Himalayan Bank Limited Internship Report
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Kathmandu University School of Management
Kathmandu College of Management
Internship Report For the partial requirement for BBA Program Program Code: RIS 401
Internship Employer Himalayan Bank Ltd., Head Office Thamel, Kathmandu
Interns Nikhil Agrawal, Redg No: A005901-05 Rishabh Tibrewala, Redg No: A005980-05
July 02, 2009
I/we certify that I/we have read this document and, in my/our opinion, it is satisfactory in scope and quality as a project in partial fulfillment for the Undergraduate Course of ‘Internship’ held at the Kathmandu College of Management during the Fourth year Second semester, 2009.
Date: July 02, 2009
_______________________ Project Evaluator Kathmandu University School of Management
All rights reserved.
No part of this report may be reproduced, stored or transmitted in any form, or by any means, without the prior permission of the authors. No patent liability is assumed with respect to the use of the information, contained herein. Although every precaution has been taken in the preparation of this report, the authors assume no responsibility for error or omission.
Date: July 02, 2009
Kathmandu College of Management
The authors are confident that the results presented in this report will be taken as guidance for a more comprehensive study at the future date. The authors of the report are not responsible or liable legally or by any other means against the results of the report. Any consequent decision based on this report shall not make the authors responsible. The views expressed in this report are as per the findings and research undertaken. These do not reflect the single rule of thumb nor are these endorsed by the College. The views expressed in this report are those of project coordinator only.
We, the undersigned declare that this project entitled is a result of our own study/ research carried out in the year 2009. It has not been previously submitted to any other University or any other examination(s).
Kathmandu College of Management
Kathmandu College of Management
Redg. no. A005901-05
Redg. no. A005980-05
ACKNOWLEDGEMENT Foremost, we would like to express our deep and sincere gratitude to Himalayan Bank Limited and the entire Himalayan Bank family for providing us the exciting opportunity to be one of them and giving us thorough guidance and opportunities to move ahead with our internship objectives.
We would like to extend our gratitude to Mr. Rabindra Pradhan, Branch Manager, Thamel branch and Mr. Vijay Nakarmi, Deputy Branch Manager, Thamel branch for trusting us and providing access to confidential documents when and where required in the scope of the project. Our indebt gratitude also goes to Mr. Pawan Agrawal of Credit Control Department and the entire Customer Relations Department of the bank for providing us guidance and motivation for the project and also by sharing their knowledge with us.
We would also like to thank Mr. Bishnu Raj Adhikari, Principal, KCM and Mr. Vinay Sharma, Director, KCM for guiding and helping us in each and every stage of the BBA course and the Internship Study. We are deeply indebted to KCM’s internship coordinator, Mr. Lhakpa Gelu Sherpa whose help, stimulating suggestions and encouragement helped us in writing of this internship report.
We would like to further thank KUSOM for providing students with such opportunity to experience the organization culture and experience and for their structuring of this course for the benefits of the students.
We are grateful to Mr. Sohan B. Khatri, Director, DCBL, Mr. Rajendra Bahadur Shrestha, Credit Department, DCBL and Mr. Amit Bajracharya, Relationship Manager, Prime Commercial Bank for all their help, support, interest and valuable hints for the preparation of this report.
Thank you all! Sincerely Nikhil Agrawal Rishabh Tibrewala
TABLE OF CONTENT Signature Page Copyright Disclaimer Declaration Acknowledgement Letter from the organization Letter of Recommendation from college Table of contents List of Figures List of Tables List of Acronyms
Part One Operational Duty
1. Background 2. Goals and Objectives of internship 3. Introduction of Himalayan Bank Limited
3 4 7 15
1. Tasks performed at HBL 2. Project work 3. Strengths and weaknesses in carrying out projects xii
15 16 17
1. Description and analysis of roles of fellow workers 2. Learnings from fellow workers
21 22 25
1. Perceptions and expectations of Interns 2. Skills, ideas and knowledge learned 3. Influence on Academic Decisions and career choices
25 27 30
Part Two Projects/Assignments/Tasks undertaken Section I 1. Brief background of the Study 2. Objectives of the assignment/project. 3. Problem Statement 4. Research Problem 5. Scope of the Study 6. Limitations of the Study
32 32 32 34 34 35 35
Section II – General Literature Review 1. SWOT Analysis 2. Five Pillars of Credit analysis used at Himalayan Bank Limited 3. Financial Ratio Analysis
37 37 38 44
Section III – Conceptual Framework 1. Conceptual framework
Section IV - Methodologies 1. The methodology and procedures of projects
Section V – Industry Analysis 1. Banking Sector as a whole 2. Commercial Banks 3. Hydropower Industry
53 53 56 57
Sections VI – Analysis of Credit
1. 2. 3. 4. 5. 6. 7. 8. 9.
Five Pillars of Credit Analysis IEE and EIA Detailed Feasibility Study NEA and Power Purchase Agreement Important Conditions in PPA for Projects up to 5 MW Strategies made by the government Policies Provisions under Hydropower Development for Private sector Other aspects to be considered
63 79 80 80 81 85 86 87 89
Sections VI – Findings from the Analysis 1. Critical Success Factors 2. Key Risk Areas 3. Normal Risk Sharing Arrangement
91 91 94 99
Section VII 1. Conclusions and Recommendations
LIST OF FIGURES
Figure 1: Executive Committee Members.....................................................................2 Figure 2: Management of Himalayan Bank Limited.....................................................2 Figure 3: All Services of Himalayan Bank Limited.......................................................2 Figure 4: Deposit Products offered at Himalayan Bank Limited...................................2 Figure 5: Loan Products of HBL....................................................................................2 Figure 6: SWOT Profile.................................................................................................2 Figure 7: Five Pillar Credit Risk Analysis.....................................................................2 Figure 8: Industry Analysis............................................................................................2 Figure 9: Porter Five Force Industry Analysis...............................................................2 Figure 10: Financial Risk Analysis................................................................................2 Figure 11: Conceptual Framework for the project.........................................................2 Figure 12: Phases of Research.......................................................................................2 Figure 13: Working of a Hydropower Plant...................................................................2 Figure 14: Shaft connecting Turbine and Generator......................................................2 Figure 15: The Generator...............................................................................................2
LIST OF TABLES Table 1: Comparison of Important Balance Sheet Items................................................2 Table 2: Financial Institutions in Nepal.........................................................................2 Table 3: Number of Consumers of Electricity in Nepal.................................................2 Table 4: Hydropower Projects in Nepal.........................................................................2 Table 5: Future load calculation.....................................................................................2 Table 6: PPA Concluded in the FY 2007/08...................................................................2 Table 7: Key Financial Indicators of NEA.....................................................................2 Table 8: Environmental Requirement............................................................................2 Table 9: Unit rate of energy for different projects fixed between NEA and IPPs..........2 Table 10: Royalty for Internal Consumption Project.....................................................2 Table 11: Royalty for Export Oriented Project..............................................................2
LIST OF ACRONYMS
Himalayan Bank Limited
Credit Approval Package
Nepal Rastra Bank
Nepal Investment Bank Limited
Bank and Financial Institution Ordinance
Non Performing Assets
Automatic Teller Machine
Political-Legal, Economic, Socio-cultural, Technological
Chief Executive Officer
Senior General Manager
Board of Directors
Strength, Weakness, Opportunity, Threat
Research and Development
Nepal Electricity Authority
International Monetary Fund
German Technical Cooperation
Department of Drug Administration
Federation of Nepalese Chamber of Commerce and Industry
Customer Relationship Department
Credit Control Department
Initial Environmental Examination
Environmental Impact Assessment
Department of Electricity Development
Standard Chartered Bank Limited
Everest Bank Limited
Net Present Value
Internal Rate of Return
Small and medium Enterprises
Gross Domestic Product
Independent Power Producers
EXECUTIVE SUMMARY Himalayan Bank Limited is one of the pioneer private banks of the Nepalese banking industry being established in 1993 AD as a joint venture with Habib Bank Limited, Pakistan. It holds a vision of becoming a leading bank of the country and providing the customers with premium services to give substantial return to its stakeholders. HBL has a huge base of customer base and especially “A” rated clients which are there due to HBL’s long history of customer satisfaction and innovation in services.
The internship period was spent in three phases, first working in the Customer Service Department for two weeks to know the zest of what kind of customers and clients the bank has, second in the Customer Relations Department to know about how a credit appraisal is done and to learn the other aspects of the department like financial analysis, loan extension etc. and third in the Credit Control Department to learn how a loan application is critically examined to pass the loan and also to learn about the special aspects of project financing. The major function of CRD is to interact with the loan applicant/client and discuss the need of the credit facility and other various factors related to it as well as understand that there is inherent credit risk in any business proposal in the banking sector. The main function of CCD is to make thorough and critical analysis of the credit approval packages forwarded by the CRD of the various branches all over the country.
During the internship, substantial work was done in the various departments which included making of Credit Approval Packages, making site visits, preparing financial statements and analyzing them, preparing group exposures, making overdraft statements etc for which the bank showed utmost trust and confidence to give access to confidential information within the scope and vicinity of the project. An industry analysis of pharmaceutical company was also done to help the bank with their credit appraisal process to extend loan to pharmaceutical companies.
The major portion of the internship was also dedicated for making the credit appraisal of the hydropower industry which includes one of the major exposures of the bank as it is one of the major interests of the country today. Hydropower industry has great potentials in the country as the gap between the demand and the supply is huge creating a great scope for the hydropower projects to come in. Though this industry seems lucrative for the banks to finance, thorough considerations should be given to the various details of the hydropower projects for the investment to be assured of without any risks. Since this sector is a capital intensive sector, a small error or problem creates huge complications in costs which should be properly analyzed by the bank for acting on the best interests of its stakeholders. These various details have been explained in the report in detail.
On the basis of the research conducted and analysis of the industry on the basis of various theories and concepts, it was found that the hydropower project if successful gives the bank an IRR of almost 15% which for the size of the projects is quite substantial. Further, we have formulated few guidelines as recommendations for the bank to maintain as necessary to ensure that the project being financed is profitable.
From this study, we gained a better understanding of what project financing is and how this is applied in the Nepalese Commercial Banks. Furthermore, we could identify what are the opportunities and threats for commercial banks to finance projects especially the hydropower projects. All these and other works done in the internship period enabled us to incorporate our theoretical knowledge into real working situations which has increased our level of knowledge and understanding.
PART I: Operational Duty Section A 1. Background The internship was carried out for the partial fulfillment of the BBA program conducted by the Kathmandu University School of Management (KUSOM). The primary objective of the internship program is to enable the students to transform the academic knowledge learnt through the years into the practical real world environment where the organizations are facing tough competition with the effect of globalization. The practical approach of internship enables the students to learn what the organizations face in terms of employee diversity, the pressures that every organization face, the regulatory environments they have to work in and other variables that are prominent in the real working environment. The two interns had the main objective of working in the banking industry and hence internship experience proved to be a nice platform for them to realize what the needs and the requirements for the job are.
HBL is one of the pioneer commercial banks in the Nepalese banking industry with it being one of the initial private commercial banks in Nepal. HBL is known for its expertise in project financing and having a reputed and “A” rated clientele. Especially with its BOD containing reputed business houses like the Khetan Group, this bank has a good business in hand. HBL is well known for its friendly work culture with educated and professional employees motivated to work for long working hours. Hence, HBL was chosen so as to experience the professional working culture and acquire the best possible knowledge of HBL’s expertise i.e. project financing and other credit related functions and products.
HBL was established in the year 1993 as a joint venture with Habib Bank Limited, Pakistan and soon became a pioneer in the banking industry attracting huge numbers of customers both for deposits and for lending. HBL has also been known for its xxi
innovative products like Personal Savings Account, Millionaire deposit scheme, HimalRemit etc.
2. Goals and Objectives of the Internship program The primary goal of the internship program for the interns was to experience the banking industry of Nepal and to experience how much has this industry evolved from the traditional banking practices of loans and deposits. Furthermore, transforming the academic bookish knowledge into practical knowledge and to understand how the concepts and theories are applied in the real working environment. Furthermore, working in the banking industry also enables the interns to know what are the recent business changes taking place in the economy and what further opportunities are present in the business market.
Learning a professional attitude and learning the value of time was also one of the major goals of the internship program. These aspects can only be learned through practical orientation as they are learnt only when it is adapted in the behavior of the individuals. The goals and objectives set at the beginning of the internship period of each intern (i.e. assignment 1) has been included in the appendix.
The personal goals and objectives of each intern are given below: Nikhil Agrawal Internship program is a medium to provide students with real time working experience so that they acquire knowledge in a practically oriented manner. This knowledge is different from the textbook knowledge because the theories in textbooks are based on many assumptions which are not levied in the practical environment.
I joined Himalayan Bank for my internship due to these various reasons: To know about the various processes and working environment of a commercial bank: A bank is an important part of any country’s economy as it plays direct and xxii
indirect roles in the various parts of the economy. So to know about what are the various processes in a bank as this work is a matter of great interest and importance, the best way to know about these things was to attain practical knowledge from the internship program.
To access a career option in this sector: Banking is a considered as a high stature job with its glamorous outlook with its good pay and stability. I aspire to get into the banking industry and hence to know whether this job was really meant for me or not, internship program was the best possible way to know about it.
To assess the various processes banks go through to overcome the risks associated with loans: The credit appraisal process during giving out a loan is very important part of the banking sector. Correct processes and steps help to differentiate between an ordinary bank and an outstanding one.
To experience the professionalism in work culture and to learn for future prospects: Professionalism in today’s working culture is evident and to learn this attitude is very important to be successful in today’s competitive environment. Since this cannot be learnt from textbook knowledge and requires real working experience, internship would be a big platform for this aspect as well.
To learn practically the knowledge learnt from academic courses: A practical orientation for every student of what he learns is very important. Hence the internship program would be useful for putting the academic knowledge learnt in the past years into practical reality.
An internship program exposes us to all aspects of the chosen industry while giving an exclusive look into a career in the same field. Internship program at HBL was joined to have an extraordinary opportunity to explore the Private Bank and gain insight into its strategy, products and business groups. This experience will help me choose a career path that is interesting, challenging and has a good payoff.
My Goals for the internship are summarized as follows: Get acquainted with real working conditions: Academically I understand how a bank works. I also have good knowledge on how various activities are carried out in a bank and various management theories are used but this internship program will help me relate my academic knowledge to the real working environment of Nepalese banks.
Get a hands on experience of commercial bank: An organization to an external customer is different from that to its internal employees and by taking hands on experience on all departments of the organization, a better understanding of the financial sector can be gained. I will also gain a better understanding of how much is actually practiced and what is more theoretical. With this internship program I intend to understand the Nepalese banking sector.
Understand the Nepalese Economy: Since all the other sectors are integrated with this sector of the economy I will also get an exposure to various other sectors. It is said that a banker is a master of his trade and jacks of all other trades. Hence the exposure that I will get from this internship program will not only be limited to banking only.
Develop Personal Relation Skills: This program shall also help me understand how the most important resource that is the human resource is managed by professional organizations. It will help me develop better Personal Relation Skills and Communication skills. It will help me make xxiv
contact with people of the business world which will come into use in the later part of my career.
Bring Professionalism in work style: This internship will develop professionalism and commitment within me. Professionalism in terms of how to work in the office and commitment in terms of giving the best I can towards work. This will also increase skills such as communication, teamwork, interpersonal along with motivation, honesty and a strong work ethics. An internship experience will allow me to develop proficiency in these areas, as well as content skills including administrative, analytical, coaching, management and research.
3. Himalayan Bank Limited
During the last two and half decades the Nepalese financial system has grown significantly. At the beginning of 1980s there were only two commercial bank and two development banks. After the adoption of economic liberalization policy, particularly the financial sector liberalization that paved the way for establishment of new banks and non-bank financial institutions into the country. Consequently, by the end of mid July 2008, altogether 235 banks and non-bank financial institutions licensed by NRB are in operation. Out of them, 25 are "A" class commercial banks, 58 "B" class development banks, 78 "C" class finance companies, 12 "D" class microcredit development banks, 16 saving and credit co-operatives, and 46 are NGO. List of Commercial Banks in Nepal has been provided in the appendix for reference.
Table 1: Comparison of Important Balance Sheet Items Amount in Millions
Particulars Borrowings Cash Balance Investments Share and other investments Loans and advances Fixed Assets Other Assets
SCBL 0.0 414.9 8146.1
HBL 870.0 278.2 7471.7
NIBL 1050.0 1464.5 3155.0
NABIL 1600.0 511.4 4889.6
EBL 300.0 823.0 4906.5
0 440.5 1755.9
2 705.2 1191.8
5 970.1 1063.0
6 511.6 1607.1
3 314.9 1155.0
Himalayan Bank Limited ranks among the top commercial banks of the country but it also faces tough competition from other established banks like Standard Chartered Bank, Nepal Investment Bank, Nabil Bank etc.
Introduction Himalayan Bank, established in 1993 in joint venture with Habib Bank Limited of Pakistan, has been able to maintain a lead in the primary banking activities- Loans and Deposits despite the cut-throat competition in the Nepalese Banking sector.
Himalayan Bank’s Vision Himalayan Bank Limited holds of a vision to become a Leading Bank of the country by providing premium products and services to the customers, thus ensuring attractive and substantial returns to the stakeholders of the Bank.
Himalayan Bank’s Mission The Bank’s mission is to become preferred provider of quality financial services in the country. There are two components in the mission of the Bank; Preferred Provider and Quality Financial Services; therefore we at HBL believe that the mission will be accomplished only by satisfying these two important components with the Customer at focus. The Bank always strives positioning itself in the hearts and minds of the customers.
Himalayan Bank’s Objective Himalayan bank has set is objectives as “To become the Bank of first choice”.
Himalayan Bank is known throughout Nepal for its innovative approaches to merchandising and customer service. Products such as Premium Savings Account, HBL Proprietary Card and Millionaire Deposit Scheme besides services such as ATMs and Tele-banking were first introduced by HBL. Other financial institutions in the country have been following their lead by introducing similar products and services. With the highest deposit base and xxvii
loan portfolio amongst private sector banks and extending guarantees to correspondent banks covering exposure of other local banks under their credit standing with foreign correspondent banks, HBL believes that they lead the banking sector of Nepal.
All Branches of HBL are integrated into Globus (developed by Temenos), the single Banking software where the Bank has made substantial investments. This has helped the Bank provide services like ‘Any Branch Banking Facility’, Internet Banking and SMS Banking. Living up to the expectations and aspirations of the Customers and other stakeholders of being innovative, HBL very recently introduced several new products and services. Millionaire Deposit Scheme, Small Business Enterprises Loan, Pre-paid Visa Card, International Travel Quota Credit Card, Consumer Finance through Credit Card and online TOEFL, SAT, IELTS, etc. fee payment facility are some of the products and services. HBL also has a dedicated offsite ‘Disaster Recovery Management System’. Looking at the number of Nepalese workers abroad and their need for formal money transfer channel; HBL has developed exclusive and proprietary online money transfer software- Himal Remit.
Himalayan Bank Limited holds of a vision to become a Leading Bank of the country by providing premium products and services to the customers, thus ensuring attractive and substantial returns to the stakeholders of the Bank.
Organizational Structure Himalayan Bank Limited has a very typical organizational structure where the top level management includes the Chief Executive Officer, the Senior General Manager and the General Manager. Under them are the various departments of the bank with one person heading each department. These departments also have been further departmentalized based on need. The major decisions of the bank are taken by the Executive Committee which includes the following: xxviii
Figure 1: Executive Committee Members
Figure 2: Management of Himalayan Bank Limited
Products/Services offered by Himalayan Bank Limited The services offered by HBL are summarized as follows. Figure 3: All Services of Himalayan Bank Limited
Since the major products are the deposit and the loans. They have various assortments of products offered to the public in the deposit market are summarized in the figure below. Figure 4: Deposit Products offered at Himalayan Bank Limited The major products offered in the loan market are as follows: Figure 5: Loan Products of HBL xxix
Competition Fierce competition has erupted in Nepal’s banking sector. At a time when the market pie has not increased and over four dozen industries are lying closed across the country, the rise in number of financial institutions is leading to cut-throat competition in the domestic banking sector. Apart from over a half dozen financial institutions, including B-class development banks and C-class finance companies, the entry of two ‘big’ A-class commercial banks will not only swell the number to 27 but also force them to look for new investment avenues.
The proposed Peoples’ Bank Nepal Ltd, the 26th commercial bank, got the green signal on September 25. Mero Bank Ltd, the 27th commercial bank, also recently got permission from Nepal Rastra bank to operate after it deposited five per cent of its paid up capital with the central bank. With this Himalayan Bank’s competition is increasing as the new banks come up with cheaper and attractive products. Even after so much of competition, HBL is one of the most sought banks. Its loan portfolio shows that 7% of the total loan market is captured by HBL as per the NRB report. HBL has 12% coverage on the manufacturing sector in terms of amount. HBL has been providing competitive products at competitive prices. HBL is not one of the players who fight solely on price. It has a brand name and customers consider HBL to be trustworthy and they bank on HBL because of this itself. Some of the new products brought in by competitors are: 1. Low Balance Accounts: Banks have come up with deposit schemes where the customer can open accounts with a minimum balance of Rs. 1,000, or even Rs. 1 and Rs. 0. 2. Internet Banking: With the change in technology, Banks, more than ever, felt the need for banking convenience for their clients. Now customers can access and have full control over their accounts 24 hours 7 days a week over the internet.
3. Mobile Banking: Today, one has the convenience of operating their accounts through their mobile which removes boundaries such as availability of branch or internet. 4. Any Branch Banking: All the branches are inter-connected with V-Sat and are capable of providing online, real-time transactions to its customers. Customers can enjoy ABBS facility in almost all the commercial banks. 5. Utility Payment Services: With the advancement in technology and increasing competitiveness in the market, banks have started providing services of utility bills payments such as telephone, schools etc through counters and internet. 6. Visa Credit and Debit Cards: With Nepalese people becoming aware of product such as credit/debit card, banks in Nepal have introduced them here as well. With this customers have to convenience of not carrying too much cash. Some of the competitive products that HBL came up to fight with the new banks are: 1. Small and Medium Enterprise Loans: to help establishment, growth and expansion of small and medium sized enterprises, Himalayan Bank has developed a special loan package meant just to suit small and medium sized enterprises. 2. Bishesh Savings Account: 'Bishesh Savings Account' is a deposit product targeted to special section of society which includes minors, senior citizens completing the age of 50 years, physically challenged and illiterate individuals. 3. Zero balance account: Customers can open an account for a minimum balance of zero. HBL came up with this product to counter other low balance accounts of banks. 4. Card Services: In order to keep its customers satisfied, HBL provides VISA Debit and VISA Credit cards to its customers at competitive prices. 5. Internet Banking: Internet banking helpsdoing many banking transactions using the Internet. It's easy, convenient, and best of all, it's available anytime. 6. Mobile Banking: Himalayan Bank also provides SMS Banking. Now customers can take care of banking needs without ever having to wait in queues. Customers can check their balance, status of cheque, last three transactions and the Bank’s foreign exchange rate, all from their cell phones. xxxi
Section B 1. Tasks Performed at HBL Research Work While working at the bank, one of the major tasks given to us was to find information about various sectors of the economy which they se to understand the industry potential while appraising a project. Information on various sectors was collected visiting various websites and institutions regulating the sector.
Firstly, we collected information about hydropower industry visiting websites and offices of Nepal Electricity Authority, Department of Electricity Development (DoED), Independent Power Producers Association of Nepal (IPPAN) etc.
We did a research about pharmaceutical industry in Nepal. Our main task was to gather information and compile them for the bank so that credit appraisal can be done. Sources of information were old cases at the bank, institutions such as Department of Drug Administration (DDA), Federation of Nepalese Chamber of Commerce and Industry (FNCCI) etc, and the internet. Customer Department We were posted to the customer service department where we understood the various deposit products of the bank and the working at the front level which helped us understand how banks perform at a basic level. Credit Department We spent most of the time at the credit department where we first understood the working of this department. We gained knowledge of how a bank initiates credit process and how approval is done. This was supported by various activities at the bank such as Credit Approval Package: xxxii
The basic assortment of products that a client is entitled to is designed and a credit approval package document is made which contains all the related information about the client. This is used as a document sent to the above level for approval and also is maintained for future reference. Site Visit Reports: Site visits are done to understand the business of the client and to check the status of the assets kept lien with the bank. This helps us get a better understanding of the client and the security aspects of credit. Financial Statement Analysis We prepared the financial statements of the bank based on the bank’s format for the clients and assessed them with various financial ratios. This was mainly very interesting as it required critical assessment based on the industry in which the client was operating and we could show our academic talents in doing so. Valuation Report and company turnover Based on the report of the valuator, we had to make the valuation report of the client’s business and collateral. We also calculated the account turnover of each client and the group in which it belonged to create a report of business given by the client to the bank. This was done by extracting data from the IT system Globus and putting it into excel.
The credit department earlier had 16 Relationship managers working to serve the clients’ request but now due to increasing branches of the bank, there were only 6 Relationship managers working. The work pressure was high and therefore we were given their part of the duty. This helped us learn enormously and also helped them finish up their work and meet deadlines. Benefits that we got from working in the bank were the knowledge about real work and hands on experience on what should be done when. Benefits that the bank got may be termed as a supporting hand in completing the work and intellectual inputs at various stages.
2. Project Work
During the course of the internship, we were given a project work to an industry analysis of the hydropower sector. The major time and involvement in the internship period was dedicated towards this project. This project was given as the bank had a few hydropower projects coming up for loans and they wanted better information and analysis of such as it includes huge commitments of funds.
For the purpose of carrying out this project, banking sector was comprehended, credit appraisal at HBL was understood, and information was collected from various sources such as NEA, DoED, IPPAN etc. Then the hydropower industry was analyzed including the technical and management aspects, other areas of concern were identified, and key risk areas and key success factors were assessed.
Based on this, a conclusion and recommendation was provided to the bank so that credit managers at the bank have more information and a pre-specified format for appraisal of credit of a particular hydropower project before extending any loan.
3. Strengths and Weaknesses While working at the bank, we had certain strengths that helped us carry the assigned tasks very efficiently. Along with strengths, we also faced certain weaknesses that acted as barriers to quality work. The individual strengths and weaknesses have been given below. Nikhil Agrawal Strengths:
While working in Himalayan Bank, I indentified some of my strengths that were very helpful during the tenure in the bank.
In the day to day activities of the bank, regular conversation with customers and colleagues is evident. My good communication skills were pretty helpful for the tasks xxxiv
assigned to me. Good communication skills were important not only in the customer service department but also in credit department where communication skills was important to build a good rapport with the customer as well as make an effective credit approval package.
Another major strength was the financial analytical skills. I was good at the financial analysis of balance sheets and the cash flows when I was told to analyze the balance sheets which were presented for the approval of loans by clients. This skill of mine helped to perform well in the credit department and remove the workload of the department colleagues as this took the major chunk of their working time.
Another major strength was my attitude towards professionalism and co-operation. Coming from a well reputed management college in the country helped me to encapsulate professionalism in my behavior. Working environment today requires working in teams for which the behavior of co-operation is of utmost importance. The ability to work with almost everyone with utmost team spirit was commended by the colleagues of the bank.
Working with computers appeared as a major strength as I was very comfortable and affluent with the various applications used in the bank and also the system software of the bank i.e. Globus. This skill enabled me to complete the assigned task quickly and precisely.
While working in the bank, I faced many shortcomings. The major weakness that I encountered was the patience to work for long hours. Since this was the first time for me working in the office environment, I found it very difficult to maintain my patience and concentration to work for long office hours. This possessed the biggest challenge to me while working in the bank.
The lack of exposure to real time working conditions was another challenge that I faced as I found it difficult to put the theoretical knowledge into practical reality. This possessed many situations where I found it difficult to move ahead with many problems and situations, which was disappointing and embarrassing to me in many situations.
Another weakness that I encountered was the ignorance of the new regulations and rules in the Nepalese financial system. Though I had studied this subject earlier but the lack of update of this knowledge possessed a great challenge to me while working in the bank. Rishabh Tibrewala Strengths
Working at HBL as an intern gave me a lot of theoretical and practical knowledge. The biggest thing that I learned from this 10 weeks program was the understanding of my individual strengths. I realized that I have a knack for numbers and have a good understanding of the financial statements. I could easily make the basic balance sheet, income statements and cash flows. Also, analysis of financial statements based on ratio analysis and the analysis of cash flow came easily to me. This to my advantage helped me in impressing the relationship managers under whom I was working. They showed more confidence in me and gave me more challenging tasks to perform. My regular visits to the bank and a basic knowledge on the working of the front end managers/tellers was also advantageous. This gave my supervisors more confidence in me in the initial stage itself. I also had good knowledge about businesses of different fields such as retail, information technology, manufacturing of carpet and pashmina, etc which helped me in interacting with the clients and gain better insight into their businesses. My skills of basic computing are good and this helped me in doing the regular work. I could easily work on MS word where the CAP was made and MS Excel where xxxvi
financials were made. I soon got accustomed to the software used by bank i.e. Globus and could check the credit line and the outstanding of the customers. My supervisors were very happy by the dedication with which I worked. I wanted to gain maximum knowledge that I possibly could in this short span of 10 weeks. My motivation to work and learn encouraged my supervisors to guide me well and I was able to learn more than required. My communication skills are also good and this helped me in interacting with the clients better. I was assigned certain clients and had to communicate to them about the processing of their credit case. I could easily maintain a good relation with the clients and they were generally happy with the relationship. I also realized that my suggestions were mostly appreciated and at times implemented by my supervisors. They were quite impressed by my analytical skills, I was able to understand various project and perform analysis of their credit appraisal. Weaknesses
Along with these strengths, I encountered certain weaknesses that acted as a barrier while working at HBL. The most important barrier or weakness that I faced was that I lacked knowledge of the real world. The book teaches us a lot of theories and practices but it is not always the same in the actual working scenario. We often have to mould these theories into possible solutions so that they are more appropriate in the real world. And for me this was difficult as my understanding of the real working scenario was less and implementing the theories turned out to be a challenge.
I did not know how credit appraisal is done at banks as I had never taken a course on that. I felt constrained as I could do nothing initially when I was given the first case. I was taught credit appraisal and its procedures at the bank itself and this took up a lot of time which I could have spent doing something more productive.
Also my spokenNepali is not good and my knowledge of technical Nepali terms is lame, I had difficulty while expressing myself in Nepali. I also felt constrained xxxvii
because often balance sheets and financial statements were presented in Nepali which was difficult to understand.
Finally I feel that lack of patience was one thing which I should try to overcome. I often got restless as things didn’t move the way it should. Often work got delayed because of some silly reason and that was irritating. Also sometimes, clients behaved in an unexpected manner and patience was the most important thing that I needed at that time.
Section C 1. Description and analysis of roles of fellow workers Customer Relation Department (CRD): The major function of managers in CRD is to interact with the loan applicant/client and discuss the need of the credit facility and other various factors related to it as well as understand that there is inherent credit risk in any business proposal in the banking sector. So the RMs in CRD has the ability or develops the ability to identify these risks and develop ways to mitigate these risks with the capability to properly monitor insurable inflow of predetermined returns. They work according to the HBL’s Credit Policy Guidelines which has set the parameters of credit operation. This department comes under the direct supervision of the branch managers and the CAPs prepared have to be forwarded to the CCD after the approval of the BM. Managers in this department basically focuses upon serving clients with loan processing and managing their loan tenure especially loans for business applications and enterprises. The various products or services this department provides to its customers are Subhida Loan (Revolving and Non Revolving), personal loan in the form of overdraft, loan processing for assessing of credit limits for Letter of Credit, Overdraft loans, EMI based loans for property purchase, Working Capital Financing, loans against financial instruments like shares, fixed deposit etc. Credit Control Department (CCD):
The CCD comes under the head office and managers in CCD are directly supervised by the General Manager- Marketing and Credit. The main function of managers in CCD is to make thorough and critical analysis of the credit approval packages forwarded by the CRD of the various branches all over the country. The credit policy envisions delegation of authority to branch level, such that credit operations can function smoothly. However, all the credit decisions cannot be finally made at the branch level. Same credit proposals need to be decided at the xxxix
corporate level, even though they originate from branches. In order to streamline the flow of such credit proposals, which are to be finally disposed off at corporate level, a team of managers dedicated to do this has been created which is the Credit Control Department. All the proposals related to credit functions are routed through them whenever such proposals are to be submitted at the corporate level. Other proposals coming from A category branches are directly routed to the CCD. 2. Learnings from fellow Workers
Nikhil Agrawal The major thing that I learned from the fellow workers in the various departments is that the core component of working in any organization is professionalism, commitment and dedication. Without these factors, no employee can succeed in an organization and also do justice to the organization as well. The perception that the banking job is glamorized and an easy 10 to 5 pm job proved to be wrong as professional bankers may have to work day in and out to conduct their assigned duties properly and significantly. Previously, the concept of ratio analysis, credit appraisal, financial statements were only theoretical but I learnt how to imply this knowledge into the daily working procedures from my fellow members. The dedicated employees of the bank always had pressure of working under tight schedules and small completion times. This helped me understand the value of working with pressure and the value of respecting time. Banking profession is not only about being sound in the daily commercial banking activities and concepts, but one another major aspect that people often miss out is the communication skills as it is required in every aspect of banking. Thus I learnt good communication skills from these fellow workers as well. In every step of the professional career, the dilemma of meeting the organization targets as well as maintaining the ethical standards comes in. This is a very difficult step for any professionalism and this skill is to be encapsulated for the success of any professional. xl
Further, for any professional balancing out with between the professional career and the personal life is also of the utmost importance. This is a very important issue for any working person. Proper balancing between the two makes the person happier and more satisfied with life and career. In this profession, people often find the job monotonous and often get de-motivated to work further. To get over this monotony, every professional should be passionate in whatever he is working with.
Rishabh Tibrewala The first and the most important thing that I got to learn from my fellow workers in the bank is Dedication. Any work can only be accomplished when done with loads of dedication and effort. I saw that the people who are dedicated to their work are progressing very fast in the bank and the people with a laid-back approach are still lacking behind. The book teaches us to work with numbers. It teaches us how to take out the ratios with a set of figures given but when it comes to analyzing the ratios it cannot very well be learned by the book. While working at HBL I learnt how to do the financial ratio analysis and it can be implemented in the real world scenario. We also got to learn how credit appraisal should be done. My supervisors at the bank taught us how it should be done and we learned that the appraisals are done on 5 pillar bases which are Industry, Technical, Financials, Management and Security. Another very important thing that I got to learn was working under pressure. There were times when our supervisor gave us deadlines and we had to accomplish within that time frame which was at times very taxing. And once you feel you have achieved your target, the feeling that you would get when your supervisor would say the job is not done well. This experience of 10 weeks did teach us to face criticism and also gave us an understanding that most of the times criticism makes you a better person and improves the quality of your work. xli
While working in the credit department of a bank the staff has to be able to keep a balance between the legal requirements and the customer requirements. While processing a loan for a client the legal requirements are enormous which is quite annoying to the clients and it becomes a big responsibility of the relationship manager to maintain a balance between both and help the client to get his loan processed. Also while carrying out your work one has to be very ethical. In order to maintain such a balance and to keep your clients happy requires good inter-personal and communication skills. And this was something that I really got to learn from my supervisors and co-workers in the bank. Another skill that I got to learn at the bank was how bankers have to be good with the negotiation skills. It is believed that the banking world is a very “Glamorized” world but with my discussions with the co-workers I realized that it is not so interesting. After a point of time this job gets monotonous and people start losing interest in their jobs. They suggested me that if I have the financial backing and support then I must not think of getting into this kind of a service but rather set up my own business. The risks involved in a business are certainly high but with higher returns and a better living standard.
Section D 1. Our perceptions and expectations
Nikhil Agrawal The banking profession, often glamorized, I thought it to be a well paying and relatively laid back profession where the working hours is not that extensive. But I found that working hours extends to even late in the nights so as to be more efficient than other competitor banks in the industry. My aim of being a professional banker has moved a step forward with my decision of pursuing my internship in a commercial bank. In this way, I will be able to know what actually the benefits are and also about the limitations of working in a bank and henceforth assure my target to work under this goal of mine to become a banker. Often it is thought that Nepalese service industry lacks professionalism and the sincerity towards one’s knowledge and expertise; but seeing the working culture in HBL, I can state that the service industry has indeed developed and has become more professional and is competitive to any international standards. The Nepalese banking industry was thought to be growing only in numbers but I experienced that this industry is coming up with newer products and innovative ones. HBL’s millionaire deposit scheme, other banks’ rupee one account, Grihini Bachat Khata to name a few have brought in new revolutions in the banking industry. But still large horizons are left for the banking industry to conquer as large deposit bases of the rural areas have not been able to be capitalized upon. This experience also made me aware that HBL as an employer is one of the most paying institution and also one of the best working places to be working in. The culture at HBL was one of the liveliest and friendliest environments I have experienced. HBL has its expertise and focuses to gain a competitive edge from the expertise such as remittance, project financing, international banking etc.
First and foremost, when I joined the internship program I believed that I had a lot of knowledge about the working of the bank. But when I actually started working in the bank I realized that the real practice is very different from the academic learning. What is learned in books and what is practiced are two different things. I got to learn about HBL, its product details, the strategy with which the bank works and the various business sectors the bank has made investments in. I also got to learn about the various departments in the bank and how they functioned. I was completely ignorant about all this and in this short span of time I got to know a lot about the bank. Looking at the reputation of the bank I was very excited about joining the internship program. But as the time of starting the job came closer, my excitement shifted to nervousness considering the grandeur of the bank and the thought as to how my supervisors would be. But after my first day at work all my nervousness disappeared as the people at the bank were very friendly and helpful. The working environment at the bank is very healthy. I always believed that banks in Nepal are very professional. But after spending few weeks in the bank I realized that it is not as professional as it looks from outside. It is more a casual environment to work in. I also thought that my HR/PR skills are very good and there is nothing more to be learned in that aspect but within a few days of working in the bank I realize that I am not perfect. The way the top level management of the bank would communicate was a big surprise and I am certainly very impressed. I got to learn a lot from them though. I actually realized that there are lots to learn in this regards and I am just a beginner. Other things that I learned from my supervisors were communication and interpersonal skills again of what I was quite proud of. I realized that communicating in general day to day life or in college is very different that communication at work. One has to really think before we speak. Words have to be manipulated so that a negative impact is not laid down. xliv
I used to always think that one has to do his own work while performing a job but here in HBL I got to realize the importance of teamwork. Everyone at work is generally so helpful and any task can be accomplished with teamwork. One should always be ready to help and others will surely come forward to help you with your work. I also learned that in a banking scenario every department is assigned their own tasks but everything works in co-ordination. As soon as one department does not know what the other is doing there would be complete chaos and the goals would get hampered. Initially when I joined my internship program I was very excited with the fact that this would open my doors to banking as a career and the reputed Himalayan Bank would be a great option. But after my internship program I realized that the job at the bank is very monotonous and not as glamorous as it appeared to me. My perception regarding banking as a career has changed and I am now revaluating my interest in banking as a career. My supervisors also suggested me that if I have the financial banking and support from the family I should get into my own business rather than opt as banking as a career. 2. Skills, ideas, and knowledge learned
The skills, ideas and knowledge that I learned from the experience in HBL are: •
Prepare financial statements and analyze the financial indicators:
In the due course of the internship, preparation of the financial statements and the analysis of these statements was a major part. This helps the bank in the appraisal process as it tells how strong a borrower is to repay back the debts and whether the financials presented are inflated or not. •
Prepare the credit approval package:
Preparation of the CAP is one of the major tasks of any credit officer as it tells what the borrower wants the loan for, who he is, what are the core competencies of the borrower, why a loan should be granted or rejected to a client. •
Development of analytical skills:
Good analytical skills are very important in the credit departments of the bank as analyzing a loan or a project and analyzing a project’s viability is very important. Though experience is very important to build this, good general knowledge and familiarity to the business world holds as a major advantage. •
Good communication skills:
For the banking job, a good communication skill is a major skill that should be present in any banker. Being a good speaker is not only important but also the ability to listen to others and understand their views and perception is very important. •
Ability to work in teams:
The ability to work in teams is often a major challenge to any banker and often the difference between a successful and an unsuccessful employee. A person who is able to work in teams, co-ordinate and rise as an influential leader, is often successful in his career. Rishabh Tibrewala
I learned to prepared the financial statements of the bank based on the bank’s own format for the clients and assessed them with various financial ratios. In our academic course also we had prepared financial statements but here it was mainly very interesting as it required critical assessment based on the industry in which the client was operating.
I also learned how credit appraisal was done in banks. I gained knowledge of how a bank initiates credit process, how the assessment is done and how approval is done. I was able to enhance our analytical and negotiation skills. Whenever it comes to dealing with clients a banker has to be very negotiative and know exactly what he wants from the clients. In our day to day life we do not perform like that. I got to learn some negotiation techniques from my supervisors when I saw them deal with clients. I xlvi
also got to practice and enhance my interpersonal skills when dealing with clients and my co-workers. The most important thing that I got to learn from this internship program is that I gained some experience of working in a real world scenario. After gaining academic knowledge and classroom experience for so many years this was the first time that we got to work in the real world. This work experience though of a short span has thought us so many things like dedication, commitment, interpersonal and communication skills etc which will certainly help us in any future endeavors we take. Whatever I have learned at this first hand first time experience is going to stay with me for a lifetime.
3. Influence on academic decisions and career choices
The skills learned in the internship program will be very useful for me both in my academics and my career ahead. Initially I was thinking that I would go for my masters directly but now I have understood that working in real organizations will give me experience that will help me in my academics later.
Further, my aim of becoming a successful banker has been motivated as I found the banking industry challenging and interesting. This industry is very interactive, creative and a good platform to use the knowledge learned throughout the years.
For my academics, I could identify which courses would be useful for me to go through to gain a competitive advantage in the industry. Also the skills of analyzing balance sheets, analyzing business proposals and project financing proposals will be a major boost for me in the academic courses I pursue further.
One other major skill I learnt from the experience is the importance of building personal relation skills and also the importance of maintaining it. PR relations are one of the major components of a successful person as it helps in all major steps of the professional career.
Another major skill I learnt from the banking experience is the importance of understanding the basics of the career one is pursuing. The more a person is acquainted to the basics that his job acquires, the more are the chances that he would succeed in the career.
Patience and time management skill is also one of the major skills I learnt in the internship. Having patience during the pressure of work and also when working with non- cooperative clients is a major skill every professional should have. Time xlviii
management in also a major component of any management personnel as without the proper management of time which is a major resource, success and efficiency is hard to achieve which shows the lack of competency in a person. Rishabh Tibrewala
This internship program was mainly like short real time training for me. I learned how there is a big difference in classroom learning and the real time working. I got firsthand experience in working in a bank and this has changed my perception towards working at a bank. Initially I was considering banking as a career but after my 10 weeks experience at the bank I realized the job to be very monotonous and not so challenging as I thought before. The so called glamorous world is not so glamorous enough. I also realized that if one has a financial setup then getting into your own business is a much better option than getting into to service sector. It really takes a long time, especially in Nepal to establish a lifestyle of your kind here, which can be achieved earlier in business.
But this was certainly an experience of a lifetime. I got an opportunity to use our academic learning in practice and also learned how I should implement this into real life experiences. The dedication and commitment level with which the people at the bank work was quite impressive and something to really learn about. These two things are very important in progressing in life. My interpersonal and communication skills were also enhanced which would certainly stay with me for a lifetime and help me in every walk of life.
PART II: Credit Appraisal of Hydropower Projects SECTION I: Introduction 1. Brief background of the Study Water resources are important natural resources for the economic development of Nepal. Availability of abundant water resources and geo-physical features provide ample opportunities for hydropower production in Nepal. Out of the total hydropower generation capacity of about 83,000 megawatt (MW) in the country, about 42,000 MW of power generation appears feasible to date from financial–technical perspective. In view of the internal consumption and export possibility of hydropower in the context of the overall development of the country, an investment friendly, clear, simple and transparent policy is necessary to enhance the development process of hydropower. An open and liberal policy pursued in the hydropower sector after restoration of democracy has started yielding positive indications in the field of hydropower development. It is also observed that the need to overcome the shortcomings and weaknesses that have emerged in the course of involvement and participation of the private sector in the water resource sector.
In view of the contribution that hydropower development in Nepal could make in the speedy development of not only the national economy but also the regional economy; it is expedient to put forward efforts on integrated water resources development based on bilateral and regional cooperation with prime considerations to the national interests of Nepal. Such efforts shall result in the economic development, industrialization, flood control, environment protection, creation of employment opportunities in the country in addition to benefits from allocation of benefits substantially resulting to the lower riparian country from large storage projects built in Nepal.
2. Objectives of the Study l
The prime objective of the undertaken project is •
To fulfill a course requirement of the BBA program at Kathmandu College of Management.
To gain practical knowledge of the banking activities and the laws governing the banking industry.
To analyze the practical implication of the theoretical aspects learnt during the BBA program.
To gain a professional experience as an employee in a leading commercial bank of Nepal.
However, the major objective behind the carrying out the study can be summarized as follows
The most risky of all business loans are project loans which are credit to finance the construction of fixed assets designed to generate a flow of revenue in future periods. Prominent examples include oil refineries, pipelines, mines, power plants, etc. the risks surrounding such projects are large and numerous.
1. Large amounts of funds, often several billion rupees. 2. Risk of project funded being delayed by whether or shortage of building materials. 3. Laws and Regulations in the region or country where the project is being constructed affecting adversely the completion time or the cost of the project. 4. Changes in interest rates may affect the lender’s return on loan under fixed interest rate, etc. Hence this study is done concentrating on the current situation of the Hydropower energy market. The study aims at understanding the demand and the supply of hydropower industry and analyzing the possibilities of Banks financing new li
upcoming projects. The specific objective of this study is to gather information regarding the existing projects and the upcoming ones and assess the risk.
To achieve the foresaid objective, the following subsidiary objectives have been formulated:
To get the overview of credit.
To examine the current position of HBL’s credit business in reference to services offered.
To analyze the competition
To understand hydropower credit appraisal at banks
To understand what are the extra things being done by competing banks
To seek opportunities those are useful for HBL in hydropower appraisal.
To critically assess hydropower projects in terms of various pillars.
To examine the critical risks factors in hydropower appraisal
To examine the success factors.
To state other aspects that banks should consider during providing hydropower credit.
To Recommend and suggest regarding the above after analysis of information gathered from various sources.
3. Problem Statement
The major decision problem can be stated as follows: lii
“What are the major factors both internal and external that has to be analyzed and enhanced in order to provide Hydropower sector with credit by the related bank?”
4. Research Problem The decision problem can be sub categorized into following Research Problems
What are the environmental issues and risks that must be addressed?
What are the strategic financial issues that must be addressed?
What are the strategic market (existing and potential) issues that must be addressed?
What are the risks associated with the 5 pillars of credit analysis for a hydropower project?
5. Scope of the Study The study as explained in the objectives section is carried out with the purpose of understanding the scenario of project financing in the context of Nepal. Since, the attention of Nepal and all Nepalese is today focused in the hydropower sector the purpose is tilted to the hydropower sector so that all the practicalities of the sector and its financing can be explored in greater detail.
In this study, the basics of credit appraisal are understood. It explains how banks assess a business and the risks related to it before providing it with credit. It also explains procedures related to credit function of a bank.
Then this study emphasized on hydropower projects. It explains why hydropower is necessary for a country like Nepal. An industry analysis of hydropower sector of Nepal is done and its strengths and weaknesses are assessed. The possible areas of liii
risks are stated which needs to be stressed before providing loans. The success factors are also given that lures banks for getting into this sector.
6. Limitations of the study The study was not free from hindrances and problems. While conducting the industry analysis we noticed that no banks wanted to disclose related information. In the course of the project preparation following major limitations was faced:
1. Limited Time: The project was completed within a span of three months.
2. Limited Information: Because of the competition and privacy of the Bank's policy, abundant statistical data could not be collected, which did not provide the sufficient information that was needed for conducting the study. So it does not reflect the exact position of bank related to the Credit business, as the bank could not, understandably, disclose financial information.
3. Geographical Constraint: The project includes study conducted within Kathmandu valley only. Hydropower projects could not be visited as they were located outside the valley.
4. Lack of elaborate knowledge: Study is done on Credit issued by Himalayan bank only, so information about credit on other banks is not mentioned elaborately. With limited information collected, the study may not cover other relevant aspect of the topic under study. Also being a student, limited by knowledge, time and resources, the study may not be as elaborative as it could have been.
5. Financial Problem: The project was funded fully by the students themselves. liv
6. Scope of the topic: Since project financing is a broad topic, special focus has been made to tilt it to the Nepalese context and has been simplified as far as possible for a naïve reader’s understandability.
SECTION II: General Literature Review
1. SWOT Analysis SWOT Analysis is a strategic planning method used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a project or in a business venture. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieving that objective. The SWOT framework was described by Edmund P. Learned, C. Roland Christiansen, Kenneth Andrews and William D. Guth. Because it concentrates on the issues that potentially have the most impact, the SWOT analysis is useful when a very limited amount of time is available to address a complex strategic situation.
I E S W O T hpetxni W rpatFigure 6: SWOT Profile O eoku T arn tegn P rsutaiThe internal and external situation analysis can produce a large amount of onshlinformation, much of which may not be highly relevant. The SWOT analysis serves as fiesn an interpretative filter to reduce the information to a manageable quantity of key itsA linA issues. The SWOT analysis classifies the internal aspects of the company as strengths ean slaor weaknesses and the external situational factors as opportunities or threats. ylStrengths can serve as a foundation for building a competitive advantage, and sy weaknesses may hinder it. By understanding these four aspects of its situation, a firm is sican better leverage its strengths, correct its weaknesses, capitalize on golden sopportunities, and deter potentially devastating threats.
The internal Analysis is a comprehensive evaluation of the internal environment’s potential strengths and weaknesses. Factors should be evaluated across the organization in areas such as company image, organizational structure, operating efficiency, access to natural resources, financial resources, exclusive contracts etc. lvi
An opportunity is the chance to introduce a new product, service or project that can generate superior returns. Opportunities can arise when changes occur in the external environment. Changes in the external environment may be related to customers, competitors, market trends, new technology, economic environment, political and regulatory environment etc.
2. Five Pillars of Credit analysis used at Himalayan Bank ltd. Credit Appraisal is a process to ascertain the risks associated with the extension of the credit facility. It is generally carried by the financial institutions which are involved in providing financial funding to its customers. Credit risk is a risk related to non repayment of the credit obtained by the customer of a bank. Thus it is necessary to appraise the credibility of the customer in order to mitigate the credit risk. Proper evaluation of the customer is performed to measure the financial condition and the ability of the customer to repay back the loan in future. Generally the credit facilities are extended against the security know as collateral. But even though the loans are backed by the collateral, banks are normally interested in the actual loan amount to be repaid along with the interest. Thus, the customer's cash flows are ascertained to ensure the timely payment of the principal and the interest.
Credit Analysis at Himalayan Bank was done on the basis of Critical Five pillars of risk which are: 1. Industry Analysis 2. Technical Risk Analysis 3. Management Risk Analysis 4. Financial Risk Analysis 5. Security Analysis Figure 7: Five Pillar Credit Risk Analysis lvii
Overall situation of the industry is studied which includes the demand and the supply and the competition faced by particular client. The key risk areas that are examined are:
Figure 8: Industry Analysis Industry Attractiveness:
Industry attractiveness includes the industry structure, market structure and the regulatory environment in which the client operates.
Porter's five forces analysis is a framework for the industry analysis and business strategy development developed by Michael E. Porter of Harvard Business School in 1979. It uses concepts developed in Industrial Organization (IO) economics to derive five forces which determine the competitive intensity and therefore attractiveness of a market. This model is based on evaluation of the following 5 forces. 1. The threat of substitute products 2. The threat of the entry of new competitors 3. The intensity of competitive rivalry 4. The bargaining power of customers 5. The bargaining power of suppliers
Figure 9: Porter Five Force Industry Analysis Market Structure lviii
In-Depth Analysis of the market structure comprising of data related with a. Market size & growth during past 3-5 years b. Reasons for market growth or decline c. Market segmentation (Customers/Geography) d. Market share e. Seasonality of the business The potential risks areas under the market structure are related with shrinking market, volatile market and dominant competitors forcing out smaller players.
Industry attractiveness also depends largely on the regulatory environment. No business can operate independently without any regulatory body behind it. The various aspects to be considered are
a. Review regulations which govern industry b. Review recent changes & determine nature of future changes c. Evaluate impact of recent & political future changes Potential Risks areas are low entry barrier which means new players are allowed to enter market, elimination of price controls leading to competition, risk exposure of foreign markets, price controls on key inputs lifted, and International Competition.
Company within the industry
The bank also needs to understand the competitive position of the client in the industry which includes areas such as: a) Competitive position: the market share of the company b) Company strategy: strategy the company has utilized, and lix
c) Alliances: alliances with various institutions Technical Risk Analysis
The strength and quality of the technical support required for sustainability operation of the company in terms of manpower and the technology used should also be given due care. Appropriate technical competence of the manpower, availability of such manpower, the capability of the technology used, availability of after sales service, cost of maintenance and replacement, etc need to be evaluated. Management Risk Analysis The integrity, competence and nature of alliances of the borrower’s management team should be assessed. Management risks relates with the overall skills required to carry out the project by the client and his management. These skills may be:
a) Integrity : The honesty, Quality/ Reliability of information, Character & Track record, Cooperativeness,
Supportiveness, etc of the management.
b) Competence The requirements related with the ability, experience, skills and competence to carry out the business.
c) Alliances The alliances of management with various individuals and institutions such as group exposure, political affiliations, private sector affiliation, etc that may affect the overall performance of the business needs to be evaluated as well.
Financial Risk Analysis
One of the most important pillars is the financial risk analysis which related to the overall performance in monetary terms. The borrower’s capacity to repay through cash flow is the “first way out” for all the banks. The strength of securities is the “second way out” i.e. through collateral liquidation is also assessed.
Analysis of the financial performance of the company is very important as the client is served with money with the main aim of recovering with the cash flow of the client and not by sale of collateral or exercising other means. Financial risk analysis is done on the following aspects:
Figure 10: Financial Risk Analysis a) Performance Evaluation of the performance of the company is done on the financial ratios calculated on the past income statement and balance sheet or expected statements. Also the cash flows of the project is evaluated. Other aspects to be considered are the inventory quality, the asset quality etc.
b) Liquidity The Liquidity of the firm needs to be assessed to check the client’s ability to sustain in difficult times.
c) Leverage The leverage of the firm needs to be addressed as well so make sure the firm is maintaining.
Security Analysis The control over various securities obtained by the bank to secure the loan, execution of the security documents and present value of the properties proposed for mortgage lxi
to the bank. The FAC (Fixed Asset Collateral) Security does not completely cover the risks as the fixed assets may not fetch adequate return under circumstances of bad loan. The project is built in such areas where the land value is very low and the proposed site may not be useful for other purposes. Under the case of bad loan, where the bank might have to sell off the property to recover the loan, the fixed assets may not recover anything. Hence for this, bank needs to consider various other factors as security and finance the project only if the bank thinks it’s worth the investment considering the project will be a success for sure. A bank provides credit which is very risky and it should be backed by certain security that can be exercised under extreme conditions where the project cannot pay back the loan amount. This security can be in terms of control or mitigation measures.
a) Control Control by the bank of the project can be in terms of legal rights, documentation, exercise against fraud, insurance etc.
b) Other security: Often various other securities such as land, building, machinery etc are placed as security whose distressed value is taken as a backup. The various aspects that should be considered are liquidation value, quality, quantity, market demand, time of scale, opportunity cost, technology replacement, legal process, etc.
3. Financial Ratio Analysis
Financial ratio analysis is the calculation and comparison of ratios which are derived from the information in a company's financial statements. The level and historical trends of these ratios can be used to make inferences about a company's financial condition, its operations and attractiveness as an investment.
Financial ratio analysis groups the ratios into categories which tell us about different facets of a company's finances and operations. An overview of some of the categories of ratios is given below:
Leverage Ratios are ratios which show the extent that debt is used in a company's capital structure. Liquidity Ratios are ratios which gives a picture of a company's short term financial situation or solvency. Operational Ratios are ratios which use turnover measures to show how efficient a company is in its operations and use of assets. Profitability Ratios are ratios which use margin analysis and show the return on sales and capital employed. Solvency Ratios are ratios which give a picture of a company's ability to generate cash flow and pay it financial obligations.
Credit analysts, those interpreting the financial ratios from the prospects of a lender, focus on the "downside" risk since they gain none of the upside from an improvement in operations. They pay great attention to liquidity and leverage ratios to ascertain a company's financial risk. Equity analysts look more to the operational and profitability ratios, to determine the future profits that will accrue to the shareholder. By careful selection of items from a borrower’s balance sheets and income statements, the loan officer can shed light on critical areas in business lending as
A borrowing customer’s ability to control expenses
A borrower’s operating efficiency in utilizing resources to generate sales and cash flow.
The marketability of the borrower’s product line.
The coverage that earnings provide over a business’s firm’s financing cost.
The borrower’s liquidity position, indicating the availability of ready cash.
The borrower’s track record of profitability or net income. lxiii
The amount of financial leverage (or debt relative to equity capital) a business borrower has taken.
Whether a borrower faces significant contingent liabilities that may give rise to substantial claims in the future.
SECTION III: Conceptual Framework
The works of the project was guided by the following conceptual framework. Various variables were studied to assess the prospects of hydropower as a client for the bank for its credit products. These variables may be divided into two major groups. 1. Affecting the hydropower project 2. Affecting the credibility of a hydropower project at the bank. Figure 11: Conceptual Framework for the project
These variables are discussed below. 1. Financial Requirements of Hydropower: includes all the financial aspects that affect the hydropower industry such as the various sources of finance, the cash flow etc. 2. Technical Requirements of Hydropower: includes all the technical aspects of a hydropower project such as the tunnel length, dam size etc. 3. Hydropower Industry Direction: The study of how the hydropower industry is growing along with the trends in the developments of various aspects of hydropower that affect the overall industry. 4. HR requirements of Hydropower: Workforce and other human resource requirements for the construction operation of a hydropower project. 5. Legal Requirements of Hydropower: Various documents and phases that a hydropower project has to go through to obtain licenses such as registration, PPA agreements etc. 6. Energy Market Growths: Trends in the energy demands and increased number of consumer requirements affecting the market for energy sources such as hydropower. lxv
7. Financial risks to banks: Risks related with performance, liquidity and leverage of the firm as a borrower. 8. Legal Requirements of Banks: Legal documentation and requirements that bank need to fulfill to undertake a project financing. 9. Technical risks affecting banks: Technical risks of the hydropower project that affects the credibility of the project towards the bank. 10. Management risks affecting banks: Risks related with integrity, Competence and alliances of management or human resource requirements for operations of hydropower project. 11. Industry Risk affecting banks: certain risks related with the industry attractiveness and the stake of particular company within the industry and the regulatory environment under which it works. 12. Other factors to be considered: Exploration of other factors affecting the success of hydropower projects and the loan becoming good or bad at the bank.
SECTION IV: Methodology of the Project
This part deals with the various methodologies and approaches that we used during the study and for the preparation for this report. Most of the data of this report is based on secondary data from various sources and also based on both informal and formal interviews with department head of the bank and other various industry experts. This in-depth interview helped us to come out with the basic required information for the study.
The study necessary for the preparation of the report was conducted in these three phases:
Figure 12: Phases of Research
Phase 1: Observation and Adaptation At this preliminary stage, we observed the working environment of HBL. We tried to make ourselves a part of the organization’s culture, conducts, practices and the rules and regulations that bind all the employees together. Our co-workers and mentors helped us to adopt the work environment and to complete the various tasks assigned to us in the due course of our internship duration.
Phase 2: Exploratory Research In this phase, identification of the core components of HBL and also of the hydropower industry in Nepal was done. Thus as a part of the research, interviews were conducted with the HBL’s employees and also with people with expertise related to credit and hydropower projects
was conducted in order to gain required
information regarding project financing and identifying their internal strengths and
weakness in this particular sector. It also helped in designing the assignment along with its methodology and approach.
After conducting the unstructured in depth interviews with the managers of the credit department of HBL, we were able to understand: •
The procedures by which the bank moves forward with project financing
The pros and cons of financing a hydropower project and why is it a priority lending sector for most of the commercial banks
What information the bank needs for the better and efficient functioning of the appraisal of hydropower project loans
The rationales of each step of the appraisal process
Phase 3: Descriptive Research In this phase of research, the focus was to find the viability of the hydropower industry in Nepal, its pros and cons, the opportunities it provides to the banks financing the projects, the areas that the banks focus upon while appraising the projects and economical viability of financing the projects for the commercial banks. The descriptive research aimed at recommending new solutions for problems that exist and formulating better strategies to get an upper hand on while financing the projects.
This descriptive research mainly comprised of two parts: ○ Qualitative research ○ Quantitative research Qualitative Research The qualitative research comprised of these various processes and parts for gathering valuable and meaningful information:
1. Review of literatures and lectures Different books, literatures, articles were reviewed and studied to have the in depth theoretical understanding of credit appraisal and of the hydropower industry as a whole. This helped in construction of unstructured questionnaire for visiting different banks and interviewing credit officers for the practical understanding of the subject.
2. In- depth interview with the credit managers of the bank To collect information about the process of project financing in HBL and also about the opportunities and challenged in the hydropower project financing, an in depth interview was conducted with these personnel of HBL: •
Mr. Pawan Agrawal, Credit officer, Credit Control Department (Expertise: Deep knowledge in hydropower project financing for a long time)
Mr. Abhaya Bahadur Shah, Relationship Manager, Customer Relation Department (Expertise: Experience of consortium lending in various projects and critical analysts of the loan proposals sent to the department)
Assignment 2, based on the interviews of Mr. Pawan Agrawal and Mr. Abhaya Bahadur Shah has been included in the appendix. 3. In-depth interview with other experienced personnel in this field of other banks To collect the information for the project and to get deeper insight about the hydropower appraisal in the commercial banks in the country, interviews were conducted with personnel of other banks as well. Some of these personnel are:
Mr. Rajendra Bahadur Shrestha, Credit Department, DCBL
Mr. Amit Bajracharya, Relationship Manager, PCBL
Mr. Sohan Babu Khatri, Director, DCBL
4. Study of Rules and Regulations Thorough study of NRB directives prescribed for project financing was done to understand the regulatory environment of the same. We also studied the rules and regulations governing the credit appraisal system in the banking environment. lxix
Quantitative Research The quantitative research comprises of following different type of the research and analysis tools as follows: 1. Financial Analysis of HBL For qualitative information, analysis of annual report of HBL and study of various other publications were done. Further, the senior manager of the bank was consulted for the same. This analysis helped in depicting the level of financial strength of the bank, which serves as a major base for growth, incorporating new ventures, and starting new operations in the bank
2. Financial Analysis of NEA Since NEA is the sole purchaser of electricity from the power plants, the analysis of the financial strength of NEA was sought to be necessary for the viability analysis of any project. The necessary details were found in the annual report of NEA and other publications it issues like Generation, Transmission etc.
3. Publications and Statistical Reports Various publications and statistical reports that provide quantitative data on hydropower plants, its operation and growth, have been analyzed.
SECTION V: Industry Analysis 1. Banking sector as a whole
All branches of economic activity today are fundamentally dependent on access to financial services. In fact, it is the diversified intermediation and risk management services of the financial system which have made possible the development of modern economies. A healthy and stable financial system, underpinned by sound macroeconomic management and prudential regulation, is an essential ingredient for sustained growth. Conversely, macroeconomic instability emanating from weaknesses in the financial sector can undermine the process of development. The continuing globalization of economic activity, and the challenge of attracting productive investments in a competitive international environment, accentuates the need to maintain a healthy and efficient financial sector.
In almost all advanced economies, financial systems deliver a broad range of financial services and sophisticated products, and the efficiency of such well-developed systems has contributed to macroeconomic stability and sustained economic growth and prosperity. Increased availability of funding and more efficient allocation of capital for productive private sector investment is beneficial economy-wide, with particular benefits for SMEs that are often constrained in their financing options prior to effective banking reforms and non-bank financial sector development. Thus, robust growth and effective functioning of a full service financial system is essential for economic development and prosperity.
Over the years the importance of financial sectors development and its contribution to nations Gross Domestic Product (GDP) has been evident. FSS comprises over 9.91percent of the GDP in the Nepal. While impressive, the numbers belie the much larger role that this industry plays in the economy. Financial services firms provide the payment services and financial products that enable households and firms to participate in the broader economy. By offering vehicles for investment of savings, extension of credit, and risk management, they fuel the modern capitalistic society. lxxi
The current financial institutions market in Nepal clearly delineates a developing market with tremendous potential. With two large economies growing at a massive speed Nepal has a lot to gain from its neighbours. In addition to this, the recent peace agreement and sign of political stability in the country has further paved a way for prosperous future ahead. Hence, in order to capitalize on the existing scenario Nepalese financial sector seriously needs focus its activities in attaining higher economic growth.
The Nepalese financial sector is composed of banking sector and non-banking sector. Banking sector comprises Nepal Rastra Bank (NRB) and commercial banks. The nonbanking sector includes development banks, finance companies, micro-credit development banks, co-operative financial institutions, non-government organizations (NGOs) performing limited banking activities and other financial institutions such as insurance companies, employee's provident fund, citizen investment trust, postal saving offices and Nepal stock exchange. However, this bulletin contains information only on those financial institutions, which are licensed by NRB up to mid-July 2008.
During the last two and half decades the Nepalese financial system has grown significantly. At the beginning of 1980s there were only two commercial bank and two development banks. After the adoption of economic liberalization policy, particularly the financial sector liberalization that paved the way for establishment of new banks and non-bank financial institutions into the country. Consequently, by the end of mid July 2008, altogether 235 banks and non-bank financial institutions licensed by NRB are in operation. Out of them, 25 are "A" class commercial banks, 58 "B" class development banks, 78 "C" class finance companies, 12 "D" class microcredit development banks, 16 saving and credit co-operatives, and 46 NGOs as shown in table below:
Table 2: Financial Institutions in Nepal Type of FI ‘8
Mid-July ‘9 ‘0 ‘05
Commercial Banks Development Banks Finance Companies Micro Credit Development Banks Saving and Credit Cooperatives NGOs (limited Banking
0 2 2 -
5 3 2 -
0 5 2 -
5 10 3 21 4 6 -
0 13 7 45 7 19 7
17 26 60 11 20 47
18 28 70 11 19 47
20 38 74 12 17 47
25 58 78 12 16 46
As an increased in number of financial institutions as well as volume of transactions, the total assets/liabilities of the financial system witnessed continuous growth over the last seven years. During the period 2001 to 2008 the total assets of whole financial system increased by 14.62 percent per annum and reached to Rs.706324.0 million in mid-July 2008 from Rs.273946.2 million in mid-July 2001. In the mid-July 2008 the total assets registered a higher growth of 21.26 percent compared to 15.12 percent in the previous year.
The ratio of total assets/liabilities of the financial system to GDP at nominal prices increased to 86.05 percent at mid-July 2008 from 80.96 percent in mid-July 2007. The same ratio was 62.04 percent in mid-July 2001.
The structure of financial assets/liabilities shows that commercial bank alone hold more than 80 percent of the total assets and liabilities of the financial system. As of lxxiii
mid July 2008 commercial bank group occupied the 80.2 percent followed by finance companies 11.4 percent, development bank 5.0 percent, micro credit development bank 1.8 percent and others 1.0 percent. The respective shares were 84.2 percent, 9.2 percent, 3.9 percent and 1.8 percent and 0.9 percent in mid-July 2007.
The composition of the total liabilities shows as usual, deposit held dominant share of 72.05 followed by borrowing 4.44 percent and capital fund 3.65 percent respectively in mid July 2008. Likewise in the assets side, loan and advances accounted the largest share of 55.43 percent followed by investments 17.04percent, liquid funds 13.86 percent and other assets 13.67 percent in the same year.
Commercial banks held dominate share on the major balance sheet components of financial system. Of the total deposits Rs.508905.7 million in mid-July 2008, the commercial banks occupied 83.7 percent. Similarly, finance companies held 10.3 percent, development banks 5.1 percent, micro credit development banks 0.3 percent and others 0.6 percent. Likewise, on the loans and advances the share of commercial banks stood at 78.3 percent, development banks 6.0 percent, finance companies 13.2 percent, micro credit development banks 1.8 percent and others 0.7 percent in mid July 2008. In the same year the share of commercial banks in borrowings, liquid funds and investments constituted 45.9 percent, 68.3 percent and 90.5 percent respectively.
The capital fund, one of the components of liabilities, witnessed a strong growth of 273.50 percent and reached to Rs.25778.0 million in mid July 2008 from Rs.6901.7 million in the last year. The borrowings and deposit, another component of liabilities, increased by 17.55 percent and 30.10 percent while other liabilities decreased by 0.11 percent compared to last year 2007. Similarly, loans and advances the major component of assets increased by 34.27 percent and reached to Rs. 391537.7 million in mid July 2008 from Rs.291605.8 million in mid July 2007. The liquid fund and lxxiv
investment increased by 58.55 percent and 18.11 percent in mid July 2008 compared to the previous year respectively.
2. Commercial banks The total number of banks operating in the country are 25(as of 2008) and the number of commercial bank branches has increased to 555 in mid July 2008 from 452 in the last year. Entry of new banks in financial system along with increased in the business, the total assets i.e. sources of fund of commercial banks went up by higher rate of 15.51 percent compared to 14.45 percent in the previous year. By the end of this fiscal year the total assets of commercial banking sector reached to Rs.566, 736.0 million from Rs.490, 638.1 million in the last year.
The share of loans and advances to total assets increased to 54.09 percent in mid July 2008 from 46.66 percent in mid July 2007. Similarly, investment and liquid funds registered the 19.22 percent and 11.80 percent respectively. In the preceding year the respective share were 19.06 percent and 8.98 percent.
The composition of liabilities of commercial banks shows that, the deposit has occupied the dominant share of 75.18 percent followed by borrowing 2.54 percent and capital fund 1.76 percent in the mid July 2008. The respective shares of deposit, borrowing and capital fund in the previous year were 68.79 percent, 2.60 percent and 8.98 percent. Of the component of assets, loans and advances occupied the highest share of 54.09 percent followed by total investment 19.22 percent and liquid fund 11.80 percent in the same year.
3. Hydropower industry It was in the late 60s that a sensation was created by declaring that Nepal has a theoretical hydropower potential of 83,000 MW and economic potential of 42,000 MW. Ever since this disclosure Nepalese in all walks of life were hopeful of the lxxv
speedy harnessing of the enormous hydro resources and the resultant inflow of hydro dollars into the country for the overall upliftment of the nation's economy. Over four decades have elapsed, but very little has been achieved in the country regarding hydropower development. The current level of hydropower generation in Nepal stands at a meager level of 619 MW. Of this 463 MW is contributed by NEA and the remaining 156 MW is contributed by Independent Power Producers (IPPs). With the commissioning of Middle Marsyangdi Project, Chamelia and Kulekhani – 3 by NEA and other IPP projects there is a possibility that the new total from these additions would result in the new figure of 797 MW. Despite the fact that Nepal has such abundance of hydropower potential, it has dismally failed in tapping this vast and essential resource. Less than 40% of Nepalese currently have access to electricity and those who do have electricity are reeling under a (up to 42 hour per week) load shedding schedule. Furthermore, there are no indications that this bleak situation is likely to improve in the foreseeable future.
This slow pace of development of hydropower in Nepal is in sharp contrast to the situation in the immediate neighboring countries. Bhutan has forged an alliance with India and is forging ahead with a fast pace in implementing major hydropower projects and is already exporting 1500 MW of electricity to India. In addition Bhutan has many mega projects ready in the pipeline for implementation. In India, a sea change has occurred in the sphere of power development after promulgation of the Indian Electricity Act - 2003. The states have unbundled their monolithic power utilities and electricity has become a commodity for trade. Small hill states such as Himachal Pradesh, Arunachal Pradesh and Sikkim have seen an upsurge in hydropower development especially on the strength of the very progressive incentives the developers are receiving for hydropower investment.
SWOT analysis of hydropower A SWOT analysis of the hydropower sector has been done below to understand the external and the internal environment. This also helps understand the potentials and the limitations of hydropower projects in Nepal. lxxvi
Strengths of Hydropower Sector in Nepal
Low running cost Hydropower projects involve high initial investments but in the latter stage the administrative and maintenance costs for running the project is at minimum compared to the cash flow generated from the project.
Minimal cost of raw materials Water is abundant in our country and the producer has to bear minimum cost of raw materials i.e. water in the form of royalty paid to the government for paying the national asset of water resources.
Low human resources required
Hydropower projects are capital intensive projects and are not focused upon labor intensity. Hence these projects bear very low costs for human resource and laborers. Initially huge number is required for the construction phase but in the latter stage when the generation starts, a hydropower plant requires only a few engineers and some maintenance staffs.
Huge potential in Nepal
There is a huge untapped potential in the Hydroelectricity sector of Nepal with only 1% of the potential being generated at the current situation. This shows a huge opportunity in investment in this sector as not only the country is facing a huge deficit
in supply but also as an opportunity to export it to other countries at competitive prices.
Weakness of Hydropower Sector in Nepal
Financial incapability as high initial investment
Hydropower projects are capital intensive projects requiring huge initial capital outlay. This possesses a big threat for financing projects as a wrong decision may result in locking up of a significant amount of capital.
Poor past performance of NEA
NEA is the sole purchaser of electricity generated by the various hydropower projects. NEA has been operating in losses due to various reasons such as electricity leakages, inability to collect payments and debts, huge administrative expenses etc. Such conditions of the sole purchaser can act as the major weakness any upcoming projects that are coming up.
Skilled Manpower unavailability
Nepal faces a huge shortage for skilled manpower especially for the engineers related to this field due to the brain-drain resulting mainly due to the worldwide shortage of Hydropower engineers.
Opportunities of Hydropower Sector in Nepal
The establishment of new industries and expansion of the capacity of consumer goods industries have led to a considerable increase in the consumption of electricity in Nepal. Apart from the programs of electrification, the demand for electricity for irrigation has also rises. Furthermore, demand by the retail consumer has also increased. Research has found that energy efficiency for hydro-electricity ranges from 83 to 93 per cent compared to 65 per cent efficiency for coal fired electric plants and 60 per cent for nucleated electric facilities.
Increased number of customers
As shows in Appendix 9, the number of consumers are ever increasing and the demand of electricity is increasing every year. A summary of this is shown below which clearly shows 145% increase in the past 10 years.
Table 3: Number of Consumers of Electricity in Nepal Year 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
No. of Consumers 6,22,363 6,73,979 7,45,992 8,84,535 9,70,611 10,53,935 11,59,855 12,77,447 13,97,813 15,24,610
Potential to export to India India is world's 6th largest energy consumer, accounting for 3.4% of global energy consumption. Due to India's economic rise, the demand for energy has grown at an average of 3.6% per annum over the past 30 years. More than 50% of India's commercial energy demand is met through the country's vast coal reserves. There is a huge potential market for Nepal to export to India as well.
Potential to replace other forms of energy Of the total energy consumption of 288 million GJ in rural Nepal, biomass accounts for 98% while electricity accounts for only 0.1% of the total energy consumes and petroleum products comprise of 1.6%. Even in the urban areas, other sources of energy are intensively used which can be replaced by hydropower generated energy.
Threats of Hydropower Sector in Nepal
Alternative sources of energy Just as potential to replace other forms of energy is an opportunity area for hydropower development, it poses a threat also as other sources may be cheaper and readily available. In a program on “use of alternative energy for promotion of micro,
cottage and small industries in Nepal, Minister for Industry Mrs. Asta Laxmi Shakya talked about use of alternative energy for small industry.
Purchase from neighboring country In 2007, The Indian government has permitted Nepal Electricity Authority (NEA) to purchase 23 MW of electricity from the Power Trading Corporation of India (PTC). This deal was done at a rate of IRs 4.40 per unit. This may pose a big threat to the hydropower sector if many more such contracts are signed.
SECTION VI: Analysis of Credit 1. Five pillars of credit analysis
Industry For the purpose of industry analysis, Porter's five forces analysis, a framework developed by Michael E. Porter of Harvard Business School in 1979 is used. According to this, industry attractiveness is assessed based on five factors which are discussed below:
The intensity of competitive rivalry:
The total installed capacity of hydropower electricity generated in Nepal is 611 MW out of which 157.34 MW is generated by private sectors.
The major hydropower projects owned by Nepal Electricity Authority are as follows:
Table 4: Hydropower Projects in Nepal Name of the Project KaliGandaki "A" Marshyangdi Kulekhani No. 1 Kulekhani No. 2 Trisuli Gandak Modi Khola Devighat Sunkosi Puwakhola
Installed Capacity in KW
1,44,000 69,000 60,000 32,000 24,000 15,000 14,800 14,100 10,050 6,200
Production in GWh 842 463 165 105 163 106 93 114 70 48
Other small hydropower projects of NEA have an installed capacity of 18380 KW.
The key player in the market is Nepal Electricity Authority which has developed various projects individually and in aid with the Government of Japan, Government of India, People’s Republic of China, EDCF Korea and the British Government and in assistance of donor agencies such as World Bank, IMF, GTZ etc.
During the year 2007/08, new records of demand of power and energy were experienced, thereby presenting big challenges in bridging the gap between supply and demand of electricity in Nepal. To resolve this issue, steps were being carried out to utilize maximum efficiency of the available resources. But even the step of carrying out import through trading of power from Indian short term market could not offset the unbalance and thus the nation faced multiple hours of load shedding which even reached 48 hours per week. The 11.31% growth in peak power demand and 10.76% growth in energy demand aggravated this situation. This situation itself explains the need and viability of hydropower projects in Nepal.
Table 5: Demand of Energy Particulars
Peak Demand (MW) Available (GWh)
999 326 1
000 351 1
001 391 1
002 426 2
003 470 2
004 515 2
005 557 2
006 603 2
007 648 3
008 721 3
345 9 1
747 13 1
798 9 1
291 328 962
372 412 960
2. Thermal 3. Purchase (Total) India Nepal
1113 1113 27
025 186 838
1106 1196 241 864
Table 5: Future load calculation 2008/2009 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 2016/2017 2017/2018 2018/2019 2019/2020 2020/2021 2021/2022 2022/2023 2023/2024 2024/2025 2025/2026
Energy in GWh 3,620.40 4,018.40 4,430.70 4,851.30 5,349.60 5,859.90 6,403.80 6,984.10 7,603.70 8,218.80 8,870.20 9,562.90 10,300.10 11,053.60 11,929.10 12,870.20 13,882.40 14,971.20
Peak Load in MW 793.30 878.80 967.10 1,056.90 1,163.20 1,271.70 1,387.20 1,510.00 1,640.80 1,770.20 1,906.90 2,052.00 2,206.00 2,363.00 2,545.40 2,741.10 2,951.10 3,176.70
All this shows that even though new projects are coming up in Nepal, the local demand is immensely high. Based on this the industry looks to be very attractive. Also if the local demand is fully satisfied, there is always room for export to countries like India where the demand is unsatisfied and they are ready to purchase electricity.
The threat of substitute products:
Various substitutes of Hydropower energy are available but the potential is not as much as there is for Hydropower. The substitutes of Hydropower are as follows:
Diesel Plants: There are a few diesel power plants in the country. But Nepal is completely a hydropower nation given the comparison of projects by their capacity. Diesel-power lxxxiv
comprises of less than 4% of the total projects and hence often is ignored. Nepal needs to import fuel/diesel from India, since it doesn't have oil. Diesel-power is expensive for this nation also Nepal doesn't need any diesel-powers if it can establish hydropower, for which, locations are in abundant.
Petroleum, Natural Gas, and Coal So far, no proven reserves of petroleum suitable for commercial exploitation have been found in Nepal. This all petroleum products consumed are imported in refined form for direct consumption. The alternative fossil fuel, natural gas, has also not been discovered as yet in any significant amount. Coal is in many countries among the cheapest sources of energy known. Two deposits are believed to have some economic significance, one in Kathmandu and one is Dang. Even these deposits, however, are believed to be insignificant in terms of the energy demand.
Solar Energy The government has earmarked Rs. 1.1 billion for subsidy on the installation of solar panels even in the urban centers and will encourage each household to install a solar panel. Though recently, developments have been made in this sector, it seems to be very small and the amount of investment in this sector is huge. Investors have not either explored this sector or the returns are satisfactory.
Thought substitutes are available, either they are not economically viable or very difficult to cultivate. Hence the risk from substitute products is very less.
The threat of the entry of new competitors:
During the fiscal year 2007/08, the Power Trade Department of NEA has concluded 6 PPAs, and is ready to sign 6 PPAs with the draft agreements prepared. The total number of PPAs concluded with IPPs has now reached 39 with a total installed lxxxv
capacity of 234/1 MW. The following chart summarizes the PPA related activities of NEA in FY 07/08.
Table 6: PPA Concluded in the FY 2007/08 IPP Projects 1. Belkhu Khola 2. Upper Hadi Khola 3. Siuri Khola 4. Hewa Khola 5. Lower Piula 6. Tinau Khola Total Draft PPA Prepared Connection Agreements Requested Projects under Detail Technical Review Projects under general technical review
kW 320 991 990 2400 990 990 6681 6 IPPs 7 IPPs 10 IPPs 7 IPPs
6350 kW 34,935 kW 66,453 kW 72,860 kW
The above table illustrates that though the hydropower industry is being flooded by many upcoming projects, still there is opportunity for newer projects to come in to cater the unutilized potential of the hydropower industry in Nepal.
The bargaining power of customers:
The main customer of a Hydropower Project in Nepal is the Nepal Electricity Authority. Before building a project, a Power Purchase Agreement (PPA) is concluded where NEA signs an agreement to purchase total capacity of the project at certain rates.
The current rates for purchase of electricity have been set at Rs. 7/unit during dry season which lasts for 4 months and Rs. 4/unit during wet Seasons. With this it is sure that the buyer market is regulated and neither the buyer not the company has any say or risk in this segment.
As a bank, the PPA assignment is taken over and all the payments made to the power project are routed through the lending bank. So this reduces the risk of payment not being received from the customer’s side.
The bargaining power of suppliers:
During the construction phase, major costs include the civil and the electromechanical parts. They in total comprise of about 80% of the cost of building a plant. The suppliers for there are available easily and one can gain competitive prices from them.
In course of operations, the only input for a Hydropower plant is the flowing water. Each hydropower plant has to pay certain royalty for the use of the river to the government. Once the agreement is signed, there are no risk factors to it. The maintenance contract is an important part to this as maintenance when not done timely can create huge costs.
The borrower’s capacity to repay through cash flow is the “first way out” for all the banks. The strength of securities is the “second way out” i.e. through collateral liquidation is also assessed.
For the financial analysis, banks should take into consideration two major things. A. Net Present Value (NPV) and Internal Rate of Return (IRR) B. Cash Flow A financial report should be provided by the consultant which includes the above aspects. The NPV of any project should be positive with an IRR of at least 14%. Also the cash flow should be assessed based on the repayment terms.
NEA being the sole purchaser of electricity in Nepal, the financial statement of NEA (Provided in the Appendix) has been analyzed for security assessment. This analysis has been done on the basis of financial ratios calculated as follows:
Table 7: Key Financial Indicators of NEA
Volume Indicators (Rs. in Mil.) (a) Sales (b) Net Working Capital* (c ) Net Trading Assets (d) Net Worth (e) Net Fixed Assets (f) Total Bank Loan O/S Profitability Indicators (% ) (a) Gross Profitability (b) Net Profitability ( c) Return on Capital Employed Liquidity Indicators (times) (a) Current Ratio (b) Quick Ratio Efficiency Indicators (days) (a) Stock days in hand (b) Average Collection Period (c ) Average Payment Period (d) Net Operating Cycle Financing Ratios (a) D/E Ratio (Overall in %) (b) Interest Cover (times)** Altman's Z Score
12.61 -8.97 -11.7 15.49 68.23 44.54
13.33 -10.86 -13.7 17.21 73.73 46.49
14.45 -12.49 -15.47 21.7 80.93 47.62
15.41 -15.04 -17.32 22.03 88.22 52.76
40.80% -8.67% -7.05%
37.50% -11.74% -9.09%
37.48% 1.85% 1.23%
35.54% -8.19% -5.73%
74.20% 0.66 0.61
73.00% 0.53 0.56
68.70% 1.16 0.6
78.20% 0.58 0.53
Results of Financial Ratio Analysis
1. Sales of electricity have a steady growth of 7% (average). This along with the current situation of demand and supply shows a good future for upcoming projects.
2. The gross profitability of the NEA is good with approximately 37% but the net profitability is very poor as a result of high interest expenses. Furthermore, the foreign exchange fluctuation has huge impact on the profits. The losses amounting from foreign exchange fluctuation is NRs 480.61 Million according to NEA’s annual report. This can also be seen as the debt is increased by 11% in 2007/2008 but the interest expense has increased by 51%.
3. The Interest coverage ratio has also been largely reduced this year.
4. The Current ratio has been decreasing as trade debtors have been increasing. The current ratio, which should be around 2, is only 0.45, which is relatively very low.
5. The ROA and the ROE of NEA is negative. This shows low amount of sales as compared to what the assets should actually return.
6. The average collection period has also increased in the past years.
7. The Altman’s Z score has been more or less stable in the past four years.
8. The overall D/E Ratio has reached 78.2%, which is relatively very high, and maintaining a DE ratio of 70/30 would be difficult.
9. The cash flow from operations has also decreased in the past year from Rs. 3,492 million to Rs. 1607 million, which is a negative indicator.
10. The major sources of funds have been through issue of shares and long term loans. The major uses of funds have been to pay the interests and purchase of fixed assets, plant and equipment.
11. According to the Du Pont analysis, a negative ROE is a result of a negative profit margin and a low asset turnover.
12. According to the report of NEA, the cost of service to them stands at Rs. 7.40 per kWh whereas the revenue rate is only Rs. 6.70 per kWh, which contributes to the major portion of losses.
13. They have a leakage of 25% and the losses from this have been Rs. 2.98 Arab in the current year.
Management During the appraisal process of a hydropower project, the bank looks into these various aspects of the management to make sure that there credit is utilized properly and in good hands. The aspects are:
The bank looks into the profile of the promoters and looks into their capability of repayment if in case the project goes in loss due to some reason. A corporate guarantee is taken and also their profile is analyzed properly to understand what their social stature is, what is there business profile, economic strength etc. This enables the bank to get an assurance that there capital is not under risk even if the project runs into loss. xc
Further a bank sees the experience of the promoters in the field of hydropower or other major huge projects. They are more comfortable to extend loans to the promoters who have had the experience in the related industry which assures them that these promoters have experienced the hardships faced during the hydropower project construction and thus are prepared for investing in hydropower projects with full confidence.
The bank always prefers a few people having the technical knowledge in the BoD or the promoters as this ensures that the project is in the hands of the people who know about the details of the project and will not compromise with quality of the project and also will not allow irrelevant cost.
It is always a plus point for the lenders when the project involves the direct participation of the local community and especially the influential community leaders. This ensures the shield against unwanted social problems, lock outs, strikes, labor problems etc ensuring the smooth flow of operations in the project resulting in lower cost implications of interests and other expenses.
Politically influential partnership:
Since the whole process of acquiring a license for the project, doing feasibility study, conducting PPA agreement and acquiring transmission process is a troublesome and lengthy process, it is always recommended to have a project partner a person who has good links in the political system especially the DoED and NEA. This is important especially because the political instability bringing in new ministers in short whiles so having a good influence in the secretarial level and other important levels is of utmost importance. xci
Furthermore hydropower industry is a capital intensive industry. The major Human Resources required for the operations of a hydropower are engineers and mechanics that need to look after the maintenance and repairs when needed. The major costs associated with such projects are of the engineers. The demand of engineers is too high worldwide and qualified engineers are less in number.
Efficient operation of a power plant requires experienced and hard working manpower together with schedule for regular inspection and maintenance. A small oversight may sometimes become the cause of a large damage having wider implications of both cost and time.
Table: No. of operators per shift and operation mode in various hydropower plants Power Plants
MW Kali Gandaki “A” 144 Marsyangdi 69 Kulekhani I 60 Kulekhani II 32 Trishuli 24 Gandak 15 Modi 14.8 Sunkoshi 10.05 Devighat 14.1 Puwa Khola 6.2
Works 4 3 2
3 2 1
6 3 6 4 6 6 4 6 7 3
Total 10 6 8 4 6 6 7 6 9 4
Operation Mode Manual/Auto Manual /Auto Manual/Auto Manual/Auto Manual Manual Manual/Auto Manual/Auto Manual Manual
Worldwide, hydropower plants produce about 24 percent of the world's electricity and supply more than 1 billion people with power. Technical Aspects of the hydropower plant should be assessed properly with the help of a consultant as this includes major costs. The civil costs may go up to 60% of the total project cost and the Electromechanical costs me go up to 35%. Things that should be taken into consideration are as follows: 1. Tunnel/Canal: A tunnel based hydropower will cost high whereas a canal based hydropower may reduce the costs drastically. 2. Head size: The size of the Head affects the flow of the water and determines how much output can be gained in dry and wet seasons. 3. Transmission line: The location of the nearest substation and the operational quality of the sub-station may affect the overall project. xciii
Hydropower plants harness water's energy and use simple mechanics to convert that energy into electricity. Hydropower plants are actually based on a rather simple concept, water flowing through a dam turns a turbine, which turns a generator. Here are the basic components of a hydropower plant:
Figure 13: Working of a Hydropower Plant •
Dam - Most hydropower plants rely on a dam that holds back water, creating a large reservoir. Often, this reservoir is used as a recreational lake.
Intake - Gates on the dam open and gravity pulls the water through the penstock, a pipeline that leads to the turbine. Water builds up pressure as it flows through this pipe.
Turbine - The water strikes and turns the large blades of a turbine, which is attached to a generator above it by way of a shaft. The most common type of turbine for hydropower plants is the Francis Turbine, which looks like a big disc with curved blades. A turbine can weigh as much as 172 tons and turn at a rate of 90 revolutions per minute (rpm), according to the Foundation for Water & Energy Education (FWEE).
Generators - As the turbine blades turn, so do a series of magnets inside the generator. Giant magnets rotate past copper coils, producing alternating current (AC) by moving electrons.
Transformer - The transformer inside the powerhouse takes the AC and converts it to higher-voltage current. xciv
Power lines - Out of every power plant come four wires: the three phases of power being produced simultaneously plus a neutral or ground common to all three.
Outflow - Used water is carried through pipelines, called tailraces, and reenters the river downstream.
Figure 14: Shaft connecting Turbine and Generator
The water in the reservoir is considered stored energy. When the gates open, the water flowing through the penstock becomes kinetic energy because it's in motion. The amount of electricity that is generated is determined by several factors. Two of those factors are the volume of water flow and the amount of hydraulic head. The head refers to the distance between the water surface and the turbines. As the head and flow increase, so does the electricity generated. The head is usually dependent upon the amount of water in the reservoir. There's another type of hydropower plant, called the pumped-storage plant. In a conventional hydropower plant, the water from the reservoir flows through the plant, exits and is carried downstream. A pumped-storage plant has two reservoirs: •
Upper reservoir - Like a conventional hydropower plant, a dam creates a reservoir. The water in this reservoir flows through the hydropower plant to create electricity. xcv
Lower reservoir - Water exiting the hydropower plant flows into a lower reservoir rather than re-entering the river and flowing downstream.
Using a reversible turbine, the plant can pump water back to the upper reservoir. This is done in off-peak hours. Essentially, the second reservoir refills the upper reservoir. By pumping water back to the upper reservoir, the plant has more water to generate electricity during periods of peak consumption. The Generator The heart of the hydroelectric power plant is the generator. Most hydropower plants have several of these generators.
Figure 15: The Generator
The generator, as you might have guessed, generates the electricity. The basic process of generating electricity in this manner is to rotate a series of magnets inside coils of wire. This process moves electrons, which produces electrical current. The Hoover Dam has a total of 17 generators, each of which can generate up to 133 megawatts. The total capacity of the Hoover Dam hydropower plant is 2,074 megawatts. Each generator is made of certain basic parts: •
As the turbine turns, the excitor sends an electrical current to the rotor. The rotor is a series of large electromagnets that spins inside a tightly-wound coil of copper wire, called the stator. The magnetic field between the coil and the magnets creates an electric current. In the Hoover Dam, a current of 16,500 amps moves from the generator to the transformer, where the current ramps up to 230,000 amps before being transmitted. d) Hydropower plants take advantage of a naturally occurring, continuous process -the process that causes rain to fall and rivers to rise. Every day, our planet loses a small amount of water through the atmosphere as ultraviolet rays break water molecules apart. But at the same time, new water is emitted from the inner part of the Earth through volcanic activity. The amount of water created and the amount of water lost is about the same. At any one time, the world's total volume of water is in many different forms. It can be liquid, as in oceans, rivers and rain; solid, as in glaciers; or gaseous, as in the invisible water vapor in the air. Water changes states as it is moved around the planet by wind currents. Wind currents are generated by the heating activity of the sun. Aircurrent cycles are created by the sun shining more on the equator than on other areas of the planet. Air-current cycles drive the Earth's water supply through a cycle of its own, called the hydrologic cycle. As the sun heats liquid water, the water evaporates into vapor in the air. The sun heats the air, causing the air to rise in the atmosphere. The air is colder higher up, so as the water vapor rises, it cools, condensing into droplets. When enough droplets accumulate in one area, the droplets may become heavy enough to fall back to Earth as precipitation.
Security The control over various securities obtained by the bank to secure the loan, execution of the security documents and present value of the properties proposed for mortgage to the bank. The FAC (Fixed Asset Collateral) Security does not completely cover the xcviii
risks as the fixed assets may not fetch adequate return under circumstances of bad loan. The project is built in such areas where the land value is very low and the proposed site may not be useful for other purposes. Under the case of bad loan, where the bank might have to sell off the property to recover the loan, the fixed assets may not recover anything. Hence for this, bank needs to consider various other factors as security and finance the project only if the bank thinks it’s worth the investment considering the project will be a success for sure. The various related documents that banks should consider during the security analysis of a project are as follows: 2. IEE AND EIA For projects below 1000 KW no IEE or EIA is required. For such projects a no objection letter from respective village development committee is enough. For projects between 1MW and 5 MW and Initial Environment Examination Report (IEE) is required where as for projects bigger than 5 MW Environment Impact Assessment (EIA) is a must. The table below shows the environmental requirement for various situations. Table 8: Environmental Requirement
1-5 MW schemes
EIA (Category C) More than 5 MW
Less than 33 kV
From 33 kV to 66
Schemes Greater than 66 kV
IEE/EIA (Category A) Up to 1
Projects Transmission lines
including substations Rural Electrification
Up to 1 MW, Less
kV Up to 5 MW, 1 to
1 MVA Displaces less than
Displaces 25 to
than 6 MVA Displaces more
100 persons with
More than 5 MW,
3. Detailed Feasibility Study After obtaining the survey license from DoED, the proponent should start the actual work within three months. Progress should be submitted to DoED every six months and complete feasibility study shall be submitted to DoED along with environmental study report within study period granted in the study license. 4. Nepal Electricity Authority and Power Purchase Agreement Nepal Electricity Authority (NEA) is a fully government owned public utility and as of date the only buyer of power produced by Independent Power Producers (IPPs) in Nepal so all the IPPs in Nepal need to enter into Power Purchase Agreement (PPA) with NEA. An application together with detailed feasibility study of the project needs to be submitted to NEA requesting it to buy power from the project to be constructed. The power to be sold to NEA should be calculated on the basis of Q65 i.e. the design discharge should be available sixty five percent time of the year for projects up to 5 MW. For projects bigger than 5 MW the design discharge is fixed by mutual agreement. A rate of Rs 3.9 (US$ 0.06) per unit for wet months (mid April to mid December) and Rs 5.52 (US$ 0.085) for dry months (mid December to mid April) is fixed by NEA as the power purchase rate from Independent Power Producers (IPPs) for projects up to 5 MW. There is no price escalation on this rate as of today. There may be one in future. For projects bigger than 5 MW the power rate is not fixed and may vary from one project to another. The Projects Completed by Independent Power Producers and the corresponding power sale / purchase rates as of mid July 2007 are as follows:
Table 9: Unit rate of energy for different projects fixed between NEA and IPPs Project Khimti Bhotekoshi Chilime Indrawati Syange Piluwa Chaku Sunkoshi Rairang Khudi Pheme Sisne
Power Sale Rate for
Each kWh US$ 0.085 (Approx.)
About 3 % price escalation every year
Rs 6.98 (US$ .107) Rs 4.86 (US$ 0.075) Rs 3.9 and 5.52
8% price escalation for 3 more years No further price escalation Rates for dry and wet months
(US$ 0.6 &
No Price escalation since last three
60 36 20 7.5 0.183 3 1.5 2.60 0.5 4 1 0.75
As can be seen in the table projects like Khimti, Bhotekoshi and Chilime have higher power sale rates. But it is unlikely that new developers can expect similar rate. The rate NEA is likely to offer is in the range of US$ 0.06 cents per kWh.
5. Important Conditions in PPA for Projects Up To 5 Mw
The following are some important conditions and clauses taken from PPAs already signed:
1. NEA charges a delay penalty equivalent to 5% of the yearly revenue for each year delay in commissioning of the project beyond the agreed date.
2. Give or Pay: There is no penalty if the developer supplies up to 80% of the agreed energy to NEA grid every month. However, if the energy supplied is less than 80% then a penalty equivalent to the cost of the unsupplied energy will be charged to the developer. (e.g. if the energy supplied is only 75% of the agreed energy then a penalty equivalent to 5% of the energy cost will be levied on the developer) ci
Take or Pay: Alternatively if NEA is not able to take power due to its own problems then it will not pay any penalty if the power taken by it is 80% or more than the monthly agreed energy. If it is less than 80% of the agreed energy then NEA shall pay 75% of the energy cost it has not been able to buy. (e.g. if NEA is able to buy only 75% of the agreed energy in a particular month then it will pay a penalty equivalent to 5 x 0.75 = 3.75% of the energy cost in that particular month.)
3. NEA does not compensate the developer for any outages due to problems in its grid for up to 144 hours in a year.
4. Hydrological risk should completely be taken by the developer. Nevertheless, in recent Power Purchase Agreements NEA has made a provision that the developer can declare availability of power at the beginning of every month. But such availability cannot be less than 90% of the agreed energy for dry months and 80% of the agreed energy for wet months.
5. The PPA period is 25 years whereas license period is 35 years. Rates and conditions of PPA are mutually negotiated between IPPs and NEA if size of project is more than 5 MW.
The involvement of private sector in the development of hydropower in Nepal is a must and there is a lot of enthusiasm on the part of private sector too. However, very few realize that there is a lot of risk associated with hydropower development. This is particularly true for local developers who are mainly capable of developing small size projects (up to 5 MW). Such small projects are very often not well studied and the developers can not afford to spend more on detailed study. Often they do not realize the value of such study and try to jump to power purchase agreement and project construction. This almost always leads to cost overrun, time delays and unavailability of predicted energy. On the other hand the success of few earlier developers can no cii
more be an example for recent developers. The cost of project is increasing every year due to inflation on manpower, material and equipment costs but there is no price escalation on the power to be sold. In contrast facilities like tax holiday for fifteen years is no more available and Nepal Electricity Authority is tightening the power purchase agreement more and more in its favor making life difficult for the independent power developers. So it is very important that IPPs should be very careful about project study before they jump for the project implementation. On the other hand the Government of Nepal too should facilitate the private developer and not take advantage from its ignorance. After all a local developer earning a reasonable profit on its investment will only boost the hydropower sector of the country. Moreover, there is significant scope for foreign IPPs to invest in hydropower sector since huge hydro potential that exists in Nepal will help fulfilling regional energy demand.
Hydropower Development Policy – 1992
This policy emphasizes the need to develop environmentally friendly hydropower to meet the country's energy needs and to encourage the private sector to invest in hydropower. It further explains that excess electricity may be sold to NEA to connect to its main transmission and distribution system. (This policy focuses more on electricity generation. Other issues or impacts emerging from a hydropower project such as upstream/downstream benefits and issues like irrigation, navigation, erosion, flood control, siltation, watershed management and involuntary migration, displacement of people, indigenous people, etc., have not been clearly specified.) Reflects realization of the need for utilization of water resources for hydro power generation; enacted through the Electricity Act of 1992.
Electricity Act - 1992 (Regulations - 1993)
Enacted to manage the survey, generation, transmission and distribution of electricity and to standardize and safeguard electricity services. Section 4, Sub-section states "…survey, generation, transmission or distribution of electricity over I MW, shall be required to submit an application to the prescribed officer along with the economic, technical and environmental study report." Section 24 states: "While carrying out electricity generation, transmission or distribution, it shall be carried out in such a manner that no substantial adverse effect be made on environment by the way of soil erosion, flood, landslide, air pollution etc." Section 33 deals with the utilization and acquisition of land and houses. According to the Electricity Regulation (ER50, below), there is a mandatory provision of publishing a public notice by DOED giving 35 days, stating the necessary particulars for information for general public. Any person may furnish his reaction to DOED if construction and operation of the proposed project is likely to cause adverse affect. Followed in 2050 by Electricity Regulations (ER50) [#7, below]
National Environmental Impact Assessment Guidelines – 1993
Nepal has tremendous potential for hydropower generation. To date, however, only a small fraction of this power potential has been utilized. Most of the hydropower projects currently being constructed or on line are of the run-of-river type, with or without daily pondage. Of the existing power projects in Nepal only Kulekhani has a reservoir for seasonal storage. Run-of-river hydropower projects will continue to dominate future hydropower development in Nepal, but the construction of high dams for generating larger amounts of power are also being considered, and in some cases preliminary investigations have begun. Hydropower development schemes are the most highly prioritized development programs in Nepal. According to EPR54, a hydropower project generating up to 5 mw requires the IEE process, whereas more than 5 mw requires an EIA. Similarly, a transmission project up to 66 kV capacity requires an IEE and more than 66 kV requires an EIA. Besides these conditions, other projects requiring an EIA are mentioned in Schedule-2 of EPR54 (Annex 2). The processes required to conduct an IEE and EIA in hydropower projects are the same as civ
described in §1.3, above. However, the impacts arising from different types of hydropower projects (as for example, high dam or run-of-river type) differ greatly. For example, a transmission line is a linear project with different magnitudes and intensities of effects compared with generation projects. For projects involving both generation and transmission it is sometimes convenient to carry out Scoping as if for two sub-projects with two separate EIAs.
6. Strategies made by the government: •
To extend hydropower services to the rural economy from the perspective of socio-equity with the realization of the fact that development of power sector, having a direct concern with agricultural and industrial development, is a prerequisite.
To pursue investment friendly, clear, simple and transparent procedures so as to promote private sector participation in the development of hydropower, also taking into account internal consumption and export possibility of hydropower.
To implement small, medium, large and storage projects for hydropower development focussing on national interest, environment protection and maximizing benefits in the development of water resources of Nepal.
To develop hydropower projects by attracting investment from private sector as well as from governmental sector, as necessary, and through joint ventures of government and private sector for the promotion of hydropower development.
To make the river basins of specific rivers as the basis of development and management of water resources in order to achieve maximum benefits from the utilization of water resources of Nepal.
To pursue a strategy of bilateral or regional cooperation in the hydropower development sector taking into consideration the feasibility of hydropower in Nepal and the demands of electric energy in neighbouring countries in view of the fact that development of hydropower in Nepal supports not only the domestic but also the regional economy. cv
To adopt a broader perspective on national development in the context of macro-economy in developing and managing hydropower in line with the concept of developing water resources in an integrated manner.
To minimize the potential risks in hydropower projects with a joint effort of government and private sector, and to make provisions for allocating the nonmitigable risks to either the government or private sector based on their capability to bear the risk at the lowest cost.
7. Policies: •
Hydropower potential of the country shall be utilized to the maximum extent in order to meet the domestic demand of electricity.
Hydropower projects suitable to the electric system for domestic use as well as the storage projects shall be developed as per requirement on competitive basis.
Implementation of hydropower projects based on the concept of Build, Operate, Own and Transfer shall be encouraged.
Appropriate incentive provisions shall be provided and transparent process shall be pursued to attract national and foreign investment in hydropower development.
Efforts shall be continued for implementation of large storage type hydropower projects and multi-purpose projects. Large storage type multipurpose projects shall be developed in such a way that downstream benefits resulting from the projects would yield maximum benefits to the nation.
In the case of multi-purpose projects, The Government may participate with the private sector in view of possibility of irrigation development.
Contribution shall be made to environment protection by developing hydropower as an alternative to biomass and thermal energy.
In addition to mitigation of adverse environmental impacts likely to result from the operation of hydropower projects, appropriate provision shall be made to resettle the displaced families. cvi
Emphasis shall be given on mobilization of internal capital market for investment in power sector.
Electrification of remote rural areas shall be encouraged by operating small and mini hydropower projects at the local level.
Unauthorized leakage of electricity shall be controlled. For this purpose, necessary technical measures and appropriate legal provisions shall be adopted and, mobilization of public support shall also be emphasized.
Provision shall be made to provide appropriate benefits at the local level while operating hydropower projects.
Proper provision shall be made to cover risks likely to occur in hydropower projects.
In view of the concept of bilateral and regional cooperation and taking into consideration the abundant hydropower generation capacity in the country, export of electricity shall be encouraged.
Attention shall be paid to safeguard the consumers' interests by providing reliable and qualitative electricity service to the consumers at a reasonable price.
Process for electricity tariff fixation shall be made rational and transparent so that electric energy shall be supplied at a reasonable price.
Priority shall be given to utilize labor and skills of Nepal in the implementation of hydropower projects.
Consumers shall be encouraged for demand side management to enhance energy conservation.
8. Provisions under hydropower development for private sector:
The following working-policy shall be followed in order to enforce the hydropower development policy and fulfil the underlying objectives therein.
1. Environmental provision where environmental impacts assessment study report shall be made.
2. Legal provisions shall be made to prevent adverse effects on the availability of water or water right. 3. Hydropower shall be developed attracting the investment of domestic and foreign investors in the hydropower generation, transmission and distribution projects. 4. Capital market shall be mobilized to encourage domestic investment in hydropower generation. 5. Rural electrification shall be encouraged in the rural areas affected directly from the electricity generation project. 6. A Rural Electrification Fund shall be established for the development of micro hydropower and rural electrification by pooling in a certain percentage of the amount received as royalty. 7. Any hydropower generation project has to be transferred, ipso facto, to The Government in a good running condition, after expiration of the period of time as specified in the license. The Government shall not provide any compensation therefore. 8. Except in cases where a private party itself also distributes the hydropower generated by it in Nepal, a power purchase agreement has to be made to sell and purchase the hydropower generated. 9. Foreign entrepreneurs shall be encouraged to be affiliated with local organizations as the cost of hydropower decreases if the project is developed through the domestic construction entrepreneurs and consultants. 10. Hydropower project, transmission system and distribution system established by the private sector shall not be nationalized during the term of the license. 11. Exchange facilities shall be provided to the foreign person, firm or company making investment for the power generation, transmission or distribution project to be constructed by the private sector to repatriate the following amount from Nepal in foreign currency at the prevailing exchange rate. 12. The license to carry out detail survey of, and generate electricity from, a hydropower project with capacity of more than ten MW, of which feasibility study has already been done by the governmental level and electricity from which is expected to be consumed in Nepal, shall be issued on competitive basis through invitation of proposals. cviii
13. The regulatory body shall fix the rate of electricity tariff to be sold and distributed to the consumers. In fixing the electricity tariff, the interest of the consumer shall also be taken into account.
9. Other important aspects to be considered
Procedure Followed For Obtaining License for a Project Any developer willing to develop a hydropower project (bigger than 1000 KW) in Nepal has to obtain survey license from Department of Electricity Development. An application with a report at desk study level of the project including boundary coordinates should be submitted to DoED who will go through the application and in case no one has been already awarded the particular river stretch, will award the survey license to the applicant within 60 days for projects up to 10 MW and 120 days for projects bigger than 10 MW.
The period of such license is normally 1.5 to 2 years but can be extended up to 5 years. Similarly survey license is required for study of the transmission line required for the project.
Royalty, Fees and Taxes An Independent Power Producer shall pay the following royalty to Government of Nepal after the commencement of electricity generation:
a) Internal Consumption Project Table 10: Royalty for Internal Consumption Project Up to 15 year
After 15 years from the date of
1 Up to 1 MW From 1 MW to
kW Rs 100/-
kW Rs 1000/-
10 MW From 10 MW
to 100 MW
MW For captive use
b) Export Oriented Project
Table 11: Royalty for Export Oriented Project Type
Up to 15 year
After 15 years from the date of commercial operation
kW Rs 400/-
kW Rs 1800/-
oriented run of-the-river 2
project Export oriented storage project
Income and other Taxes:
Income tax applicable for hydropower projects is set at ten percent lower than the normal corporate tax prevailing in the country. The originally announced tax holding for 15 years are enjoyed by some project is no more applicable. One percent tax is applicable on import of electromechanical equipment and import of steel for hydro mechanical works. Value Added Tax (VAT) is applicable on construction materials and services for projects bigger than 3 MW.
SECTION VII: Finding from the Analysis
The financial sector has identified hydropower development as a lucrative financing opportunity. The success stories of few hydropower projects developed by independent power producers in the recent past have also helped to create positive market interest and response. On the other hand, the risk is relatively high in this sector due to its technical nature, the necessity of huge funds and longer gestation as well as repayment periods. The financial sector is entering the energy sector gradually by taking small exposure, preferring to share the risk amongst various banks and developing consortium financing.
Various national and international level seminars, as well as a few small exposures mainly in small hydropower projects, have imparted some experience to various commercial banks.
From the above analysis, we have come up with the following success factors and risk areas that banks should consider before lending to this sector.
1. Critical success Factors •
Interest of agencies like USAID, ADB and countries like Japan, Germany etc.:
The works carried out by some of these agencies and countries are as follows:
USAID is helping Nepal attract and realize greater private sector involvement in electricity generation and increased private investment in environmentally and socially sound hydropower. The enabling environment for private investment in hydropower is being improved through a series of policy recommendations that were adopted by the Nepalese government. In addition, it has helped establish strict cxii
environmental guidelines and monitoring procedures to ensure compliance of hydropower development in Nepal. The project is also increasing public and private sector stakeholder understanding of the environmental, social, and economic benefits of hydropower investment. Finally, it is also assisting the Government of Nepal in exploring and developing markets for export of electricity generated from hydropower, including drafting and negotiating long-term export purchase agreements.
Agricultural Development Bank
ADB is assisting in the reform and restructuring of Nepal Electricity Authority (NEA) as an agency, as well as the restructuring of NEA's distribution system to improve accountability and efficiency, and to reduce costs. Improvements are underway in NEA's performance, operations, and power distribution. Further improvements depend upon structural changes resulting from the company's reorganization, with greater autonomy, more commercial orientation, and decentralization of NEA business units. Under this project, its activities are focused on preparation of overall planning for power sector restructuring, analysis of monthly costs, and a demand-side management study.
Japan Japan has provided extensive loan assistance to Nepal such as for the Kulekhani (I and II) Hydro-power Station, Kali Gandaki 'A' Hydroelectric Station, etc.
German Technical Assistance GTZ has been providing technical assistance in the various small hydropower projects mainly of the range of 1 MW to assist the community for its progress.
Sector of deep interest and attraction for FDIs and FIIs:
Hydropower sector slowly is becoming an attraction for foreign direct investments and also for institutional investments with companies of India, Japan, Canada coming up. For e.g.: Sutlej India is coming up with the popular project Arun III.
Huge gap between demand and supply
The load shedding hours that reached to the extent of 16 hours per day itself explains the huge gap that is evident between the demand for electricity and the supply that NEA is providing with. This itself explains the huge potential for hydropower in the country and the viability of it in Nepal. •
Availability of resources
Nepal is considered to be the second richest country in water resources and with the geographical advantage of the hills and uneven territory, hydropower projects has high feasibility in the country. •
Government’s priority sector, a sector sought to be the development factor for the country
The Government of Nepal has formulated a strategy to produce 10,000 MW of electricity by the year 2020. This has resulted in making hydropower a priority sector for Nepal which is a good sign for investors as the government is ready for all possible help that the company needs. •
Potential to replace other forms of energy used for various processes in various places. e.g. LPG, firewood, fuels etc.
Electricity is sought to be the cheapest mode of energy in most of the countries worldwide replacing the traditional forms of energy such as LPG, firewood, petroleum etc. which is very expensive and is not readily available as well.
2. Key risk areas
Foreign exchange risk
A developer can borrow locally or from foreign institutions and the conditions with regard to security will be same. However, the borrower’s exposure to certain risk will be different if the source of debt is overseas. There are mainly two types of risks that a borrower needs to be aware of while borrowing from a foreign lender. A foreign exchange risk is inherent in foreign loans due to the fact that foreign currency tends to be relatively strong compared to Nepalese currency. This risk materializes with the devaluation if revenue is denominated in local currency while having to service the loan denominated in foreign currency. Similarly, this risk also does manifest in rising cost of imports. These risks can be mitigated by either (a) having the loan denominated in local currency, or (b) rate of revenue denominated in foreign currency. In the case of increase in the cost of imports an insurance coverage against cost escalation would mitigate this risk.
Another risk associated with foreign loan is ‘repatriation risk’. This becomes of greater concern to a lender if it is not able to repatriate the proceeds of debt servicing. Generally, governments of development countries, in their quest to attract foreign investment, have enacted legislation guaranteeing repatriation. If such a guarantee is not available, either the lender will not make a loan or will make it subject to exorbitant rate of interest. In Nepal repatriation is guaranteed by the Foreign Investment and Technology Transfer Act of 1992 and the Electricity Act of 1992 for hydropower projects. A foreign equity investor is also subject to this risk.
Sovereign risk (country risk)
A foreign entrepreneur investing in Nepal is exposed to risk such as those associated with the government’s credit worthiness, the possibility of confiscation, expropriation and nationalization (CEN Risk), changes in the local political environment and enforceability of contracts. These types of risk are known as sovereign and country risk. The Multilateral Investment Guarantee Association (MIGA), a member of the World Bank group, ensures against such risk for a fee. However, the availability of such insurance is limited only to foreign investors.
Interest rate risk
It is now time we also touched upon the concept of interest rate risk. Lenders offer two kind of interest: (a) floating rate and (b) fixed rate. Floating rate entails changes in the interest rate during the term of the loan, thereby introducing an element of uncertainty or risk for the borrower. Banks prefer floating rate as they need to be able to adapt to changes in financial market as well as cover their own exposure to the vagaries of changing interest rates (including bank rates). For a developer, fixed rate is the best way to mitigate this risk. However, banks tend to add a margin to the then prevalent rate to cushion their own risk.
The real value of a unit of nominal currency tends to depreciate over time with inflation. Even hard currency is subject to this risk. Escalation in the rate of tariff is the only answer, short of trying to hold down the inflation with one’s bare hands!
Legislative change risk
Here we are talking about the risk of changes in the country’s laws that (a) increase rates and taxes or other expenses and liabilities, (b) reduce project revenues, or (c) cxvi
reduce the value of the assets. Such changes adversely impact the viability of a project. Generally, an entrepreneur has to take such risk. However, it can also be mitigated by passing the impact through to the utility provided that the utility is amenable to such a pass through.
It is common knowledge amongst engineers that energy requires a guaranteed market due to the constraints with regard, primarily, to storage and transmission. A simple way to mitigate this risk is to sign a long term Power Purchase Agreement (PPA) with the utility.
A developer can have a long term PPA, but such a PPA may not ensure plant factor at a specific level if the utility accepts delivery of the energy at its pleasure, mainly in the case of a run-of-the-river type project lacking poundage. This means there will not be a guaranteed stream of revenue to the project in order for it to meet its financial obligations with regard to (a) operation, maintenance and repairs, and (b) debt servicing. A ‘take or pay’ type of PPA mitigates this risk. However, with respect to both market risks and revenue risk, it needs to be noted that electric energy is already being traded in spot markets in Western Europe.
This risk emanates from the lack of creditworthiness on the part of the utility, the buyer of the energy. In many developing countries, state owned utilities do not have established credit histories and also suffer from records of poor management, overemployment, high leakage (technical or otherwise), etc. Developers are known to ask the government to issue a counter guarantee to cover the payment risk. This basically entails a government standing surety to the fact that the utility pays its dues to the cxvii
developer in time, and in the case of a utility’s failure to meet its obligations the government is required to promptly make payment to mitigate the delinquency of the utility. Now-a-days multilateral funding agencies like The World Bank take a dim view of a government issuing a counter guarantee. Having a letter of credit put in place by the utility with the IPP as the beneficiary is another way of mitigating this risk over the short term.
Construction related risks
Time and cost overrun risks are one group of construction risks. Time overrun risk results in loss of revenue and may also raise the cost due to inflation. It also raises the total amount of interest during construction of the debt financing and may even attract penalties for late delivery of energy. Other construction risks are force majeure risk, socioeconomic/environmental risk, geological risk, performance risk, design risk, etc. One can arrange insurance coverage against such risk like CAR, TAR, EAR, professional liability, etc., including ‘advance loss of profit insurance’ that can be complemented by signing a ‘fixed price’ turnkey contract (or EPC contract) and incorporating a clause for imposition of liquidated damages on the contractor for delayed substantial completion or commissioning of the plant.
The ‘take or pay’ nature of the PPA guarantees that all energy produced by a plant, depending on the availability of water, irrespective of whether the season is dry or wet, shall be turned into cash. However, if there is no water to generate energy due to the change in the level of precipitation, climatic reason or change in the hydrology of the catchments area, then these projects are on their own. This risk emanates from the fact that seasonal rainfall patterns affect the amount of water available to a hydropower plant and generation may fall below contract levels in any season, thus threatening the revenue stream of such projects. Obviously, a dry year will be an unmitigated disaster for a hydropower plant. The most effective way to mitigate hydrology risk is to gather hydrological data for reasonable number of years in the cxviii
past and design the project accordingly, after having selected a project with better hydrological potential as well as information.
Natural calamities risk:
Nepal being a highly risky country in terms of natural calamities like earthquakes and floods, good construction engineering practices should be practised to averse the risk that comes due to such calamities.
Financial availability risk:
Hydropower projects require high capital requirements and regular maintenance costs. Such high requirement of finance is a risky proposition during this present situation of liquidity crisis faced by the Nepalese Economy.
Neighbourhood and community risks:
It is one of the biggest problems faced by the upcoming projects as the community around the project create problems to gain maximum compensation and share owning opportunities by initially creating problems. This phenomenon is the biggest negative motivation for the investors to move away from making such huge investments in the unfavourable environment.
Availability of skilled manpower:
Hydropower projects are not only capital intensive but also human resource capital intensive as it requires highly skilled manpower with good experience and academic knowledge to carry out the project successfully. The number of such skilled manpower in Nepal is very less due to brain-drain and other related factors. This has
created a shortage in the available manpower in the country resulting in the import of expensive manpower from other countries.
Normal Risk Sharing Arrangement for Hydropower projects
Go ve rn me nt
Co m pa ny
Co ntr act or
I ns ur an ce co.
Pl ant Su pp lie r
Ut ilit y
Hydrology Temporary Deficit
Long term Deficit
Flood Damage (Construction)
Flood Damage (Permanent)
Usually company. Sometimes access to Govt funds. Insurable. Government increasingly assuming risk Generally contractor risk or insurance Company risk. Insurable.
Construction Risk Changes in quantities/cost overruns Unforeseen ground conditions
Either company, contractor or shared Increasingly borne by the utility or shared Normally contractor risk, some exposure by company.
Performance risk Equipment
Plant supplier or turnkey contractor Contractor and possibly company Usually the responsibility of the utility
Generally obligation on the utility to maintain payments Principal exposure on the utility and insurers.
Govt obligation often backed by political risk insurance.
EMP Market risk Dispatch Obligation of utility Changes in law
Company or the utility Government/utility Government/utility
Changes in tax
Go ve rn me nt
Co m pa ny
Co ntr act or
In su ra nc e co.
Pl an t Su pp lie r
Ut ilit y
Financial Increase financing costs Exchange rate
Generally passed to utility in the tariff or absorbed by company Generally passed to utility, backed by government Usually reflected in tariff during construction and by limited tariff escalation thereafter.
Utility is a power company that owns or operates facilities used for the generation, transmission, or distribution of electric energy, which is regulated at state levels. E.g.: NEA Company is the power producing company.
SECTION VIII: Conclusion and Recommendation
It is evident that Nepal is facing a power shortage which is predicted to get worse if correct measures are not taken in time. The best measure identified is to develop the hydropower sector not only to meet the local demand but also earn foreign currency by exporting it to the neighboring countries like India as Nepal has huge untapped potential of hydroelectricity. Nepal has feasible energy capacity of 43 GW. It is a very attractive industry at present also because of the government’s priority in building this sector as there is a need for the country to develop a sustainable path for generation of energy.
Along with the investors, hydropower projects are proving lucrative as a financing opportunity for the financial institutions as well. This positive market interest has been further promulgated by the success stories of few hydropower project developed by independent power producers. But with the benefits, the major risks the financial institutions are facing are that of the risks related to the technical aspects, the necessity of huge funds and the long payback periods.
NRB has increased the obligor limit of providing loan to double which has increased the financial power of lending banks. The opportunities in this sector can be estimated by the annual increase of energy demand in the Nepalese market by almost 50MW every year and also by the deficit in the demand supply gap of India of almost 1900 MW.
The major challenges faced by the financial institutions is that the total capacity of the financial sector is only up to the extent of 50 MW which shows a need and opportunity for foreign institutional investors and financial sector to enter in to the Nepalese market. The financing of 6 billion for the 309MW Upper Tamakoshi project under the lead of HBL is one of the biggest investment made by any or group of commercial banks made till date. Furthermore, project financing is a relatively new cxxiii
concept in our country as collateral and personal guarantee-backed lending is mainly done. Financing huge capitals without having the proper technical expertise is also a major drawback for the financial sector. The financial sector thus must work on building in house expertise and develop coalitions with foreign institution to enhance knowledge base and the lending capacity.
Due to these reasons, banks take every appropriate step to finance those projects whose promoters they are comfortable to work with and also who have the experience or the technical knowledge to move ahead with the projects. Management conflicts and their conflict of interest is one of the biggest hurdles for the success of a hydropower projects.
The guidelines that the financing banks should apply while doing the credit appraisal is as follows: 1. Credit Risk: a) Lending should be carried out within the parameters of lending policies, having regard to statistical data and historical risk experience. b) Credit should be evaluated against established credit policies and within authorities and it is structured, particularly in terms of security with due care and prudence for the potential risk incurred. c) Assessment of credit worthiness of the credit transaction should be done.
1.1 Economic viability analysis should include the following aspects: a) Assessment of the rationale and objective of the project, objective and the broader development objective of a sector. b) Study of the current and projected demand. c) Study of the impact of the investment project on various groups in the society. d) Evaluation of the impact of the investment project on environment and society. e) Determination of whether economic benefits provide an adequate return on economic costs.
f) Assessing whether the investment project’s net benefits shall be sustainable throughout the life of the project. g) Analysis of the sensitivity that is without allowing for the effects of general inflation on costs or benefits, but incorporating projected relative price changes for key items. 1.2 Technical viability analysis should include the following aspects: a) Assessment and the validation of construction, geological and hydrological risk of the investment project in accordance with the prevailing regulations. b) Analysis and assessment of the investment project design. c) Assessment and validation of the cost estimates for all capital works, operation and maintenance of the investment project. d) Assessment and validation of the work schedules of the investment project as per delivery requirement in accordance with technical specification. 1.3 Financial viability analysis should include the following aspects: a) Adequacy of the investment cost and the financing plan for the investment project. b) Financial viability of the investment project, both in terms of profitability and cash flow, including NPV and IRR analysis. c) Accounting and financial policies, the actual and forecast financial status and viability of the investment project. d) Sensitivity analysis of key variables. e) The investment project’s solvency, liquidity and profitability. 1.4 Environmental and social analysis: a) The IEE and the EIA should be reviewed critically to find out any possible hindrances in future legally, politically or naturally. b) The Environmental Management Plan (EMP) should be assessed properly to avoid future problems when the project is undertaken. 1.5 Project monitoring plan for the following three aspects should be discussed and analyzed critically: a) The Construction phase b) The Maintenance aspect c) The Financial aspect cxxv
1.6 Financing Agreements that should be prepared maintained and analyzed: a) Loan Agreement b) Inter Creditor Agreement c) Security Agreement 1.7 Non Financial Agreements that should be prepared, maintained and analyzed: a) Generation License b) PPA c) Engineering, procurement and construction contract d) Operation and maintenance agreement e) Insurance requirement f) Shareholder/Project Development Agreement g) Conflict of Interest Besides these guidelines the two major aspects that the financing bank(s) should take into consideration are: a) Conflict of Interest b) Contingent Equity
Conflict of Interest
Every bank should be aware of the fact whether the promoters of the hydropower project or the other members of the organizational structure have interest of other any form other than the project itself. For example: A civil contractor may be a promoter of the project which makes the project closed for open bid competitions on the part of civil construction to ensure good deal in quality and price. This can result in inappropriate pricing and also may risk the quality of construction. Hence, the financial institution should properly examine the organizational structure of the bank to avoid such situations. To avoid such situations, the financing bank in some cases puts up its own employee in the board of the project to ensure correct and smooth functioning of the project. b)
Contingent Equity cxxvi
During the due course of the construction of the hydropower project, many situations come up which increases the costs of the project bringing unwanted burden on the project which the project owners are unable to withstand. This brings up a difficult situation for the project to handle. Such situations usually come up from situations like stop of working in the project due to lock outs, strikes, etc which brings a high implication on the interest expense of the project as the construction period increases. Other situations may be uncontrollable factors like floods, landslides, earthquakes etc causing damage to the constructed parts. This burden is then passed on to the bank so as to maintain the flow of work which may put the bank in a difficult situation. To avoid such situations, it is always recommended for the bank to assure that the project has put a certain portion of the equity as contingent equity to tackle with such situations. The percentage of the contingent liability may differ in accordance to the project.
IX. Reflection Rishabh Tibrewala Working at HBL was one of the best experiences that I had. It gave me an insight into the banking sector. As we just had 10 weeks, I could not explore all the departments of the bank but did get an in-depth of all credit related departments. These 10 weeks at the bank helped me understand how Credit is processed and given to a customer. It helped me understand how credit appraisal is done and how relationship is maintained with the customers.
I got an insight into the most professionally run industry in Nepal. But on the other hand also realized that the most professionalof all organizations in not professional enough.
I saw that among majority of the workers meeting
deadlines was not important, proper standards were not followed and people had a much laid back attitude.
I interacted with various level managers at the bank and I got to meet people from various sectors such as trading, carpet manufacturing, internet services, and plastic fabricators etc. This helped me build contacts with high level management of such organizations and also gave me an opportunity to understand their businesses.
Personally, I got to develop a sense of professionalism within me. Meeting deadlines, working in extreme pressure, handling tough customers, talking with high level managers and executives, being on time, being tidy all day, being ethical at all times were few challenges that I learnt to overcome.
Hence, working with HBL as interns was an experience which helped me develop myself in real time working conditions so that I can sell myself better in the professional arena. cxxviii
The goals and objectives that I had for the internship program and the extent to which they were achieved are as follows:
To know about the various processes and working environment of a commercial bank: In the internship period, I experienced how the customer service department and the credit department work and what are the various functions and activities they have to perform. Our main focus what to understand the processes of the credit department and to know how a CAP is prepared, how the viability of the project or the loan is accessed and analyzed, what processes and requirements the bank has to look forward for the proper execution of the lending process.
To access a career option in this sector: The internship experience helped me to analyze what are the pros and cons of the banking profession which is the aim of my professional life. After working for the 10 weeks, I could understand that though the job is very demanding and challenging, still this job is my passion and my interest and I look forward to pursue my career aim as the same.
To assess the various processes banks go through to overcome the risks associated with loans: During the tenure at the CRD and the CCD, I could enhance my knowledge for this objective which was further helpful for my courses in the academic course as well for the subject commercial bank management. cxxix
To experience the professionalism in work culture and to learn for future prospects: I experienced the professionalism in the work culture in HBL which even though was informal and friendly was very professional and dedicated towards the job assigned. This helped me understand what the importance of having a professional attitude towards work is.
To learn practically the knowledge learnt from academic courses: Internship program helped me transform my academic knowledge learnt from various courses before into practical knowledge which has enabled me to gain proper understanding of the concepts and theories which were previously understood on the basis of assumptions which do not lie in the practical reality.
References 1) Management Textbooks: • Peter S. Rose ( Fourth Edition), Commercial Bank Management, IrwinMcGraw Hill • Lawrence J. Gilman( Ninth Edition), Principle of Managerial Finance, Andrson Welsey Longman(Singapore)
2) Annual reports: • Nepal Electricity Authority (2008) • Himalayan Bank Limited (2009) • IPPAN (2009) • Transmission- NEA (2008) • Generation- NEA (2008) • Vidhyut- NEA (2008) 3) Websites: • Hydropower Development Policy. Retrieved on April 15, 2009 from www.nea.org ( Website of NEA) • Electricity Act 1992. Retrieved on April 15, 2009 from www.nea.org (Website of NEA) • Manual for Preparing Scoping Document for Environmental Impact Assessment (EIA) of Hydropower Projects. Retrieved on April 20, 2009 from www.doed.gov.np (Website of Department of Electricity Development) • Nepal Hydropower Database. Retrieved on April 20, 2009 from www.nepalhydro.org.np (Website of Nepal Hydro Power Association) • Workshop on "Hydropower Investment; Bankers' Perspective". Retrieved on April 20, 2009 from www.ippan.org.np ( Website of IPPAN) 4) Others: • Nepal Rastra Bank. Banking and Financial Statistics (July 2008) • Nepal Rastra Bank. Bank and Financial Institution Ordinance (2004) • Chaulagain, N.P. (2008) Hydropower Development of Nepal in the face of climatic and hydrological uncertainties. • Upadhayay, A.K. Hydropower of Nepal : Policies and Investment Opportunities cxxxi
If Appendix rejected inform client
Report by the Next Client Flow Chart 1: New Credit working day
Collection of necessary document (Upon receipt of documents as per check list) Site Visits Discussion with Clients clarifying their requirements for facility packages (Maximum period not more
Appendix 2: Sales in GWh
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 410.5 467.0 518.3 557.9 617.11 676.3 758.1 805.7 893.2 951.8 7
6 63.5 6 81.8
2 411.00 22.8
3 Street Lights 1 Temporary supply Transport Temple Community Sales Total Internal Bulk Supply to India
4 0.77 2.60 1.98 -
8 0.93 2.68 2.37 -
2 0.83 5.89 2.51 -
0 0.28 5.64 2.48 5.72
0 0.35 5.53 2.81 4.74
6 0.25 5.47 4.11 5.58
4 0.39 5.80 4.58 6.03
Water Supply & Irrigation
0 0.87 5.65 4.77 9.18
1.26 6.31 4.78 15.5
0.70 6.03 5.37 23.4
1 5 1,019.43 1,174.28 1,281.13 1,406.19 1,509.31 1,659.58 1,853.68 1,936.07 2,127.33 2,287.41 64.1 95.0 126.0 133.8 192.2 141.2 110.70 96.5 76.8 61.5 cxxxv
Appendix 3: Revenues in Million Rupees
Non-Commercial Commercial Industrial
5 419.58 515.72 2,093.8
3 527.40 661.58 2,599.3
8 835.78 555.62 3,086.1
3 722.12 818.75 3,608.1
783.99 894.91 4,039.65
816.01 986.07 4,380.22
947.12 1,015.47 4,851.40
881.73 1,118.21 4,978.69
940.20 1,288.05 5,300.91
1,012.74 1,448.16 5,652.36
Water Supply & Irrigation Street Lights Temporary supply Transport Temple Community Sales Total Internal
8 78.14 11.37 7.06 9.46 7.42 5,198.6
4 95.65 149.95 13.39 18.31 9.70 6,697.3
0 120.90 176.05 6.77 27.73 11.45 7,981.7
3 138.68 200.74 3.63 27.90 12.16 9,173.5
148.53 246.79 4.74 29.29 14.24 16.59 10428.54
154.80 329.52 3.46 28.94 20.80 20.09 11,318.90
239.97 315.45 5.50 30.47 23.08 21.42 12,529.7
197.96 422.35 11.18 29.78 24.42 23.94 13,093.3
214.18 454.85 17.36 31.65 26.03 53.70 14,348.3
212.98 487.00 9.42 30.55 27.78 83.72 15,361.0
Bulk Supply to India Grand Total
8 198.15 5,396.8
5 327.80 7,025.1
8 396.06 8,377.8
4 514.12 9,687.6
5 673.69 573.44 11,992.59 13,103.1
8 579.33 13,672.7
3 428.93 14,777.2
8 370.23 15,731.3
Other Income cxxxvii
11,237.50 11,992.59 13,389.0 5
Appendix 4: Profit and Loss Account
SALES REVENUE Local Sales COST OF SALES Purchases of Merchandises/materials consumed Raw materials/goods consumed Direct overhead costs GROSS PROFIT/CONT. MARGIN
12,605 12,605 7,462 7,247 7,247 216 5,143
6% 6% 12% 12% 12% 8% -3% -
13,332 13,332 8,333 8,101 8,101 232 4,999
8% 8% 8% 9% 9% 4% 8%
14,450 14,450 9,035 8,794 8,794 241 5,415
7% 7% 10% 9% 9% 26% 1%
15,405 15,405 9,930 9,626 9,626 304 5,475
Administration Overheads Marketing and Dist. Overheads Depreciation Expense Deferred revenue Exp. Written off OPERATING PROFIT Non-operating incomes/(expenses)
622 1,484 1,734 123 1,179
33% 15% 5% 15% 19%
Provision for losses on property, plant and equipment
EARNINGS BEFORE INT.& TAX
NET PROFIT AFTER TAX
Depreciation & Amortisation
NET CASH PROFIT
-65 13% 9% 43% 4% 53%
-1,565 1,922 357
17% -1% 5 06%
APPROPRIATION OF PROFIT: Accumulated Profit/(Loss) b/d
Profit after tax for the year
Insurance Fund Dividend Payment/Adjustment of Past Years Accumulated Profit/loss c/d
-20 -220 -4,808
-27% 1 17%
-20 297 27% cxl
-20 47 5%
-1,262 -20 -50
Appendix 5: Balance sheet of NEA
Amounts in million rupees ASSETS Property Land and Equipment
NET FIXED ASSETS
Long Term Investments
Stock of finished goods
Cash on hand & bank
Deposits/ Advances Payment
TOTAL QUICK ASSETS
TOTAL CURRENT ASSETS
TOTAL NET FIXED ASSETS
TOTAL FICTITIOUS ASSETS
Long/Medium Term Bank Loan
TOTAL LONG/MED TERM DEBTS
TOTAL CURRENT LIABILITIES
TOTAL EXTERNAL LIABILITIES
LIABILITIES Paid up Capital Accumulated profits/ Reserves TOTAL OWN FUNDS
Other current liabilities/Provisions
Appendix 6: Cash Flow Statement
Particulars A Cash flow from Operating Activities: Operating Profit/income Depreciation and Amortisation Cash flow before change in working capital Changes in working capital: Current Assets: Total Stocks Advance Tax/VAT/other duties Trade Debtors Deposits/ Advances Payment L/C & B/Gua Cash Margin Miscellaneous current assets Changes in Current Assets: Current Liabilities: Trade Creditors Other current liabilities/Provisions Changes in Current Liabilities: Net Operating Cash flows before interest Interest Expenses B Cash flow from investing activities: Purchase/sale of fixed assets Non-Operating income (other income) C Cash flow from financing activities: Bank Loan (short term) Loan from shareholders/directors/third parties Long/Medium Term Bank Loan Increase (decrease) in cash Opening cash balance Closing cash balance as on F.Y. End
6 1,599 954 1,922 2,872 1,820
7 3,492 1,202 1,899 3,565 1,819
8 1,607 962 1,990 2,533 1,923
18 0 -390 -195 0 0 -568
-144 0 -1,063 68 0 0 -1,139
-20 0 -1,625 -50 0 0 -1,695
2,376 12 2,388 4,692 -3,094 -6,728 -7,325 640 5,199 0 0 1,950 70 1,323 1,392
2,975 -17 2,958 5,384 -1,892 -8,094 -9,049 1,017 4,445 0 0 1,128 -157 1,259 1,102
3,499 120 3,619 4,456 -2,849 -9,283 -9,218 655 7,129 0 0 5,146 -547 3,363 2,816
Appendix 7: Term of License
(1) The study/survey license: Max 5 Years (2) The hydropower generation license: (a) The project supplying the internal 35 Years demand: (b) The
hydropower 35 Years
project: (c) 60% utilized by national
industrial enterprise on its own (d) Storage projects Extended for a max of 5 Years (3) The Electricity Transmission and Distribution National Transmission Line or Grid. Electricity Distribution License
25 Years 25 Years
Appendix 8: Demand of Energy
Particulars Peak Demand (MW) Available Energy (GWh) 1. Hydro 2. Thermal 3. Purchase (Total) India Nepal
1046 118.6 309.6 232.3 77.28
1233 66.7 401.5 232.2 169.3
1113 27.1 727.9 226.5 501.3
1113 17.01 936.3 238.2 698.0
1478 4.4 778.6 149.8 628.8
1345 9.92 1025 186.6 838.8
1522 13.66 1106 241.3 864.7
1568 16.1 1196 266.2 930
1747 13.31 1291 328.8 962.2
1798 9.17 1372 412.4 960.4
Appendix 9: Number of Consumers of Electricity
Particulars Domestic Non-Com Commercial Industrial Water Supply Irrigation Street Lights Temporary Transport Temple Community
7,654 2,948 14,996 215 876 842 207 21 1,131
7,815 3,096 16,179 232 967 932 144 47 1,248
7,643 3,386 17,701 236 1,083 1,012 141 37 1,441
Internal Bulk Supply to India Grand Total
0 8,629 3,898 18,789 251 1,353 1,048 172 49 1,800
4 9,722 5,317 19,833 305 1,721 1,229 138 48 1,738
9 9,865 5,454 21,374 352 2,557 1,437 150 48 1,959
0 5 8,84,53
0 5 10,53,93
9,950 6,000 22,500 370 3,400 1,500 155 50 2,150
5 10,010 6,170 23,020 380 6,450 1,550 165 54 2,290
3 10,215 6,000 24,089 414 13,183 1,608 210 39 2,628
9 10,639 6,597 25,498 444 17,654 1,952 298 37 2,752
2 5 12,77,44
8 5 13,97,81
5 5 15,24,61
11,59,850 5 11,59,855
Namche (KBC) Panauti Phemekhola
Appendix 10: Existing Projects in Nepal
Existing Achham Andhi Khola (BPC) Arughat Gorkha Baglung Bajura Baramchi Bhotekoshi (BKPC) Chakukhola (APN) Chame Chatara Chilime (CPC) Devighat Dhading Dolpa Doti Duhabi Multifuel Fewa (Pokhara) Gamgadhi Gandak Helambu Heldung (Humla) Hetauda Indrawati-III
400 5,100 150 200 200 980 36,000 1,500 45 3,200 20,000 14,100 32 200 200 39,000 1,000 50 15,000 50 500 14,410 7,500
(NHPC) Jhimruk (BPC) KaliGandaki "A" Kalikot Khimtikhola (HPL) Khudi (KhudiHP) Kulekhani No. 1 Kulekhani No. 2 Manang Marshyangdi Modi Khola
12,000 1,44,000 500 60,000 3,450 60,000 32,000 80 69,000 14,800 cxlviii
600 2,400 995
Appendix 12: Other Projects in Nepal Appendix 11: Existing and Private sector
Piluwa Khola (AVHP) Puwakhola Rairang Ramechhap Rupalgad (Dadeldhura) Salinadi Salleri (Sceco) Sangekhola Seti (Pokhara) Simikot Sisnekhola Sundarijal Sunkoshi Small
y (KW) 3,000 6,200 500 150 100 232 400 183 1,500 50 750 640 2,500
(SanimaHP) Sunkosi Surnaiyagad (Baitadi) Tatopani/Myagdi (I) &
10,050 200 2,000
(II) Thoppalkhola Tinau (Butwal) Trisuli Leased to Private Sector Bajhang Bhojpur Chaurjhari (Rukum) Darchula (I) & (II) Jomsom Jumla Khandbari Okhaldhunga Phidim Syarpudaha (Rukum) Taplejung Terhathum
1,650 1,024 24,000 200 250 150 300 240 200 250 125 240 200 125 100 cxlix
Not in normal operations Dhankuta Gorkhe (Ilam) Jhupra Pharping Syangja Planned/ Proposed Arun 3
Balefi Budhi Gandaki
0 20,000 6,00,00
Daram Khola Fawa Khola Kabeli "A" Khimti - II Likhu - 4
0 5,000 2,079 30,000 27,000 1,20,00
Lower Indrawati Lower Nyadi Madi -1 Mailung Rahughat Seti (West)
0 4,500 4,500 10,000 5,000 30,000 7,50,00
Seti Trishuli (Storage)
Upper Marsyangdi 'A'
Upper Modi Upper Modi 'A' Upper Seti (Storage)
0 14,000 42,000 1,28,00
Upper Trishuli-3'A' Upper Trishuli-3'B'
0 60,000 37,000
240 64 345 500 80
Appendix 13: Hydropower Projects
Tinaukhola Small Upper Maikhola Upper Modi Under Construction Chamelia Gamgadhi Kulekhani No. 3 Lower Indrawati Mardikhola Middle Marsyangdi Patikhola Ridikhola Seti -II Upper Hadikhola Upper Karnali Upper Tamakoshi
under construction Project Name Priliminary WIP Belkhu Daramkhola Hewakhola Lower Chakukhola Lower Nyadi Lower Piluwa Madi-1 Maikhola Mailung Narayani Shankar Biomass Phawakhola Siurikhola Tadikhola
Capacity 320 5,000 2,400 1,765 4,500 990 10,000 2,400 5,000 500 2,079 990 970
990 3,100 14,000 30,000 400 14,000 4,500 3,100 70,000 996 2,400 979 991 3,00,000 3,09,000
Appendix 14: Services provided by Himalayan Bank Limited
Deposit Services Premium Savings Account (PSA) PSA is a privileged Savings Account with a host of convenient features and banking channels to transact through. PSA Customers enjoy a separate privileged counter and an interest rate calculated on daily balance. PSA is first Premium Deposit Product in the Banking sector of Nepal. Fixed Deposit Fixed Deposits can be made for a period ranging from 3 Months to One Year or over. The interest rate is tied up to the tenure of the deposit. Customers can borrow from the Bank against their Fixed Deposit Certificates. Savings Deposit Savings Deposit Account can be opened in any of HBL’s branch offices. The minimum deposit to be maintained by the Customer varies according to the branch. Customers are provided with free personal accidental death insurance. Customers opening this account get a free cheque Book with the ABBS facility. Current Account Mainly intended for business/corporate houses, this account can be opened and operated from any HBL’s branches. Call Deposit The Bank offers short-term term deposit in the form of Call Deposit. This is an interest bearing Current Account or in other words Term Deposit with a tenure ranging from 7 days to 3 months. Bishesh Savings Account 'Bishesh Savings Account' is a deposit product targeted to special section of society which includes minors, senior citizens completing the age of 50 years, physically challenged and illiterate individuals. Recurring Savings Account 'Recurring Savings Account' is a 3 years fixed tenure savings account targeted to individuals who would like to save funds in installments for future use. Jumbo Term Deposit 'Jumbo Term Deposit' is a fixed deposit targeted to individuals willing to deposit specified amount for specified period of time for a higher return. Loan Products Corporate Loans Funded Project / Consortium Loan: Bank extends both Fixed Term Loan and Working Capital Loan. Loans are cli
provided for the establishment, capacity addition, up-gradation of existing facilitates as well as acquisition of existing facilities. The loan is extended to manufacturing as well as service sector. If the project is big, Himalayan Bank helps financing needs of the project through consortium lending as the lead Bank and/or Co-lead Bank. Non Revolving Cash Credit: Bank extends Non Revolving Cash Credit to finance import of capital items being imported as supplementary equipment of the existing plant and machinery. Working Capital Financing: The bank extends Working Capital Loans under various headings to finance the working capital requirements. Overdraft Facility: Overdraft Facility, a recurring (revolving) credit facility, is offered to customers for meeting fluctuating working capital needs for funding current assets, overheads and administrative expenses. Demand Loan a) Revolving Demand Loan (RDL): This form of recurring working capital loan is extended to finance continuous working capital requirement of companies. b) Short Term Demand Loan (STDL): This is another form of working capital loan extended to finance seasonal and occasional working capital requirement of companies. Revolving Cash Credit Revolving Cash Credit is extended to finance working capital requirements particularly to finance import of raw materials (including custom duties) from India. Similarly the Bank extends Revolving Cash Credit to finance purchase of agriculture produce from local market as well as India. Import Credit for Telex Transfer and Demand Draft Payment Bank extends Import Credit to finance import of goods from third countries other than India where payment is made through Telex Transfer or Demand Draft. Trust Receipt Loan The Bank extends Trust Receipt Loans for financing raw materials and trading merchandise while retiring documents of the Import Letters of Credit. Export Credit Facilities: The Bank extends Export Credit Facilities against export letters of Credit. Pre Export Loan, Post Shipment Loan and Back to Back L/C are some of the facilities that can be extended. Pledge Loan: Against security of movable non-perishable stock merchandise, the bank grants Demand Loan / Cash Credit. Clean Bills purchased and discounted: The Bank extends these facilities against the Bills/Drafts/Cheque (Negotiable Instruments). The Bank purchases cheques issued by individuals, financial institutions and credit the customer’s account immediately. clii
Documentary Bills Purchased and Discounted: The bank extends loan facilities against the Documentary Bills on recourse basis.
Non Funded Facilities Bank Guarantee: The Bank issues various types of Bank Guarantee Facilities like Performance Bond Guarantee, Bid Bond Guarantee, Bonded Ware House Guarantee, Financial Guarantee, Deferred Payment Guarantee, Counter Guarantee and Advance Payment Guarantee. Letters of Credit: The Bank establishes Import Letters of Credit, sight as well as usance. Retail/Consumer Loans Hire Purchase Loan The Bank extends Hire Purchase Loan for purchase of new vehicles, (including body making in case of commercial vehicles) to individuals as well as companies. The bank also finances equipment such as medical equipment, construction equipment, manufacturing machinery equipments under Hire Purchase Financing. Housing Loan Housing Loan is available to purchase readymade / under construction building (including land cost), construct a building on an already owned land, for purchase of adjacent land or extension of existing building. Subidha Loan This is a customized loan facility offered to Customers to meet various social needs such as ceremonial expenses, education expenses, minor business dealings, home furnishing, etc. Credit Card Loan The bank extends credit to individuals through credit cards that could be payable on monthly installment basis (credit card), fixed tenure basis (capital asset financing), etc. Loan against Fixed Deposit Receipt The Bank extends Loan against the Fixed Deposit Receipt issued by the Bank itself or by other Banks (in Nepal). Generally up to 90% of the FDR value can be disbursed as Loan. Loan against Government Bonds & Bonds of Bank The Bank extends loans against various Bonds / Stocks/ Promissory notes issued by the Government/ NRB. Under this, up to 90% of the value of such Bonds can be disbursed as Loan. Similarly, the bank can extend loans against bonds issued by commercial banks. cliii
Loan against First Class Bank Guarantees The Bank extends various credit facilities, funded as well as non-funded, against unconditional guarantees issued by First Class International Banks. Loan against Shares The Bank also advances loan against listed shares of Public Ltd. companies. Small and Medium Enterprises (SME): As a step further to help establishment, growth and expansion of small and medium sized enterprises, HBL has developed a special loan package meant just to suit small and medium sized enterprises. Business houses coming from industrial, trading and service sector can avail of this facility to meet their short-term and longterm financing needs. Other Products International Banking (LC) To assist its trading Customers, HBL offers Letter of Credit (LC) facilities. Customers can place their LC application in any of HBL Branches. The fees/charges are one of the lowest amongst the commercial banks of Nepal. The Customers enjoy wide correspondent network of Himalayan Bank in addition to the attractive rates. Himal Remit Himal Remit, a premium online customer focused and technology oriented Money Transfer. HBL is a pioneer in the field of retail money transfer business with over a decade long customized service delivery experience in the field. Himal Remit has the largest network covering all major cities, towns and villages of the country and is capable of paying at more than 600 locations across Nepal. Safe Deposit Locker Customers availing of this facility enjoy peace of mind in terms of security of their valuable belongings with one of the most attractive rates and ease of location. Card Services HBL provides various card services like ATM cards, credit cards of VISA and Master Card (domestic and international), Prepaid cards and Visa debit cards. SMS Banking Using SMS Banking, one can check their balance, status of cheque (encashed or not), last three transactions and the Bank’s foreign exchange rate, all at a few clicks of a cell. Internet Banking cliv
Internet Banking is providing the banking services through the medium of the internet and the computer. All basic banking functions can be easily done through internet banking that too without the hassles of getting into the lines of the banks, travelling through traffic jams and also flexibility of banking hours to name a few advantages.
Appendix 15: Commercial banks in Nepal
Name of the Bank Nepal Bank Ltd Rastra Banijya Bank Agriculture Development Bank Ltd Nabil Bank Ltd Standard Chartered Bank Nepal Ltd Nepal Investment Bank Ltd Himalayan Bank Ltd Nepal SBI Bank Ltd Nepal Bangladesh Bank Ltd Everest Bank Ltd Bank of Kathmandu Ltd Nepal Credit and Commerce Bank Lumbini Bank Ltd NIC Bank Ltd Machhapuchhre Bank Ltd Kumari Bank Ltd Laxmi Bank Ltd Siddhartha Bank Ltd Global Bank Ltd Citizens’ International Bank Ltd Prime Commercial Bank Bank of Asia Nepal Ltd Sunrise Bank Ltd Development Credit Bank Ltd NMB Bank Ltd
Established in 15 November 1937 23 January 1966 Est. 1968 16 July 1984 24 January 1986 27 February 1986 18 January 1993 07 July 1993 01 June 1994 18 October 1994 03 March 1995 14 October 1996 17 July 1998 21 July 1998 03 October 2000 03 April 2001 03 April 2002 24 December 2002 02 January 2007 20 April 2007 24 September 2007 12 October 2007 12 October 2007 Upgraded in 2007 Upgraded in 2007
Appendix 16: Assignment 1
Assignment 1 Goals and objectives of the Interns
Part 1: Goals/ objectives of Internship Experience Specifically describe the goals you plan to set and how you will achieve these goals.
This internship experience has two ways to see it. First objective is to fulfill the academic part of the BBA program where internship holds a huge respect for the partial completion of the course with 6 credits assigned to it individually.
Second and the most important part is to set a platform for the career ahead, after we move out from the premises of the college. Internship not only makes it possible for experiencing daily working conditions but also creates a platform to set our careers in the career of our interest by gaining experience, making contacts and proving ourselves to the supervisors of our abilities.
Personal Goals: Ever since I joined KCM, I always wanted to enter into professional banking and held a dignified high post in a reputed company. So this internship at Himalayan Bank Limited is serving as a stepping stone to move towards my goal; my aim of being a banker. This experience of my internship will definitely help me to get used to the working environment in the banking world and hence further ensure me of my goal to get into this field.
Only theoretical knowledge is not enough in today's competitive world, practical knowledge alongside is very important to know what the textbook basics actually meant.
Internship not only prepares us to know the working realities, but also helps us to incorporate our knowledge from the BBA program into a reality. Furthermore doing good in the internship adds value to the CGPA as well as it carries 6 credit hours evaluation. Hence doing well in the internship program would incorporate various advantages to my academic career as well.
Professional Goals: My aim of being a professional banker has moved a step forward with my decision of pursuing my internship in a commercial bank. In this way, I will be able to know what actually the benefits are and also about the limitations of working in a bank and henceforth assure my target to work under this goal of mine to become a banker. This decision in my life holds a very important place as my whole career would depend upon my decisions henceforth. So a sincere and honest effort to m internship would be the utmost priority in my life at the moment.
Part 2: Self-Reflection Essay
When everyone is thinking that I am living a laid back life, I actually am passing through one of the most important phases of my life, the phase where I decide what decisions I will take to mould my career as per my requirements, qualifications and interests.
This phase has various dimensions to my life at this moment like anxiety, nervousness, confusions, dilemmas, decisions about priorities, fighting with the limit of time.
The anxiety of what is next in the experience of the other departments I will be recruited is very exciting as I am getting the opportunity to get into the type of working place I want to work in. This is a very important thing as I will be clviii
able to let go of all the complexities that would inadvertently stop me from fulfilling my dream and my career.
During this internship, I will also be able to let go of all the dilemmas that I have related to my career decisions like whether to enter into a job as my goal persists or to start up or continue my family business or to go for a Masters degree right after the completion of my BBA course. Taking this decision would be a lot easier after the completion of the internship period as I will be able to decide what is right and what is not for my future ahead.
In our day to day life we have to prioritize many issues over other so as to give ample attention and time for the important ones. This requirement of my punctuality in my work has made me able to prioritize my career and studies over other issues like friends, parties etc.
Now, I suddenly am realizing that we are bound by the limitness of time whereas previously I thought I have ample time for everything. This limitness of time has made me realize the value of time and how to organize every activity so as to give my time to other issues as well. This realization of importance of time will no doubt help me in anything I do in the future as for every professional, time is the one of the rarest and important assets he has.
Finally, my dream of being a professional seems to be a possibility and getting an experience even before I finished my studies is an important experience. The things I will learn will help in my career and also in my studies ahead. I pursue further to gain the maximum knowledge from the experience and enrich in my life and career ahead.
Rishabh Tibrewala Part 1: Goals/Objectives of Internship Experience The management internship program will help me relate to my academic knowledge to the real working environment. It will provide me with understanding about how to use this knowledge in my professional career. Personally, I feel that this internship will develop professionalism and clix
commitment within me. Professionalism in terms of how to work in the office and commitment in terms of giving the best I can towards work. This will also increase skills such as communication, teamwork, interpersonal along with motivation, honesty and a strong work ethics. This internship will help me understand the working environment in banks where I intend to permanently be in the future. An internship experience will allow me to develop proficiency in these areas, as well as content skills including administrative, analytical, coaching, management and research.
Academically this internship will help me use knowledge I have learned in subjects such as marketing research, finance and use practical knowledge in Commercial banking. This program will also help me gain knowledge about corporate marketing. It will help me further in my MBA.
During the internship program I will learn what it's really like to work in the financial services industry; gaining a unique insight and understanding that could not be achieved by research alone. I will learn how companies are positioned in the industry, who the big players are, as well as the latest trends or industry forecasts; knowledge which will be essential in demonstrating my commitment to a career in banking when I graduate. In Today’s competitive marketplace, recruiters look not just for academic prowess, but also for handson, relevant experience. As an intern I will have the opportunity to acquire the skills I will need to get a head start on my particular field of career. It will help me build a good rapport with the bank and help me later when I come back after my MBA. This is also a good chance to prove myself worthy of a good position and later consider me when the bank is making placements.
Part 2: Self-Reflection Essay This is a time where I need to make the most important decisions in life starting from education to career. I need to decide if I am going to study further or get into work. I need to decide, if I am going to study here in Kathmandu or go out. All these decisions are going to affect my whole life and I won’t be able to change it once I have decided. Most of my time goes in thinking about my life.
Looking at the past, I have made decisions which I am proud of. The first decision that I am proud of is taking commerce as my background. The clx
studying in KCM was the next best thing I did. Also organizing the “Daihatsu City Chase for Peace” was one of the good things I did. And finally, joining Himalayan Bank Limited for my internship is worth the pain.
KCM has not been a college where I gained academic knowledge in certain fields but in all fields of nature including psychology and human behaviour. Beyond this, it has given me opportunity to grow and gain practical knowledge. With projects and other events organized within and outside college, I gained a sense of confidence and motivation to work. The few years that I have spent in this college will be remembered all my life.
Currently the most exciting thing in my life is the internship program that I have joined. I meet new people and the work there is exciting where I get to learn a lot and show my talent. The most important thing in my life at the moment is the decision I need to make in the next few months. I need to decide where I want to be next.
The most important thing that I want to do before I die is to prove myself useful to the society and my family more importantly. I want to be into such a career in the banking sector that pays me well firstly, and then it should also be satisfying and exciting. The organization that i get into should motivate new ideas, are open to changes, and has a contemporary working environment.
Appendix 17: Assignment 2
Assignment 2: Interview of supervisor at workplace
Interview done by:
Name of the interviewee (Supervisor):
Mr. Abhaya Bahadur Shah
Himalayan Bank Limited
Internship in Himalayan Bank Limited has not been confined to just doing what the course work requires Interns to do but it has been an experience where I have expanded my horizon of knowledge and also increased my networking with many elites of the banking industry and of the corporate world. HBL not only provides the interns with maximum exposure to the banking sector but also provides us a platform to set our careers of interest by letting us carry out the daily operations of the banking industry with full faith and confidence. The supervisors are not only excellent in their related fields but also are very good teachers by sharing all their knowledge with the interns and also correcting them of their mistakes so that they learn to the optimum.
During the course of internship, I interacted with Mr. Abhaya Bahadur Shah, one of the senior RMs of the customer care department of the credit department division. An MBA degree holder in finance from Delhi University, Mr. Shah is an enthusiastic and dedicated banker for whom banking is not only a profession but a hobby. Mr. Shah does every task assigned with full dedication but at the same time does not forget to have fun which enables the whole department to be proactive and fun with the work they carry. He has received various trainings in banking and finance from his current bank and the previous bank he worked in i.e. Nepal Investment Bank Limited. The trainings include Advanced Credit Analysis, Project Financing, Risk Assessment of SBE financing, etc. Trainings and degrees are just part of a banker’s job as with the volatile and constantly changing environment, such trainings and degrees also become clxii
a necessity to get acquainted with the environment so as be competent with the challenges that is faced by a banker.
The major divisions in a bank are the operations department and the lending department. Though every work is challenging, credit department is the most challenging as the employee not only is responsible for carrying out the tasks to generate income but also puts the wealth of stakeholder’s of the bank doing the same. So the employees of the credit department need to very good in their analytical skills, academic knowledge, proper understanding of the project being financed and proper credit appraisal skills with a motive not to fulfill the targets given but for the betterment of the bank and its stakeholders. The employee not only needs to be knowledgeable but intelligent as well because situations of using personal cognitive skills becomes very necessary during the credit appraisal of a client as Nepal lacks proper credit ratings of people or corporate entities. Though there are organizations like Credit Information Bureau to provide credit information of the proposed clients but it has not been able to provide ample information about clients and their present credit ratings in the industry. There are other professional institutions and organizations working as well for the betterment and regularization of the banking industry like Nepal Rastra Bank, Nepal’s Bankers Association, and Management Association of Nepal.
Banking industry has become one of the most competitive industries of Nepal as in a small market like ours; multiple numbers of financial institutions has entered into our country. This has not only posed a threat to established banks like Himalayan Bank but also poses a competitive environment for financial institutions to excel in their field. For such analysis there are organizations like Banker of the Year for their proper ratings. This challenge is one of the most fascinating reasons for bankers to enter into this profession. Besides this, the most rewarding thing in this profession is the respect the person gains in becoming a banker as the image of professionalism and learnedness combines which gives the person a nice status in the society and the meetings with other people. This advantage covers up the small disadvantages that are associated with such jobs that is the small growing opportunities of employees as there increments are confined in a certain pattern whereas setting up own business seems to be more profitable and growing.
Attaining a manager’s level position for Mr. Shah was not an easy task as it required him years of dedication towards the work to gain confidence among seniors so as to prove one capable of attaining promotions. Besides this, good interpersonal skills and cognitive intelligence is also a necessity to excel in the career as it is easily noticed and appreciated. Another recent trend of promotion in job shift; a careful and strategic clxiii
move towards job shifting can enable a person to excel in his or her career which has been triggered by the current boom in the number of financial institutions.
For a banker in the credit department, the major portion of the working hours is spent in meetings, credit approval and site visits. Most of the time, the employees have to work over time for which a passion for the work is important to maintain motivation in their work. Also a proper working environment is necessary for the same. This is one of the most differentiating factors of the bank in front of their competitors. The working environment in HBL is considered to be the best among the financial institutions with friendly environment and no dominance of higher posts upon the lower posts as all employees are considered to be equal. This friendly and professional working environment motivates the employees to dedicate themselves to their work better.
I learnt many insights about the banking industry from Mr. Shah and got some useful recommendations and tips for my career as well. According to him, to excel in any business maintaining a network of every class and every field of people is a must because it indirectly comes useful in various stages of your working life. Besides this, to enter into the banking industry a MBA degree or masters in the interested field, masters in finance is a necessity to enter into a credit department. Besides these, proper acquaintances to subjects such as Strategic Management, Economics, and Financial Management are necessary with personal strengths like good interpersonal communication skills and good analytical skills. He further suggested maintaining professionalism in any field I pursue because that differentiates an excellent employee with a good performer.
Interview done by:
Name of the supervisor:
Mr. Pawan Agrawal
Risk Management Division
Himalayan Bank Ltd. clxiv
Internship at Himalayan Bank Ltd. has been quite an experience till now. We have been interacting with people from the banking field as well as people from other field of work. We have been going on site visits where we get to interact with business people associated with both small and large enterprises. This has been possible only because Himalayan Bank Ltd has an open culture where an intern also gets to show his talents. The managers at the bank are willing to teach the interns even when it takes up their time and talents are appreciated.
I have been lucky to get a chance to work in such a work place. I was even lucky as I got to interview one of the Credit Analyst of the bank. Mr. Pawan Agrawal, Credit Analyst, Risk Management Division, was really kind to give some of his valuable time for this assignment. He was really helpful and was genuinely interested to answer all my questions with positive attitude. The main points of the interview have been highlighted in the essay below.
Himalayan Bank established in 1993 was one of the first private commercial bank. It has established a name for itself in the market and has been a market leader ever since. It has an established brand name which is a strong point for it. This brand image has helped the bank develop a good customer base. The USP of the bank has been its brand image which has been gained with long presence in the market. Being in this competitive sector, where the market is really small and new players have come with very aggressive marketing, the bank cannot develop a unique product but because of the good financial position and cheaper cost of funds, Himalayan bank has been a leader in its market.
The most important profile that a person should have to get into the bank is a master lever degree. It is preferred to have an MBA in Finance as this lays foundation towards better understanding in the financial sector of the economy. For a job title of an Analyst good financial analytical skill, Credit Appraisal Techniques and an understanding of the Project Financing is a must.
Further, to be able to go up high in the hierarchy, one should have good communication and presentation skills which is needed while dealing with the clients, excellent negotiation skills so that a better Credit Approval Package can be designed to satisfy both the customer and the bank’s interest and analytical skills to be able to see the capabilities of the client in terms of industry, security, financials, management and technical aspects. clxv
At this bank, every individual gets to develop these skills as the environment is supportive. One gets to try new stuff and learn by doing. This way every person working at the bank enjoys freedom to use his intelligence and give something to the bank in return. The required skills are learnt through experience and training. The bank provides training with regards to Project Financing, Advanced Credit Analysis and Infrastructure Financing for the job of an analyst.
People often get impressed with the overall personality of a banker. A banker is perceived as a person with professionalism in what they do. This inspires a lot of people to come into banking sector. Also, credit is very attractive because one needs to meet a lot of people and interaction is always fun. It is a much glamorized sector of the economy but it is not always true. Getting into this sector limits your growth possibility. One cannot earn in this sector as much as he can in business. Hence if a person wants to grow, business is a better option.
If a person wants to get into the banking sector, he needs to be good in finance and should have analytical and communication skills. If he is good in it, then one can easily decide on the sector of banking. There are basically two sectors, one is the lending or the credit and the second is the operations which includes everything else such as deposits, trade, treasury etc.
There are only a few professional organizations that administer the banking sector in Nepal which are the Nepal Rastra Bank (the Central Bank of Nepal), the NBA or Nepal Bankers’ Association and the CIB or the Credit Information Bureau. These help the banks in proper operations and administration but in Nepal, this sector has not been able to develop itself properly. The level of professionalism that banks should have is not seen in any of the banks and there has been almost no progress. Any person can find this when he visits any of the banks in Nepal. The managers don’t run of deadlines and no work is actually done the way it should be done.
Along with the level of professionalism, bankers also face one more problem. There is not proper database available for them to rely on. Credit needs to be given solely on the basis of common sense and personal judgment as statistics aren’t available. This leads to wrong decisions and often it is seen that credit is provided to people who have been declared bankrupt.
The most rewarding aspect of working in a bank is that people give respect to you. Once you are in a bank, people recognize you as a capable person. Internally, being in a bank is very satisfactory as it is the most professional organization and highest paying sector of the economy.
Interview with Mr. Pawan helped me understand where I stand and how good my chances are if I want to get into this field. I bachelors degree holder does not have a good chance to grow as he will be given a job of a teller or alike and it will take long for him to get to an assistant or a manager level. Any person who needs to get into this field should at least have a MBA in finance which will help him to get a head start and will take him up much faster.
Often people make job changes in search of better lifestyles. Some get good opportunity in terms of the pay whereas some get a better organization to work in. This job shift helps one improve his living standard but needs to be strategically planned or else can lead to failure. For a person with MBA level degree, the other best alternative is to start up with own business. Business is always beneficial but there are certain cons of it. One does not always have the required startup capital which often acts as a limitation. Further, one needs to have that leadership quality or else he risks of losing his money.
This interview has been really advantageous as it gave me an insight of the banking career. It helped me understand what a banker really feels and what the best thing to do in life is. I came to know the pros and cons of working at a bank. This interview will surely be useful while deciding upon my career in the future.