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CBSL to review bank, non-bank regulation and undertake payment system legal reforms
View(s):By Kapila Bandara
Banker to the Government, adviser on economic issues, and head prefect of the banking system, the Central Bank of Sri Lanka has laid out a number of initiatives for the year in line with its mandate to maintain price stability and the soundness of the financial system.
In particular, CBSL will undertake a thorough review of the banking sector regulatory framework and the non-bank financial sector. Payment and settlement systems reforms are also on the agenda.
Governor Dr Nandalal Weerasinghe said this week “continuous supervision will be further strengthened through a comprehensive review of the regulatory framework applicable to the banking sector, including loan classification standards and risk management requirements, in alignment with the Basel Core Principles and international best practices. In parallel, the legal framework governing the non-bank financial sector is expected to be reviewed in 2026’’.
He said the use of data-driven supervisory tools will be widened to identify risks early and institutional capacity will be strengthened.
Earlier, the CBSL introduced the Banking (Amendment) Act No. 24 of 2024 to comply with International Monetary Fund Extended Fund Facility programme structural benchmarks for the banking sector. There were also structural benchmarks agreed with the World Bank and Asian Development Bank. The amended Act became effective 15 June 2024. Off-shore banking was allowed for commercial banks under the amendments.
CBSL said it will also continue to support offshore banking “through appropriate regulatory and supervisory oversight’’.
CBSL has noted this week that about six domestic banks had applied to do offshore banking under the Colombo Port City Economic Commission Act No. 11 of 2021. Under an amendment bill, fees have been reduced and income tax exemptions are limited for employees of new entrants.
Dr Weerasinghe outlined greater emphasis on financial system health to ensure that homes and businesses are provided with critical services come rain or shine. Maintaining a stable financial system through supervision and by removing or reducing systemic risks through tools such as countercyclical capital buffer, is a part of the central bank’s role.
Financial intermediation services such as credit and payment services are dependent on financial stability policies.
While commending the administration of President of Anura Kumara Dissanayake for continuing fiscal discipline, the CBSL also reminded policymakers of the value of building stronger economic buffers to be able to absorb unexpected shocks, a message brought home by the unprecedented deaths and devastation from the 27 November cyclone.
Dr Weerasinghe highlighted improvements in the banking sector and finance companies from “improved asset quality, enhanced operational efficiency, and stronger profitability’’.
Systemic resilience was further strengthened by liquidity and capital adequacy levels that were well above regulatory thresholds, he said.
To better understand the interconnectedness and spillover risks across the financial system, CBSL is establishing coordinated data-sharing arrangements between the central bank and other financial sector regulators, he said.
“We will also extend the scope of macroprudential surveillance to financial sector participants regulated by other authorities and develop appropriate prudential standards to strengthen systemic risk oversight across the broader financial sector.’’
He was referring to monitoring of the financial system, identifying vulnerabilities and introducing policies to prevent further build up and infecting the financial system. Dr Weerasinghe noted the need to build buffers during stable periods to withstand shocks from recurring natural disasters, which could endanger financial system stability.
In this context, he said, the countercyclical capital buffer framework remains a priority.
For regulators, the ‘countercyclical capital buffer’ became an important tool following the 2008 global financial crisis as a part of the Basel III agreement in 2010. The ‘countercyclical capital buffer’ is increased when vulnerabilities in the financial system are deemed to rise.
As for emerging consumer-related risks, the CBSL will further improve its supervisory processes to identify vulnerabilities early, Dr Weerasinghe said. The central bank will “address unfair
market practices, and reinforce disclosure and transparency requirements for regulated institutions’.
Sri Lankans continue to fall prey to a rising incidence of financial fraud and scams alongside cybersecurity threats.
CBSL called on financial institutions to embed market conduct and financial consumer protection principles within their organisational culture and day-to-day operational practices.
Financial Consumer Protection Regulations No. 1 of 2023 became effective 9 August 2024.
CBSL will also continue to prioritise efforts to further improve the efficiency and effectiveness of domestic payment systems.
Dr Weerasinghe said legal reforms relating to payment and settlement systems are expected to be undertaken in 2026.
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