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
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
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:
“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
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.
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.