CB to review Banking Act in 2021

• Slew of new regulatory measures for banks and finance companies 
• Group-wide consolidated supervision framework to be adopted 
• Banking Act to be revamped to upgrade legal and regulatory framework 
• Banks will be required to implement recovery plans 
• Development Bank to be set up amalgamating SMIB, HDFC and PSB 

The Central Bank (CB) has outlined a slew of regulatory measures for banks including a review of the Banking Act, implementing recovery plans to better manage risk and take forward market-driven consolidation for finance companies in its Road Map 2021 launched yesterday. 

Highlighting financial regulations outlined in the Road Map, CB Governor Prof. W.D. Lakshman said the monetary institution is currently in the process of developing the Group-wide Consolidated Supervision (GCS) framework to be adopted under risk-based supervision of financial groups. 

In 2020, the CB commenced the implementation of GCS framework by carrying out limited GCS, based on the observations of relevant supervisory authorities. In addition, in 2021, the CB will consider providing other regulatory relaxations to banks where possible, considering the extraordinary circumstances that prevailed in 2020. 

The CB also expects to review the Banking Act during the year, expecting to upgrade the legal and regulatory framework of licensed banks to further strengthen the financial system of the country. Banking institutions for identifiable market niches, such as development banks, are accepted. Large commercial banks will be encouraged to continue looking into avenues of expanding into regional markets. Further, the CB will continue to facilitate a market-driven consolidation process, enabling small-and-medium-sized banks to merge with other banks, preferably with larger banks having sound financial positions and viable business models.

The COVID-19 pandemic underscored the need for crisis preparedness. Licensed banks will be required to implement recovery plans to strengthen crisis preparedness, enhancing their ability to respond effectively to adverse scenarios. Directions will be issued in due course, providing necessary guidelines. The CB will continue to adapt its supervisory approaches to suit the ‘new normal’. 

A regulatory framework for technology risk management and resilience of licensed banks will also be introduced. This would prompt banks to upgrade and strengthen their information systems and technology platforms in line with the international standards and best practices. In this regard, the Central Bank will explore the possibilities of implementation of Supervisory Technology (SupTech) and Regulatory Technology (RegTech) solutions to streamline the data-intensive offsite supervision function by harnessing the capabilities of artificial intelligence (AI) and machine learning. 

Adoption of such frameworks and supportive human resource policies will enable the CB to keep pace with the rapidly evolving technology-driven financial innovations, so that the financial system stability could be further strengthened in time to come.

In the period ahead, the CB will work closely with the Government in facilitating the establishment of the proposed National Development Banking Corporation (NDBC) by merging the State Mortgage and Investment Bank (SMIB), the Housing Development Finance Corporation (HDFC), and Pradeshiya Sanwardhana Bank (PSB), enabling a new era of development banking in Sri Lanka.