Report and Recommendation of the President to the Board of Directors

Sri Lanka Project Number: 36169-02 May 2010

Proposed Loan, Grant, and Technical Assistance Grant Nepal: Rural Finance Sector Development Cluster Program (Subprogram 2)

CURRENCY EQUIVALENTS (as of 12 May 2010)

Currency Unit – Nepal rupee/s (NRe/NRs) NRe1.00 = $0.01

$1.00 = NRs72.17

In this report, the rate $1.00 = NRs74 was used.

ABBREVIATIONS

ADB – Asian Development Bank ADBL – Agricultural Development Bank Limited ADBN – Agricultural Development Bank of Nepal BOD – board of directors CEO – chief executive officer CIB – Credit Information Bureau DRT – Debt Recovery Tribunal GBB – Grameen Bikash Bank MIS – management information system MOF – Ministry of Finance NBL – Nepal Bank Limited NBTI – National Banking Training Institute NGO – nongovernment organization NRB – Nepal Rastra Bank PRGF – Poverty Reduction and Growth Facility RBB – Rastriya Banijya Bank RFI – rural finance institution RFSDCP – Rural Finance Sector Development Cluster Program SFDB – Small Farmers Development Bank STI – second-tier institution TA – technical assistance

GLOSSARY

Capital adequacy ratio – Ratio of a bank’s capital to its risk and measure of the bank’s

core capital, expressed as a percentage of its assets weighted credit exposures.

Initial public offering – Or simply “offering” or “flotation,” the first issue of a company’s common stock or shares to the public.

Ordinary share – Also known as an equity share. An ordinary share entitles its owner to share in the profits of a bank (dividends) and to vote at its general meetings.

NOTES

(i) The fiscal year (FY) of the Government of Nepal ends on 15 July. “FY” before a calendar year denotes the year in which the fiscal year ends, e.g., FY2010 ends on 15 July 2010.

(ii) In this report, “$” refers to US dollars.

Vice-President X. Zhao, Operations 1 Director General S. H. Rahman, South Asia Department (SARD) Director A. Sharma, Financial Sector, Public Management and Trade Division, SARD Team leader M. Ozaki, Finance Specialist (Rural and Microfinance), SARD Team member Y. Acharya, Economics Officer, SARD R. Fontejon, Administrative Assistant, SARD J. Versantvoort, Counsel, Office of the General Counsel

In preparing any country program or strategy, financing any project, or making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS Page

I.  THE PROPOSAL 1 

II.  THE SECTOR DEVELOPMENT CLUSTER PROGRAM 1 

A.  Rationale 1 B.  Impact and Outcome 3 C.  Outputs 3 D.  Program Costs and Financing 5 E.  Implementation Arrangements 7 

III.  TECHNICAL ASSISTANCE 7 

IV.  DUE DILIGENCE 8 

A.  Economic 8 B.  Governance 8 C.  Social and Poverty 8 D.  Safeguards 8 E.  Risks and Mitigating Measures 9 

V.  ASSURANCES AND CONDITIONS 9 

VI.  RECOMMENDATION 10 

APPENDIXES

1. Design and Monitoring Framework 11 2. List of Linked Documents 14 3. Development Policy Letter 15 4. Policy Matrix 18

I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on (i) a proposed increase in the amount available for the Rural Finance Sector Development Cluster Program (RFSDCP) in Nepal,1 (ii) a proposed loan to Nepal for subprogram 2 of the RFSDCP, and (iii) a proposed grant to Nepal for the Second Rural Finance Sector Development Project. The report also describes proposed technical assistance (TA) to Nepal for Capacity Building for Rural Finance Sector Development, and if the Board approves the proposed loan and grant, I, acting under the authority delegated to me by the Board, will approve the TA. In this report, RFSDCP denotes the cluster program comprising subprograms 1 and 2. Subprogram 1 refers to the subprogram implemented in 2006–2009. Subprogram 2, to be implemented in 2010–2012, will consist of the loan and the grant project described in this report. The design, implementation modality, and other aspects covered in this report refer to subprogram 2, unless specified otherwise.

II. THE SECTOR DEVELOPMENT CLUSTER PROGRAM A. Rationale

2. Nepal is in reconciliation, rehabilitation, and reconstruction after its decade-long conflict. As peace has set in, the macroeconomic environment has also turned positive and, in 2008, the gross domestic product grew by 4.7%. Nepal has also substantially reduced the incidence of poverty, from 42% in 1996 to 31% in 2004. But severe poverty persists in various parts of the country and economic growth is uneven. Poverty in Nepal is largely a rural phenomenon and rural poverty is closely associated with limited access to social and economic infrastructure such as roads, energy, markets, and finance. 3. Despite the recent rapid growth of the financial sector, just 30% of Nepalese households have an account with or a loan from formal or semiformal financial institutions,2 and 70% have no access to institutional finance but rely only on informal sources3 of finance or are financially excluded. The percentage of financially excluded households are higher in the hills and mountain areas (80% of the households) and among the poorest households (75%). Exclusive reliance on informal lending is more common in the Western region (77%). Unequal access to formal financial services is a critical economic constraint, especially given the relatively higher interest rates charged in the informal sector.4 4. The limited access to finance in Nepal is largely due to (i) excessive government involvement and distortional policies, (ii) poor governance and the limited outreach of public rural finance institutions (RFIs),5 (iii) the limited scale and capacity of semiformal RFIs, (iv) the

1 ADB. 2006. Report and Recommendation of the President to the Board of Directors: Proposed Sector

Development Program Cluster of Loans, Asian Development Fund Grant, and Technical Assistance Grant to Nepal for the Rural Finance Sector Development Cluster Program. Manila.

2 Formal financial institutions are licensed and regulated by the Nepal Rastra Bank (NRB), the central bank. Semiformal institutions are registered under various acts, such as the Cooperative Act (1992) and the Societies Registration Act (1977) but are not licensed or regulated by NRB.

3 Main sources of informal lending are families, relatives, friends, and moneylenders. 4 Asian Development Bank, World Bank, Department for International Development of the United Kingdom, and

International Labor Organization. 2009. Country Diagnostic Studies—Nepal: Critical Development Constraints. 5 Rural finance is defined as financial intermediation in the rural sector and is a subset of the broader finance sector.

This report defines RFIs as financial intermediaries, formal and semiformal, that serve the rural areas. Even commercial banks with head offices in the urban areas are considered RFIs if they serve rural clients. Microfinance institutions are financial intermediaries that mainly provide non-collateral loans below NRs150,000. Because of the high concentration of the poor and low-income households in the rural areas, most microfinance institutions operate in the rural areas and are categorized as RFIs. This report, however, refers to microfinance institutions to distinguish financial intermediation for small borrowers from other forms of lending.

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lack of appropriate laws and regulations for the supervision of RFIs, (v) insufficient support infrastructure for rural finance, and (vi) the inaccessibility of the hills and mountain areas. 5. At the core of the problems in the rural finance sector in Nepal is the omnipresence of the government in RFI ownership and management. Public institutions dominate the rural finance sector, and the outreach of the three key public RFIs—the Agricultural Development Bank Limited (ADBL), the Small Farmers Development Bank (SFDB), and the Grameen Bikash Banks (GBBs)—is estimated to account for more than 60% of the total outreach of formal and semiformal rural finance. Despite their extensive rural network, however, these public institutions have not made the most of their outreach potential because of weak governance and management, limited staff skills, and scant attention to profitability and sustainability. To improve access to finance the government has (i) directed banks to set aside 3% of their total loan portfolio for low-income households and small businesses (the so-called “deprived sector lending scheme”), and (ii) created special microfinance windows and programs. But most government-sponsored microfinance programs have performed poorly and have limited outreach. The government’s "deprived sector lending scheme" has also weakened market incentives by discouraging microfinance institutions from expanding their outreach through efficiency improvements and innovation. 6. Semiformal RFIs such as microfinance nongovernment organizations (NGOs) and savings and credit cooperatives are expected to fill the gap. But semiformal RFIs also suffer from weak capacity, limited scale of operations, and insufficient skills to be viable and provide outreach. Most lack suitable accounting, reporting, and management information systems (MISs). In the absence of regulatory requirements for accountability and transparency, RFIs have not been able to improve their accounting and internal controls and boost their operating capacity. There are no regulations specific to semiformal RFIs. Formal RFIs, licensed and regulated by the Nepal Rastra Bank (NRB), the central bank, make up only a small portion of rural finance intermediaries in number. An estimated 2,300 cooperatives and 15,000 microfinance NGOs provide financial intermediation and take deposits without license. The poor supervision of these institutions does not bode well for the security of depositors and the stability of the rural finance sector. 7. The rural finance sector needs support infrastructure such as a Credit Information Bureau (CIB) and a Debt Recovery Tribunal (DRT) to grow. The CIB that was created in 2005 serves mainly commercial banks. The service must be extended to more RFIs to improve their risk mitigation and the governance of the rural finance sector. A three-member DRT was formed to make debt recovery decisions for financial institutions, but its low capacity has delayed loan recovery. This burden on RFIs lowers the credibility of the rural finance sector. 8. The topography of the hills and mountains hampers the organization of group members and raises the transaction cost of microcredit beyond the cost in the terai (plain areas). Savings and credit cooperatives, managed by their own members, are considered more suitable for the hills and mountains. But they are hard put to mobilize resources, expand credit, and improve the efficiency of microfinance operations. The Grameen-type group-based microcredit model,6 while effective in the terai region, is difficult to implement in the hills and mountains, where households are sparsely located, and roads and communication networks are scarce. More appropriate approaches need to be developed for those areas through pilot initiatives. 9. The Asian Development Bank (ADB) approved the Rural Finance Sector Development Cluster Program and its subprogram 1 on 26 October 2006 to develop an enabling environment for the rural finance sector through policy, legal, regulatory, and institutional reforms.

6 In the Grameen microcredit model, started by the Grameen Bank in Bangladesh, women form themselves into

groups of 5–20 members each and borrow on the basis of a group guarantee.

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Subprogram 1, which was completed in December 2009, achieved successful policy and institutional reforms.7 According to the progress report for the release of the second tranche of the loan for subprogram 1, 14 of 19 conditions were fully complied with, one was substantially complied with, and four were partially complied with.8 The partial compliance was due to the delay in the passage of supporting laws and regulations, and in product and process innovations, caused mainly by the low implementation capacity of NRB, the implementing agency for the component. Qualified consultants were subsequently fielded to assist NRB during subprogram 1. Currently, of the four partially complied conditions, two are fully complied with. The condition relating to pilot-testing a crop insurance program for small and marginal farmers has been removed from subprogram 2. This made little progress under subprogram 1 because of the technical complexity of the scheme and the lack of institutions that could capably pilot-test it. The removal of the component will not affect the expected outcome of the cluster program. The remaining condition relating to approval of draft Microfinance Act has been carried to subprogram 2. The two tranches of the loan for subprogram 1, totaling $56 million, were fully disbursed. 10. Subprogram 2, the second phase of RFSDCP, will complete the rural finance sector reform agenda. It is consistent with the strategic focus of the country partnership strategy for Nepal (2010–2012) on making financial services more accessible to the poor and the rural areas.9 The RFSDCP supports the government’s Financial Sector Reform Program in coordination with the International Monetary Fund and the World Bank.10 B. Impact and Outcome 11. The impact of the RFSDCP will be economic growth and poverty reduction in rural areas through improved rural financial intermediation and easier access to affordable rural finance services, with special attention to marginalized groups and women.11 The outcome will be an inclusive rural finance system that is more sound and efficient, and has wider outreach. As the last subprogram of RFSDCP, subprogram 2 will develop a sound rural finance sector environment that is conducive to the expansion of rural finance outreach. The policy and institutional reform actions under subprogram 2 will (i) transform key RFIs into viable rural finance intermediaries with a strong client orientation and pro-poor focus, and (ii) improve the efficiency and widen the outreach of semiformal RFIs.12 C. Outputs 12. Subprogram 2 will continue the policy and institutional reform actions begun under subprogram 1.13

7 The impact of ADB’s assistance through subprogram 1, according to the country assistance program evaluation for

Nepal (2009), is “likely [to be] substantial. RFSDCP helped reinstate ADBL as a strong financial institution focused on agricultural and rural development, [and] improved [the] delivery mechanism for rural finance. The institutional development of the major rural finance institutions is expected to result in a credit environment with improved supervision and regulation. The institutions are moving [toward] eventual privatization.” ADB. 2009. Country Assistance Program Evaluation: Nepal—Delivering Assistance in a Challenging Environment. Manila.

8 ADB. 2007. Progress Report on Tranche Release: Nepal: Rural Finance Sector Development Cluster Program. Manila.

9 ADB. 2009. Country Partnership Strategy (2010–2012): Nepal. Manila. 10 Rural Finance Sector Analysis; Country Economic Indicators; Development Coordination; International Monetary

Fund Assessment Letter (Appendix 2). 11 For the purpose of subprogram 2, the marginalized sector is defined to include the poor as well as those who face

discrimination or abuse because of their gender, race, ethnic identity, or other personal attributes. 12 Design and Monitoring Framework (Appendix 1); Project Classification Summary (Appendix 2); Development Policy

Letter (Appendix 3); and Policy Matrix (Appendix 4). 13 Contribution to the Asian Development Bank Results Framework (Appendix 2).

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13. Supportive legal and regulatory framework. The process of establishing a legislative act and a regulatory authority—the second-tier institution (STI)—to supervise RFIs, which was set in motion under subprogram 1, will continue. Key component outputs will be (i) the development of a legal framework for RFI supervision and regulation, the Micro Finance Act; (ii) the establishment of the STI; and (iii) information dissemination and the start of RFI licensing and regulation. The Government will also review and update its Micro Finance Policy (2008). The STI is envisaged to be an autonomous regulatory body governed by a board of directors representing the government, NRB, and the private sector. For this initiative, the grant project will finance consultant experts at NRB to (i) draft regulations, operating manuals, and procedures for the STI; (ii) set up and start operating the STI; and (iii) disseminate information to RFIs and train them. An MIS will also be developed for the STI as part of the grant project. 14. Institutional restructuring and reforms:  Agricultural Development Bank Limited. Transforming ADBL, the country’s largest commercial bank, into a viable and effective financial intermediary is a key objective of RFSDCP. The ADBL restructuring under subprogram 1 involved voluntary retirement, the divestment of 15% of the government’s shareholding in ADBL to small shareholders,14 and the launch of the initial public offering, along with organizational and operational restructuring. An international consultant who served as chief technical adviser and national consultants assisted in the restructuring. 15. Key outputs of subprogram 2 will be the implementation of (i) the capital restructuring of ADBL, and (ii) the second phase of the ADBL institutional restructuring. A private strategic investor will buy into ADBL to provide the leadership needed to modernize the financial institution and make it more competitive. The government’s ordinary shareholding at ADBL will also be reduced to 21% by July 2011, in the first major financial privatization in Nepal. Along with the capital restructuring, comprehensive improvements will be made in governance, transparency, organization, marketing, human resources, business management, portfolio management, MIS, compliance, treasury, and internal audit in the second phase of the ADBL institutional restructuring. Consultants will assist ADBL management and staff in carrying out the restructuring. The MIS will also be expanded and strengthened to enable ADBL to offer technology-based financial services.15 16. Institutional restructuring and reforms:  Small Farmers Development Bank. The ADBL restructuring will be complemented by institutional reform of SFDB, an apex bank for small farmer cooperatives with a strong grassroots orientation. The SFDB reform will deepen rural finance outreach and make financial services more inclusive, especially to women. The SFDB restructuring plan will be updated and implemented. The board of directors will be reconstituted, the management professionalized, a portfolio audit carried out, the bank reorganized, internal controls improved, an MIS installed, and private capital increased. An international microfinance institution development specialist and national experts will help SFDB implement the plan under the grant project. The development of MIS for SFDB and SFDB member cooperatives will also receive consultant support.16 17. Strategies in the SFDB restructuring plan for expanding microfinance services in the hills and mountain areas involve (i) mapping cooperatives, self-help groups,17 and microfinance NGOs; (ii) assessing and rating institutions; (iii) designing a TA project and building capacity;

14 The Agricultural Development Bank of Nepal Act (1967) requires a person borrowing more than NRs10,000 from

ADBL to “have purchased at least one share of ADBL (small shareholders).” Small shareholders could be small farmers, a group of small farmers, a village committee or cooperative institution.

15 Agricultural Development Bank Limited Capital Restructuring Plan (Appendix 2). 16 Summary Small Farmers Development Bank Second Phase Restructuring Plan (Appendix 2). 17 Self-help groups are village-based financial intermediaries, usually composed of 10–15 local women, which are

largely unregistered and carry out voluntary savings and credit activities.

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and (iv) providing onlending support for outreach expansion. SFDB intends to make credit accessible to 20,000 more marginal farmers in the hills and mountain areas by 2012.18

18. Institutional restructuring and reforms: Grameen Bikash Bank. Subprogram 2 looks forward to the successful privatization of the Far Western GBB19 and its transformation, with full technical advisory and capacity development support, into an effective grassroots financial intermediary.

19. Sector capacity building. The RFSDCP advocates the establishment of a banking training institute to develop sector capacity. The National Banking Training Institute (NBTI), set up under subprogram 1, will continue to be assisted in raising professional standards throughout the financial sector including rural and microfinance. An output under subprogram 2 will be the start of professional training for a wide range of financial institutions. NBTI will hold short-term training, first in Kathmandu and later in other regions, and eventually long-term diploma and degree programs. Under the grant project, consultant experts will (i) develop training curricula, (ii) assess the training needs of financial institutions, (iii) conduct classroom and off-site training, (iv) design in-house training programs for RFIs, and (v) arrange financial literacy training for rural communities. The project will also support the marketing, information dissemination, staff training, and other initial operating costs of NBTI.

20. Enabling infrastructure for rural finance. Subprogram 2 will fund the development of the CIB’s credit information services to class D institutions (micro-credit development banks, microfinance NGOs and savings and credit cooperatives). CIB will begin providing credit information services to class D institutions and expand its client database from the present 40,000 to 2 million, including small borrowers. An MIS will be developed at CIB under the grant project to meet its larger data needs. The DRT, on the other hand, will undergo capacity development to speed up debt recovery and make it less costly. DRT staff will improve their skills in legal and financial management and office automation. DRT will also be given specialist assistance in legal, financial, and MIS aspects to strengthen its operating capacity. 21. Project management support. Project management and coordination assistance will come from a rural finance specialist at the Ministry of Finance (MOF). The grant project will finance the services of a consultant rural finance specialist for program implementation and the capacity development needs of the program management unit of MOF. D. Program Costs and Financing 22. The overall adjustment cost of the ADBL restructuring is estimated at $145 million, covered as follows: (i) $65 million from the government’s loan to ADBL converted into preference shares, (ii) further $65 million in performance-linked equity in the form of preference shares from the government to ADBL, and (iii) $15 million equivalent in ADBL staff size reduction through voluntary retirement. The government injected preference shares to recapitalize ADBL and improve its capital adequacy ratio to the statutory level set by NRB. The RFSDCP cluster at the time of subprogram 1 approval amounted to $91 million comprising a $56 million loan for subprogram 1 and a $35 million loan for subprogram 2. The government used the entire loan proceeds under subprogram 1 to recapitalize ADBL through cash subscriptions of additional preference shares equivalent to NRs3.9 billion. 23. The government has requested a loan in various currencies equivalent to SDR39,290,000 ($60.4 million equivalent) from ADB’s Special Funds resources to help finance

18 Summary Strategies for Expanding Microfinance Services in Hills and Mountains (Appendix 2). 19 GBBs started by replicating the Grameen Bank in Bangladesh. There are now five GBBs, one each for the Eastern,

Far-Western, Central, Mid-Western, and Western regions.

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the adjustment cost of subprogram 2. The loan will have a 24-year term, including a grace period of 8 years, an interest rate of 1.0% per annum during the grace period and 1.5% per annum thereafter, and such other terms and conditions set forth in the draft loan and program agreement. The loan will be released in two tranches. The first tranche of $30 million will be released at loan effectiveness and the second tranche of $30.4 million will be released 24 months after the release of the first tranche. The release of the first tranche is subject to the compliance of 16 conditions as specified in the policy matrix (Appendix 4). Of 16 conditions, 14 were fully complied. The two conditions: (i) the approval of the ADBL Capital Restructuring Plan, and (ii) endorsement of the SFDB Restructuring Plan by the Ministry of Finance and ADBL are in the process of being complied with. 24. The total amount for the RFSDCP cluster has been increased by $25.4 million to $116.4 million, reflecting the increase in local cost requirements, particularly for the establishment of the legal and regulatory framework for RFI supervision, the further divestment of ADBL, and the strengthening of rural finance outreach. More resources are needed for the expansion of rural finance outreach in the post-conflict period. The counterpart funds will finance the structural adjustment costs of the government and the program implementing agencies relating to the implementation of reforms under subprogram 2. 25. Grant project financing plan. The grant project will cost about $14.2 million (Table 1). The government has requested a grant not exceeding $12.1 million from ADB's Special Funds resources to help finance the project. The financing plan is in Table 2. The grant proceeds will finance equipment, international and national consulting services, training, a credit line, management support, and taxes and duties. Although some implementing agencies are operating on a commercial basis, grant financing will be provided under the project for the expansion of rural finance outreach because existing institutions will not normally undertake such financial inclusion activities nor attempt rural financial deepening for lack of economic incentives.20 For example, many rural areas of Nepal are remote and hence tend to be by-passed by financial institutions. Government and counterpart contributions will be mostly in kind and will cover counterpart staff salaries, office expenses, training, local travel, and other costs.21

Table 1: Project Investment Plan ($ million)

Item Total Cost Share (%) Base Costa A. Supportive Legal and Regulatory Framework 0.40 2.82 B. Institutional Restructuring and Reforms 1. Agricultural Development Bank Limited 5.40 38.03 2. Small Farmers Development Bank 3.30 23.24 C. Sector Capacity Building 1.30 9.15 D. Enabling Infrastructure for Rural Finance 1. Credit Information Bureau 2.00 14.08 2. Debt Recovery Tribunal 0.50 3.52 E. Project Management Support 0.50 3.52 Total Base Cost 13.40 94.36 1. Physical Contingenciesb 0.60 4.23 2. Price Contingenciesc 0.20 1.41 Total Cost To Be Financedd 14.20 100.00

a October 2009 prices. b Physical contingencies computed at 5% on all expenditure accounts except a credit line set at zero. c Price contingencies computed at 1.0% declining to 0% on foreign exchange, and at 8.0% declining to 6.5% on

local currency.

20 The Rural Microfinance Development Centre (Summary Sector Assessment: Appendix 2) is an example where

ADB assistance facilitated rural and microfinance outreach. 21 Project Administration Manual (Appendix 2).

d Inclusive of local duties and taxes of about $0.7 million Source: Asian Development Bank estimates.

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Table 2: Financing Plan ($ million)

Source Amount Share (%)

Asian Development Bank 12.1 85.2

Government 1.5 10.6

Rural Finance Institutions 0.6 4.2

Totala 14.2 100.0 a Inclusive of local duties and taxes of approximately $0.7 million. Source: Asian Development Bank estimates.

E. Implementation Arrangements 26. The implementation arrangements are summarized in Table 3.22

Table 3: Implementation Arrangements

Aspects Arrangements 1. Implementation perioda 1 June 2010–30 June 2012 2. Estimated program

completion datea 30 June 2012

3. Program managementa 3.1 Oversight body RFSDCP steering

committee Chair: Secretary, MOF Members: Joint secretary, MOF (program director); CEO, ADBL; CEO, CIB; chairperson, DRT; CEO, NBTI; CEO, SFDB; senior member, National Planning Commission; and deputy governor, NRB

3.2 Executing agency/PMU MOF Program director: Joint secretary, MOF 3.3 Key implementing

agencies/PIUs NRB, ADBL, NBTI, CIB, DRT, and SFDB

PIU director supported by at least one full-time staff at each PIU

4. Procurementb ICB 2 contracts: $5.75 million Shopping 4 contracts: $0.2 million 5. Consulting servicesb QCBS International (3 person-months); national (234 person-

months) ICS International (56 person-months); national (96 person-

months) 6. Disbursementb SOE Ceiling amount: $50,000 7. Tranche releasec Two tranches 1st tranche ($30 million) upon effectiveness; 2nd

tranche ($30.4 million) 24 months after the release of the 1st tranche

ADBL = Agricultural Development Bank Limited, CEO = chief executive officer, CIB = credit information bureau, DRT = Debt Recovery Tribunal, ICB = international competitive bidding, ICS = individual consultant selection, MOF = Ministry of Finance, NBTI = National Banking Training Institute, NRB = Nepal Rastra Bank, PIU = project implementation unit, PMU = program management unit, QCBS = quality- and cost-based selection, RFSDCP = Rural Finance Sector Development Cluster Program, SFDB = Small Farmers Development Bank, SOE = statement of expenditure. a Applicable under both the loan for subprogram 2 and the grant project. b Applicable only under the grant project. c Applicable only under the loan for subprogram 2. Source: Asian Development Bank.

III. TECHNICAL ASSISTANCE 27. A TA grant of $200,000 will be provided from ADB’s Technical Assistance Special Fund for an attached capacity development TA to support the successful transformation of ADBL into a viable and efficient financial intermediary. International consultant experts—a chief technical adviser (3 person-months) and a strategic divestment specialist (6 person-months)—will be

22 Project Administration Manual (Appendix 2).

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fielded. The experts will assist key government officials and ADBL management and staff in implementing the second phase of the ADBL restructuring, and the ADBL capital restructuring.23

IV. DUE DILIGENCE A. Economic 28. The assessment of Nepal’s performance in public finance management suggests the existence of a system that is well designed but unevenly implemented. There has nonetheless been progress toward the transparent and accountable management of public finances.24 All the formal financial institutions in Nepal are supervised by NRB and undergo rigorous inspection with various financial reporting requirements. NRB’s supervisory capacity has improved over the years under the government’s Financial Sector Reform Program. In addition, under subprogram 2, risks in public fiscal management will be controlled through records and accounts maintained by the government and the program implementing agencies in accordance with sound accounting principles. B. Governance 29. In recent years, the government has taken a number of initiatives to address corruption, including the Promoting Market Competition Act (2006); Right to Information Act (2007); Special Court Act (2002; amended in 2007); and Anti-Money Laundering Act (2008). The government has also passed the Public Procurement Act (2007) and the Public Procurement Regulations (2007), both generally acceptable to ADB and encompassing best international procurement practices. The government has also established a “procurement watchdog” in the form of the Public Procurement Monitoring Office under the Office of the Prime Minister and Council of Ministers. Furthermore, it has established the National Vigilance Centre under the direct supervision and control of the Prime Minister to control corruptions through preventive and promotional measures. RFSDCP is designed to reduce vulnerability to corruption by ensuring that (i) the boards of financial institutions can monitor corruption and mismanagement in their own institutions, and take action against these problems; (ii) all relevant institutions take adequate steps to improve corporate governance; (iii) all relevant institutions and the government give assurances that they will abide by the transparency and disclosure stipulations of the NRB; and (iv) rigorous monitoring mechanisms are put in place to ensure continuous, proper accountabilities of mandated actions and full funds flow management. C. Social and Poverty 30. The institutional restructuring and reform of RFIs will strongly emphasize inclusiveness while improving operational and financial efficiency. Further, the support for SFDB will include extending access to financial services to the most remote areas. The financial and performance monitoring of the institutional restructuring and reforms will cover outreach to marginalized groups and women.25 D. Safeguards 31. Adverse impact from policy and institutional reform actions on the environment, involuntary resettlements, and indigenous peoples is unlikely. The safeguard classification is C. The environmental implication of the SFDB restructuring for financial intermediation was

23 Agricultural Development Bank Limited Capital Restructuring Plan (Appendix 2). 24 Government of Nepal. 2008. An Assessment of the Public Financial Management Performance Measurement

Framework (Fiscal Year 2006). Kathmandu. 25 Summary Poverty Reduction and Social Strategy; Gender Action Plan (Appendix 2).

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assessed. Because of the micro scale of the investment activities of sub-borrowers, adverse environmental impact is unlikely. E. Risks and Mitigating Measures 32. With the appropriate mitigation measures in place, the overall risk of subprogram 2 is low. Key risks and mitigation measures are summarized in Table 4.26

Table 4: Summary of Risks and Mitigating Measures Risks Management Plan Procurement. The government’s limited capacity and knowledge of ADB’s procurement process may delay procurement.

A national consultant to the project coordinator who is familiar with ADB’s procurement guidelines will be placed at the executing agency to guide and supervise the procurement. Program staff will also be given intensive training in implementation.

Technical. The reform and restructuring of financial institutions involves complex technical tasks. The staff of the participating financial institutions may not have the necessary technical capacity to turn the institutions into modern financial institutions.

Staff of the participating financial institutions will be given comprehensive training in banking and financial subjects to meet the changing needs of the sector. In addition, a qualified chief technical adviser (international consultant) will lead and advise on all facets of the restructuring.

Labor union. Unions in the participating financial institutions may oppose the proposed restructuring.

During the preparation of subprogram 2, the ADBL management and the consultant team conducted extensive and continuous consultations with the unions, As a result, the second phase of the ADBL restructuring has their general support. Ongoing consultations and discussions with the unions will be conducted during the restructuring.

Economic. The recent international economic crisis may slow down the financial sector reform in Nepal.

Because of limited exposure to foreign investments and international capital markets, Nepal has been largely isolated from the recent crisis. It has made consistent progress in financial sector reform and the probability of sustained financial sector reform is high.

ADB = Asian Development Bank, ADBL = Agricultural Development Bank Limited. Source: Asian Development Bank estimates.

V. ASSURANCES AND CONDITIONS 33. ADB reserves the right to investigate, directly or through its agents, any violations of the Anticorruption Policy relating to subprogram 2. All contracts financed by ADB shall include provisions specifying the right of ADB to audit and examine the records and accounts of the executing agency and all program contractors, suppliers, consultants, and other service providers. Individuals and/or entities on ADB’s anticorruption debarment are ineligible to participate in ADB-financed activities and may not be awarded any contracts under subprogram 2. To support these efforts, relevant provisions are included in the loan and grant agreements for subprogram 2. 34. All consultants will be recruited according to ADB’s Guidelines on the Use of Consultants (2007, as amended from time to time). The procurement of goods, related services, and works financed by the grant will follow procedures outlined in the ADB’s Procurement Guidelines (2007, as amended from time to time). The grant proceeds will be disbursed in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time). No withdrawal of loan proceeds shall be made in respect of expenditures of the types described on ADB’s list of ineligible items.27 26 Risk Assessment and Risk Management Plan (Appendix 2). A peace filter for project design and implementation of

subprogram 2 will be available at ADB Nepal homepage. http://www.adb.org/Nepal/default.asp 27 List of Ineligible Items (Appendix 2).

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35. In addition to the standard assurances, the government and MOF have given the following assurances, which are incorporated in the legal documents:

(i) The government will (a) maintain the policies adopted and actions taken prior to the date of the loan agreement for the loan for subprogram 2, as described in the development policy letter and the policy matrix, for the duration of the RFSDCP and subsequently; (b) promptly adopt the other policies and the other actions as specified in the development policy letter and the policy matrix; and (c) ensure that such policies and actions continue in effect for the duration of RFSDCP and subsequently.

(ii) The government and the program implementing agencies will ensure that throughout the implementation of the grant project, adequate budgetary allocations of the required counterpart funds are made, approved, and released in a timely manner to ensure proper project implementation.

VI. RECOMMENDATION

36. I am satisfied that the proposed loan and grant would comply with the Articles of Agreement of the Asian Development Bank (ADB) and, acting in the absence of the President, under the provisions of Article 35.1 of the Articles of Agreement of ADB, I recommend that the Board approve

(i) the increase in the sector development program cluster amount from $91,000,000 to $116,400,000 for the Rural Finance Sector Development Cluster Program in Nepal;

(ii) the loan in various currencies equivalent to SDR39,290,000 to Nepal for subprogram 2 of the Rural Finance Sector Development Cluster Program from ADB’s Special Funds resources, with an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; for a term of 24 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan and program agreements presented to the Board; and

(iii) the grant not exceeding $12,100,000 to Nepal, from ADB’s Special Funds

resources, for the Second Rural Finance Sector Development Project, on terms and conditions that are substantially in accordance with those set forth in the draft grant and project agreements presented to the Board.

C. Lawrence Greenwood, Jr. Vice-President (Operations 2)

21 May 2010

Appendix 1

11

DESIGN AND MONITORING FRAMEWORK

Design Summary

Performance Targets and Indicators with Baselines

Data Sources and Reporting Mechanisms

Assumptions and Risks

Impact Economic growth and poverty reduction in rural areas

Access to credit by rural poor increases from 1 million accounts in 2008 to 1,170,000 accounts by 2012. Access to financial services in the disadvantaged hills and mountain areas increases from 10,000 accounts in 2008 to 30,000 accounts by 2012. Women’s access to finance increases from 200,000 accounts in 2008 to 283,000 accounts by 2012.

Economic reform program assessment Baseline study and impact monitoring report Nepal Rastra Bank (NRB) reports Program completion report Asian Development Bank (ADB) evaluation reports Program impact study

Assumptions Stable and favorable macroeconomic conditions Risk Changes in policy environment that discourage further financial sector reform and liberalization

Outcomea Inclusive rural finance system that is more sound and efficient, and has wider outreach

Credit outreach of Agricultural Development Bank Limited (ADBL) increases from 200,000 accounts in January 2010 to 250,000 accounts (of which 20% are women) by 2012. Credit outreach of Small Farmers Development Bank (SFDB) increases from 140,000 accounts in 2008 to 360,000 accounts (of which 60% are women) by the end of 2013. At least 60 cooperatives start providing microcredit in the hills and mountains by end 2011. National Banking Training Institute (NBTI) provides training to approximately 400 rural finance practitioners annually from 2010. Pending cases at the Debt Recovery Tribunal (DRT) reduced from 830 in 2008 to 530 by end 2012.

Program reports Program reviews (semiannual, annual, and midterm) Audit reports ADBL reports ADB review missions Program completion report Program performance evaluation report NRB reports Reports of financial institutions Parliamentary briefings Reports of the government auditor general

Assumptions The government’s commitment to market-based economic policy Autonomy and independence of NRB, the central bank The government’s commitment to maintain the financial sector reform policy Risks political interference by the government in financial institutions Insufficient regulatory enforcement by NRB

Outputs 1. Supportive Legal

and Regulatory Framework

An act for the regulation and supervision of rural and microfinance institutions An autonomous regulatory authority for rural and microfinance institutions

A Micro Finance Act is submitted to the Parliament by June 2010. A regulatory authority starts licensing and supervising rural and microfinance institutions by end 2011.

Program reports Program reviews ADB review missions Memorandum of association, articles of association, and banking license of SFDB, Grameen Bikash Banks (GBBs) NRB reports Reports of financial institutions

Assumption Lead role for NRB in establishing an independent regulatory authority Risks Lack of adequate support for rural and microfinance institutions to meet the regulatory requirements Delay in the approval of the Micro Finance Act by the Parliament

Appendix 1

12

Design Summary

Performance Targets/Indicators

Data Sources/Reporting Mechanisms

Assumptions and Risks

2. ADBL Institutional Restructuring and Reforms

Reduced government ownership and increased private sector participation in ADBL Improved ADBL financial and operating performance 3. SFDB Institutional

Restructuring and Reforms

Reduced government ownership and increased private sector participation in SFDB Improved SFDB financial and operating performance Improved access to financial services in hills and mountain areas 4. GBB Institutional

Restructuring and Reforms

Reduced government ownership and increased private sector participation at GBBs 5. Sector Capacity

Building NBTI training programs in finance, banking, and rural and microfinance subjects for a wide range of financial institutions

The initial public offering of ADBL is completed by Q2 2010. Equity investment by a strategic investor and privatization of ADBL are achieved by Q4 2011. Financial and operating performance indicators are achieved according to the second phase of the ADBL restructuring plan for 2010–2011. ADBL share at SFDB is divested to the private sector or small farmers cooperatives by end 2013. Financial and operating performance indicators are achieved according to the SFDB restructuring plan for 2010–2011. At least 50 cooperatives with 30,000 members (of which 60% are women), in the hills and mountains, receive onlending support from SFDB for 2010–2011. NRB share at the Far Western GBB is divested according to the NRB Act by end-2010 NBTI is established and training operations begin by Q2 2010. Regional training begins by Q2 2010. Long-term accredited diploma and degree programs begin by Q4 2011.

Assumption The government’s commitment to implement the ADBL divestment plan Risk Change in the financial sector reform policy due to a change in government Assumption The government’s commitment to implement the SFDB restructuring plan Risk Political interference by the government in SFDB operations Assumptions No further deterioration in the GBBs’ net worth position Risk Political interference by the government in GBB operations Assumptions Enough demand for training programs at NBTI Risks Declining interest among participating financial institutions to maintain NBTI after the program implementation period

Appendix 1

13

Design Summary

Performance Targets/Indicators

Data Sources/Reporting Mechanisms

Assumptions and Risks

6. Enabling Infrastructure for Rural Finance

Credit information services to microfinance institutions by the Credit Information Bureau (CIB) DRT capacity development

CIB begins credit information services to microfinance institutions by Q1 2011. DRT capacity development support is provided by end 2011.

Assumption Enough demand from microfinance institutions for credit information service Risk Lack of strong enforcement of debt recovery laws and regulations

Activities with Milestones (subprogram 2) 1. Supportive Legal and Regulatory Framework

- Completion of drafting of the act (Q1 2010) - Establishment of rules, regulations, and processes for supervision and regulation of

rural and microfinance institutions (Q2 2010; timeline target subject to change depending on the approval of the Micro Finance Act by the Parliament)

- Incorporation and establishment of a regulatory authority (Q3 2010) - Training and information dissemination to rural and microfinance institutions

(Q2 2010 onward) - Start of licensing and supervision of rural and microfinance institutions (Q4 2010

onward) 2. ADBL Institutional Reforms and Restructuring

- Completion of the initial public offering (by Q2 2010) - Implementation of the second phase of ADBL restructuring (2010–2012) - Implementation of the ADBL capital restructuring (2010–2012) - Review of the ADBL financial and operating performance (Q4 2010 and 2011) - Start of divestment to a strategic investor and recruitment of a strategic divestment

adviser (Q2 2010) - Completion of divestment (privatization) of ADBL (Q4 2011) - Review of the implementation of the ADBL capital restructuring (Q1 2011) - Performance review of the implementation of the second phase of the restructuring

(Q1 2011) 3. SFDB Institutional Reform and Restructuring

- Implementation of the SFDB restructuring plan (2010–2012) - Review of SFDB financial and operating performance (Q4 2010) - Development of the SFDB divestment plan for an initial public offering (Q1 2011) - Cooperative business plan development and capacity development support in the

hills and mountains (Q3 2011) - Self-help group mapping and conversion into cooperatives (Q4 2011) - Onlending support to microfinance nongovernment organizations and cooperatives

(2010–2011) 4. GBB Institutional Reform and Restructuring

- Divestment of NRB shares in the Far Western GBB (Q3 2010) - Completion of the privatization of the Far Western GBB (Q4 2011) - Review of GBB financial and operating performance (Q4 2010)

5. Sector Capacity Building - Incorporation and establishment of NBTI (Q1 2009) - Start of training programs in Kathmandu area (Q2 2010) - Start of training programs in other regions (Q4 2010) - Start of diploma and degree programs (Q4 2011)

6. Enabling Infrastructure for Rural Finance - Staff capacity development and institutional training for microfinance institutions

(Q3–Q4 2010) - Operation of microfinance unit at CIB (Q4 2010) - Recruitment of legal officer, financial officer, management information system

specialist (Q2–Q4 2010) for DRT - Development of DRT operating manuals (Q4 2010–Q1 2011) - DRT staff training and workshop (Q4 2010–Q2 2011)

Inputs (subprogram 2) Program Loan: ADB $60.4 million Supervision and regulation of semiformal rural and microfinance institutions ($5 million) ADBL privatization ($20 million) Voluntary retirement scheme ($10 million) Rural finance outreach ($20 million) Credit information enhancement ($3.2 million) DRT enhancement ($2.2 million) Project Grant: ADB $12.1 million Office equipment ($0.2 million) MIS equipment ($5.7 million) International consulting services ($1.8 million) National consulting services ($2.1 million) Training ($0.3 million) Credit line ($2.0 million) Technical Assistance Grant: ADB $200,000 Inputs in: Consultant remuneration ($180,000) Consultant International and Local travel ($8,000) Consultants reports ($1,000) Miscellaneous Administration and Support Costs ($1,000) Contingency ($10,000)

a Sex-disaggregated data will be monitored through the existing management information system in each implementing agency.

Source: Asian Development Bank.

14 Appendix 2

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=36169-02-3

1. Agreements

Loan Agreement

Grant Agreement

Program Agreement

Project Agreement

2. Summary Sector Assessment

Rural Finance Sector

3. Project Administration Manual

4. Project Classification Summary

5. Contribution to the ADB Results Framework

6. Development Coordination

7. Country Economic Indicators

8. International Monetary Fund Assessment Letter

9. Summary Poverty Reduction and Social Strategy

10. Gender Action Plan

11. Risk Assessment and Risk Management Plan

12. List of Ineligible Items

13. Others

Agricultural Development Bank Limited Capital Restructuring Plan

Summary Small Farmers Development Bank Second Phase Restructuring Plan

Summary Strategies for Expanding Microfinance Services in Hills and Mountains

Appendix 3

15

DEVELOPMENT POLICY LETTER

16 Appendix 3

Appendix 3

17

18 A

ppendix 4

Sub-programme II Policy Matrix First Tranche

Actions – May 2010

Status of First Tranche Actions as of May 2010 Second Tranche Actions

May 2010–June 2012 (i) Supportive Legal and Regulatory Framework

Approval of a draft Micro Finance Act, in form and substance satisfactory to the Asian Development bank (ADB), by the Nepal Rastra Bank (NRB) Drafting Committee. (Approved Act, NRB Drafting Committee Approval)

NRB has revised the draft Micro Finance Act incorporating the issues and concerned raised in the roundtable discussion with the Government, NRB, private financial institutions, and legal and financial sector experts held in November 2009. The NRB Drafting Committee has approved the draft on 14 March 2010. The Nepali version and an English translation of the draft Microfinance Act were sent to ADB on 29 March 2010.

Adoption of a legal framework and establishment of a supervisory authority (second tier institution [STI]) for the regulation and supervision of microfinance activities and institutions (Copy of relevant Act/Ordinance, Certificate of Registration of STI, Articles and Memorandum of Association) Formation and operationalization of the board of director for STI (STI Notification, Articles and Memorandum of Association, Minutes of Meetings ) Adoption and publication of essential regulations, guidelines, policies and standards to regulate microfinance activities and institutions (Regulations, Licensing Procedures, and Schedules, STI Approval) Commencement of processing and award of licenses to microfinance institutions under applicable legal and regulatory framework (STI Report)

(ii) Institutional Restructuring and Reform a) Agricultural Development Bank Limited (ADBL)

Adoption of the second phase Agricultural Development Bank Limited (ADBL) Restructuring plan in form and substance acceptable to ADB. (the 2nd phase ADBL Restructuring Plan, ADBL Board Approval) Approval from the Securities Board to open the initial public offering of 9.6 million ADBL shares (Securities Board Approval) A Government confirmation that its irredeemable preference shares in the capital of ADBL in the amount of NRs6.4 billion are non-cumulative (Ministry of Finance [MOF] Notification, Acknowledgement from ADBL Board)

Board of Directors and senior management of ADBL approved the second phase ADBL restructuring plan on 30 March 2010. The initial public offering was opened on 4 April 2010 and closed 8 April 2010. The shares were oversubscribed by three times. The Nepali version of the prospectus was sent to ADB for information on 15 March 2010. The Government of Nepal has confirmed by ministerial level decision dated 21 August 2009 that its irredeemable preference shares are non-cumulative. A copy of ADBL's board acknowledgement was sent to ADB on 23 March 2010.

Completion of an ADBL general meeting resulting in (i) election of four members of the board of directors from among ADBL's group B shareholders; (ii) approval of the decision that the Government's irredeemable preference shares of NRs6.4 billion are non-cumulative; and (iii) approval of the decision to convert the Government's redeemable preference share of NRs2.3 billion into 6% debenture. (ADBL General Meeting Resolution) ADBL’s review and agreement with the Government on a conversion of the Government's irredeemable, non-cumulative preference shares into debenture (i) to the extent consistent with sound banking practice and (ii) on terms and conditions acceptable to ADB. (ADBL report, minutes of relevant ADBL Board meeting, MOF Approval)

POLICY MATRIX

Appe

ndix 4

19

Sub-programme II Policy Matrix First Tranche

Actions – May 2010

Status of First Tranche Actions as of May 2010 Second Tranche Actions

May 2010–June 2012 A Government notification that it has approved the conversion of its redeemable preference shares in the capital of ADBL in the amount of NRs2.3 billion into 6% debenture. (MOF notification, ADBL Board Resolution) The Government’s adoption of the ADBL Capital Restructuring Plan (2010). (Approved ADBL Capital Restructuring Plan, MOF Approval) Completion of ADBL Audit for the fiscal year 2009 (ADBL Audit Reports)

The Government of Nepal has decided by the ministerial level decision dated 21 August 2009 on the conversion of the redeemable preference share at ADBL of NRs2.3 billion into debenture under following terms and conditions. Interest rate for the debenture will be 6% and should

be paid in July and January every year. Debenture should be repaid as follows: (i) 5 year

debenture of NRs0.46 billion, (ii) 6 year debenture of NRs0.46 billion, (iii) 7 year debenture of NRs0.46 billion, (iv) 8 year debenture of NRs0.46 billion, and (v) 9 year debenture of NRs0.46 billion.

The board of directors (BOD) and senior management of ADBL has reviewed the Capital Restructuring Plan and forwarded the plan for MOF approval. MOF approval is expected soon. ADBL audit has been completed. NRB has also granted approval for publication of final financial statements for the year ending 15 July, 2009.

Confirmation that the accounts payable by the Government to ADBL amount to 3% or less of ADBL's shareholders' equity. (ADBL Confirmation) Achievement of critical financial performance indicators and at least 2/3 of the action plan implementation indicators set out in the 2nd phase ADBL Restructuring Plan. (ADBL Progress Report, ADBL Audit Report) Transfer of Government's shares in the capital of ADBL to a strategic investor substantially in accordance with the ADBL Capital Restructuring Plan. (Confirmation from ADBL Company Secretary, MOF Notification) Recruitment of a chief executive officer (CEO) for ADBL on a competitive and transparent basis. (ADBL Board Approval, ADBL Recruitment Notice, ADBL Recruitment Committee Evaluation Report)

b) Small Farmer Development Bank Ltd (SFDB) Adoption of the 2nd phase Small Farmers Development Bank (SFDB) restructuring plan in form and substance acceptable to ADB (2nd phase SFDB Restructuring Plan, SFDB Board Approval, ADBL Endorsement, Government [MOF] Endorsement) Recruitment of CEO on a competitive and transparent basis. (SFDB Board Approval, SFDB Recruitment Notice, SFDB Recruitment Committee Evaluation Report) Adoption of Strategies for Expanding Microfinance Services in the Hills and Mountains in the form and substance acceptable to ADB. (Approved Strategies, SFDB Board Approval)

BOD of SFDB has approved the second phase restructuring plan on 17 February 2010 and is in the process of soliciting endorsements from ADBL, the Government. SFDB board recruited a CEO through a competitive and transparent recruitment procedure in August 2009. BOD of SFDB has adopted the relevant Strategies on 17 February 2010.

Achievement of the milestones set out in the Second Phase SFDB Restructuring Plan. (SFDB Progress Report, SFDB Audit Report) Achievement of the performance indicators set out in the Strategies for Expanding Microfinance Services in Hills and Mountains. (SFDB Progress Report, SFDB Audit Report)

20 A

ppendix 4

Sub-programme II Policy Matrix First Tranche

Actions – May 2010

Status of First Tranche Actions as of May 2010 Second Tranche Actions

May 2010–June 2012 c) Grameen Bikas Banks (GBB)

Divestment of the Government's stake in the share capital of Central, Mid-Western, Western, and Eastern GBBs to 25% or less of the issued and outstanding capital (NRB Report, NRB Notice of Transfer of Ownership)

Central, Mid-Western, Western, and Eastern GBBs were privatized beginning from 2007 at different stages. First Western GBB was privatized followed by Eastern and Central GBB. Mid-Western GBB was privatized in May 2009. A NRB report, showing that the Government's share in each of these entities has been reduced to the required level was provided to ADB on 28 March 2010.

Divestment of NRB's stake in the share capital of the Far Western GBB to 10% or less, as prescribed by the NRB Act. (NRB Report, NRB Notice of Transfer of Ownership)

(iii) Sector Capacity Building Incorporation of National Banking Training Institute (NBTI). (Certificate of incorporation, Articles and Memorandum of Association) Formation and meetings of NBTI board of directors. (NBTI Articles of Association and Minutes of meeting) Recruitment of a CEO for NBTI on a competitive and transparent basis. (NBTI Recruitment Notice, NBTI Recruitment Committee Evaluation Report, NBTI Board Approval NBTI Board Approval) Adoption of an initial NBTI operational plan (2010-2012) in form and substance acceptable to ADB. (Approved NBTI Operational Plan, NBTI Board Approval)

NBTI was registered as a company under the Company Act 2006 in March 2009. NBTI BOD was formed in March 2009 and has conducted a number of meetings since. NBTI has recruited a CEO on December 2009 and the CEO has joined NBTI from 17 January, 2010. NBTI has provided ADB with a copy of its initial operational plan on 12 March 2010.

Commencement of training programs at NBTI substantially in accordance with the NBTI operational plan (2010-2012). (NBTI Progress Report, NBTI Board Approval) Review of the NBTI operational plan. (NBTI Review Report)

(iv) Enabling Rural Finance Infrastructure Credit Information Bureau (CIB) has announced its decision to offer credit information services to microfinance institutions. (CIB Board Approval)

Credit Information Bureau has notified ADB of its decision to start offering credit information services to microfinance institutions on 11 March 2010.

Commencement of data collection from microfinance institutions. (CIB Progress Report) Commencement of membership registration of microfinance institutions. (CIB Progress Report) Review of the operation of its microfinance credit information services. (CIB Review Report)