Banks set to face ‘delicate balancing act’


Ms. Summaiya Macan Marker, head of compliance – Cargills Bank, D.M Rupasinghe director finance, Central Bank, Reyaz Mihular, managing partner KPMG Sri Lanka, Rajendra Theagarajah-chairman Ceylon Chamber and MD/CEO Cargills Bank, Sanjiva Senanayake- senior director/ non-executive director , Sampath Bank, Ms. Yvette Fernando, assistant governor-Central Bank and Nandika Buddhipala- CFO, Commercial Bank sit on the panel during the dialogue with the audience comprising a bank community. Pic: Saman Abeysiriwardena

by Sanath Nanayakkare

IFRS 9 (International Financial Reporting Standard), Basel 3 (International Regulatory Framework for Banks) and Sri Lanka's new Inland Revenue Act coming into effect from April 1 are here to stay as a potential answer to the problems Sri Lanka's financial and the economic landscape has seen for donkey's years. Although they may bring challenges to the banking system for some time, it won't be so bothersome after the banking system gets accustomed to do their delicate balancing act , Reyaz Mihular, managing partner KPMG Sri Lanka said in Colombo recently.

He said so while speaking as keynote speaker at the public-private policy dialogue on overcoming the regulatory and compliance challenges in the banking sector, organized by the Ceylon Chamber of Commerce.

"IFRS 9 set out principles-based standards on how banks should recognise and provide for credit losses for financial statement reporting purposes. The International Accounting Standards Board (IASB has issued an "expected credit loss" (ECL) framework for the recognition of impairment, effective for annual periods beginning from 1 January 2018. Also, IFRS 9 sets out how an entity should classify and measure financial assets and financial liabilities based on its business model, I think these are good features in these standards", he noted.

Further speaking Mihular said, "In essence, if a financial asset is a simple debt instrument such as a loan, the objective of the business model in which it is held is to collect its contractual cash flows and generally not to sell the asset. Those contractual cash flows represent solely payments of principal and interest, then the financial asset is held at amortised cost. The ECL framework is applied to those assets and any others that are subject to IFRS 9’s impairment accounting".

"It recognises and provisions for credit losses to promote safe and sound banking systems and play an important role in bank supervision. The Basel Committee on Banking Supervision (BCBS) has recognised that there is a close relationship between capital and provisions. This is reflected in the regulatory treatment of accounting provisions under the Basel capital framework".

"Today the banks have a lot of products. Basel 3 focuses you to show how much capital is assigned to those products as well as the efficient use of that capital, so you don't need to cover any loss from one particular product from the gains of another product".

"With the passage of time, we should see a smooth transitioning to IFRS 9 and Basel 3 and the new Inland Revenue Act, ensuring the banks' compliance with them", he said.

On a lighter note, Mihular reminded the young bank employees who joined the banks hoping to enjoy concessionary bank loans, among other things, that they would be taxed for this employment benefit for the first time from April 1, 2018.

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