Nepali Industries Secure Over Rs 60 Billion in Foreign Loans

As of the fiscal year 2022/23, Nepal's private sector has secured foreign loans amounting to Rs 60.28 billion, representing roughly 20% of the nation's total foreign investment, according to the Foreign Direct Investment Survey Report 2022/23 published by Nepal Rastra Bank. The total foreign direct investment in Nepal currently stands at Rs 295.49 billion, highlighting the significant role that foreign loans play in the country's economy.

In recent years, Nepal has eased the process for companies to acquire foreign loans as a form of investment. The Foreign Investment and Technology Transfer Act of 2018 allows companies with foreign investment to secure loans from international financial institutions through project loans or investment agreements. Additionally, public limited companies in Nepal can raise funds by issuing foreign bonds, debentures, and other securities under the same Act.

To further support this framework, Nepal Rastra Bank introduced a policy in 2022 that allows companies with foreign investment to borrow up to 100% of their net worth from their parent companies or other entities abroad. In January 2022, the Foreign Investment and Loan Management Regulations were amended to increase this borrowing limit from 60% to 100% of net worth. The provision for companies to borrow from their overseas parent firms was first introduced in 2021.

Despite these regulatory changes, challenges remain. Suraj Vaidya, chairman of the Vaidya Group of Industries, pointed out that Nepali industries still face significant hurdles in obtaining foreign loans. "Foreign lenders are often hesitant to lend to Nepali companies due to the absence of a sovereign credit rating for Nepal," he said.

The government has been considering establishing a sovereign credit rating for Nepal to attract more international investors, but progress has been slow, even after selecting an international rating agency for the task. Although the government announced plans to complete this rating before the investment summit held last April, the process has yet to begin.

In December 2019, Nepal selected Fitch Ratings, an international rating company, to provide a rating for the country. Vaidya, who has invested in the Huaxin Narayani Cement Industry as a joint venture partner with Chinese investors, mentioned that the company secured a loan equivalent to USD 30 million from China’s Export-Import Bank, according to a report. The company also sought financing from the International Finance Corporation, part of the World Bank Group.

According to Nepal Rastra Bank's report, the foreign loans outstanding as of FY 2022/23 were lower than in the previous fiscal year when Rs 68.68 billion was recorded. Prakash Kumar Shrestha, Executive Director of Nepal Rastra Bank and a member of the National Planning Commission, explained that this decline in foreign loan balances is largely due to increased repayment activity. "There has been a noticeable increase in foreign investments in Nepal's private sector recently," Shrestha stated. "As banks have become more involved in settling these loans, the proportion of foreign loans has decreased."

The report also highlights that the largest share of foreign loans in FY 2022/23 was directed towards the electricity, gas, steam, and air conditioning sectors, amounting to Rs 29.26 billion. The construction sector followed with Rs 17.04 billion, while the financial and insurance services sector had foreign loans totaling Rs 11.91 billion. The transportation and storage sector accounted for Rs 2.05 billion.

A survey conducted in FY 2022/23, involving 238 companies operating with foreign direct investment, found that the total stock of foreign direct investment in Nepal increased by 11.8% to Rs 295.50 billion by the end of the fiscal year. This investment is composed of 52.8% paid-up capital, 33.7% reserves, and 13.5% loans.

As of July 2023, Nepal had received foreign direct investment from 58 countries. India remains the largest investor, contributing 35% (Rs 103.45 billion) of the total, followed by China (Rs 35.46 billion, 12%), Ireland (Rs 22.62 billion, 7.7%), Australia (Rs 19.06 billion, 6.4%), and Singapore (Rs 18.81 billion, 6.4%).

Sector-wise, 59.7% of the foreign direct investment in Nepal is concentrated in the industrial sector, while the remaining 40.2% is in the service sector. Within the industrial sector, hydropower and manufacturing attract 30% and 29.4% of the investments, respectively. In the service sector, banks, financial institutions, and insurance companies account for 26% of the total foreign direct investment.

Regionally, Bagmati Province leads with 59.7% of the foreign direct investment in Nepal, followed by Gandaki Province (15.1%), Koshi Province (14.7%), and Madhesh Province (8.8%). The provinces of Lumbini, Karnali, and Sudurpaschim each account for less than 1% of the total foreign direct investment, according to the central bank.