Document of The World Bank Report No: RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF FINANCIAL SECTOR TECHNICAL ASSISTANCE PROJECT LOAN {BOARD APPROVAL DATE: DECEMBER 19, 2002} TO NEPAL {DATE OF RESTRUCTURING: DECEMBER 2, 2011} ABBREVIATIONS AND ACRONYMS CIAA Centre for Investigation of Abuse of Authority CICL Credit Information Centre Limited DFID Department for International Development, United Kingdom IDA International Development Association IFC International Finance Corporation MoF Ministry of Finance NBL Nepal Bank Limited NRB Nepal Rastra Bank RBB Rastriya Banijya Bank STRO Secured Transaction (movable collateral) Registry Office WB The World Bank Regional Vice President: Isabel M. Guerrero Country Director: Ellen Goldstein Sector Manager / Director: Ivan Rossignol Task Team Leader: Sabin Raj Shrestha 2 NEPAL FINANCIAL SECTOR TECHNICAL ASSISTANCE PROJECT P071291 CONTENTS Page A. SUMMARY ............................................................................................................... 4 B. PROJECT STATUS ................................................................................................. 4 C. PROPOSED CHANGES .......................................................................................... 5 ANNEX 1: REVISED SCHEDULE: WITHDRAWAL OF PROCEEDS OF CREDIT 6 3 FINANCIAL SECTOR TECHNICAL ASSISTANCE PROJECT RESTRUCTURING PAPER SUMMARY 1. This restructuring paper seeks approval to cancel undisbursed funds across all categories except incremental operating cost of US$ 25,000 (cumulative amount of SDR 46,087.31). The reason for cancellation of funds is due to lack of progress in the remaining activities under the project due to various procurement related issues – this cancellation is being proposed based on the request of the government – the request letters dated November 25, 2011 and December 2, 2011 received from the Ministry of Finance. PROJECT STATUS 2. This project was co-financed with DFID and IFC. After seven years of implementation, the project (IDA) was 94% disbursed as at October 31, 2011. The Implementation Progress and Development Objectives of the project were downgraded in July 2010 to “Moderately Unsatisfactory�. This unsatisfactory performance resulted in DFID deciding to close their assistance early. The Bank restructured the project in January 2011 by downsizing components on the basis of what could be realistically achieved within the remaining project period. With regard to individual project components, the status is as follows: (i) Restructuring the two big state-controlled banks: The targeted outcomes for the restructuring of Nepal Bank Limited (NBL) and Rastriya Banijya Bank (RBB), both state controlled banks, have been largely achieved. Both banks, which were incurring operating losses, have been turned around with positive cash flows over the last seven years. Non-performing loans have been brought down from 58% for NBL and 60% for RBB in mid-July 2003 to 5.3 % and 10.9 %, respectively as of mid-July 2011. Staff levels have been reduced by more than 40% in both NBL and RBB. Branches covering more than 80 % of the deposit base are now computerized. Quarterly financial statements are now published in less than a month from quarter ends. As these banks were considered technically ready for the next steps of restructuring. a new activity was added in the last restructuring paper, which involved a detailed diagnostic assessment of NBL to assist the GON to make decisions regarding the next steps for this bank. However, the procurement process was significantly delayed that resulted in not meeting milestones agreed under the Procurement Plan. The Bank was informed of implementing agency’s inability to complete the activity within remaining project period. (ii) Re-engineering Nepal Rastra Bank: For the Nepal Rastra Bank (NRB), the re-engineering component has not been fully achieved. The bank’s supervision capacity has improved but agreed outcomes were not fully achieved due to the failure of NRB to recruit international supervision 4 experts. The financial disclosure standard has improved in terms of quality and timeliness. The legal and regulatory framework has significantly improved although amendments to Banks and Financial Institutions Act remain pending in the Parliament. (iii) Capacity Building in the Financial Sector: The development objective of supporting an environment for financial sector reform has been partly achieved. Public awareness of the reform program has increased significantly and the quality of financial news1 reporting improved. The training for NRB staff in reputed institutions has been successfully implemented and the training program was closed with the closure of DFID grant on March 31, 2011.With the re-establishment of the Credit Information Centre Limited (CICL) as a private institution, it is functioning more efficiently with quick turn-around in availability of credit reports. Procurement of a new MIS to upgrade CICL ran into problem when the amounts quoted in the financial bids significantly exceeded the budget of NRB and hence the bid was cancelled. Given the inadequate time within project period for another round of bidding process, the activity was considered for cancellation. Similarly, in case of procuring MIS for Secured Transaction Registry Office, agreed milestone as per Procurement Plan was not achieved and hence this activity also was considered for cancellation. PROPOSED CHANGES Cancellation 3. In view of Implementing Agency’s inability to complete the remaining activities within the project period, the Government has made a request for cancellation of undisbursed funds, except for Incremental Operating Cost not exceeding USD 25,000. The cancelled funds would amount to SDR 1,198,977.84 and will be recommitted to another program in Nepal within the current fiscal year. Closing date 4. There is no change in the closing date, which remains December 31, 2011. 1 Improvement in the quality of financial news reporting is evidenced through greater factual content, accuracy and substance in articles that appear in the press today. At the start of the project period, financial news reports usually lacked depth and focus. Greater emphasis was placed on financial scandals and controversy. Investigative journalism, as in the case of Unity Life reported in May 2010, has also led to regulatory action. 5 ANNEX 1: Revised Schedule Withdrawal of Proceeds of the Credit Category of Expenditure Allocation (Expressed in SDR % of Financing Equivalent) Current Revised Current Revised (1) Goods 1,617,000.00 952,274.03 100 % Unchanged (2) Consultants' Services 5,475,000.00 4,932,660.82 100 % Unchanged (3) Training, workshops and - - 100 % Unchanged study tours (4) Incremental Operating Costs 30,000.00 46,087.31 60 % Unchanged (5) Refunding of Project 655,000.00 655,000.00 Amount due Unchanged Preparation Advance pursuant to Section 2.02 (b) of Development Credit Agreement Unallocated 8,000.00 - Sub-total 7,785,000.00 6,586,022.16 Cancellation as of May 31, 2008 4,000,000.00 4,000,000.00 Cancellation as of April 25, 615,000.00 615,000.00 2011 Cancellation as of December 2, - 1,198,977.84 2011 Original Credit Amount 12,400,000.00 12,400,000.00 6 7