Nepal Rastra Bank NRB (Central Bank
of Nepal) has increased the capital requirement by four times for the
commercial banks (NPR 8 billion from NPR 2 billion). The decision to increase
the paid up capital within two years is not only applicable for commercial
banks but also for development banks and finance institutions.
This has forced banks and financial
institutions towards merger & acquisition, issuance of bonus and right
shares.
Although banks and financial
institutions have shown dissatisfaction over the new directive, this is a positive
news for hydropower developers.
How
hydropower will benefit from the changing scenario?
1) The NRB has set a
regulatory cap of 25% of the total core capital as a single borrower limit. But
in case of hydropower, there is a special provision. It states “banks may
advance to the projects relating to hydropower project, the fund-based loan and
non fund-based facilities not exceeding an amount of 50 percent of its core
capital”.
The increase in paid up capital will
certainly increase the core capital fund of the banks. Thus, it strengthens
banks financial position to invest more in hydropower.
2) Banks will be in better position
to finance comparatively larger hydropower projects than they used to do before.
(Do not expect to finance large projects by the way).
There might not be a need
for forming a consortium for projects below 10 MW. Even for projects up to 25
MW, 2 to 3 banks will have the adequate capacity.
If anyone involved in the financial
closure know the pain of having a number of consortium member banks. Having worked for
both sides (on behalf of banks and the developers), I can tell you it is not an easy task for developers and the lead bank to find member banks. I remember doing a financial closure of a 24 MW project by involving
10 banks. Each bank had to get approval from their respective boards (hydropower loan generally cross the bank CEO's limit). It was
actually frustrating and time consuming.
Still
more room to improve.
1) Banks and financial institutions
lack matching funds. Nepali banks generally collect short term deposits
(normally 1 to 2 years) while hydropower loan is long term in nature (usually
12 to 15 years). As such, banks charge floating interest rate that put developers
in a huge risk.
The best way to mitigate this risk
is to enhance the capacity of banks and financial institutions to collect
longer term deposits.
2) The amount of risk involved
during construction and operation of the projects is totally different. This
should be reflected in the interest rate too.
3) A provision of reviewing interest
rate exists in all loan syndication agreements. However, banks are always in a
rush to increase the interest rate during liquidity crisis while they seem to be less bothered to do the opposite in surplus situation.
4) Banks are charging as high as 3
percent for swapping loan. There should not be any charges at all. Developers
should have the freedom to switch banks if they feel necessary.
5) NRB should relax the provision
for non performing loans. Currently, 100% provisioning is required for non performing
loan. This is one of the reasons why banks are not interested in non-recourse
financing.
6) Lack of in-house hydropower
experts in banks and financial institutions results in delayed decision making
as they have to rely on external consultants fully. This is where NRB can
intervene and instruct banks and financial institutions to hire in house
hydropower consultants.
7) The current minimum lending
requirement in agriculture and hydropower sector is 12 percent (both combined) of
the total loan portfolio. This minimum requirement has to be further increased
if we are to generate hydro electricity rapidly. Also, this minimum requirement should be the actual investment not the commitment. Because the current regulation allows banks to count the commitment amount, there are many incidents where banks have not shown interest in actual disbursement.
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