Banking Sector

     The banking sector is the section of the economy devoted to the holding of financial assets for others, investing those financial assets as leverage to create more wealth and the regulation of those activities by government agencies.


The banking sector in Sri Lanka is monitored by the Bank Supervision Department of the Central Bank of Sri Lanka under the Banking Act, Monetary Law Act and the Exchange Control Act.
When we consider the Banking system we can categorize as follows.

Financial system
1.      Banking System
v  LCBs
·         Private
·         Public
v  LSBs
2.      Non Banking System

Banking System

Banks are just one part of the world of financial institutions, standing alongside investment banks, insurance companies, finance companies, investment managers and other companies that profit from the creation and flow of money. As financial intermediaries, banks stand between depositors who supply capital and borrowers who demand capital. Given how much commerce and individual wealth rests on healthy banks, banks are also among the most heavily regulated businesses in the world. 

v Licensed Commercial Bank (LCBS)

Licensed Commercial Bank is a banking institution issued with a license by the Central Bank of Sri Lanka to carry on, among other things, maintain current accounts for customers, where money could be transferred by cheque and withdrawn on demand. The 26 licensed commercial banks which currently operate though a total of more than 6180 branches and over 4655 automated Teller Machines in the country. 
ü  Bank of Ceylon
ü  Hatton National Bank PLC
ü  Commercial Bank of Ceylon PLC
ü  Amana Bank PLC
ü  Axis Bank Ltd
ü  Bank of china Ltd
ü  Cargills Bank Ltd
ü  Citibank, N.A
ü  Indian Overseas Bank
ü  MCB bank Ltd
ü  National Development Bank  
ü  Nation trust Bank PLC
ü  Pan Asia Banking Corporation PLC
ü  People`s Bank
ü  Deutsche Bank AG
ü  DFCC Bank PLC
ü  Habib Bank Ltd
ü  ICICI Bank Ltd
ü  Indian Bank
ü  Public Bank Berhad
ü  Sampath Bank PLC
ü  Seylan Bank PLC
ü  Standard Charted Bank
ü  State Bank of india
ü  HSBC
ü  Union Bank of Colombo PLC 

v Licensed Specialized Bank (LSBs)

The licensed specialized banks are the financial institutions which have obtained a licensed from the central bank to conduct specialized banking business under the Banking Act. These banks are different from the commercial banks since they are not authorized to accept demand deposits from the public and therefor, do not maintain current account for customer. However, they are authorized to accept saving and time deposits on which interest is paid. Also they are not authorized to deal in foreign currency.
At present there are 7 specialized banks operating with 696 banking outlets and 376 ATMs in the country.
ü  Housing Development Finance Corporation Bank of Sri Lanka
ü  Lankaputra Development Bank
ü  National saving Bank
ü  Sanasa Development Bank PLC
ü  Sri Lanka Saving Bank Ltd
ü  State Mortgage & Investment Bank
ü  Pradeshiya Sanwardana Bank

  Non Banking System

A non-banking financial institution or non-bank financial company is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency.


Risk in the Banking Sector

  In  view  of  growing  complexity  of  banks„  business  and  the  dynamic  operating  environment,  risk  management  has  become  very  significant,  especially  in  the  financial  sector. Risk at the apex level may be visualized as the probability of a banks„ financial  health  being  impaired  due  to  one  or  more  contingent  factors.  While  the  parameters  indicating the banks„ health may vary from net interest margin to  market  value  of  equity,  the  factor  which  can  cause  the  important  are  also  numerous.  For  instance,  these  could  be  default  in  repayment  of  loans  by  borrowers,  change  in  value  of  assets  or  disruption  of  operation  due  to  reason  like  technological  failure.  While the  first  two  factors  may  be  classified as credit risk and market risk, generally banks have all risks excluding the credit  risk and market risk as operational risk. 
  

Financial Risk

            Financial risk arises from any business transaction undertaken by a bank, which is exposed to potential loss. This risk can be further classified into Credit risk and Market risk.

v  Credit Risk

            Credit Risk is the potential that a bank borrower/counter party fails to meet the obligations on agreed terms. There is always scope for the borrower to default from his commitments for one or the other reason resulting in crystalisation of credit risk to the bank. These losses could take the form outright default or alternatively, losses from changes in portfolio value arising from actual or perceived deterioration in credit quality that is short of default.
·         Counter part or Borrower Risk
·         Intrinsic or Industry Risk
·         Portfolio or Concentration Risk

v  Market Risk

            Market Risk may be defined as the possibility of loss to bank caused by the changes in the market variables. It is the risk that the value of on-/off-balance sheet positions will be adversely affected by movements in equity and interest rate markets, currency exchange rates and commodity prices.
·         Interest Rate Risk
·         Liquidity Risk
·         Current Forex Risk
·         Hedging Risk
·      

Non Financial Risk

Non- financial risk refers to those risks that  may affect a bank's business growth, marketability of its product and services, likely failure of its strategies aimed at business growth etc.  These risks   may arise on account of management failures, competition, non- availability of suitable products/services, external factors etc. In these risk operational and strategic risk have a great need of consideration.  
·         Operational Risk
·         Strategic risk
·         Funding Risk
·         Political Risk
·         Legal Risk









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