loans granted under the scheme.



(vii) Ensure that the branches implementing the scheme submit regular progress reports in respect of implementation, recovery of loans, etc. to the respective Head Offices of the PFIs.

(viii) The Head Office of the PFI should submit progress reports to the RDD of the CBSL quarterly.

(ix) The branches of PFIs eligible for participation will be identified by the respective PFI and Code Numbers will be assigned to them by the CBSL. Any new branches selected for implementation of the scheme will be notified by the CBSL from time to time.


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84. Credit Scheme

4.1 Total Fund Allocation : Rs.3 billion

4.2 Sub Loan Amount : The sub-loan amount shall not exceed –

(i) Rs.5 million for a sub-borrower whose assets (excluding owned or leased land and buildings) are not exceeding Rs.10 million.

(ii) Rs.10 million for a sub-borrower whose assets (excluding owned or leased land and building) are more than Rs.10 million and not exceeding Rs.20 million.

4.3 Equity Contribution by Sub-borrower : 15% of the total project cost for a sub-borrower under category 4.2.(i) above and 20% of the total project cost for a sub-borrower under category 4.2.(ii) above.

4.4 Refinance : The CBSL will refinance loans upto 100 per cent of the amount disbursed by PFIs.

4.5 Rate of Interest (From CBSL to PFI) : 3 per cent per annum.

4.6 Repayment Period for PFIs : 9 years with the grace period of one year. (During the grace period, no interest will be charged).

4.7 Rate of Interest for sub-loans : 6 per cent per annum. (From PFIs to sub-borrowers)

4.8 Repayment period of sub-loans : More than 3 years, but not exceeding 8 years with the maximum grace period of one year depending on the nature of the sub-project. (During the grace period, no interest will be charged).

4.9 Date of Implementation : The scheme will be effective from 5th July, 2005.


4.11 Leasing : Interest rate applicable for leasing should be 6 per cent per annum and no upfront leasing instalments, legal charges or any other charges should be levied.


5.1. Eligible sub-borrowers should apply for sub-loans on application forms designed by respective PFIs;

5.2. Sub-loan application should be made to the branch of the PFI closest to the location of projects.

6. Eligible Sub-borrower

6.1. Any privately or co-operatively owned enterprise which fulfil the following conditions are eligible.


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8 (i) Enterprises affected by the Tsunami on December 26th, 2004 and able to produce

acceptable evidence such as restoration certificates by the relevant authority;

(ii) Enterprises whose fixed assets (excluding owned or leased land and buildings) are not exceeding Rs.20 million.

6.2. The borrower should be an entrepreneur proven as affected by the disaster and He/She should prove to the PFI with evidence;

6.3. The borrowers who had already obtained financial facilities for their enterprises should agree to reschedule the outstanding balances with the PFIs prior to obtain new facilities under the project

6.4. The borrower should have equity contribution towards restarting the project as indicated at 4.3 above;

6.5. The borrower should be able to satisfy the PFI that the proposed project has a good repayment capacity;

6.6. The borrower should be able to provide collateral if any, as determined by the PFI.

7. Collateral


8. Eligible Sectors

All sectors, except for the arms industry, narcotics industry, prostitution or any other unlawful businesses, are eligible.

9. Fishery Sub-Loans

9.1 Fisheries sub-projects, which are consistent with the objective of the scheme will be eligible for financing under the following criteria:

(i) Payments should be disbursed direct to suppliers of boats, engines and fishing gear on an instalment basis, if appropriate;

(ii) Sub-borrowers should be permitted to borrow for improvement of existing assets and development of boatyards, etc.;

(iii) The terms of repayment of sub loans should be determined by the PFI on the basis of economic life span and the capacity of the borrower subject to the maximum repayment period of 8 years.

(iv) The boats should be registered with the local Fisheries Authorities;

(v) Repayment should be linked to marketing wherever possible;

(vi) Insurance premium, cost of transport of boats, engines and fishing gear may be considered as components eligible for lending. Borrowers will have the choice of insurance companies.

10. Eligible Sub-projects

The sub-projects financed by sub-loans shall contribute to restoring and enhancing production and service capacities. PFIs should consider environment impact of projects in approving sub-loans.

11. EligibleItemstobefinanced

The cost of all restoration work, buildings, machinery, other fixed assets and vehicles are eligible for financing.


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812.Non-EligibleItemstobefinanced

(i) General administration expenses;

(ii) Taxes and duties;

(iii) Purchase of lands and other real properties; and

(iv) Compensation and other indirect items.

13. Release of Loan


13.2 Procurement Procedure

PFIs should ensure that the goods produced locally out of the proceeds of sub-loans shall be reasonably and competitively priced. Imported items costing more than US$ 100,000 should be procured through international shopping on the basis of price quotations from at least three (3) independent suppliers.



14.2 In respect of sub-loans for acquisition of assets such as equipment, machinery, tools, raw materials and agricultural inputs, the field officer of the branch should verify the supply of same to the borrower by the supplier to whom payment was made direct on behalf of the borrower soon after the loan was released and obtain an acknowledgement from the borrower for the file.





15.1 Inquiry Number

Refinance is released only for the applications already registered and assigned with an inquiry number by the CBSL. Please see item 2.1(v).


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8 15.2 RefinanceclaimbyPFIBranches

After the registration of the enquiry, branches of the PFIs are allowed to grant/release loans to sub-borrowers. Once the loans are granted, the PFI branch should claim refinance from the CBSL through their respective Head Offices.

15.3 RefinanceApplicationsbyPFIHeadOffices

Once received the refinance claims from branches, PFI Head Office should prepare refinance applications to submit to the CBSL along with the following documents.

Refinance Application Form Appendix II Demand Promissory Note – with a schedule Appendix III Form of assignment by way of pledge to the CBSL Appendix IV Delivery Note Appendix V

The above documents should be submitted by the PFI Head Office to the Director, Regional Development Department, Central Bank of Sri Lanka in respect of loans granted under the project for refinance.

The refinance will be released immediately if the above documents are duly filled and are in order.


Repayment of refinance loans by PFIs will be on half yearly basis (i.e., June 30, December 31) commencing from the end of the grace period.

Yours faithfully,

W. M. KarunaratneDirector



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8Appendix I

Small Business Revival Programme (SBRP) to assist theSMEs affected by Tsunami Tidal Waves

Loan Registration Application

(1) Name of PFI : ………………………………………………………………………………………

(2) Branch of PFI : ………………………………………………………………………………………

(3) Address of PFI : ………………………………………………………………………………………

(4) Tel. Nos. / Fax Nos. : ………………………………………………………………………………………



i.

ii.

iii.

(6) Title of Project to be Restarted : ……………………………………………………………


(8) Amount recommended / approved by the PFI : Rs. …………………………………………………………



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8REFINANCE APPLICATION NO.: ………..

APPENDIX IIRDD/SBRP/2

(Under Operating Instructions No.RDD/2005/3 dated 5th July, 2005)

Address:

Date:

APPLICATION FOR REFINANCE UNDER SMALL BUSINESS REVIVAL PROGRAMME TO ASSIST SMALL AND MEDIUM SCALE ENTERPRISES

AFFECTED BY TSUNAMI TIDAL WAVES ON 26.12.2004

To : The Central Bank of Sri Lanka

Gentlemen

We, ..............................................................................................................................................................................

......................................................................................................................................................................................

a licensed commercial bank/licensed specialized bank and an authenticated print of whose constitution has already

been/is herewith submitted to you, do hereby apply for the grant of a loan of Rupees ……………………………

......................................................................................................................................................................................

(Rs. …………………………….) under the above Refinance Scheme.

2. In making this application, we agree to comply with the terms and conditions stipulated in your Operating Instructions No. RDD/2005/3 dated 5th July, 2005.

3. As required by the aforementioned Operating Instructions and in compliance therewith, we forward herewith a statement, in duplicate of loans granted not earlier than 15th January, 2005 by us under the above Refinance Scheme. We certify that the loans mentioned in the statement have not been reflected in any previous statement in support of an application for a refinance loan.

4. We hereby certify that we have satisfied ourselves that (i) the loans mentioned in para (3) have been granted to eligible sub-borrowers for eligible projects under the above scheme, (ii) such loans are within the borrowing powers of the respective sub-borrowers and (iii) in the case of guarantees obtained for the repayment of such loans, that the guarantors have the power to give such guarantees.

Signature, Name and description of the Authorised Officer(s) of the Financal InstitutionManager, Refinance Unit.


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APPENDIX IIIRDD/SBRP/3


Address:

Date:

DEMAND PROMISSORY NOTE

Rs. ………………………………………

On demand, we, the under signed ...............................................................................................................................

......................................................................................................................................................................................( Name and address of the PFI )

......................................................................................................................................................................................

hereby promise to pay to THE CENTRAL BANK OF SRI LANKA or ORDER at COLOMBO the sum of

Rs. ................................................................................................................................................................................for value received with interest thereon at the rate of 3% per annum from the date hereof.

(Repayment schedule is given in the Annex attached)

For (Name of the PFI) :REFINANCE UNIT :HEAD OFFICE :

1. ……………………………………………………………… ( Stamp )

2. ………………………………………… ( Signature of the Authorised Officer )

WITNESS :

1. ……………………………………………

2. ……………………………………………


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APPENDIX IVRDD/SBRP/4


FORM OF ASSIGNMENT BY WAY OF PLEDGE TO THE MONETARY BOARD OF THE CENTRAL BANK OF SRI LANKA

UNDER SECTION 88A OF THE MONETARY LAW ACT

Colombo

Date:

We, ...............................................................................................................................................................................( Name and address of the Participatory Financial Institution )

......................................................................................................................................................................................

in terms of Section 88A of the Monetary Law Act do hereby assign to the Central Bank of Sri Lanka, by way of pledge, the debt owing to us, particulars whereof are set forth in the Schedule hereto, as security/further security for the repayment to the Central Bank of a Loan of Rupees .......................................................................................

.................................................................................................................................... (Rs. …………………………)

granted to us by the Bank repayable with interest at 3 per cent per annum.

SCHEDULE

Amount of Debt(Rs.)

Borrower’s Name & Address Date Notary

…………………………………………… ( Signature of the Authorised Officer )



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APPENDIX VRDD/SBRP/5


Address:

Date:

DELIVERY NOTE

To : CENTRAL BANK OF SRI LANKA

In consideration of you agreeing to grant us, a loan in the amount of Rupees ............................................................

................................................................................................................................ (Rs. ……………………………)

with the object of granting re-finance to us in respect of lending operations carried out by us under the Small Business Revival Programme referred to in your Operating Instructions No.RDD/2005/3 dated 5th July, 2005 WE HEREWITH DELIVER TO YOU OUR Promissory Note in your favour for Rs. ..............................................

................................................................................................................................ (Rs. ……………………………)payable on demand together with interest as therein mentioned.

We hereby waive presentment for payment and confirm that it shall not be necessary for you to give notice of dishonor, in respect of our said Promissory Note.


1. …………………………………………



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APPENDIX ……RDD/SBRP/……



CONFIRMATION OF DAMAGES CAUSED BYTSUNAMI ON 26.12.2004

This is to confirm that the Project/Business belongs to ...............................................................................................

......................................................................................................................................................................................( Sub-borrower’s name and address )

......................................................................................................................................................................................

has been directly affected by the Tsunami on 26th December 2004 and he/she is an eligible sub-borrower under the Operating Instructions No.RDD/2005/3 dated 5th July, 2005.

For (Name of Bank/Financial Institution) REFINANCE UNIT HEAD OFFICE

………………………………………… ( Signature of the Authorised Officer )


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12th October 2005Tel. : 2477447 / 2477432 / 2477452 / 2477339Fax : 2477733 / 2477734

To : Bank of Ceylon People’s Bank Seylan Bank Ruhuna Development Bank Sanasa Development Bank

Dear Sir / Madam,

LOAN SCHEME FOR SUSTAINABLE RECOVERY OF THEMICRO-ENTERPRISE SECTOR (SRMES)

FUNDED BY UNDP

1. Introduction

The United Nations Development Programme (UNDP) entered into a Memorandum of Understanding (MOU) with the Central Bank of Sri Lanka (CBSL) to grant US$ 1,000,000.00 (One million US$) to the Central Bank as principal for the implementation of the Sustainable Recovery of Micro-enterprise sector of Sri Lanka with a view to assist the Tsunami affected individuals and their families to restart their micro enterprises on a sustainable basis. The CBSL implements the above loan scheme through selected Participating Credit Institutions (PCIs) and Micro-finance Institutions (MFIs) operating in the Tsunami affected areas.

The above project will be implemented in supplement to the existing Tsunami Relief Loan Scheme, SUSAHANA, implemented by the CBSL.

1.1 Credit under the Scheme will be disbursed to (MFIs) and sub-borrowers through PCIs with the aims to assist the Tsunami affected individuals and their families to regain or restart as new micro-finance enterprises that will be viable and sustainable.

1.2 Target beneficiaries would be –

(a) only Tsunami affected households

(b) women headed households should be given priority (at least 40 per cent of borrowers)

(c) enterprising women and vulnerable population in the Tsunami affected areas (30 per cent of borrowers)

(d) other Tsunami affected micro enterprises i.e. new borrowers (at least 20 per cent of borrowers)


The Regional Development Department (RDD) of the CBSL will be responsible for implementation of the Scheme.


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8 2.1 Role of the CBSL


(i) Continuous monitoring of the progress of sub-loan processing and providing necessary assistance for PCIs/MFIs in implementation and supervision of credit;

(ii) Monitoring and evaluation of benefits accruing to sub-borrowers with a view to evaluating the impact of the loan scheme in relation to its planned objectives and improving its impact through the development of improved implementation procedure;

(iii) Monitoring and evaluating the performance of the PCIs/MFIs in the project area;

(iv) Organizing training programmes to educate the staff of branches designated by the PCI/MFI and conducting of public relations campaigns to let the public know about the Scheme; and

(v) Registration of borrowers/applicants under the project

At the time of processing the loan application, inquiry should be registered with the RDD of the CBSL by using the format given in Annex I-a and 1-b.

3. Role of the PCIs

Each PCI shall designate a senior officer as the administrator of the loan scheme at its Head Office who will be responsible for co-ordinating and supervising the PCIs’ sub-loan operations. The functions allocated to each PCI are as follows:

(i) Designate the appropriate branches for grant of bulk loan (bulk loans should be given to MFIs) and sub-loans (sub-loans could be granted directly to individual customers of the PCI branch under the supervision of UNDP field staff.)

(ii) Prepare detailed guidelines for branch managers on bulk loan/ sub-loan processing and take action to recover those loans.

(iii) The branch should maintain a separate ledger in respect of loans granted under the scheme.

(iv) In the case of sub loans ensure regular spot inspections of the enterprises to review the physical progress of sub-projects before disbursement of instalments.

(v) Ensure the availability of adequate field officers for the designated branches for inspection and supervision on the progress on the utilisation of the loan and recovery of sub-loans.

(vi) Ensure that the branches implementing the scheme submit regular progress reports in respect of implementation, recovery of loans, etc. to the respective Head Offices of the PCIs.

(vii) Monitor and report the progress of the sub-loans given through MFIs under the Scheme.

(viii) The Head Office of the PCI should submit progress reports to the RDD of the CBSL quarterly.

(ix) The branches of PCIs should be identified by the respective PCIs and Code Numbers will be assigned to them by the CBSL.

3.1 Role of the MFIs

(i) Selecting eligible borrowers from their Membership.

(ii) Identifying suitable projects for finance.

(iii) Ensure regular spot inspections of the enterprises to review the physical progress of sub-projects before disbursements of instalments.


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8 (iv) Disburse loans for suitable micro enterprises.

(v) Maintain a separate ledger in respect of loans granted under the scheme.

(vi) Ensure the availability of adequate field officers for inspection of damages, supervision on the progress on the utilisation of the loan and recovery of sub-loans.

(vii) Ensure that the MFI implementing the scheme submit regular progress reports in respect of implementation, recovery of loans etc. to the respective branch of the PCI.

(viii) The MFI should submit progress reports to UNDP quarterly.

4. Credit Scheme

4.1 Total Fund Allocation : US$ 1,000,000.00 (One million US$)

4.2 Sub Loan Amount : The sub-loan amount shall not exceed – Rs. 50,000 for a sub-borrower

4.3 Extent of Refinance : 100 per cent of the loan.

4.4 Rate of Interest for end Borrower : 6 –8 per cent per annum.

4.5 Rate of Interest for Refinance Loan : 0.5 per cent per annum (CBSL to PCI) 3 per cent per annum (PCI to MFI)

4.6 Repayment Period : Maximum 3 years.

4.7 Grace period for the MFI and the PCIs : Maximum 2 years from the date of grant of the loan (No interest charged during the grace period).

4.8 Grace period for the Individual borrowers : Maximum 6 months from the date of grant of the loan (No interest charged during the grace period).

4.9 Recovery of loan (PCI to CBSL) : Semi annually (30th June and 31st December)

4.10 Date of Implementation : The scheme will be effective from 12th October, 2005.



5.1. Eligible sub-borrowers should apply for sub-loans on application forms designed by respective PCIs and MFIs;

5.2. Sub-loan application should be made to the branch of the PCI/MFI closest to the location of projects.

6. Eligible Sub-borrower of PCI and MFIs

Tsunami affected individuals and their family members as given in Section 1.2.

7. Collateral

Inter-se guarantee of 02 similar borrowers or two non-nuclear family members are acceptable as guarantors or any other collateral acceptable to MFI or PCI.

8. Eligible Sectors

All sectors, except for the arms industry, narcotics industry, prostitution or any other unlawful businesses, are eligible.


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89. Release of Loan

Release of sub-loan will be made in stages on the basis of an agreed disbursement schedule and subject to actual work progress. The manager of the PCI branch is required to carry out an inspection of the sub-project after release of each instalment of sub-loan.


10.1 The bank and the MFI should undertake periodic inspections of the investments financed by the PCI/MFI branches to ascertain that the borrowers are engaged in the activities identified under the Scheme.




10.5 The field officer of the branch should visit the sub-projects regularly with a view to maintaining close contact with the sub-borrowers for recovery of sub-loans. These visits are intended to verify the progress of investments and whether the borrowers continue to be in possession of items financed by the PCI/MFI and the investment yield the income as envisaged at the time of application. The borrowers should be advised to continue their sub-projects.

11. DisbursementofRefinance

11.1 Inquiry Number

Refinance is released only for the applications already registered and assigned with an inquiry number by the CBSL.

11.2 Refinance Applications by PCI Head Offices

Once received the refinance claims from branches, PCI Head Office should prepare refinance applications to submit to the CBSL along with the following documents.

Refinance Application Form Annex II Demand Promissory Note – with a schedule Annex III Form of assignment by way of pledge to the CBSL Annex IV Delivery Note Annex V

The above documents should be submitted by the PCI Head Office to the Director, Regional Development Department, Central Bank of Sri Lanka in respect of loans granted under the project for refinance.



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Repayment of refinance loans by PCIs will be on half yearly basis (i.e., June 30, December 31) commencing from the end of the grace period.

Yours faithfully,



Annex I-a

Loan Scheme for Sustainable Recovery of the Micro-Enterprise Sector (SRMES)Funded by UNDP

Loan Registration Application for Individual borrowers

(1) Name of PCI : ………………………………………………………………………………………

(2) Branch of PCI : ………………………………………………………………………………………

(3) Address of PCI : ………………………………………………………………………………………

(4) Tel. Nos. / Fax Nos. : ………………………………………………………………………………………



i.

ii.

iii.

(6) Title of Project to be Restarted : ……………………………………………………………


(8) Amount recommended / approved by the PCI : Rs. …………………………………………………………



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8Annex I-b

Loan Scheme for Sustainable Recovery of the Micro-Enterprise Sector (SRMES)Funded by UNDP

Loan Registration Application for MFIs

(1) Name of PCI : .............................................................................................

(2) Branch of PCI : .............................................................................................

(3) Address of PCI : .............................................................................................

(4) PCI’s Tel. Nos. / Fax Nos. : .............................................................................................

The borrower (MFI)

(1) Status of MFI and Reg. No. : ............................................................................................. NGO/Company/Co-operative/Other Please specify the legal status of the MFI

(2) Name and address of the MFI : .............................................................................................

.............................................................................................

(3) Telephone/Fax/E-mail of the MFI : .............................................................................................

(4) Name of contact person/s of the MFI : .............................................................................................

.............................................................................................

(5) Project site location in which loans are to be granted : .............................................................................................

.............................................................................................

(6) Amount recommended/approved by the PCI : Rs. .......................................................................................



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ANNEX IIRDD/SRMES/2

(Under Operating Instructions No.RDD/2005/5 dated 12th October, 2005)

Address:

Date:

APPLICATION FOR REFINANCE UNDER THE LOAN SCHEME FORSUSTAINABLE RECOVERY OF THE MICRO-ENTERPRISE SECTOR (SRMES)

FUNDED BY UNDP


Gentlemen

We, ..............................................................................................................................................................................

......................................................................................................................................................................................

a licensed commercial bank/licensed specialized bank and an authenticated print of whose constitution has already

been/is herewith submitted to you, do hereby apply for the grant of a loan of Rupees ……………………………

......................................................................................................................................................................................

(Rs. …………………………….) under the above Refinance Scheme.

2. In making this application, we agree to comply with the terms and conditions stipulated in your Operating Instructions No. RDD/2005/5 dated 12th October, 2005.

3. As required by the aforementioned Operating Instructions and in compliance therewith, we forward herewith a statement, in duplicate of loans granted not earlier than 15th January, 2005 by us under the above Refinance Scheme. We certify that the loans mentioned in the statement have not been reflected in any previous statement in support of an application for a refinance loan.


Signature, Name and description of the Authorised Officer(s) of the Financal InstitutionManager, Refinance Unit.


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ANNEX IIIRDD/SRMES/3


Address:

Date:


Rs. ………………………………………



......................................................................................................................................................................................

hereby promise to pay to THE CENTRAL BANK OF SRI LANKA or ORDER at COLOMBO the sum of

Rs. ................................................................................................................................................................................for value received, with interest thereon at the rate of 0.5% per annum from the date hereof.

(Repayment schedule is given in the Annex attached)


1. ……………………………………………………………… ( Stamp )


WITNESS :

1. ……………………………………………

2. ……………………………………………


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ANNEX IVRDD/SRMES/4


FORM OF ASSIGNMENT BY WAY OF PLEDGE TO THE MONETARY BOARD OF THE CENTRAL BANK OF SRI LANKA

UNDER SECTION 88A OF THE MONETARY LAW ACT

Colombo

Date:


......................................................................................................................................................................................

in terms of Section 88A of the Monetary Law Act do hereby assign to the Central Bank of Sri Lanka, by way of pledge, the debt owing to us, particulars whereof are set forth in the Schedule hereto, as security/further security for the repayment to the Central Bank of a Loan of Rupees .......................................................................................

.................................................................................................................................... (Rs. …………………………)

granted to us by the Bank repayable with interest at 3 per cent per annum.

SCHEDULE

Amount of Debt(Rs.)

MFI’s / Borrower’s Name & Address Date Notary

…………………………………………… ( Signature of the Authorised Officer )



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ANNEX VRDD/SRMES/5


Address:

Date:

DELIVERY NOTE



................................................................................................................................ (Rs. ……………………………)

with the object of granting re-finance to us in respect of lending operations carried out by us under the Small Business Revival Programme referred to in your Operating Instructions No.RDD/2005/5 dated 12th October, 2005 WE HEREWITH DELIVER TO YOU OUR Promissory Note in your favour for

Rs. ................................................................................................................................................................................



For (Name of Bank / Financial Institution) :REFINANCE UNIT :HEAD OFFICE :

1. …………………………………………



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8Operating Instructions No. : RDD/SPCDP Revolving Fund/2006/01


4th May 2006Tel. : 2477447 / 2477432 / 2477452 / 2477339Fax : 2477733 / 2477734

To : The General Manager, Bank of Ceylon Sampath Bank People’s Bank Ruhuna Development Bank Hatton National Bank Kandurata Development Bank NDB Bank SME Bank Commercial Bank of People’s Leasing Company Ceylon Ltd. Seylan Bank DFCC Bank

Dear Sir / Madam,

SECOND PERENNIAL CROPS DEVELOPMENT PROJECTREVOLVING FUND CREDIT SCHEME

1. Introduction

1.1 The Project

The Government of Sri Lanka (GOSL) entered into a Loan Agreement with the Asian Development Bank (ADB) on 03rd April, 1998 to obtain assistance to the extent of SDR 14.743 million for the implementation of the Second Perennial Crops Development Project (SPCDP) over a period of six years from August, 1998 to June, 2006 in the island, except the Northern and Eastern Provinces. The project consists of five major components namely; (a) Credit, (b) Farm Advisory, Marketing and Technical Services, (c) Research, (d) Seed and Planting Material, and (e) Institutional Strengthening.

In terms of the above Loan agreement the Central Bank of Sri Lanka is responsible to establish the Revolving Fund to continue the funding to the perennial crop sector. Accordingly, the Regional Development Department is authorized by the Monetary Board in concurrence with the Ministry of Finance to implement the Revolving Fund Credit Scheme utilizing recovery of capital and interest under the SPCDP.

1.2 The Objectives of the Project

(a) to provide further support for the development of the Perennial Crops Sector ;

(b) to increase enterprise profitability and farm income considerably ;

(c) to broaden the agricultural export base, while encouraging a greater private sector participation in commercial agriculture.


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82. Credit Scheme

2.1 Executing Agency of the Credit Scheme

The Central Bank of Sri Lanka (CBSL) is responsible for the implementation of the Second Perennial Crop Development Project Revolving Fund Credit Scheme. The CBSL will refinance the loans granted by Participating Finance Institutions (PFIs) direct to the sub borrowers for the activities identified under the project.

Regional Development Department of the Central Bank of Sri Lanka is responsible for implementation of the credit scheme.

Code No. assigned to the Credit Scheme : 0001

2.2 Project Period

Commencement : 01st January, 2006 Termination : 31st December, 2014

However, the project operations will be come to an end with the full utilization of the allocation.

2.3 Project Area

The Project will be implemented in all districts including the districts in the North and the East.

2.4 Eligible Participating Financial Institutions (PFIs)

Banks selected for participation :

Name of PFI Code Nos.

(a) Bank of Ceylon 7010 (b) People’s Bank 7135 (c) Hatton National Bank 7083 (d) Commercial Bank of Ceylon Ltd. 7056 (e) NDB Bank 6080 (f) DFCC Bank 6099 (g) Sampath Bank 7278 (h) Ruhuna Development Bank 6062 (i) Kandurata Development Bank 6141 (j) Seylan Bank (k) SME Bank (l) People’s Leasing Company

2.5 Eligible sub-projects

(a) Field Development and cultivation of Perennial Crops; (b) Inter-cropping with medium term crops; (c) Pasture and Livestock Development under Perennial Crops; (d) Nursery Operations; (e) Agro processing; (f) Provisions of marketing facilities for perennial crops and perennial crops based product.

The major crops eligible for financing are given in the Annexture I.


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8 2.6 Eligible criteria for sub-projects

All PFIs shall ensure that an eligible sub-project satisfies the following criteria.

(a) The Sub-project should cover any of the activities stated in Section 2.5 or other activities as may be agreed upon by the CBSL.

(b) The Sub-project or its products should have a favourable market.

2.6.1 Financial Viability

(a) Eligibility of a loan should be determined on the basis of the repaying capacity of a borrower.

(b) The PFI shall ensure that the net incremental income generated from the new investment is adequate to meet the loan installment, i.e., principal and interest on the loan.

(c) All categories of loans for On-farm Crop Development and Nursery Development under the scheme should be appraised separately by preparing a Farm Budget indicating financial viability of the project.

2.6.2 Environmental Regulations & Social Measures

(a) Sub-project should have an environmental clearance certificate issued by the Central Environmental Authority (CEA) if any sub-project fall within the following categories:

(i) Extraction of timber covering land areas exceeding 5 ha. (ii) Conversion of forests covering area exceeding 1 ha. into non-forest uses. (iii) Clearing of land areas exceeding 50 ha. (iv) Falling of the sub-project within the following areas.

• water catchment area;• area preserved by the Archaeological Department;• within 100 meters from the boundaries or within any area declared as a

sanctuary; and• within 100 meters from the high flood level contour of a public lake/

reservoirs.

(b) Borrowers who own sub-projects which may cause environmental hazards are required to follow the procedures prescribed by the CEA in preparation of Initial Environmental Assessment Report (IEAR).

(c) The borrowers can obtain more details on environmental regulations and environ-mental clearance certificates from the Environmental Units attached to the Divisional Secretariats and the Local Government Institutes located in the respective areas.

2.6.3 Security (a) PFIs should obtain a demand promissory note from the borrower in favour of the PFI

for each loan.(b) In addition to above, PFI can request the borrower to furnish a guarantee of two

guarantors acceptable to the PFI or any other security acceptable to the PFI.(c) PFIs may proceed under the general Mortgage Laws of the country and are free to

decide on the security requirements.


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8(d) As a general rule, the sub-loan amount should not exceed 70% of the appraisal value

of the immovable property offered as security.

2.7. Eligible sub-borrowers

(a) The borrower shall be a citizen of Sri Lanka.

(b) Be an individual or group of individuals or a registered company engaged in farming, processing or marketing activities related to Perennial Crops.

(c) Be able to provide in cash or kind, equity contribution of at least 25% of the estimated sub-project.

(d) Not be a defaulter of loans to any financial institution.

(e) Should have a farm development or business plan acceptable to the PFI concerned for the proposed sub-project.

(f) Be able to provide the collateral required.

2.8 Sub-loan size, Maturity and Free Limit of Sub-loans

(a) The maturity period of the sub-loans will be not more than 10 years, including a grace period upto a maximum of 5 years. This should be based on the economic life of the assets financed and the gestation period of the crops and consistent with the sub-borrowers’ capacity to repay as reflected in the cash flow projections.

(b) The maximum individual sub-loan size should be Rs. 1,000,000.00.

(c) PFIs should disburse sub-loan installments to borrowers in stages in accordance with the progress specified in the farm development plan.

2.9 Financing sources for sub-loans

The financing package for each sub-project shall be as follows :–

(a) Up to 65 per cent of the estimated sub-project cost may be financed through the sub-loan refinanced by the CBSL out of the Revolving funds.

(b) At least 10 per cent of the estimated sub-project cost shall be provided by the PCI out of its own resources.

(c) At least 25 per cent of estimated sub-project cost shall be provided by the sub-borrower as equity in cash or in kind(equity contribution).

(d) When the borrower bears 25% of the project cost, the balance 75% i.e., the loan component is divided between the CBSL and the PFI in proportion to 87 : 13 respectively, (75% total project cost = 100% loan i.e., both CBSL and PFI contribution).

(e) In the cases where the borrower’s equity contribution exceeds 25% of the total sub-project cost, the loan component be divided between the CBSL and the PFI according to the above proportion i.e., 87 :13.

2.10 Sub-loan Agreements with Sub-borrowers

The PFI shall enter into a written Sub-loan Agreement with the Sub-borrower acceptable to the borrower and the CBSL.

2.11 Interest Rate

(a) On-lending interest rate per annum is nine (9) percentage points.

(b) Interest rate per annum for refinance from CBSL is four (4) percentage points.


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82.12 Grace Period

(a) The grace period shall not exceed 5 years from the date of granting the sub-loan.

(b) The grace period for sub-loans will vary according to the loan amount, the project capacity and the categories and the nature of the project.

3. Functions of PFIs

3.1 FunctionsofHeadOfficesofPFIs

Each PFI shall :

(a) Nominate a senior official who will co-ordinate and supervise sub-loan operations within the head office.

(b) Designate an appropriate number of branches for the provision of sub-loans as per the Subsidiary Loan Agreement.

(c) Set up annual performance credit targets of the project by districts and branches and review the progress quarterly.

(d) Ensure that designated branches are adequately staffed with sufficient number of field officers for the supervision and recovery of loans.

(e) Conduct regular spot inspections of sub-projects financed by its branches to review the physical progress and prepare inspection reports.

(f) Ensure that the designated branches submit regular reports on the implementation progress and recovery performance to the CBSL through the head office. The PFI Head Office should consolidate such data and submit to the CBSL on quarterly basis in the format given in Annexture II.

(g) Promote the Credit Scheme through the local media to create an awareness among the prospective borrowers.

3.2 Functions of PFI Branches

3.2.1 Inspection of Sub-Projects

The Branch Manager of the relevant branch should carry out an inspection of the sub-project after he has received an application for a loan and he should be satisfied that the following critaria have been met by the sub-project:

(a) Financial viability;

(b) Technical feasibility;

(c) Environmental harmony;

(d) Suitability of land;

(e) Marketability of the crop or the product.

3.2.2 Appraisal of Sub-projects by PFI Branch

The branch shall examine the project site and the appraisal report submitted by the CBSL to ensure the viability of the sub-project.

3.2.3 Registration of Sub Borrowers

(a) An interested party to obtain loans under the Project may approach either a bank branch. They may approach the Central Bank or its Regional Offices;


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8(b) In the case where the loan applicant approaches the CBSL, he has to be directed to

a bank branch where he wishes to get the loan;

(c) Once the loan applicant approaches the PFI branches, the branch manager shall prepare a complete inquiry registration form as described in Annexture III;

(d) The original copy of this inquiry form should be sent to the CBSL on following address for registration the borrower.

The DirectorRegional Development DepartmentLevel 07, Tower 04The Central Bank of Sri LankaNo: 30, Janadhipathi Mawatha, Colombo 01.

(e) After registering the inquiry, the borrower may forward the loan application to the PFI branch. A cash flow statement on the sub-project should be forwarded to the PFI branch by the borrower. PFI branch may also prepare cash flow statements of sub-projects where necessary;

(f) The PFI will help the borrower to prepare the cash flow statement;

(g) The Bank branch should maintain a register of loan applications received, the different stages of their processing, sanction and disbursements;

(h) The PFI branches should visit the Project site to appraise the viability of the Project before releasing any installment of the loan;

(i) The final decision of all cases of loan sanction rest with the respective authority of the PFI. The branch should maintain close and constant contact with the borrower.

3.3 Release of Loan

(a) Release of sub-loans will be in stages in accordance with the requirement of the sub-project as presented in the appraisal report.

(b) The Managers of PFI Branches are required to limit the stages of sub-loans to a maximum of 03 instalments.

(c) Manager of the PFI branch should continue to carry out field inspections of the sub-projects after the release of each instalment of the loan and maintain records on such visits.

3.4 Monitoring of Sub-Projects

(a) The PFI is responsible for identification of sub-borrowers and evaluation of the sub-projects, PFIs are requested to supervise the sub-projects and recover the loans within the stipulated period.

(b) The Branch Managers should carry out an inspection of the sub-projects in regular intervals after the disbursement of the loan.

(c) The Central Bank shall, in so far as may be necessary for the purpose of this Scheme, have the right to inspect the books of accounts and other records of the PFI pertaining to any loan guaranteed under this scheme.

4. Recovery of Sub-loan

(a) Sub Borrowers are required to pay interest of loan during the grace period. After the grace period is over, the Branch Manager will take action to recover the loan together with accumulated


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8interest (only if the interest is capitalized) In accordance with the repayment programme originally set-out in the Appraisal Report and in the Loan Contract.

4.1 Reporting of Recoveries

(a) The CBSL expects the PFIs to be active in recovering of loans granted under the project.

(b) The PFIs should report their progress on Project activities according to the prescribed form ‘RDD/SPCDPRF/PR-1’ on a quarterly basis to the RDD in order to submit annual reports to the Ministry of Finance. The format of the RDD/SPCDPRF/PR-1 is given in the Annexture II.

4.2 Post-Credit Supervision and Follow-up Actions

(a) The PFI branch should undertake periodic inspections in respect of the projects financed by the branch.

(b) Where the PFI branch is not satisfied with the work carried out and/or finds that the sub-loans have not been used for the purposes prescribed in the appraised sub-project, the PFI branch shall take immediate action to –

i. suspend the release of the rest of the installments of sub-loan. ii. take immediate recovery action on the outstanding amount of the sub-loans and iii. report to the RDD, CBSL.

5. RefinanceProcedure

(a) Applications for refinance should be submitted by the Head Office of the PFI to the Regional Development Department of the Central Bank of Sri Lanka. The refinance application should be accompanied by the following documents.

(i) Application for Refinance (Appendix I) (ii) Statement of Loan Disbursements (Appendix II) (iii) Demand Promissory Note (Appendix III) (with relevant Stamp duty) (iv) Delivery Letter (Appendix IV) (v) Medium and Long Term Credit (MLTC) Refinance Form of Credit Institution’s

Assignment (Appendix V) (vi) Disbursement Letter (Appendix VI) (vii) A copy of the Appraisal Report

(b) Upon approval of the refinance application, the Regional Development Department will sanction the refinance application and release refinance on first come first served basis.

(c) Applications for refinance of subsequent disbursements of sub-loan installments should be accompanied by all the above mentioned documents except the Appraisal Report.

(d) Refinance claims should be submitted to RDD within 01 month of the date of disbursement.

(e) RDD undertakes to ensure that refinance payment is made within 01 week of the receipt of the completed refinance application.

(f) Capital and Interest payments on refinance loan will be payable half yearly by the PFIs to the CBSL on 30th June and 31st December of each year as per the interest rates mentioned in the paragraph 2.11(b).

(g) If any interest payable during the grace period is not paid on its due date, such interest may at the option of the PFI concerned be capitalized until payment thereof is made.


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86. Accounts and Financial Statements

(a) Each PFI should maintain appropriate accounts or records to indicate inter-alia, sub-loan appraisals, approvals, disbursements and recoveries.

(b) Each PFI should appoint auditors acceptable to the CBSL to undertake in the course of the annual audit as provided under the Project Agreement, a review of the loan and investment portfolio in general and its sub-loan operations in particular, and the report of this review should be furnished to CBSL not later than 6 months after the end of each fiscal year.

(c) PFIs are required to maintain separate accounts for the utilization of loan proceeds and refinance operations.

7. Other

7.1 Revolving Fund

(a) The CBSL will establish and maintain a Revolving Fund.

(i) The interest payments and principal payments by PFIs under the Credit Scheme will be credited to Account No. RDD No.1, 4214 held in the Domestic Operation Department of the CBSL.

(b) The resources of the Revolving Fund could be made available for the PFIs for further lending to eligible sub-projects subject to the concurrence of the GOSL and the CBSL.

7.2 The Central Bank reserves the right to revise the terms and conditions in respect of refinance scheme as and when necessary.

Yours faithfully,



Copies to : 1. Chief Accountant, Central Bank of Sri Lanka. 2. Secretary, Ministry of Agriculture & Lands. 3. Secretary, Ministry of Finance and Planning. 4. Secretary, Ministry of Plan Implementation. 5. Secretary, Ministry of Forestry and Environment. 6. Chairman, Agricultural Development Authority. 7. Chairman, Central Environmental Authority. 8. Chairman, Sri Lanka Cashew Corporation. 9. Chairman, Sri Lanka Export Development Board.10. Deputy Secretary to the Treasury.11. Auditor-General.12. Director, Dept. of Management Audit, CBSL.13. Regional Manager, CBSL Regional Office, Anuradhapura.14. Regional Manager, CBSL Regional Office, Matara.15. Regional Manager, CBSL Regional Office, Matale.


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8APPENDIX I

REFINANCE APPLICATION NO.: ………..

(To Operating Instructions No. …… dated …………)

Address:

Date:

APPLICATION FOR REFINANCESECOND PERENNIAL CROPS DEVELOPMENT PROJECT

REVOLVING CREDIT SCHEME (SPCDPRF)


Gentlemen

We, ..............................................................................................................................................................................

a credit institution within the meaning of Section 88F of the Monetary Law Act (Chapter 422), as amended from time to time / a registered finance leasing establishment, and an authenticated print of whose constitution has already been/is herewith submitted to you, do hereby apply for the grant of a loan of Rupees ................................

................................................................................................................................ (Rs. …………………………….)under the provisions of Section 88A of the Monetary Law Act.

2. In making this application, we agree to comply with the terms and conditions stipulated in your Operating Instructions No. RDD/SPCDP Revolving Fund/05/01 dated 25th December 2005.

3. As required by the aforementioned Operating Instructions and in compliance therewith, we forward herewith a statement, in duplicate, of loans granted not earlier than six months immediately preceding the date of this application by us under the Second Perennial Crop Development Project Revolving Fund Credit Scheme.

We certify that the loans mentioned in the statement have not been reflected in any previous statement in support of an application for a refinance loan.

4. We hereby expressly agree to repay the monies disbursed to us in terms of this application to you in ………….. (number of instalments) …………………………. (monthly/quarterly/ half yearly [state frequency] ) instalments each of Rs. ………………………………. the first of which shall be payable on …………… day of ………………………… 200……

5. We hereby certify that we have satisfied ourselves that

(i) the loans granted to borrowers mentioned in paragraph 3 above are within their borrowing powers; and

(ii) in the case of guarantees obtained for the repayment of such loans, that the guarantors have the power to give such guarantees.

SignatureName and description of the Authorized Officer(s)of the Credit InstitutionManager, Refinance Unit.


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8

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8APPENDIX III



Colombo.

Date:


Rs. ………………………………………


......................................................................................................................................................................................( Name and address of the Bank )

......................................................................................................................................................................................

hereby promise to pay to the CENTRAL BANK OF SRI LANKA or ORDER at COLOMBO the sum of

Rupees ..........................................................................................................................................................................

............................................................................................................................................. (Rs. ……………………)

currency for value received, with interest thereon, at the rate of …… per cent per annum from the date hereof.

For (Name of the Bank) :REFINANCE UNIT :HEAD OFFICE :

1. ……………………………………………………………… ( Stamp )

2. ………………………………………… ( Signature of the Authorized Officer )

WITNESSES :

1. ……………………………………………

2. ……………………………………………


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8APPENDIX IV



Colombo.

Date:

DELIVERY LETTER


In consideration of you agreeing to grant us, under the provisions of Section 88A of the Monetary Law Act (Chapter 422) as amended from time to time, a loan to the extent of Rupees ............................................................................

................................................................................................................................ (Rs. ……………………………)

with the object of granting financial accommodation to us in respect of lending operations carried out by us

under the Credit Scheme ………………………………………………………………………………………………

referred to in your Operating Instructions No. ……………………… dated …………………………………

we herewith deliver to you our Promissory Note in your favour for Rs. ....................................................................




1. …………………………………………



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8APPENDIX V



MEDIUM AND LONG TERM CREDIT REFINANCE FORM OFCREDIT INSTITUTION’S ASSIGNMENT

Colombo

Date:

We, ...............................................................................................................................................................................( Name and address of PCI )

......................................................................................................................................................................................

in terms of Section 88A of the Monetary Law Act as amended by Section 67 of the Finance Act, No.11 of 1963 and by the Monetary Law (Amendment) Act, No.21 of 1968, do hereby assign to the Central Bank of Sri Lanka, by way of pledge, the debit owing to us, particulars whereof are setforth in the Schedule hereto, as security/further

security for the repayment to the Central Bank of a loan of Rupees ..........................................................................

.................................................................................................................................... (Rs. …………………………)

granted to us by the Bank repayable with interest at ……… per cent per annum.

SCHEDULE

Amount of Debt(Rs.)


…………………………………………… ( Signature of the Authorized Officer )



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8APPENDIX VI

DISBURSEMENT LETTER


Bank Name : …………………………Bank Code No. : …………………………Branch Name : …………………………Branch Code No. : …………………………Serial No. of the Loan : …………………………Date : …………………………Disbursement : …………………………

1 2 3 4 5 6 7 8 9 10

SECOND PERENNIAL CROPS DEVELOPMENT PROJECT REVOLVING FUNDCREDIT SCHEME

Enquiry Number :

1. Particulars of the Borrower : 1.1 Name of the Borrower : 1.2 Address of the Borrower :

2. Particulars of the Loan : 2.1 Purpose of the Loan : 2.2 Location of the Sub-project : 2.3 Total amount of loan sanctioned : originally Rs. Subsequent enhancement of loan for cost overruns Rs. __________ Total Rs. ========= 2.4 Date of original sanction of loan : Date of sanction of enhancement of loan :

2.5 Repayment Programme for the instalment for which refinance was applied for :

Date : ………… Amount (Rs.) : ……………………… 2.6 Rate of interest

3. Status of Loan : 3.1 Amount released previously and refinance claimed from the CBSL Rs. 3.2 Amount now released and for which refinance is sought Rs. ___________ Total Rs. ==========

I certify that the particulars given above are true and correct.

Signature of Branch ManagerDate :

Name of Branch Manager

• Please indicate whether it is 1st, 2nd or any other instalment by putting a cross ( X ) in the appropriate box.


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8Operating Instructions No. : RDD/TDPRF/2006/02


08th June 2006

To : Bank of Ceylon DFCC Bank People’s Bank Kandurata Development Bank Commercial Bank Ruhuna Development Bank Hatton National Bank Sabaragamuwa Development Bank Sampath Bank SME Bank Seylan Bank Lanka Orix Leasing Company Ltd. NDB Bank Ltd. People’s Leasing Company

Dear Sir / Madam,

TEA DEVELOPMENT PROJECT REVOLVING FUNDCREDIT SCHEME (TDPRFCS)

Part I

1. Introduction

1.1 The Project

A Loan Agreement was signed between the Government of Sri Lanka (GOSL) and the Asian Development Bank (ADB) on 28th January, 1999 to obtain assistance to the extent of SDR 26.326 million for implementation of the Tea Development Project (TDP) over a period of six years from June, 1999 to June, 2005. The Project consists of four major components namely; (a) Institutional Reforms and Strengthening; (b) Tea Development; (c) Social Infrastructure and afforestation; and (d) Project Management. For the Tea Development Component, a sum of SDR 15.4 million will be made available to the Central Bank of Sri Lanka (CBSL) for financing of sub-loans to the Tea sector.

In terms of the above Loan Agreement, the CBSL is responsible to establish a Revolving Fund to continue the funding for Tea Development. Accordingly, the Regional Development Department is authorized by the Monetary Board in concurrence with the Ministry of Finance and Ministry of Plantation Industry, to implement the Revolving Fund Credit Scheme with the recovery of capital and interest under the TDP.

1.2 Objective of the Project

The objectives of the Project are –

(a) Achieve the required annual replanting rate of 2% of small holder Tea Sector;

(b) Enhance investment in land development;

(c) Remedial measure for limitation of Cess funds for tea replanting and factory develop-ment;


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8 (d) Improve the quantity and quality to meet the internationally acceptable requirement of

tea;

(e) Increase tea smallholder’s income on a sustainable basis; and

(f) Improve the natural environment in the Project area.

Part II

1. Credit Scheme

1.1 Executing Agency of the credit scheme

The CBSL is responsible for the implementation of the Tea Development Project Revolving Fund Credit Scheme. The Monetary Board has allocated Sri Lanka Rs.1,100 million for the credit component to provide credit for Tea Development. The CBSL will refinance on a first come first served basis out of the above allocation the loans granted by Participating Financial Institutions (PFIs) direct to the sub-borrowers for the activities identified under the Project.

1.2 Regional Development Department of the CBSL is responsible for implementation of the credit scheme.

Code No. assigned to the credit scheme : 0002.

1.3 Project Period

Date of commencement : 01.05.2006

1.4 Project Area

The Project will be implemented in 14 districts, i.e. Kandy, Galle, Matara, Ratnapura, Badulla, Nuwara Eliya, Kegalle, Matale, Kalutara, Hambantota, Moneragala, Kurunegala, Colombo and Gampaha.

1.5 Eligible Participating Financial Institutions (PFIs)

Name of PFI Code No.

Bank of Ceylon 7010 People’s Bank 7135 Commercial Bank 7056 Hatton National Bank 7083 Sampath Bank 7278 Seylan Bank 7287 NDB Bank Ltd. 6080 DFCC Bank 6099 Kandurata Development Bank 6141 Ruhuna Development Bank 6062 Sabaragamuwa Development Bank 6044 SME Bank 6178 Lanka Orix Leasing Company Ltd. 2024 People’s Leasing Company 2015


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82. Terms and Conditions

2.1 Eligible Sub-Projects

(a) Credit Scheme for Land Development Activity Total fund allocation would be Rs. 750 mn.

(b) Credit Scheme for Factory Modernization and rehabilitation Total fund allocation would be Rs. 350 mn.

(c) Inclusive of Rs. 100 mn. for Tea Shakthi factories.

2.2 Eligible Sub-Borrowers

(a) The borrower shall be a citizen of Sri Lanka;

(b) Be an individual, group of individuals, registered company or Tea Small Holder Development Societies (TSHDS) registered under the Tea Small Holder Development Authority (TSHDA);

(c) Not be a defaulter of any previous loan from a formal financial institution;

(d) Be able to make an equity contribution of at least 25 per cent of the sub-project cost;

(e) Be able to provide collateral acceptable to the PFI;

(f) Be able to demonstrate capacity to effect repayment.

2.3 Eligible Criteria for Sub-Projects

(a) The sub-project should include only the activities referred to in para 2.1 above;

(b) A certification for having met the environmental guidelines and requirements of the Central Environmental Authority where necessary.

3. General Terms for Lending

3.1 Financing Package for Sub-Projects

The financing package for sub-projects for each sub-borrower shall be as follows :

(a) Up to an average of 65 per cent of the estimated sub-project costs will be financed through the sub-loan;

(b) At least 10 per cent of the remaining percentage of the sub-project cost will be provided by the PFI out of its own resources; and

(c) At least 25 per cent of estimated sub-project costs shall be provided by the sub-borrower as equity in cash or in kind.

3.2 Sourceandextentoffinancing

The source and extent of financing sub-loans shall be as follows :

(a) When the borrower bears 25% of the project cost, the balance 75%, i.e., the loan component is divided between the CBSL and the PFI in proportion to 87:13 respectively (75% total project cost = 100% sub-loan i.e., both CBSL and PFI contribution).

(b) In the cases where the borrower’s equity contribution exceeds 25% of the total sub-project cost, the loan component be divided between the CBSL and the PFI according to the above proportion, i.e., 87:13.


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8 3.3 Sub-loan Agreements with Sub-Borrower

The PFI shall obtain a written sub-loan agreement with the sub-borrower acceptable to the borrower and the CBSL.

3.4 Eligible Activities for Financing

Sectors Scale of Finance Maximum Sub-Loan Repayment Release of Loan

1. Replanting and Infilling

* Cost Estimate is at Annex I a

Replanting: Mid/High/Low Grown Tea Rs.750,000/- (per hectare)

Block Replanting:The PFI should cons ider financing for block replanting only in cases where it is required for less than 20 per cent of the total applied extent.The same scale of finance which is applicable for replanting should be applied for block replanting.

Rs.3.75 mn. Up to 13 years with a maximum grace period of 5 years

TSHDA should inspect and certify the applications whether they are complying with the requirements deter-mined for replanting and block replanting.Release of loans will be in stages in accordance with the general pattern indicated in the cropping models and in the Appraisal Report. An inspection of the sub-project should be made by the PFI or TSHDA as the case may be before release of each loan instalment.

2. Nursery Operation

Nursery Operations Rs.100,000/- fo r a Nurse ry p roduc ing a minimum of 10,000 plants annually. The minimum size of the nursery should have the capacity not less than 10,000 plants p.a.

Rs. 1.0 mn. Up to 5 years with a maximum grace period of 1 year

Should be a Registered Commercial Nursery under the TSHDA. Release of loan instalments to be decided by the PFI in accordance with the disbursement schedule and an inspection report of the TSHDA / PFI.

3. Intercropping (Tea & Rubber, Tea & Coconut)

S.L. Rs.750,000/- (per hectare) Rs. 1.5 mn. Up to 13 years with a maximum grace period of 5 years

TSHDA should inspect and certify the applications whether they are complying with the requirements.Release of loans will be in stages in accordance with the general pattern indicated in the cropping models and in the Appraisal Report. An inspection of the sub-project should be made by the PFI or TSHDA as the case may be, before release of each loan instalment.

4. Use of new tech-nology / Society Mobilization

Rs .1 ,000 ,000 per TSHDS registered with TSHDA.The PFI may consider the society deposits, and activities/transactions etc. The sub project should be directly relevant for member small holders to use new technology for their agribusiness and to strengthen services provided by the TSHDS.


TSHDA should inspect and certify the applications whether they are complying with the requirements.In stages in accordance with the appraisal report and as recommended by the TSHDA.

(Contd.)


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85. Factory Moder-

n i za t i on , Re -habilitation & Relocation

(a) Meeting expenditure on improvements for HACCP certification.

(b) Develop infrastructure requirements for certification programmes for compliance with EU standards under the guidance of the Sri Lanka Tea Board. Items of machinery and installation are confined to the list in Annex I b.

Under this component, granting of loans should str ict ly be confined to H A C C P c e r t i f i c a t i o n related modernization as recommended by the Tea Commissioner.


To be dec ided by the PFI in accordance with disbursement schedule and the recommendations of the Tea Commissioner of the Sri Lanka Tea Board.

6. Modernization/ C o m p l e t i o n of Tea Shakthi Factories

i . C o m p l e t i o n o f p a r t l y constructed tea factory sub projects.

ii. Modernization of tea factories as required an EU standards under the guidance of Sri Lanka Tea Board.

i. Rs. 20.0 mn.

ii. Rs. 2.0 mn.

i. Up to 7 years with a maximum grace period of 1 year

ii. Up to 7 years with a maximum grace period of 1 year

To be decided by the PFI in accordance with Appraisal Report and disbursement schedules.

Note : 1. All PFIs should ensure that sub-projects listed in the above table from 1 to 4 should have followed all agricultural practices in terms of the TRI guidelines and recommended by the TSHDA for replanting, The TSHDA will ensure that such recommendations be sent to PFIs not later than 14 days.

2. In such instances, the application accompanied by a copy of the sub- loan agreement and an appraisal report of the sub-project should be forwarded to the CBSL. It is mandatory that such appraisal reports should be recommended by the following authorities.

(a) Replanting, Infilling Nursery Establishment the Inter cropping : Regional Manger of TSHDA New technology Development Society mobilization (b) Factory modernization and Rehabilitation : Tea Commissioner (c) Modernization / Completion of Tea Shakthi factories : Tea Shakthi Fund Tea Commissioner

3.5 (a) Subject to the terms and conditions of these Operating Instructions, the sub borrowers for replanting sub projects will be eligible to receive a 50% Interest Subsidy on request as a Cess rebate payable by the TSHDA and as a reimbursement of the interest paid by such borrower to the PFI in the course of the immediately preceding calendar year. Details of the interest subsidy scheme is given at Annex II.

(b) For the purpose at (a) above, the PFIs are required to furnish the information to the CBSL at the end of each calendar year.

3.6 Interest Rate

(a) On lending interest rate per annum is 9%.

(b) Interest rate for refinance from CBSL is 4%.

Sector Scale of Finance Maximum Sub-Loan Repayment Release of Loan


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84. Role of the PFIs

Each Head Office of PFIs shall –

(a) operate a Project Management Unit headed by a senior official who will co-ordinate and supervise its sub-loan operations within its head office;

(b) designate an appropriate number of branches for the provision of sub-loans as per the subsidiary Loan Agreement;

(c) set up annual performance credit targets of the project by districts and branches and review the progress quarterly;

(d) ensure the designated branches are adequately staffed with sufficient number of field officers for the supervision and recovery of loans;

(e) conduct regular spot inspection of sub-projects financed by its branches to review the physical progress and prepare inspection reports;

(f) ensure that the designated branches submit regular reports on the implementation progress and recovery performance to the CBSL through the head office. The PFI Head Office should consolidate such data and submit to the CBSL on quarterly basis in the format given in Annex III.

(g) promote the credit scheme through the local media to create an awareness among the prospective borrowers.

5. Release of Loan

5.1 Registration of sub-borrowers

(a) Whenever a prospective sub-borrower approaches a bank branch for a loan under the credit scheme, the inquiry shall be registered on form A in Annexure IV. The original copy should be sent to RDD upon receipt of which an enquiry number will be assigned to the respective borrower, PFI branch, and the Regional Manager/Head Office. After registering the enquiry, the PFI branch will require to file a copy of the Appraisal Report with RDD;

(b) Applications must be processed at the branch closest to the location of the project in order to facilitate close supervision of the project by the bank. However, this requirement will not apply in the case of factory development, where the applicants are permitted where necessary to make their loan applications to the branches of PFIs operating outside the project area.

5.2 Sub Loan approval

Granting of sub loan approval must be informed to the sub borrower and the TSHDA Regional Office or TCD as the case may be. (List of addresses of the TSHDA and Tea Board offices is attached at Annex V).

5.3 Release of Sub-Loans

(a) Release of sub-loans will be in stages in accordance with the Appraisal report.

(b) The Managers of PFI branches are required to limit the stages of sub-loans to a maximum of 10 instalments.

(c) Managers/Field Officers of the PFI branch should continue to carry out field inspection of the sub-projects after the release of each instalment of the loan where necessary.


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8 5.4 Monitoring of Sub-Projects

(a) PFI are responsible for identification of sub-borrowers and evaluation of the sub-projects. PFIs are requested to supervise the sub-projects and recover the loans within the stipulated period.

(b) The Branch Managers should carry out an inspection of the sub-projects in regular intervals after the disbursement of the loan.

(c) The CBSL shall, in so far as may be necessary for the purpose of this Scheme, have the right to inspect the books of accounts and other records of the PFI pertaining to any loan guaranteed under this scheme.

5.5 DisbursementofRefinance

(a) Applications for refinance should be submitted by the Head Office of the PFI to the Regional Development Department of the CBSL. The refinance application should be accompanied by the following documents.

(i) Application for Refinance (Appendix I)1/; (ii) Statement of Loan Disbursements (Appendix II)1/; (iii) Demand Promissory Note (Appendix III)1/; (iv) Delivery Letter (Appendix IV)1/; (v) Medium and Long Term Credit (MLTC) Refinance Form of Credit Institution’s

Assignment (Appendix V)1/; (vi) Disbursement Letter (Appendix VI)1/; (vii) A copy of the Appraisal Report.

(b) Upon approval of the refinance application, the Regional Development Department will sanction the refinance application and release refinance on first come first served basis. Refinance claims should be submitted to RDD within 01 months of the date of disbursement. RDD undertakes to ensure that refinance payment is made within one week of the receipt of the completed refinance application.

5.6 Sub Loan approval

Capital and interest payments on refinance loan will be payable half yearly by the PFIs to the CBSL on 30th June and 31st December of each year.

6. General Requirements

(a) Each PFI should maintain separate accounts and financial statements for the credit scheme to indicate sub-loan appraisals, approvals, disbursements, refinance and recoveries.

(b) Each PFI should appoint auditors acceptable to the CBSL to undertake in the course of the annual audit. PFIs will have its financial statement audited by auditors acceptable to the Bank and in the course of the annual audit, review its loan and investment portfolio in general and its sub-loan operations in particular. PFIs are required to submit their audited financial statements to CBSL not later than 12 months after the end of each released fiscal year.

1/ The formats for these documents are similar to those on pgs. 639 to 644


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87. Other

The CBSL reserves the right to revise the terms and conditions in respect of refinance scheme as and when necessary.

Yours faithfully,

W. M. KarunaratneDirector / Regional Development Department

08.06.2006

Copies to: 1. Chief Accountant, Central Bank of Sri Lanka. 2. Secretary, Ministry of Plantation Industries. 3. Secretary, Ministry of Finance & Planning. 4. Secretary, Ministry of Plan Implementation. 5. Deputy Secretary to the Treasury. 6. Director General, External Resources Dept. 7. Director, State Accounts Dept., General Treasury. 8. Auditor-General, Auditor-General’s Dept. 9. Chairman, Tea Small Holdings Development Authority. 10. Commissioner, Tea Commissioner’s Dept. 11. Chairman, Tea Research Institute. 12. Chairman, Sri Lanka Tea Board. 13. Director, Dept. of Management Audit, CBSL. 14. Regional Manager, CBSL Regional Office, Matara. 15. Regional Manager, CBSL Regional Office, Matale


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2nd October 2006Tel. : 2477447 / 2477432 / 2477452 / 2477339Fax : 2477733 / 2477734

To : Bank of Ceylon Commercial Bank DFCC Bank National Development Bank Sampath Bank Ltd. Hatton National Bank Seylan Bank Lanka Orix Leasing Company Ltd.

Dear Sir / Madam,

LOAN SCHEME FOR RECONSTRUCTION OF SMALL AND MEDIUM SIZED PROJECTS (INDUSTRIAL, TOURISM AND OTHER SERVICE SECTOR) REVIVAL PROGRAM (RSMSRP)

UNDER POST TSUNAMI LINE OF CREDIT (CONTRACT B) – SRI LANKAFUNDED BY EUROPEAN INVESTMENT BANK (EIB)

1. Introduction

The Government of Sri Lanka (GOSL) entered into an agreement with the European Investment Bank) to borrow Twenty Million Euros (EUR 20,000,000) as principal for the implementation of the Loan Scheme for Reconstruction of Small and Medium Sized Projects (Industrial, Tourism and Other Service Sector) Revival Program (RSMSRP) under Post Tsunami Line of Credit (Contract B) – Sri Lanka Funded by European Investment Bank. The Central Bank of Sri Lanka (CBSL) on behalf of the GOSL implements the RSMSRP titled as “EIB Contract B” Loan Scheme through Participating Financial Institutions (PFIs) which satisfy the eligibility criteria agreed among the EIB, GOSL and the CBSL.

Subsequent to the completion of disbursements under SUSAHANA Loan Scheme, the CBSL in concurrence with the Government this new credit line will be implemented in order to meet the demand for loans at a concessionary interest rate to resume the affected enterprises in the Tsunami affected areas.

1.1 Credit under the EIB Contract B will be provided through eligible PFIs to eligible sub-borrowers whose businesses were directly affected by Tsunami waves on 26th December 2004. The activities identified for financing should be related to resumption of operations of small and medium scale enterprises affected by Tsunami waves to the level that prevailed before Tsunami.




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8 2.1 Role of the CBSL



(ii) monitoring and evaluation of benefits accruing to sub-borrowers with a view to evaluating the impact of the loan scheme in line with the original objectives of the project.

(iii) monitoring and evaluating the performance of the PFIs in the project area;

(iv) Organizing training programmes to educate the staff of branches designated by the PFI and conducting of public relations campaigns where necessary to let the public know about the scheme; and

(v) Registration of borrowers/applicants under the project

PFI branches should submit the applications to RDD through their respective Head Offices for registration by following the approval procedure (3:2:1). The RDD will issue a registration number for each application. PFIs are requested to initiate action/grant loans only after receiving the registration number from RDD. The Registration No. registered in the CBSL will be crucial for identification of sub-loan and for the purpose of refinance. All correspondence with RDD should carry this number. Branches of PFIs are advised to use this number on their ledger sheets for the purpose of identification of the sub-loan

3. Eligible PFIs and Role of the PFIs

3.1 Eligible PFIs

The PFIs which satisfy the eligibility criteria agreed among the EIB, GOSL and CBSL are eligible to receive refinance loans under the project.

3.2 Documentation

3.2.1 Approval Procedure

Allocation request should be presented to EIB through the CBSL and AU not later than 3 months before the implementation of the sub project is completed, provided that projects which are completed before the date falling three months after the signature of the Finance Contracts (i.e., 6 April 2006) are eligible. The AR should be duly signed by an authorized officer of the PFI whose specimen signature is with the AU. Further, PFIs are requested to follow the guidelines given by EIB under the attached documents titled as “Allocation procedures and other important practical provisions”.

The AR (Annex 1) should be accompanied by all necessary supporting documents including :

• Simplified Form (Annex 2 ) • Comparative Schedule of Quotations – Procurements (CSQ-P) (Annex 3) • CEA approval/EIA as applicable (Annex 4) • Environmental Fiche (Annex 5)

The first Allocation Request submitted by the PFI shall provide a list of its representatives, authorized to sign allocation requests together with specimen signatures.

The PFIs are requested to submit allocation requests (AR) along with all supporting documents in electronic and hard copy formats to CBSL.


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8 3.2.2 Disbursement Procedure

On partial/full disbursement of funds to the final beneficiary, the PFI should submit the completed Allocation Disbursement Request (Annex 6) to the AU signed by the authorized officer of the PFI whose signature is with the AU, together with

• Evidence of disbursement by the PFI • A summarized statement of expenditure financed by the PFI with the supporting

documents

3.2.3 Reporting Procedure

PFI should furnish to the CBSL all relevant reports as laid down in the Finance Contract B and Allocation Procedures and should adhere to the time frames mentioned therein, which includes the following :

PFI Progress Report Quarterly

Final Report Within four (4) months of the last disbursement of the Credit

Report on Prepayments

31 December of each year the position as at 30 September of that year

Further, the PFIs should provide any other information that EIB AU or CBSL may reasonably request.

3.3 Role of the PFIs





(iv) The PFI branch should maintain a separate ledger in respect of loans granted under the scheme.



(vii) Ensure that the branches implementing the scheme submit regular progress reports in respect of implementation, recovery of loans, etc., to the respective Head Offices of the PFIs.

(viii) The Head Office of the PFI should submit progress reports to the RDD of the CBSL as indicated in the item 3.2.3.


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8 (ix) The branches of PFIs eligible for participation will be identified by the respective PFI

and Code Numbers will be assigned to them by the CBSL. Any new branches selected for implementation of the scheme will be notified by the CBSL from time to time.

4. Credit Scheme

4.1 Total Fund Allocated : SLR equivalent to Euro 20 million.

4.2. Sub-Loan Amount : Maximum – should not exceed SLR equivalent to Euro 500,000

Minimum – should not be less than SLR equivalent to Euro 10,000

4.3 Equity Contribution by : 25% of the total project cost for a sub-borrower Sub-borrower

4.4 Refinance Amount : The CBSL will refinance loans up to 100 per cent of the amount disbursed by PFIs.

4.5 Rate of Interest : 6 per cent per annum (From CBSL to PFI)

4.6 Repayment Period for PFIs : 9 years with a maximum grace period of 4½ years from the starting date (during the grace period, interest will be charged.

The PFIs should pay only the interest during the grace period. If the sub-borrowers be given 4½ years grace period, the PFI shall repay the loan within the remaining period of 4½ years in 9 equal semi annual instalments.

4.7 Rate of Interest for sub-loans : 9 per cent per annum (from PFI to sub-borrower) (From PFIs to sub-borrowers)

4.8 Repayment period of sub-loans : More than 3 years, but not exceeding 9 years including the maximum grace period of four and half years from the starting date depending on the nature of the sub-project. However, interest will be charged during the grace period.

4.9 Date of implementation : The scheme will be effective from 6th April, 2006.


4.11 Leasing : Interest rate applicable for leasing should be 9 per cent per annum.


5.1. Eligible sub-borrowers should apply for sub-loans on application forms designed by respective PFIs;

5.2. Sub-loan application should be made to the branch of the PFI closest to the location of projects;

6. Eligible Sub-borrower

6.1 Any privately or co-operatively owned SMEs of Industrial, Tourism and Other services sector directly affected by the Tsunami. which fulfil the following conditions are eligible.

Enterprises affected by the Tsunami on December 26th, 2004 and able to produce acceptable evidence such as restoration certificates by the relevant authority;


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8 6.2 The borrower should be an entrepreneur proven as affected by the disaster and He/She should

prove to the PFI with evidence;

6.3 The borrowers who had already obtained financial facilities for their enterprises should agree to reschedule the outstanding balances with the PFIs prior to obtain new facilities under the project;

6.4 The borrower should be able to satisfy the PFI that the proposed project has a good repayment capacity;

6.5 The borrower should be able to provide collateral if any, as determined by the PFI.

7. Collateral


8. Eligible sub-projects

Any sub-project financed by sub-loan that contributes to restoring and enhancing production and service capacities subject to the limitation given at item (9) below. PFIs should consider environment impact of projects in approving sub-loans.

9. Excluded Sectors (sub-projects) • Manufacture and distribution of weapons and ammunition, arms and military equipment • Manufacture and distribution of tobacco products • Housing (except broader – based urban renewal projects) • Administrative buildings and other offices for non-commercial use (e.g., public administration, non-profit-making union, cultural or charitable activities) • Waste incineration and processing of toxic waste • Gambling betting activities • Real state activities • Nuclear energy • Purely financial transactions

Restricted sectors • Sea fisheries • Sectors/products subject to EU anti dumping measures

10.EligibleItemstobefinanced

The cost of all restoration work, buildings, machinery, other fixed assets and vehicles are eligible for financing.

11. Release of Loan






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8 12.3 A letter of guarantee issued by the supplier for due performance of the machinery and

implements and equipment supplied to the borrower should be held by the branch during the warranty periods. The borrower should be required to bring to the notice of the lending branch the manufacturing defects during the warranty period so that the branch could take up the matter with the supplier immediately for corrective action.



13. DisbursementofRefinance

13.1 Inquiry Number Refinance is released only for the applications already registered and assigned with an inquiry

number by the CBSL. Please see item 2.1(v).

13.2 RefinanceclaimbyPFIBranches After the registration of the enquiry, branches of the PFIs are allowed to grant/release loans to

sub-borrowers. Once the loans are granted, the PFI branch should claim refinance from the CBSL through their respective Head Offices.

13.3 RefinanceApplicationsbyPFIHeadOffices Once received the refinance claims from branches, PFI Head Office should prepare refinance

applications to submit to the CBSL along with the following documents.

Refinance Application Form Appendix I1/ Demand Promissory Note – with a schedule Appendix II1/ Form of assignment by way of pledge to the CBSL Appendix III1/ Delivery Note Appendix IV1/

The above documents should be submitted by the PFI Head Office to the Director, Regional Development Department, Central Bank of Sri Lanka in respect of loans granted under the project for refinance.



Repayment of refinance loans by PFIs will be on half yearly basis on the 31st March and 30th September in each year commencing 4½ years from the Start Date.

Yours faithfully,





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1st March 2007Tel. : 2477447 / 2477428Fax : 2477734

To : General Manager / CEO Bank of Ceylon Wayamba Development Bank People’s Bank Sabaragamuwa Development Bank Seylan Bank Uva Development Bank Sampath Bank Ruhuna Development Bank Commercial Bank Kandurata Development Bank Hatton National Bank Rajarata Development Bank Sanasa Development Bank Lankaputhra Development Bank

KRUSHI NAVODAYA LOAN SCHEME

1.1 Introduction

Krushi Navodaya loan scheme has been introduced with the objective of provisioning of capital to improve the income generating avenues of small farmers and others who are engaged in different self employment activities in the agricultural sector. A greater potential is available to increase the levels of income and productivity of farmers provided that quality inputs and services could be procured in required quantities. Accordingly, Krushi Navodaya loan scheme has been introduced by the government budget - 2007 to empower small farmers with financing their income generating projects in the agriculture sector.

The expected amount to be disbursed among the target beneficiaries under the scheme is Rs.3,000 million. The loans will be disbursed through the Participatory Financial Institutions (PFIs) at 8 per cent per annum within the year 2007 as instructed by the Ministry of Finance (MOF). Since the loans would be provided by PFIs out of their own resources, PFIs are required to select/identify suitable borrowers for finance. The government will pay the PFIs with an additional payment at 9 per cent per annum on the outstanding balance to offset their interest losses.

1.2 Objectives of the Project

• Formulation of an agricultural credit programme to facilitate the small farmers to purchase agricultural equipments, services and other inputs for enhancement of their income level.

• Generating new employment opportunities in the agriculture sector and related fields.

• Granting medium term loans (maximum of 36 months) for agricultural activities.

• Opening avenues for small farmers to move towards new technology, techniques and market opportunities.

• Providing opportunities for small farmers to move from subsistent level to commercial level.

• To improve the productivity in the agriculture sector as a whole.


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82. Implementation Mechanism

Development Finance Department of Ministry of Finance and Planning – Policy and Progress

Lankaputhra Development Bank (LDB) – Implementation of the scheme by co-ordinating PFIs

Central Bank of Sri Lanka (CBSL) – Issue of Operating Instructions and making payments to PFIs on the recommendation of the LDB

3. Project Duration

Commencement : 1st March 2007 Termination : 28th February, 2010

However, the loan scheme could be terminated with full utilization of expected amounts, i.e., Rs.3,000 million during the period.

4. Area of Operation

All island.

5. Participatory Financial Institutions (PFIs)

Lankaputhra Development Bank will be the main implementing agency of the scheme. A list of PFIs is given below:

Lankaputhra Development Bank Sanasa Development BankBank of Ceylon Ruhunu Development BankPeoples Bank Rajarata Development BankHatton National Bank Wayamba Development BankCommercial Bank Sabaragamuwa Development BankSampath Bank Kandurata Development BankSeylan Bank Uva Development Bank

Development Finance Department of the MOF will involve in the project on behalf of the government while the Regional Development Department will issue the Operating Instructions on behalf of the Central Bank of Sri Lanka.

6. Eligible Economic Activities for Loans

Small farmers and persons who are engaged in self-employment activities and require fixed and working capital under the following categories, are eligible for obtaining loans upto Rs.100,000/-.

• Improving agricultural activities and processing of agricultural commodities.• Purchase of equipment for the development of agriculture and allied activities.• Extension services for agricultural activities.• Animal husbandry.• Agro-based and agro-related industries.• Organic farming and producing of organic fertilizer.• Enhancing storage facilities.• Micro irrigation, Drip-irrigation and distribution systems etc.• Development of protected agriculture.


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87. Financial Feasibility

Branch Managers of PFIs are required to ensure the financial feasibility of the Project before financing and, therefore, they should

• determine the volume of loan and the suitability of the applicant based on his/her repayment capacity;

• confirm the sufficiency of income generation and increment of net income to pay the installment of loan with interest.

• Prepare the budget estimates and cash flow statements for all sub projects for which loans are applied and should be affixed them with the loan applications.

8. Compliance with the Rules of Environmental Conservation

It is a responsibility of the respective bank to obtain an environmental feasibility report from the relevant authority when necessary. In such an event environmental feasibility report relevant to the project should be affixed to the loan application.

9. Security Requirements

PFIs are free to obtain suitable collateral to minimize the risk involved in disbursement of loans as determined by the PFIs.

10. Loan Volume

It is expected to disburse a total volume of Rs.3,000 million through the banking system as loans for small farmers and self employed persons during the period. Maximum amount per borrower would be Rs.100,000/-.

11. Loan Financing and Rate of Interest

• The volume of finance required for implementing the project is Rs.3,000 million and the total amount should be procured by respective PFIs.

• On-lending interest rate to the borrower would be 8 per cent per annum.

• Additional amount of interest at 9 per cent per annum will be paid by the government to the PFIs through the Central Bank of Sri Lanka on the recommendation and certification of the Lankaputhra Development Bank.

12. Period of Loan Repayments

Maximum time period for loan repayments will be 3 years inclusive of grace period, if required.

13. Agreements between Operational Institutions and PFIs

An MOU has to be signed among the Lankaputhra Development Bank, the Central Bank of Sri Lanka, the Ministry of Finance and Planning and the PFIs for the implementation of the loan scheme.

14. Grace Period and Rescheduling

Grace period, if required, should be determined by the PFI after consulting the borrower and considering the nature of the project. However, the loan repayment period should not exceed 3 years. If any requirement arises to reschedule the loan for a period exceeding 3 years, a prior approval has to be obtained from the institutions mentioned at paragraph 2.


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FunctionsofHeadOffices

The loan scheme should be administered under a senior staff officer.

• A list of branches which grants loans should be forwarded to the LDB and the CBSL.

• All loan applications should be forwarded to the LDB, the main implementing agency for registration.

• Preparation of targets for branches in the districts and monthly progress reports and forwarding them to LDB should be done by the head office of the PFI.

• It is the responsibility of the head office of the PFI to forward duly completed progress reports on loan disbursement and recoveries.

16. Functions of Bank Branches

• Manager of the bank branch should carryout a prior inspection after the receipt of an application for a loan and ensure that the project is satisfied with the following aspects:

Financial feasibility Environmental effectTechnical feasibility Project sustainability

• Details of the loan application (form No.1) should be forwarded to the Head Office of the PFI.

• Cash-flow statements should be prepared in respect of each project.

• A Register has to be maintained to depict the steps in progress of loan applications received to the branch, i.e., number of applications received, applications under examination, applications forwarded to the LDB for registration and loan applications approved etc.

• Post supervision has to be continued for building up a close relationship with the beneficiaries from the date of loan disbursements.

• Information pertaining to each loan, whether loan repayments are in order or distorted, should be submitted monthly to the implementing agency, i.e., the LDB, through the Head Office of the PFI.

17. Functions of LDB

• All applications received from PFIs should be registered and the registration number should be informed to the respective branches through their Head Offices.

• Additional interest amounts, as indicated at paragraph 11, payable to the PFIs on behalf of the government should be calculated, recommended and forwarded to the CBSL for payment.

• Taking all the loans granted into accounts, recovery reports should be prepared and loans with arrears of 12 monthly installments or 2 six-month installments should be classified as ‘past due’ and such loans should be removed from the list of eligible loans for the payment of additional interest.

• Requests by PFIs for reschedule of loans should be investigated and submitted to the Ministry of Finance and Planning for approval. For such loans additional interest payment should be recommended only after obtaining approval of the MOF.

• Preparation of quarterly progress reports.

• Post supervision of project, where necessary.


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818. Loan Disbursement and Reporting of Information

• After the prior inspection for a loan application if he satisfies, the branch manager should forward Form No.1 to the LDB through the Head Office for registration either by e-mail or by post. Registration numbers for such applications will be given by the LDB to the PFI.

• Loans will be disbursed after the receipt of registration number. Loan disbursement should be reported to the LDB. A comprehensive data base will be maintained by the LDB in this regard. This information is essential for analyzing progress, calculate additional interest repayments etc. A suitable software package for this purpose will be established in the computer system of LDB.

• Every PFI should inform the details of loan disbursements within 3 months after the registration of every loan application, and, if failed to do so, the details stored under that registration number will automatically be deleted in the system assuming that no loan has been granted under that registration number. Also the LDB is empowered not to approve additional interest payment for loans granted after 3 months of the registration.

• Information on loan recoveries from the date of loan disbursement should be reported to the LDB by the PFIs quarterly.

• Data system of the LDB should be made updated and quarterly progress reports should be forwarded to the CBSL and DFD of the MOF.

• Officers of the LDB have direct access for field inspections/visits in the field as and when necessary.

• Recommendation for the payments of additional 9% interest will be made by the LDB to the CBSL based on the updated information received from PFIs.

• Preparation of schedules for the payments of interest subsidies will be made by the LDB and based on such recommendations interest payment will be paid by the CBSL to the respective PFIs.

• Additional interest payment will be made on quarterly and annual interest payments will be completed in 4 quarterly payments.

Yours faithfully,



c.c. Director-General Development Finance Department Ministry of Finance and Planning Colombo 1.


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8Form No. 1

To : Manager Lankaputhra Development Bank 34 Maitland Crescent, Colombo 7. Registration No.

For LDB use only

KRUSHI NAVODAYA LOAN APPLICATION FORM

(1) Name of the Bank : …………………………………………… Bank Code : ……………………

(2) Branch : …………………………………………… Barnch Code : …………….……

(3) Branch Address : …………………………………………………………………………………

(4) Branch Tel. Nos. / Fax Nos. : …………………………………………………………………………………

(5) Applicant’s Status : …………………………………………………………………………………


i.

ii.

iii.

(6) Description of the Project and purpose of Loan :

………………………………………………………………………………………………………..…………

(7) Estimated cost of the Project : Rs. …………………………………………………………………..…………

(8) Complete Address of Project Site, Location, District and Grama Seva Division :

………………………………………………………………………………………………………..…………

………………………………………………………………………………………………………..…………

………………………………………………………………………………………………………..…………

(9) Repayment Period : ….…………………………………………………………………………………………

(10) Instalment (Monthly / Quarterly / Bi-Annually) : Rs. …………………………………………………………

(11) Amount recommended by the PFI : Rs. ….……………………………………………………………………



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03rd April 2007

To : Kandurata Development Bank Bank of Ceylon Sabaragamuwa Development Bank People’s Bank Wayamba Development Bank Hatton National Bank Uva Development Bank Seylan Bank Ruhuna Development Bank Sampath Bank Rajarata Development Bank Sanasa Development Bank Commercial Bank

Dear Sir / Madam,

POVERTY ALLEVIATION MICROFINANCE PROJECT (REVOLVING FUND)LOAN SCHEME

1. Introduction

Poverty Alleviation Microfinance Project (PAMP), which commenced operations on 4th August 1999, jointly sponsored by Sri Lankan Government and Japan Bank for International Co-operation (JBIC) was terminated on 31st December 2006, as scheduled. It has been decided to implement the Poverty Alleviation Microfinance (Revolving Fund) Loan Scheme for a period of three years commencing from 1st April 2007 utilizing the loan recoveries of the PAMP.

2. Objective of the Loan Scheme

2.1 Strengthening of economic conditions and social empowerment of low income families living in most backward areas identified by the Government.

2.2 Linking low income communities with formal financial system for establishment of efficient and sustainable financial delivery system for them.

2.3 Encouraging participation of rural women in income generating activities.

2.4 Improving the habit of thrift and savings among low income families in the rural sector.

2.5 Improving professional and entrepreneurial skills and financial capabilities.

2.6 Improving self confidence and making them free from dependent mentality.

2.7 Encourage capable government and non-governmental organizations in financing the poor.

3. Strategies of the loan scheme

3.1 Identification of target community, households and groups.

3.2 Organizing and socially strengthening of the poor through a social mobilization process.

3.3 Establishment of a methodology among the poor to access the formal financial system on the basis of group strength.

3.4 Improving savings habits among the poor beneficiaries.


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8 3.5 Identification of skills and much needed training and provision of such training and other

supporting services for their development.

3.6 Provision of small scale credit facilities for income generating activities suitable for beneficiaries.

3.7 Obtaining the assistance of governmental and non-governmental institutions for financing and provision of other supporting services.

3.8 Transforming well organized small groups into financially strong societies and linking them with formal financial institutions so that they could have access to formal financial sector for their requirement on a sustainable basis.

4. Area of operation

Island-wide

5. Duration

From 1st April 2007 to 31st March 2010.

6. Implementing agency

Central Bank of Sri Lanka.

Implementation of monitoring and supervision of the loan scheme will be done by the Director, Regional Development Department of the Central Bank of Sri Lanka or staff appointed by him. The functions to be performed are as follows:

i. Policy formulation. ii. Preparation of annual operational plan and budget. iii. Solving problems emerging during operation. iv. Disbursement of refinance for Participating Financial institutions and partner agencies. (DRD is authorized to refuse/reject disbursement of refinance under the scheme). v. Co-ordination of training programs. vi. Preparation of financial reports. vii. Maintenance of vehicles and equipment of PAMP and utilizing them in the operation of the new

loan scheme. viii. Supporting the PFIs and PAs. ix. Make arrangements for conducting annual audit.

A sum of Rs.600 million was allocated from the Poverty Alleviation Microfinance Project for the implementation of the Revolving Fund Loans Scheme.

It is expected to perform three major activities under the loan scheme :

(i) Social Mobilization: Awakening, organizing, strengthening of the poor and mobilization of savings.

(ii) Financing: Identifying suitable projects, analyzing them, skill development, provision of training, provision of loans and other supporting services.

(iii) Linkingorganizedsocietieswithformalfinancialinstitutions:

Improvement of internal financial transactions within the beneficiary societies, upliftment of their capacity to obtain bulk loans through a sustainable relationship with the relevant bank branch.


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87. Loans

Short and medium term loans could be obtained for eligible low income groups for their income generating activities in the agricultural and non-agricultural sector through participating financial institutions. As loans are provided on the recommendation of organized groups and societies, it is expected that leaders and other members of such groups would assist the PFIs in supervision of beneficiary projects, providing relevant information to the bank officers and also in the loan recoveries.

PFIs are responsible for disbursement and recoveries of loans with the assistance of organized groups and societies.

8. Eligible Projects

Fixed and working capital requirements of income generating activities selected by beneficiaries are eligible for finance under the loan scheme. The main sectors for which loans could be granted are as follows :

i. Agriculture

ii. Animal husbandry

iii. Fisheries

iv. Small scale and cottage industries

v. Any other suitable activity leading to income diversification.

9. Targetbeneficiaries

i. Households whose monthly income is less than Rs.7,500 and living under vulnerable conditions such as poor housing, sanitary, education and number of dependent family members etc.

ii. They should not be beneficiaries of any other similar loan scheme.

iii. They should not be loan defaulters of any financial institution.

10.Qualificationsforfinance

Groups should be in active for 3 months and during that period members are required to contribute for formal savings continuously/regularly. Every member should save at least Rs.10 or any agreed amount weekly. Members should always behave for the betterment of the groups.

11. Amount of the loan

A member of a registered group is eligible to obtain a maximum of Rs.50,000 at the beginning. Based on the feasibility of the project and the recommendation of the field officer/CDA Branch Manager could approve the loan.

12. Rate of interest

CBSL to PFIs : 4.5% per annum PFIs to PAs : 7.5% per annum PA to borrower : 16% (maximum) per annum

The PFIs could also grant loans directly to beneficiaries. The on-lending rate for the beneficiaries should not exceed 16 per cent per annum.


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813. Repayment period

Loans disbursed for income generating activities should be paid back within a period of maximum 36 months. Short-term agricultural loans can be granted at the initial stage and should be paid back within 8 months.

14. Securities

PFIs are requested to accept group security/guarantee as meaningful collateral instead of traditional collateral. Group operation, unity and strength should be improved over the time to use as a meaningful collateral.

15. Staff Training

Short term training will be given to staff attached to District Offices (DOs), PFIs and PAs. These awareness/training programs are implemented by the RDD of the CBSL in collaboration with PFIs.

16. Technical assistance

RDD of the CBSL supports to obtain technical assistance for beneficiary income generating projects financial management training for DOs, PFIs and PAs on request.

17. Central Operating Committee

Central Operation Committee will meet once in every 3 months or when required, to assign tasks and responsibilities to stakeholder institutions in respect of project implementation and overall coordination of the loan scheme. The committee consists with the following officers:

i. Assistant Governor, CBSL

ii. Director/Deputy Director of the Regional Development Department

iii. District Co-ordinators

iv. Chairman/CEO/GM or representative from PFIs

v. Representatives of Partner Agencies.

Representatives of other institutions can participate in these meetings as observers on invitation by the Committee.

The following policy matters pertaining to the loan scheme will be considered by the Central Operation Committee:

i. Inclusion of NGOs as PAs, selection of PAs, suspending the participation or taking suitable necessary action for PAs of which operation is not satisfactory or committed any wrongful act.

ii. Amendments of credit limits and volumes for PFIs and PAs.

iii. Determination of bank guarantees and cash deposit ratios needed to maintain by PAs with PFIs.

18. District Committee

District Committees chaired by DCs will be established at district levels to maintain a good relationship with PFIs and different institutions which assist to implement the loan scheme. Composition of the committee will be as follows:

i. District Co-ordinator (Chairman)

ii. Deputy Director or a representative from Regional Development Department, CBSL.


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8 iii. Branch Manager of the respective PFI.

iv. District Managers of PAs.

v. Two representatives from Development Societies.

District Committee will be an advisory committee in which all the matters related with coordination and implementation of the loan scheme in the district required to be discussed. Functions of the Committee are as follows:

i. Operational problems.

ii. Co-ordination of activities of PFIs and PAs within the district.

iii. Decision making on loan rescheduling.

iv. Preparing budget and annual work plan for the district.

v. Progress evaluation.

vi. Providing policy information to the central operational committee.

Committee will meet once a month or when required.

19.DistrictOffices

District Offices will be maintained in the former PAMP districts presided by District Co-ordinators to co-ordinate the loan scheme with PFIs and PAs. Tasks and responsibilities of the DOs will be as follows:

i. Preparing the budget and annual work plan for the district.

ii. Implementing the scheme in association with PFIs and PAs in the districts.

iii. Maintaining district level accounts and reports and submitting them to RDD.

iv. Supervision of CDAs functions and finding suitable solutions for problems emerging at operation and reporting them to the CBSL.

v. Supporting PFIs when necessary for group formation and promotion of member savings.

vi. Organizing training programs for beneficiaries and staff of PFIs and PAs with the corporation of CBSL.

vii. Recommending the suitability of granting loans for income generating activities of group members pertaining to PFIs and PAs. Deciding whether beneficiary projects have reached to the suitable level to recommend bulk/individual loan is one of the important activities.

viii. Transforming group beneficiary communities into development societies and recommending bulk loans for those societies in association with the respective Branch Manager.

ix. Reaching agreement on applications for rescheduling of loans with PFIs.

x. In districts where DOs are not available the relevant monitoring tasks will be undertaken by the nearest DO or Regional office of CBSL.

20. Functions and responsibilities of PAs

i. Organizing the target groups, motivating for savings and registering organized groups in respective PFI.

ii. Organizing beneficiary training programs.

iii. Providing individual loans for suitable projects of eligible beneficiaries from bulk loans.


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8 iv. Supporting group members to obtain direct loans for their very productive activities, if required,

from PFIs.

v. Monitoring, supervision and supporting for recoveries of loans in concurrence with PFIs.

vi. Maintenance of financial reports.

vii. Forwarding a maximum or an amount equivalent to 25 per cent of the bulk loan in cash as securities to the PFI.

viii. Forwarding progress reports for relevant activities to the PFI and DO.

21. Functions and responsibilities of PFIs

i. Organizing the target groups, motivating for savings and registering organized groups

ii. Disbursement of bulk loans and direct loans to the PAs and beneficiaries in time and make sure that respective funds are disbursed to the registered group beneficiaries.

iii. The responsibility of supervision and recovery of loans. However this function can be assigned to any PA that wishes to undertake the task. At this stage the interest margin should be shared among two institutions.

iv. Confirmation should be obtained that loans are disbursed for registered group beneficiaries before the funds are released.

v. PFIs should provide the following reports and details pertaining to implementation and administration of the loan scheme to the RDD of the CBSL:

a. Monthly, quarterly, semi-annually and annual progress reports until the loan scheme is over.

b. Separate accounts should be maintained on each and every loan granted. Respective financial reports and other details should be maintained so that they are available for the CBSL.

c. Loan installments should be paid back by the PFIs to the CBSL according to the loan recovery schedule associated with refinancing.

22. Basic steps of group formation

(Please see Appendix V)

23.Applyingrefinance

i. Duly perfected application for refinance should be forwarded to the RDD of the CBSL by the PFI after disbursement of loans to the beneficiaries by branches.

ii. Following documents should be completed when applying for refinance: a. Refinance application (Appendix I)1/

b. Promissory Note (Appendix II)1/

c. Statement of loan disbursement (Appendix IIA)1/

d. Letter of Assignment (Appendix III)1/

e. Delivery Note (Appendix IV)1/

f. Letter of recommendation that beneficiaries are members of groups or development societies. (Recommendation of CDO/DC/CBSL Regional Manager will be obtained by RDD separately– Appendix VI).



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8 iii. Loan application pertaining to bulk loan should be prepared in triplicate by the PA, i.e., original

to the relevant branch of the PFI, second copy to the respective PA and the third copy to the CBSL as an attachment to the refinance application of the PFI.

iv. Refinance will be issued first come first serve basis according to the receipt of applications.

v. Refinance applications should be forwarded to the CBSL within 6 months after the disbursement of relevant loans.

vi. Refinance will be released to the relevant PFI within a period of one month after the receipt of duly perfected applications.

24. Loan repayments

i. Members who obtained the loan could re-pay the loan through the PA or directly to the PFI.

ii. Authority to collect loan installments at group meetings could be given to CDA or field officer at the discretion of the respective PFI/PA. A receipt has to be issued for all the money collected.

25. Action against loan defaulters

Loan defaulters could be categorized into two groups:

i. Willful defaulters

ii. Non-willful defaulters – defaults due to acceptable reasons.

Based on the information provided by the CDO/field officer DC/Branch Managers should identify them separately.

26. Willful Defaulters

Defaulters who do not pay the loan installments despite the fact that they earn sufficient income from projects are reported as willful defaulters.

27.Defaultersduetojustifiablereasons

Defaulters who are unable to pay the loan installments, according to CDO/Field officer, due to a natural calamity (drought or flood) or any other justifiable reason, and if the Branch Manager is satisfied, they can be categorized as non-willful defaulters.

Recover processes are also different for the two categories of defaulters.

i. Legal action should be taken against willful defaulters to recover the loans without delay.

ii. Based on information of CDA/FO DC Branch Managers can reschedule the loan of non-willful defaulters and recover the loans in instalments.

iii. If a request is made to reschedule a loan, such matter should be discussed with the group members for obtaining suggestions and after confirmation of the matter, it should be forwarded to the PFI.

iv. An information sheet pertaining to the loans rescheduled by PFIs should be maintained by the District Office and according to the information therein (period of time the project was operated after refinance was granted to PFI and the need of capital to run the project after rescheduling) the volume of the capital for the project should be calculated. That schedule should be forwarded to the Regional Development Department.


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828. Disbursement of Project Fund

i. A loan agreement should be signed by each PFI with the CBSL.

ii. Refinance should claim within 3 months after releasing loans by PFIs separate or PAs to beneficiaries direct from their own funds.

iii. Expected annual limits for loans should be determined by each PFI at the beginning of the year. A copies of the documents processed according to that targets should be submitted to the District Office and the CBSL at the beginning of the year.

29. Audit of accounts

Final accounts of the project should be prepared by the CBSL based on the information provided by the district offices and it should be submitted to the Government Auditor before the 30th of April of the next year.

30. Other

The CBSL has the authority to make necessary amendments to the rules and regulations appearing in these Operating Instructions when necessary. If there is any ambiguous or unclear clause available in these Instructions, please note that the Sinhala version of the Operating Instructions is valid and final.

Yours faithfully,




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8Operating Instructions No. : RDD/MREAPRF/2007/04

Regional Development DepartmentCentral Bank of Sri LankaP. O. Box 590Colombo 01.

3rd July 2007Tel. : 2477033/2477472 / 2477473Fax : 2477733

MATALE REGIONAL ECONOMIC ADVANCEMENT PROJECTREVOLVING FUND (MREAPRF)

1. Introduction

1.1 The Project

The Ministry of Nation Building and Estate Infrastructure Development has decided to continue the credit component under the Matale Regional Economic Advancement Project (MREAP) for another one year utilizing recoveries of the original project sponsored by the International Fund for Agriculture Development (IFAD). The main objectives of the original Project were to raise the income of rural and farm families and to provide funds for medium scale entrepreneurs to create non-farm enterprises and to expand existing projects as well in the Matale District. Accordingly, the Central Bank of Sri Lanka will implement the Revolving Fund Loan Scheme in the Matale District commencing from 1st June, 2007.

1.2 Objectives

(a) Permanent raising and sustaining of the income of small entrepreneurs of rural and farm families of the Project area ;

(b) Generate more income from agricultural and non-agricultural activities ;

(c) To create non-farm employment and non-farm enterprises ;

(d) Focusing on women and youth and the promotion of non-traditional income generating activities ;

(e) Promotion of private sector partnership in the following four main areas :- Commercial Agricultural Development - Enterprise Development - Rural Financing- Project and Company Management

1.3 Project Area – Matale District

1.4 Project Period – One year

2. Credit Scheme

2.1 Implementing Agencies

Matale Project Office under the Regional Development Division of the Ministry of Nation Building and Estate Infrastructure Development will responsible for overall project administration and


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8management. The Regional Development Department of the Central Bank through the Regional Office/Matale will be responsible for the implementation of the credit component under the revolving fund of the Project.

2.2 Participating Financial Institutions (PFIs)

Kandurata Development Bank (KDB), Sanasa Development Bank (SDB), Seylan Bank and People’s Bank (PB).

2.3 Eligible Sub-borrowers

The PFI shall ensure that loan applications should comply with the following criteria :

(a) Individual borrowers should live in the Matale District and co-operative farmer companies/farmer organizations and NGOs should be registered in the district.

(b) Do not have default on any loan from a financial institution ;

(c) Submit a farm development plan or business development plan acceptable to the PFI for the proposed sub-project ; and

(d) Sub-borrowers should be able to provide collateral acceptable to the PFI.

2.4 Eligible Sub-projects

The PFI shall ensure that a sub-project selected for finance should be included in one of the areas mentioned in Annexure 1 of this Operating Instructions.

3. Responsibilities of PFI

(a) Eligibility for a loan should be determined on the basis of the repaying capacity of a borrower ;

(b) PFI should enter into an agreement with the borrowers for the repayment programme ;

(c) A Credit Monitoring Committee should be established for the evaluation of credit proposals and to recommend/approve the proposals ;

(d) The Credit Monitoring Committee consists of the following members : (i) Project Director (ii) Regional Manager of CBSL (Matale) (iii) General Manager of KDB (iv) Seylan Bank (v) People’s Bank (vi) Sanasa Development Bank (vii) Technical officer from relevant field (viii) Business Promotion Officers

3.1 Security

(a) PFIs are free to decide on the security requirements in terms of their normal lending terms and conditions ;

(b) However, in the case of small loans of Rs.50,000/- and below loans could be granted on lesser security acceptable to PFIs.

3.2 Interest Rates

(a) On lending interest rates (PFI to borrowers) is 10% per annum


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8(b) Interest rate for refinance from CBSL to PFIs is 6% per annum

(c) PFI to MFI/CBO (bulk loans) is 8% per annum

3.3 Grace Period

(a) The grace period of the sub-loans should not exceed one year from the date of granting the sub-loans depending on the nature of the Project ;

(b) The grace period for refinance loans to PFIs will be maximum one year.

3.4 Loan Size and Repayment Period

(a) The loan size and repayment period for sub-loans will be decided by the PFIs on the repayment capacity of the borrower and the nature of the Project ;

(b) However, the repayment period for borrowers should not exceed 7 years including the grace period

(c) The repayment period for refinance loans should not exceed 7 years including the grace period of one year ;

(d) Upper limit of the loan size will be Rs.500,000/- per loan

(e) Capital and interest payments on refinance loan will be payable half yearly by the PFIs to the CBSL on 30th June and 31st December of each year.

3.5 Registration of sub-borrowers

(a) Individuals who are interested in obtaining loans from PFIs under the Project may be approached through the respective Business Promotion Officers or Branch Managers of PFIs for loan applications. PFI branches should submit such applications for registration to the Project Office. Once the application is received, it will be registered and a reference number will be assigned to each application by the Project Officer. This reference should be used for all future correspondence.

4. ReportingProgressandRefinanceProcedure

(a) PFIs should submit Project Progress Reports monthly to the Project Management Office with a copy to the Regional Office of the CBSL Matale under the prescribed forms given in Annexure II ;

(b) The Regional Office of the CBSL Matale will submit the Progress Reports quarterly to the RDD under the prescribed form given in Annexure III ;

(c) The PFI Head Office should forward applications for refinance to the RDD of the CBSL with the recommendation of the Regional Office – CBSL Matale for refinance after releasing loans to the borrowers by their respective branch. The refinance applications should be accompanied with the following documents : i. Application for refinance (Appendix I)1/

ii. Statement of loan disbursements (Appendix II)1/

iii. Demand Promissory Note (Appendix III)1/

iv. Delivery Letter (Appendix IV)1/

v. Letter of assignment (Appendix V)1/

vi. Disbursement Letter (Appendix VI)1/



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85. Organization and Management

ProjectManagementOffice(PMO)

(a) Facilitation of acquisition preparation and appraisal of development concepts and proposals from beneficiaries, NGOs, line agencies and the private sector for inclusion in AWPB (Annual Work Plan & Budget);

(b) Contracting the services of expertise and assistance available in line agencies, NGOs and private sector to support the establishment of sub-projects ;

(c) Establish liaison and develop dialogue between project management, provincial districts and divisional bodies, communities and beneficiaries ;

(d) Monitoring Poverty Alleviation Impact ;

(e) Support the RDD/CBSL and PFIs to disburse loans to selected borrowers in line with the accepted procedures.

6. The responsibilities of the Regional Development Department

(a) Supervision and overall monitoring of the Revolving Fund through the Matale Regional Office;

(b) Disbursement of refinance to PFIs based on the recommendation of the Regional Manager, Matale ;

(c) Maintenance of a special account with an allocation of Rs.77 million from Loan Account at the CBSL to refinance the PFIs against the loans granted under Enterprise Development Credit.

7. The responsibilities and functions of theRegionalManager,RegionalOffice,Matale of theCentral Bank

(a) Maintenance of a data base relating to sub-borrowers ;

(b) Appraisal of the refinance applications submitted by PCIs and making recommendations for the release of refinance to the Director/Regional Development ;

(c) Maintenance of the database and other management information relating to the Project for submission to the Monetary Board, Ministry of Nation Building and other institutions ;

(d) Supervision and monitoring of the credit activities undertaken by the PFIs in collaboration with the Project Management Office set up in Matale to implement the Project ;

(e) Making arrangements for the training and social mobilization of target groups with the assistance of the field officers appointed to the Project by the Project Management Office;

(f) Representing Central Bank at regional level meetings or committees relating to the Project; and

(g) Any other task or function which is necessary for the achievement of the objectives of the Project.

8. Accounts and Financial Statements

(a) Each PFI should maintain appropriate accounts and records to indicate inter-alia, sub-loan appraisal, approvals, disbursements and recoveries ;

(b) Each PFI should appoint auditors acceptable to the Central Bank to undertake in the course of the annual audit, a review of the loan and investment portfolio in general and its sub-loan operations in particular and the report of this review should be furnished to the CBSL not later than 4 months after the end of each financial year.


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8(c) PFIs are required to maintain separate accounts for the utilization of loan proceeds and refinance

operations.

9. Others

The Central Bank reserves the right to revise the terms and conditions in respect of this programme as and when necessary in concurrence with the Ministries of Finance and Nation Building and Estate Infrastructure.

Yours faithfully,



c.c. : 1. Secretary / Ministry of Finance 2. Secretary / Ministry of Nation Building and Estate Infrastructure 3. Auditor-General 4. Chief Accountant / CBSL 5. Director, Management Audit Department / CBSL 6. Regional Manager, Regional Office, Matale 7. Project Director / Matale 8. General Manager, Kandurata Development Bank 9. General Manager, Sanasa Development Bank 10. General Manager, Seylan Bank 11. General Manager, People’s Bank


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8Operating Instructions No. : RDD/CSPD/2007/05


Tel. : 2477447 / 2477472 / 2477473Fax : 2477733 / 2477734

1st October 2007

To : All Licensed Commercial Banks All Licensed Specialised Banks All Licensed Leasing Companies

Dear Sir / Madam,

CONSTRUCTION SECTOR DEVELOPMENT PROJECT (CSDP)TO ASSIST THE CONSTRUCTION AND PUBLIC WORK RELATING TO

POST-TSUNAMI RECONSTRUCTION

1. Introduction

The Government of Sri Lanka (GOSL) entered into an agreement with the Agence Francaise de Developpement (AFD) to borrow Euro Ten Million (Є 10,000,000) as principal for the implementation of activities aimed at strengthening the financial and technical capacities of private local businesses to effectively participate in construction and public works in post tsunami reconstruction. The project consists of two components i.e., Construction Sector Development project (CSDP) and financing the creation of an Advanced Construction Training Academy (ACTA). The Central Bank of Sri Lanka (CBSL) on behalf of the GOSL implements the CSDP through Participating Financial Institutions (PFIs) which satisfy the eligibility criteria agreed among the AFD, GOSL and the CBSL.

1.1 Credit under the CSDP Project will be provided through eligible PFIs to eligible sub-borrowers engaged in construction and public work in order to participate in post-tsunami reconstruction.



2.1 Role of the CBSL

The CBSL will

(i) establish a project committee which will comprise of representatives of all parties participating in the project to ensure the co-ordination and monitoring of the project;

(ii) continuously monitor the progress of granting of sub-loans and provide necessary assistance for PFIs in implementation and supervision of credit;


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8 (iii) monitor and evaluate benefits accruing to sub-borrowers with a view to evaluating the

impact of the loan scheme in relation to its planned objectives and improving its impact through the development of improved implementation procedure;

(iv) monitor and evaluating the performance of the PFIs in the project area;

(v) conduct public awareness campaigns through media about the CSDP.

2.2 Registration of sub-borrowers under the project

The Branch Manager of PFI shall prepare a complete loan registration application as per format given at Annex I. The original of this application should be sent to Regional Development Department of the CBSL through the Head Office of the respective PFI along with the recommendation of the National Construction Association of Sri Lanka (NCASL).

Before processing a loan application, sub-borrowers should have been registered with the CBSL. The Enquiry number registered in the CBSL will be crucial for identification of sub-borrower and for the purpose of refinance. All correspondence with RDD should carry this number. Branches of PFIs are advised to use this number on their ledger sheets for the purpose of identification of the sub-loan.

The branches of PFIs eligible for participation will be identified by the respective PFI.

3. Eligible PFIs and Role of the PFIs

3.1 Eligible PFIs

All licensed commercial banks, licensed specialized banks and licensed leasing companies registered with the Central Bank of Sri Lanka are eligible to receive refinance loans under the Project.

3.2 Role of the PFIs

Each PFI shall designate a senior officer as the administrator of the loan scheme at its Head Office who will be responsible for co-ordinating and supervising the PFIs’ sub-loan operations. The functions allocated to each PFI are as follows :

(i) Ensure discharging all duties and obligations required of it in terms of the Prevention of Money Laundering Act, No.5 of 2006, the Financial Transaction Reporting Act, No.6 of 2006 and the Convention for the Suppression of Terrorist Financing Act, No.25 of 2005, and in particular ensure that the Board of Directors and major shareholders (owning more than 5 per cent of the companies shares) of the sub-borrowers and the sub-borrowers themselves are not designated as terrorist persons or entities by the United Nations, the European Union or any other country to be specified by the Central Bank.


(iii) Confirm that the applicant businesses are members of the NCASL and registered by the relevant authorities and the Institute for Construction Training and Development (ICTAD).

(iv) Verify the ranking of the business by the ICTAD.

(v) Ensure that a separate ledger in respect of loans granted are maintained at a branch level under the scheme.

(vi) Ensure regular spot inspections of enterprises to determine whether the funds borrowed are used for the intended purpose and review the physical progress of sub-projects before disbursement of instalments;


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8 (vii) Ensure the availability of adequate field officers for the designated branches for inspection

and supervision of the progress of the sub loan, its utilisation and its recovery. (viii) Ensure that the branches implementing the scheme submit regular progress reports in

respect of implementation, recovery of loans, etc., to the respective Head Offices of the PFIs.

(ix) The PFI Head Office should consolidate such data and submit to the CBSL on quarterly basis.

(x) Conform with all other mandatory requirements specified in item 5.2 of the on-lending agreement.

4. Credit Scheme – Development of the construction sector

4.1 Total Fund Allocation : Sri Lanka Rupees equivalent of Euro 9 million and out of which 40% will be allocated for large construction companies who possess ICTAD Grade M1 to M3 and the balance 60% will be allocated for small and medium level construction companies who possess ICTAD Grade M4 – M10.

4.2 Purpose of the Loan : Acquisition of machinery and equipment and/or financing of working capital requirements for construction and public works to participate in post tsunami reconstruction. The financing of imports of equipment and material, and of real estate development is not eligible.

4.3 Sub-Loan Amount : The sub-loan amount by the PFI shall not exceed – the rupee equivalent of Є 250,000.

The amount granted to a business and all its associates from one or more PFIs should not exceed the rupee equivalent of Є 500,000.

4.4 Refinance : The CBSL will refinance loans disbursed by PFIs under the category 4.2 above.

4.5 Rate of Interest : 4.2 per cent per annum. (From CBSL to PFI)4.6 Repayment Period for PFIs : Less than 7 years inclusive of a grace period of one year. (Interest will be charged during the grace period).4.7 Rate of Interest for sub-loans (From PFIs to sub-borrowers) : 9 per cent per annum or any such sum below this level as

may be specified by the Central Bank. (Central Bank will specify the applicable rate for a 6 months period at the beginning of each period)

4.8 Repayment period of sub-loans: Loans will have a maturity between one, and 6 years including a grace period of a maximum of one year (interest will be charged during the grace period).

4.9 Project Period : Commencement – 1st October, 2007 Termination – 31st March, 2010

4.10 Areas of Operation : CSDP will be operated in all provinces in the Island and a recommendation with regard to sub-borrower will be obtained from the NCASL to ensure fair and equal distribution of credit facilities among provinces considering the number of construction companies in each province.


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5.1 Eligible borrowers should apply for loans on application forms designed by respective PFIs 5.2 Funds will be made available to a borrower at his request by successive disbursements and upon

proof of expenses paid by him.

6. Eligible borrower

6.1 Any privately or co-operatively owned enterprise which are proven construction and public work companies who are members of the NCASL registered with the ICTAD and the local authority and rated by the ICTAD, which are able to produce acceptable documentary evidence of such registration and rating by the relevant authority and details of projects to be undertaken by them together with the estimated and satisfactory evidence of repayment capacity. Borrowing companies should also be able to provide collateral acceptable to PFIs and abide by the undertakings set out in item 5.3 of the on-lending agreement which should be included in the sub-loan agreement the PFI enters into with the sub borrower.

7. Collateral


8. Eligible Sectors

Construction and public work sectors in all areas of post-tsunami reconstruction work

9. Eligible projects

Public work contracts in post-tsunami reconstruction undertaken by private businesses.


The cost of acquisition of machinery and equipment and working capital for the construction and public work projects eligible for financing. The financing of imports of equipment and material, and of real estate development is not eligible.

11. Release of Loan11.1 Release of loan will be made in stages on the basis of an agreed disbursement schedule and

subject to actual work progress according to the supplied estimates. The manager of the PFI branch is required to carry out an inspection of the sub-project after release of each instalment of sub-loan.

11.2 Procurement Procedure Sub borrowers should conform with the requirements with regard to procurement set out in

the undertaking given by them and specified in item 5.3 – of the on-lending agreement with regard to procurement procedures, which should also be included in the sub-loan agreement the PFI enters into with the borrower.


12.1 The bank should undertake periodic inspections of the investments financed by the PFI branches to ascertain whether the borrowers are engaged in the activities identified under the project.



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812.3 The field officer of the branch should visit the sub-projects regularly with a view to maintaining

close contact with the sub-borrowers for recovery of sub-loans. These visits are intended to verify the progress of construction activities and to determine whether the borrowers continue to be in possession of items financed by the PFI.


13.1 Inquiry Number

Refinance is released only for the sub-borrowers registered and assigned with an inquiry number by the CBSL.

13.2 RefinanceApplications

(a) Applications for refinance should be submitted by the Head Office of the PFI to the Regional Development Department of the Central Bank of Sri Lanka. The refinance application should be accompanied by the following documents :

(i) Application for Refinance (Appendix I) (ii) Statement of Loan Disbursements (Appendix II) (iii) Demand Promissory Note with relevant Stamp Duty (Appendix III) (iv) Delivery Letter (Appendix IV) (v) Form of assignment by way of pledge to CBSL (Appendix V) (vi) Disbursement letter (Appendix VI) (vii) Confirmation of the Compliance Officer (Appendix VII) (viii) A copy of the Appraisal Report (ix) Confirmation letter in terms of Clause 3.2 (iii) and (iv)

(b) Upon approval of the refinance application, the Regional Development Department will sanction the refinance application and release refinance on first come first served basis.

(c) Applications for refinance of subsequent disbursements of sub-loan instalments should be accompanied by all the above mentioned documents and inspection report as per Clause 13 of the Operating Instructions in place of Appraisal Report.

(d) Refinance claims should be submitted to RDD within one month of the date of disbursement.

(e) RDD undertakes to ensure that refinance payment is made within one week of the receipt of the refinance application provided that all documents referred to (a) above are in order.

14.RefinanceRepaymenttotheCBSL

(1) Capital and interest payments on refinance loan will be payable half yearly by the PFIs to the CBSL on 30th June and 31st December of each year.

(2) The first recovery falls due on six months after the granting of refinance or expiry of grace period.

Yours faithfully,




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8Annex I

REGISTRATION NO : …………………………

CONSTRUCTION SECTOR DEVELOPMENT PROJECT (CSDP)TO ASSIST THE CONSTRUCTION AND PUBLIC WORK RELATING TO


LOAN REGISTRATION APPLICATION

1) Name of PFI : …………………………………………………………………………….

2) Name of the Branch : …………………………………………………………………………….

3) Address of the Branch : ……………………………………………………….……………………

……………………………………………………….……………………

4) Telephone Nos./Fax Nos. : ……………………………………………………….……………………

5) Status of Applicant/s : Individual Partnership Corporate

6) Name and Address of Applicant/Partner/Director :

Name Address NIC Number (i) (ii)(iii)

7) Applicant’s ICTAD registration number and the ranking number : …………………………………………..

8) Complete Address of the Project Site and Location :

…………………………………………………………………………………………………………………

…………………………………………………………………………………………………………………

9) Type of sub-project :

1. Buildings 4. Digging & Reclamation

2. Highways 5. Bridge Construction

3. Water Supply & Drainage 6. Others (pl. specify)

10) Brief description of the Project to be financed under CSDP :

…………………………………………………………………………………………………………………

…………………………………………………………………………………………………………………


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811) Whether the applicant has any associate companies which have obtained for credit facilities under CSDP

…………………………………………………………………………………………………………………

12) Whether the PFI has followed the due diligence procedures in identification of the applicant in terms of the convention on the Suppression of Terrorist Financing Act, No. 25 of 2005 and the Prevention of Money Laundering Act, No. 5 of 2006 :

…………………………………………………………………………………………………………………

13) Whether the applicant, the Board of Directors and major holders (owning over 5%) of the company are not identified as terrorist persons or entity by the United Nations, the Europian Union or any other country to be specified by the Central Bank:

…………………………………………………………………………………………………………………

14) If the applicant is partnership or corporate entity, indicate the names of major shareholders owning over 5% and the senior management of the company :

Name Address NIC Number (i) (ii)(iii) (iv) (v) (vi)(vii)

15) Estimated cost of the Project : Rs. ……………………………………………..

16) Amount recommended/approved by the PFI : Rs. ……………………………………………..

Date : ……………. ……………………………………………. Signature of Branch Manager


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8APPENDIX IRDD/CSDP/2007/5


(Under Operating Instructions No. RDD/CSDP/2007/5 dated 1st October 2007)

Address:

Date:

APPLICATION FOR REFINANCE UNDER CONSTRUCTION SECTOR DEVELOPMENTPROJECT TO ASSIST THE CONSTRUCTION AND PUBLIC WORK RELATING TO



Gentlemen

We, ..............................................................................................................................................................................

a licensed commercial bank / licensed specialised bank / registered leasing establishment, and an authenticated print of whose constitution has already been/is herewith submitted to you, do hereby apply for the grant of a loan of Rupees ...................................................................................................................................................................

................................................................................................................................ (Rs. …………………………….)under the above Refinance Scheme.

2. In making this application, we agree to comply with the terms and conditions stipulated in your Operating Instructions No. RDD/CSDP/2007/5 dated 1st October 2007.

3. As required by the aforementioned Operating Instructions and in compliance therewith, we forward herewith a statement, in duplicate, of loans granted not earlier than one month immediately preceding the date of this application by us under the Refinance Scheme. We certify that the loans mentioned in the statement have not been reflected in any previous statement in support of an application for a refinance loan.

4. We hereby expressly agree to repay the monies disbursed to us in terms of this application to you in ………….. (number of instalments) …………………………. half yearly instalments each of Rs. ………………………………. the first of which shall be payable on …………… day of ………………………… 200…… .


SignatureName and description of the Authorized Officer(s)of the Credit InstitutionManager, Refinance Unit.


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8

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8APPENDIX IIIRDD/CSDP/2007/5



Colombo.

Date:


Rs. ………………………………………



......................................................................................................................................................................................

hereby promise to pay to the CENTRAL BANK OF SRI LANKA or ORDER at COLOMBO the sum of

Rupees ..........................................................................................................................................................................

............................................................................................................................................. (Rs. ……………………)

for value received, with interest thereon, at the rate of 4.2% per annum from the date hereof.(Repayment schedule is given in the Appendix II attached)


1. ……………………………………………………………… ( Stamp ) 2. ………………………………………… ( Signature of the Authorized Officer )

WITNESSES :

1. ……………………………………………

2. ……………………………………………


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8APPENDIX IVRDD/CSDP/2007/5



Colombo.

Date:

DELIVERY NOTE

To : THE CENTRAL BANK OF SRI LANKA


................................................................................................................................ (Rs. ……………………………)

with the object of granting re-finance to us in respect of lending operations carried out by us under the Refinance Scheme (Construction Sector Development Project to assist the Construction and Public Work relating to Post-Tsunami Reconstruction) referred to in your Operating Instructions No. RDD/CSDP/2007/05 dated 1st October 2007 we herewith deliver to you our Promissory Note in your favour for Rs. .......................................



For (Name of the Bank / Financial Institution) :REFINANCE UNIT :HEAD OFFICE :

1. …………………………………………



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8APPENDIX VRDD/CSDP/2007/5



FORM OF ASSIGNMENT BY WAY OF PLEDGE TO THE MONETARY BOARD OFTHE CENTRAL BANK OF SRI LANKA

UNDER SECTION 88A OF THE MONETARY LAW ACT*

Colombo

Date:


......................................................................................................................................................................................

in terms of Section 88A of the Monetary Law Act do hereby assign to the Central Bank of Sri Lanka, by way of pledge, the debit owing to us, particulars whereof are setforth in the Schedule hereto, as security/further

security for the repayment to the Central Bank of a loan of Rupees ..........................................................................

.................................................................................................................................... (Rs. …………………………)

granted to us by the Bank repayable with interest at 4.2 per cent per annum.

SCHEDULE

Amount of Debt(Rs.)


…………………………………………… ( Signature of the Authorized Officer )


* To be used by Licensed Commercial Banks and Licensed Specialised Banks only.


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8APPENDIX VI

DISBURSEMENT LETTER

(To Operating Instructions No. RDD/CSDP/2007/5 dated 1st October 2007)

Bank Name : …………………………Bank Code No. : …………………………Branch Name : …………………………Branch Code No. : …………………………Serial No. of the Loan : …………………………Date : …………………………Disbursement : …………………………

1 2 3 4 5 6 7 8 9 10

CONSTRUCTION SECTOR DEVELOPMENT PROJECT (CSDP) TO ASSIST CONSTRUCTION AND PUBLIC WORK RELATING TO POST-TSUNAMI RECONSTRUCTION

Enquiry Number :

1. Particulars of the Borrower : 1.1 Name of the Borrower : 1.2 Address of the Borrower :

2. Particulars of the Loan : 2.1 Purpose of the Loan : 2.2 Location of the Sub-project : 2.3 Total amount of loan sanctioned : originally Rs. Subsequent enhancement of loan for cost overruns Rs. __________ Total Rs. ========= 2.4 Date of original sanction of loan : Date of sanction of enhancement of loan :

2.5 Repayment Programme for the instalment for which refinance was applied for :

Date : ………… Amount (Rs.) : ……………………… 2.6 Rate of interest

3. Status of Loan : 3.1 Amount released previously and refinance claimed from the CBSL Rs. 3.2 Amount now released and for which refinance is sought Rs. ___________ Total Rs. ==========

I certify that the particulars given above are true and correct.

Signature of Branch ManagerDate :

Name of Branch Manager

• Please indicate whether it is 1st, 2nd or any other instalment by putting a cross ( X ) in the appropriate box.


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8APPENDIX VIIRDD/CSDP/2007/5

REFINANCE APPLICATION NO. : ………..


To : THE CENTRAL BANK OF SRI LANKA

CONSTRUCTION SECTOR DEVELOPMENT PROJECT (CSDP)TO ASSIST CONSTRUCTION AND PUBLIC WORK RELATING TO


We, ...............................................................................................................................................................................( Name and address of PFI )

......................................................................................................................................................................................

being a Participatory Financial Institution under the Construction Sector Development Project confirm that

(a) the sub-borrower ................................................................................................................................................( Name and address of sub-borrower )

............................................................................................................................................................................

utilizes the credit facility granted under CSDP for the intended purposes in terms of the Operating Instructions No. RDD/CSDP/2007/05 dated 1st October 2007.

(b) due diligence procedures have been followed in identification of the sub-borrower in terms of the Convention on the Suppression of Terrorist Financing Act, No.25 of 2005, the Prevention of Money Laundering Act, No.5 of 2006 and Financial Transactions Reporting Act, No.6 of 2006.

(c) the Board of Directors and major shareholders (owing over 5%) of the sub-borrower are not included as terrorist persons or entity in the consolidated lists established and maintained by the 1267 Committee of the United Nations, Consolidated Lists of Persons, Groups and Entities subject to European Union Financial Sanctions maintained by the European Union or any other country to be specified by the Central Bank.

…………………………………………………… ( Name & Signature of Compliance Officer )

Date : …………………


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8Operating Instructions No. : RDD/CSPD/2007/05 (Amendment)


17th December 2007

To : All Licensed Commercial Banks All Licensed Specialised Banks All Licensed Leasing Companies

Dear Sir / Madam,

CONSTRUCTION SECTOR DEVELOPMENT PROJECT (CSPD)TO ASSIST THE CONSTRUCTION AND PUBLIC WORK RELATING TO


Further to our Operating Instructions No. RDD/CSDP/2007/05 dated 1st October, 2007 on Construction Sector Development Project.

Please note that Amendment dated 11th December 2007 to the above Operating Instructions is hereby withdrawn and replaced with the following amendments.

It has been decided to amend the Operating Instructions of the Construction Sector Development Project (CSDP) consequent to the request made by the AFD and decisions taken at the CSDP Committee meetings held on 16th November and 27th November 2007.

Accordingly, the respective sections/sub-sections of the Operating Instructions are replaced with the following new sections/sub-sections. (The new sections/amendments are highlighted).

2.1 Role of the CBSL

The CBSL will

(i) establish a project committee which will comprise of representatives of all parties participating in the project to ensure the co-ordination and monitoring of the project;

(ii) monitor the selection of sub-loans in full compliance with the criteria of the credit scheme set out in Section 4 below;

(iii) continuously monitor the progress of granting of sub-loans and provide necessary assistance for PFIs in implementation and supervision of credit;

(iv) monitor and evaluate benefits accruing to sub-borrowers with a view to evaluating the impact of the loan scheme in relation to its planned objectives and improving its impact through the development of improved implementation procedure;

(iv) monitor and evaluating the performance of the PFIs in the project area;

(v) conduct public awareness campaigns through media about the CSDP.


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8 2.2 Registration of sub-borrowers under the project

The Branch Manager of PFI shall prepare a complete loan registration application as per format given at Annex I. The original of this application should be sent to Regional Development Department of the CBSL through the Head Office of the respective PFI together with the following supporting documents:

(i) AcertificateissuedbytheNationalConstructionAssociationofSriLankaconfirmingthatthesub-borrowerisamemberoftheAssociation.(Specimencertificateisgivenat Annex II).

(ii) AcopyoftheLetterofawardissuedbyaGovernmentAuthorityoraConfirmationletter issued by the Divisional Secretary of the respective area to prove that the construction activity to be financedunderCSDP is related to post-tsunamireconstruction work.

(iii) A statement of estimated cost of the project and schedule of expenditure to be financedunderCSDP.

Before processing a loan application, sub-borrowers should have been registered with the CBSL. The Enquiry number registered in the CBSL will be crucial for identification of sub-borrower and for the purpose of refinance. All correspondence with RDD should carry this number. Branches of PFIs are advised to use this number on their ledger sheets for the purpose of identification of the sub-loan.

The branches of PFIs eligible for participation will be identified by the respective PFI.

4.7 Rate of Interest for sub-loans (From PFIs to sub-borrowers) : AWDR plus 3%, capped at 9% per annum maximum.

4.10 Areas of Operation : CSDP will be operated in all provinces in the Island.

However, in order to ensure that construction business located in non-urban areas of the country also benefit from the project, 50% of the total amount (i.e., Euro 4.5 million) will be allocated to the construc-tioncompanieswhoseHeadOfficesarelocatedoutsidethe Colombo District.

6. Eligible borrower

6.1 Any privately or corporately owned enterprise which are proven construction and public work companies who are members of the National Construction Association of Sri Lanka, registered with the ICTAD prior to 30th September, 2007 and the local authority and rated by the ICTAD, which are able to produce acceptable documentary evidence of such registration and rating by the relevant authority and details of projects to be undertaken by them together with the estimated costs and satisfactory evidence of repayment capacity. Borrowing companies should also be able to provide collateral acceptable to PFIs and abide by the undertakings set out in item 5.3 of the on-lending agreement which should be included in the sub-loan agreement the PFI enters into with the sub borrower.


The cost of acquisition of machinery and equipment and working capital for the construction and public work projects eligible for financing. The financing of imports of equipment and material, and of real estate development is not eligible. However, sub-borrower can import machinery and equipment which are necessary for his construction work.


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813.2 RefinanceApplications

(a) Applications for refinance should be submitted by the Head Office of the PFI to the Regional Development Department of the Central Bank of Sri Lanka. The refinance application should be accompanied by the following documents :

(i) Application for Refinance (Appendix I)1/

(ii) Statement of Loan Disbursements (Appendix II)1/

(iii) Demand Promissory Note with relevant Stamp Duty (Appendix III)1/

(iv) Delivery Letter (Appendix IV)1/

(v) Form of assignment by way of pledge to CBSL (Appendix V)1/

(vi) Disbursement Letter (Appendix VI)1/

(vii) Confirmation of the Compliance Officer (Appendix VII)1/

(viii) A copy of the Appraisal Report (ix) Confirmation Letter in terms of Clause 3.2 (iii) and (iv)

In addition to the above documents, Registered Leasing Companies should submit aDeclarationofTrustwiththeirrefinanceapplications.

Yours faithfully,





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Regional Development DepartmentCentral Bank of Sri LankaNo: 30, Janadhipathi Mawatha,Colombo 01.

21 April 2008Tel. : 2477447 / 2477472Fax : 2477734

To : General Manager / CEO Bank of Ceylon Wayamba Development Bank People’s Bank Sabaragamuwa Development Bank Seylan Bank Uva Development Bank Sampath Bank Ruhuna Development Bank Commercial Bank Kandurata Development Bank Hatton National Bank Rajarata Development Bank Sanasa Development Bank Lankaputhra Development Bank

AGRO LIVESTOCK DEVELOPMENT LOAN SCHEME (ALDL)

1.1 Introduction

Agro Livestock Development Loan Scheme (ALDL) has been introduced with the objective of provisioning of capital to improve the income generating avenues of small farmers and others who are primarily engaged in dairy farming activities in the agricultural sector. A greater potential is available to increase the levels of income and productivity of dairy industries and other agricultural activities provided that quality inputs and marketing services could be procured at easy terms. Accordingly, ALDL scheme has been introduced by the Government budget - 2008 to empower small farmers with financing their dairy development projects on the one hand and assist the liquid milk processing and agricultural crop processing industries on the other.

The expected amount to be disbursed among the target beneficiaries under the scheme is Rs.5,000 million. The loans will be disbursed through the Participatory Financial Institutions (PFIs). Since the loans would be provided by PFIs out of their own resources, PFIs are required to select/identify suitable borrowers for financing. The Government will pay the PFIs with an interest subsidy payment on the outstanding balance to offset their interest losses as follows:

(a) For small dairy projects – 5% per annum (b) Milk and crop processing industries – 5% per annum

1.2 Objectives of the Project

• Formulate a loan scheme to facilitate the dairy farmers to purchase cows/heifers, chilling equipment, services and construction of cattle sheds for enhancement of liquid milk production.

• Generate new employment opportunities in the agriculture sector and related fields.

• Grant medium term loans (maximum of 60 months) for milk and crop processing activities.

• Open avenues for dairy farmers to adopt new technology, techniques to make the industry sustainable and cost effective.


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8 • Provide opportunities for dairy farmers and farmers engaged in crop cultivation to move

away from subsistent level farming to commercial level farming enabling them to become entrepreneurs.

• Improve the productivity in the agriculture sector as a whole.

2. Implementation Mechanism

Development Finance Department of Ministry of Finance and Planning – Policy and Progress monitoring and provision of

interest subsidies to PFIs through Government budget

Central Bank of Sri Lanka (CBSL) – Issue Operating Instructions and make payments to PFIs out of the funds available under Government budget through DFD/MOFP

3. Project Duration

Commencement : 1st March 2008 Termination : 28th February, 2011

In the event if the PFIs have disbursed Rs.5,000 million, then the loan scheme will cease to function.

4. Area of Operation

All island.

5. Participatory Financial Institutions (PFIs)

Bank of Ceylon Uva Development BankPeoples Bank Lankaputhra Development BankRuhunu Development Bank Sanasa Development BankRajarata Development Bank Hatton National BankWayamba Development Bank Commercial BankSabaragamuwa Development Bank Sampath BankKandurata Development Bank Seylan Bank

Development Finance Department of the MOF will involve in the project on behalf of the government while the Regional Development Department will issue the Operating Instructions on behalf of the CBSL.

6. Eligible Economic Activities for Loans

Small farmers and persons who are engaged in dairy farming activities and require seed and working capital under the following categories, are eligible for obtaining loans from PFIs.

• Purchase of cows, heifers, equipment for the development of dairy projects and construction of cattle sheds.

• Processing of liquid milk and production of milk based products.

• Agro-based and agro-related processing industries.

• Enhancing storage facilities in the processing industry.

7. Financial Feasibility

Branch Managers of PFIs are required to ensure the financial feasibility of the Project before financing and, therefore, they should:


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8• Determine the volume of loan and the suitability of the applicant based on his/her repayment

capacity.

• Ensure the sufficiency of income generation and increment of net income to pay the installment of loan with interest.

• Prepare the budget estimates and cash flow statements for all sub projects for which loans are applied and they should be affixed to the loan applications.

8. Compliance with the Rules of Environmental Conservation

It is a responsibility of the respective bank to obtain an environmental feasibility report from the relevant authority when necessary. In such an event environmental feasibility report relevant to the project should be affixed to the loan application.

9. Security Requirements

PFIs are free to obtain suitable collateral to minimize the risk involved in disbursement of loans as determined by the PFIs.

10. Loan Volume

It is expected to disburse a total volume of Rs.5,000 million through the banking system as loans for small farmers and processing industries during the period.

Maximum amount per borrower

(a) Small dairy farmer – Rs.400,000(b) Processing industry – Rs.300 million

11. Loan Financing and Rate of Interest

• The volume of finance required for implementing the project is Rs.5,000 million and the total amount should be procured by respective PFIs.

• On-lending interest rate and rates applicable for interest subsidies from the Government are given below:

Activity MaximumLoan Amount

On-lendingRate

InterestSubsidy

(a) Small Dairy projects Rs.400,000/- 12% 5%

(b) Liquid milk processing and Agriculture crop processing industries

Rs.300 million 14% 5%

12. Period of Loan Repayments

Maximum time period for loan repayments will be 5 years inclusive of grace period, if required.

13. Grace Period and Rescheduling

Grace period, if required, should be determined by the PFI after consulting the borrower on the nature of the project. However, the loan repayment period should not exceed 5 years. If any requirement arises to reschedule the loan for a period exceeding 5 years, prior approval has to be obtained from the MOFP through the CBSL.


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FunctionsofHeadOffices

The loan scheme should be administered under a senior staff officer and should give priority.

• A list of branches which grants loans should be forwarded to the CBSL.

• All loan applications (Form 1) should be forwarded to the CBSL for registration.

• Preparation of targets for branches in the districts and monthly progress reports and forwarding them to CBSL should be done by the Head Office of the PFI.

• It is the responsibility of the Head Office of the PFI to forward duly completed progress reports on loan disbursement and recoveries on time.

15. Functions of Bank Branches

• Manager of the bank branch should carryout a prior inspection after the receipt of an application for a loan and ensure that the project is satisfied with the following aspects:

Financial feasibility Environmental effectTechnical feasibility Project sustainability

• Details of the loan application (Form 1) should be forwarded to the Head Office of the PFI.

• Cash-flow statements should be prepared in respect of each project.

• A Register has to be maintained to depict the steps in progress of loan applications received by the branch, i.e., number of applications received, applications under examination, applications forwarded to the Head Office for registration and loan applications approved etc.

• Post supervision has to be continued for building up a close relationship with the beneficiaries from the date of loan disbursements.

• Information pertaining to each loan, whether loan repayments are in order or distorted, should be submitted monthly to the CBSL through the Head Office of the PFI.

16. Functions of the CBSL

• All applications received from PFIs should be registered and the registration number should be informed to the respective branches through their Head Offices.

• Interest subsidy amounts, as indicated at paragraph 11, payable to the PFIs on behalf of the Government should be calculated and forwarded to the MOFP for payment.

• Recovery reports should be prepared taking all the loans granted into accounts and loans with arrears of 12 monthly installments or 2 six-month instalments should be classified as ‘past due’ and such loans should be removed from the list of eligible loans for the payment of additional interest subsidy.

• Requests by PFIs for reschedule of loans should be investigated and submitted to the MOFP for approval. For such loans interest subsidy payment will be made only after obtaining approval of the MOFP.

• Preparation of quarterly progress reports.

• Conducting of awareness programmes for the beneficiaries/bank staff/Government officials island wide.

• Post supervision of project, where necessary.


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817. Functions of the MOFP

• Obtain adequate provision annually under the Government budget for payment of interest subsidy to PFIs.

• Ensure timely payment of interest subsidy to PFIs on the recommendation of the CBSL.

• Monitor and review the progress of the Scheme.

18. Loan Disbursement and Reporting of Information

• After the prior inspection for a loan application, if the Branch Manager is satisfied, he should forward Form 1 to the CBSL through the Head Office for registration either by e-mail or by post. Registration numbers for such applications will be given by the CBSL to the PFI.

• Loans will be disbursed after the receipt of registration number. Loan disbursement should be reported to the CBSL. A comprehensive data base will be maintained by the CBSL in this regard. This information is essential for analyzing progress, calculating interest subsidy repayments etc.

• Every PFI should inform the details of loan disbursements within 3 months after the registration of every loan application, and, if failed to do so, the details stored under that registration number will be automatically deleted in the system assuming that no loan has been granted under that registration number.

• Information on loan recoveries from the date of loan disbursement should be reported to the CBSL by the PFIs quarterly.

• Officers of the CBSL have direct access to field inspections/visits in the field as and when necessary.

• Regular progress reports on the scheme to be submitted to Department of Development Finance of the Ministry of Finance and Planning and Central Bank of Sri Lanka, monthly.

• Preparation of schedules for the payments of interest subsidy will be made by the CBSL and based on such recommendations interest subsidy payment will be made by the MOFP to the respective PFIs.

• Interest subsidy payment will be made biannually.

Yours faithfully,



c.c. Director-General Development Finance Department Ministry of Finance and Planning Colombo 1.


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8FORM1(tobefilledbyBanks)

AGRO LIVESTOCK DEVELOPMENT LOAN SCHEME

LOAN REGISTRATION APPLICATION

1) Name of Bank : …………………………………………………………………………….2) Name of Bank Branch : …………………………………………………………………………….3) Address of Bank Branch : ……………………………………………………….…………………… ……………………………………………………….……………………4) Telephone Nos./Fax Nos. : ……………………………………………………….……………………

5) Status of Applicant/s : Individual Partnership Corporate

6) Name and Address of Applicant/Partner/Director :

Name ofApplicant / Partner / Director

Address NIC No. / Business Registration No.

(i) (ii)(iii)

7) Purpose of the Proposed Project (please describe with details) :

…………………………………………………………………………………………………………………

…………………………………………………………………………………………………………………

8) Address of the Project Site Location :

…………………………………………………………………………………………………………………

…………………………………………………………………………………………………………………

9) Office / Resident Address of the Applicant :

…………………………………………………………………………………………………………………

…………………………………………………………………………………………………………………

10) Type of Project :

1. Livestock Development

2. Liquid Milk Processing

3. Agro Processing Industry

11) Amount requested by the Applicant (as loan) : Rs. …………………………………………………………

12) Total estimated Project Cost : Rs. …………………………………………………………

13) Applicant’s contribution (equity) : Rs. …………………………………………………………

14) Loan amount (to be approved) : Rs. …………………………………………………………

Date : ……………. ……………………………………………. Signature of Branch Manager


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8Operating Instructions No. : RDD/NCRCS/2008/03Ref. : 32/12/02/002/002

Regional Development DepartmentCentral Bank of Sri LankaNo: 30, Janadhipathi Mawatha,Colombo 01.

21st September 2008To : General Manager / CEO Bank of Ceylon Wayamba Development Bank People’s Bank Sabaragamuwa Development Bank Hatton National Bank Uva Development Bank Sampath Bank Ruhuna Development Bank Commercial Bank Kandurata Development Bank Seylan Bank Rajarata Development Bank Sanasa Development Bank Lankaputhra Development Bank

Dear Sir / Madam,

RECOMMENDATION OF INTEREST SUBSIDY UNDERNEW COMPREHENSIVE RURAL CREDIT SCHEME (NCRCS) – 2008/09 MAHA

1. Further to our Operating Instructions No. RCD/NCRCS/01/2001 dated 2nd May 2001 on the above, we wish to inform you that the scheme will be continued during the cultivation season of 2008/09 Maha, subject to the following terms and conditions:

1.1 The Government will continue the provision of interest subsidy to lending banks for loans granted out of their own resources to farmers for cultivation of paddy and other subsidiary food crops and pre and post cultivation activities such as producing seeds and planting materials, and to buyers for purchasing agricultural produce, under Forward Sales Contracts.

1.2 The interest subsidy applicable for loans granted for the above purposes has been revised with effect from July 2008 as follows:

Purpose Beneficiary On-lending Rate

GOSL Interest subsidy

Commission fee allowed to be

charged

Repayment period

(a) Cultivation of agricultural crops Small farmers 12% p.a. 8% p.a. – 270 days

(b) Production of seeds and plant material

Seed farmers and Companies 12% p.a. 8% p.a. – 270 days

(c) Purchase of agricultural commodit ies under Forward Sales Contracts (FSCs)*

Commodity buyers and Companies

12% p.a. 6% p.a.

Not exceeding 2% p.a.

(Commission should be charged at the point of recovery)

180 days for paddy.

270 days for other crops

* The first loan should be settled by the borrower prior to obtaining the second loan for the next season


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81.3 The interest subsidy will be made available from the Government in two installments. In order

to qualify for the interest subsidy, Participating Financial Institutions (PFIs) are required to grant loans to both farmers and commodity buyers who entered into Forward Sales Contracts with the farmers.

1.4 The Government has granted approval to increase the upper limit of purchasing loans for buyers under the NCRCS to Rs.50 million with effect from 2005 Yala, subject to signing of Forward Sales Contracts with the farmers at the beginning of the cultivation. Accordingly, the PFIs are requested to furnish with information on such arrangements made under Forward Sales Contracts to the CBSL on format RDD/NCRCS/FSC/1 on or before 31st December 2008, for registration.

2. Accordingly, all applications for interest subsidy payable by the Government in respect of loans granted for the above purposes at 1.2 (a) and (b) during Maha 2008/09 along with the diskette(s) should reach the Director, Regional Development Department, Central Bank of Sri Lanka, No. 30, Janadhipathi Mawatha, Colombo 1, through the Banks Head Office, on or before 15th February 2009. However, the PFIs are permitted to submit the applications for interest subsidy in respect of purchasing loans [purpose at 1.2 (c)] under Forward Sale Contracts up to 30th April 2009.

3. In respect of FSC arrangements, PFI branches are responsible for conducting of preparatory meetings with farmers and buyers who wish to enter into FSCs, at the beginning of cultivation. Once the parties enter into contracts, PFI should certify the FSCs and keep the PFI’s copy with the relevant Branch Manager. PFI branch should inform the CBSL the particulars of FSC, for registration (Form No. RDD/NCRCS/FSC). In order to cover the cost of above arrangements, PFIs are eligible to charge a commission on FSC arrangement not exceeding 2 percent per annum from the buyers.

4. Further the Government has granted approval to enhance the loan upper limit for the buyers who maintain good track records in the performance under Forward Sales Contracts for 5 consecutive cultivation seasons on case by case basis under the supervision of the CBSL. Therefore, the PFIs are required to furnish with details of buyers who require over 50 million to the CBSL for consideration. However, the CBSL will not recommend interest subsidy for purchasing loans if it is found that PFIs have violated the above terms and conditions.

5. In order to speed up the data processing activities in respect of interest subsidy claims, the PFI branches are requested to furnish the above information with electronic softcopies in MS-EXCEL spreadsheets, along with the documents signed (Hard Copies) through the Branch Managers. Head Offices of the PFIs are requested to e-mail such data files to [email protected]

5.1 The PFIs are required to use the following formats to claim interest subsidy from the CBSL:

(i) RDD/NCRCS/IS/1 for cultivation loans.

(ii) RDD/NCRCS/FSC/2 for purchasing loans under Forward Sales Contracts.

6. In order to meet the cost of cultivation in maize cultivation, the scale of finance determined under the NCRCS has been increased up to Rs.25,000/- per acre with effect from 20.09.2009 Maha season. A copy of the revised Scale of Finance (per acre) for all crops is annexed herewith (Annex 1) enabling the PFIs to decide the maximum loan amount for the respective crops. The PFIs are requested to take all prudential steps to ensure that the loans are utilized for the purposes for which they have been sanctioned. Further Sugar Cane, Betel and Ginger have been admitted as eligible crops under NCRCS giving the farmers 365 days for repayment.


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87. The scheme remains unchanged in all other aspects as indicated in our Operating Instructions

No. RDD/NCRCS/01/2001 dated 2nd May 2001.

8. You are kindly requested to bring these instructions to the notice of all your Branch Managers and District/Regional/Head Office Managers for compliance.

Yours faithfully,



cc: 1. Secretary / Ministry of Finance and Planning 2. Secretary / Ministry of Agriculture Livestock, Land & Irrigation 3. Director-General / Development Finance Dept. (DFD), Ministry of Finance & Planning 4. Director / Management Audit Department, Central Bank of Sri Lanka 5. Regional Managers / CBSL – Anuradhapura, Matale & Matara.

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