Conformed Copy - C3727 - Financial Sector Technical Assistance Project - Supplemental Letter

NEPAL RASTRA BANK April 30, 2003 International Development Association 1818 H Street NW Washington, DC 20433 United States of America Re: NEPAL: Credit No. 3727 NEP (Financial Sector Technical Assistance Project) Paragraph 8 (a) of the Project Agreement Performance Monitoring Indicators Dear Sirs and Mesdames: This letter is with reference to paragraph 8 (a) of Schedule 2 to the Project Agreement of even date herewith between the International Development Association (the Association) and Nepal Rastra Bank for the above-captioned project (the Project). Unless agreed otherwise with the Association, Nepal Rastra Bank shall monitor and evaluate implementation of the Project in accordance with the Performance Monitoring Indicators attached to this letter. Very truly yours, NEPAL RASTRA BANK By /s/ Rajan Singh Bhandari Authorized Representative Attachment  Attachment NEPAL: Financial Sector Technical Assistance Project Key Performance Indicators \ Key Performance Data Collection Strategy Hierarchy of Objectives Indicators Critical Assumptions Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) Improve the efficiency and Comprehensive financial Periodic review of national Stability in the financial stability of the financial sector sector reform that eliminates accounts, NRB's monetary sector will help set the stage to facilitate private-sector led the need for (real or and financial data, and for longer term growth and growth and ongoing contingent) budgetary commercial bank audited more rapid poverty macroeconomic stability. support for the financial financial statements. alleviation in Nepal. system. Reorient the role of the state Periodic Economic and A lower level of Government in the financial sector from Sector Work, including a involvement within the that of an owner of financial Financial Sector Study financial sector will also free institutions to that of a (completed). up budgetary resources for regulator and supervisor of increased social sector the entire financial system. expenditures. A deeper and broader financial sector will also ultimately, have a positive impact upon rural banking in Nepal. Project Development Outcome / Impact Project reports: (from Objective to Goal) Objective Indicators: NRB operates independently A record of timely, effective, Annual Report of NRB and Sufficient political stability to and effectively regulates the and independent supervision and achieve the overall goals of banking sector to ensure that implementation of central implementation reports. the program. commercial banks operate on banking policies. a prudent and commercial basis. Timely and effective Periodic supervision and Positive response by the intervention by NRB to evaluation reporting. private sector to banking enforce prudential sector reforms leading to regulations and relevant higher levels of both banking legislation. domestic and foreign investment and consequent higher growth. Increased share of financial Commercial bank financial system owned and operated statements, NRB reports, and by private-sector players. supervision missions. Increase in range and Annual reports of sophistication of financial commercial banks and instruments and services supervision missions. available at competitive prices.  NEPAL: Financial Sector Technical Assistance Project Key Performance Indicators Key Performance Data Collection Hierarchy of Objectives Indicators Strategy Critical Assumptions Output from each Output Indicators: Project reports: (from Outputs to Objective) Component: Capacity of banking Production of timely quarterly NRB reports, supervision The Ministry of Finance is supervision department within off-site and annual on-site missions, midterm project willing to allow NRB to NRB strengthened to conduct banking supervision reports for reviews. enforce the bank supervisory examinations of financial each of the banks operating in regulations unfettered by institutions competently and Nepal with accompanying political considerations. undertake appropriate relevant analysis. remedial action. Review of the audited NRB is prepared to take swift financial statements of all and decisive action (even commercial banks. taking curatorship) when a bank is found to be in noncompliance with Central Bank requirements even when the bank is a publicly- owned institution. 2. Timely and reliable Production of good quality (to Review of draft legislation banking information international standards) audited and regulations. published for general use, financial data for the banks Supervision missions and improved central and within four months of the end midterm project reviews. commercial banking of the financial year. legislation (and Finalization of a new Central accompanying regulations) Banking Act (done) and a drafted and ready for Banking and Financial adoption. Institutions Act and associated regulations. 3. Progress made on Gradually improved financial Review of annual financial restructuring of RBB and health of RBB and NBL. statements. NBL. 4. Final decisions made on Progress made on: liquidation, privatization, (a) The promulgation of a new splitting, or other options for central banking and commercial RBB and NBL. banking act. (b) Issuance of new regulations for above legislation. (c) Revocation of existing restrictions on foreign accountancy companies from operating in Nepal. (d) Changed rules on majority banking ownership in Nepal. (e) Cessation of directed lending to priority sectors. 2  NEPAL: Financial Sector Technical Assistance Project Key Performance Indicators Key Performance Data Collection Strategy Hierarchy of Objectives Indicators Critical Assumptions Project Components / Sub- Inputs: (budget for each Project reports: (from Components to components: component) Outputs) 1. Re-engineering NRB. US$4.68 million, of which: Quarterly disbursement Close cooperation between IDA will finance US$2.64 reports; quarterly progress the World Bank, MOF and million, and reports and supervision NRB. DFID will finance US$1.56 reports. Close cooperation between million. the World Bank, the IMF, DFID, and the ADB. Accountancy skills can be developed or imported to meet the increased needs. 2. Restructuring the two US$24.43 million of which: HMGN is willing to privatize largest commercial banks, IDA will finance US$12.81 and/or liquidate the state- RBB and NBL. million, and DFID will owned banks and lose control finance US$8.10 million. over them as stated in official policy. Timely provision of counterpart funds as agreed in the project plan. 3. Capacity building in the US$0.99 million, of which: Institution building will be financial sector IDA will finance US$0.55 possible through a million, and commitment to skills' DFID will finance US$0.34 upgrading by financial sector million. participants. TOTAL Project Cost US$30.10 million IDA financing of US$16.00 million, DFID financing of US$10.00 million. HMGN will fiance the balance of US$4.10 million. 3