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

 SIGNATURE PAGE

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

ii
 COPYRIGHT

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

iii
 DISCLAIMER

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.

iv
 DECLARATION

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).

Signature

_____________________ _____________________
Nikhil Agrawal Rishabh Tibrewala
BBA 2005-2009 BBA 2005-2009
Kathmandu College of Management Kathmandu College of Management
Redg. no. A005901-05 Redg. no. A005980-05

v
 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

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vii
viii
ix
x
 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

Executive Summary

Part One
Operational Duty

Section A Page No.

1. Background 3
2. Goals and Objectives of internship 4
3. Introduction of Himalayan Bank Limited 7

Section B 15
1. Tasks performed at HBL 15
2. Project work 16
3. Strengths and weaknesses in carrying out projects 17

Section C 21
1. Description and analysis of roles of fellow workers 21
2. Learnings from fellow workers 22

Section IV 25
1. Perceptions and expectations of Interns 25
2. Skills, ideas and knowledge learned 27
3. Influence on Academic Decisions and career choices 30

Part Two
Projects/Assignments/Tasks undertaken

Section I 32
1. Brief background of the Study 32
2. Objectives of the assignment/project. 32
3. Problem Statement 34
4. Research Problem 34
5. Scope of the Study 35

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 6. Limitations of the Study 35

Section II – General Literature Review 37

1. SWOT Analysis 37
2. Five Pillars of Credit analysis used at Himalayan Bank Limited 38
3. Financial Ratio Analysis 44

Section III – Conceptual Framework 46

1. Conceptual framework 46

Section IV - Methodologies 49
1. The methodology and procedures of projects 49

Section V – Industry Analysis 53

1. Banking Sector as a whole 53
2. Commercial Banks 56
3. Hydropower Industry 57

Sections VI – Analysis of Credit 63

1. Five Pillars of Credit Analysis 63
2. IEE and EIA 79
3. Detailed Feasibility Study 80
4. NEA and Power Purchase Agreement 80
5. Important Conditions in PPA for Projects up to 5 MW 81
6. Strategies made by the government 85
7. Policies 86
8. Provisions under Hydropower Development for Private sector 87
9. Other aspects to be considered 89

Sections VI – Findings from the Analysis 91

1. Critical Success Factors 91
2. Key Risk Areas 94
3. Normal Risk Sharing Arrangement 99

Section VII 101

1. Conclusions and Recommendations 101

Reflection

References

Appendices

xii
 LIST OF FIGURES

Figure 1: Executive Committee Members ................................................................... 10

Figure 2: Management of Himalayan Bank Limited ................................................... 10

Figure 3: All Services of Himalayan Bank Limited .................................................... 11

Figure 4: Deposit Products offered at Himalayan Bank Limited ................................ 11

Figure 5: Loan Products of HBL ................................................................................. 12

Figure 6: SWOT Profile ............................................................................................... 37

Figure 7: Five Pillar Credit Risk Analysis ................................................................... 39

Figure 8: Industry Analysis .......................................................................................... 39

Figure 9: Porter Five Force Industry Analysis ............................................................. 40

Figure 10: Financial Risk Analysis .............................................................................. 42

Figure 11: Conceptual Framework for the project ....................................................... 46

Figure 12: Phases of Research ..................................................................................... 49

Figure 13: Working of a Hydropower Plant ................................................................ 74

Figure 14: Shaft connecting Turbine and Generator.................................................... 75

Figure 15: The Generator ............................................................................................. 77

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 LIST OF TABLES

Table 1: Comparison of Important Balance Sheet Items ............................................... 7

Table 2: Financial Institutions in Nepal ....................................................................... 55

Table 3: Number of Consumers of Electricity in Nepal .............................................. 61

Table 4: Hydropower Projects in Nepal....................................................................... 63

Table 5: Future load calculation .................................................................................. 65

Table 6: PPA Concluded in the FY 2007/08 ............................................................... 67

Table 7: Key Financial Indicators of NEA .................................................................. 69

Table 8: Environmental Requirement .......................................................................... 79

Table 9: Unit rate of energy for different projects fixed between NEA and IPPs ....... 81

Table 10: Royalty for Internal Consumption Project ................................................... 89

Table 11: Royalty for Export Oriented Project ............................................................ 90

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 LIST OF ACRONYMS

HBL Himalayan Bank Limited

CAP Credit Approval Package
NRB Nepal Rastra Bank
NIBL Nepal Investment Bank Limited
BAFIO Bank and Financial Institution Ordinance
HR Human Resource
FY Fiscal Year
Rs. Nepalese Rupees
i.e. That is
NPA Non Performing Assets
ATM Automatic Teller Machine
PEST Political-Legal, Economic, Socio-cultural, Technological
CEO Chief Executive Officer
GM General Manger
SGM Senior General Manager
BOD Board of Directors
SWOT Strength, Weakness, Opportunity, Threat
R&D Research and Development
IT Information Technology
MW Megawatt
NEA Nepal Electricity Authority
GWh Gigawatt Hour
KW Kilowatt
IMF International Monetary Fund
GTZ German Technical Cooperation
DDA Department of Drug Administration
FNCCI Federation of Nepalese Chamber of Commerce and Industry
CRD Customer Relationship Department
CCD Credit Control Department
GJ Giga Joule
IEE Initial Environmental Examination
EIA Environmental Impact Assessment
DoED Department of Electricity Development
SCBL Standard Chartered Bank Limited
EBL Everest Bank Limited

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NPV Net Present Value
IRR Internal Rate of Return
SME’s Small and medium Enterprises
GDP Gross Domestic Product
IPP Independent Power Producers

xvi
 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

1
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.

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 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
innovative products like Personal Savings Account, Millionaire deposit scheme,
HimalRemit etc.

3
 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
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.

4
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.

Rishabh Tibrewala

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:

5
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
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.

6
 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 micro-
credit 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 SCBL HBL NIBL NABIL EBL

Borrowings 0.0 870.0 1050.0 1600.0 300.0
Cash Balance 414.9 278.2 1464.5 511.4 823.0
Investments 8146.1 7471.7 3155.0 4889.6 4906.5
Share and other investments 5756.7 5280.3 3724.4 5077.0 154.6
Loans and advances 13355.0 19985.2 27145.5 21514.6 18814.3
Fixed Assets 440.5 705.2 970.1 511.6 314.9
Other Assets 1755.9 1191.8 1063.0 1607.1 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

7
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
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.

8
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:

9
 Mr. Prachanda Bahadur Shrestha
(Director)

Mr. Bijaya Bahadur Shrestha

(Director)

Executive Mr. Upendra P. Poudyal

(Director)
Committee
Mr. Ashoke SJB Rana
(Chief Executive Officer)

Mr. Masood Ul Hasan

(Senior General Manager)

Figure 1: Executive Committee Members

Chief Executive Officer

(Mr. Ashoke SJB Rana)

Senior General Manager

(Mr. Masood Ul Hasan)

General Manager
(Mr. Sushiel Joshi)

Ex. Admin Officer Ex. Marketing Officer Ex. Credit Officer

(Mr. Pradeep N. Rayamajhi) (Mr. Ujjal R. Rajbhandari) (Mr. Anup Maskey)

SWIFT Dept. Head Legal and Share Dept. IT Dept. Head

(Mr. Banshidhar Sharma) (Mr. Maheshwor P. Joshi) (Mr. Kanchan Basnyat)

HR Dept. Head Reconciliation Dept.

(Mr. Ishwar Kumar Karki) (Mrs.Sunita Shrestha)

Figure 2: Management of Himalayan Bank Limited

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Products/Services offered by Himalayan Bank Limited

The services offered by HBL are summarized as follows.

Deposits
Loans
Safe Deposit Lockers

Internet Banking HBL Letter of Credit

SMS Banking Card Services

Himal Remit

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.

Premium Savings
(PSA)
Fixed Deposit
Jumbo Term Deposit

Savings Account Deposits Recurring Savings

A/C

Current Account Bishesh Savings

Account
Call Deposit

Figure 4: Deposit Products offered at Himalayan Bank Limited

The major products offered in the loan market are as follows:

11
 Funded

 Project / Consortium Loan

 Non Revolving Cash Credit
 Working Capital Financing
 Overdraft Facility
 Demand Loan
 Revolving Cash Credit
 Import Credit & DD
 Trust Receipt Loan
 Export Credit Facilities Non Funded
 Pledge Loan
 Clean Bills discounted  Bank Guarantee
 Documentary Bills Discounted  Letter of Credit

Corporate Loans

Loans

Retail/Consumer
Loans
Loan against BG Loan against FD

Hire Purchase Housing Loan

Subidha Loans Loan against Bonds

Loan against Shares Credit Card Loan

Figure 5: Loan Products of HBL

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

12
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

13
 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 helps doing 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.

14
 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:
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

15
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.

16
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
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

17
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.

Weaknesses:

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.

18
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
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.

19
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 spoken Nepali is not good and my knowledge of technical Nepali terms is
lame, I had difficulty while expressing myself in Nepali. I also felt constrained
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.

20
 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

21
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

22
step for any professionalism and this skill is to be encapsulated for the success of any
professional.

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

23
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.

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.

24
 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.

Rishabh Tibrewala

25
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.

26
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

Nikhil Agrawal

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.

27
  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
also got to practice and enhance my interpersonal skills when dealing with clients and
my co-workers.

28
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.

29
 3. Influence on academic decisions and career choices

Nikhil Agrawal

 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

30
 with non- cooperative clients is a major skill every professional should have. Time
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.

31
 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

The prime objective of the undertaken project is

32
  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

Primary objective

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.

33
Secondary Objective

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?

34
  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.

35
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.

36
 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.

Situation Analysis

Internal Analysis External Analysis

Strengths Weaknesses Opportunities Threats

SWOT Profile

Figure 6: SWOT Profile

The internal and external situation analysis can produce a large amount of
information, much of which may not be highly relevant. The SWOT analysis serves
as an interpretative filter to reduce the information to a manageable quantity of key
issues. The SWOT analysis classifies the internal aspects of the company as strengths
or weaknesses and the external situational factors as opportunities or threats.
Strengths can serve as a foundation for building a competitive advantage, and
weaknesses may hinder it. By understanding these four aspects of its situation, a firm
can better leverage its strengths, correct its weaknesses, capitalize on golden
opportunities, and deter potentially devastating threats.

37
Internal Analysis

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.

External Analysis:

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

38
 4. Financial Risk Analysis
5. Security Analysis

Credit Risk

Industry Technical Management Security

Financial Risk
Analysis Analysis Risk Analysis

Figure 7: Five Pillar Credit Risk Analysis

Industry Analysis

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:

Industry
Analysis

Industry Companies
Attractiveness Within

Figure 8: Industry Analysis

Industry Attractiveness:

Industry attractiveness includes the industry structure, market structure and the
regulatory environment in which the client operates.

Industry Structure:

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.

39
 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

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.

Regulatory Environment

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

40
 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
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, Consistency & Quality of communication with bank,
Supportiveness, etc of the management.

41
 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:

Financial
Risk

Performance Liquidity Leverage

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.

42
 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
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

43
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

44
 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.
 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.

45
 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.

HR Financial
Requirements Requirements
Industry
Technical
Direction
Requirements

Markets Legal
Growths Requirements
Hydropower
Industry

Bank
Financial Management
Risks Risks

Legal Industry
Requirements Risks
Technical Other factors
Risks to be
considered

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.

46
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.

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.

47
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.

48
 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.

Study Approach

The study necessary for the preparation of the report was conducted in these three
phases:

• Observation
• Adaptation
Phase 1

• Exploratory Research
Phase 2

• Descriptive Research
• Qualitative
Phase 3 • Quantitative

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

49
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.

50
This descriptive research mainly comprised of two parts:
o Qualitative research
o 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:

51
  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.

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.

52
 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.

53
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 non-
banking 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 micro-
credit development banks, 16 saving and credit co-operatives, and 46 NGOs as shown
in table below:

54
 Table 2: Financial Institutions in Nepal

Type of FI Mid-July
‘80 ‘85 ‘90 ‘95 ‘00 ‘05 ‘06 ‘07 ‘08
Commercial Banks 2 3 5 10 13 17 18 20 25
Development Banks 2 2 2 3 7 26 28 38 58
Finance Companies - - - 21 45 60 70 74 78
Micro Credit Development Banks - - - 4 7 11 11 12 12
Saving and Credit Cooperatives - - - 6 19 20 19 17 16
NGOs (limited Banking activities) - - - - 7 47 47 47 46
Total 4 5 7 44 98 181 193 208 235

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
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.

55
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
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

56
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
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

57
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.

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.

58
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

59
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

Increasing demand

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.

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 Table 3: Number of Consumers of Electricity in Nepal

Year No. of Consumers

1999 6,22,363
2000 6,73,979
2001 7,45,992
2002 8,84,535
2003 9,70,611
2004 10,53,935
2005 11,59,855
2006 12,77,447
2007 13,97,813
2008 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,

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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.

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 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 Installed Capacity in Avg Annual

KW Production in GWh
KaliGandaki "A" 1,44,000 842
Marshyangdi 69,000 463
Kulekhani No. 1 60,000 165
Kulekhani No. 2 32,000 105
Trisuli 24,000 163
Gandak 15,000 106
Modi Khola 14,800 93
Devighat 14,100 114
Sunkosi 10,050 70
Puwakhola 6,200 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

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 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 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Peak Demand (MW) 326 351 391 426 470 515 557 603 648 721
Available (GWh) 1475 1701 1868 2066 2261 2380 2642 2780 3051 3180
1. Hydro 1046 1233 1113 1113 1478 1345 1522 1568 1747 1798
2. Thermal 118 66 27 17 4 9 13 16 13 9
3. Purchase (Total) 309 401 727 936 778 1025 1106 1196 1291 1372
India 232 232 226 238 149 186 241 266 328 412
Nepal 77 169 501 698 628 838 864 930 962 960

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 Table 5: Future load calculation

Energy in GWh Peak Load in MW

2008/2009 3,620.40 793.30
2009/2010 4,018.40 878.80
2010/2011 4,430.70 967.10
2011/2012 4,851.30 1,056.90
2012/2013 5,349.60 1,163.20
2013/2014 5,859.90 1,271.70
2014/2015 6,403.80 1,387.20
2015/2016 6,984.10 1,510.00
2016/2017 7,603.70 1,640.80
2017/2018 8,218.80 1,770.20
2018/2019 8,870.20 1,906.90
2019/2020 9,562.90 2,052.00
2020/2021 10,300.10 2,206.00
2021/2022 11,053.60 2,363.00
2022/2023 11,929.10 2,545.40
2023/2024 12,870.20 2,741.10
2024/2025 13,882.40 2,951.10
2025/2026 14,971.20 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:

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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
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

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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 kW
1. Belkhu Khola 320
2. Upper Hadi Khola 991
3. Siuri Khola 990
4. Hewa Khola 2400
5. Lower Piula 990
6. Tinau Khola 990
Total 6681

Draft PPA Prepared 6 IPPs 6350 kW

Connection Agreements Requested 7 IPPs 34,935 kW
Projects under Detail Technical Review 10 IPPs 66,453 kW
Projects under general technical review 7 IPPs 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.

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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.

Financial analysis

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:

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 Table 7: Key Financial Indicators of NEA

2004/05 2005/06 2006/07 2007/08

Volume Indicators (Rs. in Mil.)
(a) Sales 12.61 13.33 14.45 15.41
(b) Net Working Capital* -8.97 -10.86 -12.49 -15.04
(c ) Net Trading Assets -11.7 -13.7 -15.47 -17.32
(d) Net Worth 15.49 17.21 21.7 22.03
(e) Net Fixed Assets 68.23 73.73 80.93 88.22
(f) Total Bank Loan O/S 44.54 46.49 47.62 52.76
Profitability Indicators (% )
(a) Gross Profitability 40.80% 37.50% 37.48% 35.54%
(b) Net Profitability -8.67% -11.74% 1.85% -8.19%
( c) Return on Capital -7.05% -9.09% 1.23% -5.73%
Employed
Liquidity Indicators (times)
(a) Current Ratio 0.49 0.45 0.45 0.43
(b) Quick Ratio 0.41 0.38 0.39 0.37
Efficiency Indicators (days)
(a) Stock days in hand 67 59 61 56
(b) Average Collection 107 112 130 161
Period
(c ) Average Payment Period 820 839 894 942
(d) Net Operating Cycle -646 -667 -703 -725
Financing Ratios
(a) D/E Ratio (Overall in %) 74.20% 73.00% 68.70% 78.20%
(b) Interest Cover (times)** 0.66 0.53 1.16 0.58
Altman's Z Score 0.61 0.56 0.6 0.53

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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.

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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:

 Capability:

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.

 Experience:

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.

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  Technical capability:

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.

 Community participation:

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.

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.

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Technical

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 Capacity, Head Powerhouse Total Operation
MW Works Mode
Kali Gandaki “A” 144 4 6 10 Manual/Auto
Marsyangdi 69 3 3 6 Manual /Auto
Kulekhani I 60 2 6 8 Manual/Auto
Kulekhani II 32 4 4 Manual/Auto
Trishuli 24 6 6 Manual
Gandak 15 6 6 Manual
Modi 14.8 3 4 7 Manual/Auto
Sunkoshi 10.05 6 6 Manual/Auto
Devighat 14.1 2 7 9 Manual
Puwa Khola 6.2 1 3 4 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.

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 3. Transmission line: The location of the nearest substation and the operational
quality of the sub-station may affect the overall project.

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.

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  Transformer - The transformer inside the powerhouse takes the AC and
converts it to higher-voltage current.
 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 re-
enters 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.

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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.
 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.

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 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:

 Shaft
 Excitor
 Rotor
 Stator

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.

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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. Air-
current 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
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

78
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

S. No. Project Not Requiring Requiring IEE Requiring Full

IEE/EIA (Category B) Scale
(Category A) EIA (Category
C)
1 Hydropower Up to 1 MW 1-5 MW schemes More than 5 MW
Projects schemes Schemes
2 Transmission lines Less than 33 kV From 33 kV to 66 Greater than 66
including substations kV kV
3 Rural Electrification Up to 1 MW, Less Up to 5 MW, 1 to More than 5
Projects than 6 MVA MW, grater
1 MVA than 6 MVA
4 Displacement of Displaces less than Displaces 25 to Displaces more
Settlement 25 100 persons with than 100
people with permanent people with
permanent settlements permanent
settlements residence

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 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:

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 Table 9: Unit rate of energy for different projects fixed between NEA and IPPs

Project Capacity Power Sale Rate for Remarks

in MW Each kWh
Khimti 60 US$ 0.085 (Approx.) About 3 % price escalation every year
Bhotekoshi 36
Chilime 20 Rs 6.98 (US$ .107) 8% price escalation for 3 more years
Indrawati 7.5 Rs 4.86 (US$ 0.075) No further price escalation
Syange 0.183 Rs 3.9 and 5.52 Rates for dry and wet months
Piluwa 3 (US$ 0.6 & No Price escalation since last three
Chaku 1.5 US$ 0.085) years
Sunkoshi 2.60
Rairang 0.5
Khudi 4
Pheme 1
Sisne 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)

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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
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

82
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.

Regulations

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."

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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
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.

84
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 pre-
requisite.
 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.
 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 non-
mitigable risks to either the government or private sector based on their
capability to bear the risk at the lowest cost.

85
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 multi-
purpose 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.
 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.

86
  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.

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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.
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.

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 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 co-
ordinates 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

Electricity commercial operation
Capacity Annual Energy Annual Energy
Annual Capacity Royalty, Capacity Royalty,
Capacity Royalty, per per kWh Royalty, per per kWh
kW kW
1 1 Up to 1 MW - - - -
2 From 1 MW to Rs 100/- 1.75% Rs 1000/- 10%
10 MW
3 From 10 MW Rs 150/- 1.85% Rs 1200/- 10%
to 100 MW
4 Above 100 Rs 200/- 2.00% Rs 1500/- 10%
MW
5 For captive use Rs 1500/- - Rs 3000/- -

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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

Annual Energy Annual Energy

Capacity Royalty, Capacity Royalty,
Royalty, per per kWh Royalty, per per kWh
kW kW
1 Export- Rs 400/- 7.5% Rs 1800/- 12%
oriented run
of-the-river
project
2 Export Rs 500/- 10% Rs 2000/- 15%
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.

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 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

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
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

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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.

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  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.

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 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.

Repatriation 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

94
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.

Inflation rate

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)
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.

Market risk

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

95
way to mitigate this risk is to sign a long term Power Purchase Agreement (PPA) with
the utility.

Revenue risk

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.

Payment risk

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, over-
employment, 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
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

96
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.

Hydrological risk

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
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.

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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.

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Normal Risk Sharing Arrangement for Hydropower projects

Plant Supplier
Insurance co.
Government

Contractor
Company

Utility
Risks Comments
Hydrology
Usually company. Sometimes
Temporary Deficit  access to Govt funds.
    Insurable.
Long term Deficit      Government increasingly
assuming risk

   insurance
Flood Damage (Construction) Generally contractor risk or

Flood Damage (Permanent)     Company risk. Insurable.

Construction Risk
Changes in quantities/cost
   shared
Either company, contractor or
overruns

    utility or shared
Unforeseen ground conditions Increasingly borne by the

   exposure by company.

Delayed completion Normally contractor risk, some

Performance risk

    contractor
Equipment Plant supplier or turnkey

Contractor and possibly

Land acquisition/resettlement    company
     the utility
EMP Usually the responsibility of

Environmental Aspects
Permitting       Company or the utility
Land acquisitions/resettlement       Government/utility
EMP       Government/utility
Market

     utility to maintain payments

Market risk Generally obligation on the

     utility and insurers.

Dispatch Principal exposure on the

Political
Obligation of utility       by political risk insurance.
Govt obligation often backed

Changes in law      
Changes in tax      

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 Plant Supplier
Insurance co.
Government

Contractor
Company

Utility
Risks Comments
Financial
Generally passed to utility in
Increase financing costs  the tariff or absorbed by
    company
Exchange rate      backed by government
Generally passed to utility,

Usually reflected in tariff

during construction and by
Cost escalation 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.

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 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
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

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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.

102
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

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

103
 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

a) 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
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

104
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.

105
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 professional of 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.

106
Nikhil Agrawal

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.

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.

107
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.

108
 References

1) Management Textbooks:
 Peter S. Rose ( Fourth Edition), Commercial Bank Management, Irwin-
McGraw 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

109
 Appendix

Appendix 1: New Credit Client Flow Chart

110
 Appendix 2: Sales in GWh

Particulars 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Domestic 410.57 467.05 518.36 557.94 617.11 676.37 758.19 805.72 893.27 951.84
Non-Commercial 62.93 63.59 73.16 78.22 80.74 83.01 100.54 95.29 100.52 108.90
Commercial 77.34 81.82 94.17 90.43 92.74 108.12 109.31 120.30 141.69 159.37
Industrial 411.00 508.36 520.63 596.68 629.51 689.80 764.00 785.55 849.13 911.67
Water Supply & Irrigation 22.83 15.74 28.60 29.28 29.98 31.67 49.98 45.50 47.96 47.50
Street Lights 29.41 31.74 36.98 39.52 45.80 55.20 54.86 63.24 66.90 72.58
Temporary supply 0.77 0.93 0.83 0.28 0.35 0.25 0.39 0.87 1.26 0.70
Transport 2.60 2.68 5.89 5.64 5.53 5.47 5.80 5.65 6.31 6.03
Temple 1.98 2.37 2.51 2.48 2.81 4.11 4.58 4.77 4.78 5.37
Community Sales - - - 5.72 4.74 5.58 6.03 9.18 15.51 23.45
Total Internal 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
Bulk Supply to India 64.16 95.00 126.00 133.86 192.25 141.23 110.70 96.55 76.87 61.50
Grand Total 1,083.59 1,269.28 1,407.13 1,540.05 1,701.56 1,800.81 1,964.38 2,032.62 2,204.20 2,348.91

111
Appendix 3: Revenues in Million Rupees

Particulars 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Domestic 2,056.05 2,622.03 3,161.38 3,641.43 4,249.81 4,578.99 5,079.87 5,405.12 6,021.40 6,396.37
Non-Commercial 419.58 527.40 835.78 722.12 783.99 816.01 947.12 881.73 940.20 1,012.74
Commercial 515.72 661.58 555.62 818.75 894.91 986.07 1,015.47 1,118.21 1,288.05 1,448.16
Industrial 2,093.88 2,599.34 3,086.10 3,608.13 4,039.65 4,380.22 4,851.40 4,978.69 5,300.91 5,652.36
Water Supply & Irrigation 78.14 95.65 120.90 138.68 148.53 154.80 239.97 197.96 214.18 212.98
Street Lights 11.37 149.95 176.05 200.74 246.79 329.52 315.45 422.35 454.85 487.00
Temporary supply 7.06 13.39 6.77 3.63 4.74 3.46 5.50 11.18 17.36 9.42
Transport 9.46 18.31 27.73 27.90 29.29 28.94 30.47 29.78 31.65 30.55
Temple 7.42 9.70 11.45 12.16 14.24 20.80 23.08 24.42 26.03 27.78
Community Sales - - - - 16.59 20.09 21.42 23.94 53.70 83.72
Total Internal 5,198.68 6,697.35 7,981.78 9,173.54 10428.54 11,318.90 12,529.75 13,093.38 14,348.33 15,361.08
Bulk Supply to India 198.15 327.80 396.06 514.12 808.96 673.69 573.44 579.33 428.93 370.23
Grand Total 5,396.83 7,025.15 8,377.84 9,687.66 11237.50 11,992.59 13,103.19 13,672.71 14,777.26 15,731.31
Other Income 285.86 336.09 689.08 328.96
Total Revenue 5,396.83 7,025.15 8,377.84 9,687.66 11,237.50 11,992.59 13,389.05 14,008.80 15,466.34 16,060.27

112
Appendix 4: Profit and Loss Account

Particulars 2004/05 VAR 2005/06 VAR 2006/07 VAR 2007/08

SALES REVENUE 12,605 6% 13,332 8% 14,450 7% 15,405

Local Sales 12,605 6% 13,332 8% 14,450 7% 15,405
COST OF SALES 7,462 12% 8,333 8% 9,035 10% 9,930
Purchases of Merchandises/materials consumed 7,247 12% 8,101 9% 8,794 9% 9,626
Raw materials/goods consumed 7,247 12% 8,101 9% 8,794 9% 9,626
Direct overhead costs 216 8% 232 4% 241 26% 304
GROSS PROFIT/CONT. MARGIN 5,143 -3% 4,999 8% 5,415 1% 5,475
Administration Overheads 622 -33% 420 14% 480 20% 576
Marketing and Dist. Overheads 1,484 15% 1,704 8% 1,834 6% 1,947
Depreciation Expense 1,734 5% 1,817 2% 1,856 3% 1,920
Deferred revenue Exp. Written off 123 -15% 105 -60% 43 64% 70
OPERATING PROFIT 1,179 -19% 954 26% 1,202 -20% 962
Non-operating incomes/(expenses) 618 640 59% 1,017 -36% 655
Provision for losses on property, plant and equipment -40 -65 -60 -30
EARNINGS BEFORE INT.& TAX 1,757 -13% 1,529 41% 2,159 -26% 1,587
Financial Expenses 2,850 9% 3,094 -39% 1,892 51% 2,849

113
NET PROFIT AFTER TAX -1,093 -43% -1,565 117% 267 -573% -1,262
Depreciation & Amortisation 1,857 4% 1,922 -1% 1,899 5% 1,990
NET CASH PROFIT 764 -53% 357 506% 2,166 -66% 728
APPROPRIATION OF PROFIT:
Accumulated Profit/(Loss) b/d -3,475 -38% -4,808 -27% -6,096 5% -5,802
Profit after tax for the year -1,093 -43% -1,565 117% 267 -573% -1,262
Insurance Fund -20 -20 -20 -20
Dividend Payment/Adjustment of Past Years -220 297 47 -50
Accumulated Profit/loss c/d -4,808 -27% -6,096 5% -5,802 -23% -7,134

114
Appendix 5: Balance sheet of NEA

PARTICULARS 2004/05 VAR 2005/06 VAR 2006/07 VAR 2007/08

Amounts in million rupees

ASSETS
Property Land and Equipment 52,167 -1% 51,743 0% 51,782 1% 52,294
Capital Work-in-Progress 16,060 37% 21,992 33% 29,145 23% 35,931
NET FIXED ASSETS 68,227 8% 73,735 10% 80,927 9% 88,225
Long Term Investments 777 6% 820 8% 882 82% 1,602
TOTAL NET FIXED ASSETS 69,004 8% 74,555 10% 81,809 10% 89,827
Stock of finished goods 1,373 -1% 1,355 11% 1,498 1% 1,518
TOTAL STOCKS 1,373 -1% 1,355 11% 1,498 1% 1,518
Trade Debtors 3,698 11% 4,088 26% 5,151 32% 6,777
Cash on hand & bank 1,323 -5% 1,259 15% 1,448 -43% 821
Deposits/ Advances Payment 2,099 2,294 -3% 2,226 2% 2,275
TOTAL QUICK ASSETS 7,119 7% 7,641 15% 8,825 12% 9,873
TOTAL CURRENT ASSETS 8,492 6% 8,995 15% 10,323 10% 11,391
TOTAL ASSETS 77,496 8% 83,550 10% 92,132 10% 1,01,218
LIABILITIES
Paid up Capital 20,162 15% 23,113 14% 26,382 8% 28,415
Accumulated profits/ Reserves 4,294 -29% 5,545 13% 4,803 -27% 6,115

115
TOTAL OWN FUNDS 15,868 11% 17,568 23% 21,579 3% 22,300
Deferred expenses 376 -4% 360 -135% 124 321% 275
TOTAL FICTITIOUS ASSETS 376 -4% 360 -135% 124 321% 275
NET WORTH 15,492 11% 17,208 26% 21,704 1% 22,025
Long/Medium Term Bank Loan 44,538 4% 46,488 2% 47,616 11% 52,762
TOTAL LONG/MED TERM DEBTS 44,538 4% 46,488 2% 47,616 11% 52,762
Trade Creditors 16,769 14% 19,144 16% 22,119 16% 25,618
Other current liabilities/Provisions 698 2% 710 -2% 693 17% 813
TOTAL CURRENT LIABILITIES 17,466 14% 19,854 15% 22,812 16% 26,431
TOTAL EXTERNAL LIABILITIES 62,004 7% 66,342 6% 70,428 12% 79,193
TOTAL LIABILITIES 77,496 8% 83,550 10% 92,132 10% 1,01,218

116
Appendix 6: Cash Flow Statement

Particulars 2005/06 2006/07 2007/08

A Cash flow from Operating Activities: 1,599 3,492 1,607
Operating Profit/income 954 1,202 962
Depreciation and Amortisation 1,922 1,899 1,990
Cash flow before change in working capital 2,872 3,565 2,533
Changes in working capital: 1,820 1,819 1,923
Current Assets:
Total Stocks 18 -144 -20
Advance Tax/VAT/other duties 0 0 0
Trade Debtors -390 -1,063 -1,625
Deposits/ Advances Payment -195 68 -50
L/C & B/Gua Cash Margin 0 0 0
Miscellaneous current assets 0 0 0
Changes in Current Assets: -568 -1,139 -1,695
Current Liabilities:
Trade Creditors 2,376 2,975 3,499
Other current liabilities/Provisions 12 -17 120
Changes in Current Liabilities: 2,388 2,958 3,619
Net Operating Cash flows before interest 4,692 5,384 4,456
Interest Expenses -3,094 -1,892 -2,849
B Cash flow from investing activities: -6,728 -8,094 -9,283
Purchase/sale of fixed assets -7,325 -9,049 -9,218
Non-Operating income (other income) 640 1,017 655
C Cash flow from financing activities: 5,199 4,445 7,129
Bank Loan (short term) 0 0 0
Loan from shareholders/directors/third parties 0 0 0
Long/Medium Term Bank Loan 1,950 1,128 5,146
Increase (decrease) in cash 70 -157 -547
Opening cash balance 1,323 1,259 3,363
Closing cash balance as on F.Y. End 1,392 1,102 2,816

117
 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 export-oriented hydropower 35 Years
project:
(c) 60% utilized by national 30 Years
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. 25 Years
Electricity Distribution License 25 Years

Appendix 8: Demand of Energy

Particulars 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Peak Demand
326.4 351.9 391 426 470.3 515.2 557.5 603.2 648.3 721.7
(MW)
Available Energy
1475 1701 1868 2066 2261 2380 2642 2780 3051 3180
(GWh)
1. Hydro 1046 1233 1113 1113 1478 1345 1522 1568 1747 1798
2. Thermal 118.6 66.7 27.1 17.01 4.4 9.92 13.66 16.1 13.31 9.17
3. Purchase (Total) 309.6 401.5 727.9 936.3 778.6 1025 1106 1196 1291 1372
India 232.3 232.2 226.5 238.2 149.8 186.6 241.3 266.2 328.8 412.4
Nepal 77.28 169.3 501.3 698.0 628.8 838.8 864.7 930 962.2 960.4

118
 Appendix 9: Number of Consumers of Electricity

Particulars 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Domestic 5,93,468 6,43,314 7,13,307 8,48,540 9,30,554 10,10,719 11,13,740 12,27,295 13,39,253 14,58,419
Non-Com 7,654 7,815 7,643 8,629 9,722 9,865 9,950 10,010 10,215 10,639
Commercial 2,948 3,096 3,386 3,898 5,317 5,454 6,000 6,170 6,000 6,597
Industrial 14,996 16,179 17,701 18,789 19,833 21,374 22,500 23,020 24,089 25,498
Water Supply 215 232 236 251 305 352 370 380 414 444
Irrigation 876 967 1,083 1,353 1,721 2,557 3,400 6,450 13,183 17,654
Street Lights 842 932 1,012 1,048 1,229 1,437 1,500 1,550 1,608 1,952
Temporary 207 144 141 172 138 150 155 165 210 298
Transport 21 47 37 49 48 48 50 54 39 37
Temple 1,131 1,248 1,441 1,800 1,738 1,959 2,150 2,290 2,628 2,752
Community - - - 1 1 15 35 58 169 315
Internal 6,22,358 6,73,974 7,45,987 8,84,530 9,70,606 10,53,930 11,59,850 12,77,442 13,97,808 15,24,605
Bulk Supply to India 5 5 5 5 5 5 5 5 5 5
Grand Total 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

119
 Kulekhani No. 1 60,000
Appendix 10: Existing Projects in Nepal Kulekhani No. 2 32,000

Project Name Capacity (KW) Manang 80

Existing Marshyangdi 69,000

Achham 400 Modi Khola 14,800

Andhi Khola (BPC) 5,100 Namche (KBC) 600

Arughat Gorkha 150 Panauti 2,400

Baglung 200 Phemekhola 995

Bajura 200
Baramchi 980
Bhotekoshi (BKPC) 36,000
Chakukhola (APN) 1,500
Chame 45
Chatara 3,200
Chilime (CPC) 20,000
Devighat 14,100
Dhading 32
Dolpa 200
Doti 200
Duhabi Multifuel 39,000
Fewa (Pokhara) 1,000
Gamgadhi 50
Gandak 15,000
Helambu 50
Heldung (Humla) 500
Hetauda 14,410
Indrawati-III (NHPC) 7,500
Jhimruk (BPC) 12,000
KaliGandaki "A" 1,44,000
Kalikot 500
Khimtikhola (HPL) 60,000
Khudi (KhudiHP) 3,450

120
 Okhaldhunga 125
Appendix 11: Existing and Private sector Phidim 240
projects
Syarpudaha (Rukum) 200
Project Name Capacity Taplejung 125
(KW) Terhathum 100
Piluwa Khola (AVHP) 3,000
Puwakhola 6,200
Rairang 500
Ramechhap 150
Rupalgad (Dadeldhura) 100
Salinadi 232
Salleri (Sceco) 400
Sangekhola 183
Seti (Pokhara) 1,500
Simikot 50
Sisnekhola 750
Sundarijal 640
Sunkoshi Small 2,500
(SanimaHP)
Sunkosi 10,050
Surnaiyagad (Baitadi) 200
Tatopani/Myagdi (I) & (II) 2,000
Thoppalkhola 1,650
Tinau (Butwal) 1,024
Trisuli 24,000
Leased to Private Sector
Bajhang 200
Bhojpur 250
Chaurjhari (Rukum) 150
Darchula (I) & (II) 300
Jomsom 240
Jumla 200
Khandbari 250

121
Appendix 12: Other Projects in Nepal Appendix 13: Hydropower Projects
Project Name Capacity under construction
(KW) Project Name Capacity

Not in normal operations Priliminary WIP

Dhankuta 240 Belkhu 320

Daramkhola 5,000
Gorkhe (Ilam) 64
Hewakhola 2,400
Jhupra 345
Lower Chakukhola 1,765
Pharping 500
Lower Nyadi 4,500
Syangja 80
Lower Piluwa 990
Planned/ Proposed
Madi-1 10,000
Arun 3 4,02,000 Maikhola 2,400
Balefi 20,000 Mailung 5,000
Budhi Gandaki 6,00,000 Narayani Shankar Biomass 500
Daram Khola 5,000 Phawakhola 2,079
Fawa Khola 2,079 Siurikhola 990

Kabeli "A" 30,000 Tadikhola 970

Tinaukhola Small 990
Khimti - II 27,000
Upper Maikhola 3,100
Likhu - 4 1,20,000
Upper Modi 14,000
Lower Indrawati 4,500
Under Construction
Lower Nyadi 4,500
Chamelia 30,000
Madi -1 10,000
Gamgadhi 400
Mailung 5,000 Kulekhani No. 3 14,000
Rahughat 30,000 Lower Indrawati 4,500
Seti (West) 7,50,000 Mardikhola 3,100
Seti Trishuli (Storage) 1,28,000 Middle Marsyangdi 70,000
Upper Marsyangdi 'A' 1,21,000 Patikhola 996

Upper Modi 14,000 Ridikhola 2,400

Upper Modi 'A' 42,000 Seti -II 979

Upper Hadikhola 991
Upper Seti (Storage) 1,28,000
Upper Karnali 3,00,000
Upper Trishuli-3'A' 60,000
Upper Tamakoshi 3,09,000
Upper Trishuli-3'B' 37,000

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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
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.

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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.

Documentary Bills Purchased and Discounted:

The bank extends loan facilities against the Documentary Bills on recourse
basis.

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 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.
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 long-
term financing needs.

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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
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.

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Appendix 15: Commercial banks in Nepal

Name of the Bank Established in

Nepal Bank Ltd 15 November 1937
Rastra Banijya Bank 23 January 1966
Agriculture Development Bank Ltd Est. 1968
Nabil Bank Ltd 16 July 1984
Standard Chartered Bank Nepal Ltd 24 January 1986
Nepal Investment Bank Ltd 27 February 1986
Himalayan Bank Ltd 18 January 1993
Nepal SBI Bank Ltd 07 July 1993
Nepal Bangladesh Bank Ltd 01 June 1994
Everest Bank Ltd 18 October 1994
Bank of Kathmandu Ltd 03 March 1995
Nepal Credit and Commerce Bank 14 October 1996
Lumbini Bank Ltd 17 July 1998
NIC Bank Ltd 21 July 1998
Machhapuchhre Bank Ltd 03 October 2000
Kumari Bank Ltd 03 April 2001
Laxmi Bank Ltd 03 April 2002
Siddhartha Bank Ltd 24 December 2002
Global Bank Ltd 02 January 2007
Citizens’ International Bank Ltd 20 April 2007
Prime Commercial Bank 24 September 2007
Bank of Asia Nepal Ltd 12 October 2007
Sunrise Bank Ltd 12 October 2007
Development Credit Bank Ltd Upgraded in 2007
NMB Bank Ltd Upgraded in 2007

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Appendix 16: Assignment 1

Assignment 1
Goals and objectives of the Interns

Nikhil Agrawal

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.

Academic Goals:
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.

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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
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

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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
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 hands-
on, 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
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

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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.

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Appendix 17: Assignment 2

Assignment 2:
Interview of supervisor at workplace

Interview done by: Nikhil Agrawal

Name of the interviewee (Supervisor): Mr. Abhaya Bahadur Shah
Position: Relationship Manager
Department: Credit Department
Organization: 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
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

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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
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.

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Interview done by: Rishabh Tibrewala
Name of the supervisor: Mr. Pawan Agrawal
Position: Credit Analyst
Department: Risk Management Division
Organization: Himalayan Bank Ltd.

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.

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

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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

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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.

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