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Banking in Nepal: Existing scenario

AIIB offers sovereign and non-sovereign financing for sustainable projects in energy and power, transportation and telecommunications, rural infrastructure and agriculture development, water supply,  sanitation and environmental protection.

Nepal has ample opportunities for investments. Hydroelectricity, tourism and service are three prominent sectors the investors are willing to make their investments in recent times. Not only these sectors, other categories like mega infrastructure developmental projects specially, construction of bridges, dams, trolleys, roads, tunnel highway, railways, monorails, airport, link road; manufacturing projects like cement, steel and other production units; extraction and exploration of minerals, mines and natural resources, etc are priority sector investments for investors. These mega projects require considerable amount of capital investment and the gestation period of return on investment is long.

There are 28 commercial banks in Nepal along with 40 development banks and 32 finance companies having paid up capital of not less than Rs. 8 billion, Rs. 2.5 billion and Rs. 800 million, respectively. The total core capital of commercial banks is 288 billion rupees. Total deposits and loans of all commercial banks of Nepal is 2,093 billion rupees and 1,736 billion rupees, respectively (as of mid-July 2017). Out of the total loan of 1,736 billion rupees, local currency loan is 1,710 billion rupees.

The Central Bank of Nepal is shrinking the number of banks and financial institutions (BFIs) and insisting  on the BFIs to merge and for acquisition. Small development banks and financial institutions either go for mergers or are being taken over by commercial banks. No new license is being issued to banks and financial institutions by the central bank.

Mega investments, no doubt, call for huge amount of funds. Funds can be arranged either from local banks and financial institutions or through international markets. The appetite of existing commercials banks and other financial institutions is limited to medium and small projects, except for some consortium financing. Borrowing from international market is subject to many factors like interest rates risk, credit risk, market rate risk, foreign exchange risk, country risk etc. But it does not mean that local borrowing is not subject to these factors.

The Banks and Financial Institution Act (BAFIA), 2074 (2017) opens establishment of Infrastructure Development Banks (IDB) though it is reluctant to issue new licenses to commercial banks and other financial institutions. Section 107 of the same Act provides that the central bank can formulate the policy with respect to Infrastructure Development Banks.

As per the Licensing Policy, a minimum paid up capital of IDB has to be 20 billion rupees. If IDB is established from local investment only, and promoters group shall hold a minimum 51% of the shares and 30% shares would be allocated to the public. If IDB is established with foreign investment, foreign investors can own 20% to 85% of the shares but it has to allocate at least 15% shares to the public. If foreign shareholding is 20% or more but less than 50%, the public shall be allocated, at least, 30% of shares. Local promoters group cannot invest in shares using capital borrowed from any bank or financial institution.

An application is recently registered on August 30, 2017 with NRB for the establishment of IDB in the name of Nepal Infrastructure Development Bank Limited with the shareholding of 60% promoters’ shares inclusive of 10% government stake and 40%  public holding. The Investment Board of Nepal (IBN) is established to promote economic development in Nepal by creating an investment friendly environment. The board handles hydropower projects having capacity of more than 500 MW and other mega projects. If the size of investment is greater than USD 100 million it needs to be approved by IBN.

Recently, IBN and Hongshi-Shivam Cement Pvt Ltd, signed a Project Investment Agreement (PIA) on September 3, 2017 worth USD 359.18 to set up a mega cement factory in Nawalparasi. Sixty percent of the investment will be financed by Chinese financial institutions and also a consortium of banks in Nepal. The Asian Infrastructure Investment Bank is a new multilateral financial institution founded to bring countries together to address the daunting infrastructure needs across Asia. By furthering inter-connectivity and economic development in the region through advancements in infrastructure and other productive sectors, it can help stimulate growth and improve access to basic services.

AIIB offers sovereign and non-sovereign financing for sound and sustainable projects in energy and power, transportation and telecommunications, rural infrastructure and agriculture development, water supply and sanitation, environmental protection, and urban development and logistics.

There are 16 approved projects financed/co-financed by AIIB in energy, six in transportation, two in multi-sector and two in urban sectors in different states.

 

With a view to promoting economic prospect and sustainable development, larger infrastructural projects are of utmost importance. Nepal is a small country with a lot of opportunities. Larger projects require considerable amount of investment and it can be achieved only by financing from mega infrastructural banks. This gives rise to better prospect for Nepal with the accessibility of basic requisites to the general people.

 

Chinese businesses have extended their footprints across the globe. With the scaling up of their business, Chinese Entrepreneurs are making investments in Nepal and initiated various projects in expanded size. With a view to cater the need of Chinese businesses and entrepreneurs, China Desk in Reanda Nepal is established with bilingual professionals. In this dynamic business environment, we offer varieties of professional services like business advisory, taxation, accounting and back office support, transaction advisory, business risk advisory, management consulting, foreign direct investment (FDI) support, Financial Reporting Compliance, Statutory Compliance, Mergers and Acquisitions (M&A) etc to Chinese Investors through our China Desk Office.
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