Public Disclosure Copy The World Bank Implementation Status & Results Report Nepal Second Finance for Growth Development Policy Financing (P176881) Nepal Second Finance for Growth Development Policy Financing (P176881) SOUTH ASIA | Nepal | Finance, Competitiveness and Innovation Global Practice | IBRD/IDA | Development Policy Lending | FY 2022 | Seq No: 1 | ARCHIVED on 11-Apr-2023 | ISR55436 | Implementing Agencies: Ministry of Finance, Nepal Key Dates Key Project Dates Bank Approval Date: 24-Mar-2022 Effectiveness Date: 19-May-2022 Original Closing Date: 30-Jun-2023 Revised Closing Date: 30-Jun-2023 pdoTable Project Development Objectives Program Development Objective (from Program Document) Support the Government of Nepal in its efforts to strengthen financial sector stability, diversify financial solutions, and increase access to financial services. Has the Project Development Objective been changed since Board Approval of the Project Objective? No Overall Ratings Name Previous Rating Current Rating Progress towards achievement of PDO -- Satisfactory Overall Implementation Progress (IP) -- Satisfactory Overall Risk Rating -- Substantial Implementation Status and Key Decisions Introduction The second Finance for Growth (F4G2) Development Policy Credit (DPC) supports the Government of Nepal (GoN) in its efforts to strengthen financial sector stability, diversify financial solutions, and increase access to financial services. The proposed F4G2 DPC, in the amount of US$150 million equivalent, is the second in a programmatic series of three operations. The F4G2 is part of a set of four operations supporting the GoN’s policy reforms and priorities with significant complementarities among each other. The other operations are the: (i) Second Fiscal Policy for Growth, Recovery and Resilience DPC, (ii) Third Programmatic Energy Sector DPC and (iii) First Nepal, Green, Resilient and Inclusive Programmatic DPC. Each operation addresses policy issues from different angles with an overarching target of supporting green, resilient, and inclusive growth while making sure that all fiscal, financial sector and sectoral (i.e., energy sector) governance systems are strengthened simultaneously. All four programmatic DPCs in Nepal are aligned with each other and pivot around the GoN’s own growth objectives Prior Actions and Implementation Status All eight agreed Prior Actions (PAs), under the three strategic pillars of the program including i) Strengthening Financial Sector Stability; ii) Diversifying Financial Solutions and iii) Increasing access to financial services have been met. Key Achievements The F4G2 DPC resulted in key policy and institutional reforms to further strengthen Nepal’s financial sector covering banking, insurance, and capital markets. While policy interventions were instituted through Nepal Rastra Bank (NRB), Nepal Insurance Authority (NIA – formerly Beema Samiti), and the Securities Board of Nepal (SEBON) the financial sector regulators, the impact of these reforms have resulted in enhanced market competitiveness amongst market players improving the financial sectors’ stability, ensuring sustainable operations of the sector and enhancing financial inclusion. 4/11/2023 Page 1 of 5 Public Disclosure Copy The World Bank Implementation Status & Results Report Nepal Second Finance for Growth Development Policy Financing (P176881) For the banking sector, the reforms were instituted through the Nepal Rastra Bank (NRB), Nepal’s banking sector regulator and included i) adoption of risk-based supervision through off-site supervision manuals and operationalization of an information sharing platform (Supervisory Information System (SiS)); ii) adoption of an updated Environment and Social Risk Management Guideline for climate-related risk due diligence; iii) regulatory guidance on interoperability of payment transactions to strengthen digital finance, iv) improvement in regulatory regime to allow for foreign borrowing and iv) design, financing and delivery of financial literacy programs with targeted interventions to women towards addressing the gender gap issues. For the insurance sector, reforms included adoption of i) a risk-based solvency framework and ii) climate-related risk disclosures to strengthen the sector’s ability to monitor key risks including climate related risks. Additionally, a disaster risk finance strategy was adopted for implementation of cost-effective risk transfer instruments as a key reform for the sector. Reforms under the capital markets included amendment to the Securities Registration and Issue Regulation pertaining to mandatory listed issuers’ disclosure on climate change and Environmental Social and Governance (ESG). The reform addresses climate risks by way of regulations on climate change and) disclosures that will provide for the mandatory compliance of disclosures by listed companies. Some of the identified reforms at the initial project state related to: (i) Credit Information Reporting Act (CIRA) (ii) Securities legislation (SEBON) (iii) Medium-Term Debt Strategy (MTDS) and dematerialization implementation plan and (iv) Amendments to the Secured Transactions Act (STA) have been deferred to other operations to manage design complexity and allow for more extensive stakeholder consultations, which were delayed due to COVID constraints. Risks Systematic Operations Risk-rating Tool Risk Category Rating at Approval Previous Rating Current Rating Political and Governance Substantial -- Substantial Macroeconomic Substantial -- Substantial Sector Strategies and Policies Moderate -- Moderate Technical Design of Project or Program Moderate -- Moderate Institutional Capacity for Implementation and Substantial -- Substantial Sustainability Fiduciary Substantial -- Substantial Environment and Social Moderate -- Moderate Stakeholders Moderate -- Moderate Other -- -- -- Overall Substantial -- Substantial Results Results Indicators PILLAR 1 - Strengthening Financial Sector Stability IN01273021 ►Results Indicator (RI) #1 (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target All three CP#8, #9, #10 At least two of the Under Progress to assessed as Materially three CP#8, #9, #10 Value -- achieve the target Non-Compliant. are assessed Largely Compliant. 4/11/2023 Page 2 of 5 Public Disclosure Copy The World Bank Implementation Status & Results Report Nepal Second Finance for Growth Development Policy Financing (P176881) Date 30-Jun-2020 -- 28-Mar-2023 30-Jun-2023 The Nepal Rastra Bank (NRB) improves compliance with at least two of the three Basel Core Principles (BCPs) #8 (supervisory approach), #9 (supervisory techniques and tools), and/or #10 (supervisory Comments: reporting), as per an independent IMF assessment. (text) IN01273022 ►Results Indicator #2 (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target The 2014 NRA would not The NRA is Partially meet the requirements Compliant for the for technical compliance technical compliance and effectiveness as set Under process to meet requirements for FATF Value -- out in the target Recommendation 1, FATF Recommendation and Moderate Level of 1 and FATF IO 1. Effectiveness for FATF IO 1 Date 30-Jun-2020 -- 28-Mar-2023 30-Jun-2023 The National Risk Assessment (NRA) meets at least a minimum level of technical compliance for FATF Recommendation 1, and minimum level of effectiveness for FATF Intermediate Outcome 1 (IO1). (text) Comments: IN01273023 ►Results Indicator #3 (NEW) (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target Under Progress to 75 percent of stock Value 0 percent -- achieve the target market capitalization Date 30-Jun-2020 -- 28-Mar-2023 30-Jun-2023 PILLAR 2 - Diversifying Financial Solutions IN01273024 ►Results Indicator#4 (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target Under progress to Value 0.00 -- 1.00 achieve the target Date 30-Jun-2020 -- 28-Mar-2023 30-Jun-2023 The Ministry of Finance (MoF) has secured in coordination with government departments/agencies the Comments: placement of a disaster risk finance instrument in the market. (number) IN01273025 ►Results Indicator #5 (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target NR 70,917,788,520.00 (Approximately US$ Under progress to Value -- 15 percent 585,000,000) achieve the target 4/11/2023 Page 3 of 5 Public Disclosure Copy The World Bank Implementation Status & Results Report Nepal Second Finance for Growth Development Policy Financing (P176881) Date 30-Jun-2020 -- 28-Mar-2023 30-Jun-2023 Increase in the securities (excluding government securities) holdings of institutional investors (including Comments: provident funds). (percent IN01272994 ►Results Indicator#6 (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target NR 9,000,000,000 (approximately Under progress to Value -- 20 percent US$74,000,000) achieve the target Date 30-Jun-2020 -- 28-Mar-2023 30-Jun-2023 Increase in the financing through capital contribution and credit received by private equity and venture Comments: capital companies. (percent) PILLAR 3 - Increasing Access to Financial Services IN01272995 ►Results Indicator #7 (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target Under progress to Value 0.00 -- US$ 200,000,000 achieve the target Date 30-Jun-2020 -- 28-Mar-2023 30-Jun-2023 Increase in international borrowing by bank and financial institutions. (number) Comments: IN01273026 ►Results Indicator #8 (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target 480,000 females, 50 percent (female), 890,000 males (WB Under Progress to Value -- 25 percent (male) Findex achieve the target Date 30-Jun-2020 -- 28-Mar-2023 30-Jun-2023 Increase of individuals using transaction accounts to make electronic payments. (percent) Comments: IN01273027 ►Results Indicator #9 (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target 1,331,299 females, 40 percent (female), 454,334 males, 267,071 Under Progress to 25 percent (male), 15 Value -- firms achieve the target percent(firm) Date 30-Jun-2020 -- 28-Mar-2023 30-Jun-2023 Increase in individuals and firms enrolled with the Credit Information Bureau (CIB). (percent) Comments: 4/11/2023 Page 4 of 5 Public Disclosure Copy The World Bank Implementation Status & Results Report Nepal Second Finance for Growth Development Policy Financing (P176881) IN01273028 ►Results Indicator #10 (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target Under Progress to Value 151,705 registrations -- 15 percent achieve the target Date 30-Jun-2020 -- 28-Mar-2023 30-Jun-2023 Increase in new registrations of security interests in the secured transactions registry. (percent) Comments: IN01273029 ►Results Indicator#11 (NEW) (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target Under Progress to Value 0 percent -- 15 percent achieve the target Date 30-Jun-2020 -- 28-Mar-2023 30-Jun-2023 Green guarantees in Deposit and Credit Guarantee Fund (DCGF) portfolio. (percent) Comments: Data on Financial Performance Disbursements (by loan) Project Loan/Credit/TF Status Currency Original Revised Cancelled Disbursed Undisbursed % Disbursed P176881 IDA-70500 Effective USD 150.00 150.00 0.00 144.93 0.00 100% Key Dates (by loan) Project Loan/Credit/TF Status Approval Date Signing Date Effectiveness Date Orig. Closing Date Rev. Closing Date P176881 IDA-70500 Effective 24-Mar-2022 04-May-2022 19-May-2022 30-Jun-2023 30-Jun-2023 Tranches Restructuring History There has been no restructuring to date. Related Project(s) P173044-Finance for Growth Development Policy Financing ,P178531-Nepal Finance for Growth DPC (3 of 3) 4/11/2023 Page 5 of 5