It is expected that these policies and measures will create the necessary environment for Sri Lanka to move into virtual banking and benefit from advanced technologies. We therefore, invite financial institutions to join these initiatives without delay. It is also a notable fact that the Sri Lankan financial system has become more interconnected and complex than ever before and more susceptible to shocks. Accordingly, the Central Bank recognises the importance of a more comprehensive macroprudential approach, which goes beyond supervision at individual firm level to look at broad market and economic factors that could have a material impact on the overall financial stability of the country. As we have already mentioned, stability of the financial system was preserved in 2018 amidst challenging market conditions with the help of timely macroprudential measures in addition to microprudential supervision and regulation. In this regard, a number of measures were taken by the Central Bank and the government to address the emerging systemic risks affecting financial system and macroeconomic stability. The imposition of Loan to Value (LTV) ratios on motor vehicle related lending, imposing margins on Letters of Credit (LC) on the importation of selected vehicle categories and non-essential items were among the policy measures taken by the Central Bank to mitigate emerging risks. The Central Bank will continue to resort to macroprudential measures to stabilise the overheating sectors in the economy, which can 30  undermine system stability. We expect to incorporate provisions for a stronger macroprudential framework into the proposed amendments to the Central Bank law.

As we firmly believe in the need for strengthening inter-regulatory cooperation and collaboration, a Memorandum of Understanding was signed between the Central Bank, Securities and Exchange Commission and Insurance Regulatory Commission on risk based consolidated supervision where the Central Bank will be the lead regulator. As we have reiterated on many occasions, market driven consolidation will be facilitated with the objective of promoting strong and dynamic banking and non-bank financial institutions to meet financial needs of the economy more effectively, while safeguarding the stability of the financial system. The performance of Licensed Finance Companies (LFCs) and Specialised Leasing Companies (SLCs) slowed down significantly during 2018 due to low credit growth, declining profitability and increasing nonperforming loans. The slowdown in the sector was also a result of moderate economic growth and the impact of natural calamities, such as floods and drought conditions that prevailed in 2017 and the first half of 2018. Policy measures taken to curb excessive demand for vehicle imports also impacted the sector significantly. Several regulations were introduced to strengthen non-bank financial institutions during 2018. A financial customer protection framework was introduced to protect customer interests and to strengthen customer confidence in the sector. 26  A new capital adequacy framework for LFCs and SLCs was implemented with a view to fostering a strong emphasis on risk management and to encourage ongoing improvements in the risk assessment capabilities of the sector. In terms of the new framework, companies with assets over Rs.100 billion are required to maintain higher capital adequacy ratios.