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.

A regulatory framework for appointment of agents was also issued. The Direction largely focuses on the approval and selection process of agents, responsibilities of banks, permitted activities, risk management and oversight, customer protection and dispute resolution. Further, adoption of Sri Lanka Financial Reporting Standards 9 on financial reporting of financial instruments is another progressive policy measure adopted in line with international best practices. The Central Bank also issued guidelines to banks on the adoption of SLFRS 9 in consultation with the Institute of Chartered Accountants of Sri Lanka for consistent and prudent application of standards. The Central Bank has already initiated drafting a new Banking Act with a view to further strengthening the regulatory framework pertaining to licensed banks. The overall mandate for supervision and regulation, strengthening corporate governance, digital banking, consolidated supervision, resolution, monetary penalties/fines, ring-fencing, mergers, acquisitions and consolidation, subsidiarisation of foreign banks and differentiated regulatory frameworks for a tiered banking structure are the key policy aspects to be factored into the proposed Act. In addition, the Banking Sustainability Rating Index (BSRI) will be implemented from 2019 for risk based supervision and planning the supervisory calendar. As banks are frequent targets for cyber-attacks and other information security threats, a road map and a consultation paper were issued to improve technology risk resilience in the banking sector in line with international 24  standards and best practices. A Banking Direction in this regard will be issued in 2019.