Nepal To Receive Support For Financial Sector Reform
Media Contacts:
In Kathmandu: Rajib Upadhya (9771) 4226792
E-mail: rupadhya@worldbank.org
In Washington: Karina Manasseh (202) 473-1729
E-mail: kmanasseh@worldbank.org

Washington, March 10, 2004 – The World Bank approved yesterday a US$75.5 million credit to Nepal to support the country's ongoing efforts at
improving its financial sector. A healthier financial sector is one of the key structural reforms that Nepal has been pursuing to reduce poverty by
stimulating more equitable and inclusive growth for all its citizens.

The Financial Sector Restructuring Project is a follow-on to the Financial Sector Technical Assistance credit, approved by the World Bank in 2002 in
an attempt to address the critical situation of the banking system in the country. The first credit strengthened the supervisory functions of the central
bank, Nepal Rastra Bank. Further, management teams were brought in to stem the losses at the two largest Nepalese commercial banks, Rastriya
Banijya Bank (RBB) and Nepal Bank Limited (NBL). This follow-on operation will provide further financial support to make these two banks commercially
viable for privatization.

“In view of the slow progress in commercial banks’ debt recovery, some Executive Directors questioned whether the government is fully committed to
taking tough reform actions, and hence the reluctance to support this project by several of them,” said Ken Ohashi, World Bank Country Director for
Nepal. “The high cost of the Voluntary Retirement Scheme also caused concerns about the rigidities in the labor laws, which not only make it expensive
for the government to rationalize state-owned enterprises, but also raise the cost of investment in Nepal and hence hold back healthy private sector
growth.”

The project has four main components. These are Voluntary Retirement Schemes, Hiring of Sales Advisors, Ongoing Nepal Rastra Bank Re-
engineering, and Management Team Support.

“Our engagement in the financial sector will continue to test the collective will of Nepalis to put the poor and voiceless at the center of reforms to
overcome resistance from narrow vested interests,” says Ohashi. “The underlying message in the approval of this new credit is that the Bank stands
ready to support these difficult reforms, but only to the extent that the authorities do their part, including the pursuit of large, willful defaulters with the
utmost vigor. Should commitment to do this falter, the Bank will certainly have to rethink its assistance.”

Ohashi also said that a healthy financial sector is one in which funds can flow to their most productive economic use. In so doing, these funds can
benefit the entire economy in terms of more rational investment decisions, more sustained employment opportunities, increased production and exports,
and, ultimately, enhanced growth. Consequently, he added, the ongoing bank reform process has many important indirect poverty alleviation implications
for Nepal.

The project is to be supported through the International Development Association, the World Bank’s concessionary lending arm, with a US$68.5 million
credit and US$7 million grant. As institutional and implementation arrangements for the predecessor project have already been developed with Nepal
Rastra Bank, these will continue to be used to oversee the implementation of the current operation.

                                              For more information on the World Bank’s activities in Nepal, visit:
                                                                 http://www.worldbank.org/np

                                                           For More information on this project, visit:
                                                   http://web.worldbank.org/external/projects/mainP084219