BSD LSB Circulars Up2 2004

LICENSED SPECIALISED BANKS
DIRECTIONS, DETERMINATIONS, NOTICES

&
GUIDELINES
TABLE OF CONTENTS
PART A
Subject
Page
1. Capital Adequacy Ratio (Separate Direction for NSB)

1.1 Amendment to Capital Adequacy Ratio
1.2 Capital Funds in Relation to Prudential Limits
1.3 Directions on Capital Adequacy ...
1.4 Interpretation of Capital Funds ...
...
...
...
...
...
...
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3
5
17
18
19
2. Reserve Fund (Separate Direction for NSB)
...
...
...
20
3. Investment in Equity (Separate Direction for NSB)
...
...
...
21
...
...
...
23
5. Liquid Assets (Separate Direction for NSB & SMIB) ...
...
...
26
6. Share Capital Ownership
...
...
...
27
7. Single Borrower Limit (Separate Direction for NSB) ...

7.1 Amendment to Single Borrower Limit
...
...
...
...
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30
31
8. Accommodation to Directors/Related Companies
...
...
32
...
...
34
Unpaid Interest
...
...
...
9. Acquisition of Immovable Properties (Separate Direction for NSB)

10. Conditions for Grant of Accommodation
...
...
...
35
11. Specific Provisions

...
11.1 Amendment to Specific Provisions
...
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...
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36
40
12. Prior Approval of the Central Bank for certain transactions
...
...
41
13. Alteration of Memorandum and Articles of Association
...
...
42
14. Payment of Dividends
...
...
...
43
15. Disqualification for being appointed or elected Director
...
...
44
16. Secretary of a Licensed Specialised Bank
...
...
...
45
17. Disqualification for Appointment of Manager etc.
...
...
...
46
18. Restriction in the Sale, Transfer of Immovable Assets ...
...
...
47
19. List of Qualified Auditors
...
...
...
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48
20. Deposit Direction
...
...
...
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50
21. Liquid Assets
...
...
...
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52
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PART B
Page
1. Guidelines for External Auditors
...
...
...
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55
2. Guidelines for External Auditors Relating to Their Statutory Duties
...
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63
3. Prescribed Accounting Format
...
...
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65
4. Criteria for Selection of Valuers
...
...
...
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81
5. Guidelines on the Grant of Facilities for the issue of

Commercial Paper and other forms of Promissory Notes
...
...
82
6. Customer Due Diligence-Know Your Customer Procedures
...
...
86
7. Publication of Capital Adequacy Statement in the Annual Report
...
...
89
8. Public Disclosure by Publication of Financial Statements in the Press ...
...
90
9. Publication of Financial Statements in the Press
...
...
...
95
...
...
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96
11. Code of Corporate Governance for Banks and Other Financial Institutions
...
97
12. Acceptance of Certificates of Deposit ...
...
...
... 112
13. Guidelines on Credit Rating of Banking Institutions
...
...
... 115
10. Display of Interest Rates
...
PART C
Directions to National Savings Bank
1.
Capital Adequacy
...
...
...
... 119
2.
Reserve Fund
...
...
...
... 120
3.
Liquid Assets
...
...
...
... 121
4.
Investments in Equity
...
...
...
... 122
5.
Single Borrower Limit
...
...
...
... 124
6.
Acquisition of Immovable Property
...
...
...
... 126
...
... 128
...
... 130
1.
Liquid Assets
...
...
Directions to Rural Development Banks

1.
Pawn Broking
...
...
BSD LSB Dir.Det.Not & Guls
Directions to State Mortgage & Investment Bank
BANKING ACT
PART A
BSD LSB - Dir. to All/NSB/SMIB/RDBs
DETERMINATIONS, DIRECTIONS AND

NOTIFICATIONS
2
BANKING ACT
BANKING ACT
BANKING ACT NO. 30 OF 1988

AS AMENDED BY BANKING (AMENDMENT) ACT NO. 33 OF 1995
The directions issued by the Monetary Board of the Central Bank of Sri Lanka as amended by
the Directions dated 29th November, 2000 under Section 76J(1) of the Banking Act, No. 30 of 1988
as amended by the Banking (Amendment) Act, No. 33 of 1995.
Sgd. A. S. Jayawardena
Governor
Colombo
21-11-1997.
DIRECTIONS UNDER 76.J(1)

CAPITAL ADEQUACY
(1) (a) With effect from 01.01.1998, a licensed specialised bank having an equity capital as
defined in the Banking Act is required, at all times, to maintain a minimum capital
adequacy ratio of 8 per cent in relation to its risk weighted assets with core capital
constituting not less than 4 per cent computed as per instruction in Schedule I attached
hereto.
(b) For the period commencing on 1st January 2001 and ending 31st December, 2001 a
licensed specialised bank having an equity capital as defined in the Banking Act is
required, at all times, to maintain a minimum capital adequacy ratio of 9% in relation to its
risk weighted assets with core capital constituting not less than 4% and from 1st January
2002, a minimum capital adequacy ratio of 10% in relation to its risk weighted assets with
core capital constituting not less than 5% computed as per instructions given Schedule I
attached hereto and every reference, in Schedule I to the percentage of the minimum
capital adequacy ratio as 8% and the core capital ratio as 4% shall
(a) for the period commencing on 1st January 2001 and ending on 31st December, 2001
be amended to read as 9% and 4% respectively; and
(b) with effect from 1st January, 2002 be amended to read as 10% and 5% respectively.
(2)
(i) Every licensed specialised bank shall submit to the Director of Bank Supervision of the
Central Bank a quarterly return as per instructions in Schedule I as at the close of business
on the last business day of the months of March, June, September and December of each
year.
Such quarterly returns should reach the Director of Bank Supervision on or before the last
working day of the months of April, July, October and January, immediately following the
respective reporting dates.
(ii) Every licensed specialised bank shall submit an annual return, based on the annual audited
accounts in the format given in Schedule I to the Director of Bank Supervision within six
months from the end of each financial year.
(3) Where a licensed specialised bank is unable to maintain the capital ratios referred to in
paragraph (1)(a) above, as at the quarter ending 31.03.1998 such specialised bank is granted
only a period of 3 months from 01.04.1998 in order to maintain the capital ratios.
(4) Adjustment to capital shall be effected in accordance with the instructions annexed to Schedule
I for this purpose.
BANKING ACT
For the purposes of this Direction,

assets shall mean
all on-balance sheet and off-balance sheet items appropriately risk-weighted on the basis of the
instructions given in Schedule I.
capital base shall consist of core capital, supplementary capital and any adjustments, determined
by the Central Bank of Sri Lanka.
Core Capital shall mean
(a) permanent share holders equity;
and
(b) disclosed reserves created or increased by appropriations of retained earnings or other
surpluses, including share premium, retained profits, general reserves and legal reserves
excluding, however, revaluation reserves and general provisions.
Supplementary Capital shall mean
Revaluation reserves (as approved by the Central Bank of Sri Lanka), general provisions, hybrid
(debt/equity) capital instruments, and minority interests arising from preference shares issued by
subsidiaries and approved subordinated term debt.
BANKING ACT

The Direction issued by the Monetary Board of the Central Bank of Sri Lanka, relating to
maintenance of Capital Adequacy Ratio dated 21 November 1997, under Section 76J(1) of the
Banking Act, No. 30 of 1998 as amended by Banking (Amendment) Act, No. 33 of 1995 is hereby
amended and would come into effect on 1 January 2002.
Governor
Colombo, on this 27th day of December, 2001.
DIRECTION
1. Delete Paragraph 1 of the Direction dated 21 November 1997 relating to maintenance of Capital
Adequacy Ratio as amended by the Direction dated 27 December 1999 and the Direcion dated
29 November 2000 and substitute therefor the following as Paragraph 1.
With effect from 1 January 2001, a licensed specialised bank having an equity capital as
defined in the Banking Act is required, at all times, to maintain a minimum Capital
Adequacy Ratio of 9% in relating to its Risk Weighted Assets with Core Capital
constituting not less than 4 1/2% upto 31 December 2002, and thereafter at all times, 10%
in relation to its Risk Weighted Assets with Core Capital constituting not less than 5%,
computed as per instructions in Schedule I attached hereto.
2. Every reference, in Schedule I of the Direction dated 21 November 1997 to the percentage of
the minimum Capital Adequacy Ratio as 8% and the Core Capital as 4% shall;
(a)
for the period commencing on 1 January 2001 and ending on 31 December 2002 be
amended to read as 9% and 4 1/2% respectively.
(b) for the subsequent period commencing on 1 January 2003 be amended to read as 10% and
5% respectively.
3. The Direction issued to licensed specialised banks on 29 November 2000 relating to the
maintenance of Capital Adequacy Ratio is hereby repealed.
SCHEDULE I
COMPLETION INSTRUCTIONS
RETURN ON RISK WEIGHTED CAPITAL ADEQUACY RATIO
Introduction
All licensed specialised banks are hereby informed that, the Central Bank of Sri Lanka, in keeping with current
international practice, will introduce with effect from 1st January, 1998, a risk weighted capital adequacy ratio based on
requirements laid down by the Banking Regulations and Supervisory Practices Committee (The BASLE Committee).
Exercising national discretion permitted under the BASLE arrangement, Central Bank has modified these
standards to suit the local conditions.
BANKING ACT
For the purpose of computing the capital adequacy ratio of specialised banks under the standard, the constituents
of capital would be divided into :Tier 1
Core Capital representing permanent shareholders equity (paid-up shares and common stock) and
reserves created or increased by appropriations of retained earnings or other surpluses, e.g., share premium,
retained profits and other reserves; and
Tier 2
Supplementary Capital representing revaluation reserves, general provisions and other capital
instruments which combine certain characteristics of equity and debt, such as hybrid capital instruments
and subordinated term debt.
The minimum capital adequacy standard to be achieved is a risk weighted asset ratio of 8* per cent with core
capital constituting not less than 4 per cent.
All On-Balance Sheet Items have been assigned weights from 0-100% (see Section B Form I) in line with
international practice, adjusted wherever necessary to reflect risk attaching to assets in the local context. Off-Balance
Sheet Items are also included in the computation by converting them into on Balance Sheet equivalents before being
allocated a risk weight.
A locally incorporated bank is required to compute its capital adequacy requirements on a consolidated basis
i.e. combining its Sri Lankan operations with those of its overseas branches (if any) and subsidiaries.
These standards will be brought into operation with effect from 1st January, 1998. However, a Bank that cannot
comply with the requirements on or before the deadline stipulated must apply to the Central Bank of Sri Lanka in writing
for a deferment of the application of these standards.
The monitoring of the capital adequacy standard will be undertaken on the basis of returns submitted to the
Director/Bank Supervision at the end of each quarter and annually after finalisation of the audited balance sheet of a
Bank. The first quarterly return under the arrangement is due as at 31st March, 1998.
These instructions consist of 3 sections :
Section A General instructions
Section B Reporting Requirements
Section C Definitions and Clarifications
Section A General Instructions
Submission of Returns
(i)
Specialised Banks are required to submit the quarterly Returns in the format provided at the end of each
quarter, not later than 30 days after the close of each quarter.
(ii)
The annual Return based on the audited consolidated Balance Sheet should be submitted in the format
provided within six months of the close of the financial year.
Structure of the Returns : This Return is divided into Four Parts.

Form 1
Relates to the computation of the Risk Weighted Assets on on-balance sheet items and off-balance
sheet items (two sheets).
Form 2
Relates to the computation of the Balance Sheet equivalent of off-balance sheet items (two sheets).
Form 3
Relates to the computation of the capital base (three sheets).
Form 4
Relates to the computation of the Capital Adequacy Ratio (one sheet).
Section - B
RETURN ON RISK-WEIGHTED CAPITAL RATIO
OF SPECIALISED BANKS IN SRI LANKA
Name of Institution :
We certify that
(1)
this return is, to the best of our knowledge and belief, correct;
and
* see par
agraph (1) of the
ections
Dir
As at :
Quarterly/Annual Return
BANKING ACT
(2)
the capital adequacy ratio was, at any time during the quarter/year under review, not less than that stipulated by
Directions made by the Monetary Board of the Central Bank of Sri Lanka under Section 76J(1)(a) of Banking Act
No.30 of 1988 as amended by Banking (Amendment) Act No.33 of 1995.
______________________________
Chief Accountant/Authorised Officer
______________________________
Chief Executive
______________________________
Name
______________________________
Name
Date :
Date :
FORM 1 : ON BS
COMPUTATION OF RISK-WEIGHTED ASSETS OF SPECIALISED BANKS
[On-Balance Sheet Items]
As at :
{In Rupees Thousand}
Code
Total
Risk
Weight
Cash
02.
Gold & Bullion
0%
03.
Due from Central Bank of

Sri Lanka
0%
04.
Sri Lanka Govt. Treasury Bills
0%
05.
Sri Lanka Govt./Central Bank Securities
0%
06.
Other Securities guaranteed by

Sri Lanka Government
0%
07.
Loans and Advances : *
07.01
Against Cash Deposits/Gold
0%
07.02
Against SL Govt. Guranteee/Securities
0%
07.03
Guranteed by Central Bank of Sri Lanka
0%
07.04
Staff Loans secured by Provident

Fund Balances
0%
07.06
Local Currency
Foreign Currency
Credit
Equivalent of
Off-Balance
Sheet Items
01.
07.05
Assets
Principal Amount
of
On-Balance Sheet
Item
0%
0%
Guranteed by OECD Central

Government & Central Banks
10%
Guranteed by Non-OECD Central

Governments and Central Banks
20%
07.07
Guaranteed by Local/Foreign Commercial

Banks and Local/Foreign Development
Financial Institutions with a
maturity Upto 1 year
20%
07.08
Guranteed by OECD Incorporated banks
20%
07.09
Guranteed by SLECIC
50%
07.10
Secured by a Primary Mortgage
RiskWeighted
Assets
Amount
BANKING ACT
over Residential Property
50%
07.11
Other Loans and Advances
100%
08.
Due from Branches Abroad
0%
09.
Due from banks Abroad
20%
10.
Due from Licensed Specialised

Banks Including Licensed Commercial Bank
20%
11.
Cash Items in Process Of Collection
20%
12.
Other Investments (excluding items

Deducted from the Total capital)
100%
13.
Fixed Assets
100%
14.
Other Assets
100%
15.
Total
* Loans and Advances should be net of specific provisions and interest in suspense
FORM 2 : OFF BS
COMPUTATION OF RISK-WEIGHTED ASSETS OF SPECIALISED BANKS
[Off-Balance Sheet Items]
As at :
16.
16.1
16.2
16.3
16.4
17.
17.1
17.2
17.3
18.
18.1
18.2
18.3
18.4
19.
19.1
19.2
19.3
19.4
19.5
19.6
20.
20.1
Instruments
Direct Credit Substitutes

General Guarantees of Indebtedness
Standby LCs serving as Financial Gurantees
Bank Acceptances
Others (please specify)
Transaction-related Contingencies
Performance Bonds, Bid Bonds & Warranties
Standby LCs related to particular transactions
Short-Term Self-Liquidating Trade-related Contingencies
Shipping Guarantees
Documentary Letters of Credit
Trade related acceptances
Sale and Repurchase Agreements and Assets Sale with
recourse Where the credit risk with theBank
Sale and Repurchase Agreements
Housing Loans sold with recourse
Other Assets sold with recourse
Forward Assets Purchase
Partly Paid Shares/Securities
Obligations under an On-going Underwriting Agreement
Underwriting of Shares/Securities Issue
Credit
Conversion =
Factor
Credit
Equivalent of
Off-Balance
Sheet Items
100%
50%
20%
100%
50%
Code
Principal
Amount of X
Off-Balance
Sheet Item
BANKING ACT
20.2
20.3
21.
21.1
21.2
21.3
21.4
22.
22.1
22.2
22.3
Note Issuance Facilities and Revolving Underwriting Facilities

Others (Please specify)
Other Commitments with an original maturity of upto one year
or which can be unconditionally cancelled at any time
Formal Standby Facilities and CreditLines
Undrawn Term Loans
Unused credit card lines
Other Commitents with an Original Maturity of over one year
Formal standby facilities and CreditLines
Undrawn Term Loans
23.
Total
0%
50%
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. Credit equivalent amount would then be weighted according to the nature of the
corresponding asset item.
FORM 3 : CAP ELE

CAPITAL BASE OF SPECIALISED BANKS
As at :

Code
Constituents of Capital
TIER 1 : CORE CAPITAL
24.
Paid-up Ordincary Shares/Common Stock/++
25.
Non-cumulative, Non-redeemable Preference Shares
26.
Share Premium
27.
Statutory Reserve Fund
28
Published Retained Profits/(Accumulated Losses)
29.
General and Other Reserves
30.
Surplus/Loss after tax arising from the sale of fixed and long-term investments
31.
Unpublished Current Years Profits/Losses
32.
Minority Interests (consistent with the above capital constituents)
33.
Sub Total
Deductions
34.
35.
Goodwill
TOTAL TIER 1 CAPITAL
++ Delete whichever is inapplicable.

TIER 2 : SUPPLEMENTARY CAPITAL
36.
Revaluation Reserves (as approved by CBSL)
37.
General Provisions
38.
Hybrid (debt/equity) Capital Instruments
39.
Minority Interests arising from Preference Shares issued by Subsidiaries
Amount
10
BANKING ACT
40.++ Approved Subordinated Term Debt (Actual amount is Rs. )

41.
Total Tier 2 capital
42.
Eligible Tier 2 Capital
43.
TOTAL CAPITAL
LIMITS :
(i) ++ Approved Subordinated Term Debt is limited to 50% of Total Tier 1 Capital.
NB : The actual amount of the subordinated debt should be reported.
(ii)
(iii)
The total of Tier 2 Supplementary Elements should not exceed a maximum of 100 % of Tier 1
Elements.
General Provisions should not exceed 1.25 % of Risk-Weighted Assets.
FORM 3 : CAP ELE Continuation

COMPUTATION OF CAPITAL BASE OF SPECIALISED BANKS
As at :

Code
Constituents
Amount
43.
Total Capital
44.
Deductions
44.1
Equity Investments in unconsolidated banking and financial subsidiaries
44.2
Investments in capital of other banks/Financial associates
45.
Capital Base
FORM 4 : RATIOS
COMPUTATION OF CAPITAL ADEQUACY RATIOS OF SPECIALISED BANKS
As at :

Amount
35.
Total Tier - 1 Core Capital
45.
Total Capital Base
46.
Total Risk Weighted Assets

Core Capital Ratio (Minimum Ratio 4%)
Core Capital
Risk-Weighted Assets
100
Total Risk Weighted Capital Ratio (Minimum Ratio 8%)

Capital Base
Risk-Weighted Assets
100
Code
BANKING ACT
11
SECTION C
DEFINITIONS AND CLARIFICATIONS

ON-BALANCE SHEET ITEMS
01.
CASH - LOCAL CURRENCY

Notes and coins which are legal tender in Sri Lanka.
FOREIGN CURRENCY
Notes and coins that are legal tender of foreign countries converted to Sri Lanka rupees as at reporting date.
02.
GOLD AND BULLION

Gold and bullion held in the specialised banks vaults. Gold items held in safe custody should be excluded.
03.
DUE FROM CENTRAL BANK OF SRI LANKA

Represents the statutory reserve required to be maintained with the Central Bank of Sri Lanka under Section 76
J(1)(e) of the Banking Act No.30 of 1988 as amended by Act No. 33 of 1995 and clearing balances in the name of
the specialised Bank.
04.
SRI LANKA GOVERNMENT TREASURY BILLS

Holdings of Treasury Bills issued by the Central Bank of Sri Lanka.
05.
SRI LANKA GOVERNMENT/CENTRAL BANK SECURITIES

Holdings of Sri Lanka government securities and Central Bank securities.
06.
OTHER SECURITIES GUARANTEED BY SRI LANKA GOVERNMENT

Holdings of other securities guaranteed by the Sri Lanka Government.
07.01 LOANS & ADVANCES - AGAINST CASH DEPOSITS/GOLD

Loans and advances collateralized by cash deposits and covered by the legal right to set-off and the loans and
advances extended against gold and jewellery that have been pawned to the Specialised Bank.
07.02 LOANS & ADVANCES AGAINST SRI LANKA GOVERNMENT GUARANTEES/SECURITIES
Loans and advances collateralized by a guarantee issued by the Sri Lanka Government or securites issued by the
Central Bank of Sri Lanka.
07.03 LOANS & ADVANCES GUARANTEED BY THE CENTRAL BANK OF SRI LANKA
Loans and advances collateralized by a guaratee issued by the Central Bank of Sri Lanka.
07.04 STAFF LOANS
Loans and advances granted to the specialised Banks staff members against their Provident fund balances
maintained by the specialised Bank.
07.05 LOANS AND ADVANCES GUARANTEED BY OECD CENTRAL GOVERNMENT & CENTRAL
BANKS
Loans and advances guaranteed by OECD Central Governments and OECD Central Banks.
For the purpose of this return OECD refers to the 24 full member countries belonging to the Organization for
Economic Co-operation and Development as listed below and those countries which have concluded special
lending arrangements with the IMF associated with the Funds General Arrangements to borrow (at present only
Saudi Arabia).
OECD COUNTRIES ARE

1. Australia
2. Austria
3. Belgium
4. Canada
5. Germany
6. Denmark
7. Finland
8. France
9. Greece
10. Iceland
11. Ireland
12. Italy
13. Japan
14. Luxembourg
15. Netherlands
16. New Zealand
17. Norway
18. Portugal
19. Spain
20. Sweden
21. Switzerland
22. Turkey
23. United Kingdom
24. United States
07.06 LOANS AND ADVANCES GUARANTEED BY NON-OECD CENTRAL GOVERNMENTS &

CENTRAL BANKS
Loans and advances collateralized by a guarantee issued by the Central Governments and the Central Banks of
countries other than the OECD countries.
12
BANKING ACT
07.07 LOANS AND ADVANCES GUARANTEED BY LOCAL/FOREIGN COMMERCIAL BANKS &

LOCAL/FOREIGN DEVELOPMENT FINANCE INSTITUTIONS
Loans and advances secured by a guarantee issued by such institutions with a maturity of 1 year.
07.08 LOANS AND ADVANCES GUARANTEED BY OECD INCORPORATED BANKS
Loans and advances guaranteed by a Bank incorporated in an OECD country. Branches of OECD Banks in NonOECD countries are also considered as OECD Banks.
07.09 LOANS & ADVANCES GUARANTEED BY SLECIC
Loans and advances guaranteed by the Sri Lanka Export Credit Insurance Corporation. Only the guaranteed
portion of the Loan should be included.
07.10 LOANS & ADVANCES SECURED BY A PRIMARY MORTGAGE OVER RESIDENTIAL
PROPERTY
Loans granted for residential purposes secured by a primary mortgage over residential property which is rented or
occupied by the borrower including housing loans granted to the staff. A 50 % weight will not be applied for loans
granted to companies engaged in speculative residential building or property development. Loans for other
purposes (except residential purposes) secured by a mortgage over residential property would not be eligible for
a 50 % weight.
07.11
OTHER LOANS & ADVANCES

The aggregate of loans and advances which have not qualified for low risk-weights according to their
counterparty or collateral - and not included in any other loan item in the Return.
08.
DUE FROM BRANCHES ABROAD

A debit balance in the current account maintained with the branches abroad. Any deposits placed with the
branches or any amount lent to branches abroad should also be included.
09.
DUE FROM BANKS ABROAD

Fixed and other deposits placed with and the amount lent to banks abroad.
10.
DUE FROM LICENSED SPECIALISED BANKS INCLUDING

LICENSED COMMERCIAL BANKS
Amounts lent to licensed specialised banks and to licensed commercial banks. (In the call money market)
11.
CASH ITEMS IN PROCESS OF COLLECTION

Cheques, drafts and other cash items such as money order, postal orders drawn on the 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 and considered as loans and advances.
12.
OTHER INVESTMENTS
Investments in equity or other capital instruments in quoted or unquoted companies as reported in the balance
sheet that are not deducted from the total capital in the computation of the capital base.
13.
FIXED ASSETS
The item includes bank premises, immovable property, machinery and equipment, motor vehicles, furniture and
fittings and other fixed assets, reported at cost or the revalued amount, net of accumulated depreciation.
14.
OTHER ASSETS
OFF-BALANCE SHEET ITEMS

16.
DIRECT CREDIT SUBSTITUTES
16.1
General Guarantees of Indebtedness :

General guarantees of indebtedness where the risk of loss in the transaction may crystallise into a direct liability
and become a direct claim on the counterparty. These include Guarantees in respect of counterparties like
insurance agents, sales agents, etc., to cover any non-payment by them of premium, sales proceeds, etc., to their
beneficiaries. Bank Guarantees in favour of customs would cover any non-payment of customs duties by their
counterparties.
16.2
Stand-by LCs serving as Financial Guarantees :

Stand-by Letters of Credit which are direct credit substitutes where the risk of loss in the transaction is
All other assets or investments not included elsewhere in the Return.
BANKING ACT
13
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.
16.3
Bank Acceptances :
Liabilities arising from acceptances on accommodation of bills but excludes bills that have been discounted by
the bank itself. Risk participation and other similar commitments undertaken to repay the financial obligation of
a customer on his failure to do so, should be included.
16.4
Others
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.
17.
17.1
TRANSACTION-RELATED CONTINGENCIES
Performance Bonds, Bid Bonds & Warranties :
Transaction-related contingent items such as Performance Bonds, Bid Bonds and Warranties where the risk of
loss arises from an irrevocable obligation to pay a third party the non-financial obligation of the customer upon
his failure to fulfil obligations under a contract or a transaction. Such contingencies would crystallise into actual
liabilities depending upon the occurence or non-occurrence of an event other than that of a defualt in payment by
the counterparty.
17.2
Standy-by LCs related to particular transactions :

Contingent liabilities relating to particular transactions. Here too, there is a likelihood of the contingencies
crystallising into actual liabilities depending upon the occurence or non-occurence of an event other than that of
a default in payment by a counterparty.
17.3
Others :
Other contingent liabilities arising from an irrevocable obligation to pay a third party, the non-financial
obligation of a customer upon his failure to fulfil such obligation or terms under contract or transaction.
18.
18.1
SHORT-TERM SELF-LIQUIDATING TRADE-RELATED CONTINGENCIES

Shipping Guarantees :
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.
18.2
Documentary Letters of Credit :

Documentary credits collateralised by the underlying shipments which are short-term self-liquidating and traderelated transactions.
18.3
Trade-related Acceptances :
Liabilities arising from acceptances that are based on a specific trade transaction either domestic or foreign. E.g.
Letters of Credit.
18.4
Others
Contingent Liabilities arising from short-term self-liquidiating trade related obligations
19.
SALE AND REPURCHASE AGREEMENTS AND ASSETS SALE WITH RECOURSE WHERE THE
CREDIT RISK REMAINS WITH THE BANK
Risk-weight for these items should be determined according to the underlying assets or the issuer of the assets
rather than the counter party with whom the transaction had been entered into.
19.1
Sale and Repurchase Agreements :

Sale and Repurchase Agreement (REPO) is an agreement whereby a bank sells an asset to a third party with a
commitment to repurchase it at an agreed price on an agreed future date. Purchase and Resale Agreements
(Reverse REPOS) should be considered as collateralised loans. The risk is to be measured as an exposure to the
counterparty unless the underlying asset has been reported as an on-balance sheet item where the risk weight
appropriate to the underlying asset should be used.
19.2
Housing Loans Sold with Recourse :

The amount of housing loans sold to a counterparty with recourse where the credit risk remains with the Bank.
14
19.3
BANKING ACT
Other Assets Sold with Recourse :
Assets sold with recourse where the credit risk remains with the reporting institution. The holder of the asset is
entitled to put the assets back to the reporting institution within an agreed period or under certain prescribed
circumstances - e.g. deterioration in the value or credit quality of the asset concerned.
19.4
Forward Asset Purchases :

Commitment to purchase, at a specified future date and or on pre-arranged terms, a loan, security or other asset
from another party.
19.5
Partly-Paid Shares/Securities
Unpaid amounts on partly-paid shares and securities where the issuer may call upon the Bank to pay at a predeternmined or unspecified date in the future.
19.6
Others
Placements of forward forward deposits and other commitments with certain drawdown. A forward forward
deposit is an agreement between two parties whereby one will place and other will receive, at a pre-determined
future date, a deposit, at an agreed rate of interest. A commitment to place a forward forward deposit should be
reported under this item and weighted according to the risk-weight appropriate to the counterparty.
20.
OBLIGATIONS UNDER AN ON-GOING UNDERWRITING AGREEMENT
20.1
Underwriting of Shares/Securities Issue :

Obligations due to underwriting of shares and securities, net of the amount sub-underwritten by another
institution.
20.2
Note Issuance Facilities and Revolving Underwriting Facilities :

Arrangements where a borrower may draw down funds up to a prescribed limit over a pre-determined period
through the issue of notes which the reporting bank has a commitment to underwrite.
20.3
Others :
Other obligations due to on-going underwriting agreements.
21.1
OTHER COMMITMENTS WITH AN ORIGINAL MATURITY OF UPTO ONE YEAR OR WHICH

CAN BE UNCONDITIONALLY CANCELLED AT ANY TIME
Formal Standy-by Facilities and Credit Lines :
Commitments include the undrawn portion of any binding arrangements which obligate the reporting institution
to provide funds at some future date. Such commitments would have an original maturity of less than one year or
which can be unconditionally cancelled at any time by the reporting bank at its discretion. Formal stand-by
facilities and credit lines for Letters of Credit, Trust Receipts, etc., should be included under this item.
21.2
Undrawn Term Loans :

Undrawn portion of a term loan with an original maturity of less than one year or which can be unconditionally
cancelled at any time by the reporting bank.
21.3
Unused Credit Card Lines :

The undrawn portion of 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.
21.4
Others :
Any other commitment with an original maturity upto one year or which can be unconditionally cancelled at any
time.
22.
22.1
OTHER COMMITMENTS WITH AN ORIGINAL MATURITY OF OVER ONE YEAR

Formal Stand-by Facilities and Credit Lines :
Commitments under formal standby facilities and credit lines with an original maturity of over one year.
22.2
Undrawn Term Loans :

The undrawn portion of term loans where the original maturity is over one year.
22.3
Others :
Any other commitment with an original maturity of over one year. Original maturity is defined as the length of
time between the date the commitment is made and the earliest date on which the reporting bank, at its option,
unconditionally cancels the commitment.
21.
BANKING ACT
15
CAPITAL ELEMENTS
24.
PAID UP ORDINARY SHARES/COMMON STOCK

Issued and fully paid oridinary shares or common stock. For the computation only the paid up portion of partly
paid shares or stock should be counted as capital.
25.
NON-CUMULATIVE, NON-REDEEMABLE PREFERENCE SHARES

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.
26.
SHARE PREMIUM
The excess of issue price over the par value of the ordinary shares or common stock or non-cumulative nonredeemable preference shares.
27.
STATUTORY RESERVE FUND

Balance in the Reserve Fund as per last audited statement of accounts and set up by specialised banks in terms of
Section 76J(1)(b) of the Banking Act No. 30 of 1988 as amended by Act No. 33 of 1995.
28.
PUBLISHED RETAINED PROFITS/(ACCUMULATED LOSSES)

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.
29.
GENERAL AND OTHER RESERVES

Disclosed reserves in the form of general or other reserves created or increased by appropriation of retained
earnings, share premia or other surplus as per last audited statement of accounts.
30.
SURPLUS/LOSS AFTER TAX ARISING FROM SALE OF FIXED & LONG TERM INVESTMENTS
Any surplus/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.
31.
UNPUBLISHED CURRENT YEARS PROFITS/LOSSES

Current years profits/losses (excluding any surplus/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
institutions external auditor.
Current years loss should be reported using negative sign (-) and deducted.
32.
MINORITY INTERESTS (CONSISTENT WITH THE ABOVE CAPITAL CONSTITUENTS)

Minority interests on consolidation of capital items.
33.
SUB TOTAL
Total of core capital items 24 to 32.
34.
GOODWILL
Report the amount of goodwill as shown in the balance sheet.
35.
To arrive at total Tier 1 capital, deduct goodwill from the sub total at item 33.
36.
REVALUATION RESERVES
Revaluation reserves may be included within Tier 2 Supplementary Capital provided that such revaluation is
prudently valued reflecting fully the possibility of price fluctuations and forced sale, with the PRIOR approval of
the Central Bank of Sri Lanka.
37.
GENERAL PROVISIONS
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 Tier 2 Supplementary Capital. General provisions should not exceed 1.25% of the sum of all risk
weighted assets.
16
BANKING ACT
38.
HYBRID (DEBT/EQUITY) CAPITAL INSTRUMENTS

Capital instruments which combine certain characteristics of equity capital and debt. e.g. perpetual loan stock,
non-redeemable preference shares, etc. and satisfy the following characteristics :
(i) Unsecured, subordinated and fully paid.
(ii)
Not redeemable at the initiative of the holder or without the prior consent of the Central Bank of Sri
Lanka.
(iii)
Available to participate in losses without the Bank being obliged to cease trading.
(iv)
Obligation to pay interest that can be deferred where the profitability of the Bank would not support such
payment.
Prior approval of the Central Bank of Sri Lanka is required for the inclusion of such items in the capital base.
39.
MINORITY INTERESTS ARISING FROM PREFERENCE SHARES

Minority interests arising from the consolidation of preference shares issued by the reporting financial
institutions subsidiaries.
40.
APPROVED SUBORDINATED TERM DEBT

Subordinated term debt should have the prior approval of the Central Bank of Sri Lanka for inclusion as Tier 2
Capital and should satisfy the following conditions :
(i)
Unsecured, fully paid up and subordinated to the interests of creditors.
(ii) A minimum original maturity of 5 years.

(iii)
Early repayment or redemption shall not be made without the prior consent of the Central Bank of Sri
Lanka.
(iv)
The amount counted as capital should be discounted by 1/5th each year during the four years preceding
maturity.
Approved subordinated term debts are limited to 50% of total Tier 1 capital. The actual amount of subordinated
debt also should be reported.
41.

Total of supplementary capital from items 36 to 40.
42.
ELIGIBLE TIER 2 CAPITAL

Eligible Tier 2 capital is limited to a maximum of 100% of Tier 1 capital. In the event of Tier 1 capital being less
than the total of Tier 2 capital, eligible Tier 2 capital would be equivalent to Tier 1 capital. If Tier 1 capital is
negative a Nil amount should be reported as eligible Tier 2 capital.
43.
TOTAL CAPITAL
The total of Tier 1 capital (35) and eligible Tier 2 capital (42).
44.1
EQUITY INVESTMENTS IN UNCONSOLIDATED BANKING AND FINANCIAL SUBSIDIARIES

Equity investments would include only investments in unconsolidated banking and financial subsidiaries.
44.2
INVESTMENT IN CAPITAL OF OTHER BANKS/FINANCIAL ASSOCIATES

Holdings of other domestic banking institutions, and financial associates by way of shares, hybrid capital
instruments or subordinated term debt.
(a)
Twenty per cent or more but not more than fifty percent of the institutions issued share capital, and
(b)
Has a controlling interest over the institutions Board of Directors.
Investments in the capital of financial associates, made under the sponsorship of the Sri Lanka Government or the
Central Bank of Sri Lanka, are excluded from the computation of the capital base. However, such investments
should be reported as on-balance sheet assets under other investments.
45.
CAPITAL BASE
The amount after deducting items 44.1 and 44.2 from the total capital (item 43).
46.
TOTAL RISK-WEIGHTED ASSETS

The total risk-weighted assets of on balance sheet assets and off balance sheet items.
An Associate is deemed to be a associate where the Bank holds -
BANKING ACT
17
Ref. : 02 / 04 / 002 / 0005 / 003

Bank Supervision Department
21st November 2003
To : All Licensed Commercial Banks and
Licensed Specialised Banks
Dear Sir / Madam
CAPITAL FUNDS IN RELATION TO PRUDENTIAL LIMITS

All licensed commercial banks and licensed specialised banks are hereby required to ensure that the
risk exposures tied to capital funds are maintained within the specified prudential limits of actual capital
funds at all times.
Yours faithfully,
Director of Bank Supervision
18
BANKING ACT
Ref. : 02 / 04 / 002 / 0005 / 003

02 January 2004
To : All Licensed Specialised Banks
Dear Sir / Madam
DIRECTIONS ON CAPITAL ADEQUACY
I refer to the Directions on Capital Adequacy Ratio dated 21 November 1997 as amended on
27 December 2001 and write to clarify the following requirements relating to maintenance of the Capital
Adequacy Ratio (CAR) in terms of the said Directions :
I. All Licensed Specialised Banks (LSBs) are required at all times to maintain a CAR of 10 per cent
at the minimum in relation to its risk weighted assets, with core capital constituting not less than
5 per cent, both on a bank only/solo basis and on a consolidated basis i.e. including the bank and all
subsidiaries.
II. Accordingly, all LSBs are required to submit two returns on the statutory Capital Adequacy Ratio
as at the end of each quarter of the year, commencing from the quarter ended 31 December 2003, as
follows:
(a) Return indicating the CAR on a bank only/solo basis.
(b) Return indicating the CAR on a consolidated basis.
III. All LSBs are also required to submit the above two returns based on the audited data after the
completion of the annual audit, in addition to the quarterly returns.
Yours faithfully,
BANKING ACT
19
Ref. : 02 / 04 / 002 / 0005 / 003

06 January 2004
To : All Domestic Licensed Commercial Banks and
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 directions issued thereunder, relating to the basis for the computation of
the Single Borrower Limit and Investments in Equity in terms of section 46 and 17 A respectively and,
section 76 J (1) of the Banking Act.
Yours faithfully,
20
BANKING ACT

The directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section
76J(1) of the Banking Act No. 30 of 1988 as amended by the Banking (Amendment) Act No. 33 of
1995.
Governor
Colombo
21-11-1997.

RESERVE FUND
1. Every licensed specialised bank having an equity capital as defined in the Banking Act shall 1.1 Maintain a reserve fund.
1.2 Transfer to such reserve fund out of net profits of each year, after payment of taxes due for
each year and before the declaration of dividends or the transfer of profits elsewhere :
1.2.1 a sum equivalent to not less than five percent of such net profits until the amount of
the said reserve fund is equal to fifty percent of the equity capital of such licensed
specialised bank and after such percentage is reached :
1.2.2 a sum equivalent to not less than two percent of such net profits until the amount of
the said reserve fund is equal to the equity capital of such licensed specialised bank.
Provided, however, that an amount not less than twenty five per centum of the net profits shall
be utilised for setting off such intangible assets as may be determined by the Central Bank,
before such profits are transferred to the reserve fund.
2. For the purposes of this direction intangible assets shall mean goodwill, preliminary expenses
including legal and other fees, all capitalized expenses and other items not represented by
tangible assets.
BANKING ACT
21

1995.
Governor
Colombo
21-11-1997.

INVESTMENTS IN EQUITY
1.
Subject to paragraphs 2 and 3 below a licensed specialised bank having an equity capital as
defined in the Banking Act shall not invest in the equity of any institution other than a public
company and
1.1 any shareholding acquired by such bank shall not be in excess of ten percent of its capital
funds; and
1.2 the aggregate amount invested in the shares of public companies shall not exceed fifty
percent of its capital funds:
Provided that such acquisition or holding of shares in terms of paragraph 1.1 above shall not
exceed twenty per cent of the paid up capital of the public company:
Provided further a licensed specialised bank may, without exceeding the limits specified above,
acquire shares in a company other than a public company if such acquisition becomes necessary
for the purpose of rehabilitating such company to make it financially viable.
2.
2.1 A licensed specialised bank is permitted to invest in the equity of a private company
subject to sub paragraph 2.2 below of this paragraph, provided such investment does not
exceed 20% of the paid up capital of the private company and 10% of the capital fund of
the licensed specialised bank provided further that the aggregate amount of such
investments in the private companies shall not exceed 25% of the capital funds of the
licensed specialised bank and the total aggregates of its investments in private and public
companies shall not exceed 75% of its capital funds.
2.2 Any equity investment in a private company by a licensed specialised bank shall be
subject to the condition that before the lapse of five years from the date of such
investments or such longer period extended by the Central Bank :
2.2.1
the entire investment in the company shall be purchased by the other shareholders
of the company or
22
BANKING ACT
2.2.2
The provisions of paragraph 1 above shall not apply to 3.1 investment in a subsidiary or associate company of the bank acquired or formed prior to
the issue of these directions.
3.2 investments in any other subsidiary or associate company acquired or formed with the
approval of the Central Bank of Sri Lanka.
3.3 any shareholding which the bank has acquired or might acquire in the course of the
satisfaction of any debt due to such bank, or as a consequence of the underwriting of a
share issue:
Provided that, where as a result of the acquisition of these shares the total investment of
the bank exceeds the percentage of capital funds as determined by the Monetary Board
under paragraph 1 above, the bank shall dispose of such excess shares within two years or
such longer period as may be determined by the Central Bank of Sri Lanka, from the date
of this direction or the date of the acquisition whichever is later.
3.4 Any equity which the bank has acquired or might acquire consequent to a statutory
provision in an Act establishing a financial institution.
3.
the private company be converted to a public company.
BANKING ACT
23

1995.
Governor
Colombo
21-11-1997.
DIRECTIONS UNDER 76J(1)

UNPAID INTEREST
1. No licensed specialised bank shall take into account as income, any unpaid interest on any type
of accommodation on which interest is in arrears for 3 months or more.
2. Every licensed specialised bank shall segregate the accommodation to which paragraph 1.1 is
applicable, from other accommodation under separate control accounts in the General Ledger.
3. Schedule I, attached hereto, shall form part of this direction.
4. This direction will be effective from 1st January, 1998.
SCHEDULE I
SUSPENSION OF INTEREST ON NON-PERFORMING ADVANCES AND
CLASSIFICATION OF BAD AND DOUBTFUL ADVANCES FOR
PROVISIONING PURPOSES
1.
The objective of these requirements is to establish a common standard for income recognition and loan loss
provisioning which would be in line with the accepted international practices.
2.
These requirements represent the minimum requirement that the license specialised banks should observe in respect
of interest-in-suspense, classification of advances as non-performing and specific provision for bad and doubtful
advances. Any specialised bank which chooses to adopt a more stringent standard is encouraged to do so.
3.
The requirement on suspension of interest on non-performing advances are as follows :-
Classification of advances as non-performing

i. Term loans, Block loans, Packing credits,
Pledge loans, Revolving loans Discounting
facilities, Hire purchase loans and other loans
including leases.
ii. Trust Receipts, Bills of Exchange, Bankers
Acceptances or other instruments of similar
nature :
iii.
Rescheduled credit facilities :
When principal and/or interest have been in arrears

for 3 months or more.
When the facility is in arrears for three months after

the maturity date.
When rescheduling occurs before an account is

classified as non-performing, the rescheduled account
shall be classified as non-performing when, in the
24
BANKING ACT
aggregate, the period of time the account is in arrears
before rescheduling (if any) and after rescheduling is 3
months or more.
Where rescheduling occurs after an account has been
shall continue to be classified as non-performing.
Rescheduled loans classified as non-performing can
be declassified only when the repayments under the
rescheduled terms have been complied with for a
continuous period of six months.
All advances classified as non-performing should be segregated from other advances so as to facilitate close followup action.
Treatment of interest on non-performing advances
All interest accrued (but uncollected) from the date an advance is classified as non-performing shall forthwith be
suspended and credited to the Interest-in-Suspense account. It is suggested that the Interest-in-Suspense account
may be suitably responded to by maintaining an Interest Receivable Account (Loans).
Interest earned on an account which has been classified as non-performing shall only be recognised as income as and
when the interest has been collected by the bank. In other words, interest is recognised as income on a cash basis.
Reclassification on non-performing advances as performing
Upon settlement of all arrears in interest/principal due on a non-performing account, the account may be reclassified
as a performing account and thereafter, interest may be recognised as income on an accrual basis. However, funds for
the repayment of the arrears should not be obtained from the creation of new loans or debt instruments from the same
bank in the name of the same borrower.
As stated under (III) at page 1 above, a non-performing advance which has been rescheduled shall be reclassified as
performing only when the repayments under the rescheduled terms have been complied with for a continuous period
of 6 months. On the other hand, for an account which was performing at the time of rescheduling but subsequently
turned non-performing, the account shall be reclassified as a performing account upon full settlement of the
repayments in arrears under the rescheduled terms.
Classification of accounts and provisioning
For the classification of accounts the banks are to be guided by the principles enumerated below. Public sector
borrowers should be treated on an equal footing with private sector borrowers unless the facility extended is
supported by a Treasury Guarantee. Where a facility is guaranteed by the Central Bank, commercial banks, the World
Bank, the Asian Development Bank or any other financial institution approved by the Central Bank, provision should
be made only to the extent of the banks exposure.
(i)
Substandard Accounts
Credit facilities of which the situation of the borrower makes it uncertain that part or the entirety of the
facility will be repaid including those that are in arrears for six months or more but less than twelve months,
shall be classified substandard. Characteristically, these are advances which involve 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. Consequently there is also the distinct possibility that the specialised bank will
be likely to sustain some loss if these deficiencies are not corrected.
The specialised banks are required to make specific provision to cover the amount of the expected exposure,
but not less than 20 per cent of the amount of outstanding, net of any realisable security value and interest
suspensed in the event of such interest being debited to the advances account.
(ii) Doubtful Accounts

Credit facilities with a high risk of partial default including those that are in arrears for 12 to 18 months shall
be classified doubtful. Usually these advances are accounts where full collection is improbable and there is a
high risk of default. The specialised banks are required to make a specific provision to cover the amount of
the expected exposure, but not less than 50 per cent of the amount outstanding, net of realisable value of
security and interest suspensed in the event of such interest being debited to the advances account.
(iii)
Loss Accounts
4.
BANKING ACT
25
Credit facilities where the situation of the borrower makes it virtually certain that the facility will not be
repaid including those that are in arrears for over 18 months shall be classified loss. These advances are
deemed uncollectible and worthless. The accounts classified loss should be covered by a specific provision
equivalent to 100 per cent of the amount of outstanding net of realisable security value, if any, and interest
In exceptional cases, provisions prescribed by the requirement can be varied with the approval of the
Director of Bank Supervision on the basis of representations made by individual banks.
26
BANKING ACT

1995.
Governor
Colombo
21-11-1997.

LIQUID ASSETS
1. Every licensed specialised bank shall maintain minimum average monthly, liquid assets of not
less than 20 per cent of its total monthly deposit liabilities.
2. Every licensed specialised bank shall furnish to the Director of Bank Supervision a monthly
return in a format to be released by him, certifying the total monthly deposit liabilities and the
average total monthly liquid assets as at close of business on the last working day of that month.
Such return should be forwarded before the 15th day of the month following the month to which
the statement relates.
3.1
Cash in hand.
3.2
Balance in a current account in a licensed commercial bank.
3.3
Balance in a deposit account in a licensed specialised bank or a licensed commercial bank

provided such deposit account have a maturity not exceeding one year.
3.4
Money at call in Sri Lanka.
3.5
Treasury bills and securities issued or guaranteed by the Government of Sri Lanka which
have a maturity not exceeding one year.
3.6
Goods receipts.
3.7
Import and export bills.
3.8
Inland bills.
3.9
Cash items in process of collection.
3.10 Treasury Bonds issued under Section 21 A of the Registered Stock and Securities
Ordinance. (see page 47)
3.11 Such other assets as may be determined by the Monetary Board.
3. Liquid Assets for purpose of this direction shall mean -
BANKING ACT
27

Directions given by the Monetary Board under Section 76J(1) of the Banking Act No. 30 of
1988 as last amended by the Banking (Amendment) Act No. 33 of 1995.
Governor
Colombo
23-11-1999.
BANKING ACT DIRECTIONS No.3 OF 1999

(SHARE CAPITAL OWNERSHIP LICENSED SPECIALISED BANKS)
In exercise of the powers conferred by section 76J(1) of the Banking Act No.30 of 1988 as last
amended by the Banking (Amendment) Act No.33 of 1995 the Monetary Board gives the following
Directions
Citation.
1. These Directions may be cited as the Banking Act Directions

No.3 of 1999.
Maximum percentage of
ownership of shares.
2. (1) Subject to the proviso to paragraph (q) of section 76J(1) of

the Banking Act No.30 of 1988 as amended by the Banking
Amendment Act No.33 of 1995 and subparagraph (2) of this
paragraph, the percentage of the share capital in a licensed
specialised bank incorporated or established in Sri Lanka held
(a) by a company, an incorporated body or an individual shall
not exceed 15 per centum of the issued share capital of the
licensed specialised bank; or
(b) in the aggregate, by a company and anyone or more of the
following
(i) its subsidiary
(ii) its holding company;
(iii) a subsidiary of its holding company; or

(iv) a company in which the company or its subsidiary or
holding company or a subsidiary of its holding
company has a substantial interest, where the
substantial interest held in the shares of the company
first mentioned in this clause exceeds 10 per centum
of its paid up capital,
shall not exceed 20 per centum of the issued share capital of
the licensed specialised bank; or
(c)
in the aggregate, by an individual and one or more of the

following
28
BANKING ACT
(i) a close relation of the individual;

(ii) a company in which the individual or a close relation
of the individual has a substantial interest, where the
substantial interest held in the shares of the company
exceeds 10 per centum of the paid up capital of the
company;
(iii) a subsidiary of a company referred to in
subparagraph (c)(ii);
(iv) a holding company of a company referred to in
subparagraph (c)(ii);
(v) a subsidiary of a holding company referred to in
subparagraph (c)(iv);
(vi) a company in which a company referred to in
subparagraph (c)(ii) or its subsidiary, holding
company or a subsidiary of its holding company has
a substantial interest, where the substantial interest
held in the shares of the company first mentioned in
this clause exceeds 10 per centum of its paid up
capital;
(vii) an incorporated body, other than a company, in
which the individual or a close relation of the
individual has a substantial interest, where the
substantial interest held in the subscribed capital of
the incorporated body exceeds 10 per centum of
such capital.
shall not exceed 20 per centum of the issued share capital of
the licensed specialised bank.
(2) (a) Notwithstanding the limits imposed by subparagraph (1),
one of the promoters of a licensed specialised bank may,
with the approval of the Monetary Board, hold as a
company, incorporated body or an individual or in the
aggregate, as set out in subparagraph (1)(b) or (c), such
percentage, not exceeding 25 per centum, of the issued
share capital of the bank.
3. In order to ensure compliance with the Direction contained in

paragraph 2, a licensed specialised bank shall not enter the name of
any company, incorporated body or individual referred to in
paragraph 2 in the register of members of the bank as the holder of
such number of shares as is in excess of the percentage specified in
that paragraph.
Steps to secure compliance by

banks.
4. (1) Anything contained in paragraph 2 shall not be construed

to restrict the ownership of shares in
Non-application of paragraph 2.
(b) For the purposes of this paragraph promoter means a

company, incorporated body or an individual, who in the
opinion of the Monetary Board, is predominantly
responsible in promoting the establishment of a company as
a bank.
BANKING ACT
29
(a) a licensed specialised bank established by a Statute, being

shares held by the Government or a public corporation or a
statutory body or a statutory fund;
(b) a licensed specialised bank, being shares acquired by any
person consequent to the underwriting of shares of such
licensed specilised bank with the prior written approval of
the Central Bank subject to such terms and conditions as
may be imposed by the Central Bank;
(c)
Revocation of Banking Act

Directions dated 21.11.1997.
a licensed specialised bank, being shares acquired by any

person after obtaining the prior written approval of the
Monetary Board where the Monetary Board considers that
such acquisition of shares is necessary or expedient in the
interest of the national economy.
5. (1) The Banking Act Directions under section 76J(1) of the

Banking Act dated 21.11.1997 are hereby revoked.
(2) The revocation of the Directions by subparagraph (1) shall

not affect any penalty or liability incurred under those Directions
prior to the revocation.
30
BANKING ACT

1995.
Governor
Colombo
21-11-1997.

SINGLE BORROWER LIMIT
1. Unless permitted by the Monetary Board under exceptional circumstances, no licensed
specialised bank having an equity capital as defined in the Banking Act shall grant
accommodation, exceeding thirty per cent of the capital funds of such bank as at end of the
preceding financial year
1.1 to any one company, public corporation, firm, association of persons or individuals;
1.2 in the aggregate to
1.2.1
an individual, his close relations or to a company or firm in which he has a

substantial interest;
1.2.2
a company and one or more of the following

1.2.2.1 its subsidiaries;
1.2.2.2 its holding company;
1.2.2.3 its associate company;
1.2.2.4 a subsidiary of its holding company; or
1.2.2.5 a company in which such company or its subsidiary, or its holding
company, or a subsidiary of its holding company has a substantial
interest;
2. 2.1 For purpose of single borrower limit, accommodation granted against the security of
items, indicated at 2.2.1 to 2.2.4 below, shall not be included in the computation of single
borrower limit.
2.2.1 Cash;
2.2.2 Government/Central Bank Securities;
2.2.3 Treasury/Central Bank Guarantees;
2.2.4 Guarantees issued by Asian Development Bank, International Development
Association, World Bank or other International Institutions acceptable to the
2.3 The provision of paragraph 1 shall not apply to inter lending of licensed specialised banks.
2.4 For purpose of computing the maximum amount of accommodation under paragraph 1
above, the outstanding amount of all accommodation granted before or after the issue of
direction shall be taken into account.
Provided that accommodation exceeding fifteen per cent of capital funds granted under
paragraph 1.1 or 1.2 above shall not when aggregated exceed fifty per cent of its total advances
including total commitment to undertake contingent liabilities, as at end of the preceding
financial year.
BANKING ACT
31

24th November 2003
Dear Sir / Madam
DIRECTION ISSUED UNDER SECTION 76 J (1) OF THE BANKING ACT

ON SINGLE BORROWER LIMIT
I enclose herewith an amendment to the above Direction, which would take effect immediately.
Yours faithfully,
AMENDMENT TO THE DIRECTION UNDER SECTION 76 J (1)

OF THE BANKING ACT ON SINGLE BORROWER LIMIT
The Direction issued under section 76J(1) of the Banking Act on Single Borrower Limit is hereby
amended by the insertion of the following paragraphs as paragraph 1A and 1B:
1A. Where a licensed specialised bank having an equity capital as defined in the Banking Act increases its
capital funds subsequently through:
I. funds realised from a new share issue or a rights issue, such increased capital may be considered
for the computation of the Single Borrower Limit under paragraph 1 above, from the date on
which the proceeds of the share issue were received by the bank and accounted for in its books;
II. current years profits- such profits could be considered to the extent that the External Auditors
have certified such profits as being capitalised profits as at the date of certification and may be
included in the computation of the Single Borrower Limit under paragraph 1 above;
1B. Further, if a licensed specialised bank incurs losses during the current year or if there is any reduction
in the retained profits due to payment of dividends etc. capital funds considered for the computation of
the Single Borrower Limit under paragraph 1 above should be reduced accordingly to reflect the
reduction.
Colombo
18 November, 2003
Sgd. A S Jayawardena
Governor
32
BANKING ACT

1995.
Governor
Colombo
21-11-1997.

ACCOMMODATION TO DIRECTORS & RELATED COMPANIES
1. No licensed specialised bank shall grant accommodation to
1.1 any director or to a close relation of such director an amount exceeding the amount of
accommodation, if any, extended to him or such close relation, outstanding on the day prior
to the date of his appointment as a director or the date of this direction whichever is later or
Rs.1 million, whichever is more and such accommodation is secured by such specified
security referred to at paragraph 7 below.
1.2 any concern in which such director or his close relation
1.2.1
has a shareholding in excess of 10 per cent of the paid up capital of the concern if
such concern is a company;
1.2.2
is the sole proprietor or is a partner;

unless such accommodation is secured by specified security referred at paragraph 7
below.
3. Where any accommodation has been granted by a licensed specialised bank to a person or close
relation of a person or to any concern mentioned at paragraph 1.2.1 or 1.2.2 above, and if that
person is a director of a licensed specialised bank on the date of this direction or appointed a
director after the date of this direction, steps shall be taken to obtain such specified security
referred to at paragraph 7 below within one year from the date of this direction or from the date
of appointment as a director as may be applicable or such longer period as may be given by the
Monetary Board.
4. Where such special security at paragraph 7 below has not been provided within the time period
granted or any extension granted by the Monetary Board, such director shall be deemed to have
vacated office on the expiry of the period granted /extended to obtain such specified securities
under paragraph 3 above.
2. Any accommodation granted in accordance with paragraph 1 above shall be sanctioned at a

meeting of the Board of Directors with not less than two-thirds of the number of the directors
constituting the Board of Directors of the licensed specialised bank (other than the director
concerned) voting in favour of such accommodation.
BANKING ACT
33
5. Provisions of paragraph 3 & 4 above shall not apply if and when the director concerned vacates
such office by death, retirement, resignation or otherwise.
6. No accommodation or any part thereof, granted by a licensed specialised bank to a director or a
close relation of the director or to any concern mentioned at paragraph 1.2.1 & 1.2.2 above, shall
be remitted without the prior approval of the Monetary Board and any such remission without
such approval shall be null and void.
7. The specified securities referred to at paragraphs 1, 3 & 4 above shall be 7.1 Sri Lanka Government Guarantees;
7.2 Bank Guarantees;
7.3 Guarantees of International Financial Institutions;
7.4 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;
7.5 Cash Deposits held under lien to the order of the lending licensed specialised bank
provided that the accommodation granted would not exceed 90 per cent of such cash
deposits;
7.6 Life Insurance Policies issued in Sri Lanka and assigned to the lending licensed specialised
bank provided that the accommodation granted would not exceed 75 per cent of the
surrender value of such policy;
7.7 Immovable property held on a freehold basis and on which a primary mortgage has been
taken by the lending licensed specialised bank provided that the accommodation granted
would not exceed 60 per cent of the value of such property;
7.8 Immovable property held on a leasehold basis provided that 7.8.1 the lease has been granted by a statutory body;
7.8.2 the unexpired period of lease is at least 50 years;
7.8.3 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;
7.8.4 a primary mortgage has been taken on the leasehold rights by the lending licensed
specialised bank;
and provided further that the accommodation granted does not exceed 60 per cent
of such property.
7.9 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;
7.10 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;
7.11 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 accommodation granted would not exceed 40 per cent of the market value of such
goods;
7.12 Mortgage of Plant and Machinery provided that the accommodation granted shall not
exceed 50% of the value of such plant and machinery as at date of accommodation.
34
BANKING ACT

1995.
Governor
Colombo
21-11-1997.

ACQUISITION OF IMMOVABLE PROPERTY
1. Except with the approval of the Central Bank a licensed specialised bank having an equity
capital as defined in the Banking Act shall not purchase or in any way acquire any immovable
property or any right therein exceeding in the aggregate ten percent of its capital funds.
2. Where a licensed specialised bank has purchased or in any other way acquired any immovable
property or any right therein in excess of limits imposed at paragraph 1, on or before the date of
this direction, such licensed specialised bank shall conform with paragraph 1 before the expiry
of two years from the aforementioned date.
3. The restriction at paragraph 1 shall not prevent a licensed specialised bank from
3.1 acquiring immovable property as security for a debt and in the event of a default in
payment of the debt, from holding such immovable property provided that the licensed
specialised bank shall sell such property or any right therein, if such holding exceed the
limit prescribed in paragraph 1 above, within a period of two years from the date it acquires
or this direction whichever is later or such longer period as may be determined by the
Central Bank;
3.2 acquiring immovable property reasonably required for purpose of conducting its business,
or housing or providing amenities to its staff.
BANKING ACT
35

1995.
Governor
Colombo
21-11-1997.

CONDITIONS FOR GRANT OF ACCOMMODATION
1. No licensed specialised bank shall grant any accommodation 1.1 on the security of its own shares;
1.2 on the security of the shares of any of its subsidiaries;
1.3 to purchase its own shares;
1.4 on the security of shares of a company in which a company referred to in 1.2 above has a
shareholding, in excess of ten percent of the paid up capital of the former company.
36
BANKING ACT

1995.
Governor
Colombo
21-11-1997.

SPECIFIC PROVISIONS
1. All licensed specialised banks are directed to make specific provisions, with effect from 1st
January, 1998 for bad and doubtful debts and, in doing so, shall
1.1 comply with the requirements set out in Schedule-I and Schedule II annexed hereto which
shall form part of this direction and
1.2 comply with the requirements at paragraph 1.1 above, prior to the declaration of dividends,
transfer of profits or making any public disclosure in the form of an financial statement of
their operations.
SCHEDULE I
SUSPENSION OF INTEREST ON NON-PERFORMING ADVANCES AND CLASSIFICATION OF

BAD AND DOUBTFUL ADVANCES FOR PROVISIONING PURPOSES
1.
The objective of these requirements is to establish a common standard for income recognition and loan loss
provisioning which would be in line with the accepted international practices.
2.
These requirements represent the minimum requirement that the license specialised banks should observe in respect
of interest-in-suspense, classification of advances as non-performing and specific provision for bad and doubtful
advances. Any specialised bank which chooses to adopt a more stringent standard is encouraged to do so.
3.
The requirement on suspension of interest on non-performing advances are as follows :-
i. Term loans, Block loans, Packing credits,

Pledge loans, Revolving loans Discounting
facilities, Hire purchase loans and other loans
including leases.
ii. Trust Receipts, Bills of Exchange, Bankers
Acceptances or other instruments of similar
nature :
iii.
Rescheduled credit facilities :
When principal and/or interest have been in arrears

for 3 months or more.
When the facility is in arrears for three months after

the maturity date.
When rescheduling occurs before an account is
shall be classified as non-performing when, in the
aggregate, the period of time the account is in arrears
Classification of advances as non-performing
BANKING ACT
37
before rescheduling (if any) and after rescheduling is

3 months or more.
Where rescheduling occurs after an account has been
shall continue to be classified as non-performing.
Rescheduled loans classified as non-performing can
be declassified only when the repayments under the
rescheduled terms have been complied with for a
continuous period of six months.
All advances classified as non-performing should be segregated from other advances so as to facilitate close followup action.
Treatment of interest on non-performing advances
All interest accrued (but uncollected) from the date an advance is classified as non-performing shall forthwith be
suspended and credited to the Interest-in-Suspense account. It is suggested that the Interest-in-Suspense account
may be suitably responded to by maintaining an Interest Receivable Account (Loans).
Interest earned on an account which has been classified as non-performing shall only be recognised as income as and
when the interest has been collected by the bank. In other words, interest is recognised as income on a cash basis.
Reclassification on non-performing advances as performing
Upon settlement of all arrears in interest/principal due on a non-performing account, the account may be reclassified
as a performing account and thereafter, interest may be recognised as income on an accrual basis. However, funds for
the repayment of the arrears should not be obtained from the creation of new loans or debt instruments from the same
bank in the name of the same borrower.
As stated under (III) at page 1 above, a non-performing advance which has been rescheduled shall be reclassified as
performing only when the repayments under the rescheduled terms have been complied with for a continuous period
of 6 months. On the other hand, for an account which was performing at the time of rescheduling but subsequently
turned non-performing, the account shall be reclassified as a performing account upon full settlement of the
repayments in arrears under the rescheduled terms.
4.
Classification of accounts and provisioning

For the classification of accounts the banks are to be guided by the principles enumerated below. Public sector
borrowers should be treated on an equal footing with private sector borrowers unless the facility extended is
supported by a Treasury Guarantee. Where a facility is guaranteed by the Central Bank, commercial banks, the World
Bank, the Asian Development Bank or any other financial institution approved by the Central Bank, provision should
be made only to the extent of the banks exposure.
(i)
Substandard Accounts
Credit facilities of which the situation of the borrower makes it uncertain that part or the entirety of the
facility will be repaid including those that are in arrears for six months or more but less than twelve months,
shall be classified substandard. Characteristically, these are advances which involve 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. Consequently there is also the distinct possibility that the specialised bank will
be likely to sustain some loss if these deficiencies are not corrected.
The specialised banks are required to make specific provision to cover the amount of the expected exposure,
but not less than 20 per cent of the amount of outstanding, net of any realisable security value and interest
(ii) Doubtful Accounts
Credit facilities with a high risk of partial default including those that are in arrears for 12 to 18 months shall
be classified doubtful. Usually these advances are accounts where full collection is improbable and there is a
high risk of default. The specialised banks are required to make a specific provision to cover the amount of
the expected exposure, but not less than 50 per cent of the amount outstanding, net of realisable value of
security and interest suspensed in the event of such interest being debited to the advances account.
(iii)
Loss Accounts
Credit facilities where the situation of the borrower makes it virtually certain that the facility will not be
repaid including those that are in arrears for over 18 months shall be classified loss. These advances are
deemed uncollectible and worthless. The accounts classified loss should be covered by a specific provision
38
BANKING ACT
equivalent to 100 per cent of the amount of outstanding net of realisable security value, if any, and interest
In exceptional cases, provisions prescribed by the requirement can be varied with the approval of the
Director of Bank Supervision on the basis of representations made by individual banks.
SCHEDULE II
VALUATION OF SECURITY FOR PROVISIONING PURPOSES

(1)
Primary Mortgage Over Property

(a)
Where a auction under the powers of parate execution has not yet been instituted, the forced sale value (FSV)
has to be taken provided that a current professional valuation report on property to that effect is available.
(b) Where resolution has been passed under parate execution to auction the property but action is pending,
minimum price (MP), if so fixed, is to be used.
(c)
Where auction has not been successful and the FSV of the property is lower than the MP, FSV is to be used.
(d) Where unsuccessful MP is based on FSV and where new MP has to be determined, a 10 per cent discount
should be made on the unsuccessful MP.
Note : Current Professional Report is defined as a report that is not more than two years old.
(2)
Deposits of Title Deeds with an Undertaking to Mortgage

No value should be assigned until a legal mortgage is executed.
(3)
Assignment Over Life Polices

90 per cent of the surrender value is to be used provided confirmation of surrender value from the insurer is
available and the assignment in the banks favour is duly registered.
(4)
Lien Over Fixed Deposit/Savings Deposit

Full amount of the deposit may be used provided the depositor has duly signed a lien in the banks favour.
(5)
Deposit of Certificates of Deposit

Paid-up value minus 3 per cent stamp duty on the face value is to be used.
(6)
Assignment of Shares
(a) Quoted
Normally, 90 per cent of the latest market price is to be taken. Appropriate discounts should be considered if
the shares are either thinly traded and/or comprise a large block of shares. Premiums may only be considered
where there is a valid offer at the highest price as evidenced by a firm commitment, such as, purchase
contracts or undertaking letters provided by brokers.
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 auditors
certificate evidencing the value per share is available. If appropriate financial statements/certificates are not
available, no value is to be given. In the case of shares where sales are temporarily suspended, the last quoted
prior to suspension may be used.
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 companys auditors. A higher valuation
may be given only if there is a firm purchase commitment as evidenced by purchase contracts or undertaking
letters provided by brokers.
(7)
(a) Mortgage Over Plant, Machinery and Equipment

In the absence of a professional 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, would be
applicable.
(b) Mortgage Over Motor Vehicles, Motor Cycles and Farm Power Equipment
(b) Unquoted
BANKING ACT
39
In the absence of professional valuation the net book value calaculated 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.
(8)
Pledge Over Stocks/goods under the Banks Control

50 per cent of the market value determined on a case-by-case basis may be applicable.
(9)
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.
(10) Assignment of Books Debts

Generally, no value may be assigned unless the bank is certain and can prove that the debtors are worth the value
quoted.
(11) Debentures
No value can be attached unless it is certified by a receiver/liquidator/professional valuer.
(12) Guarantees
(a) Personal
Generally, no value, if such guarantee is unsupported. If supported by security mentioned above, the relevant
security valuation base may be applied.
(b) Licensed Banks/Banks Abroad or Any Other Banking Institutions
Full value.
(c)
Government Guarantees
Full value.
(d) Others
To be considered on a case by case basis.
(13) All other Securities
To be considered on a case by case basis which should be documented in the relevant credit file.
40
BANKING ACT

15th August 2003
Licensed Specialised Banks & SLBA
AMENDMENT TO DIRECTIONS ON SUSPENSION OF INTEREST ON

NON-PERFORMING ADVANCES AND CLASSIFICATION OF BAD AND
DOUBTFUL ADVANCES FOR PROVISIONING PURPOSES
As discussed at the meeting of the Chief Executive Officers of Licensed Commercial Banks and
Licensed Specialised Banks held on 23 January 2003 and subsequently, the attached amendment to the
above Directions is introduced, and would take effect from 01 January 2004.
Please acknowledge receipt.
VALUATION OF SECURITIES FOR PROVISIONING PURPOSES

Amendment to Directions issued under Section 46A of the Banking Act, No. 30 of
1988 as amended by Banking Amendment Act, No. 33 of 1995
Section 1 of Schedule II of the above Direction will be replaced with the following paragraph with
effect from 01.01.2004.
1.
Primary Mortgage Over Property

(i) At the time of first provisioning for a loan, only 75% of the forced sale value (FSV) of the
property based on a current professional valuation report can be considered as the value of
security (i.e. an initial haircut of 25% will be applied);
(ii) When an advance is transferred to the Loss category, the following progressive discounts will
apply to the forced sale value of immovable property held as collateral, based on a current
professional valuation report, depending on the time period for which it remains in the Loss
category:
No. of years in loss category
% of FSV of immovable property that can be
counted as the value of security
1-2 years
2-3 years
3-4 years
60%
50%
40%
i. In respect of loans granted against residential property which is occupied by the borrower for
residential purposes is a report that is not more than four years old.
ii. In respect of loans granted for all other purposes is a report that is not more than three years old.
Colombo
15 August, 2003
Sgd. A S Jayawardena
Governor
All immovable property held as collateral, relating to loans in the Loss category for more than
4 years should be reviewed on a regular basis, and discounted further at the discretion of the
Management.
Note: A Current professional valuation report,
BANKING ACT
41

1995.
Governor
Colombo
21-11-1997.

PRIOR APPROVAL OF THE CENTRAL BANK
TO CARRY ON CERTAIN TRANSACTIONS
1. A licensed specialised bank shall require the written approval of the Monetary Board for the
following
1.1 to open or close an agency or office of such bank or close a branch;
1.2 to acquire the business of another licensed specialised bank or bank or of any branch of
another licensed specialised bank;
1.3 to merge with another licensed specialised bank or branch of another licensed specialised
bank.
2. The approval under these directions may be granted subject to such terms and conditions as may
be specified by the Monetary Board.
42
BANKING ACT

1995.
Governor
Colombo
21-11-1997.

MEMORANDUM & ARTICLES TO BE ALTERED WITH APPROVAL
1. A Licensed specialised bank which is a company as defined in Section 449 of the Companies
Act, No.17 of 1982, shall not alter its Memorandum of Association and the Articles of
Association, without the prior written approval of the Central Bank.
BANKING ACT
43

1995.
Governor
Colombo
21-11-1997.

PAYMENT OF DIVIDENDS
1. No licensed specialised bank incorporated or established within Sri Lanka by or under any
written law shall pay any dividend on its shares until all its capitalised expenses including
preliminary expenses and other items of expenditure not represented by tangible assets, have
been completely written off.
44
BANKING ACT

1995.
Governor
Colombo
21-11-1997.

DISQUALIFICATION FOR BEING APPOINTED OR ELECTED DIRECTOR
1. No person shall be appointed or elected as a director of a licensed specialised bank if he
1.1 has been under any written Law in force in Sri Lanka, found or declared to be of unsound
mind; or
1.2 is a person who, having been declared insolvent or bankrupt under any law in force in Sri
Lanka or in any other country, is an undischarged insolvent or bankrupt; or
1.3 has been convicted of an offence involving moral turpitude and punishable with a term of
imprisonment; or
1.4 is an employee or a director of any other licensed specialised bank or an employee (other
than the chief executive officer) of the licensed specialised bank.
Provided a director or employee of any licensed specialised bank shall not be disqualified
of being a director of a licensed specialised bank only if the latter licensed specialised bank
is a subsidiary of the first mentioned licensed specialised bank
2. A director of a licensed specialised bank shall be removed from the office of director if
2.1 he becomes subject to any of the disqualifications mentioned in paragraph (1) above; or
2.3 he has done an act or thing which is manifestly opposed to the objectives and interests of
the licensed specialised bank.
2.2 he becomes permanently incapable of performing his duties; or
BANKING ACT
45

1995.
Governor
Colombo
21-11-1997.

SECRETARY OF A LICENSED SPECIALISED BANK
1. Subject to paragraph 3 of this direction no licensed specialised bank shall appoint as its
Secretary, a person
1.1 unless such person possesses such qualifications as may be prescribed for a Secretary of a
company under Sub section (1) of Section 176 of the Companies Act No.17 of 1982, and;
1.2 Unless such person is an employee of that licensed specialised bank.
2. Such person so appointed as Secretary shall not become an employee of any other institution so
long as such person continues to be employed as the Secretary of that licensed specialised bank.
3. This direction shall not apply to the person presently employed as the Secretary of any
Institution specified in Schedule III of the Banking Act.
46
BANKING ACT

1995.
Governor
Colombo
21-11-1997.

DISQUALIFICATION FOR APPOINTMENT AS MANAGER,
SECRETARY OR OTHER OFFICIAL OF A LICENSED SPECIALISED BANK
1. No person shall be appointed as Manager, Secretary or other official of a licensed specialised
bank and any person appointed as Manager, Secretary or other official of such bank shall be
removed from office if he
1.1 is a person who, having been declared insolvent or a bankrupt under any law in Sri Lanka
or in any other country, is an undischarged insolvent or bankrupt; or
1.2 is serving or has served a sentence of imprisonment imposed by any court in Sri Lanka or
by any other country; or
1.3 has been convicted of any act which is of a fraudulent or illegal character.
2. No person who has been a director or has been a chief executive officer of a licensed specialised
bank which has been would up by an order of court shall, without the written approval of the
Central Bank, act as a director or chief executive officer of a licensed specialised bank.
3. No licensed specialised bank shall employ or be managed by a managing agent other than an
employee of such licensed specialised bank.
BANKING ACT
47

1995.
Governor
Colombo
21-11-1997.

RESTRICTION IN THE SALE, TRANSFER &C. OF IMMOVABLE ASSETS
1. Without the prior written approval of the Central Bank, no licensed specialised bank shall sell,
transfer, assign or dispose of any of its immovable assets below the market value of the assets or
increase the valuation of the assets as recorded in the books of the bank above the market value
of the assets, excluding immovables property acquired in default of a debt.
48
BANKING ACT
BS/38/90
Dept. of Bank Supervision
8th Floor, Renuka Building
41, Janadhipathi Mawatha
Colombo 1.
30-04-1998
TO : Licensed Specialised Banks (03)
Dear Sir,
LIST OF QUALIFIED AUDITORS

S.38A 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.38 A(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.38 A(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.
Please acknowledge receipt of this letter.
Yours faithfully,
Sgd. Y. A. Piyatissa
LIST OF QUALIFIED AUDITORS

S.38A (1) of the Banking Act No.30 of 1988 as amended by Act No.33 of 1995
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 Markar Mawatha

P.O. Box 186
Colombo 3.
3.
Coopers & Lybrand
P. O. Box 918
315 Vauxhall Street
Colombo 2.
Name
BANKING ACT
4.
Someswaran Jayawickrema & Co.
222 Galle Road

Colombo 4.
5.
H L B Edirisinghe & Co.
45 Braybrooke Street
Colombo 2.
6.
B R de Silva & Co.
17 Park Avenue
Colombo 5.
7.
Kreston MNS & Co.
P. O. Box 210
50/2 Sir James Peiris Mawatha
Colombo 2.
8.
Burah Hathy & Co.
Charter House
65/2, Sir Chittampalam A. Gardiner Mawatha
P. O. Box 962
Colombo 2.
9.
B V Fernando & Co.
271/5 Canal Row

Colombo 1.
10.
Tissa Fernando & Co.
519/2B Elvitigala Mawatha

Colombo 5.
49
50
BANKING ACT

Directions issued by the Monetary Board of the Central Bank of Sri Lanka, under Section
76J(1) of the Banking Act No.30 of 1988 as last amended by the Banking (Amendment) Act
No.33 of 1995 in respect of deposits.
Governor
Colombo
7th May 1998
LICENSED SPECIALISED BANKS (DEPOSITS)

DIRECTIONS
1. Every Licensed Specialised Bank shall, in
opening an
account for a depositor, require the depositor to sign a
mandate form and a signature card in such form as may be
approved by the Board of Directors of the Bank.
Opening of Deposit Accounts
2. The terms and conditions under which any deposit may be

accepted by a Licensed Specialised Bank from a depositor
shall, among other matters, state
Terms and Conditions
(a) whether interest on such deposit is paid or credited on a

daily balance or otherwise;
(b) the minimum balance, if any, that is required to be
maintained in such account;
(c)
the terms and conditions relating to deposit and withdrawal

of money at any of its branches or automated teller
machines in and from an account.
3. Every Licensed Specialised Bank shall issue to a depositor if

such depositor requests
Pass Books & receipts and

certificates
(a) in respect of a savings account, a pass book or such other

document, recording the operations of the account;
4. Interest shall not be paid to a depositor or be credited to a

depositors account
(a) on any deposit of money in such account, other than a
savings account, if the deposit is withdrawn before 7 days
from the date of deposit;
(b) on the sum in deposit in a savings account in respect of
any month in any year, where there have been more than 4
withdrawals from that account in that month.
Interest when not payable
(b) in respect of other deposit accounts, a receipt or a

certificate specifying the amount deposited and the manner
of its withdrawal.
BANKING ACT
51
Communication of terms and

conditions to depositors
5. Every Licensed Specialised Bank shall, before opening a

deposit account for a depositor, communicate in writing to the
depositor the terms and conditions specified in paragraph 2
and receive an acknowledgement in writing from such
depositor that the depositor has received and has agreed to
accept such terms and conditions.
Non-application of Directions
6. These Directions shall not apply to any deposits made by a

Licensed Commercial Bank or a Licensed Specialised Bank.
52
BANKING ACT
BS/31/90 Vol. IV
Colombo 1.
18th May, 1998
TO : Licensed Specialised Banks
LIQUID ASSETS
DIRECTION UNDER SECTION 76J(3) OF THE
BANKING ACT NO.30 OF 1988 AS AMENDED BY ACT NO.33 OF 1995
The Monetary Board, in terms of Paragraph 3.10 of the above mentioned Directions dated
21st November 1997, has determined that Treasury Bonds issued under Section 21 A of the
Registered Stock and Securities Ordinance shall be liquid assets.
The Licensed Specialised Banks may, therefore, take into account the Treasury Bonds they
hold on their account for the purpose of complying with the provisions of the Directions issued
under Section 76J(3) of the Banking Act No.30 of 1988 as amended by Act No.33 of 1995, relating
to their obligation to maintain the required amount in liquid assets.
Yours faithfully,
Section 76J(3)
SMIB
NSB
BANKING ACT
PART B
GUIDELINES
53
54
BANKING ACT
BANKING ACT
55
BS/38/90
Dept. of Bank Supervision
Colombo 1.
20 May 1998
TO : All approved External Auditors of
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,
56
BANKING ACT
BANKING ACT
57
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
1.
(1)
The verification of prudential returns;
(2)
The evaluation of control systems;
(3)
The expression of opinions on provisioning policies and
(4)
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 Banks 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 :
4.
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 :
5.
(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.
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 institutions 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 :
(1)
Improper disclosure of information;
(2)
Error;
(3)
Fraud;
(4)
Interruption of business due to hardware or software failure;
(5)
Ineffective planning and risks associated with end-user computing operations.
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 act 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 Banks management immediately in certain situations, reference to
which shall be contained in their annual Management Letter. The situations envisaged in this regard are :
58
6.
BANKING ACT
(a)
Where it has come to the Auditors 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 institutions 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.
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 1995
1.
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.
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;
(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;
Planning and Audit
BANKING ACT
6.
(g)
The timing and nature of the audit work to be carried out;
(h)
The use of staff with adequate training and experience.
59
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)
(ii)
(iii)
(b)
(i)
the parties, including, in the case of a loan, advance or other credit exposure, whether it is subparticipated 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;

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;
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 institutions 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)
any income and/or expenditure, current and/or deferred which arises from it;
provide details, as appropriate, for each transaction and commitment, showing :
(v)
(c)
its nature and purpose;

any asset and/or liability, actual and contingent, which respectively arises or may arise from it; and
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
(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.
60
BANKING ACT
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 Banks 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 banks 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.
(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
(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 banks 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
14. The Auditors should assess the extent, nature and impact of automation within the bank and plan and perform their
work accordingly.
BANKING ACT
61
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 banks 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 :
(1)
Segregation of duties wherever these controls are deemed necessary;
(2)
Physical controls wherever they are deemed necessary;
(3)
Authorization and approval wherever they are deemed necessary;
(4)
Arithmetical and accounting accuracy and controls where they are deemed necessary;
(5)
Supervision controls where they are deemed necessary;
(6)
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.
(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.
62
BANKING ACT
21. Other controls which affect a number of areas :

controls over the authorization and correct recording of :
(i)
(ii)
nostro transactions; and

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)
(ii)
accounting policies ; and

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.
(a)
BANKING ACT
63

27 April 2004
To : All Approved External Auditors
Dear Sir,
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
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.
64
BANKING ACT
Annex 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
ADDENDUM
Non 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.
BANKING ACT
65
02/04/004/0002/001
Colombo 01.
15th December 1999
Dear Sir,
PRESCRIBED ACCOUNTING FORMAT FOR THE PUBLICATIONS OF

ANNUAL AUDITED ACCOUNTS OF LICENSED SPECIALISED BANKS
We enclose herewith the Prescribed Accounting Format specified by the Monetary Board, in
terms of Section 38(3) of the Banking Act No. 30 of 1988 as amended by Section 76(H) of the
Banking (Amendment) Act No. 33 of 1995, for the publication of annual audited accounts of
Licensed Specialised Banks (LSBs).
All LSBs are required to publish their annual audited accounts for the accounting periods
ending on or after 31.12.1999 in the enclosed Prescribed Accounting Format.
Yours faithfully,
Sgd. Ms. C. I. Fernando

66
BANKING ACT
Profit and Loss Account for the year ended ......

BANK
Note
GROUP
Curr. Yr.
19
Prev. Yr.
19
Curr. Yr.
19
Prev. Yr.
19
(Rs.)
(Rs.)
(Rs.)
(Rs.)
Income

======== ======== ======== ========
Interest Income
Interest Expense
Other Income
Less : Operating Expenses

Personnel Costs
Provision for Staff Retirement Benefits
Premises, Equipment and Establishment Expenses
Fee and Commission Expenses
Provision for Loan Losses
Provision for Fall in value of Dealing & Investment securities
Other Overhead Expenses
Net Interest Income
Operating Profits
Share of Associate Companies Profits before Taxation
Profit on Ordinary Activities before tax

Less : Tax on profits on Ordinary Activities
Profits on Ordinary Activities after tax

Less : Minority Interests
Extraordinary Items
Retained Profit/(Accumulated Loss) brought forward

Prior Year Adjustments
10
Profit Available for Appropriation
Transfers to Reserves
Transfer to Reserve Fund
Dividends
11
Retained Profit Carried Forward
Earnings per share
========
========
========
========
========
========
========
========
12
Appropriations
BANKING ACT
67
Balance Sheet as at
BANK
Note
GROUP
Curr. Yr.
19
Prev. Yr.
19
Curr. Yr.
19
Prev. Yr.
19
(Rs.)
(Rs.)
(Rs.)
(Rs.)
ASSETS
Cash and Short Term Funds
13
Balances with Central Bank
Treasury Bills and other securities eligible for rediscounting

with Central Bank
14
Government and other securities held for dealing purposes
15
Placements with and loans to other Banks and Financial Institutions
16
Bills of Exchange
17
Loans and Advances
18
Lease Rentals Receivable
19
Interest 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
Group Balances Payable
30
Deferred Taxation
31
Other Liabilities
32
SHAREHOLDERS FUNDS
Share Capital / Assigned Capital
33
34
Reserves
Shareholders Funds
35
Minority Interest
========
========
========
========
========
========
========
========
TOTAL LIABILITIES & SHAREHOLDERS FUNDS
Commitments and Contingencies
36
68
BANKING ACT
Cash Flow Statement for the Year Ended

BANK
GROUP
Curr. Yr.
19
Prev. Yr.
19
Curr. Yr.
19
Prev. Yr.
19
(Rs.)
(Rs.)
(Rs.)
(Rs.)
Cash Flows from Operating Activities

Interest received
Fees and Commission Receipts
Interest Payments
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 Activities

Dividends 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 Activities
Issue/(Redemption) of Shares
Increase/(Decrease) of Long Term Borrowings
Net Increase in Other Borrowings
Dividends Paid
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 year
Balances with Central Bank
Government of Sri Lanka Treasury Bills
========
========
========
========
Net Cash from Financing Activities
BANKING ACT
69
NOTES TO THE ACCOUNTS AS AT

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 accounting 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 subsidiaries 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 Groups share of profits and losses of the investee
companies is accounted for in the Consolidated Profit and Loss account for the year. The carrying value of the
investment in the Consolidated Balance Sheet is thereby increased or decreased to recognise the Groups 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 Balance Sheet except as indicated in (b) below. Translation gains and losses are dealt with through the
Profit & Loss Account.
(b)
Forward exchange contracts are valued at the forward market rates ruling on the date of the Balance Sheet.
Unrealized 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.
1.1.5 Deferred Taxation
Deferred taxation is provided on the basis of tax effects accounting using 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. Partial application method cannot be used as it is against the matching and prudence
concept.
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 interest which is not accrued to revenue.
(b)
Specific provisions for possible loan losses are based on a continuous review of all advances in accordance
with CBSL directions (Briefly summarise the CBSL requirements).
(a)
State the policy for general provisioning.
1.2.2 Investments (SLAS 22)

Specify the accounting policy followed on valuation of dealing and investment securities.
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 assets.
Leasehold Properties
Buildings
Over the period of lease

... 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.
70
BANKING ACT
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 Pensions and Retirement Benefits (SLAS 16)
The bank has a non-contributory pension scheme for the members of the staff. The banks policy is to fund the
pension reserve annually from post tax profits by appropriating a sum which, in the managements 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
pension 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 Profit and Loss Account
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 during the year.
The excesses of aggregate rentals receivable over the cost of the leased asset constitutes the total unearned income.
The unearned 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 Losses on Dealing & Investment Securities
Fall in value of dealing & investment securities, whether temporary or permanent, should be routed through the P&L
A/c. Charging diminution in value of securities direct to reserves lack tranparency, specially for a deposit taking
institution such as a bank and results in the loss of credibility of te P&L A/c as a measure of management
performance.
1.4.3 Terminal Benefits SLAS 16
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.
1.4.4 Extraordinary Items SLAS 10
Extraordinary items are those derived from events or transactions outside the ordinary course of business and which
are material and are not expected to recur frequently or regularly.
2. INCOME
GROUP
Curr. Yr.
Prev. Yr.
(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

========
========
========
========
BANK
Curr. Yr.
Prev. Yr.
(Rs.)
(Rs.)
BANKING ACT
71
4. INTEREST EXPENSE
BANK
Curr. Yr.
Prev. Yr.
(Rs.)
(Rs.)
GROUP
Curr. Yr.
Prev. Yr.
(Rs.)
(Rs.)
Long Term Borrowings
Debentures
Deposits
Treasury bills repurchased
Others
========
========
========
========
5. OTHER INCOME
Net Foreign Exchange Gain/Loss
Dividend Income from Securities :

Quoted
Unquoted
Dividend Income from Investments in Associates/Subsidiaries:

Quoted
Unquoted
Fee and Commission Income
Gains from dealing securities
Gains from Investment Securities
Others

========
========
========
========
6. OPERATING EXPENSES
Operating Expenses include the following:
Chairmans Emoluments
Directors Emoluments Fees

Salaries
Others
Auditors Remuneration
Depreciation
Expenses on litigation

========
========
========
========
Percentage
Holding
Current
Year
Previous
Year
(Rs.)
(Rs.)
7. SHARE OF ASSOCIATE COMPANIES PROFITS BEFORE TAX - BREAK UP

Name of Company
GROUP

========
========
8. TAX ON PROFITS ON ORDINARY ACTIVITIES

BANK
Curr. Yr.
Prev. Yr.
(Rs.)
(Rs.)
GROUP
Curr. Yr.
Prev. Yr.
(Rs.)
(Rs.)
(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
========
========
========
========
72
BANKING ACT
Income tax on profits has been computed at the rate of on the taxable income of the Bank plus a surcharge of on
the income tax payable.
(b) In computing the liability to taxation, credit has been taken for investment relief amounting to Rs. granted under
Section 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 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
Specify the nature, particulars and amount of extraordinary items.
10. PRIOR YEAR ADJUSTMENTS SLAS 10
The details of any restatement of retained profits brought forward on account of prior year adjustments. The amount should be
shown onthe face of the P&L A/c, but the details can be given in a note.
11. DIVIDENDS
Inteirm
Paid
(%)
Final
Proposed
(%)
Curr. Yr.
Total
(Rs.)
Prev. Yr.
Total
(Rs.)
Net dividends
Tax deducted at source
========
========
========
========
Gross Dividends
12. EARNINGS PER SHARE
Give the basis of calculation.
13. CASH AND SHORT TERM FUNDS
GROUP
Curr. Yr.
Prev. Yr.
(Rs.)
(Rs.)
Cash in Hand and Balances with Banks
Money at Call and Short Notice

========
========
========
========
14. TREASURY BILLS AND OTHER SECURITIES ELIGIBLE FOR REDISCOUNTING WITH THE CENTRAL BANK
Treasury Bills
Treasury Bonds

========
========
========
========
BANK
Curr. Yr.
Prev. Yr.
(Rs.)
(Rs.)
BANKING ACT
73
15. GOVERNMENT AND OTHER SECURITIES HELD FOR DEALING PURPOSES

BANK
Curr. Yr.
Prev. Yr.
(Rs.)
(Rs.)
GROUP
Curr. Yr.
Prev. Yr.
(Rs.)
(Rs.)
Quoted
Unquoted
========
========
========
========
Market
Value
Curr. Yr.
No. of
Ordinary
Shares
Cost
Previous
Year
Market
Value
Prev. Yr.
Total
15.1 Quoted
No. of
Ordinary
Shares
(a)
Bank

========
(b)
Cost
Current
Year
========
========
========
========
========
Group
========
========
========
========
========
========
No. of
Ordinary
Shares
Cost
Current
Year
Directors
Valuation
Curr. Yr.
No. of
Ordinary
Shares
Cost
Previous
Year
Directors
Valuation
Prev. Yr.
15.2 Unquoted
(a)
Bank

========
(b)
========
========
========
========
========
Group
========
========
========
========
========
========
Value of Securities sold subject to repurchase agreements reported under Note Nos. 14, 15 or any other Note should be disclosed
separately together with the estimated market values of such items (UITF 13).
16. PLACEMENTS WITH AND LOANS TO OTHER BANKS AND FINANCIAL INSTITUTIONS
BANK
Curr. Yr.
Prev. Yr.
(Rs.)
(Rs.)
GROUP
Curr. Yr.
Prev. Yr.
(Rs.)
(Rs.)
Banks
Financial Institutions
======== ======== ======== ========

Loans under Reverse Repurchase agreements should be separately disclosed with estimated market values of underlying securities (UITF 13).
17. BILLS OF EXCHANGE
Local Bills
Other Bills
(a) Less : Provision for Bad Debts
========
========
========
========
74
BANKING ACT
18. LOANS AND ADVANCES

BANK
Curr. Yr.
Prev. Yr.
(Rs.)
(Rs.)
Direct Loans
GROUP
Curr. Yr.
Prev. Yr.
(Rs.)
(Rs.)
Refinance Loans
Staff Loans
Other Loans
(b) Less : Loan Loss Provision
========
========
========
========
19. LEASE RENTALS RECEIVABLES

Total Rentals Receivable
Less : Unearned Income
Less : Provision for Bad & Doubtful Debts
Interest in Suspense

========
========
========
========
The above analysis should be given for both lease rental receivable within one year and after one year.
20. Interest RECEIVABLE
Interest Receivable
Less : Interest in Suspense

========
========
========
========
21. MOVEMENTS IN THE PROVISIONS FOR LOAN LOSSES AND INTEREST IN SUSPENSE
Provisions against advances
Specific
(Rs.)
General
(Rs.)
Interest in
Total
(Rs.)
Suspense
(Rs.)
As at 01/01/19
Amounts written off
Recoveries of advances written off in previous year
Provisions made during the year
Interest suspensed during the year
Suspensed interest recovered
As at 31/12/19
BANK
GROUP
Loan Loss Interest in
Loan Loss Interest in
Provision
(Rs.)
Suspense
(Rs.)
Provision
(Rs.)
Suspense
(Rs.)
Bills of Exchange
Loans and Advances
Lease Rental Receivable

========
========
========
========
21.1 Analysis of provision for loan losses and interest in suspense
BANKING ACT
75
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 as disclosed in Note 1.4.1 on Revenue Recognition
BANK
Curr. Yr.
Prev. Yr.
(Rs.)
(Rs.)
GROUP
Curr. Yr.
Prev. Yr.
(Rs.)
(Rs.)
Bills of Exchange
Loans and Advances
Lease Rental Receivable
========
========
========
========
21.3 Concentration of Credit Risk

Sectorwise analysis of banks credit portfolio given below reflects the banks exposure to credit risk in the various sectors
of the economy.
Current year
Previous Year
(Rs.)
(Rs.)
Exports
Imports
Whoelsale and Retail Trade
Banking, Finance and Insurance
Agriculture and Fisheries
Plantation
Others
Manufacturing
Garments
Others
Hotels and Travels
Housing Construction & Property Development
Consumption
Services
Other
22. INVESTMENT SECURITIES

BANK
Curr. Yr.
Prev. Yr.
(Rs.)
(Rs.)
GROUP
Curr. Yr.
Prev. Yr.
(Rs.)
(Rs.)
Quoted
Unquoted
Total
========
========
========
========
Market
Value
Curr. Yr.
No. of
Ordinary
Shares
Cost
Previous
Year
Market
Value
Prev. Yr.
22.1 Quoted
No. of
Ordinary
Shares
(a)
Bank

========
(b)
Cost
Current
Year
========
========
========
========
========
Group

========
========
========
========
========
========
76
BANKING ACT
22.2 Unquoted
No. of
Ordinary
Shares
(a)
Cost
Current
Year
No. of
Ordinary
Shares
Cost
Previous
Year
Directors
Valuation
Prev. Yr.
Bank

========
(b)
Directors
Valuation
Curr. Yr.
========
========
========
========
========
Group

========
========
========
========
========
========
23. INVESTMENTS IN ASSOCIATES AND SUBSIDIARIES

23.1 Investment in subsidiaries By Bank
Subsidiary
Company
Principal
Activity
%
Holding
Cost
Market
%
Cost
Market
Current Value* Holding Previous Value*
Year
Curr. Yr.
Year Prev. Yr.

====== ====== ====== ====== ====== ======

* Directors valuation in the case of unquoted subsidiaries/associates.
23.2 Investments in Associate Companies
(a) By Bank
Principal
Activity
Cost
Market
%
Cost
Market
Current Value* Holding Previous Value*
Year
Curr. Yr.
Year Prev. Yr.

Company
%
Holding

====== ====== ====== ====== ====== ======
* Directors valuation in the case of unquoted subsidiaries/associates.
(b) By the Group
Company
Balance
B/F
(Rs.)
Inrease in
Investment
(Rs)
Share of Profits
Net of Dividend Received
(Rs)
Balance
B/F
(Rs.)
24. GROUP BALANCES RECEIVABLE

BANK
Curr. Yr.
Prev. Yr.
(Rs.)
(Rs.)
GROUP
Curr. Yr.
Prev. Yr.
(Rs.)
(Rs.)
Name of Company
BANKING ACT
77
25. FIXED ASSETS

(a) Bank
Land and
Buildings
Equipment/
Furniture
Motor
Vehicles
Total
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 Depreciation
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
(b) Group
Land and
Buildings
Equipment/
Furniture
Motor
Vehicles
Total
31. 12.
(Rs.)
31. 12.
(Rs.)
Cost/Valuation
Additions for the year
Disposals during the year
Excess on Revaluation
Accumulated Depreciation
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
25.1 Other disclosres required by SLAS 18 and SLAS 19 should also be made.
26. OTHER ASSETS
BANK
Curr. Yr.
Prev. Yr.
(Rs.)
(Rs.)
GROUP
Curr. Yr.
Prev. Yr.
(Rs.)
(Rs.)
Deposits & Prepayments
Others

========
========
========
========
27. INTANGIBLE ASSETS

Goodwill
Deferred Expenditure
Others
========
========
========
========
78
BANKING ACT
28. DEPOSITS
BANK
Curr. Yr.
Prev. Yr.
(Rs.)
(Rs.)
GROUP
Curr. Yr.
Prev. Yr.
(Rs.)
(Rs.)
Savings Deposits
Time Deposits
Certificates of Deposit
Others
========
========
========
========
Deposits from Non-bank customers
Deposits from Banks
Deposits from Financial Institutions
Other Money Market Deposits

========
========
========
========
29. BORROWINGS
Govt. of Sri Lanka (GOSL) Loans under Foreign Credit Lines
Other GOSL Loans
Direct Foreign Borrowings
Refinance Borrowings
Debentures
Subordinated Debentures
Borrowings under Repurchase Agreements
Other borrowings

========
========
========
========
Due within one year
1-5 years
After five years

========
========
========
========
29.1 Assets Pledged as Security

Disclose 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

========
========
========
========
========
BANKING ACT
79
32. OTHER LIABILITIES

BANK
Curr. Yr.
Prev. Yr.
(Rs.)
(Rs.)
GROUP
Curr. Yr.
Prev. Yr.
(Rs.)
(Rs.)
Accrued Expenditure
Dividends Payable
Current Taxation
Provision for Gratuities
Others
========
========
========
========
33. SHARE CAPITAL

Authorised
Ordinary Shares of Rs. each

========
========
========
========
Isued & Fully Paid

Balance B/F
Ordinary Shares of Rs. each
Issued during the year

Ordinary Shares of Rs 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)
Forward Rate Agreement
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

======== ======== ======== ========
80
BANKING ACT
37. POST BALANCE SHEET EVENTS (SLAS 12)

38. DIRECTORS INTEREST IN CONTRACTS
Disclose the Directors interest in contracts in accordance with the requirements of SLAS 30 and SLAS 23.
39. RELATED PARTY TRANSACTIONS
Disclose the related party transactions in accordance with the requirements of SLAS 30 and SLAS 23.
40. MATURITY ANALYSIS
An analysis of the assets and liabilities based on the remaining period at the Balance Sheet date to the respective contractual
maturity dates is as follows :
Upto
3 Months
(Rs.)
__________
Interest
3 to 12
Months
(Rs.)
________
1 to 3
Years
(Rs.)
_________
3 to 5
Years
(Rs.)
_________
More than
5 years
(Rs.)
_________
Total
(Rs.)
________
Earning
Assets
Non-Interest Earning Assets
Total Assets
Interest
Bearing
Liabilities
Non-Interest Barning Liabilities
Total Liabilities
41. TRUST ACTIVITIES

Disclose 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 BANKS 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 banks operations.
(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 exposures 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 Instruments 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.
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 :
BANKING ACT
81
BS/69/93
Bank Supervision Dept.
No. 41 Janadhipathi Mawatha
Colombo 1.
19th April 1999
Dear Sir,
CRITERIA FOR SELECTION OF VALUERS UNDERTAKING

THE REVALUATION OF FIXED ASSETS FOR THE
COMPUTATION OF THE CAPITAL ADEQUACY RATIO
All Licensed Specialised Banks are hereby informed that in the selection of Valuers to
undertake the revaluation of the Banks 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.
Yours faithfully,
Sgd. Ms. C I Fernando

Actg. Director of Bank Supervision
82
BANKING ACT
02/04/004/0005/001
Central Bank of Sri Lanka
GUIDELINES ON THE GRANT OF FACILITIES FOR THE ISSUE OF

COMMERCIAL 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 Banks 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.
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;
full redemption value refers to the amount of the principal, interest and any other
charges which is payable upon redemption of such CP/PN.
BANKING ACT
(d)
83
Board resolution for the issue of CP/PN concerned.
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:
3.9
(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.
(a)
The LCBs/LSBs 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 LCBs/LSBs 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.
84
BANKING ACT
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
PR
PU
PQ
PC
Date :
Name of Bank :
Authorised Offcer :
We hereby certify that this statement reflects the value of support extended to the Banks customers and that the statement figures tally with the General Ledger Balances as at the
end of the month.
* A nil statement should be submitted if there are no outstanding amounts.
* This statement should reach the Director, Bank Supervision Department on or before the 15th of the following month.
* Column (3) : Please indicate whether Commercial Paper (CP), Promissory Notes (PN), or any other form (Please specify)
Private Company
Public Unquoted Company
Public Quoted Company
Peoples Company
AC
EN
GT
UN
PR
IA
PA
DE
AU
(9)
Accepting
Endorsing
Guaranteeing
Underwriting
Purchasing
Issuing Agent
Paying Agent
Dealer
Authenticating
(8)
Nature of
Support
Code
(7)
Rate of
Interest (%)
Nature of Support
(6)
Date of
Maturity
(YY/MM/DD)
Please indicate using the foliowing Codes :
(5)
Date of
Issue
(YY/MM/DD)
Please indicate using the foliowing Codes :
(4)
Amount
Subscribed
* Column (2)
(3)
Amount
of the Issue
(Face Value)
(Amounts in Rupees Thousands)
* Column (9)
(2)
(1)
Type of
Promissory
Notes Issued
As at in terms of Guidelines dated 5 January 2001
Monthly Statement of Commercial Paper / Promissory Notes
Instructions :
Legal Status
of Issuing
Company
Name of
Issuing Company
BANKING ACT
85
86
BANKING ACT

3rd December, 2001
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
BANKING ACT
87
Ref. No. : 02 / 04 / 004 / 0012 / 001

3rd December, 2001
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.
Customer Identification
3.1
Personal Accounts
The following information should be obtained from all prospective personal customers:
Customers 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.
Customers 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 introducers 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
Resolution by the Board of Directors
Duly completed application form containing authorised specimen signatures
88
BANKING ACT
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.
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 banks policies on
customer acceptance and identification.
P.T. Sirisena
3.4
BANKING ACT
89
Ref. Nos. : 02 / 04 / 002 / 0105 / 001

&
02 / 04 / 002 / 0151 / 001
Colombo 1.
20th March, 2001
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
90
BANKING ACT
Ref. No. : 02 / 04 / 004 / 0007 / 001

Colombo 1.
15th August, 2001
To : All Licensed Specilised Banks
Dear Sir,
PUBLIC DISCLOSURE BY PUBLICATION OF

FINANCIAL STATEMENTS IN THE PRESS
The Central Bank of Sri Lanka (CBSL) in keeping with international banking standards for greater
transparency and market discipline has decided to introduce certain disclosure requirements. These are
aimed at improving the markets ability to make well-informed decisions as a means of promoting a sound
and efficient banking system in Sri Lanka.
Accordingly, we enclose herewith the format prepared for publishing the financial statements in the
Press as agreed with the Chief Executive Officers of Licensed Specialised Banks (LSBs) Meeting.
All LSBs are hereby informed that the annual and half-yearly financial statements should be published in the Press as per the enclosed formats commencing from the half-yearly accounts as at 30 June
2001. Banks whose financial year end is 31 March should commence publishing with the half-yearly
accounts as at 30 September 2001. Publication of financial statements in the Press should be made within
three months of the close of the half-year and six months of the close of the financial year.
Further, the enclosed formats specify the minimum information required to be disclosed, and the
CBSL would welcome any additional voluntary disclosures by banks.
With regard to the medium of publication, LSBs may initially publish the financial statements in the
daily English Newspapers. However, if any LSB wishes to publish financial statements in Sinhala or Tamil
it may do so to suit the banks requirements.
Yours faithfully
ENCL :
BANKING ACT
91
Name of Bank :
SUMMARISED BALANCE SHEET

(in Rs. 000s)
BANK
Current
Previous
As at As at
Change
(%)
Group
ASSETS
Balances with Central Bank of Sri Lanka
Treasury Bills and Other Securities eligible for rediscounting
with Central Bank
Government and Other Securities held for dealing purposes
Placement with & Loans to Other Banks & Financial Institutions
Securities Purchased under Resale Agreements
Other Investments
Bills of Exchange**
Loans & Advances**
Receivable on Leases**
Less : Provision for possible credit losses
Net Bills of Exchange, Loans & Advances and Leases
Investments in Associate & Subsidiary Companies
Interest and Fees Receivable
Property, Plant & Equipment
Other Assets
TOTAL ASSETS
LIABILITIES
Deposits
Other Borrowings
Securities Sold under Repurchase Agreements
Deferred Taxation
Other Liabilities
TOTAL LIABILITIES
SHAREHOLDERS FUNDS
Share Capital/Assigned Capital
Reserves
Minority Interest
TOTAL FUNDS EMPLOYED
TOTAL LIABILITIES AND FUNDS EMPLOYED
COMMITMENTS AND CONTINGENCIES

The above balance sheet of the Bank as at is drawn-up from the unaudited accounts of the Bank and
prepared in accordance with Sri Lanka Accounting Standards.
General Manager / Chief Executive Officer

** Balances of respective overdue interest receivable amounts should also be included.
92
BANKING ACT
Name of Bank :
SUMMARISED PROFIT & LOSS ACCOUNT

(in Rs. 000s)
BANK
For the Six Months ended
Current
Previous
Change
(%)
Group
Total Income
Interest Income
Interest Expenses
Net Interest Income
Other Income
Net Income
Operating Expenses
Personnel Costs
Provision for Credit Losses
Other Operating Expenses
Operating Profit/(Loss) before provision for fall in value of
dealing & investment securities
Provision for fall in value of Dealing & Investment Securities
Share of Associate/Subsidiary Companies Profit/(Loss)
Before Taxation
Profit/(Loss) Before Provision for Taxation
Provision for Taxation
Profit/(Loss) After Provision for Taxation
Minority Interest
Extra-ordinary Items (please specify)
Profit/(Loss) after Extra-ordinary Items
Retained or Unappropriated Profits B/F
Retained Profits C/F
The above Profit & Loss Account for the six months ended . is drawn-up from the unaudited accounts of
the Bank and prepared in accordance with Sri Lanka Accounting Standards.
General Manager / Chief Executive Officer / Country Manager
BANKING ACT
93
Name of Bank :
SUMMARISED BALANCE SHEET

(in Rs. 000s)
BANK
Current
Previous
Change
(%)
Group
ASSETS
Balances with Central Bank of Sri Lanka
Treasury Bills and Other Securities eligible for rediscounting
with Central Bank
Government and Other Securities held for dealing purposes
Placement with & Loans to Other Banks & Financial Institutions
Securities Purchased under Resale Agreements
Other Investments
Bills of Exchange**
Loans & Advances**
Receivable on Leases**
Less : Provision for possible credit losses
Net Bills of Exchange, Loans & Advances and Leases
Investments in Associate & Subsidiary Companies
Interest and Fees Receivable
Property, Plant & Equipment
Other Assets
TOTAL ASSETS
LIABILITIES
Deposits
Other Borrowings
Securities Sold under Repurchase Agreements
Deferred Taxation
Other Liabilities
TOTAL LIABILITIES
SHAREHOLDERS FUNDS
Share Capital/Assigned Capital
Reserves
Minority Interest
TOTAL FUNDS EMPLOYED
TOTAL LIABILITIES AND FUNDS EMPLOYED
COMMITMENTS AND CONTINGENCIES
The above figures are from audited accounts which have been audited by .

** Balances of respective overdue interest receivable amounts should also be included.
94
BANKING ACT
Name of Bank :
SUMMARISED PROFIT & LOSS ACCOUNT

(in Rs. 000s)
BANK
Current
Previous
Change
(%)
Group
(a) Income Statement

Total Income
Interest Income
Interest Expenses
Net Interest Income
Other Income
Net Income
Operating Expenses
Personnel Costs
Provision for Credit Losses
Other Operating Expenses
Operating Profit/(Loss) before provision for fall in value of
dealing & investment securities
Provision for fall in value of Dealing & Investment Securities
Share of Associate/Subsidiary Companies Profit/(Loss)
Before Taxation
Profit/(Loss) Before Taxation
Taxation
Profit/(Loss) Afte Provision for Taxation
Minority Interest
Extra-ordinary Items (please specify)
Net Profit for the Period
(b) Statement of Changes in Equity (#)
(c) Statement of Recognised Gains and Losses (##)
The above figures are from audited accounts which have been audited by
(#) (Indicate changes in each equity component in accordance with SLAS 3)

(##) (Indicate changes in equity that represent gains and losses recognised in accordance with SLAS 3)
BANKING ACT
95
02 / 04 / 003 / 0400 / 001

30th January 2003
Dear Sir / Madam
PUBLIC DISCLOSURE BY PUBLICATION OF FINANCIAL STATEMENTS IN

THE PRESS
I refer to the discussion of the above subject at the meeting of the Chief Executive Officers of
Licensed Commercial Banks (LCBs) and Licensed Specialised Banks (LSBs) held on 05.12.2002 and
23.01.2003, and the agreement to publish the financial statements of banks in the press on a quarterly basis.
All LCBs and LSBs are hereby informed that the financial statements of the respective banks should
be published in the press on a quarterly basis within two months of the close of the quarter.
While the Banks are encouraged to make any additional voluntary disclosures the format applicable
to the publication of half yearly accounts and the guidelines dated 15.08.2001 will be applicable.
With regard to the medium of publication, banks may publish the financial statements in the daily
English Newspapers. However, the banks are encouraged to publish the financial statements in Sinhala and/
or Tamil to suit the banks requirements.
This guideline becomes effective from 01.01.2003. Please acknowledge receipt of this letter.
Yours faithfully,
96
BANKING ACT
02 / 05 / 006 / 0100 / 001

28th 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,
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
Rate : Rupees per unit of Foreign Currency as at

Exchange Rates
Currency
Buying Rate
US Dollar
Sterling Pound
Yen
Euro
Australian Dollar
Singapore Dollar
Indian Rupee
Selling Rate
Travellers Cheques
Buying Rate
Selling Rate
Export Bill Finance - Rupee Facilities

Import Bill Finance - Rupee Facilities
Lease Finance
Lending to Medium Scale Industries (up to 5 years)
Residential Housing
Pawning
US Dollar Loans to Exporters
BANKING ACT
97

25th June 2002
To : All CEOs of LCBs and LSBs
Dear Sir/Madam
CODE OF CORPORATE GOVERNANCE FOR

BANKS AND OTHER FINANCIAL INSTITUTIONS
I have pleasure in enclosing a copy of the Code of Corporate Governance for banks and other
financial institutions compiled by the National Task Force on Corporate Governance in the Financial Sector
which was set up to promote best corporate governance practices at national level.
Although the Code of Corporate Governance for banks and other financial institutions is not intended
to be treated as a regulation or a legal statute, it is strongly recommended that the principles and guidelines
set out in the Code be treated as standards of conduct in order to maintain the integrity and stability of the
financial system.
Yours faithfully,
Mrs. P P Sirisena
Encl.
98
BANKING ACT
CODE OF CORPORATE GOVERNANCE FOR BANKS AND

OTHER FINANCIAL INSTITUTIONS
Issued by the
CENTRAL BANK OF SRI LANKA
2002
These guidelines have been drafted using the following documents and some of the views contained
in the documents were used in relevance to the Banking and Financial sectors in particular.
Code of Best Practice
(Report of the Committee to make recommendations on matters relating to financial aspects of corporate
governance).
Institute of Chartered Accountants
Enhancing Corporate Governance for Banking Organisations
Basle Committee on Banking Supervision
Exposure Draft on Board Room Governance
Institute of Chartered Accountants in Sri Lanka (ICASL).
Corporate Governance in the Financial Sector
Issued by the Commonwealth Working Group on Corporate Governance in the Financial Sector
November 2000.
Framework for the Evaluation of Internal Control Systems
Basle Committee on Banking Supervision
Basle, January 1998
Corporate Governance in the Financial Sector
Checklist of Issues for Promoting Effective Corporate Governance
Commonwealth Secretariat, January 2001
The Corporate Governance of Banks, CAMEL in a cage, Arvind Mathur and Jimmy Burhan, Asian
Development Bank.
OECD Principles of Corporate Governance
Mr. A.S. Jayawardena (Chairman)

Mr. P.M. Nagahawatte (Alternate to the Chairman)
Mr. Amitha Gooneratne
Mr. Nicholas Cherril
Mr. Ranjith Fernando
Mr. Lakshmi Narasimhan
Mr. Deva Rodrigo
Mr. Nihal Fonseka
Mr. K. Sivagananathan (Late)
Mr. W. Sellamuttu
Ms. S. Kadurugamuwa
Deshamanya, Lalith Kotalawala
Governor, CBSL
Deputy Governor, CBSL
MD, Commercial Bank of Cey. Ltd.
Chief Executive Officer, HSBC
Director, Managing Director, NDB
Country Head, Indian Overseas Bank
Senior Partner, Price Waterhouse Coopers
General Manager, DFCC
Consultant, CBSL
President, FHA
Director, Legal, CBSL
Chairman, Ceylinco Group
Members of the National Task Force on Corporate Governance
BANKING ACT
Mr. Ken Balendra

Mr. Chandra Jayaratne
Mr. Mano Tittawella
Mr. P.T. Sirisena (Secretary)
Chairman, Bank of Ceylon

Managing Director, Eagle Insurance
Chairman, Peoples Bank
Director, Bank Supervision, CBSL
Ms. N.U. Sudantha Medhavi (Asst. to the Secretary)
Asst. Examiner, Bank Supervision, CBSL
99
CODE OF CORPORATE GOVERNANCE FOR

BANKS AND OTHER FINANCIAL INSTITUTIONS
Introduction
Corporate Governance
Corporate governance is a set of relationships between a companys management, its Board, its
shareholders, and other stakeholders through enhanced performance (OECD).
Corporate Governance is an essential safeguard of a stable banking system. As Asia emerges from
the economic crisis, most institutions in the region want to introduce good corporate governance.
(The Corporate Governance of Banks, Arvind Mathur and Jimmy Burhan, ADB)
Corporate governance also provides the structure through which the objectives of the company are
set, and the means of attaining those objectives and monitoring performance are determined. Good
corporate governance should provide proper incentives for the Board and management to pursue objectives
that are in the interests of the company and shareholders and should facilitate effective monitoring, thereby
encouraging companies to use resources more efficiently.
Inadequacy of Corporate Governance and Financial Instability
Good corporate governance of banks/financial institutions is a sine qua non for a sound financial
system. For individual banks/financial institutions, it can reduce the cost of capital and enhance
shareholder value. The Asian financial crisis has, in part, been attributed to serious inadequacies in the
governance of banks. The post crisis period has created an environment where most of the major financial
institutions in Asia are now willing to implement governance reforms, not only as a way to ensure survival,
but also as a competitive weapon.
Inadequate Corporate Governance in the corporate and financial sectors is an important factor that has
contributed to financial instability in many countries. Weak corporate governance (and associated risk
management practices) in the corporate sector increases the risk profile of companies and exposes banks
and other lending institutions to greater risk of loss than would otherwise be the case. In a more direct
sense, weaknesses in corporate governance in banks and other financial institutions reduce their capacity to
identify, monitor and manage their business risks, and can result in poor quality lending and excessive risktaking by such institutions. For example, inadequate corporate governance can lead to poor management of
credit risks, an insufficiently developed credit culture, excessive exposure concentration, poor
management of interest rate risk and exchange rate risk, and inadequacies in the management of connected
exposures. In some cases, inadequacies in corporate governance and risk management have the potential to
lead to bank insolvency and financial instability.
Underlying Principles of Corporate Governance in Banking and other Financial Institutions
More than most other corporate entities, banks and financial institutions are critically reliant on
maintaining the confidence of depositors and other creditors for their viability. The financial viability, and
indeed survival, of a financial institution are very much dependent on maintaining depositor and other
counter-party confidence. Therefore, the directors and senior management of such institutions could be said
to have a special duty of care to their depositors and other creditors the creditors are extremely important
stakeholders in a financial institution. A financial institutions corporate governance arrangements could be
expected to reflect this duty of care to creditors in a number of ways, such as in the management of
100
BANKING ACT
conflicts of interest between shareholders and creditors, in the nature of financial disclosures made to
creditors (and others) and in the nature of risk management systems.
Risk Management and Corporate Governance
Financial institutions differ from most companies in terms of the nature and range of their business
risks, and the adverse consequences that would follow if these risks are poorly managed. Banks/financial
institutions face a wide range of risks, many of them complicated in nature, including credit risk, exposure
concentration risk, connected exposure risk, interest rate risk, exchange rate risk, payment system interface
risks and business continuity risks. If these risks are poorly identified and managed, they expose such
institutions to the potential for financial collapse, particularly given the fact that most financial institutions
operate on a thin layer of capitalization and have substantial maturity mismatches in their balance sheet.
Therefore, they need corporate governance structures that promote effective identification, monitoring and
management of all material business risks.
Regulatory Requirements and Corporate Governance
Most financial institutions are required to comply with a large number of regulatory requirements,
including prudential requirements, taxation rules, various reporting obligations and the like. There is,
therefore, a need for the corporate governance framework to include systems for ensuring that all statutory
and regulatory requirements are being complied with and to highlight potential or actual breaches if and
when they occur.
High Quality Financial Disclosure
An essential complement to sound corporate governance is the implementation of robust financial
disclosure requirements for corporates and financial institutions. Financial disclosure is essential as a
means of strengthening the accountability of directors and senior management and enhancing the incentives
for risk management. It is also essential for market participants and observers particularly the larger
creditors of banks, financial news media, financial analysts and rating agencies to effectively monitor the
performance and soundness of financial institutions and to exercise appropriate disciplines on those
institutions which do not perform well or fail to meet acceptable prudential standards. Financial disclosure
is also essential for smaller creditors, including depositors, to protect their own interests.
Strengthening Market Discipline
It is increasingly being recognized that market discipline can play an important role in promoting
financial system stability and in encouraging the maintenance of sound corporate governance and risk
management practices. Banks and corporates are more likely to be attentive to risk management in an
environment where poor risk management and financial performance are penalized by the market, and
strong risk management, and financial performance are rewarded by the market. In the longer term, robust
market discipline is likely to enhance financial stability and efficiency by strengthening the incentives for
the efficient management of risks and by weeding out poor performers.
2. Content of Corporate Governance
From a banking and financial sector industry perspective, corporate governance involves the manner
in which the business and affairs of individual institutions are governed by their Boards of directors and
senior management. These include the following :
set corporate objectives (including generating economic returns to owners);
set risk management policies and procedures;
ensure that the day-to-day operations of the business are carried out efficiently and with integrity;
protect the interests of depositors;
consider the interests of recognized stakeholders;
align corporate activities and behaviour with the expectation that the institutions will operate in a safe
and sound manner; and
operate in compliance with applicable laws and regulations.
Objectives
BANKING ACT
101
Strategies and Techniques

Strategies and techniques that are basic to sound corporate governance include:
corporate values, code of conduct and other standards of appropriate behaviour and the systems used
to ensure compliance with them;
a well-articulated corporate strategy against which the success of the overall enterprise and the
contribution of individuals can be measured;
clear assignment of responsibilities and decision-making authorities, incorporating a hierarchy of
required approvals from individuals to the Board of directors;
establishment of a mechanism for the interaction and cooperation among the Board of directors,
senior management and the auditors;
strong internal control systems, including internal and external audit functions, risk management
functions, independence in business operations, and other checks and balances;
special monitoring of risk exposures where conflicts of interest are likely to be particularly great,
including business relationships with borrowers affiliated with the bank, large shareholders, senior
management, or key decision-makers within the firm (e.g. traders);
financial and managerial incentives to act in an appropriate manner offered to senior management,
business line management and employees in the form of compensation, promotion and other
recognition; and
appropriate information flows internally and to the public.
Communication throughout the organization and also to the stakeholders of the organization as to
what the Institution is going to achieve in the years ahead and the corporate values.
CODE OF BEST PRACTICES FOR CORPORATE GOVERNANCE

Principle 1
The Board
Every bank/financial institution (hereafter collectively referred in this code as a financial institution)
should be headed by an effective Board of directors, which should determine its policies and ensure their
implementation and lead and control the financial institution.
Guideline 1.1
The board of directors is responsible for the operations and financial soundness of the financial
institution.
The board of directors should have responsibility for
ensuring the vision, mission, values and objectives of the company
approving policies and strategies and budgets
approving the organizational structure;
understanding the risks run by the financial institutions and setting acceptable levels for these risks;
ensuring that senior management takes the steps necessary to identify, monitor and control these
risks;
ensuring that senior management is monitoring the effectiveness of the internal control system.
effective monitoring of management in achieving the objectives set
compliance with the applicable laws and regulations
monitoring its financial and non-financial performance
initiating and encouraging the establishment of good corporate governance throughout the
institution.
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Guideline 1.2
The Board of directors (hereafter referred to in this Code as the Board) and senior management of a
financial institution are responsible for promoting high ethical and integrity standards, and for
establishing a culture within the institution that emphasizes and demonstrates to all levels of personnel
the importance of internal controls. All levels of personnel at such institutions need to understand their
role in the internal control process and be fully engaged in the process.
Guideline - 1.3
The Board should meet regularly, at least 10 meetings per annum and should also meet when a particular
necessity arises.
Guideline - 1.4
Every director should bring his independent judgment to bear on issues of strategy, performance,
resources (including key appointments) and standards of conduct.
Guideline - 1.5
The Board should have a schedule of matters specifically reserved to it for decision, including the
following ;
Formulation of Business Strategy and effect changes if and when necessary
Formulation of Risk Management Strategy
Ensure that the Chief Executive Officer and Management Team are of the highest caliber
Approval of Senior Management succession strategy
Securing effective information, control and audit systems
Compliance with regulatory legal/ethical standards and
Control and management of risk.
Guideline - 1.6
There should be an approved procedure, for the directors, to obtain independent professional advice in
the performance of their duties and for the cost to be borne by the institution upto a reasonable extent.
Guideline - 1.7
Guideline - 1.8
In discharging its duties, the Board is expected to exercise leadership, enterprise, integrity and
judgement in directing the financial institution so as to achieve continuing prosperity and to act in the
best interest of such institution in a manner based on transparency, accountability and responsibility.
Guideline 1.9
In discharging its duties, the Board is expected to ensure that, Board appointments are made so as to
provide a mix of directors proficient in different disciplines, each of whom is able to add value and to
bring independent judgement to bear on the decision making process.
The Board adds strength to the corporate governance of the financial institution when the members of
the Board;
understand their oversight role and their duty of loyalty to such institution and its shareholders;
feel empowered to question the management and are comfortable insisting upon straightforward
explanations from management;
provide dispassionate advice;
are not overextended;
avoid conflicts of interest in their activities with, and commitments to, other organizations;
meet regularly with senior management and internal audit to establish and approve policies, establish
communication lines and monitor progress toward corporate objectives;
refrain from making decisions on matters on which they are incapable of providing objective advice;
do not participate in day-to-day management of the institution.
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Guideline 1.10
In discharging its duties the Board is expected to ensure that the financial institution complies with all
relevant laws, regulations and codes of best business practices.
Guideline 1.11
In discharging its duties, the Board is expected to ensure that the financial institution communicates with
shareholders and other stakeholders effectively.
Guideline 1.12
In discharging its duties, the Board is expected to ensure that no one person or group of persons has
unfettered power, and that there is an appropriate balance of power and authority on the Board which is,
inter alia, usually reflected by separating the roles of the Chief Executive Officer and Chairman, and by
having, subject to the statutory and regulatory requirements, a balance between executive and non
executive directors.
Guideline 1.13
In discharging its duties, the Board is expected to regularly review processes and procedures to ensure
the effectiveness of the internal systems of control of the financial institution, so that financial
institutions decision making capability and the accuracy of reporting and financial results are
maintained at high levels at all times.
Guideline 1.14
In discharging its duties, the Board is expected to ensure that the Senior Management adheres to this
Code of Best Practice.
Guideline 1.15
In discharging its duties, the Board is expected to ensure that all technology and systems used in the
financial institution are adequate to properly run the business and for it to remain a meaningful
competitor.
Guideline 1.16
In discharging its duties, the Board is expected to ensure annually that the institution will continue as a
going concern for the next 3 to 5 years as per the yearly revised Corporate Plan.
Guideline - 1.17
In discharging its duties, the Board is expected to ensure that senior management of the financial sector
institution has discharged their role satisfactorily.
Guideline 1.18
There should be a proper service contract signed between the financial institution and the non-executive
directors setting out the terms and conditions, including period of service, rotations and retirement age.
The re-appointment of non-executive directors be based on an appraisal of their contributions to the

functioning of the Board. Non-executive directors who have not participated in at least 50% of the
Board/Committee meetings should not generally be re-appointed to the Board/Committee.
Principle 2
Qualification of Directors
The members of the Board should be persons whose abilities are widely acknowledged by the
shareholders and the public. They should have the experience, knowledge, expertise and good judgment
to make an effective contribution for the financial institution to achieve its objectives. The directors
should have a clear understanding of their role in corporate governance and should not be subject to
undue influence from management or outside concerns.
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Guideline - 2.1
A person should not be appointed, elected or nominated as a director of a financial sector institution or
continue as a director unless the person is a fit and proper person to hold office as a director of such
institution.
Fit and Proper Test
In determining whether a person is fit and proper, regard shall be had to any one or more of the
following matters;
The persons probity
The persons competence and soundness of judgment for fulfilling the responsibilities of the office of
director
The diligence with which the person is likely to fulfil the responsibilities of the office of director
Whether the interest of the depositors or creditors or potential depositors or creditors of the financial
sector institution are or are likely to be, in any way threatened by the person holding office of director
The previous conduct and activities in business and financial matters of the person
Academic qualifications and/or, professional qualifications and/or effective experience in respect of
one or more of the recommended fields.
Principle 3
Appointment and Duties of a Director
Guideline 3.1
For proposing a person for the post of director, there should be a formal nomination committee
comprising at least the Chairman, Chief Executive Officer and two other directors. The committee in
recommending a person should ensure that the Board consists of a mix of persons preferably having the
following experience and skills.
(a) Thorough knowledge of banking, finance, accounting, law or business accounting
(b) Experience in the banking and the financial industry at a senior level.
(c) Experience in human resources management, Information Technology skills or marketing skills.
Guideline - 3.2
It is the duty of a director to act in the best interest of the financial institution and its shareholders with
due regard to claims of other stakeholders by:
(a) Compliance with the statutory and regulatory requirements and loyalty to such institution
(b) Independence of judgement.
(c) In the event of a conflict of interest, ensuring the interest of the financial institution.
(d) Ensuring fairness in dealing with different stakeholders.
(e) Exercising of care, skill, diligence, and professionalism.
Chairman and Chief Executive Officer (CEO)

There are two key tasks in every financial institution; They are
(a) Responsibility of the Chairman for carrying out the functions of the Board; and
(b) Responsibility of the Chief Executive Officer for the running of the business of the financial
institution.
Guideline - 4.1
There should be a clear division of responsibilities at the head of the financial institution between the
Chairman and the Chief Executive Officer which will ensure a balance of power and authority, so that
no one individual has unfettered powers of decision.
Principle 4
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Guideline - 4.2
There should be a strong and independent non-executive element on the Board.
Principle 5
Role of the Chairman
The role of the Chairman of a financial institution in securing Good Corporate Governance is crucial.
The Chairman is expected to preserve order, ensure that proceedings at meetings are conducted in a
proper manner, and to ascertain the views or decisions of the meeting on the issues being discussed.
Guideline - 5.1
In the context of good corporate governance, the Chairman is expected to ensure that all directors,
executive and non-executive alike, are encouraged to play a useful role within their respective
capabilities in order to secure the maximum benefit to the financial institution.
Guideline - 5.2
It is desirable that the Chairman is not involved in the day-to-day operations of the financial institution,
but operates in such a way so as to ensure that the Board is in complete control of the affairs of the
institution and fully alert to the obligations towards the stakeholders.
Guideline - 5.3
The Chairmans position should be separated from that of the Chief Executive Officer. This is mainly to
avoid the domination of power by a single individual.
Guideline - 5.4
The Chairman should conduct Board proceedings in a proper manner and ensure, inter-alia, that :
all directors participate effectively,
all directors are encouraged to make an effective contribution, within their respective capabilities, for
the benefit of the financial institution,
a balance of power in the Board is maintained,
the views or decisions of directors on issues under consideration, are ascertained,
the Board is in complete control of the affairs of the financial institution and alert to its obligations to
stakeholders.
each Board member understands the significance and technical aspects of the matter under discussion.
Principle 6
Role of the Chief Executive Officer (CEO) and Senior Management
The Board should have complete confidence in the CEO. It is the role of the CEO and Senior
Management to establish and maintain adequate systems and controls.
While the CEO should be accountable for the effective implementation of the Board policies and
implementation of collective decisions taken by the Board, accountability for the performance of the
financial institution is the responsibility of the Board.
Guideline - 6.1
Functions of the CEO include the following:
Recommend strategic direction for the financial sector institutions
Leadership in achieving goals and objectives
Develop operational plans, budgets for approval by the Board
Monitor activities of the company to ensure targets are met and safeguard assets
Public relations (social responsibility)
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Inform Chairman and Board of operational matters

Provide Board with timely and relevant information and access to management as required
Guideline - 6.2
Senior management should have responsibility for formulating and implementing strategies guided and
approved by the Board; setting appropriate internal control policies; monitoring the effectiveness of the
internal control system, and accountability for the performance of the financial institution.
Guideline - 6.3
Senior management should ensure that the internal and external factors that could adversely affect the
achievement of the objectives of the financial institution are being identified and evaluated. This
assessment should cover all risks facing such institution.
Guideline 6.4
Senior management should ensure that the risks affecting the achievement of the strategies and
objectives of the financial institution are continually being evaluated. Internal controls may need to be
revised to appropriately address any new or previously uncontrolled risks.
Principle 7
Role of the Company Secretary
The Secretary of a financial institution (hereafter in this code referred to as the Company Secretary)
should be a person who possesses such qualifications, as are prescribed by the Companies Act No.17 of
1982 for a Secretary of a company.
Guideline - 7.1
All directors should have access to the advice and services of the company secretary, who is responsible
to the Board for ensuring that Board procedures are followed and that applicable laws, rules and
regulations are complied with.
Guideline - 7.2
The Company Secretary is responsible for preparation of the agenda and keeping proper minutes of the
meetings under the supervision of the Chairman.
Guideline - 7.3
Any question of the appointment and removal of the company secretary should be a matter for the Board
as a whole.
Principle 8
Every director should receive appropriate training and/or familiarization on the business of the financial
institution when he is first appointed as a director and also subsequently as necessary. The areas of
training/familiarization should encompass both general aspects of Directorship as well as matters
specific to the institution.
Guideline - 8.1
It is always beneficial to a financial institution when its Directors have a basic knowledge of areas other
than the area of his expertise, as it would contribute to arriving at good decisions.
Guideline - 8.2
All Directors should update their knowledge by attending appropriate Seminars and Conferences,
particularly in fields such as Financial Management, Risk Management, Entrepreneurship, Management,
Corporate Planning etc.
Directors Training / Familiarisation
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Principle - 9
Committee Structure for Boards
The effectiveness of a Board depends on its structure and procedures. This would require the
appointment of Committees such as
(a) Audit Committee
The internal audit shall report to the chairman of the Audit Committee. The Chairman of the Audit
Committee shall be responsible and take appropriate action to address weaknesses and forward
reports for the information of the Board.
The Chairman of the Audit Committee should preferably be a person with appropriate qualifications
in accountancy or knowledge and experience in accounting or auditing. The members of the Audit
Committee should not be persons with executive responsibilities in the institution.
(b) Risk Management Committee
(c) Remuneration Committee
(d) Nomination Committee
(e) Executive Committee
(f) Management Committee
(g) Compensation Committee
(h) Stakeholder Relations Committee
Guideline - 9.1
Terms of reference and operating procedures should be laid down by the Board for the functioning of
each Committee.
Guideline - 9.2
The Executive Committee consisting of three Non-Executive Directors and Chairman/CEO of the
financial institution to meet twice a month to review key matters such as :
Major loan approvals
Debt restructuring
Risk management
Employee policy and other policy issues
The Executive Committee should work with the management very closely and make decisions on behalf
of the Board within the framework of the authority and responsibility assigned to the Committee by the
Board.
Guideline 9.3
The financial institution must appoint a management committee consisting of staff members higher than
the manager level headed by the CEO to implement management decisions. The key responsibilities of
the management committee will be to :
deliver clear communication to the staff regarding the vision, mission and objectives of the institution
so that all employees who play an important role in contributing to the long-term success and
sustainable performance of such institution will work towards the same objective.
Develop good corporate governance practices
A proper succession plan which involves periodic infusion of new blood and appointment of
competent and effective persons who can add value to the company.
Principle 10
Transparency
An essential factor in promoting effective corporate governance in the financial sector is to develop and
enforce robust financial disclosure requirements for financial institutions. Such disclosure results in
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better management of risks and strengthening of market discipline. It also provides shareholders and
other stakeholders with adequate information necessary to identify the strengths and weaknesses among
financial institution.
Guideline - 10.1
There should be an effective set of disclosure requirements underpinned by high quality accounting
standards and practices. These standards should conform to accepted accounting standards.
Guideline - 10.2
External audit should be conducted by a fully independent auditor, whose business connections with its
client should not be such as to compromise the auditors objectivity and independence.
Guideline - 10.3
Financial disclosures should be subject to rigorous external auditing requirements, based on a set of
auditing guidelines promulgated by an appropriately qualified standard-setting body.
Guideline - 10.4
Disclosures of financial information are more useful if they are made with a reasonable degree of
frequency e.g half yearly or quarterly.
Guideline - 10.5
Disclosure of financial and risk-related information by banks should be in respect of the bank and the
consolidated group. In some case, holding company disclosures may also be necessary.
It is desirable for the disclosures to include the following :

the type of capital, and the percentage of capital relative to credit exposures, possibly using the Basel
Capital Accord as the measurement framework as directed by the Central Bank.
the institutions credit rating by a recognized credit rating institution and any recent changes to the
rating; it may also be appropriate in some cases to require disclosure of the parent entitys credit
rating and any recent changes to its rating;
comprehensive and detailed information on the balance sheet, income statement and off-balance sheet
obligations;
exposure concentration, in terms of exposures to individual counter parties or groups of associated
counter parties relative to the institutions capital.
excessive exposures to particular economic sectors or industries;
detailed information on asset quality, including the amount of non-performing and restructured loans
and the level of specific provisioning in relation to such loans; disclosure requirements should
desirably provide guidance on the basis upon which asset quality is reported and provisioning is
determined;
information on market risk (i.e. interest rate risk, exchange rate risk and equity risk), desirably using
the Basel Committees market risk methodology or a credible alternative;
information on related party exposures.
information on the nature of an institutions fund management, securitisation and other fiduciary
business, including details of funding provided by the institution to these business activities and the
structures in place to limit contagion between the funds management activities and the core business
of the institution;
information on the institutions systems for managing its business risks, including information on the
nature of its internal control systems, internal audit arrangements and any other arrangements it has
for an external review of the adequacy of its risk management systems and internal controls;
disclosure of the names, qualifications and experience of directors and senior management.
publication of a Code of Best Practice for information of their customers;
This means the institution should have an internal code.
publication of the institutions system for complaints handling.
Guideline - 10.6
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Guideline - 10.7
Financial sector institutions could be required to regularly disclose:
the nature of any conflicts of interest that individual directors or senior managers may have ;
the Boards rules for handling directors and managers conflicts of interests; and
attestations signed by each director as to whether they are satisfied that the risks of the financial
institution are being adequately identified, monitored and controlled at all times.
Guideline 10.8
There shall be an officer identified by name and designation charged with monitoring of compliance
with disclosure requirements and equipped with the powers to enforce compliance where appropriate.
The authority should be subject to effective transparency and accountability structures.
Appendix to Principle 10
Roles and Responsibilities of External Auditor
Although external auditors are not, by definition, part of a banking organization and therefore, are not
part of its internal control system, they have an important impact on the quality of internal controls
through their audit activities, including discussions with management and recommendations for
improvement to internal controls. The external auditors provide important feedback on the effectiveness
of the internal control system.
While the primary purpose of the external audit function is to give an opinion on, or to certify, the
annual accounts of a financial institution, the external auditor must choose whether to rely on the
effectiveness of the institutions internal control system.
The external auditors have to conduct an evaluation of the internal control system in order to assess the
extent to which they can rely on the system in determining the nature, timing and scope of their own
audit procedures.
Auditing standards require that audits be planned and performed to obtain reasonable assurance that
financial statements are free of material misstatement. Auditors should examine, on a test basis,
underlying transactions and records supporting financial statement balances and disclosures. An auditor
assesses the accounting principles used and significant estimates made by management and evaluate the
overall financial statement presentation.
The Central Bank may supplement the standard auditing requirements with additional requirements for
unique application to banks. Modifications can sometimes include:
a requirement for the auditor to report to, or meet with, the supervisory authority; and
a requirement obliging the auditor to report any concerns they may have to the supervisory authority.
a requirement to inform supervisory authority of any proposed changes of auditors or their
resignations.
Principle 11
Risk Management Systems
Financial institutions need corporate governance structures that promote effective identification,
monitoring and management of all material business risks. These structures may include well developed
and tested risk management systems and internal controls including the following;
Guideline - 11.1
Training programmes for staff responsible for risk management, so that they have a well developed
understanding of risks and the means by which they can be managed.
Guideline - 11.2
Training programmes for directors and senior management to enable them to have a robust
understanding of the nature of the institutions business, the nature of the risks, the consequences of
risks being inadequately managed, and an appreciation of the techniques for managing the risks
effectively.
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Guideline - 11.3
Robust internal audit procedures, with appropriate reporting lines to the CEO or directors, and with
oversight by the Audit Committee of the Board.
Guideline - 11.4
A structure which requires regular reporting to senior management and the Board on the nature and
magnitude of the risks being carried by the bank and the structures in place to control these risks,
including a regular assurance to the Board that all risk management systems and internal controls are
being properly applied at all times.
Guideline - 11.5
Signed attestations by each director, in a public disclosure statement issued by the bank, that the director
is fully satisfied to the best of his or her ability that all the banks material business risks are being
effectively identified, monitored and managed, and that the systems in place to achieve this are
operating effectively at all times.
Guideline - 11.6
A policy requiring the institutions risk management systems and internal controls to be subject to
periodic external review, and for the results of the review to be reported to the Board.
Guideline - 11.7
Institutions to view compliance functions as a part of the overall risk management framework and
submission of compliance certificate to the Board on a monthly basis.
Guideline - 11.8
Institutions need to comply with a large number of regulatory requirements, including prudential
requirements, taxation rules, various reporting obligations and the like. There is therefore a need for the
corporate governance framework to include systems for ensuring that all statutory and regulatory
requirements are being complied with, and to highlight potential or actual breaches if and when they
occur.
Guideline - 11.9
Institutions need to consider the scope to use their influence and moral suasion to promote good
governance among their own corporate customers, thereby improving their performance and reducing
their risk, which would ultimately benefit the institutions themselves, and the wider economy.
Guideline - 11.10
Duties need to be segregated so as to avoid operational risks. Board may specify the methods of
authorisation, limits and delegation and a dual control system to ensure accuracy of limit risks.
Principle 12
Prudential supervision plays an important role in encouraging the adoption of sound corporate
governance and risk management arrangements in the financial sector. In assessing the adequacy of
supervision arrangements in the context of promoting effective corporate governance in the financial
system, the following considerations are relevant:
Guideline - 12.1
Directors and senior management should be encouraged to take responsibility for satisfying themselves
that their institution has effective corporate governance arrangements and systems for managing all
material business risks and that those systems are being applied at all times. One way of encouraging
this is for the supervisory authority to require institution directors and senior management to sign
regular statements attesting to the effectiveness of risk management systems, internal controls, internal
audit arrangements and related matters, and to hold them responsible if it transpires that those
attestations were misleading or false.
Prudential Regulation and Supervision For Regulators
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Guideline - 12.2
Encourage or require institutions to have their corporate governance arrangements and risk management
systems subject to periodic external review by external auditors or consultants.
The periodic external review by external auditors or consultants should be done after a critical cost/
benefit evaluation as far as possible in measurable forms (i.e. quantitative) to ensure positive results in
the short/medium/long term.
Guideline - 12.3
Institutions are encouraged to make it a condition that effective corporate governance is enforced by the
borrowing institutions when large sums are lent to such institutions.
Guideline - 12.4
Require institutions to maintain and publicly disclose a credit rating from a reputable international credit
rating agency, so as to provide an additional degree of external scrutiny of each banks corporate
governance and risk management capacity.
Guideline - 12.5
Provide guidelines on corporate governance arrangements and risk management systems and use the
guidelines as a framework for periodic assessments of the adequacy of corporate governance
arrangements.
Guideline - 12.6
Hold periodic consultations with bank directors to discuss banking risk issues and other matters relating
to the governance of their bank.
Guideline - 12.7
Require banks to have a corporate governance compliance officer, and require regular reports from the
compliance officer, attesting to the adequacy of particular corporate governance arrangements.
Management information regularly provided to the Board.

Methodologies used by the Board to assess the adequacy of the banks corporate governance and risk
management frameworks, and the methods used to assess whether these frameworks are being applied
satisfactorily at all times.
Nature of internal and external audit arrangements, including the composition and role of the Audit
Committee.
The Reports of the Audit Committee and other committees are submitted regularly and action taken.
Banks policies for managing potential conflicts of interest between the bank and its shareholders or
other parties.
Nature of shareholder scrutiny of the bank.
Policies for dealing with potential conflicts of interest on the part of bank directors.
Adoption of corporate governance as a criterion for credit evaluation of banks customers and extended
corporate governance to all its corporate customers.
Nature of the Boards involvement in attesting to the adequacy of risk management systems and the
veracity of financial disclosures issued by the bank.
Nature of the resources made available to the Board to assist it to discharge its responsibilities.
Nature of the reporting from the Board to shareholders and the transparency of how the Board conducts
its affairs.
Supervisory authorities should be involved in tax reforms to ensure that bank customers provide honest
information of their revenues and sources.
Supervisory authorities, securities and exchange commissions and stock exchanges should be involved
in company/commercial law reform.
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02 / 04 / 004 / 0012 / 001
Bank
Supervision
Department
12th June 2003
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,
BANKING ACT
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02 / 04 / 004 / 0012 / 001

16th June 2003
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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02 / 04 / 004 / 0012 / 001

23rd July 2003
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 Commercial 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,
BANKING ACT
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Ref. No. : 02 / 04 / 003 / 0400 / 001

Department of Bank Supervision
Banking Department
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 banks rating.
4. With effect from July 2004, all banks are required to disclose their rating in all their advertisements
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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BANKING ACT
PART C
DIRECTIONS TO THE
NATIONAL SAVINGS BANK
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BANKING ACT
119

1995.
Governor
Colombo
21-11-1997.

CAPITAL ADEQUACY
National Savings Bank established under Act No.30 of 1971 shall not reduce or impair its
General Reserve or Revaluation Reserve, without the prior written approval of the Monetary Board.
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1995.
Governor
Colombo
21-11-1997.

RESERVE FUND
1. Every licensed specialised bank not having an equity capital as defined in the Banking Act
shall
1.1 Maintain a reserve fund referred to as Statutory Reserve Fund.
1.2 Transfer to such reserve fund out of net profits of each year, after payment of taxes due for
each year and before the declaration of dividends or the transfer of profits elsewhere a sum
not less than five percent of such net profits to the said reserve fund.
BANKING ACT
121

1995.
Governor
Colombo
21-11-1997.

LIQUID ASSETS
1. National Savings Bank established under Act No.30 of 1971 shall maintain minimum average
monthly, liquid assets of not less than 10 per cent of its total monthly deposit liabilities.
2. National Savings Bank shall furnish to the Director of Bank Supervision a monthly return in a
format to be released by him, certifying the total monthly deposit liabilities and the average total
monthly liquid assets as at close of business on the last working day of that month. Such return
should be forwarded before the 15th day of the month following the month to which the
statement relates.
3. Liquid Assets for purpose of this direction shall mean

3.1
Cash in hand
3.2
Balance in a current account in a licensed commercial bank.
3.3
Balance in a deposit account in a licensed specialised bank or a licensed commercial bank

3.4
Money at call in Sri Lanka.
3.5
Treasury bills and securities issued or guaranteed by the Government of Sri Lanka which
3.6
Goods receipts.
3.7
Import and export bills
3.8
Inland bills.
3.9
Cash items in process of collection.
3.10 Treasury Bonds issued under Section 21 A of the Registered Stock and Securities
Ordinance.
122
BANKING ACT

1995.
Governor
Colombo
21-11-1997.

INVESTMENTS IN EQUITY
1. Subject to paragraphs 2 and 3 below a licensed specialised bank not having an equity capital as
defined in the Banking Act shall not invest in the equity of any institution other than a public
company and
1.1 any shareholding acquired by such bank shall not be in excess of ten percent of its
aggregate of General Reserves, Statutory Reserve and fifty percent of the Revaluation
Reserve of such bank; and
1.2 the aggregate amount invested in the shares of public companies shall not exceed fifty
percent of its aggregate of General Reserves, Statutory Reserve and fifty percent of the
Revaluation Reserve of such bank.
Provided that such acquisition or holding of shares in terms of paragraph 1.1 above shall
not exceed twenty per cent of the paid up capital of the public company.
Provided further a licensed specialised bank may, without exceeding the limits specified
above, acquire shares in a company other than a public company if such acquisition
becomes necessary for the purpose of rehabilitating such company to make it financially
viable.
2.1 A licensed specialised bank is permitted to invest in the equity of a private company
subject to sub paragraph 2.2 below of this paragraph, provided such investment does not
exceed 20% of the paid up capital of the private company and 10% of the aggregate of the
General Reserves, Statutory Reserves and fifty percent of the Revaluation Reserves of
such bank provided further that the aggregate amount of such investments in the private
companies shall not exceed 25% of the aggregate of General Reserves, Statutory Reserves
and fifty percent of the Revaluation Reserves of such bank and the total aggregates of its
investments in private and public companies shall not exceed 75% of its aggregate of
General Reserves, Statutory Reserve and fifty percent of the Revaluation Reserve of such
bank.
2.2 Any equity investment in a private company by a licensed specialised bank shall be subject
to the condition that before the lapse of five years from the date of such investments or
such longer period extended by the Central Bank :
2.
BANKING ACT
123
2.2.1
the entire investment in the company shall be purchased by the other shareholders
of the company or
2.2.2
the private company be converted to a public company
3. The provisions of paragraph 1 above shall not apply to

3.1 investment in a subsidiary or associate company of the bank acquired or formed prior to the
issue of these directions.
3.2 investments in any other subsidiary or associate company acquired or formed with the
approval of the Central Bank of Sri Lanka.
3.3 any shareholding which the bank has acquired or might acquire in the course of the
satisfaction of any debt due to such bank, or as a consequence of the underwriting of a
share issue:
Provided that, where as a result of the acquisition of these shares the total investment of the
bank exceeds the percentage of its aggregate of General Reserves, Statutory Reserve and
fifty percent of the Revaluation Reserve of such bank as determined by the Monetary
Board under paragraph 1 above, the bank shall dispose of such excess shares within two
years or such longer period as may be determined by the Central Bank of Sri Lanka, from
the date of this direction or the date of the acquisition whichever is later.
3.4 Any equity which the bank has acquired or might acquire consequent to a statutory
provision in an Act establishing a financial institution.
124
BANKING ACT

1995.
Governor
Colombo
21-11-1997.

SINGLE BORROWER LIMIT
1. Unless permitted by the Monetary Board under exceptional circumstances, no licensed
specialised bank not having an equity capital as defined in the Banking Act shall grant
accommodation, exceeding thirty per cent of the aggregate of General Reserves, Statutory
Reserve and fifty percent of the Revaluation Reserve of such bank as at end of the preceding
financial year
1.1 to any one company, public corporation, firm, association of persons or individuals;
1.2.1
an individual, his close relations or to a company or firm in which he has a

substantial interest;
1.2.2
a company and one or more of the following

1.2.2.1
its subsidiaries;
1.2.2.2
its holding company;
1.2.2.3
its associate company;
1.2.2.4
a subsidiary of its holding company; or
1.2.2.5
a company in which such company or its subsidiary, or its holding

company, or a subsidiary of its holding company has a substantial
interest.
Provided that such accommodation exceeding fifteen per cent of the
aggregate of General Reserves, Statutory Reserve and fifty percent of
the Revaluation Reserve of such bank granted under paragraph 1.1 or
1.2 above shall not when aggregated exceed fifty per cent of its total
advances including total commitment to undertake contingent liabilities,
as at end of the preceding financial year.
2.1 For purpose of single borrower limit, accommodation granted against the security of items,
indicated at 2.2.1 to 2.2.4 below, shall not be included in the computation of single
borrower limit.
1.2 in the aggregate to
BANKING ACT
125
2.2.1
Cash
2.2.2
Government/Central Bank Securities
2.2.3
Treasury/Central Bank Guarantees
2.2.4
Guarantees issued by Asian Development Bank, International Development

Association, World Bank or other International Institutions acceptable to the
2.3 The provision of paragraph 1 shall not apply to inter lending of licensed specialised banks.
126
BANKING ACT

1995.
Governor
Colombo
21-11-1997.

ACQUISITION OF IMMOVABLE PROPERTY
1. Except with the approval of the Central Bank a licensed specialised bank not having an equity
capital as defined in the Banking Act shall not purchase or in any way acquire any immovable
property or any right therein exceeding in the aggregate ten percent of its aggregate of General
Reserves, Statutory Reserve and fifty percent of the Revaluation Reserve of such bank.
2. Where such licensed specialised bank has purchased or in any other way acquired any
immovable property or any right therein in excess of limits imposed at paragraph 1, on or before
the date of this direction, such licensed specialised bank shall conform with paragraph 1 before
the expiry of two years from the aforementioned date.
3. The restriction at paragraph 1 shall not prevent a licensed specialised bank from
3.1 acquiring immovable property as security for a debt and in the event of a default in
payment of the debt, from holding such immovable property provided that the licensed
specialised bank shall sell such property or any right therein, if such holding exceed the
limit prescribed in paragraph 1 above, within a period of two years from the date it acquires
or this direction whichever is later or such longer period as may be determined by the
Central Bank.
3.2 acquiring immovable property reasonably required for purpose of conducting its business,
or housing or providing amenities to its staff.
BANKING ACT
DIRECTIONS TO THE
STATE MORTGAGE AND INVESTMENT BANK
127
128
BANKING ACT

1995.
Governor
Colombo
21-11-1997.

LIQUID ASSETS
1. State Mortgage & Investment Bank established under Act No. 13 of 1975 shall maintain
minimum average monthly, liquid assets of not less than 10 per cent of its total monthly deposit
liabilities.
2. State Mortgage & Investment Bank shall furnish to the Director of Bank Supervision a monthly
return in a format to be released by him, certifying the total monthly deposit liabilities and the
average total monthly liquid assets as at close of business on the last working day of that month.
Such return should be forwarded before the 15th day of the month following the month to which
the statement relates.
3. Liquid Assets for purpose of this direction shall mean
3.1 Cash in hand
3.2 Balance in a current account in a licensed commercial bank.
3.3 Balance in a deposit account in a licensed specialised bank or a licensed commercial bank
3.4 Money at call in Sri Lanka.
3.5 Treasury bills and securities issued or guaranteed by the Government of Sri Lanka which
3.6 Goods receipts.
3.8 Inland bills.

3.9 Cash items in process of collection.
3.7 Import and export bills
BANKING ACT
DIRECTIONS TO THE
REGIONAL DEVELOPMENT BANKS
129
130
BANKING ACT
BS/31/90 Vol. III

Colombo 1.
15th September, 1998
Dear Sir,
BUSINESS OF PAWN BROKING
We enclose herewith the Direction issued by the Monetary Board, in terms of Section 76J(1)
of the Banking Act No.30 of 1988 as amended by Act No.33 of 1995, relating to the business of
pawn broking conducted by a Regional Development Bank, which is a Licensed Specialised Bank
within the meaning of the Banking Act referred to above, for your information and compliance.
The effective date of this Direction would be 1st October 1998.
Yours faithfully,
Encl.
BANKING ACT
131

Directions issued by the Monetary Board of the Central Bank of Sri Lanka, under Section
76J(1) 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 carried on by a Regional Development Bank, being
a licensed specialised bank within the meaning of the Banking Act.
Governor
Colombo
7th September 1998
REGIONAL DEVELOPMENT BANKS (PAWNING) DIRECTIONS 1998

1. (1) These Directions may be cited as the Regional
Development Banks (Pawning) Directions, 1998.
Citation & Application
(2)
These Directions shall apply to the business of
pawn broking, (hereafter referred to as pawning) carried on by a
Regional Development Bank or any branch or agency of such bank
(hereafter referred to as the pawnee).
2. In these Directions 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.
Interpretation
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 owner of the article.
Ownership of pledge
(2)
A person who gives an article as a pledge or
redeems an article shall establish the identity of the person to he
satisfaction of the pawnee.
4.
Pawning shall be carried on by a pawnee
Dates & Times of Pawning
(a) between the opening and closing hours of business

for the public by the Regional Development Bank
(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.
Competence of Staff and

equipment
132
Standard Measurement
BANKING ACT
6. (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.
Interest Rates
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.
Books to be maintained
8.
(1)
A pawnee shall keep for its business

(a) a pledge book in the Form set out in the First
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.
Pawn Ticket
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.
(b) a sale book of pledges in the Form set out in the

Second Schedule.
BANKING ACT
133
(3)
The counterfoil of the pawn ticket shall, after it 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 a
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 of interest chargeable for that month.
Computation of Interest
(2)
Where the business of a pawnee remains closed on
the last day 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 Directions referred to as the redeemable
period).
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 persons 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 redeemable 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
Procedure for redemption of a

pledge
134
BANKING ACT
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.
(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
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.
Loss or destruction of pledge
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.
Period of retention of
documents
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 article
relating to 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 months from the
(2)
Every pawnee shall insure the business of pawn
broking to the value of the articles taken as pledges.
BANKING ACT
135
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.
15. (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 subparagraph (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
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 despatch of the notice, pay to the
pawner the sum lying to the pawners 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
Sale of Pledges
136
BANKING ACT
account opened in the name of the pawner or

transfer the said amount to an unclaimed balance
amount 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 the pawner.
Acts prohibited
Safe custody of articles
16 A . 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
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.
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
BANKING ACT
137
19. (1)
A pawnee may formulate rules which are not
inconsistent with these Directions for the conduct of its pawn
broking business.
Rules
(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.
[ PARAGRAPH 8 ]
1st Schedule
PLEDGE BOOK
Pledge Book of
Date
Serial
No. of
pledge in
the month
Weight of Article
if Jewellery
No. of
the Issued
Pawn Ticket
Value of each
Article in term of
para (6)
(Rs. cts.)
Pawnee of
Name
of
Pawner
Amount of Loan
upon each Article
(Rs. cts.)
Address*
of
Pawner
Name
Description
of Owner if other of each Article
than
Pawned
Pawner
Profit or interest
charged upon
each Article
(Rs. cts.)
Date
of redemption
Name &
Address
of
Person
redeeming
* New address if original is changed
[ PARAGRAPH 8 ]
2nd Schedule
SALE BOOK OF PLEDGES
Date and Place of Sale :

Name and Address of Auctioneer :
Date
of
Pawning
No. of
pledge as in
pledge
Book
Name
of
Pawner
Amount
of
Loan
Amount
of
Interest
due
Amount for which

each Pledge was
Sold by Auctioneer
Name &
Address of
Purchaser
138
BANKING ACT
[ PARAGRAPH 9 ]
3rd Schedule
PAWN TICKET
Counterfoil
No.
Foil.
No.
(To be retained by Pawnee)

Date :
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.
(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)
(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
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
BANKING ACT
[ PARAGRAPH 12 ]
139
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
140
BANKING ACT
[ 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
2.
The pawnee shall cause all pledges to be exposed to public view.

The pawnee shall display catalogues of the pledges, stating
(a)
the pawnees 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 pawnees 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.
1.

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LICENSED SPECIALISED BANKS

DIRECTIONS, DETERMINATIONS, NOTICES

1. Capital Adequacy Ratio (Separate Direction for NSB)

2. Reserve Fund (Separate Direction for NSB)

3. Investment in Equity (Separate Direction for NSB)

5. Liquid Assets (Separate Direction for NSB & SMIB) ...

6. Share Capital Ownership

7. Single Borrower Limit (Separate Direction for NSB) ...

8. Accommodation to Directors/Related Companies

9. Acquisition of Immovable Properties (Separate Direction for NSB)

11. Specific Provisions

12. Prior Approval of the Central Bank for certain transactions

13. Alteration of Memorandum and Articles of Association

14. Payment of Dividends

15. Disqualification for being appointed or elected Director

16. Secretary of a Licensed Specialised Bank

17. Disqualification for Appointment of Manager etc.

18. Restriction in the Sale, Transfer of Immovable Assets ...

19. List of Qualified Auditors

20. Deposit Direction

21. Liquid Assets

2. Guidelines for External Auditors Relating to Their Statutory Duties

3. Prescribed Accounting Format

4. Criteria for Selection of Valuers

5. Guidelines on the Grant of Facilities for the issue of

6. Customer Due Diligence-Know Your Customer Procedures

7. Publication of Capital Adequacy Statement in the Annual Report

8. Public Disclosure by Publication of Financial Statements in the Press ...

9. Publication of Financial Statements in the Press

12. Acceptance of Certificates of Deposit ...

13. Guidelines on Credit Rating of Banking Institutions

10. Display of Interest Rates

Single Borrower Limit

Acquisition of Immovable Property

Directions to Rural Development Banks

BSD LSB Dir.Det.Not & Guls

Directions to State Mortgage & Investment Bank

BSD LSB - Dir. to All/NSB/SMIB/RDBs

DETERMINATIONS, DIRECTIONS AND

BSD LSB - Dir. to All/NSB/SMIB/RDBs

BANKING ACT NO. 30 OF 1988

DIRECTIONS UNDER 76.J(1)

BSD LSB - Dir. to All/NSB/SMIB/RDBs

For the purposes of this Direction,

BSD LSB - Dir. to All/NSB/SMIB/RDBs

BANKING ACT NO. 30 OF 1988

BSD LSB - Dir. to All/NSB/SMIB/RDBs

Structure of the Returns : This Return is divided into Four Parts.

Relates to the computation of the capital base (three sheets).

Relates to the computation of the Capital Adequacy Ratio (one sheet).

BSD LSB - Dir. to All/NSB/SMIB/RDBs

{In Rupees Thousand}

Gold & Bullion

Due from Central Bank of

Sri Lanka Govt. Treasury Bills

Sri Lanka Govt./Central Bank Securities

Other Securities guaranteed by

Loans and Advances : *

Against Cash Deposits/Gold

Against SL Govt. Guranteee/Securities

Guranteed by Central Bank of Sri Lanka

Staff Loans secured by Provident

Guranteed by OECD Central