OFFOAL DOCUMENTS1 CREDIT NUMBER 5282-NP Financing Agreement (Financial Sector Stability Credit) between Nepal and INTERNATIONAL DEVELOPMENT ASSOCIATION Dated -UL \ ,2013 FINANCING AGREEMENT AGREEMENT dated T LA 1l , 2013, entered into between NEPAL ("Recipient") and the INTERNATIONAL DEVELOPMENT ASSOCIATION ("Association") for the purpose of providing financing in support of the Program (as defined in the Appendix to this Agreement). The Association has decided to provide this financing on the basis, inter alia of: (a) the actions which the Recipient has already taken under the Program and which are described in Section I of Schedule I to this Agreement, and (b) the Recipient's maintenance of an adequate macroeconomic policy framework. The Recipient and the Association therefore hereby agree as follows: ARTICLE I - GENERAL CONDITIONS; DEFINITIONS 1.01. The General Conditions (as defined in the Appendix to this Agreement) constitute an integral part of this Agreement. 1.02. Unless the context requires otherwise, the capitalized terms used in this Agreement have the meanings ascribed to them in the General Conditions or in the Appendix to this Agreement. ARTICLE II - FINANCING 2.01. The Association agrees to extend to the Recipient, on the terms and conditions set forth or referred to in this Agreement, a credit in an amount equivalent to nineteen million nine hundred thousand Special Drawing Rights (SDR 19,900,000) (variously, "Credit" and "Financing"). 2.02. The Recipient may withdraw the proceeds of the Financing in support of the Program in accordance with Section II of Schedule I to this Agreement. 2.03. The Maximum Commitment Charge Rate payable by the Recipient on the Unwithdrawn Financing Balance shall be one-half of one percent (1/2 of 1%) per annum. 2.04. The Service Charge payable by the Recipient on the Withdrawn Credit Balance shall be equal to three-fourths of one percent (3/4 of 1%) per annum. 2.05. The Payment Dates are May 15 and November 15 in each year. 2.06. The principal amount of the Credit shall be repaid in accordance with repayment schedule set forth in Schedule 2 to this Agreement. 2.07. The Payment Currency is Dollars. -2- ARTICLE III - PROGRAM 3.01. The Recipient declares its commitment to the Program and its implementation. To this end: (a) the Recipient and the Association shall from time to time, at the request of either party, exchange views on the Recipient's macroeconomic policy framework and the progress achieved in carrying out the Program; (b) prior to each such exchange of views, the Recipient shall furnish to the Association for its review and comment a report on the progress achieved in carrying out the Program, in such detail as the Association shall reasonably request; and (c) without limitation upon the provisions of paragraphs (a) and (b) of this Section, the Recipient shall promptly inform the Association of any situation that would have the effect of materially reversing the objectives of the Program or any action taken under the Program including any action specified in Section I of Schedule I to this Agreement. ARTICLE IV - REMEDIES OF THE ASSOCIATION 4.01. The Additional Event of Suspension consists of the following: that a situation has arisen which shall make it improbable that the Program, or a significant part of it, will be carried out. ARTICLE V - EFFECTIVENESS; TERMINATION 5.01. The Additional Condition of Effectiveness consists of the following: that the Association is satisfied with the progress achieved by the Recipient in carrying out the Program and with the adequacy of the Recipient's macroeconomic policy framework. 5.02 The Effectiveness Deadline is the date ninety (90) days after the date of this Agreement. -3- ARTICLE VI - REPRESENTATIVE; ADDRESSES 6.01. The Recipient's Representative is its Secretary, Ministry of Finance. 6.02. The Recipient's Address is: Ministry of Finance Government of Nepal Singha Durbar Kathmandu Nepal Facsimile: (977-1) 4211-164 6.03. The Association's Address is: International Development Association 1818 H Street, N.W. Washington, D.C. 20433 United States of America Cable address: Telex: Facsimile: INDEVAS 248423(MCI) 1-202-477-6391 Washington, D.C. -4- AGREED at Kathmandu, Nepal, as of the day and year first above written. NEPAL By Authorized Representative Name: Shdd v r)4 Subpd Title: ro11eC )C qcVA4y INTERNATIONAL DEVELOPMENT ASSOCIATION By Authorized Representative Name: 1-0jse-e)'j -A e Title: COtAY t MA VA j -5- SCHEDULE I Program Actions; Availability of Financing Proceeds Section I. Actions Taken Under the Program The actions taken by the Recipient under the Program include the following: 1. The first phase of a time bound recapitalization plan for RBB has been approved by NRB and completed, including a cash injection from the Recipient of NPR 4.32 billion and the conversion of a loan of NPR 3 billion from the Recipient into capital. 2. The first phase of a time bound recapitalization plan for NBL has been approved by NRB and completed, including: (i) a cash subscription from the Recipient of NPR 1.37 billion in advance payment for rights offering shares, (ii) the publication of a notice for tenders from the public for the sale of non-banking assets of NBL with an estimated value of NPR I billion; and (iii) the initiation of a rights offering for private shareholders to purchase NBL shares with a value of up to NPR 2.2 billion. 3. NRB has approved a program of in-depth diagnostics for a list of financial institutions whose aggregate assets represent over 50% of the total banking assets in the territory of the Recipient, including approval of the terms of reference of the diagnostic and the initial list of the institutions on which diagnostics will be performed. 4. NRB has established a bank resolution desk and approved a bank resolution manual. 5. NRB has, in May 2011 and October 2012, respectively, issued a bylaw and amendments to the bylaw, as provided for under the NRB Act, to facilitate mergers of financial institutions so as to consolidate and strengthen the financial sector. 6. The moratorium on new license applications for Class A, B and C financial institutions, as defined in BAFIA, and evidenced by no acceptance of banking license applications in 2012, has been maintained- 7. The Draft Bill on Deposit and Credit Guarantee Trust has been endorsed by MOF for submission to the Recipient's Cabinet. -6- 8. Amendments to the NRB Act providing NRB with modernized tools for bank resolution have been approved by NRB Board and further endorsed by MOF. 9. The President of the Recipient has promulgated the Mutual Legal Assistance Ordinance, Extradition Ordinance and Organized Crime Ordinance. Section II. Availability of Financing Proceeds A. General. The Recipient may withdraw the proceeds of the Financing in accordance with the provisions of this Section and such additional instructions as the Association may specify by notice to the Recipient. B. Allocation of Financing Amounts. The Financing is allocated in a single withdrawal tranche, from which the Recipient may make withdrawals of the Financing. The allocation of the amounts of the Financing to this end is set out in the table below: Allocations Amount of the Financing Allocated (expressed in SDR) (1) Single Withdrawal Tranche 19,900,000 TOTAL AMOUNT 19,900,000 C. Withdrawal Tranche Release Conditions. No withdrawal shall be made of the Single Withdrawal Tranche unless the Association is satisfied (a) with the Program being carried out by the Recipient, and (b) with the adequacy of the Recipient's macroeconomic policy framework. D. Deposits of Financing Amounts. Except as the Association may otherwise agree: 1. all withdrawals from the Financing Account shall be deposited by the Association into an account designated by the Recipient and acceptable to the Association; and 2. the Recipient shall ensure that upon each deposit of an amount of the Financing into this account, an equivalent amount is accounted for in the Recipient's budget management system, in a manner acceptable to the Association. E. Excluded Expenditures. The Recipient undertakes that the proceeds of the Financing shall not be used to finance Excluded Expenditures. If the Association -7- determines at any time that an amount of the Financing was used to make a payment for an Excluded Expenditure, the Recipient shall, promptly upon notice from the Association, refund an amount equal to the amount of such payment to the Association. Amounts refunded to the Association upon such request shall be cancelled. F. Closing Date. The Closing Date is December 31, 2013. -8- SCHEDULE 2 Repayment Schedule Date Payment Due Principal Amount of the Credit repayable (expressed as a percentage)* On each May 15 and November 15: commencing November 15, 2023, to and including 1% May 15, 2033 commencing November 15, 2033, to and including 2% Ma 15, 2053 * The percentages represent the percentage of the principal amount of the Credit to be repaid, except as the Association may otherwise specify pursuant to Section 3.03 (b) of the General Conditions. -9- APPENDIX Section I. Definitions 1. "BAFIA" means the Recipient's Banks and Financial Institutions Act, 2063 (2006), as amended from time to time. 2. "Draft Bill on Deposit and Credit Guarantee Trust" means the draft bill providing for the establishment and operation of a deposit guarantee fund for the protection of rights and interests of depositors. 3. "Excluded Expenditure" means any expenditure: (a) for goods or services supplied under a contract which any national or international financing institution or agency other than the Association or the Bank has financed or agreed to finance, or which the Association or the Bank has financed or agreed to finance under another credit, grant or loan; (b) for goods included in the following groups or sub-groups of the Standard International Trade Classification, Revision 3 (SITC, Rev.3), published by the United Nations in Statistical Papers, Series M, No. 34/Rev.3 (1986) (the SITC), or any successor groups or subgroups under future revisions to the SITC, as designated by the Association by notice to the Recipient: Group Sub-group Description of Item 112 Alcoholic beverages 121 Tobacco, un-manufactured, tobacco refuse 122 Tobacco, manufactured (whether or not containing tobacco substitutes) 525 Radioactive and associated materials 667 Pearls, precious and semiprecious stones, unworked or worked 718 718.7 Nuclear reactors, and parts thereof; fuel elements (cartridges), non-irradiated, for nuclear reactors 728 728.43 Tobacco processing machinery 897 897.3 Jewelry of gold, silver or platinum group metals (except watches and watch cases) and goldsmiths' or silversmiths' wares (including set gems) 971 Gold, non-monetary (excluding gold ores and concentrates) - 10- (c) for goods intended for a military or paramilitary purpose or for luxury consumption; (d) for environmentally hazardous goods, the manufacture, use or import of which is prohibited under the laws of the Recipient or international agreements to which the Recipient is a party[, and any other goods designated as environmentally hazardous by agreement between the Recipient and the Association]); (e) on account of any payment prohibited by a decision of the United Nations Security Council taken under Chapter VII of the Charter of the United Nations; and (f) with respect to which the Association determines that corrupt, fraudulent, collusive or coercive practices were engaged in by representatives of the Recipient or other recipient of the Financing proceeds, without the Recipient (or other such recipient) having taken timely and appropriate action satisfactory to the Association to address such practices when they occur. 4. "Extradition Ordinance" means the ordinance promulgated by the President of the Recipient on June 18, 2012 providing a legal framework for dealing a framework for extradition, including procedures and requirements, in line with international standards. 5. "General Conditions" means the "International Development Association General Conditions for Credits and Grants", dated July 31, 2010 with the modifications set forth in Section II of this Appendix. 6. "MOF" means the Recipient's Ministry of Finance, or any successor thereto. 7. "Mutual Legal Assistance Ordinance" means the ordinance promulgated by the President of the Recipient on June 18, 2012 providing a legal framework for mutual legal assistance between Nepal and other countries, in line with international standards. 8. "NBL" means the Recipient's Nepal Bank Limited, or any successor thereto. 9. "NPR" means Nepalese Rupees, the currency of the Recipient. Vflie 6rackftedcfause to 6e includedif agreement has 6een reacebetween the Recipient an tie Association on a list ofgoods designatedas environmentaffy lazardous for purposes of this Financing, rliis wilT6e recordedin the agreedminutes of negotiations. 10. "NRB Act" means the Recipient's Nepal Rastra Bank Act, 2058 (2002) providing for the establishment of Nepal Rastra Bank to carry out the function of the Central Bank, as amended from time to time. 1. "Organized Crime Ordinance" means the ordinance promulgated by the President of the Recipient on February 15, 2013, providing a legal framework for dealing with organized international crime, including terrorism, trafficking and money laundering, in line with international standards. 12. "Program" means the program of actions, objectives and policies designed to strengthen the institutional, legal and regulatory framework for prompt corrective action and effective resolution of financial institutions, and enhance compliance of prudential regulations by key systemic financial institution, and set forth or referred to in the letter dated May 14, 2013, from the Recipient to the Association declaring the Recipient's commitment to the execution of the Program, and requesting assistance from the Association in support of the Program during its execution. 13. "RBB" means the Recipient's Rastriya Banijya Bank, or any successor thereto. 14. "Single Withdrawal Tranche" means the amount of the Financing allocated to the category entitled "Single Withdrawal Tranche" in the table set forth in Part B of Section II of Schedule I to this Agreement. Section H. Modifications to the General Conditions The modifications to the General Conditions are as follows: I. The last sentence of paragraph (a) of Section 2.03 (relating to Applications for Withdrawal) is deleted in its entirety. 2. Sections 2.04 (Designated Accounts) and 2.05 (Eligible Expenditures) are deleted in their entirety, and the remaining Sections in Article II are renumbered accordingly. 3. Sections 4.01 (Project Execution Generally), and 4.09 (Financial Management; Financial Statements: Audits) are deleted in their entirety, and the remaining Sections in Article IV are renumbered accordingly. 4. Paragraph (a) of Section 4.05 (renumbered as such pursuant to paragraph 3 above and relating to Use of Goods, Works and Services) is deleted in its entirety. 5. Paragraph (c) of Section 4.06 (renumbered as such pursuant to paragraph 3 above) is modified to read as follows: - 12 - "Section 4.06. Plans; Documents; Records (c) The Recipient shall retain all records (contracts, orders, invoices, bills, receipts and other documents) evidencing expenditures under the Financing until two years after the Closing Date. The Recipient shall enable the Association's representatives to examine such records." 6. Section 4.07 (renumbered as such pursuant to paragraph 3 above) is modified to read as follows: "Section 4.07. Program Monitoring and Evaluation ... (c) The Recipient shall prepare, or cause to be prepared, and furnish to the Association not later than six months after the Closing Date, a report of such scope and in such detail as the Association shall reasonably request, on the execution of the Program, the performance by the Recipient and the Association of their respective obligations under the Legal Agreements and the accomplishment of the purposes of the Financing." 7. The following terms and definitions set forth in the Appendix are modified or deleted as follows, and the following new terms and definitions are added in alphabetical order to the Appendix as follows, with the terms being renumbered accordingly: (a) The definition of the term "Eligible Expenditure" is modified to read as follows: "'Eligible Expenditure' means any use to which the Financing is put in support of the Program, other than to finance expenditures excluded pursuant to the Financing Agreement." (b) The term "Financial Statements" and its definition as set forth in the Appendix are deleted in their entirety. (c) The term "Project" is modified to read "Program" and its definition is modified to read as follows: "'Program' means the program referred to in the Financing Agreement in support of which the Financing is made." All references to "Project" throughout these General Conditions are deemed to be references to "Program".