Bhutan: Strengthening Royal Monetary Authority's Regulatory Capacity for Nonbank Financial Institutions

Sovereign Project | 42244-012

Summary

a. Link to Country Partnership Strategy/Regional Cooperation Strategy:

Under ADB Strategy 2020, one of the five key drivers of change that ADB will focus on is private sector development, and one of the five core priority areas that best support its agenda is financial sector development. The proposed CDTA is consistent with ADB Strategy 2020 and the Government of Bhutan's Tenth Five-Year Plan (2008-2013) since the TA promotes private sector development and financial sector development. Furthermore, the TA will meet one of the objectives of the Bhutan 2020 i.e. balanced and equitable socio-economic development, by meeting the needs of vulnerable and disadvantaged groups and minimizing inequalities through promotion of micro-finance in Bhutan.

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Project Name Strengthening Royal Monetary Authority's Regulatory Capacity for Nonbank Financial Institutions
Project Number 42244-012
Country Bhutan
Project Status Closed
Project Type / Modality of Assistance Technical Assistance
Source of Funding / Amount
TA 8076-BHU: Strengthening Royal Monetary Authority's Regulatory Capacity for Nonbank Financial Institutions
Japan Fund for Poverty Reduction US$ 525,000.00
Strategic Agendas Inclusive economic growth
Drivers of Change Governance and capacity development
Partnerships
Private sector development
Sector / Subsector

Finance - Banking systems and nonbank financial institutions

Gender Equity and Mainstreaming No gender elements
Description

a. Link to Country Partnership Strategy/Regional Cooperation Strategy:

Under ADB Strategy 2020, one of the five key drivers of change that ADB will focus on is private sector development, and one of the five core priority areas that best support its agenda is financial sector development. The proposed CDTA is consistent with ADB Strategy 2020 and the Government of Bhutan's Tenth Five-Year Plan (2008-2013) since the TA promotes private sector development and financial sector development. Furthermore, the TA will meet one of the objectives of the Bhutan 2020 i.e. balanced and equitable socio-economic development, by meeting the needs of vulnerable and disadvantaged groups and minimizing inequalities through promotion of micro-finance in Bhutan.

Under the World Bank's ongoing project (entitled Developing and Strengthening the Regulatory Framework for Pension, Provident Fund, and Other Such Schemes in Bhutan ), the National Pension Policy and the draft Pension Law are being reviewed, and specifically examining investment opportunities in the market and appropriate subordinate legislations are also being drafted. An overall regulatory framework for use by the RMA is also being pursued which will include, but not be limited to, procedures for licensing or registering participants in the pension sector, as well as a regulatory and supervisory framework for such entities operating in Bhutan.

Under the World Bank's Private Sector Development Project, support to Financial Inclusion involves (i) establishing and drafting the financial inclusion policy (ii) creating an enabling regulatory and supervisory framework for microfinance institutions and branchless banking (iii) organizing outreach missions (iv) and promoting financial literacy.

As a result, the proposed TA complements the interventions of the World Bank by strengthening RMA's nonbank supervisory and regulatory capacity and implementation work will be closely coordinated with the World Bank and other relevant development partners.

b. Impact

Improve the overall functioning of the finance sector in Bhutan. This will be measured by a reduction in the non-performing loans in the nonbank sector, an increase in capital adequacy for the nonbank sector, an increase in pension coverage, and an increase in microfinance penetration.

c. Outcome

Enhanced efficiency and effectiveness of the financial sector supervisory and regulatory system for nonbank financial institutions.

d. Outputs

(i) Improved regulatory and supervisory role of RMA. The first component will assist the RMA in setting a regulatory and financial supervisory policy that strikes the right balance in formulating effective nonbank financial regulations and rules that would support market development while enhancing the stability of the Bhutanese financial system across the insurance, pension, microfinance, and securities sectors. Training will also be provided to enhance RMA staff expertise both at the management level and the departmental level in terms of drafting nonbank financial regulations as well as ensuring effective implementation of these regulations. At least 10 regulations pertaining to insurance, securities, pension, and microfinance activities will be completed and implemented under this component.

(ii) Enhanced capacity of nonbank financial institutions to implement new rules and regulations. The second component will focus on training staff of nonbank financial institutions to ensure effective implementation and compliance of the RMA's new nonbank rules and regulations.

(iii) Enhanced capacity of finance sector to ensure update with new rules and regulations. The third component will focus on training staff from various finance sector entities to ensure that they are updated with the RMA's new nonbank rules and regulations. This component will contribute to broadening the expertise and capability of professionals across the Bhutanese finance sector by disseminating nonbank financial sector knowledge.

Project Rationale and Linkage to Country/Regional Strategy

Nonbank financial institutions account for 9.4% of total assets of the financial sector as of end FY2011. The nonperforming loan ratio in the nonbank financial sector is currently estimated at 7% as of end FY2011. The two major nonbank financial institutions, Bhutan Development Bank (BDB) and Royal Insurance Corporation of Bhutan (RICBL), are heavily involved in commercial lending, due to limited investment opportunities in the domestic markets and profitability concerns. BDB is engaged in lending to private sector industrial clients, agricultural businesses, as well as micro, small and medium-sized enterprises. The absence of an enabling regulatory and supervisory framework for the micro-finance sector limits the effective delivery of micro-finance. RICBL provides life and general insurance. RICBL utilizes insurance premiums to make investments, and its investment portfolio is split into (i) credit products, (ii) equity investments, (iii) real estate, and (iv) liquid resources.

The pensions market is relatively untapped in Bhutan. The National Pension and Provident Fund (NPPF) is comprised of a defined benefit pension plan (Tier 1) and a defined contribution provident fund (Tier 2). NPPF runs the provident funds for the armed forces, state-owned enterprises' employees, and the civil service. It is presumed that NPPF will be allowed to offer pension products to private individuals in the future. Currently, there is no pension regulation and there is no national pension scheme for private sector or self-employed workers.

The Royal Securities Exchange of Bhutan Limited (RSEBL) is subject to supervision by the Royal Monetary Authority of Bhutan (RMA), the acting securities commission. RSEBL rules are approved and amended by RMA. RSEBL is currently regulated by provisions under the Companies Act (2000), Securities Exchange Regulation (1993), Control of Brokers Regulations (1993), Listing Rules of RSEBL (1993), and Rules of the Exchange (1993).

To fill gaps in the regulation and supervision of the financial sector in Bhutan, RMA, as the single regulator, was required to be empowered to license, regulate, and supervise all financial service providers. These gaps were especially pronounced in laws and regulations for insurance and securities exchanges. A comprehensive and coherent Financial Services Act (FSA) was recently enacted in 2011 to bring banking, insurance, and securities activities under a unified legislative, regulatory, and supervisory framework. In particular, the RMA was to be given powers to address shortcomings and issues in regulation, supervision, and penalty or prosecution in case of violations. The FSA bill conforms to international standards. These include, among others, (i) definition of insurance solvency margins and admissibility of assets, (ii) setting out of securities trading and settlement procedures with regard to a proper matching and delivery versus payment, (iii) on-site inspection procedure of securities exchanges, and (iv) issuer disclosure on control and related-party disclosure and expanded remedies for defective disclosure. In general, because the FSA is an integrated financial services bill, chapters have been drafted to align with current international standards in insurance, and securities for example, Objectives and Principles of Securities Regulation, and Insurance Core Principles and Methodology.

The RMA being the integrated regulator of all financial institutions in Bhutan and the apex institution is significantly constrained by limited human resource development in terms of regulating and supervising nonbank financial institutions. This constraint has been further exacerbated with the recent enactment of the FSA which has more detailed and specific provisions for insurance and securities as compared to the previous Financial Institution Act, as well as upcoming new provisions for pension (pension policy, licensing or registration of pension providers, pension supervisory framework) and micro-finance (financial inclusion policy, regulatory and supervisory framework) under the World Bank's ongoing projects. The RMA supervisors and stakeholders therefore require specific training in the insurance, securities, pension, and micro-finance subsectors.

In addition, regulatory gaps persist despite progress made in developing policies, provisions, and guidelines for the insurance, securities, pension, and micro-finance sectors. In the insurance subsector, regulations need to be formulated on insurance brokerage, licensing of surveyor/loss assessor, criteria for actuary appointment, determination of insurance premium as well as developing reporting formats and on-site / off-site manuals. In the securities subsector, regulations are required in areas such as venture capital, mutual funds, subordinated debt and corporate bonds, and derivatives. In the pension subsector, regulations are needed for voluntary saving schemes and the development of on-site / off-site manuals. In the micro-finance subsector, the development of on-site / off-site manuals is required.

Impact Improve overall functioning of the financial sector in Bhutan
Project Outcome
Description of Outcome Enhanced efficiency and effectiveness of the financial sector supervisory and regulatory system for nonbank financial institutions.
Progress Toward Outcome Ongoing.
Implementation Progress
Description of Project Outputs

1. Improved regulatory and supervisory role of RMA

2. Enhanced capacity of nonbank financial institutions to implement new rules and regulations

3. Enhanced capacity of finance sector to ensure update with new rules and regulations

Status of Implementation Progress (Outputs, Activities, and Issues) All activities under the TA have been completed. TA is closed.
Geographical Location
Summary of Environmental and Social Aspects
Environmental Aspects
Involuntary Resettlement
Indigenous Peoples
Stakeholder Communication, Participation, and Consultation
During Project Design RMA and MOF participated and were consulted during the TA Fact-Finding Mission.
During Project Implementation

All stakeholders will be constantly engaged during the TA implementation through the series of training sessions.

Furthermore, each international consultant will submit an inception report to the RMA and ADB within 2 weeks of the start of work and a draft final report 2 weeks before the end of the engagement. The inception report and finalization of the draft final reports will be discussed at tripartite meetings involving the RMA, the consultants, and ADB. RMA will provide a brief report on the progress made in supervision activities on a yearly basis for the next three years.

Business Opportunities
Consulting Services tbd
Responsible ADB Officer Jennifer Romero-Torres
Responsible ADB Department South Asia Department
Responsible ADB Division Public Management, Financial Sector and Trade Division, SARD
Executing Agencies
Royal Monetary Authority of BhutanP.O. Box No. 154
Thimphu
Bhutan
Timetable
Concept Clearance 22 Aug 2011
Fact Finding 04 Jul 2011 to 06 Jul 2011
MRM -
Approval 11 May 2012
Last Review Mission -
Last PDS Update 24 Sep 2014

TA 8076-BHU

Milestones
Approval Signing Date Effectivity Date Closing
Original Revised Actual
11 May 2012 07 Jun 2012 07 Jun 2012 31 May 2013 31 Oct 2013 -
Financing Plan/TA Utilization Cumulative Disbursements
ADB Cofinancing Counterpart Total Date Amount
Gov Beneficiaries Project Sponsor Others
0.00 525,000.00 70,000.00 0.00 0.00 0.00 595,000.00 11 May 2012 452,027.45

Safeguard Documents

See also: Safeguards

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Evaluation Documents

See also: Independent Evaluation

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