Extraordinary regulatory measures taken by Central Bank to provide flexibility to banks

Thursday, 2 April 2020 00:00 -     - {{hitsCtrl.values.hits}}

 


To support COVID-19 affected businesses and individuals

 

  • This is the full text of the note accompanying a letter from the Central Bank Governor Prof. W.D. Lakshman to all bank CEOs recently.

At present the banking sector in Sri Lanka as a whole is operating with healthy capital and liquidity buffers reflecting resilience and stability.

Since 2017, the banks have built up capital which can be utilised in times of stress. As at end 2019, total capital adequacy ratio of the banking sector stood at 16.5%, which is well above the regulatory minimum of 13.5%/14% and 12.5% applicable for Domestic Systematically Important Banks (D-SIBs) and non-D-SIBs, respectively.

At present the capital buffers in excess of the Capital Conservation Buffer (CCB) in the banking sector amounts to around Rs. 200 billion whilst the CCB amounts to Rs. 170 billion. These buffers can be drawn and can be leveraged up to eight to 10 times during times of stress.

Overall liquidity position of banks has been healthy and the Liquidity Coverage Ratio (LCR) of the banking sector as at end 2019 was 212.8% where the regulatory minimum is 100%. The buffers maintained in excess of the required LCR were comfortably high indicating that banks had high quality liquidity assets to meet the next 30-day outflows.

The subsequent reduction in policy interest rates and statutory reserve requirement has enabled banks to strengthen their liquidity position. Further the Central Bank has already announced that it will ensure the availability of adequate liquidity in the market in order to facilitate smooth operations amidst the COVID-19 outbreak.

In the meantime, CBSL will closely monitor the liquidity position of banks, due to the potential changes to their liquidity risk profile considering the already announced debt moratorium and other measures.

Accordingly, the Monetary Board has decided to introduce the following extraordinary measures to provide further space for banks to assist COVID-19 affected businesses and individuals on an urgent basis.

1. Release of capital conservation buffer

 As an immediate measure D-SIBs and non-SIBs are permitted to draw-down their CCBs by 100 bps and 50 bps out of the total of 250 bps, respectively. This amounts to around Rs. 50 billion enabling banks to expand their lending capacity by nearly Rs. 400 billion to facilitate smooth credit flows to the economy and CVIOD-19 affected borrowers to sustain their businesses in the immediate future.

CBSL will re-assess the impact of COVID-19 on banks’ capital and will release further CCB if required

2. Relaxations on classification of loans and advances and recovery of foreign currency loans

 As of end February 2020 the total banking sector loans and advances were around Rs. 8 trillion and total non-performing loans and advances (NPLs) accounted for Rs. 435 billion. It is observed that during the first two months of 2020, new NPLs close to Rs. 50 billion have emerged in the banking sector.

However considering prevailing extraordinary circumstances, the Monetary Board has decided to grant following measures in respect of classification of loans and advances and recovery of foreign currency loans to provide further space for banks to assist COVID-19 affected businesses and individuals. 

In circumstances where recovery loans in foreign currency is remote, the banks are permitted, as a last resort, to convert such loans to Sri Lanka Rupee denominated loans, where necessary and recover them in Rupees. However, banks shall ensure that borrowers do not get an undue advantage at the cost of country’s foreign reserves or cause pressure on the exchange rate. Further, banks shall maintain necessary documents in this regard. Further instructions on this regard will be issued to banks by Director, Department of Foreign Exchange.

The requirement to classify all credit facilities extended to a borrower as non-performing when the aggregate amount of all outstanding non-performing loans exceeding 30% of the total credit facilities extended will cease to apply with immediate effect.

With respect to borrowers who are not entitled to any other concessions, banks are permitted to provide additional 60 days period to settle loans and advances which are becoming past due during March 2020. Such facilities should not be considered as past due facilities until the end 60-day concession period.

Banks shall consider all changes made to payment terms and loan contracts from 16 March 2020 to 30 June 2020, due to challenges faced by customers amidst COVID-19 outbreak as modifications to loans and advances instead of restructuring of loans and advances for the purpose of classification of loans and advances and computing impairment,

Further CBSL is in the process of finalising a Credit Support Scheme to COVID-19 affected customers through a debt moratorium and working capital facility at concessionary rates of interest, consequent to the decision taken by the Cabinet of Ministers. CBSL has already issued initial instructions to banks to implement these decisions.

3. Deferring the enhancement of minimum capital requirement

 CBSL in its efforts to strengthen the capital position of banks and with a view to encouraging banks to maintain scale to operate in an effective and meaningful manner, in 2017,  enhanced the minimum capital requirement of commercial banks and specialised banks by end 2020 to Rs. 20 billion and Rs. 7.5 billion respectively. In this regard the banks which were in the process of infusing capital or planning mergers had submitted their capital plans to the Central Bank.

The requirement to meet higher levels of capital by the banks, which are yet to meet the requirement, is deferred until end 2022, considering the potential challenges ahead of raising capital and strategising for mergers.

All banks, however, should refrain from using the release of capital on any capital related relaxations granted, to distribute dividends or declare bonuses to its management and staff to avail of any other similar action.

4. Extension of deadlines to address supervisory concerns

The process of addressing supervisory concerns communicated through the Letters of Findings of the Statutory Examinations and other correspondence are in progress in banks.  However, considering the disruption to smooth operations of banking business and with the change of priorities due to the exceptional circumstances, meeting timelines set by CBSL and the banks may be challenging.

For this purpose, banks are permitted to reset the timelines if necessary, prioritising them on the basis of severity/importance. In the case of banks which are required to meet timelines to address supervisory concerns/findings during the period up to 30 May 2020, such banks are granted a further period of three months for rectification of supervisory concerns/findings.

5. Facilitating application of accounting standards

CBSL is in discussion with CA Sri Lanka on any facilitation for banks on the application of SLFRS9, considering the extraordinary circumstances arising from COVID-19 outbreak. Both CBSL and CASL will closely monitor the developments locally and internationally and take appropriate measures to address any concerns arising from the current situation.

6. Extension of timelines for submission and publication of statutory returns and financial statements

Timely submission of key statutory returns and publication of financial statements will be challenging during these exceptional times. Therefore, the reporting period for submission of statutory returns to the Bank Supervision Department will be extended by two weeks and publication of quarterly financial statements will be extended by one month until further notice. However, depending on the circumstances the period may be further extended. 

CBSL will continue to closely monitor the liquidity and the capital position of banks and any early warnings of stress, to ensure safety and soundness of the banking sector.  

All licensed banks are requested to avail these relaxations in the best interest of supporting their customers and the economy at large, benefits of which would in return accrue to the banking sector to remain resilient.

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