Statutory examinations of banks and financial institutions carried out by the Central Bank of Sri Lanka (CBSL) have raised concerns on the lack of clear demarcation between corporate governance and corporate management which are of critical importance for licensed banks. Deputy Governor of the CBSL K.G.D.D. Dheerasinghe said on Thursday that governance and management stepping into each other’s area eventually cause banking malpractices and prove detrimental to the interest of depositors, creditors and other stakeholders.
Addressing a workshop on financial risk management organized by Investec Capital (Pvt) Ltd in Colombo, Mr. Dheerasinghe said these situations result from inadequate oversight by the board of directors and senior management, lack of policy guidance from the board of directors, inadequate systems and controls including ineffective internal audit functions, related party exposures, understatement of non-performing loans and inadequate loan loss provisioning. He said these are clear indications of the need for proper corporate governance and risk management processes in those financial institutions. Accordingly, the CBSL issued mandatory Corporate Governance Directions in December 2007, requiring the banks to streamline their governance practices and risk management systems commencing from 2008.
The CBSL has introduced several new regulatory measures to strengthen the risk management systems in financial institutions, particularly in licensed banks, registered finance companies, specialized leasing companies and primary dealers. Mr. Dheerasinghe said the implementation of the Basel II framework from January 2008 was another measure introduced by the CBSL for the financial industry to strengthen the risk management framework.
However, this was never intended to increase the overall requirement for capital in the banking system but rather to ensure that capital requirements better reflect the risks inherent to each of the financial institution. Mr. Dheerasinghe said more detailed objectives of Basel II include the promotion of stronger risk management practices by banking institutions and the development of more risk-sensitive capital requirements that are conceptually sound.
He said the CBSL is currently facilitating the adoption of International Accounting Standards (IAS) such as IAS 32 and 39 which deal with recognition, measurement and disclosures of financial instruments while at the same time guidelines on Integrated Risk Management Systems in Banks are being finalized.
Mr. Dheerasinghe added that given the diversity of risk profiles of financial institutions, it is neither prudent nor desirable to adopt a one size that fits all framework for management of risks. The architecture of risk management should be bank-specific, dictated by the size, complexity of functions, operating environment and technical expertise of staff.