Nepal Rastra Bank

ACCESS TO FINANCIAL SERVICES PROJECT

The World Bank, UNDP and UNCDF are supporting the Government of Nepal (GON)’s efforts to increase access to financial services especially for urban micro and small enterprises (MSEs) and urban and rural low income households through Access to Financial Services Project.

The project consists of five closely interrelated components:

• I. A technical assistance fund to strengthen the capacity of financial institutions to expand access to new underserved market segments and to carry out a financial literacy campaign.
• II. Technical assistance to support reforms of the legal/regulatory and supervisory framework for microfinance, and the implementation of a secured transactions registry.
• III. A line of credit for financial institutions interested in serving MSE, especially previously unbanked ones.
• IV. Technical assistance to reform state-owned microfinance institutions, i.e., the Rural Self-Reliance Fund and the Regional Rural Development Banks.
• V. Technical assistance to fund a public information campaign, project implementation, monitoring and evaluation.
• Component (I) will be implemented by the Fund for Inclusive Finance (FIF), which will be managed by a private firm, components (II) to (V) will be implemented by the Advisory Services Team of Nepal Rastra Bank. These TORs refer to the procurement officer who will make up part of the AST.

Component I: Fund for Inclusive Finance

This component will be implemented by the Fund for Inclusive Finance (FIF), a new technical assistance fund. The Fund will have two windows and part will be used to cover the management cost of FIF.

Component II: Legal and Regulatory framework Reform

This component would have two sub-components, one supporting the reforms of the legal/regulatory and supervisory framework for microfinance, and the other supporting the implementation of a secured transactions registry. The implementing agency for this component will be the NRB.

Sub-Component II-A: Microfinance Legal and Regulatory Framework reform:

This component would support the drafting of a national microfinance policy/strategy, review and reform of the existing microfinance legal and regulatory framework and strengthening of the microfinance regulator. As part of project preparation a mapping of the microfinance sector is being conducted. The mapping will provide the information needed to develop criteria for determining which institutions should be licensed and regulated by NRB and which institutions might only have a reporting requirement to the regulator or some other institution. Under this component both goods and services will be procured.

Sub-Component II-B: Implementation of a Secured Transactions Registry:

The aim of this component is to i mplement the secured transactions law by creating a secured transactions registry, and by training the professionals involved in the implementation of the law (e.g., judges, lawyers, loan administration departments of banks, commercial courts, etc.).

In November 2006, the new Secured Transactions Law (ST Law) of Nepal was ratified by Nepal’s legislature. An integral part of this new law is the charges registry, i.e. a central database that will contain the details of all claims made on assets of a particular corporate or individual debtor.

While the ST Law sets out the basic framework for the registry there are many details that have to be resolved before implementation of the registry can begin. To speed up the implementation of this sub-component, a feasibility study will be conducted during project preparation. The key issues that the feasibility study will explore include: options for location of the registry (where does the capacity lie to implement the registry? How should access be controlled and what are the implications of these choices?), fee structure of the registration (does the fee structure in the new law need to be amended?), requirement for IT Infrastructure (what are the hardware, software and maintenance requirements for the registry?), most appropriate methods of search and registration (should filings be done on paper, electronically or both? Should there be one central registry office or regional outposts and should users be able to access the registry remotely from their own computers?).

On the basis of the outcomes of the feasibility study, the GoN will need to make the relevant policy choices, mostly by way of implementing regulations, and, on the basis of such policy choices, the registry will be implemented.

This sub-component will involve the procurement of the hardware, software and implementation of the IT system, of local and international legal expertise to assist in the implementation of the registry, design of a users’ guide targeted to both the financial and entrepreneurial community, and delivery of seminars and outreach events for lawyers, bankers and judges. The registry will be designed in a way that it will be technically expandable to the land registry.

Component III: MSE Lending:

This component includes a line of credit for commercial and/or development banks and/or finance companies interested in focusing on the MSME market, with a particular focus on MSMEs that are presently un-banked. The financing mechanism will give the participating financial institutions skills, technology, and market-based incentives to quickly build a large portfolio of good quality MSME loans. Since the success of the credit facility depends on application of the appropriate lending methodology, financial institutions will have access to funds under the credit facility only if they enter into a technical assistance agreement with FIF . The implementing agency for this component will be NRB.

Financial institutions will be selected in accordance with criteria agreed with the Bank and from a pool of five banks, development banks, and finance companies pre-screened by an international consultant. The screening criteria take into account financial condition, governance, institutional and management capacity, interest in and commitment to servicing MSMEs, willingness to adopt and mainstream the required policies and procedures, and commitment to hire and train new loan officers. The final selection of the first three PFIs will be carried out by a team of NRB staff, FIF staff and an international consultant, who will also train the Nepalese counterparts in due diligence methodologies. PFIs subsequently proposed for participation in the credit line will have due diligence performed on them by the AST and NRB, and will be subject to secondary screening by the Bank.

Component IV: Reforming state owned microfinance institution :

This component would support the transition of the Rural Self-Reliance Fund (RSRF) into an independently and professionally managed fund with a strong governance structure and the development of a restructuring plan for the regional rural development banks. This component would include the procurement of both goods and services. The implementing agency for this component will be NRB.

Sub-component IV-A: Professionalization of the RSRF:

RSRF is one of the two wholesale lenders for microfinance institutions (MFIs) in Nepal. A World Bank sponsored rating of RSRF conducted in 2006 concluded that RSRF financing to the smaller microfinance institutions is important for the sector’s growth, especially in remote areas. However, the rating identified a number of weaknesses in the fund, including weak governance and management and poor financial performance. These weaknesses are caused mainly by the fact that RSRF is not professionally managed and does not have an independent board. As a result, RSRF is often used as a development policy tool, by lending at an interest rate that does not allow for cost recovery, and has a poor track record in loan enforcement. In addition only half of RSRF funds have been disbursed to date, due to understaffing and long loan processing time. Recognizing that the independence of RSRF is a pre-requisite for its proper functioning, NRB has drafted an act that would spin RSRF off the central bank.

While the law is being finalized and is going through the approval process, this subcomponent will assist NRB to audit RSRF portfolio to assess its true value (before it is transferred to the balance sheet of the new institution) and to prepare a business plan for the new institution

Once NRB proposed legislation is approved and RSRF portfolio is transferred to a separate and independent entity, this sub-component will provide capacity building for the new RSRF, especially in those areas identified as key weaknesses in the rating. This will include:

• advisory services and training to improve RSRF’s portfolio-at-risk, by strengthening its recovery policy
• advisory services and training to develop new products
• governance training to the new Board and management of RSRF to ensure that there will be no political interference in RSRF’s lending (in terms of type of activity, interest rate and selection of partners) and to enshrine a culture of independence from the government
• purchase of a modern and customized MIS to help improve portfolio management and training to staff and management on how to use the new MIS
• development of an HR policy that would serve the needs of a microfinance wholesaler institution

Sub-component IV-B: Restructuring plan for the Regional Rural Development Banks:

This sub-component will assist the government take stock of the outcome of the 2001 privatization program and help identify viable options to improve the performance of the RRDBs, while keeping them focused on their original mandate to serve low income households. The sub-component will include:

• Audit and rating of all the five RRDBs to assess their current financial performance and their strengths and weaknesses
• Evaluation of the privatization of the Western and Eastern regional rural development banks. The evaluation will assess both the current financial performance of the two institutions as well as their current focus on their original mandate
• Reform plan for the all RRDBs (for those that have been privatized, the reform plan will take into account their new status) to ensure a better financial performance and their continued focus on low-income households. The proposed reform plan will include a few options as a way forward.

Component V: Public Information Campaign, Implementation, Monitoring and Evaluation:

This component includes both the development and execution of a public information campaign and support to the project Advisory Services Team (AST), the unit within NRB that will lead project preparation and implementation. The implementing agency for this component will be the NRB.

Sub-component V-A Public Information Campaign:

The sub-component w ill aim to build consensus for all the suggested reforms (e.g., the creation of the secured transactions registry), to communicate the key components and outcomes of the project to all stakeholders.

The project would support the acquisition of goods and services to carry out a series of communications campaigns. This effort will include:

• An awareness campaign targeting financial institutions introducing them to the FIF and explaining to them how they can benefit from it, and what they need to do to apply.
• An awareness campaign targeted at MFI’s to describe the new legal and regulatory framework for the microfinance industry and clarify the potential impact of the suggested changes.
• An awareness campaign targeting Nepali citizens, explaining the role, functioning and possible positive impact of establishing a Secured Transactions Registry and explaining the various legal and regulatory reforms that the project introduces, especially in terms of which institutions are supervised and which are not.

The target audience for this campaign will therefore be: financial institutions (Microfinance Development Banks, FINGOs, Commercial Banks, Development Banks, Financial Credit Cooperatives, Financial Companies, Remittance Companies, etc), t he Nepali public at large, Ministries and national organizations. Both services and goods will be procured under this component.

Sub-component V-B Implementation, Monitoring and Evaluation:

This sub-component would provide support to the AST by procuring required goods and services, including regional procurement experts.