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CENTRAL BANK OF SRI LANKA Communications Department 30, Janadhipathi Mawatha, Colombo 1. Tel : 2477424, 2477639,2477420 Fax : 2346257, 2477739 E-mail:[email protected]; [email protected] PRESS RELEASE Date: 20.02.07 Issued By: Bank Supervision Department New Prudential Requirements on Maximum Amount of Accommodation Granted by Banks One of the policy measures proposed in the Road Map: Monetary and Financial Sector Policies for 2007 and Beyond announced by the Central Bank on January 2, 2007 is to issue new prudential requirements on single borrower limit of licensed banks with the objective of mitigating the banks’ credit concentration risk arising from granting loans and other facilities to large customers and promoting the banks’ risk management further. Accordingly, on February 20, 2007, the Central Bank issued new Directions under the Banking Act to licensed banks covering prudential requirements on maximum amount of accommodation that may be granted to single customers or grouped customers by licensed banks. In these Directions, existing prudential requirements on single borrower limit are revised and realigned to encourage and promote better risk management of banks. The Central Bank will continue to watch whether the banks’ risk management improves as a result of these Directions and revisit the Directions if necessary to ensure that the objectives if improved risk management are achieved. The highlights of the Directions are as follows. (i). The accommodations that are subject to and fall within the limits of maximum amount of accommodation specified in the Directions include any loan, overdraft or advance inclusive of finance lease, hire purchase and reverse repurchase agreements against debt securities, investments in debentures and other debt instruments and any commitment to grant any loan, overdraft or advance or such other facility including a commitment to accept a contingent liability. (ii). Accommodation granted against certain types of securities will be excluded from the computation of accommodations for the purpose of complying with the maximum limits. This includes accommodation granted against the security of cash, gold, Government Securities, Central Bank Securities, Treasury Guarantees, Central Bank Guarantees, Guarantees issued by the World Bank, the Asian Development Bank, International Development Association or any other international institution acceptable to the Monetary Board and Guarantees issued by a bank incorporated in Sri Lanka or abroad having a high credit rating in the range of AAA to A- or equivalent (subject to exclusions limiting to 80% and 50% based on the ratings). (iii). Maximum limits of accommodation that may be granted by banks to the categories of customers such as individuals, companies and groups of companies referred to in the Banking Act are specified as a percentage of capital base of the licensed banks computed for the purposes of maintaining the capital adequacy ratio in terms of the Basel Capital Accord. (iv). Four major limits of accommodation as a percentage of capital base of a bank specified in the Directions are as follows. 30 per cent in respect of an individual, a company or any other entity. 33 per cent in respect of a group of companies where the companies are grouped or connected as per the provisions of the Banking Act. Enhanced limits of 36 per cent and 40 per cent in respect of a group of companies depending on the status of risk management of banks and companies measured on a formula covering the capital adequacy ratio of banks and credit rating of banks and companies in the group. In the event, accommodation is granted to any customers in excess of 15 per cent of capital base of a bank, the total amount of accommodation granted to all such customers should not exceed 55 per cent of total outstanding accommodation granted by the bank to all customers. (v). In terms of the Banking Act, the Monetary Board retains the powers to grant permission to banks to provide accommodation up to 50 percent of capital base of banks for infrastructure projects specified in the Directions and such other higher limits of accommodation to any customers on a case-by-case-basis subject to terms and conditions the Monetary Board may deem fit, taking into consideration the national priorities and/or national interest and assessment of risks arising from such accommodation to banks. (vi). The maximum limits will not apply to accommodation granted to (a) the Government of Sri Lanka, (b) any licensed bank with a contractual repayment or maturity period of less than two years and (c) Ceylon Petroleum Corporation and Ceylon Electricity Board for a maximum period of two years from the date of the Directions. (vii). If any accommodation already granted exceeds the new limits, a period of three months is given to reduce such accommodation to the new limits. (viii). Any licensed bank that contravenes these Directions shall not pay dividends or repatriate profits until the contravention is rectified.