CB issues new directive on impairment ratios

The Central Bank (CB) has issued new directives on classification, recognition and measurement of credit facilities in licenced banks effective 1 January 2022.

As per the directive, the impairment of Stage 1 credit facilities from 1 January 2022, licensed banks should maintain a minimum Stage I impairment ratio of 0.5% as a percentage of total Stage 1 credit facilities i.e., Stage I impairment / Stage 1 credit facilities.

In instances where a licensed bank does not maintain a minimum Stage 1 impairment ratio of 0.5% as a percentage of total Stage 1 credit facilities, such deficit shall be required to be maintained in a special reserve account against equity.

Such reserve should not be used to declare dividends by licensed banks.

However, this shall only be used as a minimum value for Stage 1 impairment, and licensed banks shall ensure the adequacy of Stage 1 impairment as per the relevant Sri Lanka Accounting Standards and internal policies, according to the directive.

Banks are required to classify all credit facilities for the purpose of impairment assessment, risk mitigation and monitoring into performing and non-performing loans and advances.

Performing credit facilities mean all the credit facilities are classified as Stage I under SLFRS 9; and all credit facilities identified as significantly increased credit risk facilities are classified as Stage 2 under SLFRS.

The new directives are with a view to further strengthening and harmonising the regulatory framework on classification, recognition and measurement of credit facilities in licensed banks with the Sri Lanka Accounting Standard, ‘SLFRS 9: Financial Instruments’ (SLFRS 9) and establishing consistent and prudent practices in the banking industry.

Banks have also been provided with directives on governance framework for credit facilities, classification of credit facilities, sub-categorisation of non-performing credit facilities, significant increase in credit risk/default facilities, impairment charges for credit facilities, models for calculation of impairment, definition of re-structured and re-scheduled credit facilities, upgrading of credit facilities, valuation of collateral for impairment purposes, and recognition of interest income. 

Separately, directives have been provided on the role of internal audit and regulatory reporting.