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Document of The World Bank

Report No: ICR2218

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-37270 TF-50593)

ON A

CREDIT

IN THE AMOUNT OF SDR 12.4 MILLION

(US$ 16.0 MILLION EQUIVALENT)

TO THE

GOVERNMENT OF NEPAL

FOR A

FINANCIAL SECTOR TECHNICAL ASSISTANCE PROJECT

August 14, 2012

Finance and Private Sector Development South Asia

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CURRENCY EQUIVALENTS

(Exchange Rate Effective September 30, 2009)

Currency Unit = Nepalese Rupees (NPR) 1.00 = US$0.0129

US$1.00 = Rupee 77.19

FISCAL YEAR July 15 – July 14

ABBREVIATIONS AND ACRONYMS

ADB Asian Development Bank BFIA Banking and Financial Institutions Act BOD Banking Operations Department CAS Country Assistance Strategy CIAA Commission for the Investigation of the Abuse of Authority CICL Credit Information Center Limited DCA Development Credit Agreement DFID UK’s Department for International Development DPC Development Policy Credit DRT Debt Recovery Tribunal FMS Financial Management Specialist FSRP Financial Sector Restructuring Project FSSS Financial Sector Strategy Statement FSTAP Financial Sector Technical Assistance Project GON Government of Nepal ICR Implementation Completion and Results Report IDA International Development Association IDF Institutional Development Fund IFC International Finance Corporation IMF International Monetary Fund IRR Internal Rate of Return ISR Implementation Status and Results Report MOF Ministry of Finance MTR Mid Term Review NBL Nepal Bank Limited NPC National Planning Commission NPL Non Performing Loans NPV Net Present Value NRB Nepal Rastra Bank PAD Project Appraisal Document PCD Project Closing Date PDO Project Development Objective PPF Project Preparation Facility PRO Public Relations Officer PRSC Poverty Reduction Support Credit RBB Rastriya Banijya Bank SLR Statutory Liquidity Requirement

STR Secured Transaction Registry TA Technical Assistance VRS Voluntary Retirement Scheme

Vice President: Isabel M. Guerrero

Country Director: Ellen A. Goldstein

Sector Manager: Ivan Rossignol

Project Team Leader: Sabin Raj Shrestha

ICR Team Leader: Ann Christine Rennie

ICR Primary Author: Kiran Afzal

NEPAL Financial Sector Technical Assistance Project

CONTENTS

Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Program Performance in ISRs H. Restructuring

1. Project Context, Development Objectives and Design ............................................... 1 2. Key Factors Affecting Implementation and Outcomes ............................................ 10 3. Assessment of Outcomes .......................................................................................... 15 4. Assessment of Risk to Development Outcome ......................................................... 20 5. Assessment of Bank and Borrower Performance ..................................................... 20 6. Lessons Learned ....................................................................................................... 23 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners .......... 24 Annex 1. Project Costs and Financing .......................................................................... 26 Annex 2. Outputs by Component……………………………………………………..31 Annex 3. Economic and Financial Analysis ................................................................. 28 Annex 4. Bank Lending and Implementation Support/Supervision Processes ............ 29 Annex 5. Beneficiary Survey Results ........................................................................... 30 Annex 6. Stakeholder Workshop Report and Results .................................................. 31 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ..................... 32 Annex 8. Comments of Cofinanciers – DFID .............................................................. 41 Annex 9. List of Supporting Documents ...................................................................... 43

MAP…………………………………………………………………………………..44

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A. Basic Information

Country: Nepal Project Name: Financial Sector Technical Assistance Project

Project ID: P071291 L/C/TF Number(s): IDA-37270,TF-50593

ICR Date: 08/20/2012 ICR Type: Core ICR

Lending Instrument: TAL Borrower: NEPAL

Original Total Commitment:

XDR 12.40M Disbursed Amount: XDR 6.57M

Revised Amount: XDR 6.57M

Environmental Category: C

Implementing Agencies: Nepal Rastra Bank Cofinanciers and Other External Partners: Department of International Development - UK B. Key Dates

Process Date Process Original Date Revised / Actual

Date(s)

Concept Review: 08/31/1999 Effectiveness: 07/01/2003 07/01/2003

Appraisal: 02/11/2002 Restructuring(s):

06/03/2008 08/03/2008 04/01/2011 12/02/2011

Approval: 12/19/2002 Mid-term Review: 09/18/2006

Closing: 06/30/2007 12/31/2011 C. Ratings Summary C.1 Performance Rating by ICR

Outcomes: Moderately Unsatisfactory

Risk to Development Outcome: Substantial

Bank Performance: Moderately Unsatisfactory

Borrower Performance: Moderately Unsatisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings

Quality at Entry: Moderately Unsatisfactory

Government: Moderately Unsatisfactory

Quality of Supervision: Moderately Unsatisfactory

Implementing Agency/Agencies:

Moderately Unsatisfactory

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Overall Bank Performance:


Overall Borrower Performance:


C.3 Quality at Entry and Implementation Performance Indicators

Implementation Performance

Indicators QAG Assessments

(if any) Rating

Potential Problem Project at any time (Yes/No):

Yes Quality at Entry (QEA):

Satisfactory

Problem Project at any time (Yes/No):

Yes Quality of Supervision (QSA):

None

DO rating before Closing/Inactive status:


D. Sector and Theme Codes

Original Actual

Sector Code (as % of total Bank financing)

Banking 98 80

Media 1 10

Vocational training 1 10

Theme Code (as % of total Bank financing)

Corporate governance 14 14

International financial standards and systems 28 28

Regulation and competition policy 29 29

State-owned enterprise restructuring and privatization 29 29 E. Bank Staff

Positions At ICR At Approval

Vice President: Isabel M. Guerrero Mieko Nishimizu

Country Director: Ellen A. Goldstein Kenichi Ohashi

Sector Manager: Ivan Rossignol Marilou Jane D. Uy

Project Team Leader: Sabin Raj Shrestha Simon C. Bell

ICR Team Leader: Ann Christine Rennie

ICR Primary Author: Kiran Afzal F. Results Framework Analysis

Project Development Objectives (from Project Appraisal Document) The overarching objective of the Reform Program in the Financial Sector is to support the renewed efforts of His Majesty's Government of Nepal to improve the sector in order to

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bring macroeconomic stability and promote private-sector-led economic growth. The project will focus on: (a) helping to restructure and re-engineer the Central Bank (Nepal Rastra Bank - NRB), so that it can effectively perform its key central banking functions; (b) commencing commercial banking reform in the two large ailing commercial banks that dominate the sector (Rastriya Banijya Bank (RBB) and Nepal Bank Limited (NBL)) -- by introducing stronger bank management that protects the financial integrity of the two banks and would take on a conservator role to prepare the banks for the next steps of restructuring; and (c) supporting a better environment for financial sector reform in areas such as enhanced credit information, better financial news reporting, and better training for staff in financial institutions. Revised Project Development Objectives (as approved by original approving authority) The revised PDO as approved on April 1, 2011, was to assist the borrower in: (i) developing the capacity of NRB staff to effectively perform key central banking functions; (ii) implementing restructuring program of RBB and carrying out diagnostic review of NBL to prepare these state owned commercial banks for the next steps of restructuring; and (iii) creating an enabling environment for financial sector development, specifically in the area of credit information bureau, secured transaction registry and financial news reporting. (a) PDO Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Timely and effective intervention by NRB to enforce prudential regulations and relevant banking legislation.

Value quantitative or Qualitative)

Weak in supervising and regulating functions; weak legal structure; politicization of the Central Bank; lack of computerization; weak HR management.

Well-run, fully professional public-sector institution with adequate oversight of the financial system and monetary policy.

Not revised. This was one of the original PDO indicators which was not carried forward after project extensions and restructuring

New HR policy designed and adopted.

Date achieved 02/28/2003 06/30/2007 12/31/2011 05/17/2007 Comments (incl. % achievement)

Not achieved within the original closure period of June 2007. Computerization component delayed as bidding documents were still under preparation; BFIA had to be amended subsequently in line with IMF/Bank recommendations.

Indicator 2 : A record of timely implementation of central banking guidelines on reporting requirement, audit, on-site and off-site supervision, and corrective actions

Value NRB's annual report not Statutory audit for Target value Statutory audits of

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quantitative or Qualitative)

compliant with International Accounting Standards (IAS); bank supervision reports outdated and no evidence of prompt corrective action; No evidence of effective enforcement of NRB policies.

all banks completed within 5 months and NRB audit within 6 months; Annual on-site inspection and quarterly off-site inspection conducted by NRB; Prompt Corrective Action guidelines implemented.

not revised, project closing date (PCD) extended twice and target date/year moved to Dec 31, 2011

all banks completed in a timely manner. Audits of NRB for FY 2010 and 2011 completed. PCA guidelines implemented from FY2010/11.

Date achieved 02/28/2003 06/30/2007 12/31/2011 12/31/2011

Comments (incl. % achievement)

Partially achieved. The annual reports of NRB, RBB and NBL are published with delays of 1-2 years due to manual accounting procedures in remote branches of RBB and delays in submission of audited public accounts. NRB reports still noncompliant with IAS

Indicator 3 : Increased share of financial system owned and operated by private-sector players.


More than 50% of financial sector assets state owned/managed – namely NBL, RBB and ADBL and 5 Grameen Bikash Banks (GBB).

More than 75 % of banking sector assets owned/managed by the private sector banks.

Target value not revised, PCD extended twice and target date/year moved to Dec 31, 2011

Private sector banks comprise 77.8% of total banking sector as of Q1 (FY2011-12).


Fully achieved. This is primarily due to rapid growth in country's financial sector and new entrants in the market during a period when the growth of RBB and NBL was constrained by their lack of capital.

Indicator 4 : Increase in range and sophistication of financial instruments and services available at competitive prices.


High cost of financing; limited financial products; weak Credit Information Bureau (CIB); weak financial journalism; lack of adequate training facilities

Credit Information Center Limited (previously CIB) seeks external support for capacity enhancement; NRB considers establishing Bankers Training Center (BTC) for training own staff only; Revised dissemination strategy approved by NRB.

This indicator was neither revised nor carried forward after project restructurings

With competition from NBL/RBB interest rates in general decline; CICL operations improved and further support through FSTAP envisaged; group of financial journalist trained by Reuters, London.

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Date achieved 02/28/2003 06/30/2007 12/31/2011 05/17/2007


Partially Achieved. CICL was strengthened, but that cannot be attributed directly to FSTAP. CICL sought support from Asian Development Bank (ADB) for expansion of its activities and for automation. BTC functional, financial journalists trained abroad.

Indicator 5 : Creditor's rights enhanced through an upgraded bureau and establishment of a movable collateral registry


Weak CIB; Turnaround time takes more than a week; non existence of movable collateral registry.

CICL automated with upgraded system; Turn-around time within 24 hours; A functioning Secured Transactions Registry (STR) established with automated system

Not revised

CICL is privately owned/operated. Its efficiency improved significantly and targets for turnaround and volumes have been met with a semi-automated system developed in-house

Date achieved 08/03/2008 12/31/2011 12/31/2011 12/31/2011


This indicator was added in project restructuring and was partially achieved. Management Information System (MIS) upgrade for CICL and STR's automation remained incomplete on account of procurement delays, and eventually support to STR was dropped.

(b) Intermediate Outcome Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised

Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Production of timely quarterly off-site and annual on-site banking supervision reports for each of the banks.

Value (quantitative or Qualitative)

On-site supervision sometimes overdue by two years; supervision reports produced after six months; no prompt and corrective action taken in most of the cases.

Supervision reports of high quality to be produced within two months from on-site inspection and prompt /corrective action taken.

Not revised. This was the original IO indicator.

On-site inspection on two yearly cycle; management of three troubled private banks (LB, NBB, NCCB) have been contracted to external team by NRB.


Partially Achieved. New international Bank Supervisors could not be recruited due to procurement delays

Indicator 2 : Production of good quality (IAS compliant) audited financial data for the banks within four months of the end of FY

Value (quantitative

Delay in audit of NBL and RBB by more than

IAS complaint audit to be

Not revised. This was the

Quality and timeliness of

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or Qualitative) three years before external management took over in FY 2002/03.

published for general use within 4 months after end of FY.

original IO indicator.

disclosures of NBL improved; Provisionals are published within record one month.

Date achieved 02/28/2003 12/30/2005 12/31/2011 05/17/2007


Fully achieved as desired disclosures were made by banks. This was significant improvement from culture of minimal disclosure and complete lack of financial accountability. RBB statutory audit were still delayed by Office of Accountant General (OAG)

Indicator 3 : Finalization of a New Central Bank Act (done) and Banking and Financial Institutions Act (BFIA) and associated regulations.


Separate banking regulations for commercial banks, finance companies, development banks, agriculture banks, RBB, other financial intermediaries and cooperatives.

BFIA to be amended as per recommendation of WB/IMF joint study.

Not revised

BFIA 2006 undergoing further amendments to reflect Bank/Fund recommendations; blacklisting directive effective in dealing with defaulters; GON instructs passport seizure of 81 large defaulters than 24 hours.


Partially achieved. BFIA was not enacted till the original PCD of June 2007. The enforcement of the blacklisting directive and seizure of passports was happening without any glitches.

Indicator 4 : Revocation of restriction on foreign accountancy companies to operate; Changed rules on majority banking ownership; Cessation of directed lending in priority sector.


Foreign accounting firm cannot operate in Nepal; Majority banking ownership restricted to 50%; 12 %of lending portfolio must be invested in priority sector.

Further relaxation in bank ownership and priority sector lending form existing levels; foreign accountancy firms allowed to operate.

Not revised. It was one of the original IO indicator and was achieved within the original PCD

Foreign firms can conduct special audits obtaining prior approval; Bank ownership allowed up to 85%; Priority sector lending is abolished and Deprived is 3% of total lending portfolio


Fully achieved.

Indicator 5 : A privately owned automated web based credit information system established Value A CIB being manually Ability to handle Not revised. CIB transformed

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(quantitative or Qualitative)

operated by NRB up to 1000 requests per day in real time

This indicator was added after the August 2008 restructuring

into Credit Information Center Limited (CICL) that handles 1500 requests per day and turnaround time is less than 24 hours.

Date achieved 08/03/2008 12/31/2011 12/31/2011 12/31/2011


Fully achieved. CICL is privately owned, target volume has been surpassed, and turnaround times greatly reduced. However the requests are not handled on real time basis, and system cannot handle modern value-added products such as credit scoring.

Indicator 6 : A functioning movable collateral registry (STR) established.


STR not in place

A fully functioning movable collateral registry (STR) established.

Not revised. Indicator added after the August 2008 restructuring

Registry was established in the MoF in 2010 and a contract was signed with CICL in Oct 2010 by the MoF for STR's management.


Partially achieved. The STR has been established, but its automation had to be dropped from the project due to procurement delays. Its handing over to CICL is pending.

Indicator 7 : Financial journalists trained abroad.


Economic/financial journalists do not have access to proper training.

Total of 30 journalists trained

Not revised

A total of 48 journalists trained from FY 2010 - FY 2011.


Target fully achieved. The journalists were trained by Reuters in the UK and USA. Training was also conducted in Bangalore and Asia Institute of Technology, Bangkok.

Indicator 8 : Improved profitability and loan portfolio of NBL and RBB.


NBL and RBB incurred losses of NPR3 billion and NPR7 billion in FY 2001-02; NPA level of NPR10.8 billion (56%) and NPR 14.9 bn (55%)respectively.

Target for FY 2005/06: NPBT (before extra ordinaries) for NBL and RBB of NPR 2.3 bn and NPR1.5 bn ; NPA levels of NPR5 bn and NPR10.2 bn; Negative networth of NPR5.4 bn and NPR16.8 bn and NPR1 bn for RBB;

Profitability to be maintained above NPR0.5 billion for NBL and NPR1 billion for RBB; NPL level to be reduced by 70 % from FY 2002 level

Provisional results for FY 2011: Net Profit of NPR380 million for NBL and NPR1.759 bn for RBB; NPL level of NBL (5.29 percent) reduced by 87 percent and that of RBB (10.90 percent) reduced by 76 percent from FY 2002 level.

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NPL level to be reduced by 70 % from FY 2002 level

Date achieved 02/28/2003 07/17/2006 12/31/2011 12/31/2011


Fully Achieved. NBL has posted average annual profits exceeding NPR5 bn since 2004, compared to a loss of NPR 3 bn in 2003. Compared to loss of NPR4.84 bn in July 2003, the RBB posted a net profit of NPR1.75 bn in January 2011.

G. Ratings of Project Performance in ISRs

No. Date ISR Archived

DO IP Actual

Disbursements (USD millions)

1 05/15/2003 Satisfactory Satisfactory 0.00 2 07/21/2003 Satisfactory Satisfactory 0.55 3 11/21/2003 Satisfactory Satisfactory 2.75 4 05/31/2004 Satisfactory Satisfactory 4.94 5 11/29/2004 Satisfactory Satisfactory 6.98 6 05/17/2005 Satisfactory Satisfactory 7.88 7 11/17/2005 Satisfactory Satisfactory 9.45 8 05/12/2006 Satisfactory Satisfactory 9.89 9 11/27/2006 Satisfactory Satisfactory 10.27

10 12/28/2006 Satisfactory Satisfactory 10.27 11 06/22/2007 Moderately Satisfactory Satisfactory 10.52

12 12/17/2007 Moderately

Unsatisfactory Moderately

Unsatisfactory 10.52

13 06/26/2008 Moderately Satisfactory Moderately Satisfactory 10.53 14 11/22/2008 Moderately Satisfactory Moderately Satisfactory 10.53 15 06/29/2009 Moderately Satisfactory Moderately Satisfactory 10.54 16 12/28/2009 Moderately Satisfactory Moderately Satisfactory 10.58












Unsatisfactory 9.54

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H. Restructuring (if any)

Restructuring Date(s)

Board Approved

PDO Change

ISR Ratings at Restructuring

Amount Disbursed at

Restructuring in USD millions

Reason for Restructuring & Key Changes Made

DO IP

06/03/2008 N MU MU 10.53

Project extended for 18 months i.e. up to December 31, 2008 and savings under the second component of the Project (NBL and RBB Restructuring) were reallocated to NRB's IT upgradation, extension of management contracts (for RBB and NBL)and enhancing capacity of CICL.

08/03/2008 N MS MS 10.53

Project Closing Date (PCD) extended up to December 31, 2011, Also some activities from the Financial Sector Restructuring Project (FSRP) were allocated to this Project since the intent was to close the FSRP early (it was in fact closed only in March 2009 at the request of GON). Funds equivalent to SDR 4.0 million (US$5.83 million)were cancelled.

04/01/2011 N MU MU 10.69

This was a Level 1 restructuring and entailed revision of the PDO, and Intermediate Results. The Project components were downsized as some of the non-feasible activities were cancelled.

12/02/2011 Y MU MU 9.54

Undisbursed funds equivalent to SDR1,198,977.84 (US$2.0 million) were cancelled at the request of GON, as NRB was unable to complete the remaining activities within the PCD of December 31, 2011 due to several delays in procurement

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If PDO and/or Key Outcome Targets were formally revised (approved by the original approving body) enter ratings below: Outcome Ratings Against Original PDO/Targets Moderately Unsatisfactory Against Formally Revised PDO/Targets Moderately Unsatisfactory Overall (weighted) rating Moderately Unsatisfactory

I. Disbursement Profile

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1. Project Context, Development Objectives and Design

1.1 Context at Appraisal Country and Sector Background 1.1.1 When the Financial Sector Technical Assistance Project (FSTAP) was being designed, Nepal had a population of 24 million, and, with a Gross Domestic Product (GDP) per capita of US$220, it was one of the poorest countries in the world. The transition to multi-party democracy, which began in 1991, had resulted in a high degree of political instability, with numerous changes in government between 1991 and 2001. Its social indicators also deteriorated during the decade long conflict in the country, which came to an end in 2006. 1.1.2 Until the mid-1980’s, all financial sector activity was dominated by two state-owned commercial banks; Rastriya Banijya Bank (RBB) and Nepal Bank Limited (NBL). Following financial sector liberalization in the 1980s, the sector became more diversified, and by 2002, it had grown to include five commercial banks, eight development banks, five regional rural development banks, one postal savings bank, forty eight finance companies, thirty non-government microfinance institutions, and thirty-five non-government cooperative societies involved in limited banking activities. In the absence of a strong regulatory framework and sound technical capacities of the regulators, this diversity proved problematic. By 2002, the financial sector was grappling with serious governance issues, rising non-performing loans (NPLs), political interference in banking activities, and weak institutional management. The overall legal and regulatory framework for the sector was outdated, and had serious shortcomings in the areas of collateral, credit activity and bankruptcy laws. These factors were contributing to a build-up of systemic risks and potential fiscal costs that called for immediate redressal measures. 1.1.3 The two largest state owned commercial banks, RBB and NBL accounted for 50 percent of banking sector assets and were in a precarious financial position. The RBB, which represented 27 percent of commercial banking sector assets, had 71 percent NPLs. Both banks were characterized by overstaffing, strong and politicized staff unions, poor financial information systems, and a tradition of non-repayment of loans. A KPMG/Barents report completed in 2000 estimated the cumulative losses in these two institutions were between US$368 million and US$426 million. This was equivalent to approximately 8 percent of Nepal’s GDP and 40-46 percent of the country’s budget. The magnitude of these losses clearly demanded the attention of the Government of Nepal (GON). 1.1.4 The KPMG/Barents report recommended a number of steps to reform the financial sector, which included a clear statement of GON’s commitment to financial reforms, bringing in qualified management teams to run the two large state-owned banks,

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and ultimately recapitalizing and privatizing RBB and NBL after turning them into saleable entities. 1.1.5 In response to the prevailing distress in the banking sector, GON embarked on institutional reforms and released a Financial Sector Strategy Statement (FSSS) in 2000. FSSS made a case for a strengthened financial sector supervisory and regulatory regime to ensure financial discipline, improved legislation, and strong corporate governance. It envisioned a modern Nepal Rastra Bank (NRB) and advocated for a new NRB Act that could provide sufficient autonomy in NRB’s conduct of monetary policy, banking system regulation and supervision, and the licensing of banks and non banking financial institutions. It also aimed at restructuring NRB and RBB, and ultimately recapitalizing them and diluting GON’s ownership in the banks. 1.1.6 Until January, 2002, when the new NRB Act 2002 was passed into law, the Central Bank fell under the direct authority of the Ministry of Finance (MoF). This lack of autonomy hindered NRB’s ability to properly regulate and supervise the state-dominated banking system. In addition, NRB had been only partially successful in developing its core central banking functions, and required a complete re-engineering. The areas that required strengthening included human resource management, banking supervision and regulation, accounting and auditing, research and monetary policy analysis, information technology and internal audit. Rationale for Bank Assistance 1.1.7 FSSS and the measures adopted by GON sent a clear message to stakeholders that GON would support financial sector reforms going forward. GON approached the Bank, International Monetary Fund (IMF), and the UK’s Department for International Development (DFID), seeking financial and technical assistance (TA) for implementing its reform agenda. 1.1.8 The Bank completed an assessment of Nepal’s financial sector in 2002, which made a strong case for providing support to the sector to stem the mounting losses of the public sector banks, to strengthen the Central Bank and its supervisory function, and to strengthen the legal and regulatory framework of the financial system. Its findings endorsed the need for a financial sector TA operation to support GON’s reforms. These findings, coupled with the GON’s commitment to financial sector reforms (outlined in the 2000 FSSS and demonstrated by GON’s initial reform measures), provided the rationale for Bank assistance to the sector. 1.1.9 At the same time, the Bank recognized the risks inherent in the proposed financial sector reform program, given political uncertainty and limited implementation capacity. A history of weak coalitions and frequent changes in government increased the risk of policy reversals that could jeopardize project outcomes. As a result, a decision was made to undertake support for the reform program in three phases. FSTAP was conceived under Phase I. This TA was to focus on the re-engineering of NRB; restructuring of RBB and NBL; and improving the enabling environment for financial sector development.

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The projects under Phase II and III were to complement the activities under the FSTAP, with the objective of recapitalizing and privatizing NBL and RBB. 1.1.10 FSTAP was in line with the Bank’s 1998 Nepal Country Assistance Strategy (CAS) that emphasized structural reforms in four key areas; (i) restructuring/privatization of RBB and NBL; (ii) the development of NRB’s regulatory and supervisory capacity; (iii) development of a uniform legal framework for Nepal’s financial system; and (iv) establishment of additional private financial institutions supported by the International Finance Corporation (IFC). 1.1.11 Poverty Reduction Support Credit (PRSC) – 2003: Soon after the effectiveness of the FSTAP, a US$70 million PRSC was approved by the Bank. The prior actions for the financial sector under PRSC, which mirrored the objectives of FSTAP, were as follows: (i) Dissolve boards of RBB and NBL, introduce new professional management teams

at RBB and NBL – (PRSC I prior action) (ii) Implement scheme to rationalize excess staff at NRB, NBL and RBB – (PRSC II

Indicative action expected by September 2004). The first prior action was implemented when GON appointed the management team at NBL and a Chief Executive Officer (CEO) at RBB in 2002. The second action was supported through FSTAP and the Phase II Reform Project, the Financial Sector Restructuring Project (FSRP)1 which became effective in 2004. Co-financing Arrangements with DFID and GON 1.1.12 DFID also endorsed GON’s financial sector reform agenda and agreed to provide financial and technical support to FSTAP. It committed a US$10 million grant to supplement the International Development Association (IDA) credit. A Memorandum of Understanding (MoU) was signed in 2003 between the Bank and DFID, and it was decided that the funds would be disbursed in the proportion of 62 percent IDA and 38 percent DFID 2 . The grant was to be administered according to IDA’s financial management (FM), disbursement and procurement guidelines. GON was to contribute the balance of US$4.1 million to this project.

1 The US$7.0 million FSRP was the second operation under the Bank’s financial sector reform program for GON. The main objective of FSRP was to improve corporate governance by providing management support to NBL and RBB in order to move them into the private sector, and to sustain the banking reforms. The project also financed Voluntary Retirement Schemes (VRS) schemes at the two banks. The undisbursed funds equivalent to SDR13.7 million, under FSRP, were cancelled at the request of GON in two steps in May 2008 and March 2009, and the project closed on September 30, 2009.

2 This was subsequently changed. Subsequent governments expressed a reluctance to borrow for TA, and consequently much of the TA work was funded under the DFID grant.

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1.2 Original Project Development Objectives (PDO) and Key Indicators 1.2.1 The overarching objective of FSTAP is to support efforts of GON to improve the sector in order to bring macroeconomic stability and to promote private sector led economic growth. Specifically, the project will focus on: (a) helping to restructure and re-engineer the Central Bank (NRB), so that it can effectively perform its key central banking functions; (b) commencing the restructuring of RBB and NBL by introducing stronger bank management that protects the financial integrity of the two banks and would take on a conservator role to prepare the banks for the next steps of restructuring; and (c) supporting a better environment for financial sector reform in areas such as credit information and secured transactions, better financial news reporting, and better training for staff in financial institutions. Key Indicators 1.2.3 The PDO level key indicators were: (i) timely and effective intervention by NRB to enforce prudential regulations and relevant banking legislation; (ii) a record of timely, effective, and independent implementation of central banking policies; (iii) increased share of financial system owned and operated by private sector players; and (iv) increase in the range and sophistication of financial instruments and services available at competitive prices. This ICR assesses the performance of the project against the original PDO and revised PDO and outcome indicators. All of these have been tabulated and evaluated in the Results Framework Analysis, Section F, of this ICR’s datasheet.

1.3 Revised PDO and Key Indicators, and reasons/justification 1.3.1 The PDO was revised in April 2011 as a result of a Level-1 restructuring that also included cancellation of funds equivalent to SDR615,000 (IDA) and GBP1.964 million (DFID Grant). The detailed background of this restructuring is given in section 1.7 of this document. 1.3.2 The revised PDO was to strengthen the financial sector, notably the NRB and the state controlled banks, and to create an enabling environment for financial sector development. The project was to assist GON in (i) developing the capacity of the NRB staff to effectively perform key central banking functions; (ii) implementing the planned restructuring program of RBB and carrying out a diagnostic review of NBL to prepare NBL and RBB for the next steps of their restructuring; and (iii) creating an enabling environment for financial sector development, specifically in the areas of the Credit Information Bureau (CIB), Secured Transactions Registry (STR) and financial news reporting. The intermediate results indicators were also revised accordingly.

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1.4 Main Beneficiaries, 1.4.1 The main beneficiaries or the primary target group of this project were NRB, RBB and NBL. The actions implemented under the project were expected to foster a sound commercial banking system, with oversight provided by a modern, effective, and technically competent central bank. The FSTAP also aimed at creating a financially sound, prudent, and effectively regulated financial sector, that could contribute to macroeconomic stability and growth. This could not be achieved without strengthening the Central Bank and the country’s two largest banks, RBB and NBL. NRB: Although NRB had been able to develop some core central banking functions, it was handicapped by a lack of autonomy, an inadequate and outdated legal framework, and a large number of poorly trained and unproductive staff. NBL and RBB: Established in 1938, NBL is the oldest bank in Nepal. GON is the largest shareholder, with 41 percent ownership. The remaining shares are held 49 percent by private businessmen and 10 percent by the public3. RBB, established as a 100% government-owned bank in 1966, is Nepal’s largest commercial bank. At project inception, both banks were overstaffed, suffered serious shortfalls in governance, management and operations, and had negative net worth. 1.4.2 A key benefit of the project was to be the emergence of a more dynamic and competitive banking system that would support private-sector led growth for the benefit of Nepali enterprises and the general public.

1.5 Original Components 1.5.1 The three main components of FSTAP are tabulated below, along with the cost breakdown by financier: Table 2: Project Components and Cost by financier (US$ million) Component IDA DFID GON Total Re-engineering NRB 2.64 1.56 0.48 4.68Restructuring RBB and NBL 12.81 8.10 3.52 24.43Capacity building in the Financial Sector

0.55 0.34 0.10 0.99

Total 16.00 10.00 4.10 30.10 1.5.2 Component 1: Re-engineering NRB (US$4.68 million): The specific activities envisaged under this component included hiring of a Human Resource (HR) professional

3 GON had owned 51 percent of the NBL, but sold 10 percent to the public in 1998 through a listing on the stock exchange. At the time of listing, NBL had a negative net-worth of US$85-140 million which is in violation of the listing rules of the exchange. New management hired under FSTAP requested the de-listing of the NBL in 2003.

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who would revise the HR policies, identifying staff for retrenchment, designing the VRS, and computerizing the HR function. Additionally, this component aimed at strengthening NRB’s supervisory capacities by training its staff and by hiring experienced bank supervisors to assist with the implementation of NRB’s plan for regulatory development. This component also envisaged improving the quality and efficiency of NRB’s Accounting and Auditing Department, strengthening the Research Department, and providing IT support. Some funding was also allocated to strengthening the Legal and Internal Audit Departments, and providing training to NRB staff involved in these functions. Finally, the FSTAP envisaged providing support to NRB to engage legal experts to review the legislative and regulatory framework, and finalize the Central Bank Act and the Banking and Financial Institution Act (BFIA). 1.5.3 Component 2: Restructuring RBB and NBL (US$24.43 million): The restructuring of these two institutions was to be accomplished under the supervision of professional management teams who were to take complete control of the day to day operations of these banks, immediately stabilize their financial and operational positions, and strengthen their accounting, Management Information System (MIS) and HR functions. The ultimate objective of these efforts was to stem the losses being incurred by these banks and prepare NBL and RBB for recapitalization and ultimately privatization or liquidation. 1.5.4 Component 3: Capacity Building in the Financial Sector (US$0.99 million): The activities under this component were to support reforms introduced through the first two components and improve the environment for financial intermediation. Specific activities included; (a) support for the Bankers’ Training Center; (b) strengthening the processes of the CIB; (c) developing the capacities of the financial journalists to improve the quality of reports on financial sector issues; and (d) financing the cost of the Coordination Support team (CST) while strengthening its project management capabilities. 1.5.5 Implementation Arrangements: GON agreed with the Bank that the financial sector program would be overseen by three Government bodies, namely the MoF, NRB and the National Planning Commission (NPC). For implementation of activities at the project level, a dedicated unit called CST was formed within the Banking Operations Department (BOD) of NRB. The CST was supported by a team comprising the Executive Director of BOD, a Financial Management Specialist (FMS), a Procurement Specialist and requisite ancillary staff. FSTAP funded the operating costs of CST on a declining cost basis over the period of project’s implementation. It was also agreed to centralize the procurement function within the CST and equip it with the desired resources to ensure an effective implementation of the project’s procurement plan.

1.6 Revised Components 1.6.1 At the request of GON in June 2008, the FSTAP was assigned certain additional activities that had not been implemented under the Phase II project, FSRP, prior to closure. As the PDOs of FSRP remained largely unachieved, it was decided to close that project in August 2008, ahead of its closing date of September 2009. Due to some

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pending payments of already incurred expenditures under the project, the FSRP’s closing eventually occurred in September 2009. 1.6.2 The activities that were transferred to FSTAP included; (i) strengthening NRB’s supervision capacity by hiring a Supervision Expert with focus on risk based supervision; (ii) hiring of a Bank Restructuring Advisor for the end game resolution of NBL and RBB; (iii) strengthening the capacity of the Debt Recovery Tribunal (DRT); and (iv) establishing STR. While the PDO remained unchanged, new outcome indicators were added for the new components which were; (i) final resolution of NBL and RBB through either sale or closure; (ii) number of court cases resolved in a period and average number of days taken for resolution of a case by DRT; and (iii) full functioning of STR. 1.6.3 Later, at the request of GON, the original components of the project were downsized during the April 2011 restructuring, based on what was possible to achieve within the revised Project Closing Date (PCD) of December 31, 2011. The following activities were dropped under each component: Component 1: Re-engineering of NRB:

(i) Recruitment of Supervision Expert: It was agreed that the IMF would take on the recruitment of two Resident Advisors for one year to strengthen the Bank Supervision and Financial Institutions Supervision departments.

(ii) HR Expert: After an initial consultant completed his assignment, NRB indicated that it wanted to utilize in-house expertise rather than external consultants.

(iii) Procurement Expert: NRB did not see the need for this expert as no new procurement was planned.

(iv) Public Relations Officer: This was also dropped as NRB wanted to use its own resources.

Component 2: Management Contracts for Restructuring NBL and RBB:

(i) CEO of NBL: NBL decided not to recruit a new CEO using project funds (ii) Bank Restructuring (sales) Advisor: NRB decided against hiring an Advisor,

as GON was still divided over the ultimate disposition of GON’s shares in NBL and RBB.

Component 3: Other Financial Sector Assistance:

(i) DRT: NRB did not receive any new requests from DRT for the procurement of goods and training, hence this was dropped.

At the same time, the following activity was added at the request of GON:

(i) Diagnostic Assessment of NBL: NRB wanted to conduct a fast track diagnostic assessment of NBL’s situation to help GON decide on next restructuring steps for the Bank.

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As noted above, three out of the four activities allocated to FSTAP from the FSRP were dropped during the April 2011 restructuring, as no progress had been made between 2008 and 2011 due to procurement issues and NRB’s reluctance to pursue certain institutional reforms.

1.7 Other significant changes 1.7.1 FSTAP was restructured four times in a span of four years (2007-2011), including a level-one restructuring, three cancellations of funds, and two extensions in the PCD. 1.7.2 Significant progress had been made under the project during the period 2003-2006, especially on the restructuring of RBB and NBL. By mid-2007 however, FSTAP started to suffer from the adverse impacts of successive changes in GON and the post-conflict transition, which resulted in an extremely difficult political environment for reforms in the banking sector. Although the restructuring of NBL and RBB was broadly on track, there was increasing political resistance to privatization. June 2007 Restructuring: 1.7.3 The first extension in PCD was requested by GON in March 2007 as NRB wanted to hire three local experts for NBL in addition to extending the contract of the management team at NBL which was due to expire in July 2007. 1.7.4 In order to sustain progress made on restructuring NBL and RBB, the Bank extended the PCD to December 31, 2008 with an agreement that the NRB would make progress on the pending recruitment of sales advisors and bank supervisors. The approval for this extension was granted by the Country Management of the Bank in June 2007. Consequently, the budget was also reallocated, as DFID agreed to fund the second extension of the management contracts for another eighteen months. August 2008 Restructuring: 1.7.5 Following the 2007 restructuring, a major setback occurred when a case for fraudulent procurement was filed against the Governor and Executive Director (ED) of NRB by the Commission for Investigation of Abuse of Authority (CIAA). The case, which involved procurement under the Bank funded FSRP, took two years to be resolved in favor of the Governor and ED, brought reform and procurement activities within NRB to a virtual standstill. 1.7.6 At about the same time, there was a major change in the political landscape as Maoists had agreed to a cease fire and to participate in the Constituent Assembly elections planned for April 2008. Due to these political developments, the final resolution of the two banks had to be postponed in order to seek political consensus. However, it was felt that it was important to continue with restructuring efforts until a decision on the final resolution was reached. Stepping away from these institutions could

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have resulted in a reversal of the significant gains that had been achieved over the previous five years. 1.7.7 GON requested closing FSRP and reallocating some of its activities to FSTAP. At that time, the disbursements of FSTAP lagged Project Appraisal Document (PAD) projections by approximately 35 percent largely due to significant savings on the management contracts of NBL and RBB. The Bank therefore restructured the project again in August 2008 to reallocate US$10.11 million (IDA: US$3.77 million and DFID Grant: US$6.34 million) from FSTAP towards three activities of the FSRP. The Bank also cancelled funds equivalent to SDR4 million from FSTAP. The Development Credit Agreement (DCA) was amended accordingly, and the PCD was extended a second time, to December 31, 2011. April 2011 Level-1 Restructuring: 1.7.8 Even with this restructuring in August 2008, the project could not make satisfactory progress on implementation and disbursements. Procurement and procedural delays intensified, especially as NRB was reluctant to initiate sensitive reforms in the two banks. During its supervision missions, the Bank recorded these developments in the project Implementation Status and Results Reports (ISRs) and flagged the issues while downgrading the project ratings during the period Jun 2010 – Jan 2012. 1.7.9 DFID’s Cancellation of Funds: When the Bank downgraded the project ‘Implementation Progress’ and ‘achievement of development objectives’ from Moderately Satisfactory (MS) to a Moderately Unsatisfactory (MU) in July 2010, DFID made a decision to close its grant in March 2011 before the revised PCD. With that, US$3.16 million (GBP2.17 million) was cancelled by DFID from the total committed funds of US$10 (GBP6.86 million). At the time of cancellation, a total of US$7.49 million (GBP4.51 million) had been disbursed by the project from the DFID Grant. 1.7.10 The Bank team, however, believed it would still be possible to complete some of the uncontroversial reforms, notably the automation of the Credit Information Center Limited (CICL) and STR. In light of this, a Restructuring Paper was submitted to the Bank Board in January 2011 at the request of GON. It was approved in April 2011, just 8 months before the revised PCD. This restructuring resulted in the cancellation of a number of politically sensitive activities (listed in section 1.6.3 of this ICR), a revision in the PDO, and amendments to the results and monitoring framework, project costs, financing plan and procurement plan. December 2011 Restructuring: 1.7.11 As the PCD approached, it became clear the NBL diagnostic and automation of CICL and STR could not be completed by December 31, 2011. Project funds equivalent to SDR1.198 million were therefore cancelled in December 2011 and returned to IDA for allocation to other Bank projects in Nepal.

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2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry 2.1.1 The Bank team designed this project after undertaking one identification and three appraisal missions between the 2000 and 2002, during which discussions were held with the stakeholder group comprising NRB, RBB, NBL, MoF, DFID, Asian Development Bank (ADB), and IMF. The project design benefitted from the 1998 CAS for Nepal and the Bank’s 2002 Financial Sector Assessment Report on Nepal. Between the Project Concept Note approval in 1999 and project effectiveness in 2003, a Project Preparation Facility (PPF)4 of US$1.15 million was made available to NRB in two stages. The first PPF of US$550,000 supported the consultancy services in the area of banking supervision and training activities. The second PPF advance of US$ 600,000 financed the NBL Management Team and consultancies at RBB. The PPF was refinanced as part of the total credit amount of FSTAP. Therefore, implementation of key activities under FSTAP had begun prior to project approval. 2.1.2 The PAD correctly identified the risk of policy reversal under the project (rated as High Risk). However, it did not specifically factor in the conflict between the objectives of FSTAP and those of the staff unions in NBL and RBB, which predictably opposed many of the reforms envisaged. It also failed to identify risks associated with the lack of capacity of the judicial system to deal with enforcement of financial contracts and insolvency, though it did note that taking defaulted borrowers to court would be controversial. 2.1.3 The PAD indicated that there had been (unspecified) problems with procurement in the past, and noted that NRB had no experience with conducting procurement in accordance with World Bank rules. The team proposed the recruitment and training of an experienced procurement expert for the CST, which was done. The severe procurement issues which arose as a result of the CIAA case were not foreseeable. 2.1.4 Project alternatives considered included both a broader and narrower project focus. The project team, DFID and IMF all concurred that focusing on the two large commercial banks and the Central Bank represented the minimum required to address critical problems in the sector, while a broader program was ill-advised given capacity constraints. 2.1.5 The team appropriately drew on lessons learned from an earlier Structural Adjustment Credit that had focused on the financial sector by requiring that commitment and action be taken up-front by GON—starting with the placing of external management teams in the two banks. This was done while FSTAP was being prepared. Other lessons learned and which were reflected in project design included, inter-alia, (i) the need to

4 A PPF is an advance of project funds extended to the project counterparts for undertaking activities necessary to achieve readiness for project effectiveness and implementation.

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enhance the autonomy and skills of the regulator to sustain banking sector reforms; (ii) the necessity for requisite legal reforms; (iii) the importance of sequencing reforms and focusing on a limited number of activities; (iv) that commercial banks should not be recapitalized without fundamental changes in ownership and governance; and, (v) strong borrower commitment to the reforms is needed, as reforms forced from the outside are not always sustainable.

2.2 Implementation 2.2.1 Implementation of FSTAP began quite smoothly and enjoyed strong support from MoF and NRB during the first four years of its implementation, particularly for Component 2. When the new management teams were appointed at NBL and RBB in 2003, both banks had accumulated huge losses and were insolvent, and neither had proper MIS, financial reporting, internal controls or credit procedures. By 2006, both banks were profitable, NPLs had declined quite significantly, MIS systems, internal controls and credit procedures were in place, and the banks were producing regular and timely financial statements. 2.2.2 Mid-term review (MTR): The Bank undertook two supervision missions (September 18-29, 2006 and November 6-8, 2006) to conduct the MTR, close to the original closing date of June 30, 2007. This delay in the MTR was due to discussions between GON and Bank to decide the fate of FSRP. Both projects were running in parallel, and the Bank was considering transferring some FSRP components to FSTAP, which was eventually done. Eventually the MTR was completed in November 2006. It observed that the restructuring of NBL and RBB had progressed well, and an increasing share of the financial system was owned and operated by the private sector, in line with project objectives. The share of banking sector assets owned by NBL and RBB had declined from 51 percent in 2002 to 32 percent in FY 2006. The management teams in the two banks were performing well and their contracts were due to expire in 2007. At that time, GON was committed to maintaining external management teams at NBL and RBB until the point of sale to strategic investors. 2.2.3 The MTR also observed that there was considerable work required to strengthen the capacity of the Banking Supervision Department within NRB, and additional support to accomplish this was being provided through FSRP. It recommended that in order for DRT to function smoothly, additional resources should be extended under the project for office equipment and staff training. 2.2.4 Despite progress made on all components under FSTAP, at the time of the MTR, disbursements lagged projections by 35 percent. This was mainly due to the savings in restructuring of NBL/RBB (US$7.2 million) and under-spending of the training component for NRB (US$1.7 million). Otherwise, procurement and disbursement of equipment and consultancy services were largely on track. The MTR recommended that the Project should be extended with the savings reallocated, and that the management contracts for NBL and RBB should be extended to ensure continuity of reforms.

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2.2.5 Finally, it was recommended that the GON expedite its application for an Institutional Development Fund (IDF) grant which came through towards the end of 2006. The Bank approved the IDF Grant of US$405,000 in April 2007 for Nepal’s Supreme Court. The Grant was to complement the objectives of the ongoing FSTAP and FSRP. Specifically, it aimed to build the capacity of the judiciary in or to enable it to provide dispute resolution services in banking and commercial matters, to strengthen the commercial bench, and to facilitate data collection and analysis.5 2.2.6 The success of the reforms undertaken in NBL and RBB encouraged NRB to consider replacing international consultants with local management teams after 2007. The higher than anticipated profitability of the banks perhaps also initiated a change in the attitude of NRB and GON towards recapitalization of the two banks, as they began to believe that recapitalization could be achieved over time through retained earnings. However, after the departure of the international management team from NBL in July 2007, progress on the second component of FSTAP slowed. NRB was unable to identify and recruit an appropriate local management team for NBL after the contract of the international management team expired in July 2007. After a delay of 7-8 months, NBL’s management was handed over to a team from within NRB. 2.2.7 In addition to the disruption caused by the departure of the management teams, progress on all components stalled following the CIAA corruption case and forced resignations of the Governor and ED of NRB in July 2007. Despite subsequent attempts by the Bank to expedite implementation, NRB officials were understandably reluctant to take decisions on procurement, fearing a reaction from CIAA. The individuals were subsequently cleared of all charges and re-instated, but virtually all procurement under the project ground to a halt after mid 2007. Critical procurement, including the appointment of a replacement management team at NBL, hiring of an IT consultant for NRB, and procurement of IT systems for the automation of STR and CICL were not completed despite two extensions to the PCD. The Bank’s 2008 implementation support mission observed that 58 percent of the IDA Credit under FSTAP remained undisbursed, mainly due to the lack of progress in procurement. Moreover, after mid-2007, the Bank team noted a considerable deterioration in GON’s commitment towards the privatization of RBB and NBL. Earlier GON had fully endorsed the need for resolving governance issues within NBL and RBB through privatization in its Letter of Development Policy.

5 The Grant closed in August 2010 and could not fully achieve its development objective due to narrow focus on commercial courts and absence of performance benchmarks for commercial benches. Despite that there were some accomplishments during the implementation of this IDF. For instance the Supreme Court profited from the partially automated case management system, the legal library, the training, and the exchange of experience with other courts in the region. The commercial benches received technology, reading material on law, and benefitted from training and consultations on procedural designs and management of judiciary.

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2.2.8 The re-engineering of NRB was also falling short of expectations. project activities and disbursements were severely affected by NRB’s inability to procure and hire consultants. The recruitment of Bank Supervisors for NRB and Sales/Restructuring Advisors for NBL and RBB was postponed several times. Between 2007 and 2010, the Bank pursued the matter with GoN and NRB on numerous occasions but to no avail. Ultimately, these components were dropped in the 2011 restructuring. 2.2.9 This project went through four restructurings between 2007 and 2011 including two extensions in PCD and two restructurings in 2011. The last restructuring, in December, 2011 led to a cancellation of SDR1.198 million which was reallocated to other IDA operations in Nepal.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 2.3.1 M&E under this project was regularly conducted through the Bank’s implementation support missions, some of which were conducted jointly for FSTAP and FSRP. The MTR was conducted in September 2006. The Bank team used the project results indicators and results framework to measure performance of NRB during these missions. Aide Memoires were shared with the GON, MoF and NRB management towards the end of the each mission. Correspondence between Bank management and MoF after 2007 sought to expedite implementation and obtain GON’s renewed commitment towards privatization as the overall objective for NBL and RBB. 2.3.2 CST administered FSTAP and thus was in-charge of M&E implementation. The absence of a strong MIS within CST prevented the smooth flow of information and effective monitoring of project results. Consequently CST was unable to provide coherent and organized data to the Bank team during implementation. Similarly, no periodic supervision was conducted at the project level by NRB, MoF and NPC to monitor progress towards the achievement of PDOs.

2.4 Safeguard and Fiduciary Compliance Procurement: 2.4.1 The overall Procurement Rating is Unsatisfactory. 2.4.2 An assessment of NRB at appraisal identified that its staff had almost no experience of public procurement, and no knowledge or experience in Bank procurement procedures. In addition, the internal decision-making chain at NRB, which often required Governor level approval, took time. Thus, many planned procurement activities were delayed, including the initial procurement of management teams for NBL and RBB. The team thus recommended that CST include an experienced individual Procurement Expert who, in addition to assisting NRB with carrying out project related procurement, would also provide on-the-job training to some key staff. Though the expert was placed in CST,

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this did not result in any major improvement in the timeliness of procurement, and his services were discontinued in 2006. 2.4.3 The slow pace of procurement came to a standstill from 2007 when the CIAA filed cases against the Governor and ED related to procurement of consultants under FSRP. Even though both officials were ultimately exonerated, the fear of further CIAA investigations persisted. This gravely affected several critical procurement activities such as the appointment of a replacement management team at NBL, hiring of an IT consultant for NRB, and procurement of IT systems for the automation of STR and CICL. Financial Management (FM): 2.4.4 The FM rating for this Project is Moderately Satisfactory. 2.4.5 Project Financial Management: The dedicated project implementation unit (CST) was responsible for the FM of the project and overall FM was rated MS. Although there were some start-up delays, the project took the initiative to maintain a reliable FM information system which resulted in timely generation of financial reports and audit reports. Trimester Implementation Progress Reports which included Financial Monitoring Reports were submitted relatively on time. Over the period of implementation, the quality of financial reports improved. Audit reports were submitted on time. There were no major issues with staffing as the staff deputed to the project was of high caliber. 2.4.6 Entity Financial Management: Over the life of the project, there was little improvement in NRB’s FM capability and inadequate attention by NRB Board and management to address the weaknesses in FM which were repeatedly highlighted in the qualified entity annual audit reports of the NRB and through Bank supervision. Major issues and weaknesses in the entity's FM included: Non-compliance with NRB Act 2002 - NRB's audit reports were never completed

within four months of the end of the fiscal year; Non-compliance with International Accounting Standards; Establishing computerized FM systems within a reasonable time period; Establishing systems for assets management; Control weaknesses in banking transactions and accounting systems; and Weaknesses in internal control and internal audit. 2.4.7 Frequent changes of staffing in the Finance Division restricted any action being taken and the limited measures to improve FM by some individuals did not have major impact. There were provisions under FSRP to provide funding for FM improvements but NRB declined to make use of this provision.

Safeguards:

2.4.8 This was an Environmental Category ‘C’, project hence none of the environment and safeguards policies were triggered.

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2.5 Post-completion Operation/Next Phase 2.5.1 The proposed third phase of Bank assistance to GON for financial sector reforms was intended to support the financial re-engineering of banks (re-capitalization) at the point of sale after satisfactory changes in governance arrangements and cost restructuring had taken place. Given the lack of political will to privatize, the Bank did not pursue this, and did not launch Phase III. However, the Bank is pursuing discussions with GON on a Development Policy Credit (DPC) for FY13 to address the macroeconomic and financial sector vulnerability in Nepal. The Bank and GON have reached an in-principle agreement to a set of indicative prior actions for DPC1 and DPC2, which include a series of measures intended to support a more robust and inclusive financial sector. These include full recapitalization of RBB and NBL, a decision to transfer shares of NBL to a reputable strategic investor, and diagnostic audits of a selection of financial institutions. At end June 2012, the Cabinet announced a decision to inject equity into the two state controlled banks. RBB received NPR4.32 billion and NBL received NPR1.37 billion. However, even after these announced capital injections, both banks will still fall short of minimum capital requirement as per Central Bank guidelines. 2.5.2 While the positions of NBL and RBB improved significantly over the life of this project, the financial condition of other banks in Nepal has deteriorated due, inter-alia, to large exposure to a collapsing real estate market. Strengthening of the legal and regulatory framework for effective bank resolution is therefore a key prior action under discussion with GON for the DPC. 2.5.3 According to DFID’s assessment of FSTAP completed in March 2011, any future intervention in the financial sector of the country should factor in the highly fragile governance environment in the country and GON’s involvement in the economy. DFID is providing TA in conjunction with preparation of the proposed DPC. As DFID has the flexibility to carry out own procurement under TA grants, a program which combines TA support from DFID and budget support from the Bank, it is unlikely to encounter the procurement problems that plagued FSTAP.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation 3.1.1 Both the original and revised PDOs of this project are still relevant to the financial sector development of Nepal. Restructuring of NBL and RBB remain incomplete, and both banks remain insolvent. NRB still requires strengthening to perform its core Central Bank functions, and the financial sector as a whole is quite fragile. A few years after the project commenced, the priorities of GON changed, and privatization lost its importance in front of other reforms. For the same reason, the original PDO i.e. improving the macroeconomic stability and achieving private sector led economic growth was revised to a more realistic PDO in 2011. One can hope that the planned financial sector DPC enables GON to effectively deal with the distressed financial sector institutions.

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3.1.2 On a positive note, FSTAP managed a commendable turnaround in the two banks, and some important progress was made in each component. The project resulted, inter-alia, in greater financial discipline in the banking sector, a strengthened legal and regulatory framework, and greatly improved financial disclosure and credit information.

3.2 Achievement of Project Development Objectives 3.2.1 This section primarily details the performance on the revised PDOs and downsized components of FSTAP. The achievements against the original PDO indicators and intermediate outcome indicators have been tabulated in section F (Results Framework Analysis) of the ICR datasheet. Restructuring the two big state controlled banks (NBL and RBB):

3.2.2 The targeted outcomes for the restructuring of NBL and RBB were achieved to a great extent. The banks have been profitable and have been reporting positive cash flows for seven years in a row. When the project initiated its activities, these banks were incurring substantial losses. The number of staff within NBL and RBB was reduced from 5,652 and 5,522 to 2,342 and 2,555 respectively.

3.2.3 The banks have also made considerable progress in automation and financial reporting. The computerization of RBB branches met targets with 95 percent of deposits and 98 percent of loans automated and on-line. A total of 46 Automated Teller Machines (ATMs) were installed at various locations including markets and other public places. The quarterly financial statements and annual audited financial statements are published in a timely manner. NBL’s 58 branches were automated and 77 percent of deposit base and 88 percent of loans were covered by the IT platform.

3.2.4 Asset quality at the two banks has improved significantly. Since July 2003 NPLs have decreased from 58 percent for NBL and 60 percent for RBB to 5.29 percent and 10.9 percent respectively as of mid-October 2011. Reengineering NRB: 3.2.5 The objectives of this component were not achieved to a satisfactory level. The supervisory capacity of NRB has improved somewhat as a result of TA provided; however the agreed outcomes remained incomplete at PCD. The Central Bank did not recruit the international supervision experts needed to strengthen NRBs supervisory capacity. The project did achieve results on improving the regulatory framework as the NRB Act was enacted for the first time and BFIA was amended. However, the amendments to BFIA are still pending with the Parliament. 3.2.6 The PRO hired by NRB also proved very effective while he was in place as he implemented NRB’s communication strategy with the objective of informing the public on the restructuring efforts and their significance for the economy. Some progress was also made in HR policy reform.

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Capacity Building in the Financial Sector: 3.2.7 The objectives under this component were partially achieved, with mixed results on the various activities. 3.2.8 CICL and STR: The project funded a consultant to draft a business plan for CICL’s establishment and operations. At the start of the project in 2003, Nepal’s CIB was a very basic structure within NRB that had limited resources and manual data entry systems. During the lifetime of FSTAP, it turned around completely as the private sector took over CICL’s management with an independent board. CICL now generates the requested credit reports within 24 hours, which has facilitated lending decisions by commercial banks. STR was established in 2010, but is not yet operational due to the failure to procure the requisite systems. Its management was outsourced to CICL by MoF; however there has been no action on this decision. 3.2.9 DRT: The project enhanced the capacity of DRT through training programs and exposure visits of DRT staff to similar institutions in other South Asian countries. The Bank has received positive feedback on the performance of DRT from commercial banks, who indicate that DRT has helped in debt recovery efforts. 3.2.10 In addition, FSTAP also contributed to the Banker’s Training Center by supporting its automation, enhancing its capacities to train professionals, and developing a strategic plan for the Center. 3.2.11 Training of Journalists: The project organized international training for 44 financial journalists, and financial reporting in the press appears to have improved as a result. More factual and accurate financial reporting has ensured greater public awareness of what is happening in the financial sector, and has contributed to greater credit discipline. As a result of press reports, for example, a former Prime Minister was made to repay a loan taken by friends (with his guarantee). 3.3 Efficiency Due to the nature of project activities and the mix of results accomplished under FSTAP (and FSRP), it has not been possible to calculate an accurate Net Present Value (NPV) or Economic Rate of Return (ERR) for this intervention. While many of the ultimate results expected, including the recapitalization of NBL and RBB, have not yet been achieved, there has been a number of significant cost savings realized. The two restructured public banks have generated NPR30 billion (US$400 million) in operating profits since 2003, when they were losing US$80 million per annum before restructuring efforts began under FSTAP. While some of the savings and turnaround can also be attributed to the 2nd phase FSRP (or indeed other factors), assuming the losses had continued at the same rate, the fiscal savings to GON exceed US$1 billion (losses of US$640 million over 8 years versus profits of US$400 million). Total expenditures for both projects were approximately only US$78 million. While the net worth of the two banks remain negative, the deficit has

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declined significantly, thereby substantially reducing the ultimate fiscal cost of recapitalizing the banks.

3.4 Justification of Overall Outcome Rating Rating: Moderately Unsatisfactory 3.4.1 The original and revised PDOs of FSTAP are still relevant to Nepal’s financial sector development. NRB should be strengthened to assume its core Central Bank and regulatory functions. Similarly in order to sustain the progress made in reforming RBB and NBL, there needs to be a resolution to the ownership and negative capital position of the public banks, as originally envisaged in FSSS. The change in the political economy for financial sector reform, coupled with the unfortunate prosecution of senior NRB officials for mis-procurement, brought progress under the project to a virtual stand-still from 2007 onwards. The following review of outcomes under the project components substantiates the rating: 3.4.2 Restructuring of RBB and NBL: This is the centerpiece of the project, and efforts to restructure and improve the performance of RBB and NBL showed very significant results. The project achieved virtually all of the targets and outcomes during the first five years of its implementation. Both banks were incurring losses until 2003 and were subsequently turned around by the management teams, proper procedures and financial reporting were put in place, and NPLs were brought down from 61 percent and 60 percent to 5.3 percent and 10.9 percent for NBL and RBB respectively by PCD. More than 80 percent of the deposit base was computerized. The overall staff levels were reduced by 48 percent and 44 percent in NBL and RBB respectively by July 2007, largely due to the VRS funded through FSRP. The ultimate outcome of strengthening corporate governance of the banks cannot be achieved until there is a final resolution of the ownership and negative net worth of the two banks, but these were not objectives of FSTAP. Recognizing the risk of a policy reversal, the program was designed in three phases, and the first phase FSTAP had limited objectives of restructuring the banks and preparing them for eventual recapitalization and privatization or liquidation. This was largely achieved, though its sustainability cannot be assured until there is a more lasting resolution of the ownership, governance and management of the banks. 3.4.3 Developing the capacity of NRB staff to effectively perform key central banking functions: This outcome has not been achieved to a significant degree. Needed financial legislation was prepared under the project but has not been enacted due to the current political situation in Nepal (BFIA approval pending). The objective of strengthening the supervision capacity of NRB was not achieved. A consulting firm was recruited in 2006 for this assignment but left Nepal abruptly due to the security situation. While NRB was trying to replace the team in 2007 the Governor was charged by CIAA. Subsequent efforts to recruit banking supervision experts failed, though, as noted above, the Bank and IMF both sought to provide support through alternative arrangements which did not require NRB procurement i.e. through First Initiative and IMF TA. The current

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fragile state of Nepal’s banking system demonstrates that NRB’s regulatory and supervisory capacity remains weak, however. 3.4.4 Creating an enabling environment for the financial sector development: The key elements of this component were either not achieved or only partially achieved, due, inter-alia, to NRB’s inability to procure the requisite goods and services. While some progress was made on credit discipline through the establishment of DRT, and financial reporting and credit information improved, outcomes have fallen short of expectations in key respects. Nepal still does not have a modern and fully automated STR or CIB, both of which are critical pieces of the country’s financial infrastructure. Similarly, the diagnostic of NBL, which was to provide a road map for the resolution of the bank, had to be dropped due to procurement issues. 3.4.5 Considering the above, the outcomes of FSTAP have been rated as Moderately Unsatisfactory.

3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development Not Applicable (b) Institutional Change/Strengthening 3.5.1 The local staff of NBL and RBB was trained by the management teams and international consultants. Most of these staff are still working in these institutions and are making significant contributions. However, due to their inability to influence the policy level decisions or overall governance, the institutional strengthening efforts of FSTAP may not be sustainable. 3.5.2 It is encouraging to note that with very limited financial assistance, FSTAP provided an impetus to the establishment of CICL as a successful private sector concern. CICL is now planning to complete its automation and expand the scope of its services with support from ADB and IFC. The commercial banks in Nepal are highly appreciative of the improvement in the service offered. (c) Other Unintended Outcomes and Impacts 3.5.3 It is worth noting that two activities were carried out by NRB with Bank assistance outside of the Project which contributed to the achievement of the PDO. The first was the assistance provided to NRB by the State Bank of Pakistan to carry out stress testing. This enabled NRB to identify vulnerable banks and manage these vulnerabilities. The second activity was the development of a Contingency Framework for managing potential crises in the sector. This was much needed in light of credit and liquidity distress in the banking sector. The TA was delivered through the FIRST Initiative, which is a Bank-executed trust fund. This obviated the need for NRB to procure consultancy services.

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3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops Not applicable as this is a Core ICR

4. Assessment of Risk to Development Outcome Rating: Significant 4.1 The expected development outcomes, including the revised PDO and intermediate results indicators, could not be achieved by FSTAP to a satisfactory level. While the performance of NBL and RBB has improved significantly, both banks still have a negative net worth and remain fragile. Furthermore, without a change in ownership or governance, they may well revert to their previous management practices. Indeed there are some worrisome trends emerging, where staff costs are increasing rapidly following a costly and protracted VRS that was partially funded under FSRP. Recent discussions around a potential financial sector DPC for Nepal have included discussions on recapitalization of the banks. However, recapitalization without dealing with the underlying governance and management issues is fraught with risks.

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry (QAE) Rating: Moderately Unsatisfactory 5.1.1 FSTAP was designed and prepared after lengthy deliberations with the GON, MoF, NRB, NPC, development partners (including IMF, DFID) and other stakeholders, and took more than 40 months to prepare. A major driving force behind this ambitious lending operation was the willingness of GON to introduce reforms in the financial sector and the fact that it had demonstrated this commitment by initiating measures to overhaul NBL and RBB. 5.1.2 At the time of project preparation, FSTAP appeared to be the right intervention for the sector and enjoyed tremendous support from the development partners including DFID and IMF. In addition, the Bank’s own 2002 report on Nepal’s financial sector outlined the difficulties faced by the economy due to the rapidly deteriorating financial sector, and the immediate need to address that. 5.1.3 Recognizing the risk of a policy reversal, a phased approach was adopted. However, this may have inadvertently increased the chances of such a reversal as it envisaged a rather protracted process for recapitalizing the banks. The Bank could have looked at alternative resolution mechanisms, such as good bank/bad bank splits, which would have resulted in an irreversible resolution of the problem banks up-front while there was the political will to tackle the issue. Furthermore, the design of the project might in retrospect have been too complex given capacity constraints and the political environment. There was a bundling of diverse and loosely related activities under the

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various components, and significant involvement of GON’s procurement function. A project which focused, for example, solely on the rapid resolution of RBB and NBL and strengthening banking supervision may have encountered fewer implementation problems. (b) Quality of Supervision Rating: Moderately Unsatisfactory 5.1.4 The Bank team conducted regular supervision of the project through; (a) regular supervision from the Country Office in Nepal except for few months during 2008 when the Task Team Leader (TTL) was based in Washington D.C.; (b) periodic supervision missions; and (c) a MTR in 2006. DFID also joined a few supervision missions. The implementation progress of the project was successful in the initial years, especially on Component 2 due to the effective management teams in place at NBL and RBB. 5.1.5 The project counterparts and donors are of the view that the Bank team provided tremendous support and guidance to ensure smooth implementation of project activities. In addition, during the initial years of implementation senior management of the Bank was engaged in an active dialogue with the country’s financial sector stakeholders, including MoF and the Central Bank. However, with changes in senior management at the Bank and government officials, this engagement was not sustained over the long duration of FSTAP. The project team, however, remained very actively engaged with counterparts throughout. 5.1.6 As noted above, a difficult political economy, coupled with the charges against the Governor, adversely affected both project disbursements and outcomes. One obvious example is NRB’s unwillingness to recruit the services of the bank supervisors who could have played a crucial role in strengthening the Central Bank’s supervisory capacity through staff training and institutional reforms. The project team remained in close contact with NRB and GON throughout project implementation, and tried unsuccessfully to un-block the situation, including proposing the appointment of an external agent to handle procurement (this proposal was eventually rejected by GoN). Senior management of the Bank (at the Vice-President level), also tried, unsuccessfully, to get the project back on track. In the face of these obstacles, the team sought alternative solutions, such as bringing in supervisors from State Bank of Pakistan to assist NRB with stress testing. 5.1.7 The Bank should have decided to close this project in 2008 or in early 2009 as progress on the major components had ceased. However it still went ahead with restructurings and extension in the PCD. (c) Justification of Rating for Overall Bank Performance Rating: Moderately Unsatisfactory 5.1.8 Overall Bank performance is Moderately Unsatisfactory. The Bank provided relevant and technical advice to the counterparts and also to the management teams in the two banks. Senior management was involved in an active dialogue with GON and NRB

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during the project design and implementation. However, given conflict, political risks and capacity constraints, which were acknowledged up-front, the project design and components were perhaps too ambitious and there was no provision in the project design to mitigate against the changing political scenario in a timely fashion. Further, the Bank unnecessarily escalated its commitment to this project despite lagging disbursements and slowdown in implementation performance. The problems inherent in the changing political economy could not be resolved by the Bank, despite repeated interactions with GON and MoF. Although it strived very hard to get renewed commitment towards the reforms, this commitment never materialized. Despite these fundamental obstacles, the PCD was extended twice and the Project was restructured twice in its final year. 5.1.9 While the initial project extension made sense as it was requested at a time when FSTAP was showing considerable results, the later extension and restructurings appear more difficult to justify. It took almost four years from 2007 to 2011 for the project to disburse just US$0.17 million and with very little achieved under the PDOs. The project should have been either: (i) fundamentally restructured with PDOs and results indicators revised, as was belatedly recommended (but not implemented) by the Bank supervision team in September 2009; or (ii) closed due to the change in GON’s reform priorities, and the lack of progress on procurement, disbursement and outcomes. The project team’s rationale for keeping the project open through 2011 is that it provided the Bank with a platform for continued engagement in the financial sector, which has been going through turbulent times in the past few years. Bank management was apparently unwilling to provide the requisite budgetary resources to maintain a financial sector dialogue other than through extensions of the project. In the absence of progress on project implementation, the project team pursued an active engagement with NRB on stress testing and crisis preparedness through South-South cooperation and a First-funded project.

5.2 Borrower Performance (a) Government Performance Rating: Moderately Unsatisfactory 5.2.1 The performance of GON was Moderately Unsatisfactory. It provided tremendous support to the Bank team during project appraisal and design stages and introduced supportive reforms in the financial sector prior to the effectiveness of FSTAP. However, due to the political environment, GON was unable to provide timely support to NRB to enable it to address delays in project implementation. Also, despite several attempts by the Bank, the GON did not move on the implementation of the actions laid out in FSSS. This had a direct impact on the PDOs of both FSRP and FSTAP, and consequently the idea of Phase III reforms was dropped, and DFID pulled out of FSTAP before PCD. (b) Implementing Agency or Agencies Performance Rating: Moderately Unsatisfactory 5.2.2 The strengthening of the NRB was a critical part of the reform process, with a focus on enhancing its credibility and enforcement capacity. FSTAP provided the

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resources to GON and NRB to support NRB’s transition from compliance based to more risk focused supervision, for automation of key functions such as CICL and STR, and for capacity building of banking sector professionals. However, the opportunity was lost due to issues with procurement, and NRB’s inability to hire Bank Supervisors and other important experts. Consequently, IDA-allocated funds equivalent to SDR1.198 million were cancelled. In addition, progress on other components of FSTAP suffered severe delays at the hands of NRB, for example the diagnostic study of NBL and the appointment of replacement management teams at RBB and NBL. These delays proved detrimental to the outcome of the Project, as the PDOs could not be achieved. (c) Justification of Rating for Overall Borrower Performance Rating: Moderately Unsatisfactory 5.2.3 Overall the performance of GON under this project was Moderately Unsatisfactory. This has been determined based on: (i) a change in the attitude towards the financial sector reforms during the course of project implementation; (ii) lack of progress on banking sector legislation, including the approval of BFIA; (iii) inability to achieve results on the reengineering of NRB due to, inter-alia, procurement issues and; (iv) lack of supervision of crucial activities such as NRB’s hiring of Bank Restructuring Advisor for NBL and RBB, despite having signed the amendment to the DCA in 2008. As a result, these activities could not be completed.

6. Lessons Learned 6.1 Banking sector reforms, particularly privatization, require sustained commitment and political will, which cannot be imposed by external parties. The Bank therefore needs to carefully weigh the pros and cons of supporting such projects in countries prone to political instability, such as Nepal. In this case, the political will appeared to be present at project inception, and the potential rewards were no doubt worth the risks, given the huge losses and systemic risks building in the system. And, despite later policy reversals, much was achieved in terms of restructuring the public sector banks. However, given Nepal’s history, and the recognized high political risks of the project, the team should have considered restructuring/privatization options that could have been implemented more rapidly, thereby reducing the risk of policy reversals over time. 6.2 It is difficult to sustain implementation progress over a very long period, particularly in a fragile and conflict state. This project went on for more than eight years, many of which were characterized by conflict, and saw many changes within the teams of the Bank and of the project counterparts. The long duration made it very difficult to sustain the performance beyond the initial years, especially as the individuals involved in project preparation and early implementation moved on to other positions. This posed several challenges to their successors in an environment emerging from conflict. Successive governments faced a broad range of post conflict issues, and it became clear that difficult financial sector reforms were not a high priority.

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6.3 The Bank should act decisively when it becomes clear that the client is no longer committed to project objectives. Problems associated with the post conflict environment and changing political economy of Nepal were exacerbated by the procurement charges brought against senior NRB officials. It should have been clear to the project team and Bank management well before the 2011 project restructurings that these factors had irrevocably undermined the likelihood of achieving project objectives. Bank management should have urged the project team to fundamentally restructure or close FSTAP earlier, and provided the necessary resources to maintain an ongoing dialogue on critical financial sector issues in the absence of a project. 6.4 The Bank needs to be particularly vigilant to ensure a measured sequencing of reforms in fragile countries and conflict prone environments. The design and objectives of FSTAP were no doubt overly ambitious, complex, and time-consuming given the post conflict situation in Nepal. A project which focused more narrowly on key objectives, for example, the rapid resolution of RBB and NBL, might have had more sustainable results. 6.5 The GON’s communications strategy plays a crucial role in securing public approval on difficult reforms such as bank restructuring and privatization. In its initial years, the project benefitted tremendously from the PRO placed at NRB as an advisor to the Governor. However, when the Governor was suspended, the PRO’s contract was neither renewed nor a replacement hired. Politically sensitive reforms in any sector require a buy-in of the employees’ unions and associations and of the general public. A continued communications strategy might have helped sustain the reform efforts, and would have complemented the training program for financial journalists that was being implemented. 6.6 The team approach towards the restructuring of NBL worked very well. One firm was recruited to undertake the restructuring and it brought in a team of very strong professionals each matched with the intended role. Whereas, following the withdrawal of the firm selected to manage RBB, a CEO and individual consultants were hired in order to expedite hiring. The CEO faced considerable challenges in building his team as the individual TORs did not fully match the requirements of RBB at the time.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies 7.1 The Borrower’s ICR has been received by the Bank and is attached as Annex 7 (b) Cofinanciers (Detailed comments are in Annex 8) 7.2 DFID pulled out of this project in March 2011, a year earlier than initially planned and also cancelled some of the Grant amount once the Bank downgraded the

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ratings on implementation progress and PDO to Moderately Unsatisfactory. The responsible team member at DFID completed a summary of the project results in March 2011. The report noted that there was a need for a continuous political economy analysis to inform target setting and program design. It endorses the Bank’s views that around 2006-2007 the GON commitment to the reform program faded. In DFID’s opinion, the project should have been redesigned or suspended at that point instead of being extended. 7.3 DFID has shared its own experiences on this project (Annex 8) and from those it is clear that it acknowledges the strong supervision support extended to GON and NRB by the Bank. However the report also notes that it would have been better for the Bank to address the underlying causes of the problems rather than treating the symptoms. NRB was generally reluctant to continue implementation of the reforms after the 2007 incident of CIAA charging the Governor. Further, it also showed lack of interest towards following alternate arrangements for procurement that could have addressed the delays in disbursements under the project. Going forward, it would be important to have a broad based political agreement and bureaucratic support prior to embarking on financial sector reforms.

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Annex 1. Project Costs and Financing

(a) Project Expenses by Component and Financiers (in US$ Million equivalent)

(b) Financing

Source of Funds Appraisal Estimate

(US$ millions)

Actual/Latest Estimate

(US$ millions)

Percentage of Appraisal

Borrower

4.10 3.71 90.48

UK: British Department for International Development (DFID)

10.00 8.35 83.50

International Development Association (IDA)

16.00 9.52 59.50

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Annex 2. Outputs by Component (As reported in ISR # 20 dated: December 2011) Summary Performance

Indicators Baseline Value (28/02/2003)

End of Project (31/12/2011)

Value Achieved (14/12/2011)

Strengthening the financial sector, notably the Central Bank and the state controlled banks, and to create an enabling environment for financial sector development

1. A record of timely implementation of central banking guidelines on reporting requirement, audit, on-site and off-site supervision, and corrective actions

NRB’s annual report non-compliant with IAS; bank supervision reports outdated and lacking evidence of prompt corrective action. No evidence of effective enforcement of NRB policies

Statutory audits of all banks completed in a timely manner. Audits of NRB for FY 2010 and 2011 completed. PCA guidelines implemented from FY2010/11.

Partially achieved as commercial banks meet periodic reporting requirements. While the statutory audits are done within the targeted timeframe, the annual reports of NRB, RBB and NBL are published after considerable delays (up to 1-2 years) due to a combination of factors such as manual accounting procedures in the remote branches of RBB and delays in submitting the audited accounts to NRB by other public sector entities and line departments of the GON. The clearance of NRB FY11 audit from the Auditor General is pending. Further the annual reports of NRB are non-compliant with the IAS.

2. Increased share of financial system owned and operated by private-sector players.

More than 50 percent of financial sector assets state owned/managed – namely NBL, RBB and ADBL and 5 Grameen Bikash Banks

More than 75 percent of banking sector assets owned/managed by the private sector banks.

Fully achieved. Approximately 77 percent of the banking sector assets managed by the private sector. This is primarily due to rapid growth in country’s financial sector and new entrants in the market during a period when the growth of RBB and NBL was constrained by their lack of capital.

3. Creditor's rights enhanced through an upgraded bureau and establishment of a movable collateral registry i.e. Secured Transactions Registry (STR)

Weak Credit Information Bureau; Turnaround time takes more than a week; non existence of movable collateral registry

CICL automated with upgraded system; Turn-around time within 24 hours; A functioning STR established and automated

Partially achieved. CICL is now privately owned and operated, and its efficiency has improved significantly. The target time-lines for turn-around and volumes have been met with a semi-automated system developed in-house. However, its planned MIS upgrade could not be completed due to procurement delays. Similarly, the upgrade and automation of the STR was not completed due to procurement delays.

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Annex 3. Economic and Financial Analysis Due to the nature of Project activities and the mix of results accomplished under the FSTAP (and FSRP), it has not been possible to calculate an accurate Net Present Value (NPV) or Economic Rate of Return (ERR) for this intervention. FSTAP achieved significant results during the initial years of its implementation but not much was accomplished in the last 3-4 years despite extensions and restructuring. While many of the ultimate results expected, including the recapitalization of NBL and RBB, have not yet been achieved, there have been a number of significant cost savings realized. The management teams hired under the Project supervised the effective implementation of the VRS schemes for NBL and RBB which were funded by the Phase II FSRP. The institutions recorded annual cost savings of US$2.67 million from FY04 until FY09 with 45 percent financial IRR and a payback period of just four years6. The two restructured public banks have generated NPR 30 billion (US$400 million) in operating profits since 2003, when they were losing US$80 million per annum before restructuring efforts began under the FSTAP. While some of the savings (including those from the VRS) and turnaround can also be attributed to the Phase II FSRP (or indeed other factors), assuming the losses had continued at the same rate, the fiscal savings to the GON exceed US$ 1.0 billion (losses of US$640 million over 8 years versus profits of US$ 400 million). Total expenditures for both projects were approximately only US$78 million. While the net worth of the two banks remain negative (NPR4.24 billion for NBL and NPR87.5 billion for RBB), the deficit has declined significantly from NPR10.02 billion (NBL) and NPR22.39 billion (RBB), thereby substantially reducing the ultimate fiscal cost of recapitalizing the banks. Additionally the gross non-performing loans levels decreased for both banks from approximately 60 percent in year 2003 to 5.29 percent for NBL and 10.90 percent for RBB in year 2011.

6 ICR of FSRP. Report No. ICR00001348. Annex 3. Economic and Financial Analysis

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Annex 4. Bank Lending and Implementation Support/Supervision Processes

(a) Task Team Members Names Title Unit

Supervision/ICR Sabin Raj Shrestha Sr Financial Sector Spec. SASFP Simon C. Bell Sector Manager MNSFP Shamsuddin Ahmad Sr Financial Sector Spec. SASFP Kiatchai Sophastienphong Sr Financial Sector Spec. SASFP Suran KC Shrestha Team Assistant SASFP Nagavalli Annamalai Lead Counsel LEGPS Kiran R. Baral Senior Procurement Officer SARPS Bigyan B. Pradhan Sr Financial Management Specia SARFM Hisanobu Shishido Senior Economist SASEP Niraj Lall Shrestha Information Officer IMTOS Lalima Maskey Country Program Assistant SACSA Margaret Murray Temporary SASHD Craig W. Thorburn Sr Financial Sector Spec. FCMNB Rajib Upadhya Sr External Affairs Off. SAREX Rakesh Asthana Director IMTSO

(b) Staff Time and Cost

Stage of Project Cycle Staff Time and Cost (Bank Budget Only)

No. of staff weeks US$ ‘000 (including travel and consultant costs) Lending

FY01 53 84.04 FY02 65 95.56 FY03 24 45.33

Total: 142 224.93 Supervision/ICR

FY01 0.00

FY02 0.00 FY03 17.64 29.09 FY04 40.78 55.89 FY05 22.55 40.43

FY06 34.28 132.99

FY07 24.89 89.70 FY08 27.65 159.93 FY09 13.97 79.26 FY10 18.48 132.16

FY11 32.18 128.16

FY12 21.59 53.85

Total: 254.01 901.46

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Annex 5. Beneficiary Survey Results Not applicable as this is a Core ICR.

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Annex 6. Stakeholder Workshop Report and Results Not Applicable as this is not an intensive learning ICR. However the Bank ICR team comprising Ann Christine Rennie (Lead Financial Sector Development Specialist), Sabin Raj Shrestha (Senior Financial Sector Specialist), Kiran Afzal (Private Sector Development Specialist) and Suran K.C. Shrestha (Team Assistant) conducted an ICR mission from April 1 – 7, 2012 in Kathmandu. During the mission, the ICR team met with the officials from MoF, NRB, NBL, RBB, and all major stakeholders including CICL and DRT. Audios were later organized with Mr Duncan Overfield (DFID) and Mr Craig Mc Allister (ex-CEO of NBL management team, 2003-2007). A list of people met in Kathmandu during the ICR mission follows:

The ICR team also met Ms Tahseen Sayed Khan, Country Manager for Nepal.

1. Mr. Bhaskar Mani Gnawali, Executive Director, Regulation Bank and Financial Institution Regulation Departmen

2. Mr. Keshab Thapa, Deputy Director, NRB 3. Mr. Rishikesh Bhatta, Deputy Director, Internal Audit Department, NRB 4. Mr. Ashoke SJB Rana, CEO, Himalayan Bank 5. Mr. Maha Prasad Adhikari, Deputy Governor, NRB 6. Mr. Parshuram K. Chettri, CEO, Bank of Asia 7. Mr. Maheswor Lall Shrestha, CEO and Head Credit, NBL 8. Mr. Sushil Ram Mathema, Ex ED Regulations, NBL 9. Mr. Gokul P. Burlakoti, Chairman DRT 10. Mr. Kedar Nath Paudel, Registrat, DRT 11. Mr. Ratna Raj Bajracharya, CEO, Global Bank 12. Mr. Janardhan Acharya, NBL Board 13. Mr. Sita Ram Regmi, Under Secretary, Ministry of Finance 14. Mr. Anil Chandra Adhikari, CEO, CIBL 15. Mr. Prem Khanal, Deputy Editor, Republica (Newspaper) 16. Mr. Rajan Singh Bhandari, CEO, Citizens Bank 17. Mr. Narayan Poudel, Director, Research Department NRB

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Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR The NRB sent its completion report to the Bank on April 19, 2011. It is attached along with the cover letter.

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Implementation Completion Report (ICR)

Financial Sector Technical Assistance Project

Prepared by,

Nepal Rastra Bank Banks and Financial Institutions Regulation Department Financial Sector Technical Assistance Project (FSTAP)

Coordination and Support Team (CST) Baluwatar, Kathmandu, Nepal

March 2012

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Table of Contents

S.N TITLE

I Background And Brief Description Of Project

II NRB Re-engineering

III Restructuring of Rastriya Banijya Bank (RBB) and Nepal Bank Limited (NBL)

IV Supporting other Financial Sector Reform

VIII Achievement of Project Table -1 Total Expenses of Financial Sector Technical Assistance Table -2 Comparative Financial Indicators of Nepal Bank Limited

Table -3 Comparative Financial Indicators of Rastriya Banijya Bank Limited

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Basic Information Of The Project

1. Borrower: Government of Nepal

2. Implementing Agency Nepal Rastra Bank

3. IDA Credit: 3727 – NEP

4. DFID Grant: TF- 050593

5. Original Total Commitment: Credit - SDR 12.4 Million

Grant - GBP 6.86 Million

6. Disbursed Amount: Credit - SDR 6.59 Million (US$ 10.10 Million)

Grant - GBP 4.69 Million (US$ 7.35 Million)

7. Project Start Date April 30, 2003

8. Period Ending DFID - March 31,2011

IDA - December 31, 2011

I. Background and Brief Description of Project

Financial Sector Technical Assistance Project, (Phase I) was focused on (a) re-engineering of Nepal Rastra Bank, particularly in its core central banking functions; supervision, monetary policy, banking legislation, accounting and auditing, information technology, human resources, and training, (b) restructuring of two large ailing commercial banks namely Rastriya Banijya Bank and Nepal Bank Limited through the recruitment of Management Teams and automation of those bank branches and (c) finally supporting for the capacity building in the financial sector through support for training of financial journalism, and automation of Credit Information Bureau and Debt Recovery Tribunal. The main objective of the project was to support the on-going efforts to improve the financial sector in order to maintain macroeconomic stability and to promote private-sector-led economic growth.

ll. NRB RE-ENGINEERING

Under Re-engineering of Nepal Rastra Bank ,the following programs were mentioned in the agreement:

1. Strengthening Nepal Rastra Bank's human resource management capabilities; 2. Strengthening Nepal Rastra Bank's supervisory and regulatory capacity with respect to

banks and non-banking financial institution ; 3. Supporting Nepal Rastra Bank's comprehensive legislative and regulatory reform efforts

in the financial sector; 4. Supporting Nepal Rastra Bank's research activities, including, among other things,

computerizing and developing Nepal Rastra Bank's library services; 5. Strengthening Nepal Rastra Bank's accounting and auditing capabilities to produce

better quality and more timely financial and accounting information; 6. Strengthening information technology solutions of Nepal Rastra Bank;

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7. Conducting a training program for professional development of Nepal Rastra Bank staff including in-house training and attendance at external seminars and conferences; Among the programs under re-engineering of Nepal Rastra Bank works completed are as follows:

Selection and Employment of International Consultants

For providing the consultancy services, the contract was signed with the consulting firm M/S IEF Inc. in association with KPMG, Sri Lanka on February 06, 2006 for the positions of four Bank Examiners, two Non-bank Examiners, one Off-site Supervisor .However, the consulting firm had changed individual consultants many times rather than originally proposed consultants. As a result, Board of Director of Nepal Rastra Bank decided to terminate the contract.

Team of Chartered Accountants to prepare accounting manual :

A team of 7 Chartered Accountants from Nepal Rastra Bank was formed to prepare accounting manual, internal audit manual, budget directive, annual and periodically financial reporting format. The team submitted the final report on February 10, 2008. Nepal Rastra Bank has been gradually implementing manuals prepared by the team.

Human Resource Advisors:

Mr. M.A. Nandasiri of Sri Lanka was appointed as International Human Resource Advisor from June 26, 2005, to provide advice to restructure NRB's Human Resource Management.The tenor of the consultant expired on June 25, 2008. Management of Nepal Rastra Bank decided to terminate the contract with Mr. Nandasiri on the basis that the management considered to implement the recommendation of the report.

Upgrade in Information Technology:

Nepal Rastra Bank and Mr. Krishnan signed a Contract on August 9, 2004. Mr. Krishnan assumed his assignment as IT Expert to upgrade Nepal Rastra Bank's Information Technology System. Although, the contract was extended for few times up to October 2005, the consultant did not response on the issues raised by NRB regarding the need of information technology in NRB. That's why, the management of NRB terminated the contract and the upgradation of the information technology of NRB has been implemented through its internal resources.

Training of the Employees of Nepal Rastra Bank: Training to the employees of Nepal Rastra Bank had been provided in core and non-core function to enhance the capacity in the field of supervision, inspection, regulation and licensing of new financial institutions.

lll. Restructuring of Rastriya Banijya Bank Limited (RBBL) and Nepal Bank

Limited (NBL) : Under Restructuring of Rastriya Banijya Bank and Nepal Bank Limited, programs focused in the agreement are :

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1. Implementing a restructuring program for each of Rastriya Banijya Bank and Nepal Bank Limited with a view to : (a) controlling bank day-to day operations : (b) stabilizing their operational and financial positions: (c) strengthening the accounts of these institution and improving their accounting

system: (d) designing a human resource program that will include, among other things, a training

program, a retrenchment program, and a revised remuneration package for bank staff: and

(e) Preparing these institutions for divestiture from public sector.

Among the above set targets, the works done in these two banks are as follows:

Rastriya Banijya Bank Limited (RBBL):

Under the restructuring of Management of RBBL, Mr.Bruce F. Henderson was appointed as Chief Executive Officer of the Management Team on December 21, 2002 and continued until January 15, 2008. After his term, Nepal Rastra Bank hired management team of two consultants, Mr. Janardan Acharya, as a CEO and Mr. Om Bindu Lal Rajbhandari, as IT Manager. The contract with Mr. Acharya expired on March 31, 2011.

Further, as a part of restructuring, all branches of the bank have been computerized. Forty branches of RBBL deployed with Pumari Software and 75 branches with RBBSYS software. Any Branch Banking Services (ABBS) have been provided in major branches of RBBL.

As a result of restructuring and NRB control over the bank through the selection of the management team, major financial indicators were improved. Though the Capital Fund of the Bank could not be maintained at the required level. The Non performing Loan was reduced from 60 percent to 10.85 percent,Net worth from negative of Rs.22.39 billion to negative of Rs. 8.75 billion, number of employees from 5522 to 2555 from Mid July 2003 to Mid January 2011.

Restructuring of Nepal Bank Limited (NBL:

As a part of restructuring of NBL, the contract was signed between the Nepal Bank Limited and ICC Consulting Bank of Scotland (Ireland), the Management Team worked in NBL from July 22, 2002 to July 21, 2007. After the expiry of the contract with the ICC Consulting Ireland Limited, Nepal Rastra Bank deputed its personnel for management.

During the period of restructuring, almost all branches had been computerized and deployed with Newton Software and major branches started Any Branch Banking Services (ABBS).

As a result of restructuring and NRB control over the Bank's management, major financial indicators of NBL were improved. The Non performing Loan was reduced from 60 to 7.93 percent ,Net worth from negative of Rs.10.18 billion to negative of Rs. 4.24 billion and number of employees from 5652 to 2342 from Mid July 2003 to Mid January 2011.

IV. Supporting Other Financial Sector Reform :

Under supporting the reform of other financial sector, programs mentioned in the agreement are:

38

1. Strengthening the Banker's Training Center by (i) developing a strategic plan for the center ; (ii) designing appropriate course work; (iii) supporting enhanced training capabilities; and (iv) establishing and operating a modern information technology and computer system at the center.

2. Strengthening the Credit Information Bureau and the means through which credit information is disseminated.

3. Supporting training and capacity building among local journalists to assist them in conveying financial and business news and issue to the public.

4. Supporting the Coordination Support Team in implementing and supervising the Project,especially in relation to financial management, procurement and coordination capabilities.

Among the above reform programs, the main activities performed are :

Debt Recovery Tribunal (DRT)

FSTAP supported capacity building of employees of DRT. The in-house training program was conducted in the office of DRT. The officials of DRT made couple of study visit programs in South Asian countries to discuss the best practice of Tribunal business. First, the team of DRT officials and officials from Ministry of Finance and Nepal Rastra Bank visited Bangladesh as well as tribunals in different Indian cities. The other visit program was the Debt Recovery Tribunal of Sri Lanka. Also, the project supported the automation of DRT to enhance the efficiency of the tribunal activities

Financial Journalism

FSTAP assisted in the training of 48 financial journalists. The project provided support for training of financial journalists in Reuters in United Kingdom and the United States of America. Also, the trainings were conducted in Banglore and Asian Institute of Technology (AIT), Bangkok.

V. Achievement of Project

The main objective of the project are to assist the borrower in (i) re-engineering the Nepal Rastra Bank for it to effectively perform key central banking functions;(ii) implementing reforms in the commercial banking sector that will focus initially on restructuring Rastriya Banijya Bank Limited and Nepal Bank Limited; and(iii) improving the environment for financial sector reforms in areas such as credit information and financial news reporting through specialized training and capacity building. The major achievements of the project are;

Both the public sector banks, Nepal Bank Limited and Rastriya Banijya Bank Limited were in deep financial trouble before the commencement of the project. Both banks have made a satisfactory progress in their financial indicators. The Non-Performing loan was reduced from 60 percent to 7.93 percent and 10.85 percent, negative net-worth of Rs.10.02 billion and Rs.22.39 billion to negative of Rs.4.24 billion and negative of Rs.8.75 billion, number of employees from 5652 and 5522 to 2342 and 2555 in Nepal Bank Limited and Rastriya Banijya Bank Limited respectively from Mid July 2003 to Mid January 2011.

As a part of restructuring of Nepal Bank Limited almost all branches had been computerized and deployed with Newton Software and major branches started to provide

39

with Any Branch Banking Services (ABBS). Similarly, in Rastriya Banijya Bank Limited, all branches of the bank have been computerized. Forty branches of RBBL deployed with Pumari Software and 75 branches with RBBSYS software. Any Branch Banking Services (ABBS) have been provided in major branches of RBBL.

As a part of restructuring of NBL, the managementof Nepal Bank Limited was made strong through the contract between the Nepal Bank Limited and ICC Consulting Bank of Scotland (Ireland), who worked in NBL for five years. Similarly, in RBBL the contract was signed with Mr. Bruce F. Henderson, Chief Executive Officer of the Management Team which expired on Jan 15, 2008. Nepal Rastra Bank hired management team of two consultants, Mr. Janardan Acharya, as a CEO and Mr. Om Bindu Lal Rajbhandari, as IT Manager. The contract with Mr. Acharya expired on March 31, 2011.

The Project supported in the capacity building of employees of DRT. The in-house training program was conducted in the office of DRT and made couple of study visit programs in South Asian countries to discuss the best practice of Tribunal business. The team of DRT officials and officials from Ministry of Finance and Nepal Rastra Bank visited Bangladesh as well as tribunals in different Indian cities.

FSTAP assisted in the training of 48 financial journalists. The project provided support for training of financial journalists in Reuters in United Kingdom and the United States of America. Also, the trainings were conducted in Banglore and Asian Institute of Technology (AIT), Bangkok.

As a part of re-engineering of Nepal Rastra Bank, a team of 7 Chartered Accountants from NRB was formed to prepare accounting manual, internal audit manual, budget directive, annual and periodically financial reporting format. The team submitted the final report on February 10, 2008. Nepal Rastra Bank has been gradually implementing manuals prepared by the team.

40

Table 1: Total Expenses of Financial Sector Technical Assistance-Phase I (Rs. In Million)

S.N Category/Components IDA

Credit DFID Grant

GON Fund Total

1 NRB Re-engineering 79 202 35 3162 NBL Management Team 355 237 131 7233 RBB Management Team 191 147 56 3944 Other Financial Sector Reform 17 175 Project Preparation Fund (PPF) 117

Grand Total 1567

Table 2: Comparative Financial Indicators of NBL

In Rs. Billion

(Mid July 2003) (Mid January 2011)

NPL % 60.47 7.93

Net Profit (0.25) 0.38 (Mid July 2011)

Net Worth (10.18) (4.24)

Deposit 35.01 48.70

Loan 19.27 27.45

Operating Expenses 3.77 1.95

Number of Employees (In hundred) 56.52 23.42

Core Capital % (29.75) -8.53

Table 3: Comparative Financial Indicators of RBBL

In Rs. Billion

(Mid July 2003) (Mid July 2011)

NPL % 60.15 10.85

Net Profit (4.84) 1.75 (mid July 2011)

Net Worth (22.39) (8.75)

Deposit 39.40 75.42

Loan 28.26 36.46

Operating Expenses 3.49 2.62

Number of Employees (In hundred) 55.22 25.25

Core Capital % (45.52) (21.77)

41

Annex 8. Comments of Cofinanciers – DFID Following inputs were received from DFID’s office in Nepal in response to Bank’s questions: Overall experience on FSTAP especially your interaction with the counterparts (NRB) Given that we closed this project after nine years (i.e. 6 years longer than intended programming) and it still have not reached most of its objectives our overall experience was not positive. The main problem is that this intervention was designed in a different political context to the one which it tried to deliver in. Issues around privatisation and restructuring of state owned banks became too difficult an issue for the authorities to deal with. There were of course other issues especially to do with the politicisation of the NRB and the issues around the dismissal, imprisonment, and then re-instatement of the former Governor which created an environment where senior officials were not prepared to deal with any difficult or controversial issues. At the same time they were not prepared to admit this even in private and allow alternative delivery and procurement mechanisms to be used. In this context our interactions with the NRB we not particularly useful or helpful in ensuring delivery. They were always polite but not productive. This also had serious knock on effects on component not to be delivered by NRB, but dependent on their procurement, such as the work with the Credit Bureau which was effectively starved of funds and could not expand. In many ways this could not have been for seen at the time of design. But where the project failed was not changing direction or even closing earlier – the period around the end of 2005 would have been critical in this regard. The project really failed to grasp the underlying political economy of the NRB and the financial sector more broadly and the wide ranging political changes sweeping across Nepal which drove these. Experience of collaboration with the Bank group, what worked and how things could have been improved or done in a better way. In general this was highly positive and always best when there was a task team leader based in-country (and this was not always the case). I only took on responsibility for this in its last 12-months and collaboration with the Bank Group was strong during this period. We jointly tried to re-design the programme to deal with the NRB reluctance to take on any major procurement issues – doing this together and sending joint messages to the authorities – this was a model approach from our perspective. When it became apparent that we were not going to be able to resolve this DFID decided to terminate its support with an appropriate notice period. This was discussed with the WBG is a highly collegiate manner and we fully agreed the messaging to be given to the authorities and the media (to ensure that our reputational risk was dealt with).

42

What in your view were the key issues with this project and how did the counterpart and Bank performed with regards to project supervision and implementation. The key issues are alluded to above and non-delivery is mainly related to the changing politics and political economy in Nepal and the extreme risk aversion this generated in senior NRB officials. In broad terms the Bank performed well on overall supervision but failed to focus on the underlying issues which forced implementation to go off course. Quite often the symptoms were treated rather than looking at the underlying causes and really assessing whether there is anything that could be done about this. Where the Bank (and DFID) failed was not to take on board the broader implications of large changes in Nepal and what that did to the political landscape and the realistic range of policy options open to officials in the NRB. In retrospect once there was a substantial shift to the left and the political instability associated with a longer-term transition to democracy it was always going to be very hard for this project to deliver as designed. Suggestions on way forward As we move into a new phase of design in this area (and jointly with the World Bank) we are keenly aware to make sure we do not make the same mistakes and the specific actions been taken to ensure this are:

Slowing the design process to ensure there is broad based political and bureaucratic support for the proposed reforms (now based around a Development Policy Credit and linked TA);

Ensuring there is a full political economy analysis written into the design phase and that the project has standing capacity to ensure there can be continuous analysis throughout the intervention

One issues we are however concerned with is that there will be no TTL based in Nepal – this is not currently planned for.

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Annex 9. List of Supporting Documents 1. 2000 Strategy paper of HMG/Nepal on the Financial Sector Reform Program (FSSS) 2. Nepal Financial Sector Study, October 16, 2002 – SASFP, South Asia Region, The

World Bank. Report Number 24959-NEP 3. FSTAP – Project Appraisal Document (PAD), November 13, 2002, Report Number

23992 NEP 4. Program Document for a proposed First Poverty Reduction Support Credit to The

Kingdom of Nepal. October 15, 2003. Report No. 26556-NEP 5. FSTAP and FSRP supervision mission Aide Memoirs – World Bank Documents. 6. FSTAP Mid Term Review September 2006 – Aide Memoire and Management Letter 7. Project Implementation Status and Results Reports (ISRs) – (Sequence 1-20) 8. Bank MTR Report based on Implementation Support Missions of September 18-29,

2006 and November 6-8, 2006 9. Bank letter to Secretary MoF and Governor NRB ‘Nepal: MTR of FSTAP’.

December 26, 2006 10. Bank letter to Secretary MoF and Governor NRB ‘Nepal: Implementation Support

Mission of FSTAP and MTR of FSRP – May 18-27, 2007’. Dated: June 5, 2007 11. Bank letter to Secretary MoF ‘Nepal: FSTAP; FSRP. July 26, 2007 12. MoF letter to Bank Country Director ‘Nepal: FSTAP; FSRP’. July 30, 2007 13. Datasheet template for Project Paper – May 8, 2008 14. MoF letter to Bank Country Director for Nepal – ‘Restructuring of FSTAP and

Closure of FSRP. Ref: Bank’s letter of March 27, 2008’. Dated: April 2, 2008 15. Bank letter to Secretary MoF – Nepal: FSTAP, Amendment to the Development

Credit Agreement (DCA) – June 5, 2008 16. MoU between the Govt of UK of Great Britain and Northern Island and the IDA for

the Nepal FSTAP (IDA REF:TF 050593) – January 13, 2009 17. Amendment to the MoU between the Govt of UK of Great Britain and Northern

Island and The IDA for the Nepal FSTAP (IDA REF:TF 050593) – December 23, 2010

18. Implementation Completion and Results Report (ICR) of the Financial Sector Restructuring Project – March 15, 2010. Report Number: ICR00001348

19. Bank letter to MoF ‘Nepal: FSTAP – Amendment to the DCA’. April 25, 2011 20. Restructuring Paper (FSTAP) – Board Approval Date: December 19, 2011. Report

Number 65999 v1. 21. Aide Memoire – Possible Financial Sector and Macroeconomic Stability DPC,

Technical Consultations, December 12-20, 2011, January 16-20, 2012, February – 23 March, 2012

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This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 25 50 75

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IBRD 39300

MAY 2012

NEPALFINANCIAL SECTOR

TECHNICAL ASSISTANCEPROJECT (FSTAP)

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