UI NCIAL DN. Development Credit Agreement. Public Disclosure Authorized IT NUMBER 1696 NEP. Public Disclosure Authorized

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1 Public Disclosure Authorized UI NCIAL DN IT NUMBER 1696 NEP Public Disclosure Authorized Development Credit Agreement (Second Cottage and Small Industries Project) Public Disclosure Authorized between KINGDOM OF NEPAL and INTERNATIONAL DEVELOPMENT ASSOCIATION Public Disclosure Authorized Dated, 1986

2 CREDIT NUMBER 1696 NEP DEVELOPMENT CREDIT AGREEMENT AGREEMENT, dated O26', 1986, between KINGDOM OF NEPAL (her6inafter called the Borrower) and INTERNATIONAL DEVELOPMENT ASSOCIATION (hereinafter called the Association). WHEREAS (A) the Borrower, having satisfied itself as to the feasibility and priority of the Project described in Schedule 2 to this Agreement, has requested the Association to assist in the financing of the Project; (B) Part A (i) of the Project will be carried out by the Nepal Rastra Bank with the Borrower's assistance, and as part of such assistance, the Borrower will make available to the Nepal Rastra Bank part of the proceeds of the Credit as hereinafter provided; (C) The Borrower intends to contract from the United Nations Development Programme a grant (hereinafter called the UNDP Grant) in an amount equivalent to one million eight hundred thousand dollars ($1,800,000) to assist in financing the following Parts of the Project: A (ii), B (i) (except for establishment costs, Project staff salaries and allowances, and local expenditures for consultants' costs), B (ii), B (iv) (exclusively the foreign exchange expenditures), Part C (exclusively training and foreign expenditures of consultants' costs), Part D (consultants' costs) and E, on the terms and conditions set forth in an agreement (hereinafter called the UNDP Project Agreement) to be entered into between the Borrower and the United Nations Development Programme, including a provision for appointing an entity, satisfactory to the Association, as executing agency for such agreement; WHEREAS the Association has agreed, on the basis, inter alia, of the foregoing, to extend the Credit to the Borrower upon the terms and conditions set forth in this Agreement and in the Project Agreement of even date herewith between the Association and the Nepal Rastra Bank; NOW THEREFORE the parties hereto hereby agree as follows:

3 - 2 - ARTICLE I General Conditions; Definitions Section The "General Conditions Applicable to Development Credit Agreements" of the Association, dated January 1, 1985, with the modifications set forth in Schedule 5 to this Agreement (the General Conditions) constitute an integral part of this Agreement. Section Unless the context otherwise requires, the several terms defined in the General Conditions and in the Preamble to this Agreement have the respective meanings therein set forth and the following additional terms have the following meanings: (a) "Project Agreement" means the agreement between the Association and the Nepal Rastra Bank of even date herewith, as the same may be amended from time to time, and such term includes all schedules and agreements supplemental to the Project Agreement; (b) "Subsidiary Loan Agreement" means the agreement to be entered into between the Borrower and NRB pursuant to Section 3.01 (b) of this Agreement; (c) "NRB" means the Nepal Rastra Bank, the central bank of the Borrower, established and operating pursuant to the Nepal Rastra Bank Act, 2012 (1955) of the Borrower, as amended to the date of this Agreement; (d) "ADBN" means the Agricultural Development Bank of Nepal established and operating pursuant to the Agricultural Development Act, 2024 (1967) of the Borrower, as amended to the date of this Agreement; (e) "Participating Credit Institutions" and the acronym "PCIs" mean the Nepal Bank Limited, Rastriya Banijya Bank and ADBN, including their Branches, and such other credit institutions as the Borrower, the Association and NRB may from time to time agree; (f) "Investment Enterprise" means an enterprise which is either a CSI or a Market Agent or a Raw Material Supply Company to which a Participating Credit Institution proposes to make or

4 -3- has made a Sub-loan, and shall include: (i) Emporium, when (A) it procures or sells under the Project (1) raw materials, inputs and equipment for the production of finished cotton textiles, or (2) finished cotton textiles, and (B) a procurement and operations specialist retained pursuant to Section II paragraph (a) of Schedule 3 to this Agreement, has been assigned to assist Emporium in improving its operations and the initial Action Plan provided for in Section 3.13 of this Agreement has been adopted; (ii) the Nepal Wool Trading Company, when the provisions of Section 3.05 of this Agreement have been complied with; and (iii) the Nepal Metal Trading Company, when the provisions of Section 3.06 of this Agreement have been complied with; (g) "Sub-project" means a specific development project to be carried out in the Project Area by an Investment Enterprise utilizing the proceeds of a Sub-loan; (h) "Sub-loan" means a loan made or proposed to be made by a Participating Credit Institution out of the proceeds of the Credit to an Investment Enterprise for a Sub-project, and "free-limit Sub-loan" means a Sub-loan as so defined, which qualifies as a free-limit Sub-loan pursuant to the provisions of Section 2.02 (b) of this Agreement; (i) "CSI" means either a cottage or a small industry, whether privately or cooperatively owned, with fixed assets (including land, buildings, plant and equipment) after the granting of a Sub-loan to it, of less than eight hundred thousand rupees (NRs 800,000) in the case of cottage industries and less than two million rupees (NRs 2,000,000) in the case of small industries, or such other amounts as shall be agreed upon between the Borrower and the Association, which is engaged or intends to engage in, inter alia, manufacturing, agro-industry, handicraft production or industrial service activities; (j) "Market Agent" means a private concern involved, inter alia, directly in the organization, marketing and distribution of CSI production outside Kathmandu, Lalitpur and Bhaktapur ;Nagar Panchayats (town); (k) "Raw Material Supply Company" aeans a privately owned company, established and operating under the Borrower's Companies Act, 2021 (1964), for purposes of, inter alia, importing raw material for manufacturing cottage and small industry products;

5 -4- (1) "Emporium" means the Borrower's Cottage Industry and Handicraft Emporium, established and operating under the Borrower s Companies Act, 2021 (1964) since April 9, 1966 as a private limited company and since January 23, 1985, as a limited company; (m) "TPC" means the Borrower's Trade Promotion Centre established and operating since December 14, 1970, pursuant to the Borrower's Development Board Act, 2013 (1956); (n) "CGC" means the Credit Guarantee Corporation Private Limited, a corporation established and operating since October 20, 1974, pursuant to the Borrower's Companies Act, 2021 (1964); (o) "CIDB" means the Borrower's Cottage Industry Developmen: Board established and operating since December 22, 1974, pursuant to the Borrower's Development Board Act, 2013 (1956); (p) "CSI Credit Guarantee Scheme" means the guarantee scheme established and maintained by NRB pursuant to Section 2.03 of the Prior Project Agreement; (q) "CSI Refinance Fund" means the Fund established by NRB pursuant to the provisions of Section 2.02 (a) of the Prior Project Agreement; (r) "CSI Refinance Unit" means the Unit established within NRB pursuant to the provisions of Section 2.02 (b) of the Prior Project Agreement; (s) "Export Service Center" and the acronym "ESC" mean a division of TPC established on March 6, 1986, for purposes of carrying out product and marketing development activities in Nepal; (t) "Products of Nepal Office-New York" means the Borrower's Office established in New York pursuant to Section 3.04 (b) of the Prior Development Credit Agreement; (u) "Project Coordination Unit" and the acronym "PCU" mean the unit established by the Borrower within its Ministry of Industry on January 1, 1985, to coordinate, monitor and evaluate the Project described in Schedule 2 to the Prior Development Credit Agreement;

6 -5- (v) "Project Area" means the districts of Manang, Kaski, Lamjung, Gorkha, Syangja and Tanahu in the Borrower's administrative zone of Gandaki; the districts of Kathmandu, Bhaktapur, Lalitpur, Kavre, Sindhupalchowk, Nuwakot, Rasuwa and Dhading in the Borrower's administrative zone of Bagmati; the district of Dolakha in the Borrower's administrative zone of Janakpur; the districts of Chitwan and Makawanpur in the Borrower's administrative zone of Narayani; the districts of Palpa, Gulmi and Arghakhanchi in the Borrower's administrative zone of Lumbini; the districts of Baglung, Parbat and Myagdi in the Borrower's administrative zone of Dhawalagiri; and the districts of Dang, Pyuthan, Salyan and Rolpa in the Borrower's administrative zone of Rapti; (w) "Prior Development Credit I.greement" means the agreement dated March 9, 1982, entered into between the Kingdom of Nepal and the Association for purposes of Credit 1191-NEP (Cottage and Small Industries Project); (x) "Prior Credit" means the Credit provided for under thn Prior Development Credit Agreement; (y) "Prior Project Agreement" means the agreement dated March 9, 1982, entered into between the Association and NRB for purposes of Credit 1191-NEP (Cottage and Small Industries?roject); (z) "Nepal Wool Trading Company" means a private limited company established and operating since February 2, 1983, pursuant to the Borrower's Companies Act, 2021 (1964) for purposes of importing wool in bulk shipments on behalf of CSIs manufacturers; (aa) "Nepal Metal Trading Company" means a private limited company t ablished and operating since March 8, 1982, pursuant to the B,crower's Companies Act, 2021 (1964) for purposes of importing metal in bulk shipments on behalf of CSIs manufacturers; (bb) "Special Account" means the account referred to in Section 2.02 (e) of this Agreement; and (cc) "Rupees" and the acronym "NRs" mean Nepalese rupees, the currency of the Borrower.

7 -6- ARTICLE II The Credit Section The Association agrees to lend to the Borrower, on the terms and conditions set forth or referred to in the Development Credit AgreemeLt, an amount in various currencies equivalent to eight million seven hundred thousand Special Drawing Rights (SDR 8,700,000). Section (a) The amount of the Credit may be withdrawn from the Credit Account in accordance with the provisions of Schedule 1 to this Agreement, as such Schedule may be amended from time to time by agreement between the Borrower and the Association, for amounts paid (or, if the Association shall so agree, amounts to be paid) by: (i) a Participating Credit Institution on account of withdrawals made by an Investment Enterprise under a Sub-loan to meet the reasonable cost of goods and services required for the Sub-project in respect of which the withdrawal is requested; and (ii) in respect of the reasonable cost of goods and services required for Parts A (ii), B, C, D, E and F of the Project and to be financed out of the proceeds of the Credit; provided, however, that: (A) no withdrawal shall be made in respect of a Sub-loan unless (1) the Sub-loan has been approved by the Association, or (2) the Sub-loan is a free-limit Subloan an for which the Association has authorized withdrawals from the Credit Account; and (B) except as the Association shall otherwise agree, no Sub-loan made to any one Investment Enterprise shall exceed the sum of forty-four thousand Special Drawing Rights (SDR 44,000) equivalent or the aggregate amount of Sub-loans made to any one Investment Enterprise shall exceed the sum of one hundred thirty thousand Special Drawing Rights (SDR 130,000) equivalent; provided, further that each Subloan made to either Emporium, Nepal Wool Trading Company or Nepal Metal Trading Company shall not exceed each the sum of one hundred seventy-four thousand Special Drawing Rights (SDR 174,000) equivalent, or the aggregate amount of Sub-loans made to either Emporium, Nepal Wool Trading Company or Nepal Metal Trading Company shall not exceed for each of them the sum of one hundred seventy-four thousand Special Drawing Rights (SDR 174,000) equivalent. (b) A free-limit Sub-loan shall be a Sub-loan for a Subproject in an amount to be financed out of the proceeds of the Credit which shall not exceed the sum of twenty-two thousand

8 - 7 - Special Drawing Rights (SDR 22,000) equivalent, when added to any other outstanding amounts financed or proposed to be financed out of the proceeds of the Credit and out of the proceeds of the Prior Credit and not repaid; provided, however, that the foregoing amounts are subject to change from time to time as determined by the Association in consultation with the Borrower. (c) Except as the Association shall otherwise agree, no withdrawals shall be made from the Credit Account for purposes of Part A (i) of the Project on account of (i) expenditures before the date of this Agreement or (ii) expenditures in respect of a Sub-loan subject to the Association's approval if such expenditures shall have been made more than ninety days prior to the date on which the Association shall have received in respect of such Sub-loan the application and information required by Section 2.02 (b) of the Project Agreement or under a free-limit Sub-loan, more than ninety days prior to date on which the Association shall have received in respect of such free-limit Sub-loan the request and information required by Section 2.02 (c) of the Project Agreement. (d) The Borrower shall, for the purposes of the Project, open and maintain in Dollars a special account in the Nepal Rastra Bank on terms and conditions satisfactory to the Bank. Deposits into, and payments out of, the Special Account shall be made in accordance with the provisions of Schedule 4 to this Agreement. Section The Closing Date shall be June 30, 1994 or such later date as the Association shall establish. The Association shall promptly notify the Borrower of such later date. Section (a) The Borrower shall pay to the Association a commitment charge at the rate of one-half of one per cent (1/2 of 1%) per annum on the principal amount of the Credit not withdrawn from time to time. The commitment charge shall accrue from a date sixty days after the date of the Development Credit Agreement to the respective dates on which amounts shall be withdrawn by the Borrower from the Credit Account or shall be cancelled. (b) The commitment charge shall be paid: (i) at such places as the Association shall reasonably request; (ii) without restrictions of any kind imposed by, or in the territory of, the

9 -8- Borrower; and (iii) in the currency specified in this Agreement for the purposes of Section 4.02 of the General Conditions or in such other eligible currency or currencies as may from time to time be designated or selected pursuant to the provisions of that Section. Section The Borrower shall pay to the Association a service charge at the rate of three-fourths of one per cent (3/4 of 1%) per annum on the principal amount of the Credit withdrawn and outstanding from time to time. Section Commitment charges and service charges shall be payable semiannually on April 1 and October 1 in each year. Section The Borrower shall repay the principal amount of the Credit in semiannual installments payable on each April 1 and October 1 commencing October 1, 1996, and ending April 1, Each installment to and including the installment payable on April 1, 2006 shall be one-half of one per cent (1/2 of 1%) of such principal amount, and each installment thereafter shall be one and one-half per cent (1-1/2%) of such principal amount. Section The currency of the United States of America is hereby specified for the purposes of Section 4.02 of the General Conditions. Section NRB is designated as representative of the Borrower in respect of Part A (i) of the Project, for the purpose of taking any action required or permitted -o be taken under the provisions of Section 2.02 (a) (i) of This Agreement and Article V of the General Conditions. ARTICLE III Execution of the Project Section (a) The Borrower declares its commitment to the objectives of the Project as set forth in Schedule 2 to this Agreement, and, to this end, shall: (i) without any limitation or restriction upon any of its other obligations under the Development Credit Agreement, cause NRB to perform in accordance with the provisions of the Project Agreement all the obligations therein set forth; (ii) take, or cause to be taken, all action, including the provision of funds, facilities, services and other resources, necessary or appropriate to enable NRB to perform such

10 -9- obligations; (iii) not take, or permit to be taken, any action which would prevent or interfere with NRB obligations under the Project Agreement; (iv) carry out Parts A (ii), B, C, D, E and F of the Project through its respective agencies and departments, with due diligence and efficiency and in conformity with appropriate technical, administrative, economic, accounting, financial, banking and investment standards and practices, as the case may be; and (v) provide, or cause to be provided, promptly as needed, the funds, facilities, services and other resources required for carrying out Parts A (ii), B, C, D, E and F of the Project. (b) For the purposes of carrying out Part A (i) of the Project, the Borrower shall relend to NRB, out of the proceeds of the Credit, an amount equivalent to six million five hundred eighty thousand Special Drawing Rights (SDR 6,580,000) or such other amount as the Borrower and the Association may otherwise agree, pursuant to an agreement to be entered into between the Borrower and NRB, under terms and conditions which shall be satisfactory to the Association, which terms and conditions to include an interest rate not to exceed 3.25% per annum, a repayment period of 14 years, including a grace period of 3 years, and the provision that the Borrower shall bear the foreign exchange risk. (c) The Borrower shall exercise its rights under the Subsidiary Loan Agreement in such manner as to protect the interests of the Borrower and the Association and to accomplish the purposes of the Credit, and except as the Association shall otherwise agree, the Borrower shall not assign, amend, abrogate or waive the Subsidiary Loan Agreement or any provision thereof. Section Except as the Association shall otherwise agree, procurement of the goods and consultants' services required for Parts A (ii), B, C, D, E and F of the Project and to be financed out of the proceeds of the Credit shall be governed by the provisions of Schedule 3 to this Agreement. Section The Borrower and the Association hereby agree that the obligations set forth in Sections 9.03, 9.04, 9.05, 9.06, 9.07 and 9.08 of the General Conditions (relating to insurance, use of goods and services, plans and schedules, records and reports, maintenance and land acquisition, respectively) in respect of Part A (i) of the Project shall be carried out by NRB pursuant to Section 2.04 of the Project Agreement.

11 Section The Borrower shall: (a) maintain the Project Coordination Unit within its Ministry of Industry, headed by a qualified and experienced officer acceptable to the Association, such Unit to be assigned, at all times, with such functions, powers, responsibilities, staffing, organization, funds and other resources as shall be required to enable it to adequately coordinate, monitor and evaluate the implementation of the Project; (b) maintain the Project Coordination Committee chaired by the Secretary of the Borrower's Ministry of Industry and composed, inter alia, by representatives of the Borrower's National Planning Commission, Ministries of Commerce and Finance as well as representatives of NRB, CIDB, TPC, ESC, Emporium and the private sector, such Committee to be assigned, at all times, with such powers, responsibilities, staffing and functions as shall be required to enable it to adequately undertake the overall coordination, monitoring, evaluation and supervision of Project implementation. The Project Coordination Committee shall meet, at least, on a quarterly basis; (c) maintain the Export Service Center headed by a qualified and experienced officer acceptable to the Association, such service Center to be assigned, at all times, with such powers, functions, funds, organization, staffing and other resources as shall be required to enable it to achieve its purposes; and (d) maintain the Products of Nepal Office-New York headed by a qualified and experienced officer acceptable to the Association, such Office to be assigned, at all times, with such powers, functions, funds, organization, staffing and other resources as shall be required to enable it to achieve its purposes. Section The Borrower shall adopt a Statement of Policies and Operating Procedures for the Nepal Wool Trading Company, satisfactory to the Association, which statement to include provisions for issuing to the Nepal Wool Trading Company wool import licenses on a regular and expeditious basis against paymentt in foreign exchange, and, thereafter, cause the Nepal Wool Trading Company to apply such Statement of Policies and Operating Procedures, as so approved. Section The Borrower shall adopt a Statement of Policies and Operating Procedures for the Nepal Metal Trading

12 Company, satisfactory to the Association, which Statement to include provisions allowing metal imports at international prices by Nepalese manufacturers and exporters, and thereafter, cause the Nepal Metal Trading Company to apply such Statement of Policies and Procedures, as so approved. Section The Borrower shall: (a) cause TPC to adopt and apply a Statement of Policies and Operating Procedures for the Export Service Center, satisfactory to the Association; and (b) cause the Export Service Center to carry out its activities under the Project in accordance with a detailed action plan, satisfactory to the Association; provided, however, that based on the experienced gained through the implementation of the Project, on March 1 of each year, commencing on March 1, 1988 and thereafter, the Borrower shall cause TPC to review the Action Plan and, if required, prepare and furnish to the Association, for its review and comments a proposal for up-dating the Action Plan for the forthcoming Borrower's Fiscal Year, and thereafter, cause the Export Service Center to carry out its activities under the Project in accordance with the revised Action Plan, satisfactory to the Association. Section The Borrower shall: (a) cause CIDB to adopt and apply a Statement of Policies and Operating Procedures for the management by CIDB of a raw material and marketing fund, satisfactory to the Association; and (b) cause CIDB to carry out its activities under the Project in accordance with a detailed action plan, satisfactory to the Association; provided, however, that based on the experienced gained through the implementation of the Project, on March 1, of each year, commencing on March 1, 1988 and thereafter, the Borrower shall cause CIDB to review the Action Plan and, if required, prepare and furnish to the Association, for its review and comments, a proposal for updating the Action Plan for the forthcoming Borrower's Fiscal Year and, thereafter, cause CIDB to carry out its activities under the Project in accordance with such revised Action Plan, satisfactory to the Association. Section The Borrower shall, by December 31, 1988, prepare and furnish, or cause the Export Service Center to

13 prepare and furnish, to the Association, for its review and comments, a program for market research, product development and export sales, including eligibility criteria, to be implemented by exporters on a cost-sharing basis with the Export Service Center, and, thereafter, cause the Export Service Center to implement such program, satisfactory to the Association. Section For purposes of improving the efficiency of Emporium's operations, the Borrower shall, under terms of reference satisfactory to the Association, cause Emporium to develop and thereafter implement, an inventory management program, satisfactory to the Association, to reduce costs and monitor inventory levels. Section The Borrower shall, from time to time, exchange views with the Association regarding the Borrower's cottage and small industries policies and regulations. Section (a) The Borrower shall take all such action as shall be required to ensure that NRB and the Participating Credit Institutions shall: (i) apply the interest rates set forth in the Schedule to the Project Agreement; and (ii) implement any changes in interest rates or spreads required pursuant to the provisions of paragraph (b) of this Section. (b) Except as the Association shall otherwise agree, on November 15 of each year, commencing on November 15, 1987, the Borrower and NRB shall review and, if required, adjust the interest rates set forth in the Schedule to the Project Agreement to ensure that: (i) the minimum interest rate for Sub-loans remains positive in real terms in relation to medium term inflation projections; (ii) the spread to NRB and the Participating Credit Institutions resulting from any such interest rate adjustment shall be set at such level as shall be required to provide an adequate return; and (iii) the lending rate for Sub-loans shall remain, at least, at the levels set forth in the Schedule to the Project Agreement. Section The Borrower shall cause Emporium to carry out its activities under the Project in accordance with a detailed action plan, satisfactory to the Association; provided, however, that based on the experienced gained through the implementation of the Project, on March 1 of each year, commencing on March 1, 1988 and thereafter, the Borrower shall cause Emporium to review the Action Plan and, if required, prepare and furnish to the

14 Association, for its review and comments, a proposal for updating the Action Plan for the forthcoming Borrower's Fiscal Year, and thereafter, cause Emporium to carry out its activities under the Project in accordance with such revised Action Plan, satisfactory to the Association. Section The Borrower shall, by December 31, 1987 prepare and furnish to the Association, for its review and comments, a draft action program of import and export policies and procedures. ARTICLE IV Financial Covenants Section (a) The Borrower shall maintain or cause to be maintained records and accounts adequate to reflect in accordance with sound accounting practices the operations, resources and expenditures in respect of Parts A (ii), B, C, D, E and F of the Project of the departments or agencies of the Borrower responsible for carrying out such Parts of the Project or any part thereof. (b) The Borrower shall: (i) have the accounts referred to in paragraph (a) of this Section, including the Special Account, for each fiscal year audited, in accordance with appropriate auditing principles consistently applied, by independent auditors acceptable to the Association; (ii) furnish to the Association, as soon as available, but in any case not later than nine months after the end of each such year, a certified copy of the report of such audit by said auditors, of such scope and in such detail as the Association shall have reasonably requested; and (iii) furnish to the Association such other information concerning the said accounts and the audit thereof and said records as the Association shall from time to time reasonably request.

15 (c) For all expenditures with respect to which withdrawals from the Credit Account were made on the basis of statements of expenditure, the Borrower shall: (i) maintain or cause to be maintained, in accordance with paragraph (a) of this Section, separate records and accounts reflecting such expenditures; (ii) (iii) (iv) retain, until at least one year after the completion of the audit for the fiscal year in which the last withdrawal from the Credit Account was made, all records (contracts, orders, invoices, bills, receipts and other documents) evidencing such expenditures; enable the Association's representatives to examine such records; and ensure that such separate accounts are included in the annual audit referred to in paragraph (b) of this Section and that the report thereof contains, in respect of such separate accounts, a separate opinion by said auditors as to whether the proceeds of the Credit withdrawn in respect of such expenditures were used for the purposes for which they were provided. Section Without any limitation or restriction upon any of its other obligations under the Development Credit Agreement, the Borrower shall: (a) pay, or make adequate arrangements for payment, into the CSI Credit Guarantee Scheme a contribution of two million rupees (NRs 2,000,000) and, as and when required, pay additional amounts into the CSI Credit Guarantee Scheme so that the capitalization of the said Scheme is maintained, at all times, at no less than 10% of the guarantees outstanding in any given Borrower's Fiscal Year; (b) prior to any transfer pursuant to Section 2.10 (c) of the Project Agreement, make appropriate arrangements, satisfactory to the Association, to ensure that CGC is adequately capitalized and adopts operating policies and procedures, satisfactory to the Association, to enable CGC to adequately assume the resources and liabilities of the CSI Credit Guarantee Scheme

16 as part of its normal operations of providing guarantees for term loans for CSIs in the Borrower's territory. Section The provisions of Section 3.06 of the Development Credit Agreement dated March 9, 1982 entered into between the Kingdom of Nepal and the Association for purposes of Credit No NEP (Cottage and Small Industries Project) are hereby superceded by the provisions of Section 4.02 of this Agreement. Section Without limitation to the provision of Section 9.06 of the General Conditions, commencing on January 1, 1987 and thereafter, the Borrower shall, or shall cause the PCU to, prepare and furnish to the Association quarterly reports on the progress of Parts A (ii), B, C, D, E and F of the Project, of such scope and in such detail as the Association shall reasonably request. Such reports shall be furnished to the Association within 30 days after the end of each reporting period. ARTICLE V Remedies of the Association Section Pursuant to Section 6.02 (h) of the General Conditions, the following additional events are specified: (a) that NRB shall have failed to perform any of its obligations under the Project Agreement; (b) that the Borrower or NRB shall have failed to perform any of their respective obligations under the Subsidiary Loan Agreement; (c) that as a result of events which have occurred after the date of the Development Credit Agreement, an extraordinary situation shall have arisen which shall make it improbable that NRB will be able to perform its obligations under the Project Agreement or the Subsidiary Loan Agreement; (d) that the Borrower's Nepal Rastra Bank Act, 2012 (1955), shall have been amended, suspended, abrogated, repealed or waived so as to affect materially and adversely the ability of NRB to perform any of its obligations under the Project Agreement or the Subsidiary Loan Agreement;

17 (e) that the Borrower or any other authority having jurisdiction shall have taken any action for the dissolution or disestablishment of NRB or for the suspension of its operations; and (f) (i) subject to subparagraph (ii) of this paragraph, the right of the Borrower to withdraw the proceeds of the UNDP Grant made to the Borrower for the financing of the Project shall have been suspended, cancelled or terminated in whole or in part, pursuant to the terms of the UNDP Project Agreement. (ii) subparagraph (i) of this paragraph shall not apply if: (A) such suspension, cancellation or termination is not caused by the failure of the Borrower to perform any of its obligations under such Agreement; and (B) adequate funds for the Project are available to the Borrower from other sources on terms and conditions consistent with the obligations of the Borrower under this Agreement. Section 'ursuant to Section 7.01 (d) of the General Conditions, the following additional events are specified: (a) any event specified in paragraphs (a) and (b) of Section 5.01 of this Agreement shall occur and shall continue for a period of sixty days after notice thereof shall have been given by the Association to the Borrower; (b) any event specified in paragraphs (d) and (e) of Section 5.01 of this Agreement shall occur; and (c) the event specified in paragraph (f) (i) of Section 5.01 of this Agreement shall occur, subject to the proviso of paragraph (f) (ii) of such Section. ARTICLE VI Effective Date; Termination Section The following events are specified as additional conditions to the effectiveness of the Development Credit

18 Agreement within the meaning of Section (b) Conditions: of the General (a) the Subsidiary Loan Agreement has been executed on behalf of the Borrower and NRB; (b) the UNDP Project Agreement shall have been duly signed by the parties thereto; (c) an entity acceptable to the Borrower, UNDP and the Association shall have been duly appointed as executing agency for the Project components financed by the UNDP Grant; (d) NRB shall have issued to the Participating Credit Institutions the instructions referred to in Section 2.08 of the Project Agreement and at least two Participating Credit Institutions shall have satisfied the staffing, training and collection requirements set forth in Part II of the Schedule to the Project Agreement. (e) the NRB shall have adopted a Statement of Policies and Operating Procedures for the CSI Refinance Unit, satisfactory to the Association; and (f) the Borrower shall have employed the consultant referred to in Section II, paragraph (b) of Schedule 3 to this Agreement. Section The following are specified as additional matters, within the meaning of Section (b) of the General Conditions, to be included in the opinion or opinions to be furnished to the Association: (a) that the Project Agreement has been duly authorized or ratified by NRB, and is legally binding upon NRB in accordance with its terms; and (b) *that the Subsidiary Loan Agreement has been duly authorized or ratified by the Borrower and NRB and is legally binding upon the Borrower and NRB in accordance with its terms. Section The date 180 days after the date of this Agreement is hereby specified for the purposes of Section of the General Conditions.

19 ARTICLE VII Representative of the Borrower; Addresses Section The Secretary, Ministry of Finance of the Borrower is designated as representative of the Borrower for the purposes of Section of the General Conditions. Section The following addresses are specified for the purposes of Section of the General Conditions: For the Borrower: Ministry of Finance His Majesty's Government of Nepal Kathmandu Nepal Cable address: Telex: ARTHA 224S.EP Kathmandu, Nepal For the Association: International Development Association 1818 H Street, N.W. Washington, D.C United States of America Cable address: INDEVAS Washington, D.C. Telex: (ITT) (RCA) or (WUI)

20 IN WITNESS WHEREOF, the parties hereto, acting through their duly authorized representatives, have caused this Agreement to b-- signed in their respective names in the District of Columbia, United States of America, as of the day and year first above written. KINGDOM OF NEPAL By// 4ZPa. A Authorized Representative INTERNATIONAL DEVELOPMENT ASSOCIATION ByS Regional Vice President South Asia

21 SCHEDULE 1 Withdrawal of the Proceeds of the Credit 1. The table below sets forth the Categories of items to be financed out of the proceeds of the Credit, the allocation of the amounts of the Credit to each Category and the percentage of expenditures for items so to be financed in each Category: Amount of the Credit Allocated % of (Expressed in Expenditures Category SDR Equivalent) to be Financed (1) Refinancing of 6,580, % of amounts up to 80% of refinanced by Sub-loans under NRB Part A (i) of the Project (2) Works under 104,000 60% Part C of the Project (3) Vehicles, equip- 100% of foreign ment, furniture, expenditures; and raw materials: 100% of local expenditures (a) under Part A 13,000 (ex-factory (ii) of the cost); and 70% Project of local expenditures for other (b) under Part B (i) 26,000 items procured of the Project locally (c) under Part C 315,000 of the Project (d) under Part F 16,000 of the Project

22 Amount of the Credit Allocated % of (Expressed in Expenditures Category SDR Equivalent) to be Financed (4) Consultancy services: (a) under Part B (i) 22, % of local of the Project expenditures (b) under Part C of 9, % of local the Project expenditures (c) under Part F 221, % of the Project (5) Raw Material 87, % Procurement Fund under Part C of the Project (6) Salaries and allowances of staff: (a) under Part B (i) 44,000 FY 1987: 100% of the Project FY 1988: 90% FY 1989: 80% FY 1990: 70% (representing in the aggregate 50% of salaries and allowances of incremental staff) (b) under Part C 554,000 FY 1987: 60% of the Project FY 1988: 50% FY 1989: 40% FY 1990: 30% (representing in the aggregate 69% of salaries and allowances of incremental staff)

23 Amount of the Credit Allocated % of (Expressed in Expenditures Category SDR Equivalent) to be Financed (c) under Part D 9,000 FY 1987: 50% of the Project FY 1988: 40% FY 1989: 30% FY 1990: 20% (representing in the aggregate 50% of salaries and allowances of incremental staff) (d) under Part F 5,000 FY 1987: 100% of the Project FY 1988: 90% FY 1989: 80% FY 1990: 70% (representing in the aggregate 50% of salaries and allowances of incremental staff) (7) Equipment, consultancies and 520, % technical services and operating costs under Part B (iii) of the Project (8) Unallocated 175,000 TOTAL 8,700, For the purposes of this Schedule: (a) the term "foreign expenditures" means expenditures in the currency of any country other than that of the Borrower for

24 goods or services supplied from the territory of any country other than that of the Borrower; (b) the term "local expenditures" means expenditures in the currency of the Borrower or for goods or services supplied from the territory of the Borrower; (c) the term "incremental staff" means the additional staff employed by the Borrower after the date of this Agreement for purposes of carrying out Parts B (i), C, D and F of the Project; and (d) the acronym "FY" means the Borrower's Fiscal Year. 3. Notwithstanding the provisions of paragraph 1 above, no withdrawals shall be made in respect of: (a) expenditures made prior to the date of this Agreement; (b) expenditures under Category 1 of the Table in paragraph 1 of this Schedule until: (i) the Statement of Policies and Operating Procedures of Nepal Wool Trading Company has been adopted pursuant to the provisions of Section 3.05 of this Agreement; and (ii) the Borrower has made the initial monetary contribution (NRs 2,000,000) to the CSI Credit Guarantee Scheme pursuant to Section 4.02 (a) of this Agreement; (c) expenditures under Category 5 of the Table in paragraph 1 of this Schedule until the Statement of Policies and Operating Procedures for the management by CIDB of a raw material and marketing fund has been adopted pursuant to the provisions of Section 3.08 (a) of this Agreement; (d) expenditures under Categories 3(a), 4(a), 5, 6(b) and 7 of the Table in paragraph 1 of this Schedule until CIDB has adopted an action plan pursuant to the provision of Section 3.08 (b) of this Agreement; and (e) expenditures under Categories 3(c) and 4(c) of the Table in paragraph 1 of this Schedule until: (i) the Statement of Policies and Operating Procedures of the Export Service Center has been adopted pursuant to Section 3.07 (a) of this Agreement, and (ii) the Export Service Center has adopted an action plan pursuant to the provision of Section 3.07 (b) of this Agreement.

25 SCHEDULE 2 Description of the Project The objectives of the Project are to assist the Borrower in implementing its policies on efficient industrial development and export growth as well as increasing output, exports, earnings and income in cottage and small industries in Nepal. The Project consists of the following parts, subject to such modifications thereof as the Borrower and the Association may agree upon from time to time to achieve such objectives: Part A: (i) Implementation of a program by NRB to refinance Sub-loans granted or made by Participating Credit Institutions to Investment Enterprises for Subprojects. (ii) Implementation of a program to improve and upgrade the overall operation of the Nepal Bank Limited and the Rastriya Banijya Bank, and to strengthen the Participating Credit Institutions, and the CSI Refinance Unit, including provision of appropriate staff training and technical assistance therefor. Part B: Implementation of an export development program, including: (i) improvement in product design, production techniques, cost reduction and quality control on exportable Nepalese goods; (ii) strengthening the operations of the manufacturer/exporter associations in Nepal; (iii) overseas marketing development; and (iv) provision of technical assistance therefor. Part C: Implementation of skill training and entrepreneurial development programs, including provision of raw material supply, product marketing and technical assistance therefor. Part D: Implementation of a program to improve procurement and inventory management, including provision of technical assistance therefor.

26 Part E: Implementation of a program to assist the Borrower in improving its industrial export policies and procedures, including provision of technical assistance therefor. Part F: Implementation of a program to provide management support and to monitor and evaluate the various activities under the Project, including provision of technical assistance therefor. The Project is expected to be completed by December 31, 1993.

27 SCHEDULE 3 Procurement and Consultants' Services Section I. Procurement of Goods and Works Part A: Procurement Procedures 1. Contracts for works shall be let on the basis of competitive bidding advertised locally, in accordance with procedures satisfactory to the Association. Part B: Review by the Association of Procurement Decisions 1. Review of invitations to bid and of proposed awards and final contracts: 2. Contracts for vehicles, equipment, furniture and raw material shall be let on the basis of competitive bidding advertised locally, in accordance with procedures satisfactory to the Association. (a) With respect to each contract estimated to cost the equivalent of $10,000 or more the procedures set forth in paragraphs 2 and 4 of Appendix 1 to the "Guidelines for Procurement under IBRD Loans and IDA Credits" published by the Bank in May 1985 (the Guidelines) shall apply. Where payments for such contract are to be made out of the Special Account, such procedures shall be modified to ensure that the two conformed copies of the contract required to be furnished to the Association pursuant to said paragraph 2 (d) shall be furnished to the Association prior to the making of the first payment out of the Special Account in respect of such contract. (b) With respect to each contract not governed by the preceding paragraph, the procedures set forth in paragraphs 3 and 4 of Appendix 1 to the Guidelines shall apply. Where payments for such contract are to be made out of the Special Account, such procedures shall be modified to ensure that the two conformed copies of the contract together with the other information required to be furnished to the Association pursuant to said paragraph 3 shall be furnished to the Association as part of the evidence to be furnished pursuant to paragraph 4 of Schedule 4 to this Agreement.

28 (c) The provisions of the preceding subparagraphs (a) and (b) shall not apply to contracts on account of which the Association has authorized withdrawals from the Credit Account on the basis of statements of expenditure. Such contracts shall be retained in accordance with Section 4.01 (c) (ii) of this Agreement. 2. The figure of 10% is hereby specified for purposes of paragraph 4 of Appendix 1 to the Guidelines. Section II. Employment of Consultants (a) In order to assist the Borrower in carrying out Part A (ii), B, C, D, E and F of the Project, the Borrower shall employ, or cause to be employed, consultants whose qualifications, experience and terms and conditions of employment shall be satisfactory to the Association; provided, however, that if the cost of such consultants shall be financed, in part or in whole, out of the proceeds of the Credit, such consultants shall be selected in accordance with principles and procedures satisfactory to the Association on the basis of the "Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency" published by the Bank in August (b) Without limitation to the provisions of paragraph (a) of Section II of this Schedule and in order to assist the PCU in the overall coordination, monitoring and evaluation of Project implementation, the Borrower shall employ and assign, or cause to be employed and assigned, to the PCU a consultant whose qualification, experience and term and conditions of employment shall be satisfactory to the Association, such consultant to be selected in accordance with principles and procedures satisfactory to the Association on the basis of the "Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency" published by the Bank in August 1981.

29 SCHEDULE 4 Special Account 1. For the purposes of this Schedule: (a) the term "eligible Categories" means Categories (2) (3), (4), (5), (6) and (7) set forth in the table in paragraph I of Schedule 1 to this Agreement; (b) the term "eligible expenditures" means expenditures in respect of the reasonable cost of goods and services required for Parts A (ii), B, C, D, E and F of the Project and to be financed out of the proceeds of the Credit allocated from time to time to the eligible Categories in accordance with the provisions of Schedule 1 to this Agreement; and (c) the term "Authorized Allocation" means an amount equivalent to SDR 260,000 to be withdrawn from the Credit Account and deposited in the Special Account pursuant to paragraph 3 (a) of this Schedule. 2. Except as the Association shall otherwise agree, payments out of the Special Account shall be made exclusively for eligible expenditures in accordance with the provisions of this Schedule. 3. After the Association has received evidence satisfactory to it that the Special Account has been duly opened, withdrawals of the Authorized Allocation and subsequent withdrawals to replenish the Special Account may be made as follows: (a) On the basis of a request or requests by the Borrower for a deposit or deposits which add up to the aggregate amount of the Authorized Allocation, the Association shall, on behalf of the Borrower, withdraw from the Credit Account and deposit in the Special Account such amount or amounts as the Borrower shall have requested. (b) The Borrower shall furnish to the Association requests for replenishment of the Special Account at such intervals as the Association shall specify. On the basis of such requests, the Association shall withdraw from the Credit Account and deposit into the Special Account such amounts as shall be required to replenish the Special Account with amounts not exceeding the amount of payments made out of the Special Account for eligible

30 expenditures. All such deposits shall be withdrawn by the Association from the Credit Account under the respective eligible Categories and in the respective equivalent amounts, as shall have been justified by the evidence supporting the request for such deposit furnished pursuant to paragraph 4 of this Schedule. 4. For each payment made by the Borrower out of the Special Account for which the Borrower requests replenishment pursuant to paragraph 3 (b) of this Schedule, the Borrower shall furnish to the Association, prior to or at the time of such request, such and other evidence as the Association shall reasonably request, showing that such payment was made for eligible expenditures. 5. (a) Notwithstanding the provisions of paragraph 3 of this Schedule, no further deposit into the Special Account shall be made by the Association when either of the following situations first arises: (i) the Association shall have determined that all further withdrawals should be made directly by the Borrower from the Credit Account in accordance with the provisions of paragraph (a) of Section 2.02 of this Agreement; or (ii) the total unwithdrawn amount of the Credit allocated to the eligible Categories for Parts A (ii), B, C, D, E and F of the Project, minus the amount of any outstanding special commitment entered into by the Association pursuant to Section 5.02 of the General Conditions with respect to Parts A (ii), B, C, D, E and F of the Project, shall be equal to the equivalent of twice the amount of the Authorized Allocation. (b) Thereafter, withdrawal from the Credit Account of the remaining unwithdrawn amount of the Credit allocated to the eligible *Categories for Parts A (ii), B, C, D, E and F of the Project shall follow such procedures as the Association shall specify by notice to the Borrower. Such further withdrawals shall be made only after and to the extent that the Association shall have been satisfied that all such amounts remaining on deposit in the Special Account as of the date of such notice have been or will be utilized in making payments for eligible expenditures.