As a measure to support the banking sector, the Central Bank of Sri lanka (CBSL) has extended the current deadline for licensed banks to meet the enhanced minimum capital requirement 31 December 2022 up to 31 December 2023.
Accordingly, licensed banks which are unable to meet the minimum capital requirement by 31 December 2022, need to submit their capital augmentation plan, including plans to consolidate or merge with suitable financial institutions, by 31 December 2022 and these licensed banks too shall refrain from distribution of dividends/repatriation of profits until the minimum capital requirement is met.
The CBSL has taken this measure considering the prevailing macroeconomic conditions and its impact on the banking sector, has decided to implement the following regulatory measures to support the banking sector to facilitate effective financial intermediation and the flow of credit to the economy, whilst ensuring the soundness of the banking sector.
Among other measures that the CBSL announced, the Sri Lankan banking sector will be allowed to maintain a Capital Conservation Buffer (CCB) of 2.5% to ensure that banks have an additional layer of usable capital that can be drawn down during stressful times.
An industry-wide flexibility is granted for banks to draw down the CCB (up to 2.5%), if needed, subject to restrictions on distribution to shareholders/repatriation of profits and submission of a capital augmentation plan to rebuild CCB during a period up to three years.
Also, licensed banks are encouraged to move to approaches such as The Standardised Approach (TSA) or alternative TSA for computation of risk-weighted assets for operational risk for the purposes of computing the Capital Adequacy Ratio, which is subject to supervisory review.
Licensed banks are given the flexibility to stagger the unrealised mark-to-market loss on government securities denominated in Sri Lankan rupees on account of the recent interest rate hike for capital adequacy purposes until Q2 of 2024, subject to conditions.
Moreover, licensed banks are granted flexibility on the treatment of other comprehensive income (OCI) for capital adequacy purposes in line with international standards.
The deadline for licensed banks to submit the document on Internal Capital Adequacy
Assessment Process (ICAAP) for 2022, to the CBSL is also extended by one month, until 30 June 2022.
In addition, as a short-term measure to support licensed banks to adjust their liquidity profiles, licensed banks are provided with the flexibility to operate maintaining the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) not lower than 90% up to 30 September 2022.30.09.
Furthermore, the CBSL, on 6 May 2022 decided to restrict certain discretionary payments of licensed banks, such as declaring cash dividends and repatriation of profits, until the financial statements for the year 2022 are audited by its external auditor, engaging in share buybacks, increasing management allowances and payments to the Board of Directors until 31 December 2022 with a view to strengthening the liquidity and capital positions of licensed banks under these exceptional circumstances.