Top banking sector analysts last week commended plans by the Central Bank of Sri Lanka (CBSL) to shore up the banking sector with tougher regulations and enhanced supervision this year, as spelt out in the 2018 Road Map unveiled last week. Some of the banking regulator’s plans for the sector include the amendment of the Banking Act, assigning of ratings to banks based on a combination of quantitative and qualitative indicators that will assess their efficiency and sustainability and reviewing the existing criteria and the mechanism for the selection of the panel of qualified auditors.
“Most of the plans are welcome and the Central Bank has been careful in also not stipulating specific timelines for the tasks possibly because the banking sector is gearing up to face a hit on profitability with the introduction impairment requirements under IFRS 9 and the overall move towards risk based mechanism,” an analyst said on the condition of anonymity.
According to the 2018 Road Map, the Central Bank plans to finalise the bank examination methodology based on the Bank Sustainability Risk Index (BSRI) to facilitate the transition from an annual ‘on-site’ examination approach to a ‘risk-based’ supervision approach. Further, the financial sector regulator intends to incorporate BSRI to examination reports of all licensed banks and assign a supervisory rating grade for banks with effect from 2019, on a staggered basis.
Under the Basel III guidelines, banks will also be required to comply with guidelines regarding a Net Stable Funding Ratio with due consideration to the composition of their assets and off-balance sheet exposures, the Central Bank outlined.
“A consultation paper has already been issued to banks in this regard and the relevant standard is to be implemented during this year.
The Leverage Ratio is also to be introduced as a simple, transparent and non-risk based tool that will supplement other risk-based capital requirements. The implementation of guidelines related to this ratio is expected to curb the build-up of excessive leverage in the banking sector,” CBSL Governor, Dr. Indrajit Coomaraswamy said.
On the other hand, the governor pointed out that new directions have been issued on foreign currency borrowing limits based on the total assets of a bank, replacing the previous direction involving assets of Domestic Banking Unit (DBU) only.
On the reviewing of the existing mechanism for the selection of the panel of qualified auditors, the Central Bank governor said the guidelines from the Basel Committee on Banking Supervision also emphasises this.
“The existing criteria and selection process are undergoing a rigorous review to strengthen the current assessment process and uplift the quality of audits so that auditors are also abreast with the emerging risks and implications of the Basel III framework and the new accounting standards that are to be enforced within the next few years,” Dr. Coomaraswamy highlighted.
In addition, the Central Bank governor also spelt out plans to introduce several policies to define regulatory expectations on use of cloud computing and define minimum regulations on the use of relevant fintech solutions. This is with a view to facilitate risk management of emerging technologies and to encourage further digitalisation of banking operations.
“Further, a comprehensive technology risk assessment programme would be conducted to assess and improve the technology risk resilience of banks,” the governor added.