Banking Sector 

The banking sector in Sri Lanka, which comprises Licensed Commercial Banks (LCBs) and Licenced Specialised banks (LSBs), dominates the financial system and accounts for the highest share of the total assets in the financial system. Banks play a critical role within the Sri Lankan financial system, as they are engaged in provision of liquidity to the entire economy, while transforming the risk characteristics of assets.

Banks also engaged in providing payment services, thereby facilitating all entities to carry out their financial transactions. On the other hand, banks can create vulnerabilities of systemic nature, partly due to a mismatch in maturity of assets and liabilities and their interconnectedness. Therefore, the soundness of banks is important, as it contributes towards maintaining confidence in the financial system, and any failure may have the potential to impact on activities of all other financial and non-financial entities, and finally the economy.

In terms of the asset base and the magnitude of services provided, the LCBs are the single most important category of financial institutions within the banking sector. LCBs dominate the financial system with the highest market share of the entire financial system's assets. Therefore, the health of Sri Lankan financial system depends to a large extent on the soundness of the LCBs, primarily on the performance and financial strength of the six largest LCBs, generally referred to as the Systemically Important Banks (SIBs).

The systemic importance of the LSB sector is relatively low in comparison to the LCBs, both in terms of size and their impact on the financial system, as it does not play a major intermediary role in the payment cycle.

licensed commercial banks

Amana Bank	Indian Overseas Bank
Axis bank Ltd	MCB Bank PLC
Bank of Ceylon	National Development Bank PLC
Bank of China Limited	Nation Trust Bank PLC
Cargills Bank Ltd	Pan Asia Banking Corporation PLC
Citibank N.A	People’s Bank
Commercial Bank of Ceylon PLC	Public Bank Berhad
Deutsche Bank AG	Sampath Bank PLC
DFCC Bank PLC	Seylan Bank PLC
Habib Bank Ltd	Standard Chartered Bank
Hatton National bank PLC	State Bank of India
ICICI Bank Ltd	The Hong Kong and Shanghai Banking Corporation
Indian Bank	Union Bank of Colombo PLC

Licensed Specialised Bank

·         Housing Development Finance Corporation Bank of Sri Lanka (HDFC)

·         Lankaputhra Development Bank Ltd.

·         National Savings Bank

·         Regional Development Bank (Pradheshiya Sanwardhana Bank) (RDB)

·         Sanasa Development Bank PLC (SDB bank)

·         Sri Lanka Savings Bank Ltd (SLS Bank)

·         State Mortgage & Investment Bank (SMIB)

Risks in the Banking Industry Faced by Every Bank

Credit risk

According to the Bank for International Settlements (BIS), credit risk is defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Credit risk is most likely caused by loans, acceptances, interbank transactions, trade financing, foreign exchange transactions, financial futures the bank faces a credit risk.

Market risk

McKinsey defines market risk as the risk of losses in the bank’s trading book due to changes in equity prices, interest rates, credit spreads, foreign-exchange rates, commodity prices, and other indicators whose values are set in a public market. 

Operational risk

According to the Bank for International Settlements (BIS), operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.

Liquidity risk

Investopedia defines liquidity risk as the risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss. However if you find this definition complex, the term ‘liquidity risk’ speaks for itself. It is the risk that may disable a bank from carrying out day-to-day cash transactions.