CB takes tough measures on financial stability

Central Bank (CB) Governor Ajith Nivard Cabraal last week disclosed the Bank's policies for financial system stability for 2007 and beyond.

Accordingly the Central Bank has introduced tough regulatory and supervisory measures in its Road Map: Monetory and Financial Sector Policies for financial system stability in 2007 and beyond report issued last week.

New policies on share ownership of banks will be implemented shortly by limiting single entities' material share ownership to 15% of the bank's share capital.

The banking system supervision will change from a "compliance based" system to "risk focused" systems, whereby a corrective action plan is consistently applied across the industry. This will compel banks to develop integrated risk management systems and strengthen internal controls and procedures, in line with more advanced prudential requirements. Banks will also be required to set up integrated risk management mechanisms and begin 'stress testing' to assess their resilience to internal and external shocks.

Supervision and regulation of non-bank financial institutions has also been strengthened. The minimum capital requirement of such institutions has been enhanced and accordingly financial companies will have to increase their capital from Rs. 100 million by the end of this month to Rs. 200 million by June 30, 2008.

The regulatory framework of registered leasing establishments has been further strengthened. In the future comprehensive on-site examinations of selected leasing establishments and spot examinations of others on a regular basis will take place.

The minimum annual turnover required for renewal of money changing permits were increased from US$ 120,000 to US$ 600,000 from January 1. The scope of money changers has also been enhanced from this year granting them to encash Travellers' Cheques.

The CB is also concerned over the steadily rising outstanding and overdue balance on credit cards. Recognising this as a threat to financial system stability the CB will draw up new guidelines on the issuance and minimum repayment requirements on credit cards. In addition the CB will implement the Basel II new international capital framework in 2008.

The CB said that the use of its reverse repo window by some commercial banks as a convenient instrument for regular funding caused an inflationary impact. To discourage this practice, from January 1, the reverse repo facility of the CB will not be made available on days when there is a liquidity surplus in the commercial banking system. The CB will also closely monitor the banks that regularly seek this facility.

GW