Frequently Asked Questions (FAQs)
Resolution
Resolution
1. What is resolution of a financial institution?
Resolution is the restructuring of a Financial Institution (FI) by the Central Bank through the exercise of resolution powers of the Central Bank in order to safeguard the public interest including the continuity of the critical functions of such institution, securing financial stability and ensuring minimal costs to taxpayers.
2. What are the objectives of resolution?
Resolution of FI is required to ensure:
the stability of the financial system, including the payment, clearing and settlement systems;
the continuity of critical functions of such FI;
the protection of public funds by minimizing public financial support;
the protection of depositors of such FI; and
avoiding destruction of the value of assets and minimizing losses to creditors and minimizing overall costs of resolution of such FI.
3. What are the applicable legislations on resolution of FIs in Sri Lanka?
The legislations applicable for resolution of FIs in Sri Lanka are:
Central Bank of Sri Lanka Act, No. 16 of 2023;
Banking (Special Provisions) Act, No. 17 of 2023 (BSPA); and
Finance Business Act, No. 42 of 2011 (FBA).
4. Who is responsible for the resolution of FIs in Sri Lanka and what are the FIs covered by the above-mentioned legislations?
According to the Central Bank of Sri Lanka Act, No. 16 of 2023, the Central Bank of Sri Lanka (CBSL) is the authority responsible for the resolution of FIs while the BSPA empowers CBSL to resolve Licensed Banks (LBs) and Licensed Finance Companies (LFCs).
The Deposit Insurance and Resolution Department is the Department (DIRD) of CBSL established under the BSPA for the proper and efficient exercise, performance and discharge of CBSL’s powers, duties and functions relating to the resolution authority. Accordingly, Director of DIRD is entrusted with the resolution and winding up of LBs. However, the resolution and winding up of LFCs will continue to be handled by the Director of Supervision of Non-Bank Financial Institutions until the proposed amendments to the FBA are enacted. These amendments are intended to strengthen the resolution framework for LFCs and transfer the relevant functions to DIRD by empowering it for the same.
5. Does the Government get involved in the resolution of FIs?
Yes. The resolution measures can be implemented by CBSL and the Government of Sri Lanka to resolve an FI. When the resolution measures involve public funds, CBSL is required to take resolution decisions in consultation with the Minister in charge of the subject of Finance. However, when the Government is of the opinion that the failure of an FI can have systemic importance or impact, the Government has the authority to resolve such FI. The Government can recapitalize such LB or take over such LB into temporary public ownership.
6. What are the factors that CBSL should consider in the exercise, performance and discharge of the powers, duties and functions relating to its resolution authority?
CBSL should take into consideration the structure, scale, complexity, interconnectedness with other institutions and the risk profile of the FIs subject to resolution.
7. What is the difference between supervision and resolution?
Supervision is a proactive and continuous process focused on preventing financial instability while resolution is a reactive and crisis-management process designed to address financial distress when preventive measures have not been sufficient. Both processes are essential components of financial regulation and contribute to the overall stability of the financial system.
8. What is a Recovery Plan?
Recovery plan means a plan which provides for measures to be taken by an FI in the event of a deterioration of its financial position prior to the CBSL taking resolution action on such FI.
9. Who is responsible for the preparation of Recovery Plans?
Every FI shall prepare a recovery plan as part of its risk management process, which shall provide for measures to be taken by such FI in the event of deterioration of its financial position.
10. What is a Resolution Plan?
A Resolution Plan means a plan designed for an FI having systemic importance or impact, in accordance with the international standards and best practices available for resolution of FIs.
11. Who is responsible for the preparation of Resolution Plans?
CBSL is responsible for developing Resolution Plans. However, it will be a process adopted in line with recovery planning.
12. In what circumstances may CBSL decide to initiate a resolution process for an FI under the BSPA?
CBSL may decide to initiate resolution of an FI under this Act in the event that it is satisfied that an LB or an LFC as the case may be, is, or is likely to be, no longer viable, and has no reasonable prospects of becoming viable under the following circumstances:
where CBSL is of the opinion that an FI has failed, or is likely to fail, to comply with the provisions of the Banking Act, or any regulation, direction, determination, Order, or any requirement made, issued or imposed thereunder, including the regulatory, capital and liquidity requirements, in a manner that would compel CBSL to cancel the licence issued to such FI.
where CBSL is of the opinion that an FI is, or is likely to become, insolvent.
where an FI is unable to meet its obligations to its depositors or other creditors, or CBSL is of the opinion that such FI is likely to be unable to meet its obligations to its depositors or other creditors as they fall due.
13. What are the main Resolution Powers available to CBSL under the BSPA?
CBSL has the following main resolution powers in addition to additional resolution powers to resolve an FI:
appoint an Administrator to an FI under resolution;
effect a transfer of shares of such FI;
transfer all or any selected assets and liabilities of such FI;
cause a capital increase through the existing shareholders and new shareholders;
request the Minister to provide capital to establish a bridge bank; and
request the Minister to provide temporary financial assistance for the resolution of such FI, based on reports submitted by the CBSL to that effect.
In addition, as per the BSPA, the Government of Sri Lanka can infuse capital for such FI or take over such FI into temporary public ownership, if the Government is of the opinion that the failure of an FI can have systemic importance or impact.
14. How will the resolution of an FI be funded, if required?
Resolution of an FI can be funded mainly by two sources:
Deposit Insurance Fund for limited purposes subject to strict conditions; and
Financial Stability Fund to achieve the objectives of resolution and to ensure the effective implementation of resolution measures.
15. How is the Financial Stability Fund to be established?
The Financial Stability Fund (FSF) is to be established with various sources of funding, including the following:
budgetary allocations from the Government,
contributions from the Government,
grants or loans from International Financial Institutions,
investment income,
gains from fund investments,
contributions from FIs as determined by CBSL, and
income from other approved sources by the Minister.
Accordingly, the primary funding source for FSF would be provided by the Government.
16. For what purposes can the funds of FSF be used?
The utilization of the FSF is designated for specific purposes, namely, establishing a bridge bank, providing temporary financial assistance by the Government and capitalizing FIs with systemic importance or impact.
17. What is a Bridge Bank?
A bridge bank is an institution established by CBSL to take over and continue operations of certain critical functions and viable operations of an FI subject to resolution or to transfer shares, any one or more of the assets, liabilities, legal rights and obligations or other property instruments owned or issued by an FI subject to resolution, which, in the opinion of the CBSL, is having systemic importance or impact.
Appointment of an Administrator under the Banking (Special Provisions) Act, No. 17 of 2023 (BSPA)
1. What is the BSPA and why was it introduced?
The Banking (Special Provisions) Act, No. 17 of 2023 was introduced to provide the Central Bank of Sri Lanka (CBSL) with enhanced powers to resolve non-viable Licensed Banks (LBs) in an orderly and timely manner to protect depositors and financial system stability.
2. What are the current legal provisions applicable for CBSL to execute resolution to Licensed Finance Companies (LFC)?
CBSL issued a Gazette notification No.2432/02 on 16 April 2025 under Section 57 of the BSPA to apply Part I and II of the BSPA relating to the resolution of LBs to all LFCs. Accordingly, under the BSPA, CBSL has powers to resolve non-viable LFCs.
3. What is meant by "resolution" and what are the objectives of resolution?
Resolution refers to the process of restructuring LBs or LFCs by CBSL through the exercise of its resolution powers under the BSPA. The primary objectives of resolution are to safeguard the public interest, ensure the continuity of critical financial functions, maintain overall financial system stability and minimize costs to taxpayers.
4. Under what conditions can CBSL initiate a resolution?
CBSL may initiate resolution under Section 13 of the BSPA when an LB or LFC is determined to be non-viable or likely to become non-viable, and there is no reasonable prospect of recovery.
5. Who has the power to initiate a resolution?
The power to decide on whether an LB or LFC has been triggered for resolution rests with the Governing Board (GB) of CBSL.
6. What powers does CBSL have during resolution?
CBSL has broad resolution powers under Section 14 of the BSPA, including the power to:
a) Appoint an Administrator to such LB or LFC;
b) Effect a transfer of shares of such LB or LFC;
c) Transfer all or any selected assets and liabilities of such LB or LFC;
d) Cause a capital increase through the existing shareholders and new shareholders;
e) Request the Minister to provide capital to establish a bridge bank; and
f) Request the Minister to provide temporary financial assistance for the resolution of such LB or LFC, based on reports submitted by CBSL to that effect.
7. How does “Resolution” differ from cancellation of a licence or winding up?
• Resolution:
a) CBSL intervenes to address challenges and stabilize operations of the LB or LFC.
b) Protects depositors and maintains key financial services of such LB or LFC.
c) The LB or LFC continues to operate under the Administrator.
d) Options such as restructuring, asset sales or new ownership are explored.
e) Aims to minimize disruption and preserve value of assets of the LB or LFC under resolution
• Licence Cancellation:
a) The LB or LFC must immediately stop all business activities.
b) Leads to liquidation, with assets sold and the LB or LFC wound up.
8. Who is an Administrator?
An Administrator is an independent person, body corporate or a firm appointed by CBSL under Section 18 of the BSPA to take full control of an LB or LFC during resolution and to manage its affairs, assets and business on behalf of the institution until the expiry of the term of Administratorship. The Administrator shall have the authority to obtain the assistance of a team to support the execution of his/her duties.
9. What criteria does CBSL use when appointing an Administrator?
In terms of Section 18 of the BSPA, the Administrator should be fit and proper, shall be deemed to be a public servant within the meaning and for the purposes of Part IX of the Penal Code, and should be an independent individual who must not have any direct or indirect, financial or otherwise, interest in the affairs of the entity subject to resolution.
10. How is the general public informed of the appointment of an Administrator?
The appointment of an Administrator is formally communicated through an Order published in the Government Gazette and in at least three daily newspapers in Sinhala, Tamil and English.
11. How long does the Administrator remain in charge?
The term of the Administrator is 06 months and extendable from the date of appointment for further periods of 06 months at a time by CBSL.
12. Is the LB or LFC under resolution still under the control of the Board of Directors of such institution during Administratorship?
No. In terms of Section 19 of the BSPA, all powers and functions of the Board of Directors of the LB or LFC are suspended, and the Administrator takes full control of governance and operations. The administrator holds the authority to determine whether the BOD shall remain in place, be removed or replaced.
13. What responsibilities do employees of the entity subject to resolution have during Administratorship?
All employees are required, under Section 19(3) of the BSPA, to cooperate fully with the Administrator and provide access to all necessary records, systems and operational facilities.
14. Can the Administrator take legal or financial action on behalf of the company?
Yes. The Administrator is empowered to enter into contracts, restructure debts, make payments and perform all necessary legal and financial actions under Section 19(1) of the BSPA.
15. Will name or brand of the LB or LFC change during Administratorship?
No immediate changes to the institution’s name or branding are expected unless subsequently directed under a specific resolution strategy, such as a merger or asset transfer.
16. What are the key duties of the Administrator appointed under the BSPA?
i. Assume full control over all assets, rights, business and affairs of the LB or LFC.
ii. Prepare and submit an inventory of all assets and liabilities to CBSL within 30 days of appointment.
iii. Prepare and submit a detailed report within 60 days with recommendations on viable resolution options, such as:
a) Sale of the LB or LFC as a going concern
b) Transfer of selected assets and liabilities or establishment of a bridge bank
c) Resolve through any other resolution power as may be determined by CBSL considering the financial position and risk profile of such LB or LFC
d) Winding up of the LB or LFC
iv. Submit regular reports to CBSL on the financial condition and progress of resolution measures.
v. Organize and maintain files, documents and information related to the LB or LFC under resolution.
vi. Maintain a register of all decisions and actions taken during the period of Administratorship.
17. Who bears the costs related to the Administratorship under the BSPA?
The Administrator shall be paid a remuneration determined by CBSL and in line with Section 18(9) of the BSPA, all costs related to the Administratorship, including such remuneration, shall be borne by and charged to the LB or LFC under resolution.
18. When does an Administrator appointed for the resolution cease to function and what are his/her obligations upon termination?
An Administrator ceases to function as such in either of the following situations, whichever occurs first:
a. Upon completion of the term specified in the Gazette Order appointing the Administrator; or
b. If CBSL decides to terminate the appointment earlier than the specified term.
Within twenty working days of termination, the Administrator must prepare and submit a final report on the activities during the period of administratorship to CBSL.
19. Is there a compensation payment under the Sri Lanka Deposit Insurance Scheme (SLDIS) for the insured deposits during Administratorship?
No. Since the business continues to operate and the licence of the LB or LFC has not been cancelled under Administratorship, there will be no compensation payment from the SLDIS.