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Fitch
comments on Lankan Bank Prudential Regulations
Fitch is to shortly publish its latest report on Sri
Lankan bank prudential regulations.
The Central Bank of Sri Lanka (CBSL) has gradually tightened
the banking system’s prudential norms to be closer
in line with regional best practices; and although CBSL’s
guidelines have generally been adhered to, it has entailed
instances of extensions of deadlines for compliance,
consultative compromises to facilitate smooth adoption,
and, in some instances, the interpretation of such guidelines
left to the banks themselves, notes a special report
to be published shortly by Fitch Ratings on Sri Lankan
Bank Prudential Regulations.
The most noteworthy regulatory changes were the introduction
of a capital charge for market risk, the introduction
of a mandatory general provision on performing advances,
and the introduction of the Basel II framework from
January 2008.
Banks have been submitting parallel computations under
the Basel II framework on a quarterly basis since 2006.
Based on the observation of parallel computations of
the six largest licensed commercial banks, the agency
believes that further refinement to risk weightings
and classifications may be warranted, given that the
banks are still in the process of calibrating their
systems to accurately identify customer segments as
stipulated in the Basel framework.
It should also be noted that the CBSL continues to maintain
the minimum Capital Adequacy Ratio at a more conservative
10%, against the Basel recommended, and more commonly
practiced, 8%.
The report also covers recent regulations pertaining
to corporate governance and the ownership of bank shares.
The CBSL recently released a direction on corporate
governance for banks which, amongst other best practices,
placed limits on the age of a director, the number of
directorates in other companies and the tenure of directorship
(with adequate transition provisions).
Fitch
is of the opinion that while the code will serve to
introduce some of the more basic forms of governance
if and where lacking, the addressing of wider governance
issues are still dependent on more robust market dynamics
and greater financial sector reform.
In an attempt to curtail concentration in bank shareholdings,
the CBSL, in 2007, imposed a restriction on the ownership
of shares that carry voting rights to 10%, although
a maximum of 15% may be permitted on a case by case
basis subject to CBSL approval. A maximum period of
five years (till 2012) has been granted to comply with
this direction, and failure to do so would result in
the reduction of voting rights to 10%.
Presently, there are five banks rated by Fitch that
have reported shareholders breaching this limit.
The report will be available shortly on www.fitchratings.com
and www.fitchratings.lk.
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