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Regulatory framework
Key insurance policies
What are the principal governmental and regulatory insurance policies that govern the banking sector?
Banks in Sri Lanka are established beneath the Banking Act and require Financial Board approval. There isn’t a distinction between international and native banks. Licences are issued to each business banks (LCBs) and specialised (or financial savings or deposit) banks (LSBs).
Banks should both be public corporations or a department workplace of a international financial institution registered beneath the Corporations Act.
There are a number of banks owned by the federal government, partly to deal with the difficulty of most privately owned banks being concentrated within the capital and partly for useful resource allocation into precedence sectors (eg, agriculture, small business and regional growth).
Financial institution supervision by the Banking Supervision Division of the Central Financial institution of Sri Lanka (CBSL) is predicated on requirements set by the Basel Committee for Banking Supervision. At the moment, the Basel III tips referring to capital, leverage and liquidity are relevant.
Banks are categorised based mostly on the CBSL’s Inside Supervisory Ranking system of banks. This takes into consideration quantitative measures (eg, capital adequacy, asset high quality, administration, earnings and liquidity) and qualitative measures (eg, evaluation of banks’ compliance with statutory or regulatory necessities, inner controls and the requirements of company governance).
Current efforts by the Monetary Intelligence Unit of the CBSL to fight cash laundering have resulted in Sri Lanka being delisted from the Monetary Motion Process Drive (FATF) Gray Record and Sri Lanka is now not monitored by the FATF.
Sri Lankan banks have not too long ago launched digital services that embrace on-line banking, fee gateways and different cashless transacting varieties. Presently, Sri Lanka’s digital legal guidelines are within the formative phases.
Because the enactment of the International Trade Act and rules, banks have been given the authority and accountability to implement international exchange-related legislation. The provisions of the International Trade Act and rules are directed at banks, and so banks are required to make sure compliance.
Regulated establishments
What are the defining traits of a financial institution to be caught by the banking legal guidelines and rules? Is non-bank fintech regulated in another way?
Banks are regulated beneath the Banking Act. The important thing options recognized are:
- receiving funds from the general public;
- acceptance of cash deposits payable upon demand (by cheque, draft, order or in any other case); and
- use of such funds for advances, investments or every other operation both authorised by legislation or by customary banking practices.
There are numerous legal guidelines and rules overlaying each the receiving of funds from the general public.
All fintech operations should adjust to some tips which can be additionally relevant to banks on storage of knowledge, and so on, however non-bank fintechs should not regulated beneath the Banking Act as they don’t settle for deposits. All banks should adjust to minimal capital necessities.
Do the principles fluctuate relying on the scale or complexity of the banking establishment?
No.
Main and secondary laws
Summarise the first statutes and rules that govern the banking business.
The Banking Act and the Financial Regulation Act are the first statutes. The CBSL additionally points instructions and circulars beneath these statutes. The instructions specify ceilings on shareholdings and particular licensing processes.
The Cost and Settlement Programs Act empowers CBSL’s Funds and Settlements Division to manage and supervise funds, clearing and settlement programs, and prescribe related insurance policies.
Banks are included or registered beneath the Corporations Act. The legislation additionally governs minority shareholders’ pursuits.
The International Trade Act and rules regulate international currency-related issues.
The Monetary Transactions Reporting Act, the Prevention of Terrorism (Momentary Provisions) Act, the Prevention of Cash Laundering Act and the Conference on the Suppression of Terrorist Financing Act regulate the anti-money laundering and countering the financing of terrorism regimes.
A cybersecurity and knowledge privateness invoice was proposed in 2019 and is at the moment within the technique of being finalised earlier than it’s put to Parliament for enactment.
Regulatory authorities
Which regulatory authorities are primarily chargeable for overseeing banks?
The Financial Board is the first regulator of all banks, because it points all licences. The CBSL’s varied divisions handle the supervision of banks.
The CBSL’s Financial institution Supervision Division is the important thing supervisor of banks. Cost, clearing and settlement is overseen by the Funds and Settlement Division.
Banks listed on the Colombo Inventory Trade (CSE) should adjust to the CSE itemizing guidelines, and are topic to regulation by the Securities and Trade Fee of Sri Lanka.
Authorities deposit insurance coverage
Describe the extent to which deposits are insured by the federal government. Describe the extent to which the federal government has taken an possession curiosity within the banking sector and intends to keep up, enhance or lower that curiosity.
With impact from 1 October 2010, the CBSL requires all LCBs, LSBs and registered finance corporations to hitch the Sri Lanka Deposit Insurance coverage and Liquidity Help Scheme.
Beneath the Sri Lanka Deposit Insurance coverage Scheme Laws, depositors will probably be compensated as much as 600,000 rupees per depositor if a licence is suspended or cancelled by the Financial Board.
Deposits insured beneath this scheme embrace demand, time and financial savings deposit liabilities of member establishments, and exclude all borrowing devices.
The banking sector in Sri Lanka consists of home, international and state-owned banks. A number of of the main and largest banks in Sri Lanka are authorities owned or have authorities participation. It’s unlikely that the federal government will divest itself of the shares in such banks within the close to future.
Transactions between associates
Which authorized and regulatory limitations apply to transactions between a financial institution and its associates? What constitutes an ‘affiliate’ for this goal? Briefly describe the vary of permissible and prohibited actions for monetary establishments and whether or not there have been any adjustments to how these actions are categorised.
Associates are known as associated events beneath Sri Lankan legislation.
Part 3(7) of the Banking Act Route No. 11 of 2007 (for LCBs) and the Banking Act Route No. 12 of 2007 (for LSBs) requires the financial institution’s board to keep away from any conflicts of curiosity that will come up from any transaction of the financial institution with associated events and to make sure that ‘extra beneficial therapy’ just isn’t given to them.
Associated events are:
- any of the financial institution’s subsidiary corporations;
- any of the financial institution’s affiliate corporations;
- any of the administrators of the financial institution;
- any of the financial institution’s key administration personnel;
- a detailed relation of any of the financial institution’s administrators or key administration personnel;
- a shareholder that owns a fabric curiosity within the financial institution; and
- a priority during which any of the financial institution’s administrators or a detailed relation of any of the financial institution’s administrators, or any of its materials shareholders, has a considerable curiosity.
Varieties of transactions lined embrace:
- the grant of any kind of lodging, as outlined within the instructions on the utmost quantity of lodging;
- the creation of any liabilities of the financial institution within the type of deposits, borrowings and investments,
- the supply of any providers of a monetary or non-financial nature supplied to the financial institution or obtained from the financial institution; and
- the creation or upkeep of reporting traces and data flows between the financial institution and any associated events that will result in the sharing of doubtless proprietary, confidential or in any other case delicate info that will give advantages to such associated events.
‘Extra beneficial therapy’ consists of:
- granting complete web lodging, exceeding a prudent proportion of the financial institution’s regulatory capital as decided by the board;
- charging decrease curiosity or paying greater than the financial institution’s deposit price for a comparable transaction with an unrelated comparable counterparty;
- offering preferential therapy; or
- offering or receiving providers with out an analysis process.
Most banks are listed with the CSE and are additionally anticipated to adjust to the CSE’s associated get together transaction rules.
Regulatory challenges
What are the principal regulatory challenges dealing with the banking business?
The important thing regulatory issues are the next.
Statutory reserve necessities
LCBs should preserve reserves in opposition to deposit liabilities denominated in Sri Lanka rupees (ie, the proportion of the deposit liabilities that business banks are required to maintain as a money deposit with the CBSL). In 1981, the CBSL began to make use of open market operations and statutory reserve necessities (SRRs) to regulate the cash provide. Over time, SRRs have fluctuated. Lately, as a result of covid-19, the CBSL minimize its SRRs to 2 per cent with impact from 16 June 2020, releasing roughly 115 billion rupees into the banking system. The low reserve requirement coverage is utilised to make an impression on the liquidity of the banking system throughout the covid-19 pandemic. A decrease efficient price of reserve requirement means decrease prices for the banks. Which means that banks can scale back lending rates of interest.
Rate of interest fluctuations and controls
The CBSL resorts to rate of interest fluctuations to conduct financial coverage. This has generally impacted banks as spending is inspired.
Foreign money inflation controls
An opposed shift in financial coverage results in inflation. Within the current previous, this has posed an important concern.
Caps on lending charges
Non-performing loans are a difficulty for many banks, particularly throughout the covid-19 pandemic. In response to issues over deceleration in credit score demand and continued will increase in non-performing loans, the CBSL took measures to induce a discount in market lending charges, reminiscent of a discount of the standing deposit facility price (SDFR), the standing lending facility price (SLFR) and the SRR relevant to the rupee deposit liabilities of LCBs, and the imposition of caps on rupee deposit rates of interest provided by licensed monetary establishments. Nevertheless, not too long ago, beneath Financial Regulation Evaluation No. 1 of 2022 revealed on 20 January 2022, the Financial Board determined to extend the CBSL’s SDFR and SLFR by 50 foundation factors every to five.5 per cent and 6.5 per cent, respectively.
Digital regulation and supervision
Knowledge privateness and cybersecurity points in subtle business banking programs, particularly with the heightened use of fintech as a result of covid-19 pandemic, have develop into extra frequent. At the moment, Sri Lankan legislation doesn’t present for knowledge privateness and cybersecurity. Nevertheless, the Private Knowledge Safety Invoice was handed by Parliament in November 2021, however has but to develop into legislation.
The Sri Lankan fintech sandbox was launched to encourage and allow fintech initiatives to advertise effectivity, and to extend entry to monetary services.
Client safety
Are banks topic to client safety guidelines?
Sure. Particular necessities had been launched, as follows.
- The Monetary Ombudsman of Sri Lanka is an alternate dispute decision mechanism for patrons of licensed banks and finance corporations. Nevertheless, previous to any criticism being submitted to the Monetary Ombudsman, the criticism ought to first be referred to the complaints settlement officer or the complaints decision officer of the related monetary establishment.
- The CBSL has – beneath the Banking Act and the Finance Enterprise Act – issued buyer safety frameworks to safeguard the rights and pursuits of the purchasers of licensed banks and finance corporations. The salient obligations of the licensed banks and finance corporations embrace:
- offering factual info to clients;
- offering info in languages most popular by clients;
- facilitating clients’ understanding of the phrases and circumstances;
- displaying key info; and
- defending clients from abusive debt assortment practices.
Additional, licensed banks and finance corporations should publish audited monetary accounts.
A proposed new Banking Act will present a stronger monetary client safety framework.
The not too long ago established CBSL Monetary Client Relations Division (FCRD) will deal with all exterior complaints and grievances directed to the CBSL on entities regulated by the CBSL beneath part 33 of the Financial Regulation Act. Initially, the FCRD will solely concentrate on monetary client complaints and grievances on monetary providers suppliers which can be regulated by the CBSL, with the target of creating an impartial watchdog.
Future adjustments
In what methods do you anticipate the authorized and regulatory coverage altering over the following few years?
Proposals for a brand new Banking Act are underway. Current proposals are:
- adjustments to the varieties of banking licences at the moment issued;
- streamlining of approval to ascertain branches and different banking shops;
- strengthening client safety, deposit insurance coverage and governance;
- amalgamating each offshore banking unit and home banking unit operations right into a single banking enterprise; and
- bettering decision, enforcement and supervisory actions.
Additionally it is famous that the proposed act will govern the banking licences and regulation of banks within the upcoming Colombo Worldwide Monetary Centre within the Colombo Port Metropolis.
As a result of covid-19 pandemic, banks might overhaul a few of their protocols and insurance policies round entry administration, discovering methods to extend flexibility with out compromising safety.
The banking sector will transfer components of its IT operations to public cloud environments. Most banks at the moment use their very own personal clouds. Nevertheless, in a lockdown and different related emergency conditions, these could be difficult to keep up. Cybersecurity will stay a high precedence for banks sooner or later. Laws on IT and safety of banks might change considerably sooner or later.
A number of regulatory measures aimed toward enhancing the effectivity of transmission of current financial coverage measures to affect market lending charges are anticipated. The CBSL foresees a lift within the progress of credit score and cash provide, anticipating an additional discount in lending charges and the anticipated enchancment in investments. Capital ratios are anticipated to enhance with the infusion of capital to satisfy the improved minimal capital necessities for banks by late 2022. To strengthen disaster preparedness and resilience, banks should implement restoration plans to minimise the opposed impression on troubled banks and their potential spillover results on the monetary system.
Regulation acknowledged date
Appropriate on
Give the date on which the data above is correct.
25 January 2022.
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