Rural Finance Development Project: Report and ...

Report and Recommendation of the President to the Board of Directors

Project Number: 53307-001 November 2020

Proposed Loan and Technical Assistance Grant Kingdom of Bhutan: Rural Finance Development Project Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB’s Access to Information Policy.

CURRENCY EQUIVALENTS (as of 23 October 2020)

Currency unit – ngultrum (Nu)

Nu1.00 = $0.0135 $1.00 = Nu73.679

ABBREVIATIONS

ADB – Asian Development Bank AML/CFT – anti-money laundering/combating the financing of terrorism BDB – Bhutan Development Bank COVID-19 – coronavirus disease CSI – cottage and small industry ESMS – environmental and social management system GDP – gross domestic product IMF – International Monetary Fund NPL – nonperforming loan PAM – project administration manual RMA – Royal Monetary Authority TA – technical assistance

NOTES

(i) The fiscal year (FY) of the Government of Bhutan ends on 30 June. “FY” before a calendar year denotes the year in which the fiscal year ends, e.g., FY2020 ends on 30 June 2020.

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

Vice-President Shixin Chen, Operations 1 Director General Kenichi Yokoyama, South Asia Department (SARD) Director Kaoru Ogino, Officer-in-Charge, Public Management, Financial Sector,

and Trade Division (SAPF), SARD Team leader Mayumi Ozaki, Senior Portfolio Management Specialist, SAPF, SARD Team members Mary Kimberly L. Baes, Senior Project Assistant, SAPF, SARD

Monica Mei V. Carino-Young, Project Analyst, SAPF, SARD Sajid Raza Zaffar Khan, Financial Management Specialist, Portfolio,

Results and Quality Control Unit (SAOD-PR), SARD M. Kristina Hidalgo, Senior Financial Sector Officer, SAPF, SARD Tshering Lhamo, Economics Officer, Bhutan Resident Mission (BHRM),

SARD Tshewang Norbu, Portfolio Management Specialist, BHRM, SARD Roshan Ouseph, Senior Counsel, Office of the General Counsel Lalinka Yana M. Padrinao, Associate Environment Officer, SAOD-PR,

SARD Ma. Virginia Panis, Senior Operations Assistant, SAPF, SARD Viliami T. Sefesi, Principal Financial Control Specialist, Loan and Grant

Disbursement Section, Controller’s Department Rayhalda D. Susulan, Associate Safeguards Officer (Resettlement),

Office of the Director General, SARD Francesco Tornieri, Principal Social Development Specialist (Gender

and Development), SAOD-PR, SARD Nidup Tshering, Senior Social Development Specialist (Gender), BHRM,

SARD Peer reviewer Susan Olsen, Senior Investment Specialist, Private Sector Financial

Institutions Division, Private Sector Operations Department In preparing any country program or strategy, financing any project, or by 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

PROJECT AT A GLANCE

I. THE PROPOSAL 1

II. THE PROJECT 1

A. Rationale 1

B. Project Description 5

C. Value Added by ADB 7

D. Summary Cost Estimates and Financing Plan 7

E. Implementation Arrangements 9

III. ATTACHED TECHNICAL ASSISTANCE 9

IV. DUE DILIGENCE 10

A. Technical 10

B. Economic and Financial Viability 10

C. Sustainability 10

D. Governance 10

E. Poverty, Social, and Gender 11

F. Safeguards 11

G. Summary of Risk Assessment and Risk Management Plan 12

V. ASSURANCES 12

VI. RECOMMENDATION 12

APPENDIXES

1. Design and Monitoring Framework 13

2. List of Linked Documents 16

Project Classification Information Status: Complete

PROJECT AT A GLANCE

Source: Asian Development BankThis document must only be generated in eOps. 28092020141741589446 Generated Date: 28-Oct-2020 9:30:24 AM

1. Basic Data Project Number: 53307-001Project Name Rural Finance Development Project Department/Division SARD/SAPFCountry Bhutan Executing Agency Department of

Macroeconomic Affairs, Ministry of Finance

Borrower Government of Bhutan

Country Economic Indicators

https://www.adb.org/Documents/LinkedDocs/?id=53307-001-CEI

Portfolio at a Glance https://www.adb.org/Documents/LinkedDocs/?id=53307-001-PortAtaGlance

2. Sector Subsector(s) ADB Financing ($ million)Finance Banking systems and nonbank financial institutions 5.00

Inclusive finance 10.00

Small and medium enterprise finance and leasing 5.00

Total 20.00

3. Operational Priorities Climate Change InformationAddressing remaining poverty and reducing inequalities

Accelerating progress in gender equality

Strengthening governance and institutional capacity

GHG reductions (tons per annum) 0Climate Change impact on the Project

Low

ADB Financing

Adaptation ($ million) 0.00

Mitigation ($ million) 0.00

Cofinancing

Adaptation ($ million) 0.00

Mitigation ($ million) 0.00

Sustainable Development Goals Gender Equity and MainstreamingSDG 1.4SDG 5.aSDG 8.10, 8.3SDG 9.3SDG 10.2

Gender Equity (GEN)

Poverty TargetingGeneral Intervention on Poverty

4. Risk Categorization: Low.

5. Safeguard Categorization Environment: FI Involuntary Resettlement: FI-C Indigenous Peoples: FI-C

.

6. Financing

Modality and Sources Amount ($ million)

ADB 20.00

Sovereign Credit line (Concessional Loan): Ordinary capital resources 20.00

Cofinancing 0.00

None 0.00

Counterpart 0.00

None 0.00

Total 20.00

Note: An attached technical assistance will be financed on a grant basis by the Technical Assistance Special Fund (TASF-6) in the amount

of $750,000; Financial Sector Development Partnership Special Fund in the amount of $250,000.

Currency of ADB Financing: US Dollar

I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed loan to the Kingdom of Bhutan for the Rural Finance Development Project. The report also describes proposed technical assistance (TA) for Capacity Building for Rural Finance Development, and if the Board approves the proposed loan, I, acting under the authority delegated to me by the Board, approve the TA.1 2. The project will enhance access to finance for rural cottage and small industries (CSIs), thereby increasing rural employment and promoting economic development. The project focuses on (i) expanding collateral-based rural CSI financing through Bhutan Development Bank (BDB), Bhutan’s key rural finance intermediary; (ii) extending, through BDB, non-collateral-based group loans to rural CSIs that lack assets; (iii) strengthening BDB’s institutional capacity, including enhancement for rural CSI financing operations; and (iv) providing financial literacy training and business development support to rural CSIs, in particular CSIs owned by small and marginal farmers and women.

II. THE PROJECT A. Rationale 3. Economy. During 2010–2019, Bhutan’s economy grew more than 6% annually on average largely owing to hydropower revenue, which accounts for about a quarter of the gross domestic product (GDP).2 Because of the capital-intensive nature of growth, the economy is not well diversified and unable to create sufficient employment opportunities, especially for youth and the rural population. The unemployment rate was 2.7% in 2019, with youth unemployment at 11.9%.3 Out of a total population of about 807,600, 62.2% live in rural areas where agriculture is the primary source of livelihood.4 In rural areas, opportunities for both on-farm and off-farm employment are extremely limited and farmers mostly depend on subsistence production of crops and livestock for their living.5 The government’s Twelfth Five Year Plan, 2018–2023, aims to diversify the economy by creating jobs and promoting the private sector, including rural CSIs.6 4. In 2020, the coronavirus disease (COVID-19) pandemic has caused significant adverse impacts on Bhutan’s economy. Tourism, agriculture, and construction have been particularly hard-hit because of labor shortages, decreased external demands, and input supply disruptions. Pre-pandemic GDP growth was projected at 5.2% for fiscal year (FY) 2020 and 5.8% for FY2021.7 However, because of the pandemic, the Asian Development Bank (ADB) has revised the GDP

1 Financing partner: the Government of Luxembourg. 2 Asian Development Bank (ADB). 2020. Key Indicators for Asia and the Pacific 2020. Manila. 3 Government of Bhutan, National Statistics Bureau. http://www.nsb.gov.bt/main/indicator.php. 4 Government of Bhutan, National Statistics Bureau. 2018. 2017 Population & Housing Census of Bhutan—National

Report. Thimphu. 5 On-farm enterprises are mainly involved in commercial farming and livestock production. Off-farm enterprises are

involved in all types of economic activities other than subsistence production and other on-farm activities. An estimated 11.9% of the rural population lives below the national poverty line, compared with 0.2% in urban areas. Government of Bhutan, National Statistical Bureau. 2017. Bhutan Poverty Analysis Report 2017. Thimphu.

6 Government of Bhutan, Gross National Happiness Commission. 2019. Twelfth Five Year Plan, 2018–2023—Just, Harmonious and Sustainable Society through Enhanced Decentralisation. Thimphu.

7 ADB. 2020. Asian Development Outlook 2020—What Drives Innovation in Asia. Manila.

2

growth rate projections downwards to 2.4% in FY2020 and 1.7% in FY2021.8 The pandemic’s impacts are more severe for informal sector workers and the self-employed, who have limited financial assets and resources to cope with the economic shock. ADB estimated that about 23,000 jobs are at risk because of the pandemic. Due to the pandemic’s effect, additional 2,176–12,362 people will result in living on less than $1.90 a day (adjusted for purchasing power parity).9 5. Government policy. The government’s Twelfth Five Year Plan, 2018–2023 specifically focuses on creating income-generating opportunities for vulnerable populations and enhancing the rural economy by promoting CSIs and improving access to finance for CSIs, including startups and informal CSIs (footnote 6). The government’s National Financial Inclusion Strategy, 2018–2023 envisions enhancing access to affordable formal financial services for all Bhutanese.10 The strategy specifically aims to enhance financing to (i) strengthen priority economic activities, particularly agricultural and nonagricultural CSIs; and (ii) promote innovative credit mechanisms and alternative sources of financing. 6. Cottage and small industries. CSIs are micro and small enterprises that are primarily involved in production of crops and livestock (on-farm enterprises), as well as small-scale manufacturing and services such as retail shops, transport, and restaurants (off-farm enterprises) (footnote 5). Most CSIs are rural-based cottage-sized on-farm enterprises with the investment size below Nu500,000 and run by household members.11 In Bhutan, CSIs constitute more than 90% of total enterprises and employ about 99,288 people, with 22,064 registered CSIs in 2019. In addition to registered CSIs, there are many informal CSIs. CSIs face various constraints, including poor access to finance and bureaucratic hurdles related to labor regulation, taxation, and registration. Among these, access to finance is the largest constraint.12 Men- and women-owned CSIs face similar challenges; however, these challenges are often greater for women, who suffer from low literacy, low self-confidence, and a lack of education, training, and entrepreneurial and technical skills.13 Other key constraints for women-owned CSIs include labor shortages and inadequate business premises. As a result of these constraints, most women-owned CSIs are unable to scale up their businesses, and therefore remain at subsistence level. 7. Rural finance. Bhutan’s finance sector comprises six banks, four nonbank financial institutions (two insurance companies, one reinsurance company, and one pension fund), and five microfinance institutions. The six banks are further categorized into four commercial banks,

8 ADB. 2020. Asian Development Outlook 2020 Supplement: Lockdown, Loosening, and Asia’s Growth Prospects.

Manila. The World Economic Outlook of the International Monetary Fund (IMF) also projects economic growth of about 2.7% for Bhutan in FY2020. IMF. 2020. The World Economic Outlook. Washington, DC.

9 ADB. 2020. Report and Recommendation of the President to the Board of Directors: Proposed Countercyclical Support Facility Loan to the Kingdom of Bhutan for the COVID-19 Active Response and Expenditure Support Program. Manila.

10 Royal Monetary Authority (RMA). 2018. National Financial Inclusion Strategy, 2018–2023. Thimphu. 11 For this project, micro industries are defined as enterprises that have an investment size below Nu500,000, and

micro-industry loans are loans of less than Nu375,000; cottage industries are defined as entities with an investment size of less than Nu1 million, and cottage industry loans are loans of less than Nu750,000; small industries are defined as entities with an investment size of Nu1 million–Nu10 million, and small industry loans are loans of Nu750,000–Nu7.5 million. Investment size refers to the total value of an enterprise including both financial and physical assets. Economic Analysis (accessible from the list of linked documents in Appendix 2).

12 In an enterprise survey conducted by the Ministry of Economic Affairs in 2011, more than 80% of CSIs identified access to finance as a major constraint. Government of Bhutan 2012. Cottage, Small & Medium Industry Development Strategy (2012–2020) & Action Plan (2012–2014). Thimphu.

13 According to a 2015 World Bank enterprise survey, about 26% of women CSI entrepreneurs had no formal education, 15.23% had primary education, 57.32% had secondary education (combined lower, middle, and higher secondary), and less than 2% had tertiary education. World Bank. Enterprise Survey: Bhutan Country Highlights 2015.

3

a development bank (BDB), and a CSI bank (National CSI Bank).14 Total loan outstanding in the finance sector amounted Nu133.13 billion in 2019, of which CSIs accounted for 15%, or Nu20.17 billion. 8. Rural CSIs lack access to finance because their financing requires a different set of expertise and methodology from regular commercial banking. Many CSI owners are illiterate or semiliterate and have limited financial literacy, therefore lack the capacity to develop business proposals, which are needed for financing from formal financial institutions. Commercial banks lack business expertise in CSI financing and impose stringent collateral requirements, as per standard commercial banking risk management practices. This generally excludes them from lending to CSIs, most of which do not own sufficient physical collateral. BDB, the key formal financial intermediary with a CSI financing mandate, offers collateral-based loans to CSIs by mostly accepting rural land; however, the value of rural land is difficult to assess. As a result, it does not facilitate an effective CSI credit risk management. Further, BDB has funding constraints and weak financial and operational performance in extending financial services to rural CSIs. BDB needs to improve its credit appraisal methodology to effectively mitigate risks in lending to CSIs. 9. Bhutan Development Bank. BDB was incorporated in January 1988 with support from ADB to function as a development finance institution.15 BDB obtained its banking license in March 2010. The government owns 97% of the total paid-up capital. BDB’s key function is to provide financial services to agricultural, commercial, and industrial enterprises, especially CSIs. BDB is the most important rural finance intermediary in the country, accounting for 95% of the total agriculture loan portfolio and 84% of the CSI loan portfolio in 2019.16 In 2019, BDB’s total gross loans amounted to Nu20 billion, with 50,501 rural CSI borrowers, of which 41% were women. BDB’s funding sources are limited—84% of BDB’s funding comes from customer deposits, 5% comprises borrowing from other commercial banks, 1% is derived from investments, and the remainder is equity. BDB also provides non-collateral-based group loans (group loans) to enable CSIs with no or little collateral to access to finance. However, group loans constitute only about 1% of BDB’s total loan portfolio.17 10. BDB’s financial performance, in particular its capital adequacy, asset quality, and profitability, is weak (Table 1). ADB’s financial due diligence and financial management assessment found that BDB does not fully meet ADB eligibility criteria for financial intermediaries.18 BDB is undercapitalized and its capital adequacy ratio is below the minimum capital adequacy ratio of 12.5% set by the Royal Monetary Authority (RMA), the central bank. BDB’s financial sustainability is weakened by nonperforming loans (NPLs)—its NPL ratio was

14 National CSI Bank was established in February 2020 by converting the Rural Enterprise Development Corporation

Limited, a microfinance institution established by the government in 2016. Based on ADB’s financial due diligence and financial management assessment and because of its small size (about 0.2% of the total finance sector portfolio), National CSI Bank was not considered for financing under the project.

15 ADB. 1988. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the Kingdom of Bhutan for the Bhutan Development Finance Corporation Project. Manila.

16 Rural finance is defined as financial services in rural areas. Rural CSI financing is a subset of rural finance. However, in Bhutan, most rural clients of financial intermediaries are CSIs. Accordingly, rural finance and rural CSI financing are largely synonymous.

17 Under group loans, loans are made to individual group members and members guarantee other members’ loans. 18 ADB. 2003. Financial Intermediation Loans. Operations Manual. OM D6/BP. Manila. The key eligibility criteria include

(i) financial soundness; (ii) adequate credit and risk management policies, operating systems, and procedures; (iii) compliance with prudential regulations; and (iv) acceptable corporate and financial governance. OM D6 allows ADB to finance financial intermediaries that do not meet all eligibility criteria if they agree to implement measures to meet these criteria in accordance with a time-bound action plan acceptable to ADB. Bhutan Development Bank Financial Due Diligence and Bhutan Development Bank Financial Management Assessment (accessible from the list of linked documents in Appendix 2).

4

23.16% in 2019. This high NPL ratio largely stemmed from BDB’s inadequate credit appraisal methodology for rural CSIs, as well as natural calamities—heavy rainfall and flooding in 2016 led to a nearly 100% increase in NPLs in 2017, as most of BDB’s CSI loans are agriculture-related. However, the NPL ratio of 23.16% for 2019 does not present an accurate picture of BDB’s portfolio quality because BDB carries loans classified as loss for more than 3 years—legacy NPLs—on its balance sheet. 19 If legacy NPLs were written off, BDB’s estimated NPL ratio would have been 16.22% in 2019. COVID-19 response measures by the RMA to relief affected borrowers by relaxing some repayment obligations negatively affected BDB’s portfolio quality further in 2020.20 To address these deficiencies, ADB and BDB have agreed to a time-bound BDB institutional strengthening plan.

Table 1: Bhutan Development Bank Key Financial and Operational Indicators

Particulars 2016 2017 2018 2019a 2020b

CAR (%) 16.60 10.40 12.50 11.56 10.41

Total gross loan (Nu million)

16,546.66 18,498.52 18,613.00 19,655.71 19,749.62

NPL ratio (%) 12.47 22.72 20.72 23.16c 37.00c

ROAE (%) 9.27 -33.27 9.06 7.74 -2.67

ROAA (%) 1.42 -3.95 0.88 0.50 -29.31

CAR = capital adequacy ratio, NPL = nonperforming loan, ROAA = return on average assets, ROAE = return on average equity. a As of September 2019. b Projections. c Including legacy NPLs; if legacy NPLs are written off, the NPL ratio would be 16.22% in 2019. Sources: Bhutan Development Bank, Annual Reports, various years, Thimphu; and Asian Development Bank estimates.

11. Key issues. Key constraints for the overall rural finance sector are summarized as (i) BDB’s weak operational and financial performance, including inadequate institutional capacity in CSI financing; (ii) BDB’s insufficient operationalization of non-collateral-based loans for CSIs that lack assets; (iii) CSIs’ limited financial literacy; (iv) CSIs’ lack of skills to develop adequate business proposals; and (v) BDB’s limited funding sources. 12. Proposed solution. The project will provide financing support to BDB to expand its rural CSI financing outreach under ADB’s financial intermediation loan modality. The project will provide credit lines to BDB for (i) collateral-based rural CSI financing, and (ii) non-collateral-based group loans. For collateral-based rural CSI financing, BDB will adopt collateral requirements established by BDB using a credit appraisal methodology acceptable to ADB. For non-collateral-based group loans, BDB will mainly target rural CSIs that are owned by small and marginal farmers and women who do not own sufficient physical assets for collateral. The attached TA will develop BDB’s capacity to provide nonfinancial services essential to rural CSI clients, including financial literacy training and business development support. The financial intermediation loan modality was chosen to achieve the dual objectives of (i) expanding financing outreach to rural CSIs, and (ii) strengthening BDB’s capacity to ensure operational sustainability.

19 The major constraints that prevent BDB from expediting write-off of its legacy NPLs are (i) lengthy legal process, (ii)

difficulties disposing rural collateral, and (iii) issues related to income tax provisions. BDB can legally write off legacy NPLs, but requires a prior approval from the RMA. The IMF recommends that the RMA issues guidelines to encourage banks to write off legacy NPLs. IMF. 2018. Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for Bhutan. Washington, DC.

20 On 14 April 2020, the RMA announced monetary measures in response to COVID-19 including (i) deferment of loan repayments, (ii) waiving interest rates on outstanding loans, (iii) extension of grace period, (iv) soft working capital loans for tourism-related businesses, and (v) subsidized loans to CSIs through National CSI Bank.

5

13. The project will strengthen BDB’s institutional capacity by supporting the implementation of BDB institutional strengthening plan. Selected institutional strengthening milestones are set forth in the project administration manual (PAM). 21 BDB’s weaknesses can be improved with structured interventions focusing on governance, portfolio quality including NPL management, and internal control and risk management, among others. ADB established that BDB has adequate capacity, organizational structure, and human resources to implement the plan. BDB has commenced implementation of the plan and has (i) established a dedicated NPL resolution unit; (ii) developed a comprehensive NPL resolution framework; (iii) adopted a new credit appraisal system that incorporates subproject-specific, risk-based analysis; and (iv) initiated intensified portfolio monitoring. Through those measures, BDB can effectively control portfolio quality, resolve NPLs, and improve its financial performance. Specifically, intensifying BDB’s debt recovery litigation and asset auctioning capacity under the NPL resolution framework will enable BDB to expedite NPL write-offs, including legacy NPLs. With the improved credit appraisal system, BDB can substantially reduce credit risks and prevent new NPLs. Furthermore, BDB will adopt appropriate institutional operational policies, including improved credit manuals and a comprehensive internal control and compliance framework, by December 2021, and an enhanced accounting policy and financial administration by-laws by June 2022.

14. ADB’s sector experience and lessons. The project builds on ADB’s successful finance sector project experience in Bhutan. In 2007, ADB approved the Micro, Small, and Medium-Sized Enterprises Sector Development Program. 22 The program successfully facilitated BDB’s reorientation toward micro, small, and medium-sized enterprise lending. ADB approved the Financial Market Development Program (subprogram 1) in 2019 and subprogram 2 in 2020, which will strengthen mobilization of resources and enhance stability and inclusiveness in the finance sector. 23 15. Alignment with ADB’s Strategy 2030. The project is aligned with ADB’s Strategy 2030 operational priorities of (i) addressing remaining poverty and reducing inequalities, (ii) accelerating progress in gender equality, and (iii) strengthening governance and institutional capacity. 24 The project will promote rural employment generation and poverty reduction by enhancing rural CSI financing. The project will have a visible impact on gender equality by extending access to finance to at least 31,857 CSIs owned by women by 2024. The project will strengthen BDB’s institutional capacity and have a sustainable rural development impact. B. Project Description 16. The project is aligned with the following impact: productive and gainful rural employment opportunities generated (footnote 6). The project will have the following outcome: finance sector’s rural financing capacity enhanced.25

21 Project Administration Manual (accessible from the list of linked documents in Appendix 2). 22 ADB. 2007. Report and Recommendation of the President to the Board of Directors: Proposed Asian Development

Fund Grant to the Kingdom of Bhutan for the Micro, Small, and Medium-Sized Enterprises Sector Development Program. Manila.

23 ADB. 2019. Report and Recommendation of the President to the Board of Directors: Proposed Programmatic Approach and Policy-Based Loan for Subprogram 1 and Technical Assistance Grant to the Kingdom of Bhutan for the Financial Market Development Program. Manila; and ADB. 2020. Report and Recommendation of the President to the Board of Directors: Proposed Policy-Based Loan for Subprogram 2 and Technical Assistance Grant to the Kingdom of Bhutan for the Financial Market Development Program. Manila.

24 ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific. Manila.

25 The design and monitoring framework is in Appendix 1.

6

17. Output 1: Collateral-based rural cottage and small industry financing expanded. The project will finance a $15 million credit line for BDB to expand collateral-based loans to rural CSIs. BDB will finance rural CSIs that are engaged in small-scale enterprise activities such as crop cultivation, livestock production, retail shops, and restaurants. Eligible subborrowers are rural CSIs with an investment size of less than Nu10 million. The maximum rural CSI subloan amount is Nu7.5 million. With this credit line, BDB can leverage its rural CSI financing from Nu11.5 billion and 50,501 borrowers (of which 41% were CSIs owned by women) in 2019, to Nu17.3 billion with 63,714 borrowers (of which 50% are CSIs owned by women) by 2024. 18. Output 2: Non-collateral-based rural cottage and small industry financing expanded. To meet the needs of marginal rural CSIs lacking sufficient physical collateral to access financing from commercial banks, the project will finance a $5 million credit line for BDB to extend non-collateral-based group loans to rural CSIs. Group-loan subborrowers will be limited to rural CSIs engaged in micro-scale enterprises, with an investment size of less than Nu1 million, that are smaller than rural CSI financing subborrowers and have few or no tangible assets that can qualify as collateral. Group-loan subborrowers need to show their willingness to join a group and guarantee other group members’ loans. The maximum group-loan amount is Nu500,000. With this credit line, BDB will reach at least 4,996 group-loan subborrowers, of which 65% are women, by 2024. 19. Output 3: Bhutan Development Bank’s institutional capacity strengthened. To address BDB’s operational and financial weaknesses, in particular its high level of NPLs, the project will strengthen BDB by supporting the implementation of BDB’s institutional strengthening plan. The plan’s objective is to bring structural and operational changes to improve BDB’s performance and outreach, especially to rural CSIs. The BDB institutional strengthening plan is focused on, but is not limited to (i) strengthening corporate governance, (ii) improving portfolio quality and resolving NPLs, (iii) initiating new credit appraisal methodologies, (iv) improving management information systems, and (v) strengthening internal control and risk management. To ensure that BDB’s performance improves, key institutional strengthening milestones and performance targets are included in the PAM (footnote 21). BDB will provide quarterly reports to ADB on progress in the institutional strengthening plan’s implementation, including achievement of milestones and targets, and the government will ensure that BDB implements remedial measures in case of non-achievement. The output will also support BDB’s group-loan operations. This output will be supported under the attached TA (para. 27).

Table 2: Bhutan Development Bank Selected Key Performance Targets

Indicators 2021 2022 2023 2024

CAR (%) 10.61 10.88 12.87 12.72

Total gross loans (Nu million) 20,740.74 21,888.83 23,208.37 24,721.84

Total gross CSI loans (Nu million)a 13,481.48 14,665.52 16,013.78 17,305.29

NPL ratio (%)b 25.00 21.93 19.81 18.65 NPL ratio —for loans disbursed after 1 January 2021 (%) 8.00 6.50 6.50 6.50

ROAA (%) 0.54 0.67 1.03 1.10

ROAE (%) 7.00 8.55 12.75 12.93 CAR = capital adequacy ratio, CSI = cottage and small industry, NPL = nonperforming loan, ROAA = return on average assets, ROAE = return on average equity. a Including group loans. b Including legacy NPLs. Sources: Bhutan Development Bank and Asian Development Bank estimates.

7

20. Output 4: Financial literacy training and business development support extended to rural cottage and small industries. The rural CSI financing components under outputs 1 and 2 will be combined with financial literacy training and business development support for potential rural CSI borrowers, especially women, including training of trainer programs for credit officers. BDB’s credit officers will educate groups of rural people on financial products and services including sensitization on group loans, household financial management, and risks and rights of customers. BDB’s credit officers will provide business development support to potential rural CSI borrowers and will include development of a simple template-based business plan, basic bookkeeping training, and other support. The output will be supported under the attached TA (para. 27). C. Value Added by ADB 21. ADB’s small-scale knowledge TA facilitated the BDB institutional strengthening plan development.26 The project is relevant for Bhutan’s post-COVID-19 economic recovery. While ADB’s COVID-19 Active Response and Expenditure Support Program (footnote 9) provided immediate social relief, this project is critical for the medium-term economic recovery. The project’s institutional strengthening support to BDB will result in sustainable rural finance expansion. The project complements the Financial Market Development Program (subprograms 1 and 2) and contributes to the long-term financial sector development in Bhutan (footnote 23). The project will have close coordination with development partners especially the German Savings Banks Foundation for International Cooperation for capacity development.27 D. Summary Cost Estimates and Financing Plan 22. The government has requested a concessional loan of $20 million from ADB’s ordinary capital resources to help finance the project. The loan will have a 32-year term, including a grace period of 8 years; an interest rate of 1.0% per year during the grace period and 1.5% per year thereafter; and such other terms and conditions set forth in the draft loan and project agreements. The loan proceeds will be disbursed in accordance with ADB’s Loan Disbursement Handbook (2017, as amended from time to time).

Table 3: Summary Cost Estimates

Item Total Cost Share of Total ($ million) (%)

Credit line—rural cottage and small industry financinga 15.0 75.0

Credit line—group loana 5.0 25.0 Total 20.0 100.0

a The subborrowers are expected to contribute at least 25% of the total rural cottage and small industry subproject investments from their own sources including in-kind or labor contributions.

Source: Asian Development Bank estimates.

Table 4: Summary Financing Plan

Amount Share of Total Source ($ million) (%) Asian Development Bank

Ordinary capital resources (concessional loan) 20.0 100.0 Total 20.0 100.0

Source: Asian Development Bank estimates.

26 ADB. 2019. Technical Assistance to the Kingdom of Bhutan for Diagnostic Study and Strategy Development for Rural

Finance Sector Development. Manila. 27 The German Savings Banks Foundation for International Cooperation has promoted access to financial services for

the people in Bhutan by setting up the RENEW Microfinance Bank, a microfinance institution.

8

23. Relending. The government will relend the loan proceeds to BDB pursuant to a subsidiary loan agreement. The government expects to structure the subsidiary loan as follows: (i) $15 million of the subsidiary loan as a subordinated debt;28 and (ii) $5 million of the subsidiary loan as an unsubordinated debt. Tentatively, the subsidiary loan of $15 million subordinated debt will have a 10-year term with no grace period, interest rate of 5.0% per year; and such other terms and conditions to be set forth in the subsidiary loan agreement between the government and BDB; and the subsidiary loan of $5 million unsubordinated debt will have a 10-year term with no grace period, an interest rate of 4.0% per year, and such other terms and conditions to be set forth in the subsidiary agreement between the government and BDB. The final subsidiary loan terms and conditions for relending will be determined in the subsidiary loan agreement between the government and BDB. BDB will use the subsidiary loan proceeds to sub-lend to eligible rural CSIs under the two credit lines: (i) collateral-based rural CSI financing, and (ii) non-collateral-based group loans ─ established under outputs 1 and 2 of the project. 24. Sublending. BDB will sublend the subsidiary loan proceeds from the government to rural CSI subborrowers based on each credit line’s eligibility criteria and terms and conditions:

(i) Collateral-based rural CSI financing. An eligible rural CSI subborrower (a) is an enterprise with an investment size of less than Nu10 million; (b) is composed of individuals who are no younger than 18 years old; (c) is borrowing subloans against which fixed or financial assets are pledged, based on collateral requirements established by BDB using a credit appraisal methodology acceptable to ADB; (d) or its membership have no record of NPLs with BDB or other financial institutions; and (e) has demonstrated experience relevant to its proposed subproject. Rural CSI subloan interest rates and maturity vary depending on types of activities and underlying risks of rural CSI subprojects. However, subloan interest rates should be adequate to cover all costs and risks associated with subprojects and ensure an adequate margin.

(ii) Non-collateral-based group loans. An eligible group-loan subborrower (a) is an enterprise with an investment size of less than Nu1 million; (b) has demonstrated that it cannot offer fixed or financial assets against which to borrow subloans; (c) is composed of individuals who are no younger than 18 years old; (d) has completed all necessary preparatory work prior to applying for a subloan, including requirements established by BDB for demonstrating collective membership; and (e) has demonstrated that its membership has participated in group sensitization and training activities regarding the obligations of the qualified enterprise and its individual members. The indicative sublending terms and conditions are an interest rate of 10% per annum, with a maturity of up to 5 years for group term loans, and up to 1 year for group seasonal loans.29

25. Revolving fund (at BDB). The subloans repaid by subborrowers will be maintained at a separate rural CSI financing account and group-loan fund account established at BDB. BDB will sublend to eligible subborrowers under the project’s same onlending terms and conditions. The same subborrower eligibility criteria will apply to rural CSI financing and group loans.

28 In a bank’s capital, a subordinated debt is qualified as a part of capital. The government’s subordinated debt to BDB

will help improve BDB’s capital adequacy. 29 Group term loans are mainly for investments and group seasonal loans are mainly for working capital.

9

E. Implementation Arrangements 26. The implementation period for the project is 4 years (January 2021–December 2024). The Ministry of Finance will be the executing agency, and BDB will be the implementing agency (Table 5). The implementation details are in the PAM (footnote 21).

Table 5: Implementation Arrangements Aspects Arrangements Implementation period January 2021–December 2024 Estimated completion date 31 December 2024 Estimated loan closing date 30 June 2025 Management

(i) Oversight body Project steering committee: (i) Director general, Department of Macroeconomic Affairs; (ii) Chief executive officer, Bhutan Development Bank; and (iii) Bhutan Development Bank representative as the secretariat.

(ii) Executing agency Ministry of Finance (Department of Macroeconomic Affairs) (iii) Implementing agency Bhutan Development Bank (iv) Implementation unit The project implementation unit will be headed by a project implementation unit

manager and at least one full-time staff. Retroactive financing Withdrawals from the loan account may be made for reimbursement of eligible

expenditures incurred under the project before the effective date, but not earlier than 12 months before the date of the loan agreement, subject to a maximum amount equivalent to 20% of the loan amount.

Disbursement The loan proceeds will be disbursed following ADB’s Loan Disbursement Handbook (2017, as amended from time to time) and detailed arrangements agreed between the government and ADB. An advance account will be used.

ADB = Asian Development Bank. Source: ADB.

III. ATTACHED TECHNICAL ASSISTANCE

27. The project will be supported through attached TA for Capacity Building for Rural Finance Development. The TA has two outputs, which are aligned with the project: (i) BDB’s institutional capacity strengthened, and (ii) financial literacy training and business development support extended to rural CSIs. 28. ADB will administer the TA. ADB’s South Asia Department will select, supervise, and evaluate the consultants. ADB will recruit international and national consultants using individual consultant selection. ADB will procure consulting services following the ADB Procurement Policy (2017, as amended from time to time) and the staff instructions for ADB-administrated consultants.30 The TA is estimated to cost $1,000,000, of which $750,000 will be financed on a grant basis by ADB’s Technical Assistance Special Fund (TASF 6); and $250,000 will be financed on a grant basis by Financial Sector Development Partnership Special Fund.31

30 The required consultant inputs include (i) international technical advisor to BDB (6 person-months), (ii) international

bank restructuring specialist (16 person-months), (iii) international bank capacity development specialist (16 person-months), (iv) international rural finance specialist (16 person-months), (v) national core banking system specialist (9 person-months), (vi) national environmental and social safeguards specialist (3 person-months), and (vii) national gender specialist (5 person-months). Attached Technical Assistance Report (accessible from the list of linked documents in Appendix 2).

31 Established by ADB. Financing partner: the Government of Luxembourg.

10

IV. DUE DILIGENCE A. Technical 29. The government has limited experience in building the institutional capacity of state-owned banks. The attached TA addresses this constraint by assisting the government in developing and implementing the BDB institutional strengthening plan. BDB’s expertise in rural enterprise financing is also limited. The attached TA will support capacity building of BDB in rural CSI financing especially for non-collateral-based group loans by updating group-loan manuals to include improved credit underwriting processes, and developing a group-loan operational plan. B. Economic and Financial Viability 30. The unmet financial need for rural CSIs is estimated at Nu24.89 billion (about $331.91 million).32 The project will result in enhanced access to finance for rural CSIs that otherwise would only have access to informal sources of finance.33 The project will directly benefit at least 63,714 rural CSI borrowers, of which 50% are owned by women by 2024, by providing reliable and affordable institutional finance. C. Sustainability 31. BDB has a sustainability risk because of high NPLs. The BDB institutional strengthening plan has a special focus on resolving and controlling NPLs. The credit line for the $15 million subordinated debt from the government to BDB is qualified as tier 2 capital, thus contributing to the improvement of BDB’s capital adequacy ratio and financial sustainability. 34 The BDB institutional strengthening plan implementation especially in relation to NPL management will be closely monitored by ADB through quarterly reports and periodical review missions. D. Governance 32. ADB requirements and policies on financial management, procurement, and environmental and social safeguards were discussed and agreed with the government and BDB and incorporated in the project design. Procurement of goods, works, and non-consultancy services will follow the ADB Procurement Policy (2017, as amended from time to time), Procurement Regulations for ADB Borrowers (2017, as amended from time to time), and relevant staff instructions. Procurement will be undertaken by the individual beneficiary; fitness for purpose can be achieved by using established private sector and commercial practices. 33. The overall financial management risk for the project is assessed high. BDB has (i) inadequate financial management practices and lacks an accounting policy and financial management guidelines, (ii) weak internal control systems, (iii) poor portfolio management and high NPL ratio, and (iv) limited institutional expertise to undertake rural CSI financing. ADB’s integrity due diligence found that BDB’s weak management information systems and internal controls and the lack of an appropriate supervision and oversight accountability mechanism pose significant integrity risks. Deficiencies in BDB’s anti-money laundering/combatting the financing

32 Economic Analysis (accessible from the list of linked documents in Appendix 2). 33 Informal sources of finance refer to money lenders, relatives, and friends. Informal money lenders typically charge

annual interest rates of more than 120%. 34 Tier 2 capital is the second layer of capital that a bank must keep as part of its required reserves. This tier comprises

revaluation reserves, general provisions, subordinated term debt, and hybrid capital instruments.

11

of terrorism (AML/CFT) system also pose a significant integrity risk. 35 ADB’s financial due

diligence identified cases of misappropriation, embezzlement, unauthorized sanctions and disbursements, overwriting of field receipts, backdating errors in field receipts, and failure of updating account records of funds collected in fields. BDB has initiated measures to improve its internal controls. The BDB institutional strengthening plan will enhance internal audit and fraud control. Furthermore, BDB committed to undertaking measures to address the risks outlined in Table 6. The significant integrity risks are mitigated through the attached TA, which will support the development of BDB’s internal control and compliance framework, including AML/CFT.36 ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government and BDB. The specific policy requirements and supplementary measures are described in the PAM. E. Poverty, Social, and Gender 34. The project will have positive economic empowerment impacts on rural small and marginal farmers and women. The project’s non-collateral-based group loans will be gender-inclusive and the financial literacy training and business development support will focus on women. This will result in increased financial access for at least 31,857 rural CSIs owned by women, including at least 3,247 women group-loan borrowers by 2024. The project is classified gender equity as a theme.37 F. Safeguards 35. In compliance with ADB’s Safeguard Policy Statement (2009), the project’s safeguard categories are as follows: 38 36. Environment (category FI), involuntary resettlement (category FI-C), indigenous peoples (category FI-C). BDB will not finance subprojects with significant environmental impacts (category A), involuntary resettlement impacts (category A or B), or indigenous peoples impacts (category A or B).39 For subprojects with environmental impacts that are not significant (category B), BDB will prepare an initial environmental examination and environmental management plan, and submit the appropriate plan for ADB’s approval before the subproject is financed. 37. BDB has an environmental and social safeguard policy, but lacked a system to screen projects.40 BDB has adopted an environmental and social management system (ESMS), which was agreed by ADB. BDB’s Environment and Social Safeguard Unit will monitor and report on the status of ESMS implementation to ADB. The attached TA will support BDB’s implementation of the ESMS. BDB will

(i) through BDB’s branches, screen all subprojects to be financed to ensure compliance with government regulations, project legal agreements, the PAM, environmental and social screening guidelines, and ADB’s Prohibited Investment Activities List; and

35 ADB. 2003. Enhancing the Asian Development Bank’s Role in Combating Money Laundering and the Financing of

Terrorism. Manila. 36 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2). 37 Gender Action Plan (accessible from the list of linked documents in Appendix 2). 38 ADB. Safeguard Categories. https://www.adb.org/site/safeguards/safeguard-categories. 39 Although indigenous peoples live in scattered villages throughout Bhutan, no presence of indigenous peoples are

identified in BDB’s operating areas. BDB may finance CSIs owned by indigenous peoples; however, the project will not finance CSIs that will directly or indirectly affect the dignity, human rights, livelihood systems, culture, or territories of indigenous peoples. Thus, indigenous peoples safeguards category A and B will not be financed.

40 Bhutan Development Bank. 2020. Environmental and Social Safeguard Policy. Thimphu.

12

(ii) exclude all subprojects with category A impacts for environment, or category A and B impacts for involuntary resettlement or indigenous peoples.

G. Summary of Risk Assessment and Risk Management Plan 38. Major risks and mitigating measures are summarized in the table and described in detail in the risk assessment and risk management plan (footnote 36).

Table 6: Summary of Risks and Mitigating Measures Risk Mitigation Measures

BDB’s inadequate financial management practices may contribute to poor operations

ADB will regularly collect audited fund utilization statements from BDB. The attached TA will conduct capacity development training for BDB staff on ADB’s financial management requirements and procedures.

BDB’s weak financial and operational control system may lead to poor operational performance

The BDB institutional strengthening plan includes measures to strengthen BDB’s internal control system and develop a comprehensive internal control and compliance framework.

Poor portfolio management with high NPLs may weaken BDB’s sustainability

Under the BDB institutional strengthening plan, measures will be taken to better manage portfolio and reduce NPLs.

BDB’s limited institutional expertise to undertake rural CSI financing may lead to limited outreach

BDB will develop a group-loan operational plan. The attached TA will provide training on agriculture and livestock finance and on the group-loan manual and operational plan.

Weak implementation of BDB’s AML/CFT may undermine BDB’s operations

ADB will monitor BDB’s AML/CFT policy implementation and the attached TA will provide training on AML/CFT to BDB staff.

ADB = Asian Development Bank, AML/CFT = anti-money laundering/combating the financing of terrorism, BDB = Bhutan Development Bank, CSI = cottage and small industry, NPL = nonperforming loan, TA = technical assistance. Source: Asian Development Bank.

V. ASSURANCES

39. The government and BDB have assured ADB that implementation of the project shall conform to all applicable ADB requirements, including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, financial management, and disbursement as described in detail in the PAM and loan agreements. The government and BDB have agreed with ADB on certain covenants for the project, which are set forth in the draft loan agreement and project agreement. The government has also agreed with ADB on the following conditions to the effectiveness of the loan agreement: the subsidiary loan agreement between the government and BDB, in form and substance satisfactory to ADB, shall have been duly executed and delivered on behalf of the government and BDB, and shall have become fully effective and binding on the parties thereto in accordance with its terms.

VI. RECOMMENDATION 40. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the loan of $20,000,000 to the Kingdom of Bhutan for the Rural Finance Development Project, from ADB’s ordinary capital resources, in concessional terms, with an interest charge at the rate of 1.0% per year during the grace period and 1.5% per year thereafter; for a term of 32 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 project agreements presented to the Board.

Masatsugu Asakawa President

19 November 2020

Appendix 1 13

DESIGN AND MONITORING FRAMEWORK

Impacts the Project is Aligned with Productive and gainful rural employment opportunities generated. (Twelfth Five Year Plan, 2018–2023)a

Results Chain Performance Indicators Data Sources and

Reporting Mechanisms Risks and Critical

Assumptions

Outcome By December 2024: Finance sector’s rural financing capacity enhanced

BDB’s rural CSI borrowers increased to 63,714, of which 50% are women-owned CSIs (2019 baseline: 50,501, of which 41% are women-owned CSIs) (OP 2.1.3) At least 50% of performance targets in the BDB institutional strengthening plan achieved (2019 baseline: not applicable) [under the attached TA] (OP 1.2.1)b

BDB annual reports for 2020, 2021, 2022, and 2023 BDB institutional strengthening plan progress evaluation reports for 2020, 2021, 2022 and 2023

Project executing agencies lack sufficient capacity to perform multidisciplinary tasks which can lead to unsatisfactory project outcome

Outputs By December 2024: 1. Collateral-based rural

CSI financing expanded

a. BDB’s rural CSI loans outstanding increased to Nu17.30 billion, of which at least 50% is for women-owned CSIs (2019 baseline: Nu11.50 billion in CSI loans outstanding, of which 41% is for women– owned CSIs) (OP 1.2.1)

BDB annual reports for 2020, 2021, 2022, and 2023

Prolonged effects of the pandemic may slowdown uptake of CSI loans

2. Non-collateral-based rural CSI financing expanded

2a. At least 12,000 rural people, of which at least 50% are women, familiarized with the information on BDB’s non-collateral-based rural CSI financing (2019 baseline: 10,595) 2b. BDB’s group-loan borrowers increased to 4,996, of which 65% are women borrowers (2019 baseline: 2,398, of which 61% are women borrowers) (OP 2.1.3)

2a.–c. BDB annual reports for 2020, 2021, 2022, and 2023 2a.–c. Project progress performance monitoring reports

2c. Cumulative disbursement of BDB’s group loans totaled Nu899.23 million, of which 65% is for women group-loan borrowers (2019 baseline: Nu340.94 million, of which 60% is for women group-loan borrowers) (OP 2.1.3)

2a.–c. BDB annual reports for 2020, 2021, 2022, and 2023

14 Appendix 1

Results Chain Performance Indicators Data Sources and

Reporting Mechanisms Risks and Critical

Assumptions

3. BDB’s institutional capacity strengthened

3a. BDB institutional strengthening milestones implemented (2019 baseline: not applicable) [under the attached TA] (OP 6.1.2)

BDB annual reports for 2020, 2021, 2022 and 2023 BDB institutional strengthening plan progress evaluation reports for 2020, 2021, 2022 and 2023

4. Financial literacy training and business development support extended to rural CSIs

4a. At least 4,000 rural people, of which 50% are women, gained increased knowledge of finance (2019 baseline: not applicable) [under the attached TA] 4b. Business development services extended to at least 2,000 rural CSIs, of which 50% are women-owned CSIs (2019 baseline: Not applicable) [under the attached TA]

4a.–b. Training participant survey 4a.–b. Project progress performance monitoring reports

Key Activities with Milestones 1. Collateral-based rural CSI financing expanded (Q1 2021–Q4 2024) 1.1 Rural CSI subborrower identification (Q1 2021–Q4 2024) 1.2 Rural CSI subloan appraisal and due diligence (Q1 2021–Q4 2024) 1.3 Rural CSI subloan sanctioning (Q1 2021–Q4 2024) 1.4 Rural CSI subloan portfolio performance monitoring (Q1 2021–Q4 2024) 2. Non-collateral-based rural CSI financing expanded 2.1 Group-loan manual revised (Q1 2021) 2.2 Group-loan operational plan developed (Q1 2021) 2.3 Group-loan focal officers assigned (Q2 2021) 2.4 Group-loan training for credit officers provided (Q3 2021–Q4 2024) 2.5 Agriculture and livestock loan training for credit officers provided (Q3 2021–Q4 2024) 2.6 Group-loan operational plan implemented (Q4 2021–Q4 2024) 2.7 Group-loan operational plan implementation monitoring and evaluation (Q1 2022–Q4 2024) 3. BDB’s institutional capacity strengthened 3.1 BDB institutional strengthening plan implementation (Q1 2021–Q4 2024) 3.2 BDB institutional strengthening plan implementation monitoring and evaluation (Q2 2021, Q2 2022, Q2 2023, and Q2 2024) 4. Financial literacy training and business development support extended to rural CSIs 4.1 Financial literacy training module developed (Q3 2021–Q4 2021) 4.2 Financial literacy training operational plan developed (Q3 2021–Q4 2021) 4.3 TOT on financial literacy for credit officers provided (Q1 2022–Q4 2024) 4.4 Financial literacy training operational plan implementation and monitoring (Q1 2022–Q4 2024) 4.5 Business development services process and methodology developed (Q3 2021–Q4 2021) 4.6 Training on business development services for credit officers provided (Q1 2022–Q4 2024) 4.7 Business development service operation monitoring and evaluation (Q1 2022–Q4 2024)

Appendix 1 15

Project Management Activities Consultant recruitment (Q1–Q2 2021) Gender action plan implementation and monitoring (Q1 2021–Q4 2024) Financial management covenants implementation and monitoring (Q1 2021–Q4 2024) Environmental and social management system implementation and monitoring (Q1 2021–Q4 2024) Review of annual audit report of utilization of funds and entity audit report (Q1 2022, Q1 2023, and Q1 2024) Project progress review and monitoring report (every quarter) Midterm review (Q2 2023) Project completion report (Q4 2024) Inputs Asian Development Bank: $20 million (concessional OCR loan) Technical Assistance Special Fund (TASF 6): $750,000 (TA grant); Financial Sector Development Partnership Special Fund: $250,000 (TA grant) Assumptions for Partner Financing Not applicable

BDB = Bhutan Development Bank, CSI = cottage and small industry, NPL = nonperforming loan, OP = operational priority, Q = quarter, TA = technical assistance, TOT = training of trainers. a Government of Bhutan, Gross National Happiness Commission. 2019. Twelfth Five Year Plan, 2018–2023—Just,

Harmonious and Sustainable Society through Enhanced Decentralisation. Thimphu. b Performance benchmark targets include (i) capital adequacy ratio, (ii) NPL ratio, (iii) NPL ratio for loans disbursed

after 1 January 2021, (iv) return on average assets, (v) return on average equity, (vi) operational self-sufficiency, (vii) gross outstanding loan, (viii) gross loan growth, (ix) total deposit, (x) active loan accounts, (xi) active women loan accounts, (xii) gross CSI loan outstanding, (xiii) active CSI loan accounts, (xiv) active CSI women loan accounts, (xv) group-loan cumulative disbursement, (xvi) active group-loan accounts, and (xvii) active women group-loan accounts.

Contribution to Strategy 2030 Operational Priorities: Expected values and methodological details for all OP indicators to which this operation will contribute results are detailed in Contribution to Strategy 2030 Operational Priorities (accessible from the list of linked documents in Appendix 2 of the report and recommendation of the President). OP1.2.1: Business development and financial sector measures supported in implementation. Target, 1, implementation of a BDB institutional strengthening plan. OP2.1.3: Women-owned or -led SME loan accounts opened or women-owned or -led SME end borrowers reached. Target, 31,857 active women CSI borrower accounts including 3,247 women group-loan borrowers. OP6.1.2: Measures supported in implementation to improve capacity of public organizations to promote the private sector and finance sector. Target, 26 BDB institutional strengthening plan milestones. Source: Asian Development Bank.

16 Appendix 2

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=53307-001-3

1. Loan Agreement 2. Project Agreement 3. Sector Assessment (Summary): Finance (Small and Medium-Sized Enterprise Finance

and Leasing, and Inclusive Finance) 4. Project Administration Manual 5. Financial Analysis 6. Economic Analysis 7. Summary Poverty Reduction and Social Strategy 8. Risk Assessment and Risk Management Plan 9. Contribution to Strategy 2030 Operational Priorities 10. Attached Technical Assistance Report 11. Gender Action Plan 12. Financial Intermediary: Environmental and Social Management System Arrangement Supplementary Documents 13. Bhutan Development Bank Financial Management Assessment 14. Bhutan Development Bank Institutional Strengthening Plan

15. Bhutan Development Bank Financial Due Diligence