Nepal: Feasibility Study on Establishment of Secured Transactions Registry

NEPALFEASIBILITY STUDY ON ESTABLISHMENT OF

SECURED TRANSACTIONS REGISTRY

Mar

ch 2

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NEPAL Feasibility Study on Establishment of Secured Transactions Registry March 2008

SEDF

A multi-donor facility managed by the International Finance Corporation of the World Bank Group

Disclaimer

The Organizations (i.e., IBRD, IFC and MIGA), through FIAS, endeavour, using their best efforts in the time available, to provide high quality services hereunder and have relied on information provided to them by a wide range of other sources. However, they do not make any representations or warranties regarding the completeness or accuracy of the information included this report, or the results which would be achieved by following its recommendations.

About FIAS

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About SEDF Launched in 2002, SEDF is based in Dhaka, Bangladesh. SEDF focuses on the needs of small and medium enterprises (SMEs) in Bangladesh, Bhutan, Nepal and North East India, and has an additional office covering Sri Lanka and the Maldives. The objective of SEDF is to reduce poverty through SME development. In addition to funding from the IFC, SEDF receives funding from the Asian Development Bank, Canada, the European Commission, the Netherlands, Norway, and the United Kingdom.

Establishment of Secured Transactions Registry Content i

Contents Foreword ...........................................................................................................iii

Executive Summary...........................................................................................1

1 The Legal Framework for Establishing the Secured Transations Registry ............................................................................................................11

Secured Transaction Act, 2006: Overview .........................................13

Secured Transactions Registration Office ...........................................13

Establishing the Secured Transactions Registry ..................................15

Accountability and Oversight of Registry ...........................................15

Transactions Subject to the ST Act......................................................16

Registration of Notices in Registry Database: Contents......................16

Inspection of Registry Records: Searches............................................17

Mode of payment of fee.......................................................................18

Concerns with the ST Act: Recommendations ...................................19

2 Registry Design and Related Issues.....................................................23

What entity should host the Secured Transactions Registry................23

Registry Host: Public-Private Partnership? ........................................25

Registry Database: Principles for Design and Implementation ...........27

Registry Software: Procurement and Design Issues ................37

Administration of the Registry: staffing, hardware specifications, facilities............................................................37

3 Implementation Plan: Regulations, Time-line and Budget.................40

What Regulations Should the Government of Nepal Adopt? ..............40

Implementation Time-line: Costs .......................................................41

Estimate of Ongoing Costs and Revenues: Profits? ............................45

Ongoing Operational Costs......................................................46

Revenues ..................................................................................48

Motor Vehicle Registrations ....................................................49

Profits.......................................................................................45

A APPENDIX..........................................................................................50

Particulars of Notice Filing..............................................................................50

Original Notice: Contents .......................................................50

Statement of continuity ............................................................52

Establishment of Secured Transactions Registry Content ii

Amendments ............................................................................52

Termination statement .............................................................53

Correction statement ................................................................53

Rejections: Refusal to register the notice.................................54

B APPENDIX..........................................................................................56

Detailed Evaluation of Potential Registry Hosts .................................56

Credit Information Bureau (“CIB”) .........................................56

Office of the Companies Registrar ..........................................58

Department of Land Registration.............................................60

Securities Exchange Board ......................................................61

C APPENDIX..........................................................................................64

World Bank - Nepal Rastra Bank Survey on the Use of And Filing of Notices into the Secured Transactions Registry ..................................64

D APPENDIX..........................................................................................67

Nepal Secured Transactions Registry Business Model and Procurement Issues

Establishment of Secured Transactions Registry Foreword iii

Foreword

In 2006, the Government of Nepal enacted the Secured Transactions Act (ST Act). The overarching goal of ST Act is to reduce risks associated with extending credit, thereby increasing opportunities for economic expansion. At its core, the ST Act allows use of all types of movable assets as collateral and stipulates the creation of a Secured Transactions Registry. While the Act has been in force, it can not be fully implemented as the Secured Transactions Registry, as stipulated by the Act, has not yet been established. In this respect, Government of Nepal requested a World Bank-FIAS- IFC SEDF team to conduct a feasibility study and provide recommendations as to the necessary steps to establish the Secured Transactions Registry. The assessment team was lead by Sevi Simavi (FIAS) and included Anthony Frazier and Sumant Batra (consultants). Aurora Ferrari (SASFP), Rajeev Gopal (IFC-SEDF), Roger Handberg (IFC-SEDF), Sabin Shrestha (SASFP), Mahesh Uttamchandani (LEGPS), Everett Wohlers (FIAS) provided invaluable guidance and comments at different stages of the assessment. Abhishek Basnyat (SASFP) and Carlotta Saporito (FIAS) assisted with the design and implementation of the financial sector survey. Mark Zeydler (consultant) provided guidance on procurement issues. The assessment team examined the legal mandates in the ST Act with the goal of establishing a registry system. Numerous government officials, private sector parties (including several anticipated users of the registry system), and IT professionals were interviewed in order to create set of recommendations on how Nepal should proceed.

Establishment of Secured Transactions Registry Foreword iv

Establishment of Secured Transactions Registry 1 The Legal Framework 1

Executive Summary

In 2006, the Government of Nepal enacted the Secured Transactions Act, 2006 (ST Act). The ST Act provides the legal framework for: (i) the establishment of an entity to be called the “Secured Transactions Registration Office;” (hereinafter the “STRO”) (ii) the creation of a registration database in which a public record of obligations secured by movable property can be made; (iii) the establishment of priorities in case multiple obligations of the same security giver are secured by the same collateral; and (iv) a means to uniformly enforce security interests, should the security giver default.

Although the ST Act was enacted in 2006, it has not become operational as the STRO has not been established, nor has any entity been designated to perform the function of registering notices. Therefore, Nepal does not currently have a mechanism for the registration of security interests in movable properties and determining priority in a security giver’s collateral. In the absence of such mechanism, lenders find it risky to accept movable property as collateral for loans. This limits access to capital by individuals and small and medium enterprises which may not have adequate real estate to offer as collateral. Upon the request of the Nepalese government, a World Bank - FIAS-IFC SEDF team visited Nepal from June 3, 2007 to June 15, 2007 to investigate what steps need to be taken in order to implement the ST Act and provide a detailed roadmap for the establishment of the registry. These include:

Chapter 1- Analysis of the Legal Framework for Establishing the Secured Transactions Registry Chapter 2- Registry Design and Related Issues Chapter 3- Implementation Plan: Regulations, Timeline and Budget

Detailed information addressing each of these areas, particularly on design specifications, is addressed in detail in this report. However, the executive summary will focus on those issues that must be addressed by the GoN before the implementation of the registry can move forward. Accordingly, five primary items require some affirmative action by the Government of Nepal (GoN) as preconditions to establishing the registry database. These areas are:

1. Determine if any changes need to be made to the ST Act prior to implementation.

2. Establish the Secured Transactions Registration Office and designate an entity that will host the Secured Transactions Registry database


3. Determine whether the Registry system will be solely electronic or also conduct business using paper;

4. Select which language will be used in the Registry database; and

5. Then, the STRO, in conjunction with the Registry database host, must decide whether to develop software from the ground up, or whether an off-the-shelf product should be purchased and then modified to fit Nepal’s specific ST Act.

Below are a series of recommendations addressing these issues:

A. Recommended Changes to ST Act prior to implementation While the ST Act is largely compliant with international best practice principles and facilitates the creation of a modern secured transactions registry, there are a few areas in the law that would benefit from revision. Though no additional acts of Parliament are absolutely required in order to begin implementation of the Registry database, amendments to the Act in two areas would be particularly helpful to a successful deployment of the Registry.

Transition Period Nepal currently has no equivalent to the ST Act, yet lenders have in the past extended credit to borrowers secured by movable property. It is anticipated that these existing secured transactions will be brought into compliance with the new ST Act by filing notice of them in the Registry to be established. The issues presented by these circumstances are: 1) how these pre-exising interests will be treated under the Act with regard to priority; 2) how lenders will “transition” their existing loan portfolios into compliance with the Act; and 3) how much time lenders should have to enter their existing interests in movable property into the registry system. The Act answers each of these issues, but in a way that could have detrimental impacts on the marketplace. As a general principle, the ST Act contemplates that priority in a security giver’s assets is determined by the time and date of filing of the Initial Notice: the first to file gains priority in the underlying collateral. However, during an initial “transition period,” the ST Act contains language that is aimed at shepherding the change from the pre-Act law to the new system under the ST Act. Section 57 of the ST Act provides that a security holder has one year from the “date of establishment of the registration office” to file its Notice for any pre-existing interest. If such a Notice is filed within that one year, it will be given an effective date equal to the date that the Registry opened. While the intent may be good, this transition language may cause great harm in the marketplace. Consider the following example:


Suppose that on January 1, 2004, Lender A extended credit to Security giver that is secured by a security interest in Security giver’s assets. Then, suppose that the Registry is started on August 1, 2008. Lender A does not immediately file a Notice. Then on January 1, 2009, Lender B conducts a search of the Registry and does not find any security interests against Security giver. Based upon this clean search, Lender B extends credit to the Security giver, and files a Notice with the Registry. Lender A then files its Initial Notice of its pre-existing security interest on July 1, 2009. Under the transition language in Chapter 57 of the Act, Lender A’s notice will “spring” into existence as of the first date the Registry went live, and Lender A’s security interest would have priority over Lender B.

Given the problem illustrated by this example, during the transition period any lender will be even more wary of extending credit secured by movable assets than under the current non-system. Under the current non-system, even if there are multiple security interests against the same security giver’s property, a lender has a fair chance of being the first party to seek self-help against the security giver, thereby rewarding the vigilant lender. This is not the case under the ST Act. Lenders, aware of the possibility of a “springing interest” that will grant legal priority to a hidden security holder, will likely be very hesitant to make loans secured by movable property until the transition period has passed. Given that the transition period is for a full one year, this could have severe detrimental impacts in the marketplace, as the availability of credit could be severely curtailed. The risk to Nepal’s economy is sufficiently great that the ST Act should be amended to shorten the one-year transition period to no more than three months.

Fees and the Impact on Financial Sustainability It is critical that the Registry be financially self-sufficient. This point is equally true whether the host entity is a public or private sector party. The financial sustainability of the Registry is dependent upon only two factors: revenues generated and operating costs. On the revenue side of this equation, Section 19 of the Act establishes the fees that are to be paid for either the filing of various documents into or the retrieval of information from the Registry. With regard to filing, this Section states that all notices shall be assessed a fee of Rs500. Calculating the fees for searches is slightly more difficult. Section 19 states, in pertinent part:

(1) “The fee payable for...searching for any record, shall amount to Rs500.” (2) “Notwithstanding anything contained in Sub-Section (1), no fee shall be charged for searching for any record by utilizing the electronic facility made available by the Registration Office.”


(3) “No fee shall be charged for other services made available under this Act.”

Two concerns arise in regard to this language. First, it is not a common practice to prescribe fees in the actual statute. Instead, laws often contain an enabling provision which allows authorities to prescribe the fee in regulations. This provides the authorities with the flexibility to revise the fee without Parliament having to amend the statute. Under the ST Act, if it is later determined that the fee structure must be changed, then Parliament must amend the ST Act, a process which can take considerable time in Nepal. In order to assure long-term financial sustainability of the Registry and provide flexibility, it is recommended that Section 19 be amended to allow the fee schedule to be set forth in regulations promulgated under the Act.

Amending Versus Correcting a Name During the life of a security interest, the name of a business entity security giver may change due to any number of circumstances (sale, merger, etc.). In such an event, the notice that names the security giver must be updated to reflect the new name. Subsection 2 of section 9 of ST Act should be amended to provide that a change in the name of a security giver would require filing of an “amendment,” not a “correction” as is presently stated. As provided by section 16 of the ST Act, a correction statement is filed by a security giver to challenge the existence or content of a filed notice that names the security giver. If there is truly a subsequent change in the security giver’s name, the change in the record of registry should be made by way of an amendment filed by the security holder to reflect the new name.

Confirmation of Filing In most other jurisdictions, filing of a secured transaction notice causes the registration office to issue a receipt or acknowledgment in the prescribed form containing the particulars of the notice. The ST Act does not contain any provision for the issuance of such receipts or acknowledgments. Further, the ST Act does not specifically provide for a confirmation of filing, amendment, continuity or termination by the STRO to the person filing the notice. A print out of the filed notice with the file number and the date and time of filing would meet this need. This issue can be addressed in the regulations.

Technical Corrections There are two technical corrections to language in the Law that are necessary to avoid potential legal issues after implementation. The first of these is to amend Section 7(2) to provide that the security holder, not the security giver, is the appropriate party to file a notice. This is necessary to reflect best practices used in registries in all other countries, and to prevent a dishonest


security giver from altering or failing to file a notice that names him/her. The second technical correction is to add a clause to Section 18(2) to provide the searching criterion for security givers that are corporate entities. This appears to have been a mere oversight in drafting of the law, but it could have legal consequences if a search for a corporate entity is put in question in litigation.

B. Establishment of the Secured Transactions Registration Office and Determination of Entity To Host the Secured Transactions Registry Database Chapter 2 of the ST Act requires the GoN to establish a registration office to be known as the “Secured Transactions Registration Office” (STRO). The STRO can be established by the Ministry of Finance. The STRO is contemplated as a public body responsible for performing the functions and duties prescribed in the ST Act. The ST Act further provides for the appointment of a person as “Registrar” who is to be a government employee with a rank of “Gazetted Officer of Class II or equivalent.” The Registrar shall be responsible for managing all of the STRO’s tasks under the ST Act. The ST Act provides that the STRO can either operate the Registry itself or it can enter into a contract with a private entity pursuant to which the private entity would be authorized to implement the Registry and related functions. Based upon these provisions, there are two separate paths that could be taken. First, the STRO itself could be staffed and equipped to handle all registry functions. This is a viable option. However, starting an entirely new government agency from the ground up is time consuming under any circumstances, and especially under those that currently prevail in Nepal. Therefore, a different approach would be needed to quickly and efficiently deploy the registry. In this second approach, the STRO would be formed under the Ministry of Finance, but would only act in an oversight role, while the actual registry functions would be handled by an existing entity. It should be noted that this approach met with widespread acceptance amongst the GoN officials and the stakeholders interviewed. Four different entities were examined as potential hosts for the Registry database. All four of these entities currently undertake duties that are at least partly similar to those contemplated by the ST Act. These entities are:

1. The Credit Information Bureau.

2. The Office of the Company Registrar;

3. The Department of Land Registry; and

4. The Securities and Exchange Board.


GoN officials that oversee each of these four existing entities were interviewed and field visits were conducted to assess the entity’s capability to house a new registry. Objective criteria were employed in formulating evaluations of each of these entities, and it was agreed that the Credit Information Bureau would be the most suitable entity to host the Registry. The selection criteria are discussed in detail in Chapter 2. Accordingly, it is recommended that the STRO should enter into a contract with the Credit Information Bureau (CIB) under which the CIB will carry out all day-to-day registry functions. While the dividing line between the functions of the STRO and those of the CIB is not abundantly clear in the ST Act, this issue can be addressed in both the contract to be entered and the regulations to be promulgated under the ST Act. For example, the contract could provide for such items as: the regulatory authority will reside with the STRO; the STRO will have full inspection rights over the database and the broader functions related to the Registry; the STRO would have the right to demand removal of objectionable employees that work on the Registry; and the CIB will maintain the electronic database and web site. CIB is a credible organization, and it is currently involved in a technology upgrade that will result in the on-line filing of information by member institutions. This project is scheduled to be operational within the next few months. Therefore, the CIB has already dealt with the issues that arise from an automation implementation process. The other agencies are not feasible options for the registry host. The Office of the Company Registry’s primary charge has been to register corporate entities that seek to do business in Nepal. The Company Registry has recently been assigned numerous additional duties, including those under the recently enacted Insolvency Act, and is also wrestling with implementing a database to hold company registration information. Because of these added responsibilities and its ongoing automation project, officials with the Company Registrar expressed a reluctance to take on additional duties associated with the ST Act. Department of Land Registry officials expressed a disinclination to take on additional tasks. These officials believed that the Land Registry was already overburdened and did not have the capacity to take on another major initiative. Not only due to the reluctance of the officials to take on the responsibility of implementing the ST Act, but also because the current model used by the Department of a decentralized filing system does not coincide with the centralized filing model envisioned by the ST Act. The Securities and Exchange Board (SEBO) was established in 1993 to regulate the securities industry in Nepal. SEBO might best be characterized as a quasi-governmental entity as it has both public and private sector attributes.


For example, while its governing Board is intended to grant SEBO some degree of independence, a majority of its members come from the government’s ranks. Further, SEBO is subject to yearly appropriations, and SEBO officials stated that this dependency adversely affected SEBO’s autonomy. SEBO officials indicated that they did not have the resources to undertake new duties. They underscored this point by stating that they had plans to implement technological advances to address current legislative directives, but lack the funding necessary to carry out these mandates. These officials also questioned whether the goals of the ST Act were in congruence with SEBO’s mission to augment and regulate Nepal’s capital markets. However, SEBO officials did not go so far as to assert a specific lack of desire to take on the ST Act. Instead, it may be fair to say that while they would prefer not to have this responsibility, they would accept it if it was assigned to them. The Assessment Team believes that SEBO would be capable of handling the duties that would be imposed upon them under the ST Act.

C. The Registry system: solely electronic or paper-based?

It is strongly recommended that a solely electronic registry system be put in place and that paper notices not be accommodated. The ST Act clearly states that the Registry is to be electronic. Therefore, the database holding Registry information should by all means be in such a format, and in turn this electronic database should be available on-line via the internet for all users to both file documents and retrieve information. This format allows the public access to all functions of the database called for in the Act in the quickest and most efficient manner. A detailed argument against the deployment of a paper based registry is discussed in Chapter 2. D. Language

In most jurisdictions, the language used for registration is the official national language. However, Nepal is one of several countries where the language of commercial transactions is different from the national language. While Nepali is the nation’s official language, English is pervasive and is used in most commercial transaction documents. The private party lenders interviewed universally agreed that English should be the language of choice for notices filed in the Registry database. There are certainly practical reasons to adhere to this view, including: commercial institutions use English in their contracts and loan documents; English is much easier to type, making on-line filing more accessible; it is much easier to translate a Nepali surname into English to enter it into the Registry database than it is to translate an English name into Nepali; foreigners doing business in


Nepal will not be able to use Nepali to do searches; and it would be costly to adapt off-the-shelf software used by the Registry if Nepali were used for registration. The assessment team specifically questioned officials from the Nepal Debt Recovery Tribunal, an arm of the judicial branch that has jurisdiction over borrower–lender disputes, on this issue. These officials stated that in the event of a priority dispute between the parties, print-outs in English would be admissible to the Court, and that there are no legal requirements that such evidence should be presented in Nepali. As a result, it is concluded that an English database will facilitate broader access to users, and there are no legal restrictions against doing so.

E. Registry database: software be developed or purchased off-the-shelf?

The quickest and safest means by which to implement the Registry is to acquire an “off-the-shelf” software product that is already in use in other jurisdictions that have implemented a secured transactions law similar to the ST Act in Nepal. There are several reasons why this approach is recommended, including: 1) there will be much less likelihood of “bugs” in such software, as it will have already been in production elsewhere; 2) it will already contain many back-end functions (such as statistical reports, audit logs and accounting features) that are harder to design than simple web pages; and 3) certain time calculations related to effective periods for notices called for in the ST Act will already be in place. The vendor should modify its application to fit the specific needs of the Nepal Law, in addition to helping train local developers on the application software. The purchase agreement by which the software is acquired should provide for this arrangement, and should expressly provide for a warranty of the software for the first year of operation to be included in the price. G. Action Plan to move the project forward

The following two steps must occur at the outset before other steps may be taken. They are:

• The GoN must establish the STRO (and appoint a person to the position of Registrar) and determine that the CIB (or some other entity) will operate the Registry.

After those actions have been taken, a host of other activities can begin. They are listed below in sequential order. However, not all are directly dependent


upon one another, so some of them may proceed along parallel tracks in order to move the process along. Obviously, these tasks are listed at a high-level, and many subtasks will need to be completed under each one. This list should provide a general roadmap describing all the necessary steps required for the project to start.

• The STRO, in conjunction with appropriate GoN Ministries, must determine whether to amend the ST Act as recommended herein.

• A contract must be entered into between the STRO and the CIB, as the entity.

• The STRO, in conjunction with appropriate GoN Ministries and the Registry host entity, must prepare a draft of the regulations to be promulgated under the ST Act.

• The procurement process for the off-the-shelf software product must be undertaken.

Task Deliverable Responsible Entity

Timing

1. Establishment of STRO

Establishment of STRO and Appointment of Registrar

Finance Ministry

• Upon announcement of the budget (by July 2008)

2. Contract finalized and signed between STRO and CIB

Concession contract

Finance Ministry/ STRO and CIB

• By August 2008

3. Establishment of the drafting committee, drafting and issuance of Registry Regulations

Registry regulations covering location, accounts, payment functions, search logic etc.

Finance Ministry/ STRO

• Drafting team established by May 15, 2008

• Draft finalized and circulated for comments by October 1, 2008

• Regulations issued before the Registry is launched.

4. Amendment of the ST Act

Exclusion of fee; modification of transition period; technical amendments

Finance Ministry

• Drafting team established by May 15, 2008

• Proposed amending Bill drafted – by July 2008

• Enactment of the Bill - TBD

5. Procurement of software and hardware

Preparation of procurement documents for software and hardware

CIB • Begins by August 2008 once the contract is signed btwn STRO and CIB


Task Deliverable Responsible Entity

Timing

6. Installation, Testing and Launch

Installation of Hardware and software, testing systems and launching.

CIB

7. Training, Public Awareness Events

Training of lenders, legal community and public at large.

CIB

Once regulations have been promulgated and procurement has been completed, then the project will move into an operational phase, with activities such as completing the design of the database and staffing of the Registry to be undertaken. These functions will be handled by the Registry host and not directly by the GoN. The roadmap for these activities is contained in Section 3 of this Feasibility Study.

H. What are the key components to a successful implementation of the Registry as envisioned in this Feasiblity Study?

Once the legal framework is in place and after the information technology system has been developed, CIB must: 1) establish the office space in which to house the Registry; 2) the select and train the Registry staff; and 3) ensure the financial viability of the Registry. Each of these is discussed below.

Office Space As the Registry will be an electronic operation, there is no need for extensive office space. All that is required is that adequate space exists to house the hardware necessary to support the Registry (with sufficient electrical connectivity, grounded circuitry, automatic gaseous fire suppression, conditioned power, UPS, back-up generator with fuel supply, physical access controls to server area, protection against natural disaster, server rack space and climate control) and the minimal Registry staff.

Staff The Act calls for the establishment of a “Secured Transaction Registry Office” (“STRO”) and for the appointment of a person to serve as the “Registrar,” with such person having the job title of “Gazetted Officer of Class II or equivalent rank.” There are no other explicit requirements pertaining to staffing within the Act.


As stated above, the Assessment Team recommends that the STRO enter into a contract with the CIB, under which the CIB will run the Registry. If this scenario is followed, then the STRO itself would not require significant staffing; it should be sufficient to utilize one person part-time, for perhaps two hours per month on average. It may be advisable to assign the Registrar office and another nearly full-time office of similar rank to one person.

With regard to operation of the Registry itself, there will not be a need for significant staff to oversee its operation. It is anticipated that no more than three part-time staff would be required to handle all related operations. These individuals would be:

1) One database administrator (1/5 of total time);

2) One junior-level IT expert(1/5 of total time); and

3) A “help desk” person to respond enquiries about the Registry (1/12 of total time).

All of these positions are discussed in more detail in Section 3 of this Feasibility Study. Estimates on the number of staff and the amount of time each would have to devote to Registry functions are based upon international experience in the establishment of movable collateral registries. By way of comparison, Cambodia has implemented a solely electronic secured transactions registry, and has only two employees.

Financial Considerations The following table summarizes the major ongoing expenses associated with running the Registry: Item Nepalese Rupees/month US Dollars/month

Database administrator

20,000 391

Jr. IT Person 13,000 203

Public Help Desk 4,167 65

Staffing Costs 37,167 659

Bandwidth 5,760 90

Co-location 9,600 150

Daily Back-ups 2,560 40

Maintenance Costs 17,920 280

Capital Reserve Fund 160,000 2,500

Total Monthly Costs 215,087 3,361


With regard to expected revenues, the the ST Act currently calls for the payment of NRs500 for various notices that are filed in the Registry. The Act prohibits charging fees for access to information via the web.

To cover total estimated monthly costs, and thus generate NRs 215,087 (US$3,361) per month, the Registry would require 430 notices per month.

This is not an extraordinary amount of business to expect for the Registry. In order to gauge the number of notices that should be expected, a survey was conducted. The survey suggests that, even using a very conservative scenario and including only filings by the eighteen largest commercial banks, a substantially more than sufficient number of notices will be filed with the Registry, such that its operation will be entirely self-sufficient. Aggregate totals indicate that there will be a minimum of 28,454 initial notices (during the transition period), followed by an average of at least 480 notices per month in the next five years. (See detailed results in Appendix C).


1 The Legal Framework for Establishing the Secured Transations Registry

This chapter provides an analysis of the legal framework of the secured transactions law of Nepal relevant to the establishment of the secured transactions registry. Overall the Act is largely in compliance with international best practice principles. However, there are a few areas in the law that would benefit from revision. This Chapter One provides an overview of how the Act envisions the secured transactions registry, and then discusses those shortcomings within the Act that may require revision.

Secured Transaction Act, 2006: Overview

In 2006, the Government of Nepal notified the Secured Transactions Act, 2006 (ST Act). The ST Act provides the legal framework for:

1) the establishment of an entity to be called the “Secured Transactions Registration Office;” (the “STRO”)

2) the filing of notice of secured transactions in which movable assets serve as collateral;

3) the perfection and establishment of priorities of security interests; and

4) the enforcement of a security interest by a security holder, should the security giver default.

Although the ST Act has been enacted by the GoN, it has not become operational as the STRO has not been established nor has any entity been designated to perform the functions of filing of notices. Therefore, currently, Nepal does not have a mechanism for filing notices of security interests in movable properties and determining priority in a security giver’s collateral. In the absence of such mechanism, lenders find it risky to accept movable property as collateral. This impacts the public’s access to finance, in particular limiting access to capital by individuals and small and medium enterprises which may not have adequate real estate to offer as security.

Secured Transactions Registration Office

The ST Act calls for the establishment of a registration office to be known as the Secured Transactions Registration Office (STRO)1. The STRO is contemplated as a public body responsible for performing the functions and duties prescribed in the ST Act. The STRO can be established by the Ministry of Finance by issuing a notification in the official Gazette of Nepal. The

1 See Chapter 2 and 4 of the ST Act


government could have designated any of its offices to perform the functions of registering notices under the ST Act till the STRO was established, but this has not occurred.

Functions and duties of STRO

In general terms, the STRO will be responsible for performing the following functions and duties under the ST Act:

• Keeping the Secured Transactions Registry

• Filing notices of security interests and liens

• Provide information from the records of the STRO to any person who requests it

• Make an annual report of operations

In carrying out these functions, the ST Act does not provide specific details as to what the day-to-day functions or duties of the Registrar would be. These functions and duties may be provided in the implementing regulations to be framed under section 59 of the ST Act. Importantly, the ST Act does state that these functions and duties may be performed either by STRO itself, or that the STRO may outsource any or all the functions of the STRO to a private body. Such a private body must, however, satisfy the following two criteria provided for in the ST Act:

• It should have “adequate means, manpower and financial and technical resources needed for assisting the STRO in its task of registering notices.”

• It should have “the capacity to gain access to the electronic registry kept by the STRO according to suitable professional practices.”

Geographical location of the Registry

The Registry is contemplated as a national Registry. As such, the law does not require a network of branches in other locations to be established. Instead, the ST Act contemplates that the Registry database will be accessible by the public via the internet, eliminating the need for branch offices. However, the ST Act does not specifically prohibit the establishment of branch offices if this step if considered necessary.

Officers and staff of STRO

The ST Act provides for the appointment of a “Registrar” for systematizing the functions and activities of the STRO. The Government of Nepal must appoint or designate any Gazetted Officer of Class II or equivalent rank as Registrar. The Registrar is responsible for administering all STRO functions and duties prescribed under the ST Act.


Establishing the Secured Transactions Registry

The key function of the STRO is to cause the creation of a Secured Transactions Registry (Registry), which in practical terms is simply a database. Lenders (i.e., clients of the Registry) can register their notices of security interests into this database and then retrieve information from such database to determine if a particular security giver has already given a security interest in its movable property.

The ST Act contains provisions indicating that the Registry database is to be electronic.2 Importantly, the ST Act also calls for the delivery of information from the Registry database to the public through “any medium” chosen by the STRO. In practical terms, this means that information held in the Registry database may be posted to a website accessible by all. Further, while the ST Act does not specifically prohibit the filing of notices via paper, the relevant provisions of the law strongly suggest that the intention of the law makers was to provide for a solely electronic registry. This aspect is discussed in more detail later in this report. Because both the submission of notices to and the retrieval of information from the Registry will be performed on-line by the customers themselves, the operation and maintenance of the Registry is largely an IT function, and the entity hosting the Registry should be staffed accordingly.

The STRO can either operate the Registry itself or it can enter into a contract with a private entity pursuant to which the private entity would be authorized to implement the Registry and related functions. As will be seen later in this report, it is recommended that Registry functions be outsourced to a private entity. If the government decides to proceed in this manner, such private body may be contracted to perform all or some portion of the whole Registry related functions.

The contract entered into between the STRO and the private party Registry host can provide that the ownership of the Registry, its hardware and software, and the records therein would remain with the government. However, the use of these assets by the private body may be authorized under the contract subject to such terms and conditions as may be provided therein.

Accountability and Oversight of Registry

The Registry, whether kept and maintained by a public office or a private body, would remain subject to regulatory supervision under the ST Act. If a private entity is to house the Registry, adequate provisions regarding STRO oversight of the private should be placed in the private-party contract. It should also be noted that Chapter 6 of the ST Act provides that certain actions will constitute an offence and the offender will be liable for punishment with a fine ranging between Rs. 50,000 and Rs. 500,000 or with imprisonment for a

2 See clause (a) of sub-section (1) of section 5 (1) of the ST Act.


term not exceeding six months, or with both, depending upon the degree of offence. These actions are:

Act of intentionally inserting false particulars in the notice presented before the Registry;

Act of obstructing the function of registering a notice under the ST Act; and

Act of obstructing any person's right to use, exercise title to, possess or give a security interest in his property.

Similarly, in case the Registrar or his representative issues a bogus certificate or destroys or renders incorrect any of the records kept at the STRO, the Registrar shall be deemed to have committed an offense under the ST Act. A private entity hosting the Registry would be subject to these penalties in the event of malfeasance, and the contract should clearly underscore this point.

Transactions Subject to the ST Act

The ST Act provides the following transactions can be registered with the Secured Transactions Registry:

• All transactions, including pledge, hypothecation and hire-purchase transactions, to be made for securing obligations with a collateral;

• Sale of accounts and secured sales contracts; and

• Lease of goods.

The following transactions are excluded from the applicability of the ST Act:

• Transactions involving transfer of an employee's claim to compensation;

• Transactions in relation to sales where the accounts or secured sales contracts connected with any business have been sold in the course of selling the business;

• In relation to accounts, secured sales contracts, or instruments which have been transferred for the purposes of collection; and

• In relation to the transfer of the right to receive payment under a contract by the transferee who also has to perform an obligation under the contract.

Although the ST Act lists the transactions subject to its jurisdictions, it is not the place of the registry host to check each notice to see if the underlying transaction falls within the scope of the ST Act.

Filing of Notices in Registry Database: Contents

Who can register?


A notice can be registered either by the borrower itself or by a person authorized to act on their behalf. Where the borrower has signed a security agreement, they shall be deemed to have granted authority to the lender to file in the Registry. The practical effect of this language is that lenders will be the ones filing notices in the Registry: security givers simply have no incentive to file Notices, and it is an extremely poor lending practice to rely on them to do so. The Registry office is not responsible for verifying whether the person filing the notice has the authority or not to file the same.

The ST Act does not require the applicant filing the notice to make a declaration as to the accuracy of the contents of the notice. Instead, this concern is policed by making the act of intentionally inserting false information into the Registry a criminal offence under the ST Act.

The following types of notices can be registered with the Registry under the ST Act:

1. Original notice;

2. Statement of continuity;

3. Amendment relating to notice;

4. Termination statement;

5. Correction statement; and

6. Notices of lien holders' rights.

Please see Appendix A at the end of this report for a detailed discussion of the data elements for each of these notice types.

Inspection of Registry Records: Searches

In general, all information included on the face of any notice maintained by the Registry under the ST Act is deemed to be a public record and shall be available to any person. The following sections discuss the parameters of this general obligation.

What are the valid search parameters?

A search request may be made by any person by explicitly mentioning the following particulars:

• The file number of the original notice;

• The serial number of the serially numbered vehicle;

• The citizenship certificate number of a security giver, if he is a Nepali national; or

• The name and passport number of a security giver, if he is a non-Nepali national.


What information is to be provided from the Registry?

• The Registry is obligated to provide the following information:

• Whether or not any notice mentioning the name of any particular security giver has been registered by the Registry on any specified date and time;

• Whether or not any notice which has not expired as to all security holders has been registered by the Registry on any specified date and time;

• The file number of every notice, and the date and time of its filing;

• The names and addresses of the security giver and the security holder mentioned in every notice;

• Description of the collateral mentioned in every notice or amendment notice; and

• The file number of each document connected with every original notice, the date and time of its filing, and particulars which help to identify whether the document is an amendment, correction statement, statement of continuity, or termination statement.

How is the information to be supplied?

The ST Act provides that the information from the Registry database can be supplied through any medium. Therefore, the entity hosting the Registry may make some or all of this information available on a website accessible by the public and thereby be in compliance with the ST Act. There is no requirement that the host entity provide information in paper form.

What fees may be charged for providing information?

No fees may be charged for providing information through a web site. Internationally, a majority of jurisdictions provides information sufficient to identify security givers for free over the internet, but then fees begin to accrue when additional search services are provided through the website. It does not appear that this model is available under the current ST Act. This issue is discussed in more detail below in the section on fees.

Mode of payment of fee

The ST Act does not prescribe the mode and manner in which the applicable fee is to be received by the entity hosting the Registry. As discussed in more detail in the next section of this report, in practice, secured transactions registries in the majority of jurisdictions permit fees to be paid over the internet by use of a credit card or, for frequent users, by establishing a user account. The ST Act is broad enough to permit both of these payment types.


In the event that paper notices are also to be permitted, then the ST Act is broad enough to allow payment by cash for walk-in clients.

Concerns with the ST Act: Recommendations

To ensure the sustainability of the ST registry, four issues need clarification in the ST Act: (i) how to manage the transition period from the pre-ST Act law to the ST Act; (ii) fees; (iii) how to amend and/or correct a name on a notice; and (iv) technical corrections to the Act relating to the appropriate party to register and to searching criterion for corporate security givers and .It should be noted that while it is recommended that certain changes be made to the ST Act, these changes are not required in order to actually deploy the Registry. Rather, the amendments will facilitate smooth transition to the new system and mitigate complications that may arise in the future.

The following is list of the most critical issues with recommendations for further action.

Transition period

While this issue resides largely outside the scope of implementation of the Registry itself, it is critical to the overall success of the implementation of the Secured Transactions Act. The issue pertains to the length of time that lenders are granted within which they may register notices of pre-existing interests.

The issue is specifically tied to the inordinately long one-year transition period. Suppose that on January 1, 2004, Lender A extended credit to Security giver that is secured by a security interest in Security giver’s assets. Then, suppose that the Registry is started on August 1, 2008. Lender A does not immediately file a Notice. Then on January 1, 2009, Lender B conducts a search of the Registry and does not find any security interests against security giver. Based upon this clean search, Lender B extends credit to the security giver, and files a Notice with the Registry. Lender A then records its Initial Notice of its pre-existing security interest on July 1, 2009. Under the transition language in Chapter 57 of the Act, Lender A’s lien will “spring” into existence as of the first date the Registry went live and would have priority over Lender B.

Given the problem shown in this example, during the transition period any lender will be even more wary of extending credit secured by personal assets than under the current system. At the moment, even if there are multiple security interests against the same security giver’s property, the lender has at least a fair chance of being the first party to seek self-help against the security giver, thereby rewarding the vigilant lender. This is not the case under the ST Act. Lenders, aware of the possibility of a “springing lien,” will likely be very hesitant to take security interests secured by movable property until the transition period has passed. Given that the transition period is for one year, this could have severe detrimental impacts on the marketplace.


Given this problem, the Act should be amended to provide for no more than a three-month transition period in which pre-existing secured transaction can be placed in the Registry. The period is deemed to be sufficiently long in light of the following:

• Lenders will have had ample time within which to organize their files in anticipation of the start-up of the Registry.

• The information to be entered into the Registry is minimal: the filing of an original notice via the web can be accomplished in less than 10 minutes.

• Any burden upon any individual lender must be weighed against the overall burden on Nepal’s economy discussed above that would result from a long transition period.

Fees

The schedule of fees to be paid are set forth in the ST Act. It is not a common practice to prescribe the fee in the statute. Instead, the enabling act typically contains an enabling provision which allows the authorities to prescribe the fee in regulations. This provides the authorities with the flexibility to revise the fee without needing Parliament to amend the statute.. If at any stage it is considered necessary by the Government of Nepal to revise the fee schedule stated above, an amendment of section 19 of the ST Act by the Parliament would be needed, which can take considerable time in Nepal.

The reason why the issue of fees is so important is that there exists a direct nexus between revenues to be derived from the Registry and the business model to be adopted for operation of the Registry. As discussed in more detail herein, a public/private partnership should be established, pursuant to which a private entity will enter into a contract with the GoN to run the day-to-day functions of the Registry. In order to entice a private entity to act in this capacity, the revenue earned out of the fee receipts must be sufficient to at least cover expenses.

In Nepal, unless otherwise prescribed by law, the revenues received by a public office are deposited in the State treasury and flow into the common general fund maintained by the government. The expenses associated with such public office are then met by the yearly budgetary allocation made by the government. Presumably, this same principle would apply to the fee receipts under the ST Act if the STRO were to operate the Registry.

Correcting a Name

During the life of a security interest, the name of a business entity security giver may change due to any number of circumstances (sale, merger, etc.). In such an event, the notice against that security giver must be updated to reflect the new name. Subsection 2 of section 9 of ST Act should be amended to provide that the change in name of the security giver would require the filing


of an “amendment” and not a “correction” as presently stated. A correction statement is filed by a security giver to object to the existence or content of a filed notice that names the security giver. If there is a subsequent change in a name, the change in the record of registry should be made by way of an amendment reflecting the then-current name.

Filing and Search Records

In most other jurisdictions, a security transaction registration causes the registration office to issue a receipt or acknowledgment in the prescribed form containing the particulars of registration. Unfortunately, the ST Act does not contain any provision for the issuance of such receipts or acknowledgments. Further, the ST Act does not specifically provide for the issuance of an evidence of registration, amendment, continuity or termination by the STRO to the person filing the notice. A confirmation of the filing may be printed by the registrant which would contain the basic information about the notice or statement such as the file number, date and time of filing, name and address of security giver and security holder or the authorized representative, description of collateral, and any other information that the authorities may decide to prescribe.

Also, it is critical that an electronic search report must be self-authenticating under Nepalese law, meaning that the print out can be admitted into evidence in a court proceeding without the need of a Registry official to authenticate the record. Otherwise, every time that a dispute arises in which Registry certificates are at issue, a representative of the Registry must appear in court to authenticate the content of the certificate. This is unduly burdensome and should be avoided.

Technical Corrections

The Law contains two provisions that amount to errors in drafting, but that may have significant legal impacts. These provisions should be amended to avoid potential legal problems when the law is implemented. The first of these provisions is Section 7(2), which says in relevant part: “The security giver himself/herself, or a person authorized by him/her to act on his/her behalf, may register the original notice. . . .” In reality, the notice should be filed by the security holder, not the security giver. The party whose interest is served by filing the notice is the security holder. If the task were given to the security giver, there is a strong likelihood that notices may not be filed or that they may be altered by the security giver before being filed. In every other country that has implemented such laws, the responsibility for filing belongs to the security holder. Section 7(2) should be amended in relevant part to read: “The security holder, or a person authorized by him/her to act on his/her/its behalf, may register the original notice. . . .”


The second provision is Section 18(2), which sets out the criteria by which the Registry’s archive may be searched. The criteria should match the indexing criteria set forth in Section 8(1). However, it appears that the necessary counterpart for last three criteria in that list, those being the name of different types of corporate entities, was left out of Section 18(2) through inadvertence. Since in each of the three types of corporate entities is identified and indexed by its name, Section 18(2) can be corrected by adding a clause (e), to read: “The name of the security giver if it is a corporate entity.”

Establishment of Secured Transactions Registry 2 Registry Design and Related Issues 23

2 Registry Design and Related Issues

This chapter will first address the question of what entity should host the registry, and will then turn to implementation issues.

What entity should host the Secured Transactions Registry

The following four existing entities were evaluated as potential candidates to host the Registry.

• The Credit Information Bureau, a private entity with both public and private “owners”

• The Office of the Company Registrar

• The Land Registry

• The Securities and Exchange Board

Criteria for Evaluation

The following criteria were used in formulating this evaluation:

1. Principles Related to Governance / Organizational Structure

• Willingness of Entity to Host the Registry

• Autonomy of the Entity

• Harmony of the Registry with Current Mission of Entity

It is essential that the host entity be willing to host the Registry and not have the perception that it is an additional burden. If a proposed host entity is already so overburdened that it views the Registry as beyond its current capabilities, then implementation will not receive the attention that it deserves. It is also important that the Registry have a degree of autonomy so as to facilitate both the quick implementation of the Registry and to make certain that it remains free from improper influences.

It is also preferred that the Registry be in harmony with the current mission of the chosen entity. If such harmony exists, there will be less of a challenge in obtaining organizational “buy in” from both administrators and staff, making implementation much easier and more efficient.

2. Principles Relating to Operation of the Registry

• Efficiency in Handling Current Responsibilities

• Technological Capabilities


• Staffing Capabilities

• Physical Facilities

If for whatever reason (lack of capacity, lack of funds, etc.) a given entity is currently not in a position to adequately fulfill its current duties, it does not make sense to assign such entity new responsibilities.

The Act calls for the Registry to be in the form of an electronic database. It is therefore proper to assess to current use of technology by each agency. This could include such issues as infrastructure and the entity’s comfort level with technology. Further, a review of current staff with regard to both capacity and the use of technology are appropriate.

3. Evaluation of Credibility of Entity in the Affected Communities

The credibility of each entity within the primary user group of the entity, the lending community, is also an important consideration and therefore was examined. This was accomplished by conducting meetings with various lenders, most of whom have had experience with each of the four candidate entities, as well as with business people outside of the lending community. While the information gathered was of necessity anecdotal, the users who attended meetings represented a fair cross-section of the most common potential of users of the database, both lenders and borrowers.

Conclusion

Based on this objective analysis, CIB is the entity best situated to host the Registry. There are three primary reasons for this conclusion:

a) First, the CIB is the only entity that actively seeks to host the Registry. The Registry is most likely to be successful if it is assigned to an enthusiastic host.

b) Second, the CIB is a private entity. Given the current political realities in Nepal, a private entity will be able to start the Registry more quickly than a governmental entity would, and also carry out its functions more efficiently. A related issue to consider is that ninety percent of the equity owners of the CIB are financial institutions, who have a direct financial interest in the success of the Registry. As such, they are motivated to see it succeed and will give it the attention it deserves.

c) Finally, the CIB already performs business functions that are closely related to those that will be undertaken by the Registry host. Therefore, there will be no need for substantial cultural changes or acclimatization to entirely new technologies on the part of CIB staff in order for it to succeed.


The primary criticism levied against the CIB is with regard to its role in what is termed the “blacklisting” process. This is a process by which security givers that have defaulted are placed on a “blacklist,” which has serious adverse economic consequences for that security giver. The CIB maintains this blacklist. However, the CIB itself does not have discretion in this matter. Rather, it is simply carrying out the mandates of the law and its member institutions in performing this ministerial duty. Still, in order to dampen any potential adverse public comment on this selection, a new division within the CIB should be created to host the Registry. This division would only handle Registry functions and not be involved in the functions that result in blacklisting.

In the event that CIB is not chosen to host the Registry, then an entirely new governmental entity should be established under the Ministry of Finance to carry out these functions. This entity would be the STRO called for in the Act. While SEBO is capable of handling the Registry and could potentially be the second best choice for this operation, SEBO questioned whether the Registry fits within their current mission, which is a valid concern.

We recommend against the selection of either the Office of the Company Registrar or the Land Registry to host the Secured Transactions Registry. These entities are either overburdened by current duties or have other deficiencies in their operations. Further, due to their current workload, they expressed an uncertainty as to whether they would be able undertake this mandate.

Registry Host: Public-Private Partnership

As discussed above, it is recommended that the CIB host the Registry. This does not end the discussion, however, given the way in which the Act is written. Chapter 2, Section 4 of the Act requires the establishment of a “Secured Transactions Registry Office” (STRO) as a governmental entity, and for the appointment of a “Registrar” as a government employee. The STRO is charged with either implementing the Registry, or with entering into a contract with a private party for the purpose of having that private party carries out the Registry functions.

If the CIB is selected to carry out the day-to-day operations of the Registry, then it is clear that the STRO would enter into a contract with the CIB to host the Registry. This would mean that the duties imposed upon the STRO would generally be limited to regulatory and general administrative functions and interacting with other governmental agencies on policy issues, while the CIB would carry out all Registry functions.

The private sector parties interviewed almost unanimously believed that the Registry should be operated by a private entity for the following reasons: a private entity would be able to establish the Registry more quickly than a governmental entity would, it would more efficiently carry out ongoing Registry functions.


It should be mentioned that there are private-party vendors that specialize in housing database operations, and there are in fact international companies that undertake the operation of secured transactions registries for governments. Therefore, the STRO could enter into a contract with one of these entities as opposed to the CIB. The primary advantages of proceeding in this manner would be that such private entity:

• Would already have the corporate infrastructure in place to handle a registry;

• Would have the basic software product available, which would require little customization to comply with the Act;

• Would have a proven track record of operating a registry; and

• Given the first three factors, the deployment time would be greatly reduced.

The primary drawback to proceeding in this fashion is that there are no such entities in Nepal, meaning that the functions of the Registry would be entrusted to a foreign company. Additionally, there may be political issues in entrusting what is fundamentally a government function to a foreign private company. In comparing this option to contracting with the CIB, the following points are apparent:

• The CIB is owned by entities which will be the primary users and beneficiaries of the Registry. Therefore, there will be great incentive for the CIB to quickly implement the Registry and to ensure its ongoing success.

• The Nepal Rastra Bank has an ownership interest in the CIB and has representatives on its Board of Directors. This allows a form of direct oversight that would not be found if a wholly privately-owned entity operated the Registry.

• CIB already has 118 financial institutions as member-entities, and this number continues to grow. These entities collectively represent the vast bulk of expected users of the Registry. Further, these member-entities already submit data to the CIB. Therefore, these entities would be able to seamlessly transition to using the Registry if it is housed at the CIB.

In light of these and of the CIB’s operational strengths noted above, it is recommended that the STRO enter into a private contract with the CIB to implement the Registry. If for whatever reason this recommendation is not feasible, then the STRO itself should be tasked to put the Registry into service as a governmental agency, whose sole mission would be to establish and operate the Registry. This would be more likely to succeed than an existing agency that is already charged with several other responsibilities.


Registry Database: Principles for Design and Implementation

Electronic vs. Paper Filing System

The Act clearly states that the Registry is to be an “electronic database.” Therefore, the Registry should be devised in such format; in turn, this electronic database should be available on-line via the internet for all users. This format allows the public to access all functions of the database called for in the Act. The question remains of whether a paper-based filing system should also be put in place to augment the on-line system: a solely electronic registry system is most appropriate and aligned with recent trends and international best practice principles.

The following discussion is divided into two parts. The first part discusses in general terms the advantages that a solely electronic system offers over a dual system that also allows paper notices. The second section addresses in detail the concern about internet access for small lenders in remote areas.

A. Advantages of a Solely Electronic System

At the outset, it should be noted that creating a parallel paper-based system involves additional complexity and, in turn, cost. In general terms, to accommodate a paper-based system, the host entity would, at a minimum, need to: spend additional time in designing the database system; retain additional staff to process the paper notices; secure and maintain additional technology hardware (scanners and digital storage for scanned images); and secure the office space needed to house this staff and hardware. There are other jurisdictions, including the Federated States of Micronesia, the Marshall Islands (soon to be operational), Cambodia, New Zealand, and three Canadian provinces that successfully use an exclusive electronic filing system, demonstrating that this approach can work. In light of this, a solely electronic registry would also be viable in Nepal.

The advantages of and justification for a solely electronic Registry follow below:

• Information held by the Registry will be in an electronic database. Hence, when the public (i.e., lenders) desires to access the information prior to extending credit to a particular borrower, there is no need for the entity hosting the registry to make copies from paper for the requestor. Instead, the requestor may simply access the information via the Registry website, and they may print whatever they need.

• As discussed in above, the Act does not allow fees to be charged for providing paper copies of notices. The Act does state, however, that host entity, in response to requests for information, “may transmit notices or information through any medium.” Because it is uncertain whether the host entity can recover costs for providing paper copies, it will choose to provide information in an electronic format, i.e., it will


make the most commonly requested information available on the web. Therefore, even if users are able to file via paper, they will still be required to access the internet in order to first determine if a proposed security giver already has given a security interest to another lender. Thus, in some sense, the entire issue of internet access is moot: if users must access the internet to obtain information from the Registry prior to taking a security interest, there is no additional burden in requiring them to file evidence of their security interest via the internet.

• Filing of a notice in a secured transaction registry is not a pre-requisite to effectiveness of a security agreement between the parties to it, but only to establish priority with respect to other interests in the same collateral. Therefore, borrowers have no practical need to file in the registry. Only security holders, who are in nearly all cases businesses that have access to the internet, have a need to file notices. It is, therefore, not critical that every person in the country have access to the registry, so lack of access to the internet by security givers is not a critical shortcoming. This point is discussed in further detail below.

• A system that permits paper notices can be both more costly and more time-consuming to implement. A paper-based system will require additional infrastructure (office space, equipment for staff, scanners for converting paper notices into digital images, media for storing digital images) to implement and to maintain. As discussed elsewhere in this report, there is a concern that the fee structure—and its limitations—called for in the Act may not support a paper filing system.

• There is far less opportunity for corruption in a purely electronic database system than in a paper-based system.

o With on-line filing, items such as filing date and time – where corruption is most likely to occur – cannot be manipulated. The software assigns a filing date and time to each transaction submitted, and this function can not even be altered by a person with administrator rights to the database. Further, each time the administrator accesses the database, the software can be configured to produce an internal log that will record the fact that an individual notice record was changed.

o Even in the absence of corruption, staff must still enter information from a paper notice into the Registry database. This introduces an element of human error into the system. There can be dire consequences in the marketplace for notices that are errouneously entered. Although the Act does afford some protection with regard to an assessment of liability against the STRO (or private entity implementing the Registry) for such errors, they can cause great embarrassment and result in adverse political attention being brought to the Registry. This risk is not incurred with electronic notices.


• The electronic system poses a greater deterrent to the would-be bogus filer than a paper system would.3 A bogus filer may submit paper notices to the office and pay the filing fee in cash. As such, there would be no way to trace the identity of the bogus filer. However, with an electronic system, each transaction conducted on-line generates an entry into what is called an “audit log” in the database. The audit log can be configured so that the “biographical information” of the person/entity paying the filing fee can be captured and linked to the appropriate transaction. For example, the name and address of the credit card used for a filing fee would be retained (it is not recommended that the credit card number be stored in the database for other reasons). Thus, at least some evidence will exist as to the identity of the bogus filer. If credit cards are not viable, a commercial bank can be used for receipt of payments to the registry account. In that case, the rules for receipt of payment can call for the bank to enter the payor’s name from his official ID to achieve the end sought here.

• Even though the Registry itself would be an electronic database, there would still be the need to maintain a business office, which would not only carry out internal administrative functions, but would also serve as the client contact point for the Registry. This business office would be responsible for, amongst other things, collating and providing statistical information, as well as providing accounting of revenues and expenditures. The business office would also staff a help desk to help customers with any problems that might arise.

B. Access for Small Lenders in Rural Areas

The private sector interviewees universally stated that they would use the on-line electronic system. The business need for a paper-based system is thus questionable, given that the primary user group would employ the on-line system. Admittedly, these interviewees represented the larger institutional lenders in Nepal. While these lenders would be taking the vast bulk of security interests in Nepal, the section below addresses the needs of small lenders.

• The user group for and the beneficiaries of this registry consist of lenders as well as buyers of livestock, crops, equipment etc. In practice, the database would not receive notices from the general public, thus minimizing concerns about universal internet access to the database.

• The Registry office itself could easily establish a dedicated public workstation with internet connectivity, so that any person who does not have a computer or internet access could access the registry from that

3 The term “bogus filing” refers to instances where third parties submit phony notices to a secured transactions registry with the intent to harm another, typically through the creation of false liens.


workstation. This approach would be analogous to that used by the Companies Registry, where a person (or their agent) desiring to form a business entity must appear in person at the Company Registry in Kathmandu.

• The existence of micro finance institutions and small finance companies operating in rural areas does not justify the creation of a parallel paper-based registry system. Many of the loans extended by microfinance lenders are simply not secured by movable property collateral for at least two reasons. First, microfinance loans are often made to a group, and each member of the group acts as a sort of guarantor for the other members, with these collective guarantees effectively serving as collateral. Second, often the amount of the loan is too small to justify the expense (in filing fees and internal administrative costs) of perfecting the security interest. The filing fee for a notice in the registry is Rs500. Consider a loan of Rs4,000, the limit established by the Central Bank for loans to qualify as “Deprived Sector Lending.” The perfection of this security interest by filing would require 12.5% of the loan value to be paid in filing fees. This fee would either have to be paid by the borrower, thereby effectively raising the interest rate paid on the lent funds by a factor of 12.5%, or it would have to be absorbed by the lender, thereby reducing the return on their investment by 12.5%. Neither of these approaches is viable in the marketplace, meaning that there is no economic incentive to register small-value loans in the Registry.

• For loans above a certain threshold, lenders may currently require a real estate mortgage as collateral. In order to perfect a mortgage against real estate in Nepal, the borrower must personally appear at the local land registry office. In rural areas, this office may be at some distance from the residence of the borrower, thus requiring travel on their part. The local office of the land registry will be located in a town that has more modern amenities than would a remote village. Therefore, the borrower that is forced to travel to a land registry office to record a mortgage would pass by locations with internet access. If the borrower can make such a trip to mortgage their land, then a lender could be expected to make the same trip in order to file a notice in the Registry via the web.

Required content of a notice

The Act establishes the information required in the Notice. In summary, for an Initial Notice, the following information is required :

• Security giver Name (for an individual Nepali citizen, the citizenship number suffices as the name)

• Security giver Address


• Security holder Name

• Security holder Address

• Description of the collateral

For subsequent related notices (amendments, continuations, terminations, corrections), the file number of the Initial Notice and the name of the authorizing security holder(s) must also be included.

Though it is not listed in the requirements for a notice in section 7 of the ST Act as listed above, there is a requirement in sections 17 and 18 of the Act for serial numbers of a serial numbered vehicle to be searchable. In order for these numbers to be searchable, they must be entered into a searchable field. It will, therefore, be necessary to provide in the database for a field for entry of the serial number(s) of vehicle(s).

It should also be noted that, by necessity, the Registry will collect information related to the person / entity who files via the internet with regard to payment of the filing fee. A regular user may establish a “client account” that will hold identifying information about the client (name, address, authorized individual users, payment information, etc.). This information is not public, will be held in a secure area of the database, and will only be accessible by the client’s authorized users and Registry staff with appropriate security clearance.

An infrequent user may pay fees with a credit card or through a commercial bank. International best practices suggest that, information related to the identity of the credit card holder can be retained. This is quite typical in online credit card transactions of all types. As noted above, this information is not public, will be held in a secure area of the database, and will only be accessible by Registry staff with appropriate security clearance. The identity of the payor of fees through a commercial bank can also be captured and retained.

Search Criteria: Security Giver Identification and Collateral Types

Since the primary key by which the database is searched for information in the secured transactions registry is the information that identifies a security giver, the accuracy of that identifier is critical. The identifier for individual Nepali citizens is the citizenship number of the security giver. In the cases of foreigners and corporate bodies, the identifier is the name of the security giver.

There are two sections of the Act which relate to search criteria. First, the Act provides that the Registration Office “shall supply” the following information to any person who requests the same4:

• Whether there is on file, as of a date and time specified by the registration office, any notice that designates a particular security giver and has not lapsed with respect to all security holders.

4 Secured Transactions Act, Chapter 2, Section 18, subpart 1 of the Act.


• The file number of every notice, and the date and time of its filing;

• The names and addresses of each security giver and security holder mentioned in every notice;

• Description of the collateral mentioned in every notice or amendment notice; and

• The file number of each document connected with every original notice, the date and time of its filing, and particulars which help to identify whether the document is an amendment, correction statement, continuity statement, or termination statement.

Next, the Act establishes the search parameters that the public may use when making queries through the Registry database.5 It provides that the registration office “may be requested to search for a document by explicitly mentioning the following particulars:”

• File number of the Initial Notice

• Serial Number of a serial numbered vehicle

• Identification number of a security giver who is an individual and a citizen of Nepal; or

• The name of a security giver who is an individual but not a citizen of Nepal; or

• The name of a security giver that is a corporate body .6

Cross-Link with Other Databases

In certain jurisdictions, the secured transactions registry database is cross-linked to other governmental databases that may be of interest to lenders. This allows lenders to visit only one site in order to extract needed information about a given security giver. In Nepal there currently are no other governmental databases containing comprehensive information to which a cross-link can be established. When such other databases are created, the needed integration can be done by building a simple business services portal that is linked to all the relevant databases. That will permit all information to be retrieved through the common portal without having to directly link databases

Determine Authentication Requirements

There are two instances where the concept of “authentication” arises in the operation of a secured transactions registry. The first occurs with regard to the time that a Notice is filed, and the second involves information that is withdrawn from the database by the public. Each of these is discussed below. 5 Secured Transactions Act Chapter 2, Section 18, subpart 2 6 The law does not now provide for this, but it is implicit. It is recommended to fix this. See comments above on the Act, Section 18(2).

Comment [w1]: I think this adds only confusion to what is otherwise pretty clear in the foregoing two bulleted paragraphs. Recommend striking all of this.


Authentication of the Filing of Notices

While the Act does not require the Registry Office to authenticate the identity of the person that files a Notice, there is a practical way in which the identity of a filer may be established for electronic notices.

In order to complete an electronic notice, some method of payment must be employed. Regular users will establish accounts with the Registry Office, from which they may pay for services on an ongoing basis. Individual users will be able to use a credit card or pay via commercial bank for one-time transactions. In each instance, the software governing the database can be designed so that the biographical information of the entity paying the filing fee can be captured in an audit log and linked to the appropriate transaction. The information maintained in this audit log is not public. However, it is accessible by anyone in the registration office that has been given the proper database permissions. That way, if a dispute arises over whether a notice was submitted fraudulently, the registration office may provide information to the parties regarding who actually paid for filing the notice. The database system should be designed such that the audit log is retained as a permanent record.

While it may be counterintuitive, it is nonetheless true that the same level of filer identity verification is not attainable through a paper-based system. If paper notices are allowed, a mischievous person could elect to fill out a form with false information, mail it to the registry via regular post with the filing fee in cash, and thereby leave no tracking record.

Authentication of Information from the Database

All public information held within the Registry database should be accessible to the public via the internet. The term “public information” refers to information the Act requires to be submitted for the various notices. This includes: security giver name and address, security holder name and address, and collateral description. Any person may view and print this information as displayed on the Registry website.

The key consideration with regard to whether any additional authentication requirements exist is whether Nepali courts will require authentication in order to admit into evidence information from the Registry database. During an interview with the Debt Recovery Tribunal, members of the tribunal confirmed that printouts from the Registry website would be admissible and that no additional authentication or certification would be required unless the printout were to be challenged as a forgery, in which case the Registry would simply be asked to provide a printout.

It is recommended that the software used by the Registry be configured so as to allow a certified search report to be produced.


Technology Infrastructure for Intake and Payment Functions

The technological infrastructure and capacity of the potential user groups as well as the government were examined to determine the best path forward for Registry to succeed. This also included examination of the infrastructure available for intake and payment functions.

Meetings were held with private parties in both the financial sector and the IT sector in Nepal. As for the financial sector, it appears that all significant lenders have readily available internet access. For example, the CIB currently has 118 member institutions, each of which can send information to the CIB via the internet - although such information is currently in the form of e-mail attachments and not entered directly into the CIB database by the filer. Still, given that the vast majority of actual users have internet access, the infrastructure needed to support an electronic registry is in place.

With regard to the broader population, these private parties explained that internet access is widely available in all urban and suburban areas, and is not uncommon in rural areas. Therefore, it appears that the basic infrastructure needed to support a web-based system on a national basis is in place, keeping in mind that the users and beneficiaries of the system are primarily lenders.

No Nepali governmental agencies currently conduct business on-line, as contemplated by the Act. Certain entities enter information into a database (see discussion in subpart 2 (i) above), but this entry is completed by staff and not by the public over the internet. The CIB is nearly ready to deploy a system that will allow users to enter information directly into a CIB database, an activity analogous to accessing the Registry via the web. Also, there currently are no governmental entities either accepting payment on-line or maintaining pre-paid accounts for the payment of services. Given the lack of comparable work being conducted by the GoN, it is difficult to assess capacity. These functions are not difficult to implement, however, and should not pose a significant hurdle to implementing the Registry, given that sufficient infrastructure exists to process payments electronically. Similar processes have been implemented in other countries with poorer technology infrastructures than Nepal’s.

In basic terms, there are two ways in which payments can be processed for on-line transactions. For individual transactions, the use of a credit card is likely the most convenient method of payment. Alternatively, payment could be made in cash through a commercial bank if credit cards are not practical. To accept credit card payments, the Registry host can either directly enter into an agreement with a card issuer(s), or it could use a third party entity to handle credit card transactions. The credit card number submitted is forwarded by the host software to the approving entity, and once approval is received, the notices are able to be committed to the Registry database.

In the alternative scenario, frequent users of the Registry may desire to establish accounts to which fees may be automatically charged, so that their staff need not enter credit card information for each individual transaction.


The registry design can provide for such accounts to be either pre-paid or paid in arrears. Payment in arrears is administratively simpler, and experience in other countries has shown there is a low risk of non-payment since regular users, by definition, intend to use the service on an on-going basis. Therefore, they will pay on their accounts so as to avoid being cut off from service for non-payment. Unless there is some legal prohibition of arrearage accounts, their use is generally the better course. The STRO will designate the entity that will receives funds paid by users, which will most likely be a bank. A user desiring to establish an account will enter into an agreement with the private party implementing the Registry.

Financial and Accounting Systems

As to the appropriate financial and accounting reporting systems, international best practices suggest that the software that manages the database will be equipped with its own accounting functions. The accounting component of the database software is not complicated, as it needs to track only basic information that is consistent with any accounting software. Best practices also dictate that the accounting component of the software be designed to provide financial reports that satisfy GoN accounting requirements. Typically, such reports include transactional and fiscal activity on a daily, weekly, monthly, quarterly and annual basis. Further, such reports should provide other information, such as aggregate totals for each individual notice type so as to be able to track overall use of the database.

Security: Safeguarding the Registry; Data Integrity

Another design consideration for the Registry database is the incorporation of optimal security features with regard to safeguarding physical integrity of the registry database as well as the integrity and reliability of its contents.

There are multiple aspects to consider with regard to security. They include:

• Protecting the database from hackers, viruses and other external threats;

• An automated back-up procedure for all records within the electronic database;

• Protection against interruptions in power;

• A stable, climate-appropriate environment for hardware components;

• A disaster recovery plan and assets in the event of fire or more widespread natural disaster;

• Security against physical intrusion;

• Use of a secure, off-site facility for back-up retention.


Database Capacity

There are two components to consider with regard to database capacity of the Registry. The first concerns anticipated Registry activity as determined by the number of notices that would be expected on an annual basis. The second concerns ensuring certain that there is adequate capacity to efficiently run the software that manages that database.

With regard to estimating the number of notices anticipated on an annual basis, there is no analogous function in Nepal upon which to base an estimate. The CIB maintains a database of “borrowers”, where information that could loosely be called “credit information” holds information on approximately 40,000 borrowers. The CIB further responds to an average of 250-300 requests for information on borrowers from its member institutions each day. While this information serves as a rough benchmark as to the level of borrowing activity in Nepal, it is not specific to interests secured by movable property, and it is reasonable to suspect that some portion of the information relates to unsecured loans or to interests secured by real estate, personal guarantees or notation on the title of a vehicle. Therefore, one could extrapolate that the Secured Transaction Registry, limited as it is in scope to holding information related to movable property, might initially have fewer borrowers and experience fewer requests for information.

The Company Registry in Nepal currently has approximately 55,000 corporate entities. This relatively low number is in line with a developing nation that does not have significant economic activity. Of more relevance to estimating the number of notices that the Registry database may enjoy are the results of survey prepared by the Assessment Team and conducted by the Nepal Rastra Bank in the summer of 2007. The survey was designed to obtain information from a variety of lenders as to their anticipated use of the Registry. The full survey results are set forth in Appendix B at the end of this report.

Given the available information, it does not appear that obtaining adequate hardware capacity to maintain information in the Registry will be a concern. By way of comparison, hardware (and associated software) is readily available in the open market designed to handle registries that serve jurisdictions with over a million registered corporate entities and tens of millions of secured transaction registry records.

The exact hardware requirements can be determined once the application software vendor is selected so that hardware and system software specifications can fit the needs of the application. . If any additional individual workstations are needed the host entity to accommodate registry workload, it will not be more than one or two, and their cost will not be a significant planning factor.

Data Migration from Other Databases

There are no existing databases containing secured transaction information that would need to be migrated to the Registry database


Registry Software: Procurement and Design Issues

Three options exist with regard to obtaining the application software needed to run the Registry database:

• Purchasing a license for off-the-shelf software that exists and contract with its developer modify it to fit unique Nepalese requirements.

• Acquire a license for the core code of off-the-shelf software and modify it with local Nepalese developers.

• Build the application software from scratch to detailed specifications.

The quickest and safest means to implement the Registry is to acquire an “off-the-shelf” software product already in use in jurisdictions that have implemented a secured transactions law similar to the Act in Nepal. This approach is both faster and more cost-effective because building software from scratch requires that all specifications and business requirements must first be documented, and that such requirements be programmed. Further, there is less risk of encountering software “bugs” when purchasing a product that has already been in production.

It is anticipated that such a product can be acquired for approximately $120,000US, including the cost of related services of a local development firm such as translation of field labels and instructions.

Administration of the Registry: staffing, hardware specifications, facilities

Set forth below is an administrative strategy that addresses staffing requirements, hardware specifications for the Registry, and considers the type of facility required to house Registry functions. Since a centralized, solely electronic Registry is contemplated, issues pertaining to staffing, hardware needs, facility requirements, and associated administrative issues are not complicated. Each of these components is discussed below.

Staffing

The Act calls for the establishment of a “Secured Transaction Registry Office” (“STRO”) and for the appointment of a person to serve as the “Registrar,” with the job title of “Gazetted Officer of Class II or equivalent rank.” There are no other explicit requirements pertaining to staffing within the Act.

The organizational structure envisioned in the Act calls for the STRO to be established as a new entity under the auspices of the Ministry of Finance. The STRO would then enter a contract with a private entity to carry out the day-to-day functions of the Registry. If this scenario is followed, then the STRO itself would not require significant staffing; it should be sufficient to utilize one person part-time, for perhaps two hours per month on average. It may be


advisable to assign the Registrar office and another nearly full-time office of similar rank to one person.

If a private entity is selected to handle the day-to-day operation of the Registry, it is anticipated that no more than three staff would be required to handle all related operations, none of which would be required on a full-time basis. These individuals would be:

1) A database administartor who would handle hardware or software issues that arise, advise the administrator and interact with the STRO on technical issues affecting the Registry;

2) One junior-level IT persons to provide sufficient coverage (in conjunction with the senior level IT person) for hardware or software issues that might arise with the Registry;

3) A help-desk person to respond enquiries about the Registry.

This estimate for the number of people needed to run the Registry is very conservative, meaning it may well be possible to run the Registry with fewer than four persons. By way of comparison, Cambodia has implement a solely electronic secured transactions registry, and has two employees.

If the private party selected to operate the Registry were an entity such as the CIB, it probably has or will have employees who can provide the staffing support needed by the Registry, as described above, in addition to supporting the CIB function. For example, the CIB may already have a database administrator, a junior-level IT person and an administrative person who could provide the limited “help desk” function needed by the Registry. Based on the experience of other countries that have implemented similar systems, it is anticipated that the database administrator and junior level IT staff would not need to spend more than one fifth of full time in support of the Registry, and that the help desk person would not require more than one twelfth of full time in support of Registry needs. After the CIB completes its technology upgrade which is under way, its IT staff will almost certainly have excess capacity. Therefore, addition of the Registry to the workload of the CIB would likely not involve any new staffing, and, if it did cause a need for new staffing, it would not be more than one person.

Hardware Specifications

The equipment required to implement a purely electronic Registry is not great. The single most significant hardware cost is tied to the purchase of sufficient servers to run the database. As for the server specifications, by way of comparison, the Government of Cambodia is currently deploying a solely electronic registry that that employs only a single database server and a single web server. Cambodia elected not to have redundant servers based on a cost-benefit analysis that concluded risks of non-redundancy were accepable. A more cautious approach is recommended, as best practices suggest that it is more prudent to employ redundant database and web servers. This recommendation makes even more sense considering the relatively low cost


for servers in today’s marketplace. While the specific hardware and system software configuration will be specified by the vendor of the registry software, it is anticipated that only the redundant web and database servers will be required, since it is likely that the registry can use the same firewall and domain servers used by CIB. There may be a need for a dedicated e-mail server if CIB does not have one, since the Registry will regularly generate mass e-mailings of notices to regular users. All known vendors run their applications on MS platforms, so the lower cost of that platform, as opposed to the higher cost of Oracle, can be assumed.

It is unlikely that additional individual workstations will be required to meet the needs of the Registry. But if such workstations are needed, it would not be more than two workstations which are low-cost items that do not significantly affect the cost of hardware.

Based upon these estimates, one can surmise that the total hardware and system software (OS and database) cost for the system would be on the order of $85,000 US.

Facilities

A solely electronic Registry does not require significant physical facilities for three reasons. First, there is no need for housing large numbers of staff. Second, there is no need to establish a permanent repository to hold paper notices, which over time would require space and storage facilities. Third, providing internet access to the Registry eliminates the need to establish branch offices, resulting in substantial cost savings both at the start-up of the Registry and during ongoing operations.

The primary requirement for housing an electronic registry is that the room in which the servers are located must be climate-controlled. The facility in which the Registry is housed must also have ready access to a broadband internet connection. In addition the facility should satisfy other conditions, including grounded circuitry, conditioned power, back-up generator with fuel supply, physical security and access controls, server rack space and automated fire suppression using a gas suppressant.

Best practices suggest that a disaster recovery plan whereby a copy of the database is maintained off-site, preferably in a remote geographic location from Kathmandu in anticipation of a natural disaster (e.g. earthquake).

Public Access at the Registry

The Registry should provide access to an internet connection for users who do not otherwise have access. This can be done through a dedicated workstation that should be available to the public at either the STRO or at the location of the private entity (CIB) that houses the Registry. This workstation would have


internet connectivity, thus enabling the public to use the Registry by visiting the appropriate office.

3 Implementation Plan: Regulations, Time-line and Budget

Below is an overall roadmap to follow to bring the Secured Transaction Registry to fruition. This roadmap includes references to specific milestones and a time-line for completing critical path tasks.

What Regulations Should the Government of Nepal Adopt?

This section details the critical items that will be required to be set forth in regulations. The STRO, in conjunction with the appropriate GoN Ministries, should move to finalize regulations as soon as possible as they will feed into design criteria for the software. The actual design criteria should not be set forth in regulations as these are more appropriately addressed in procurement documents.

Currently, no regulations have been drafted to implement the ST Act and it is necessary to adopt them prior to deployment of the Registry database. These regulations will cover such substantive items as:

• The delineation of duties between the STRO and the private entity hosting the Registry;

• The language to be used in the Registry database;

• Search logic for security giver searches;

• Issuance of registry receipts / acknowledgments;

• Issuance of certificates;

• The availability of additional services beyond those offered on-line;

• Provision for fees (assuming the ST Act is amended);

• Provisions governing how to establish customer accounts; and

• General administrative items as office hours and database availability.

There is no need for voluminous regulations to implement a solely electronic database. Further, there is no need to specify items such as hardware and software specifications in regulations. These will be handled in procurement documents.

Establishment of Secured Transactions Registry 3 Implementation Plan 41

Implementation Time-line: Costs

Below is a time-line for steps required to implement the Registry, along with associated costs. The time-line includes such items as installation and testing of the software, creating internal operating guidelines and manual, mounting a public awareness campaign, as well as training of staff and end users of registry.

There are a few events that must first occur before a timeline can be constructed to implement the Registry. Assuming the recommendations that pertain to hosting the Registry are followed, these are: 1) the GoN must establish the STRO, and the STRO must have a Registrar; 2) the GoN must direct the STRO to enter into a contract with a private party, i.e, the CIB; and 3) the STRO must enter into a contract with the CIB for operating the Registry. Once these are in place, several activities related to the start-up of the Registry can begin. Many of these activities can and should be carried out on parallel tracks so as to more quickly move the project forward.

These activities are shown on the table below. This table is not to be construed as a substitute for an actual project plan listing all dependencies and subtasks. Rather, it is intended to provide the framework from which such a detailed project plan could be prepared.

Estimated Implementation Expenses

Task Responsible Entity

Timing Cost

1. Establish STRO; enter contract with private party

GoN, Ministry of Finance

Initial Task No external cost to be paid to third parties unless there is a need for outside assisstance in preparation of contract.

2. Establish a committee to start drafting regulations

CIB, STRO, Ministry of Finance

Initial task. Potential need for outside consultant(s) to assist in this process. Estimated consultant time: up to 4 weeks, including 2 weeks in Nepal, international travel, consultations etc.

Est Cost: US$ 30,000

3. Define requirements & develop specifications for application SW

GoN, MoF Initial task; pre-requisite to 4: specifications will be for application SW as modified to fit specific Nepal requirements.

Estimated consultant time: up to 3 weeks, including 2 weeks in Nepal.

Est Cost: US$25,000



Timing Cost

4. Prepare, obtain GoN procurement agency approval, and publish procurement documents for application software.

GoN, MoF Should be completed as soon as possible. Define all performance standards for software and all related tasks such as installation of Nepali field labels, etc. when received from local IT firm, specification of HW & system SW requirements, installation, on-site testing and debugging, knowledge transfer to local IT firm, etc. Preparation and approval should take 2 to 6 weeks. Publication period should be at least 30 days.

Bid as fixed price contract. Price should include technical documentation, knowledge transfer, HW/SW specifications, integration of translated labels, etc., on-site installation and testing.

Est Cost: US$100,000

5. Define requirements for local IT firm.

GoN, MoF Initial task; pre-requisite to 6: Firm will support translation of labels, etc., provide IT support of SW, participate in knowledge transfer, support training & support SW testing & acceptance.

6. Prepare, obtain GoN procurement agency approval, and publish procurement documents for local IT firm.

GoN, MoF Should be completed as soon as possible. Define all performance standards for local IT firm. Preparation and approval should take 2 to 6 weeks. Publication period should be at least 30 days.

7. Select software vendor; negotiate final terms & execute contract.

GoN, MoF As soon as possible after end of publication period. Should be no more than 4 weeks.

8. Select local IT firm; negotiate final terms & execute contract.

GoN, MoF As soon as possible after end of publication period. Should be no more than 4 weeks.

For tasks associated with establishment, e.g. translation, knowledge transfer, & test & acceptance support,.

Est Cost: US$20,000.

4. Prepare procurement docs for

CIB, with input from software

After selection of software vendor: hardware specs should be made with input from such

Software vendor’s time should be included in software procurement contract.



Timing Cost

hardware vendor vendor

5. Prepare text for Web pages.

CIB, to be given to developer

Should begin after selection of software vendor.

Cost included in the software vendor’s contract.

6. Employ Registrar

GoN, MoF Approximately concurrent with 7 & 8.

There will be costs associated with employing and housing the Registrar for the duration of the project until revenues are received.

Est Cost: US$ 5,000

7. Translate labels, etc. as SW vendor sends to local IT developer

Local IT developer

Ongoing through period that SW vendor is developing modifications to base code and installing translations.

Cost included in the local IT firm’s contract.

8. Obtain / Prepare space in which to house Registry

CIB If space is available within CIB, this is not on the critical path. If new space must be acquired, then search should begin immediately after contract is signed.

Rental costs estimated at US$1,500 per month. Space need not be available until just before hardware delivery.

Est Cost: US$5,000

9. Prepare test scenarios

Software vendor, CIB

Should be prepared in parallel with software development

Software vendor’s cost is included in its contract. Potential need for outside consultant(s) to assist in this process. Estimated consultant time: 1 week at home station.

Est Cost: US$ 5,000

10. Install hardware and system software

Hardware vendor, CIB

Cost of HW & system SW approx. US$85,000.

Est Cost: US$ 85,000

11. Delivery of technical documentation & copy of source code

Software vendor

NLT installation of SW. Software vendor’s cost is included in its contract.

12. Install application software

Software vendor, CIB

After 10. Software vendor’s cost is included in its contract.

13. Preparation of manuals and

Software vendor, CIB, STRO

Up to one month Software vendor’s cost is included in its contract. Potential need for outside



Timing Cost

user documentation

consultant(s) to assist in this process. Estimated consultant time: 2 weeks in Nepal.

Est Cost: US$15,000

14. Knowledge transfer to local IT firm

Software vendor, local IT firm

Concurrent with 12 & 15. Costs included in software vendor’s and local IT firm’s contract.

15. On-site testing and debugging

Software vendor, CIB, registrar

3 weeks Costs included in software vendor’s contract.

16. Training of staff

Software vendor, CIB, registrar

2 weeks concurrent with 13, 14 & 15.

Costs included in software vendor’s contract.Outside consultant will assist using time covered in 13.

17. Community awareness and training

CIB Should begin in earnest when a stable version of the web site is available for demonstration. Up to two months.

Multiple seminars be given for the lending community so as to provide all expected users the opportunity to attend at least one such seminar. Seminars for lenders, lessors & judges. Potential need for outside consultant. Estimated consultant time: 2 weeks in Nepal.

Est Cost: USD$ 35,000

18. Regulations must be officially adopted prior to deployment

STRO, Ministries of Finance and Laws

19. Deploy

20. Operating costs until revenue stream is sufficient to cover

STRO, CIB Est Cost: US$15,000

21. Contingencies

Est Cost: US$30,000

TOTAL ESTIMATED IMPLEMENTATION COSTs Est Total: US $370,000


Several points should be noted with regard to the table above. First, it assumes that an “off-the-shelf” software product has been purchased, thereby greatly lessening the need for customized software design. This would result in both a cost and time savings, allowing the Registry to become operational more quickly.

Second, there is a strong link between regulations and system requirements. There will be a time delay between completion of draft regulations and the date they become law. There is some theoretical risk in proceeding with procurement prior to regulations becoming final, but given how long this might take, it does not seem appropriate to forbear proceeding with the project until this date.

Three, the medium cannot reflect the reality of the timelines involved. Informal conversations with the software vendors will quickly yield information sufficient to prepare hardware procurement documents prior to the award of the contract to a given developer.

Finally, piecing together the critical path activities yields a timeline similar to the one depicted below:

4 months 3 months 3 months 2 months

Regulations Customize software Testing Training users and staff

Software Procurement docs

Procure Hardware Bug Fixes

Select vendor Obtain hardware

Under this scenario, it will take approximately one year from the time of the contract between the STRO and the CIB for the system to be ready to deploy. This is an aggressive schedule, but also a realistic one if an appropriate off-the-shelf product is selected. Please note that if the STRO is selected to host the Registry, this timeline is too aggressive as the STRO will not have the corporate infrastructure in place to facilitate moving so quickly. It is anticipated that as much as six (6) months might be added to this schedule if the STRO is assigned the Registry.

Estimate of Ongoing Costs and Revenues: Profits?

It is critical that the Registry be financially self-sufficient, meaning that the revenues generated from filing fees must at least equal ongoing expenses. In


this respect, an analysis of the costs and revenues associated with operation the Registry has been undertaken.

Ongoing Operational Costs

There are three primary categories of costs associated with running an electronic registry, and namely:

• Staff salaries

• Costs associated with routine upkeep of Registry itself and co-location (potentially including ongoing license fees, upgrades of office software, internet fees).

• Costs that will be incurred to build and maintain the Capital Reserve Fund .

The ongoing costs associated with operating a solely electronic database are far less than with a registry that also accepts paper notices. There are several factors that make a paper-based system more expensive to maintain, and namely:

• Increased staff is required to handle paper notices;

• Additional hardware is required to handle paper notices, including workstations and scanners; and

• If the paper notices are to be retained, then space is required to hold these documents.

For these reasons, along with others discussed above, it is recommended that a solely electronic Registry system be deployed.

In an electronic database, a primary ongoing cost will be staff salaries. Three part-time staff would be required for registry operations, and namely a database administrator, a junior-level IT expert, and one staff to fulfill the limited helpdesk functions that the Registry will demand. According to current salary scales prevailing in the Nepali job market for equivalent positions, the average annual pay for each of these positions is as follows (assuming a NRs 64 to 1 USD exchange rate):

Database administrator: NRs 80,000-100,000/month (USD 1250-1563)

Junior-level IT expert: NRs 40,000-65,000/month (USD 625-1015)

Public Help Desk: NRs 40,000-50,000/month (USD 468-781)

Based on this salary scale and on international experience in establishing movable collateral registries, and assuming that: the database administrator would perceive a monthly salary of NRs 100,000 and devote 1/5 of his/her time to Registry operations; the junior-level IT expert would perceive a monthly salary of NRs 65,000 and devote 1/5 of his/her time to Registry operations; the help desk staff would perceive a monthly salary of NRs 50,000 and devote 1/12 of his/her time to answering Registry-related queries; then Registry staff costs per month would be as follows:


Senior-level IT expert: NRs 20,000/ month (US$391)

Junior-level IT expert: NRs 13,000/month (US$203)

Public Help Desk: NRs 4,167/month (US$65)

Based on this very conservative estimates, which are likely to substantially overestimate actual costs, total staffing costs would therefore amount to a maximum of NRs 37,167 (USD 659) per month.

Further, assuming that the CIB undertakes the planned upgrade of hardware in conjuction with a technology partner, and that it will move to a new location more suited to the new needs of the institution, the other cost categories would be as follows:

Bandwidth (flat rate, 512 MG), apportioned 20% of CIB usage NRs 5,760 (USD 90)/month

Co-location of 2 Web Servers and 2 Database Servers

NRs 9,600 (USD 150)/month

Storage of Daily Back-ups NRs 2,560 (USD 40)/month

Based on the above, total monthly hardware and software maintenance costs would amount to NRs17,920 (USD 280).

The recommendation to purchase an off-the-shelf software product will be discussed later in the report.

Finally, the costs associated with building and maintaining the Capital Reserve Fund are estimated to be NRs 1,920,000 (USD 30,000) / year, or NRs 160,000 (USD 2,500) / month.

Total operating costs and capital reserve costs for the registry would thus amount to NRs 215,087 (USD 3,361) per month

The following table summarizes total monthly costs:

Item Nepalese Rupees/month US Dollars/month

Database administrator

20,000 391

Jr. IT Person 13,000 203


Public Help Desk 4,167 65

Staffing Costs 37,167 659

Bandwidth 5,760 90

Co-location 9,600 150

Daily Back-ups 2,560 40

Maintenance Costs 17,920 280

Capital Reserve Fund 160,000 2,500

Total Monthly Costs 215,087 3,361

Revenues

The issue of fees has been previously discussed. In summary, it is somewhat unusual to set the fee to be charged within an act itself, as this is often left to be addressed in regulation. The ST Act should thus be amended to allow fees to be established by regulation. Should this take place, then regulations can be crafted that take into account the financial sustainability of the Registry, thus helping to ensure that adequate funding will be available to meet Registry expenses. The remainder of this section discusses revenues in the absence of a change in the ST Act.

The ST Act currently calls for the payment of NRs500 for each notice with the Registry. The Act prohibits the charging of fees for accessing information from the database when that information is available via the web.

To cover total estimated monthly costs, and thus generate NRs 215,087 (US$3,361) per month, the Registry would require 430 notices.

This is not an extraordinary amount of business to expect for the Registry. In order to gauge the number of notices that should be expected, a survey was prepared and conducted by FIAS staff in February 2008. The survey suggests that, even using a very conservative scenario and including only filings by the eighteen largest commercial banks, a substantially more than sufficient number of notices will be filed with the Registry, such that its operation will be entirely self-sufficient. (See the detailed results in Appendix C)

When the Registry is deployed, there will be a large influx of notices in the initial period, generating an initial surplus of fees. It is strongly recommended that a percentage of this one-time boom be held in the form of retained earnings so as to cover periods in which filings, and thus revenues, will be of less significant volumes. The other wildcard in revenue analysis pertains to motor vehicle registrations. If security holders determine that a notice of security interest in a motor vehicle should be filed with the Registry, which would thus come to replace the existing “blue book” system, revenue stream for the host entity will be


significantly larger. (Please refer to Appendic C for revenue analysis under this scenario).

Motor Vehicle Registrations

The Assessment Team believes that lenders will use the Registry to file notice of security interests in motor vehicles. Currently, in the absence of a secured transactions law, the financiers of vehicle purchases have their security interests in vehicles acknowledged in the ownership / registration document issued by the motor vehicles registration authority. The motor vehicle registration authority concurrently mentions the name of the lender in the registration book (referred as the Blue Book), either as a creditor having a security interest in the vehicle, or, problematically for the lender, as the owner. Being designated as an “owner” in the Blue Book constitutes a potential problem for the lender as certain liabilities can attach to an owner of property as opposed to a mere lender.

It is neither the purpose nor the function of the Blue Book to record security interests in vehicles. However, as there was no alternative mechanism for lenders to register or search for security interests in vehicles, by default it has served this function. This should change as the filing of notices of security interests in motor vehicles is covered by the ST Act. Upon further examination of the law, lenders should determine to use the Registry called for in the ST Act as opposed to the Blue Book to perfect security interests in motor vehicles. If lenders use the Registry to record their security interests in motor vehicles, then there will be substantial additional revenues generated by the Registry from these filing fees.

Establishment of Secured Transactions Registry Appendix A 50

A APPENDIX

Particulars of Notice Filing

The following is a discussion of the particulars of the notices that can be filed under the ST Act. The following types of notices can be registered with the Registry under the ST Act:

7. Original notice;

8. Statement of continuity;

9. Amendment;

10. Termination statement;

11. Correction statement; and

12. Notices of lien holders' rights.

The following is a detailed discussion of each of these notice types.

Original Notice: Contents

A security interest in transactions of movable properties covered by the ST Act may be registered with the Registry by filing a notice (referred as Original notice). An Original notice filed with the Registry must contain at least the following particulars to constitute a valid notice:

• Name and address of security giver and security holder; and

• Description of collateral

Name and particulars of security giver and security holder

The original notice should state the name, address and other particulars of the security giver, namely its name, address and other particulars of the security holder. The phrase “other particulars” of security giver and security holder to be stated in the notice is not defined in the ST Act. This provides the ability to the government to prescribe such other particulars as may be considered necessary in future regulations and it is strongly recommend the law be changed to strike “and other particulars”.

Where the security giver is a natural person, the Notice is required to state citizenship number mentioned in the certificate of Nepali citizenship. In case the security giver is a non-Nepali national, the name and the country that has issued the passport are required to be stated in the notice. The name entered in the notice should be the same as it appears in his passport.

In case the security giver is a corporate entity established under the current law, its name, which has gained recognition following its incorporation under


the current law must be mentioned in the notice. The reference to “current law” appears to be the relevant law under which the concerned security giver/security holder corporate body may be established. For instance, if the security giver/security holder is a company incorporated under the Companies Act, 2006, the current law would mean the said Companies Act and the name stated in the certificate of incorporation of company should be mentioned in the notice.

Where the security giver is a foreign corporate body which has gained recognition to conduct business in Nepal under the current law of Nepal, the notice must state the name which has gained recognition under current law of the country. In case where the security giver is a foreign company not registered under Nepal’s company law but entitled under the said company law to conduct business in Nepal, the name which has gained recognition under current law of the country where it is established must be mentioned in the notice.

In case of more than one security giver or security holder, the names of all security givers and security holders are required to be mentioned in the notice.

Description of collateral

The law provides the Original notice to be filed must contain a description of the collateral forming subject matter of secured transaction. In case the notice is related to trees to be felled, minerals to be extracted, or fixtures related to the collateral, the description of the concerned immovable property must also be mentioned.

Many jurisdictions which have electronic filing of notices allow filers to provide collateral descriptions by attaching a separate electronic document to their notices. In this manner, the filer does not have to retype what might be a voluminous amount of text into a web form. Not only is this a more efficient process, but it also greatly reduces the risk of error in collateral descriptions. This option can be introduced under the regulations to be framed.

In keeping with the notion that a secured transactions registry is a “notice” system, the ST Act does not require that any of the details of the underlying transaction be registered, including the maximum monetary amount for which the security interest may be enforced.

File number

The law requires the Registry to allot a separate file number to every filed notice, and the Registry database will link this file number with the date and time of filing. The original notice shall also be filed in the name of the concerned security giver(s) so that database searches can be made against the name of the security giver(s). All subsequent notices related to the original notice shall be filed in such manner that they are connected to each other so that an entire history related to a single original notice can be reconstructed. A separate record shall be kept of expired notices.


Duration of notice

Every notice registered under the ST Act shall remain effective for a period of five years from the date of its filing. The validity of the notice may be extended by filing a notice of statement of continuity before the expiry of the duration of a notice. Failure to file the statement of continuity will cause the expiry of the original notice on completion of the period of five years, and any security interest perfected by such notice shall become unperfected unless perfection by another means is made before the expiry.

Statement of continuity

The five-year effective period of an Original notice may be extended through the timely filing of a statement of continuity. Such notice of continuity must:

• Identify the original notice by its file number;

• Identify the security holder mentioned in the notice authorizing continuity; and

• Must indicate that the original notice is continued with regard to the security holder that authorized the filing of the notice of continuity.

A statement of continuity may be filed under the ST Act six months before the expiry of the five year period of validity of the notice. In case a statement of continuity is filed within the proper timeframe, the original notice shall remain valid for another period of five years from the date when its duration would have expired if the statement of continuity had not been registered. In case the name of more than one security holder is mentioned in the notice, the notice shall remain valid for the period of another five years only in relation to the security holder who has authorized the filing of the statement of continuity. There is no limit on the number of five-year periods by which an original notice may be extended.

Amendments

An original notice may be amended through one or more amendments. Every notice amending an original notice must contain the following information:

• The original notice must have been identified by its file number;

• The notice authorizing the amendment must have identified the security holder mentioned therein;

• The matter sought to be amended must have been explicitly mentioned;

• It should contain all information that needs to be explicitly mentioned in an original notice.

Once a security agreement is signed with the security holder, the security giver shall be deemed to have granted authority to file amendment notices covering the collateral mentioned in the agreement and the proceeds thereof. If there are multiple security interests, an amendment can be filed which either affects the rights of all such security holders, or only the security holder specifically mentioned in the amendment. No amendment authorized by any one of the


security holders mentioned in the notice shall have any impact on the rights of the other security holder mentioned in the notice. Given this mandate, there are various rules that apply as to the impact of an amendment that is only intended to affect one security holder. Those rules do not affect the manner in which the Registry database operates: all amendments are simply added to the record, and it is then up to the public to determine the significance of such notices.

Termination statement

The effectiveness of a notice filed under the ST Act may be ended by registering a statement of its termination. Typically, this occurs when a security giver has fulfilled its obligations to its security holder, and the security holder is then obligated under the ST Act to file a termination if certain conditions are met. A termination statement filed in the Registry should explicitly mention the following particulars:

The original notice must have been identified by its file number;

The security holder mentioned in the notice authorizing the termination must have been identified; and

There must be a clear statement to the effect that the notice shall not be effective in relation to the security holder who has authorized filing of the termination statement.

In case a termination statement is filed as per the authority of one security holder mentioned in the notice that contains multiple security holders, only that one security holder will be affected, and the original notice shall remain effective with regard to the remaining security holders. Again, this rule does not affect the manner in which the Registry database operates: all terminations are simply added to the record and it is then up to the public to determine the significance of such notices.

Correction statement

In case any person feels that any notice registered with the Registry in his name is inaccurate or wrongfully filed, he may file a correction statement with the Registry. The correction statement must explicitly state:

• The file number of the original notice in order to identify the notice containing the concerned particulars;

• Indicate that the notice is a Correction Statement; and

• The grounds on which the filer he feels that record is inaccurate and indicate the way the record needs to be corrected in order to remove the inaccuracy.

The mere filing of a correction notice shall have no impact on the effectiveness of the concerned notice. Instead, it is simply added to the record for inspection by subsequent searchers.


Rejections: Refusal to file the notice

The STRO may refuse to file any notice or statement in the following circumstances:

• In case the filing fee payable under the ST Act is not provided;

• In case the security giver's name is not mentioned in relation to an Original notice;

• In case an amendment does not mention the file number of the original notice or the security giver's name, or in case the period of validity of the notice to be amended has already expired;

• In case a statement of continuity does not mention the file number of the Original notice, or in case a statement of continuity is not submitted within the period of six months as mentioned in Section 13 of the ST Act.

• In case a termination statement does not mention the file number of the Original notice.

Except in the circumstances mentioned above, every original notice, amendment, or statement of continuity or termination statement presented before the STRO for filing shall be deemed to have been filed even if the STRO refuses to file the same. When the filing of any document is refused by STRO, it must furnish a notice of rejection to the would-be filer explicitly mentioning the reason for such refusal.

No specific remedy is provided in the ST Act to a party whose request to file a notice has been refused by the STRO. Presumably, this is because the act of filing a notice is ministerial: there is no discretion on the part of the filing authority as to whether to file or not so long as the proper fee is paid and required information is present. Along these lines, the ST Act creates a legal fiction by containing a “deemed filed” provision for notices. This section of the law provides that any notice presented to the STRO for filing shall be deemed to have been filed provided: 1) the fee payable for such notice has been paid ; or 2) if the STRO accepts any such notice for filing; or 3) where such notice has not been refused by the STRO. However, no document presented for filing shall be deemed to have been filed in the case that the STRO refuses to file the same on the grounds for refusal stated in the ST Act. The upshot of these provisions is that the STRO is deemed to have filed a notice unless the notice is specifically rejected in writing.

Finally, the effectiveness of a notice shall not be affected simply by the failure of the Registry to accurately list that document. However, this shall not be the case where a person who acquires collateral has given value thereof with reasonable grounds to believe that no such notice has been filed, commonly called an “innocent purchaser.” Thus, if the filing office were to mis-index a notice, there could be severe ramifications in the marketplace. Note that mis-indexing by the registry is only possible if paper notices are permitted. In a solely electronic system, the registry does not index notices.


Establishment of Secured Transactions Registry Appendix B 56

B APPENDIX

Detailed Evaluation of Potential Registry Hosts

Credit Information Bureau (“CIB”)

a. Principles Related to Governance / Organizational Structure The Credit Information Bureau was formed in 1989. In 2004, the legal framework under which the CIB operated was changed to allow a private ownership structure of the CIB. This was carried out in 2005, and the current owners are: 1) Nepal Rastra Bank—10%; 2) commercial banks—60%; development banks—15%; and finance companies—15%. It currently has 118 members institutions, with this number anticipated to grow given that GoN regulations require membership for certain lenders.

• Willingness of Entity to Host the Registry With only one reservation, the CIB is eager to host the Registry. This is unsurprising given that the Registry will primarily benefit private lenders and that such entities possess such a large equity stake in the CIB. The only hesitation expressed by CIB officials pertains to the financial self-sustainability of the Registry given the manner in which the Act proscribes the fee structure.

• Autonomy of the Entity The CIB is a private entity. As such, it is not subject to direct administrative oversight by governmental agencies and in that regard operates with a high-level of autonomy. The Nepal Rastra Bank does hold a 10% equity stake in the CIB. Therefore, there is some level of government oversight inherent in this position.

Member institutions pay an initial subscription fee, and then also pay an annual fee based upon their size. The annual fee entitles the institution to some level of services for free, but the institutions must pay additional fees once these free services have been used. In this manner, the CIB is financially self-sufficient, and enjoys a profit carried in the form of retained earnings.

• Harmony of the Registry with the Current Mission From a practical perspective, the current work undertaken by the CIB is analogous with the processes that would be put in place to operate the Registry. From a broad perspective, the CIB gathers information from member institutions related to borrowers and then makes that information available to all the other member institutions. The information collected includes biographical data so as to be al to identity the borrower, and also some of the particulars of the underlying loan transaction(s), including collateral descriptions. The database currently has information related to over 40,000 borrowers.


b. Principles Related to Operation of the Registry

• Efficiency in Handling Current Responsibilities The CIB appears to be handling its duties in an efficient manner. The CIB officials acknowledged that the data that they are able to provide is often incomplete, but attribute that to the failure of their member institutions to provide them with the required information. Statistics provided by the CIB indicate that they currently receive approximately 250-300 requests for information a day, and that they provide a response within 24 hours. Further, they are able to provide a 24 hour turnaround on entering information into their database that is received from their member institutions.

• Technological Capabilities The CIB currently accepts information from member institutions in both e-mail (about 46%) and paper (54%) formats. This raw data is then manually entered into the CIB database. The CIB is close to deploying a true on-line database system where member institutions will enter data directly into the CIB database. While this new system will initially use a client/server model, the CIB hopes to migrate it to a web-based system in the near future. This system is scheduled to go live this summer.

In anticipation of starting this new on-line filing system, the CIB comparable hardware in house that would be required to run the Registry, including multiple servers and workstations.

• Staffing Capabilities The CIB has between 15-18 staff members at any time. Some of these are IT people that have knowledge directly transferable to the operation of the Registry. It is anticipated that the CIB could absorb an electronic Registry without requiring substantial numbers of additional staff.

• Physical Facilities The CIB has sufficient facilities to house an electronic Registry. These facilities are climate controlled.

c. Evaluation of Credibility of the Entity in the Affected Community The credibility of the CIB amongst the interviewees was mixed, with opinions largely depending upon the relationship of the person with the CIB. Users of the CIB’s services indicated they believed the CIB did a good job in carrying out their day-to-day tasks. Other respondents who were non-users focused on one particular aspect of the CIB’s functions, called “blacklisting,” as evidence of the CIB’s unfitness for any governmental functions. It would be essential that there be a strong wall between the credit reporting and ST functions, assuming CIB is the host.

Plainly stated, “blacklisting” is a process whereby a borrower that is in default on a loan is punished for their non-payment. When a lender informs the CIB that a borrower has satisfied the statutory requirements for being blacklisted, the CIB enters their name in that category. Of the 40,000 borrowers in the


CIB database, about 2,000 have been blacklisted. If the defaulting borrower happens to be a corporate entity, then that entity’s directors, guarantors and shareholders can be blacklisted. Remarkably, if a shareholder in a defaulting entity is blacklisted, and if that shareholder owns more than 10% in another entity, that other entity can be blacklisted as well.

The consequences for being blacklisted are severe. For example, the blacklist is published in local newspaper, which can cause great embarrassment to individuals listed on it. Further, a blacklisted person is unable to obtain any further credit from any lending institution until that person is delisted.

There is a general feeling amongst many people that the CIB blacklists people. Technically, this is not correct: it is the lender that blacklists the defaulter, and the CIB merely acts as the repository of that information. However, the sentiment that the CIB is a “bad actor” is not uncommon. Indeed, during the wrap-up workshop for the stakeholders at the conclusion of the recent mission, a Nepalese corporate attorney publicly stated that the CIB should not host the Registry because it blacklisted people. Importantly, the great majority of stakeholders in attendance did not echo this concern, but still it is fair to say that it is an issue for some individuals in Nepal.

Office of the Companies Registrar

a. Governance / Organizational Structure The Companies Registry is under the auspices of the Ministry of Industry, Commerce and Supplies. In the past, its primary charge has been to register business entities that seek to do business in Nepal. The Companies Registry has recently been tasked to perform numerous additional duties under the Insolvency Act, and is also wrestling with implementing a database to hold company registration information.

• Willingness of Entity to Host the Registry The Companies Registry has recently received several new mandates to carry out in addition to its existing function as a Registry for business entities. The bulk of these new responsibilities are found in the newly enacted Insolvency Act passed in 2006. Due to these new mandates, officials overseeing operations at the Companies Registry questioned whether they had the current capacity to take on the Secured Transactions Registry.

• Autonomy of the Entity The Companies Registry appears to act with the same level of autonomy as that which is enjoyed by other GoN entities, which is to say, it is subject to annual appropriations from the GoN and therefore does not have any independent revenue source outside of the appropriation process.

• Harmony of the Registry with the Current Mission The Company Registry registers business entities. This function involves receiving information from the public, assessing the compliance of such information with existing law, then issuing appropriate certificates back to the


submitter. In this regard, the function of the Registry is analogous to the contemplated function of the Secured Transactions Registry.

b. Principals Related to Operation of the Registry

• Efficiency in Handling Current Responsibilities The Companies Registry currently has approximately 55,000 business registrations as “active” records, and they received an average of approximately 6,500 new registrations in each of the last three (3) years. Officials with the Companies Registry believe that as many as 20%-25% of these “active” records may in fact be defunct companies, but that there is no way to track this. On a related note is the legal requirement that business entities file what amounts to an annual report with the Registrar each year. The Office of the Company Registrar currently does not have the ability to track these notices. This deficiency indicates a serious lack of capacity to undertake a new mandate. Finally, the paper records maintained by the Companies Registry staff do not appear to be held in an orderly fashion consistent with international practices.

• Technological Capabilities The Companies Registry has historically operated in a completely paper-based system. The Registry is currently undertaking a move to an electronic database system. The Companies Registry has contracted with a Nepal software provider to assist in the design and implementation of the new system. This new database system is being designed to handle existing Registry functions. Newly submitted documents are being scanned into a digital database, and over 40% of existing paper documents have similarly been scanned. However, the new electronic system does not contemplate accepting web-based notices, nor will access to existing information be made available via the web. Both of these points indicate that the Companies Registry, while taking small steps on the path of technological innovation, may not be prepared to house a fully electronic, web-based registry.

• Staffing Capabilities There are 9 employees tasked to handle Registry functions. However, the Companies Registry as a whole employs a total of 39 people, with the other 30 involved in “administrative’ functions. This seems an inordinately high number of workers in non-Registry functions. There are no field offices, making this distribution of work even more perplexing.

• Physical Facilities The Companies Registry current location appears to be insufficient to house additional hardware and staff. More space would be required to operate the Secured Transaction Registry.

c. Evaluation of Credibility of the Entity in the Affected Community


Anecdotal information suggests that the Companies Registry enjoys a mixed reputation amongst other governmental actors and the private sector. Some individuals report that the Registry performs its functions in a satisfactory manner, while others believe that the Registry is less efficient. Anecdotal reports of corruption attached to this Registry exist.

Department of Land Registration

a. Principles Related to Governance / Organizational Structure The Department of Land Registration is under the auspices of the Ministry of Land Reform and Management. Duties assigned to this Department include the registration of documents that relate to real property located in Nepal. Notably, the central office for the Department is located in Kathmandu that handles administrative functions. This central office does not handle the actual registration of real estate documents. Instead, there are branch offices located throughout Nepal, and each branch office is charged with maintaining the records related to real property within its geographic jurisdiction.

• Willingness of Entity to Host the Registry Officials overseeing the Land Registry believed that they did not have the current capacity to undertake implementing the Registry.

• Autonomy of the Entity The branch offices all operate under directives from the central office, though as a practical matter it is likely that there is some deviation in practice from one local office to the next.

• Harmony of the Registry with the Current Mission The filing of notices of security interests in movable property is, theoretically, akin to registering mortgage interests in real property. However, there are onerous authentication requirements in place under Nepalese law with regard to documents affecting real property. Each such document must contain a picture and fingerprints of the person conveying an interest in the land. Therefore, in practice the procedures in place in the Land Registry offices would be very different from the procedure for filing a secured transaction notice. Further, the central office is therefore not equipped to handle registry functions. Given that the Act contemplates all functions to be housed in a central office, the model used by the Land Registry does not seem to be an appropriate fit.


• Efficiency in Handling Current Responsibilities The efficiency of the Land Registry as a whole is difficult to assess given that each branch office operates independently. It is likely that some branches operate more efficiently than others. During the visit to the local Kathmandu office and even a cursory inspection of current practices revealed that a great possibility exists for documents to be lost. Documents are stored haphazardly


about the premises and a fire would be absolutely devastating as it would spread very quickly through the stacks of paper.

• Technological Capabilities The process employed by the Land Registry is very manual. Documents are handled by various staff members in an inefficient process brought about by a too high degree of diversification of tasks.

Approximately five of the local Land Registry offices are implementing a pilot program aimed at computerizing their records. Once a document has gone through the manual process needed for registration, it is brought to a separate location where staff enters details about the document into a database. All historical records related to that real property are then retrieved, and collectively all are scanned into a digital database. This process has only been in place for less than a year, so it is difficult to assess how successful it will be.

• Staffing Capabilities The Act contemplates a centralized location for all registry functions. Therefore, if the Land Registry were chosen to host the Registry, it would be inappropriate to locate it in one of the regional branch offices. Instead, it would be more proper to locate it at the Land Registry central office. As noted above, the Land Registry central office does not file documents from the public. As such, it would not have the staff necessary to handle the Registry.

• Physical Facilities The Land Registry central office did not appear to be overly crowded. Therefore, the raw space necessary to house the Registry would likely be available. The room(s) in which the Registry would be located would require climate control.

c. Evaluation of Credibility of the Entity in the Affected Community Numerous private sector and a few public sector interviewees suggested that the Land Registry was not efficient in its current operations due to a lack of capacity and therefore was not a viable candidate for hosting the Registry. A few interviewees went further, stating that the Registry was known to misplace documents and in this sense could not be trusted.

Securities Exchange Board

The Securities and Exchange Board (“SEBO”) was established in 1993 to regulate the securities industry in Nepal. There are 135 listed companies in Nepal.

a. Principles Related to Governance / Organizational Structure

• Willingness of Entity to Host the Registry Officials at SEBO were not directly opposed to hosting the Registry, but did state that SEBO already has so many responsibilities that taking on an additional burden would be problematic. They did confirm that if no other


appropriate candidate could be found, they would be willing to accept the Registry.

• Autonomy of the Entity SEBO is intended to act in an autonomous fashion. The Governing Board of SEBO is composed of seven members, including one full time chairman appointed by the GoN for a four year period, with other members of the Board from both public and private entities. This management structure is intended to give SEBO some level of autonomy. However, officials with SEBO stated that they are not financially self-sufficient and therefore are dependent upon government appropriations. As SEBO does not enjoy financial independence, its supposed autonomy is eroded. SEBO also is unable to issue regulations in its own name, and officials at SEBO believe this is counter to the autonomy that a securities regulator should enjoy.

• Harmony of the Registry with the Current Mission In a broad perspective, SEBO officials noted that their primary mission is to regulate and promote the securities market in Nepal. These officials questioned whether the Registry would have a direct beneficial impact on this market.

From a different perspective, SEBO does accept notices related to companies and broker/dealers and maintains information from those notices in a computer database. Further, SEBO maintains an extensive website from which the public may obtain much information pertaining to regulated entities.


• Efficiency in Handling Current Responsibilities SEBO appears to do a satisfactory job of handling its duties given the resources at its disposal. The information provided on its website is current and informative.

• Technological Capabilities

SEBO uses the internet to post current information about regulated entities. It does have the capability to allow regulated entities to directly entered required information into a central database. SEBO hope to implement this functionality when funds become available.

• Staffing Capabilities

SEBO currently has 24 staff members. It is anticipated that if the Registry were housed with SEBO, two or perhaps three additional staff members would be needed to implement an electronic database.

• Physical Facilities SEBO appears to have the physical space needed to host an electronic registry. Their facilities are at least partially climate-controlled.

c. Evaluation of Credibility of the Entity in the Affected Community


SEBO enjoys a good reputation amongst the stakeholders. The consensus is that SEBO enjoys a higher level of autonomy than would a mainline governmental entity, but that perhaps the Registry is not a good fit with their current mission.

C APPENDIX

Survey on the Use of And Filing of Notices into the Secured Transactions Registry

Note: The survey accounts only for estimated number of filings by the eighteen commercial banks listed below only. It excludes the newer commercial banks as well as the various financial instiutions present in the country, and will thus underestimate the actual number of filings.

Table 1. Filings of Notices (excluding registration of motor vehicles)/1

lName of Bank No. of filings 2009 2010 2011 2012 2013 Annua

(20091 Rastriya Banijya Bank 7,518 1,128 1,297 1,491 1,715 1,9722 Everest Bank Ltd 4,345 652 750 862 991 1,140

111111111

3 Nepal Bank Ltd. 2,536 380 437 503 579 6654 Nepal Bangadesh Bank Ltd 1,850 278 319 367 422 4855 NCC Bank Ltd 1,811 272 312 359 413 4756 Nepal Investment Bank Ltd. 1,517 228 262 301 346 3987 Kumari Bank Ltd. 1,416 212 244 281 323 3718 NABIL Bank Ltd. 1,327 199 229 263 303 3489 Nepal SBI Bank Ltd. 1,003 150 173 199 229 2630 NIC Bank Ltd. 931 140 161 185 212 2441 Siddartha Bank Ltd 791 119 136 157 180 2082 Lumbini Bank Ltd. 768 115 132 152 175 2013 Himalayan Bank Ltd 766 115 132 152 175 2014 Bank of Kathmandu 601 90 104 119 137 1585 Macchapuchhre Bank Ltd. 552 83 95 110 126 1456 Laxmi Bank Ltd 260 39 45 52 59 687 Citizen Bank Ltd. 272 41 47 54 62 718 Standard Chartered Bank Ltd. 190 29 33 38 43 50

Total (yearly) 28,454 4,268 4,908 5,645 6,491 7,465Total (monthly) 2,371 356 409 470 541 622

1/ Assumes a 15% growth in banks’ loan portfolios Note: These numbers are based upon very conservative estimates, which actual numbers are expected to substantially exceed.

Establishment of Secured Transactions Registry Appendix C 64

Table 2. Filings of Notices (including registration of motor vehicles)/1

Name of Bank No. of filings 2009 2010 2011 2012 2013

Annual Average(2009-2013)

1 Rastriya Banijya Bankloans against movables 5,622 843 970 1,115 1,283 1,475 1,13

motor vehicles 298 45 51 59 68 78 65,920 888 1,021 1,174 1,351 1,553 1,19

2 Everest Bank Ltdloans against movables 4,345 652 750 862 991 1,140 87

motor vehicles 1,424 214 246 282 325 374 285,769 865 995 1,144 1,316 1,514 1,16

3 Nepal Bank Ltd.loans against movables 2,536 380 437 503 579 665 51

motor vehicles 1,000 150 173 198 228 262 203,536 530 610 701 807 928 7

4 Nepal Bangadesh Bank Ltdloans against movables 1,850 278 319 367 422 485 37

motor vehicles 1,000 150 173 198 228 262 202,850 428 492 565 650 748 57

5 NCC Bank Ltdloans against movables 1,811 272 312 359 413 475 36

motor vehicles 579 87 100 115 132 152 112,390 359 412 474 545 627 48

6 Nepal Investment Bank Ltd.loans against movables 1,517 228 262 301 346 398 30

motor vehicles 1,019 153 176 202 232 267 202,536 380 437 503 579 665 5

7 Kumari Bank Ltd.loans against movables 1,416 212 244 281 323 371 28

motor vehicles 474 71 82 94 108 124 91,890 284 326 375 431 496 38

8 NABIL Bank Ltd.loans against movables 1,327 199 229 263 303 348 26

motor vehicles 2,500 375 431 496 570 656 503,827 574 660 759 873 1,004 77

9 Nepal SBI Bank Ltd.loans against movables 1,003 150 173 199 229 263 20

motor vehicles 635 95 110 126 145 167 121,638 246 283 325 374 430 33

10 NIC Bank Ltd.loans against movables 931 140 161 185 212 244 18

motor vehicles 499 75 86 99 114 131 101,430 215 247 284 326 375 28

11 Siddartha Bank Ltdloans against movables 791 119 136 157 180 208 16

motor vehicles 600 90 104 119 137 157 121,391 209 240 276 317 365 28


12 Lumbini Bank Ltd.loans against movables 768 115 132 152 175 201 15

motor vehicles 554 83 96 110 126 145 111,322 198 228 262 302 347 26

13 Himalayan Bank Ltdloans against movables 766 115 132 152 175 201 15

motor vehicles 1,551 233 268 308 354 407 312,317 348 400 460 529 608 46

14 Bank of Kathmanduloans against movables 601 90 104 119 137 158 12

motor vehicles 1,206 181 208 239 275 316 241,807 271 312 358 412 474 36

15 Macchapuchhre Bank Ltd.loans against movables 552 83 95 110 126 145 11

motor vehicles 541 81 93 107 123 142 101,093 164 189 217 249 287 22

16 Laxmi Bank Ltdloans against movables 260 39 45 52 59 68 5

motor vehicles 572 86 99 113 130 150 11832 125 144 165 190 218 16

17 Citizen Bank Ltd.loans against movables 272 41 47 54 62 71 5

motor vehicles 286 43 49 57 65 75 5558 84 96 111 127 146 11

18 Standard Chartered Bank Ltd.loans against movables 190 29 33 38 43 50 3

motor vehicles 2,800 420 483 555 639 735 562,990 449 516 593 682 784 60

Total (yearly) 44,096 6,614 7,607 8,748 10,060 11,569 8,91Total (monthly) 3,675 551 634 729 838 964 74

1/ Assumes a 15% growth in banks’ loan portfolios and a 20% growth in motor vehicle financing Note: These numbers are based upon very conservative estimates, which actual numbers are expected to substantially exceed.


Establishment of Secured Transactions Registry Appendix D 67

D APPENDIX

Nepal Secured Transactions Registry Business Model and Procurement Issues

This section analyzes the pros and cons of two options the GoN can adopt for operation of the secured transactions registry, should the government decide to operate it in the form of a public-private partnership, as recommended in this report. Those options are: (1) to operate it as a concession whereby the concessionaire relies on the registry’s fees to fund the costs of operation and to provide a profit; and (2) to enter a services contract whereby fees are paid to the government, and the government pays a service provider for its services. It is our conclusion that a services contract is the preferred option because it carries fewer risks for both parties. The advantages of this option can be summarized as follows:

• This option will generate a higher level interest from private firms, and thus will enable the government to assess several options and make a better choice.

• Private firms would not have to face the financial risk of not knowing if the revenues

from the registry would cover all costs associated with managing the registry.

• The Government would have closer control of the functioning of the registry and more flexibility to adjust fees accordingly to satisfy both the Registry and the beneficiaries.

• The costs of the larger responsibility of the Government, as well as the payment of

the service provider, could be funded by the fees of the registry. The advantages and disadvantages of both the concession and services contract options are as follow:

Concession contract with a Nepali private entity: A concession is a business operated under a contract with a degree of exclusivity in business. The owner of the concession — the concessionaire — is a private company that enters an agreement with the government for the exclusive right. The concessionaire may or may not be required to pay either a fixed sum or a percentage of revenue to the government. In order to attract private firms (e.g. CIB) as potential concessionaires, a detailed business plan and feasibility study, including profound analyses of the private sector and potential users of the Registry, should be performed. Based on the projected costs of operation and projected volumes of registration from the business plan and feasibility study, the government would set the fees at the level necessary to cover the concessionaire’s costs of operation and a fair profit, and perhaps a percentage for the government to cover its oversight costs. Potential concessionaires would have to be


willing to make an initial investment to cover the cost of operation of the registry in the period before the proceeds become sufficient to cover all the costs and produce a benefit. It should be anticipated that the first year or so would be crucial, and costly promotion of the registry would be necessary. In the present business environment in Nepal, it would be very difficult to identify that period or to be confident of the volume projections of the feasibility study in the longer term, even with a detailed local market study. Therefore there is a danger to prospective concessionaires of an important financial burden, thus limiting the number of those interested in the tender. There is also the converse risk that the Registry would create windfall revenues for the concessionaire if revenues significantly exceed projections, constituting an unnecessary burden on the users of the registry and creating the appearance of unfair dealing or collusion of the concessionaire with the Government. In a concession, it is in the concessionaire’s best interest to create and run a successful registry from a business standpoint, and the Government’s role is limited to supervision of compliance with contractual obligations. Service contract with a Nepali private entity: In this model, the contract with a private sector service provider provides for compensation on the basis of services rendered. As with a concession, a detailed business plan would be necessary to determine all technical and financial requirements of the contract. However in this option the Government has larger responsibility for the successful functioning of the registry. A detailed contract should define all the responsibilities of the service provider and the Government, as well as the costs of meeting those responsibilities, so that revenues can be controlled to ensure the financial sustainability of the Registry. The Government will modify the fee level over time to meet its obligations under the contract with the service provider and to cover its own costs.

Procurement considerations under recommended option If GoN decides to go with service contract, it will be necessary to structure the arrangement so that the procurements may be done. Currently, the capacity in the Ministry of Finance (MoF) to house and manage the IT assets that are necessary to operate the filing office are insufficient. Therefore, there must be some level and form of outsourcing the operation of the IT system, and perhaps other functions as well. There are two principal models that can be considered, each with its own minor variants, as follow: Under a full outsourcing model, the government would contract for all aspects of operation of the filing office, to include provision of user support, training and other filing office functions. In this scenario, the provider would have to have or acquire expertise in the function of a secured transactions filing office and would provide the staff for user support and other operations of the filing office such as reporting, training and public awareness. There would be no need for a full-time staff within the government, and the statutory position of registrar could be part-time duty of an existing official in the MoF that may take only an hour or two per month, based on experience with such an


arrangement in the Federated States of Micronesia. The periodic payment to the service provider would cover all services. This model minimizes the cost of government staff, but it incurs higher periodic payments to the service provider than the other model.

Under the second - the technology outsourcing - model, the government would establish the filing office within the government, probably in MoF, staffed by the registrar and perhaps one other person. The filing office would provide user support, monitor the operation of the technology system, provide user training and report to the government on operation of the filing office. The service provider would provide support to the technology system in the form of managed co-location of servers, off-site back-up of data and maintenance of hardware and system software. Procurement Issues: Regardless of the model selected, the method of procurement of services will be quite similar. The solicitation will specify in detail the services required in terms of performance, so a bidder can determine with confidence what is required and what the costs will be. For example, those terms could include some of the following, depending on the option selected above: on-line or telephone help-desk availability during the hours of X to Y on Z days per week; co-location of X servers taking up Y U’s of rack space; daily running and removal to off-site secure storage of backups of data in a specified medium; maintenance of hardware and system software, specifying the included tasks such as swapping out defective drives and installation of system software patches; types of user help-desk support and hours during which it must be provided; guaranteed up-time of XX.X%; conditioned power; grounded building circuitry; back-up generator with X hours of fuel; gaseous fire suppressant system; security measures against natural disaster; access to servers by registry-authorized maintenance people; and physical safeguards against intrusion. Taking into consideration the necessity of an open and transparent procurement process, a national open tender should be used. For a services contract such as anticipated in this case, a two stage proposal and evaluation process that conforms to WB Quality and Cost based selection and Nepali procurement laws and regulations is the appropriate procurement process. Under this process, the technical proposals of short listed firms are evaluated for compliance with technical requirements set forth in the Request for Proposals and scored. Then the financial proposals of bidders whose technical proposals were found to be compliant are evaluated. The bidder with the highest combined score from both evaluations is declared the winner and is invited to negotiate the contract.


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2007 ANNUAL REPORTINVESTMENT CLIMATE ADVISORY SERVICE