Report No. 1398a-NEP RLE COPYAppraisal of the NepalIndustrial Development Corporation NepalApril 15, 1977

Industrial Development and Finance DivisionSouth Asia Projects Department

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may nototherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Rs = Nepalese RupeesUS$1 Rs 12.50Rs 1 = US$0.08Rs 1 million = US$80,000Rs 1 billion = US$80.0 million

ABBREVIATIONS

AGDB = Agricultural Development BankCID = Cottage Industries DepartmentHMG = His Majesty's Government of NepalISC = Industrial Services CenterKfW = Kreditanstalt fur WiederaufbauNIDC = Nepal Industrial Development CorporationSIDC = Small Industries Development CorporationUSAID = United States Agency for International

Development

FISCAL YEAR

HMG and NIDC July 16 - July 15

FOK OFFICIAL USE UJNLYNEPAL

APPRAISAL OF THENEPAL INDUSTRIAL DEVELOPMENT CORPORATION

TABLE OF CONTENTS

Page No.

SUMMARY AND CONCLUSIONS ........... ...... i.

I. INTRODUCTION .............................................. 1

II. ECONOMIC ENVIRONMENT ............... .. .................

III. INDUSTRIAL AND FINANCIAL SECTOR ....... ................ 2

Origin of Industrialization .......................... 2The Structure of Industry ............................. 3Types of Industry ...... .................. . 3Location of Industry ...... ............................ 4Constraints on Industrialization ................... ... 5Industrial Planning .............. ..................... 5Industrial Policy ..................................... 6Industrial Coordination ..... ........................ . 7Licensing Procedures ...... .......................... 7Industrial Finance .................................... 8Interest Rates ....................................... . 9

IV. INSTITUTIONAL ASPECTS ................ ................. 10

Share Capital and Ownership ...... ..................... 10The Institution ....................................... 10Organization .......................................... 12

V. POLICIES AND PROCEDURES ............. .. ................ 13

Operating Policies .................................... 13Relationship with Government and Business Community ... 16

VI. OPERATIONS ........................................ 17

Summary of Operations ....... .......................... 17Characteristics of Loans ...... ........................ 17Guarantee Operations ....... ........................... 18Equity Investments .................................... 18NIDC Terms of Assistance ..... . .......................... 19

This report was prepared by Messrs. A Wateler and E. Nassim followingtheir visit to Nepal in September 1976.

TPA document has a restricted diebution and may be used by recipients only in the performanceO(dMf official duties. Its contsnu may not otherwise be disclosed without World Bank authorization.

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Page No.

Industrial Districts .................................. 20Small-scale Industry .................................. 20

VII. RESOURCES .............................................. 21

NIDC Funding ........................................... 21

VIII. FINANCIAL POSITION AND PERFORMANCE ..................... 23

Profitability ....... .............. ..................... 23Financial Position ...... ...................... ........ 23Quality of Portfolio ................ .. ................. 24

IX. PROSPECTS .............................................. 25

General Outlook .................... .................... 25Resource Requirements ............... .. ................. 26NIDC Pipeline ....... .............. ..................... 26Financial Projections ............... .. ................. 28

X. OBJECTIVES AND FEATURES OF THE PROPOSED CREDIT ... ...... 29

Objectives of Credit ............... .. .................. 29Lending Scheme ...... .............. ..................... 29Main Terms ....... ............... ....................... 29

XI. RECOMMENDATIONS ........................................ 30

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

ANNEXES

1. Industrial performance FY73-762. Village and cottage industries3. The tourism sector

Attachment 1 - Number of visitors arriving in NepalAttachment 2 - Tourist arrivals by main nationalitiesAttachment 3 - Gross foreign exchange earnings for tourismAttachment 4 - Present and future hotel capacity in the

Kathmandu ValleyAttachment 5 - Monthly bed occupancy rates for hotels in

the Kathmandu ValleyAttachment 6 - Present and future hotel capacity outside the

Kathmandu ValleyAttachment 7 - Visitor arrivals by purpose of visit

4. Summary of the 1974 Industrial Policy Statement5. The Industrial Services Centre

Attachment 1 - Board of DirectorsAttachment 2 - Organization of Industrial Services Centre

6. Composition of Licensing Board7. Applications and licenses issued and breakdown by type of Industry8. Source of funds for industry9. Commercial banks deposit rates10. Commercial banks loan rates11. Commercial banks' balance sheets12. NIDC's Board of Directors13. NIDC's composition of staff14. NIDC's organization structure15. NIDC's Statement of Investment and Operational Policies16. NIDC's loan requests and approvals for 1973-197617. Time and cost overruns for projects completed during 197618. Procurement of imported plant and machinery by source and

amount19. NIDC's follow-up visits for 1975 and 197620. Summary of operations 1971-197621. Industry-wise distribution of loans outstanding 1971-197622. Analysis of loan approval by size, maturity, nature of projects

and geographical spread 1970-197623. Equity portfolio as of July 15, 197624. NIDC's main terms and conditions25. Resource statement as of July l5, 197626. Details on foreign borrowing up to July 15, 197627. Income statements 1971-197628. Comparative operational ratios 1972-197629. Balance sheets 1971-197630. Trends in arrears 1973-197631. Arrears by region and industry32. NDIC's proposed strategy paper 1977-1979

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33. 'Forecast of approvals, commitments and disbursements 1977-198134. NIDC new project pipeline for 1977-197935. 'Projected income statement 1977-198136. Comparative operational ratios 1977-198137. Projected cash flow statement 1977-198138. Projected balance sheet 1977-198139. ]Estimated disbursement schedule

MAP

IBRD -- 11462

NEPAL

APPRAISAL OF THENEPAL INDUSTRIAL DEVELOPMENT CORPORATION

SUMMARY AND CONCLUSIONS

(i) The Nepal Industrial Development Corporation (NIDC) is the mainsource of long-term finance to the private industrial sector in Nepal. NIDCwas established in 1959 as a fully government-owned financial institutionresponsible for the promotion and financing of private industry includingtourism. In the past, NIDC has received a number of small loans from bilat-eral sources which have been almost fully utilized. This report recommendsa $4 million IDA credit to NIDC.

(ii) Nepal's economic growth has been slow over the past decade withan average real rate of growth of about 2%. During the same period, pop-ulation increased by just over 2%, therefore GDP per capita (about $100)did not increase. The slow growth was partly due to the priority givento development of infrastructure over productive sectors. Nepal is nowattempting to shift its priorities and to focus on the productive sectorsfor which about 50% of development expenditures for 1975-1980 are planned.

(iii) Nepal's balance of payments position had been favorable until theend of FY74 as the trade deficit had been more than offset by remittancesand pensions, interest on external reserves and tourism. However, in 1975,because of the increase in overseas imports, especially commodities that couldnot be supplied by India because of shortages, and a concurrent increase inthe outflow of private capital, the balance of payments deteriorated. Thisin turn helped cause the Government (HMG) to devalue the Nepalese Rupeeagainst the US dollar from Rs 10.56 to Rs 12.50 in October 1975.

(iv) Although the modern manufacturing sector has been growing rapidly,(7-8% in real terms) it still accounted for only about 4% of GDP in 1975. Mostindustries were established or expanded after 1955, when HMG's policy becamemore specific with the adoption of five year plans and the issue of indus-trial policy statements. A number of basic factors have hampered Nepal'sindustrialization: (1) the small size of the geographically dispersed mar-ket, with only 5% of the population living in urban areas; (2) Nepal'sland-locked position which leads to high cost of industrial raw materials andequipment as well as distribution of manufactured goods; (3) the shortage ofentrepreneurial and managerial talents; and (4) limited exploitable naturalresources. In this environment it is understandable that entrepreneurshave been giving preference to easy, low risk commercial activities suchas trade, construction, and land holdings.

(v) HMG has made strong efforts in recent years to make industrialinvestments more attractive and has granted a number of tax and other conces-sions. As a result of the various incentives, industrial investment has in-creased significantly. This is evident from NIDC's strongly improved disburse-ments over the past two years, which equaled all disbursements prior to FY74.

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Most disbursements were for projects approved prior to the April 1975 interestrate increase. While in the sixties, HMG was sometimes forced to take up in-dustrial projects which were originally reserved for the private sector, thishas changed recently. HMG's attitude towards the private sector remains verypositive and as of July 1976, it expanded the number of industries in which theprivate sector may have a majority interest.

(vi) HMG has allocated approximately 18% of its total planned develop-ment expenditure for 1975-1980 to the industrial sector (including power).HMG has defined its industrial objectives as follows: (1) the encouragementof import-substitution industries for certain essential goods such as sugar,textiles, paper, cement, etc.; (2) the modernization, balancing and expan-tion of export industries based on local raw materials such as jute and tea;(3) the erLcouragement of economically viable industries in less developedareas of Nepal, particularly small-scale village and cottage industries;and (4) thie expansion of job opportunities.

(vii) HMG's strategy with regard to tourism development has been basedon a 1972 master plan prepared with German technical assistance. The inten-tion is to increase foreign exchange earnings by capitalizing on Nepal'smagnificent landscape and rich cultural heritage, and to provide employment tothe rapidly growing labor force. Since the hotel capacity constraint in theKathmandu Valley will soon be eliminated, EMG's objectives are now to expandthe infrastructure in tourist areas outside Kathmandu, which should lengthenthe stay of tourists visiting Nepal.

(viii) NIDC has followed HMG's objectives very closely. It has financeda number of large and small hotels in the Kathmandu Valley and it will helpexpand hotel capacity in places of interest outside Kathmandu. However,capacity requirements are relatively small; consequently, NIDC's hotel fi-nancing role will reduce substantially in future, particularly when largehotels currently under construction in Kathmandu are completed (1976-1979).

(ix) In view of Nepal's limited resource endowments, NIDC has financedmainly small and simple projects, based on domestic materials. Scope existsfor further financing of projects based on agricultural raw materials andforest products. Most of these projects are of an import substitution natureand are aimed at expansion of the supply of basic consumer goods. The averagesize of the projects will be only about $500,000, and many of these projectsinvolve replacement of old, obsolete machinery. It is not expected that suchprojects will face raw material constraints.

(x) NIDC's approvals and commitments dropped considerably in FY76(although disbursements remained high), mainly due to the sharp increase ininterest rates from 7.5% to 14%, but it is expected that applications willimprove in FY77, as interest rates have been reduced to 11% since July 1976.Foreign currency commitments, including Indian rupees, are projected at Rs 48million in FY77, Rs 61 million in FY78 and Rs 68 million in FY79. The IDAcredit will finance 40% of total foreign exchange requirements (includingIndian Rupees) of $10 million during July 1977-July 1979. For NIDC to fulfillits projected foreign exchange commitment program, it is assumed that HMG will

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continue to allow convertibility of locally borrowed Nepalese currency intoIndian, although the IDA funds may also be utilized for the import of Indianmachinery and equipment.

(xi) To cope satisfactorily with the increased future operations, NIDC'sorganization policies and procedures need to be strengthened. This is alsorecognized by NIDC management who have already implemented IDA's recommenda-tions aimed at improving the efficiency and effectiveness of NIDC's operations.This will be facilitated by the fact that NIDC has recently transferred themanagement of two industrial districts to the Industrial Services Centerand has ceased its cottage industries assistance, which responsibility hasbeen taken over by the commercial banks and the Department of Cottage Indus-tries. As a consequence, NIDC management can now give its undivided atten-tion to financing of small, medium and largescale industrial projects.

(xii) NIDC's financial position is very strong, because HMG has made allits capital contributions from the budget in the past in the form of equity,resulting in a debt/equity ratio of 0.5:1 at the end of FY76. Its profit-ability was low in the past but has increased substantially in FY75 andFY76 (1.1% return on equity) and it is expected to increase to 2.8% by FY81.NIDC's debt-equity limit has been set at 5 to 1, though it should not reachthis limit for the next 5 years.

(xiii) The quality of NIDC's loan portfolio has improved significantlyin recent years with arrears (principal and interest) decreasing from 30% ofthe loan portfolio in FY73 to 11% in FY76. NIDC has increased its provisionfor doubtful debts to Rs 3.3 million which is reasonable.

(xiv) On the basis of agreements reached with HMG and NIDC, a $4 millionIDA credit is recommended which will be on-lent by HMG to NIDC at 8.2%. Theobjectives of the proposed credit are: (a) to help finance economically via-ble industrial projects controlled by the private sector; (b) to provide thebasis for an institution building program for NIDC. Two experienced advisors,one for policy matters and one for the improvement of NIDC's accounting andinformation system, will be assigned to NIDC for a period of about two yearseach. UNDP has agreed to finance the former advisor, and the United Kingdomhas tentatively agreed to finance the latter advisor. The 48 man-months oftechnical assistance is estimated to cost about $216,000.

NEPAL

APPRAISAL OF THENEPAL INDUSTRIAL DEVELOPMENT CORPORATION

I. INTRODUCTION

1.01 The Nepal Industrial Development (NIDC) was established in 1959 asa fully government-owned institution with the responsibility of promoting andfinancing private industry. Over the years, it has received technical andfinancial assistance from bilateral aid agencies. NIDC had been the onlysource of medium and long-term financing for private industry in Nepal until1975 when commercial banks were permitted to make term loans for industry.

1.02 At the request of HMG, a Bank mission visited NIDC in November/December 1973 to review its operations. NIDC's foreign resource position atthat time was sufficiently strong and no lending recommendation was made. How-ever, in the past three years, this has changed substantially with the resultthat a $4 million IDA credit is now recommended to HMG to be on-lent to NIDC.The objectives of the proposed credit are to meet part of NIDC's foreignresource requirements from July 15, 1977 to July 15, 1979 and to assist inthe development of NIDC as a strong and viable organization that finances theprivate sector in Nepal.

II. ECONOMIC ENVIRONMENT

2.01 Nepal's GDP was estimated to be Rs 15.1 billion in current pricesat the end of FY75, having increased from an estimated Rs 13.1 billion inFY74, or by 15% 1/. In real terms, Nepal's economic growth has been slow,with an average real rate of growth of 2.2% from FY67 to FY75. During thesame period, population increased by just over 2%. There was, therefore,hardly any increase in GDP per capita which was just over $100 in FY75.Agriculture accounts for roughly two-thirds of GDP, 80% of export earningsand about 90% of employment. The manufacturing, mining and constructionsector accounted for only 4% of GDP, although these sectors have been rapidlygrowing. Over the past ten years, value-added in manufacturing has more thandoubled in real terms.

2.02 Nepal's balance of payments position had been favorable until theend of FY74 as the trade deficit had been more than offset by remittancesand pensions, interest on external reserves and tourism. Balance of payments

1/ A more detailed assessment of Nepal's economy is contained in the Bank'slatest economic report No. 1180-NEP of July 22, 1976.

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surpluses amounted to about $10 million a year and foreign exchange reserveswere $139 million in November 1974. This represented more than 12 months ofimports. However, in 1975, because of the increase in overseas imports(especially of commodities that could not be supplied by India because ofshortages and had to be supplied from other countries at higher prices) anda concurrent increase in the outflow of private capital, foreign exchangereserves declined to $105 million by September 1975. To cope with this situa-tion, the Nepalese authorities adopted a package of stabilization measureswhich included restraining of credit to the public sector, raising interestrates and a partial reform of the exchange and trade system. The latterinvolved a devaluation of the Nepalese rupee against the U.S. dollar fromRs 10.56 to Rs 12.50 in October 1975, while keeping the parity rate againstthe Indian rupee unchanged. The tentative figures for FY76 show a rise in ex-ports to Rs 1,012 million for the first 9 months compared with Rs 738 millionfor the first 9 months of FY75 whereas import growth was small (from Rs 1,701million in the first 9 months of FY75 compared with Rs 1,747 million in FY76)which has resulted in a reduced trade gap. During the same period, the rateof increase in the Kathmandu consumer price index declined from 16% to 4%,though this index is not an accurate yardstick for inflation. Although theannual inflation rate has been declining in.recent years, it is still about6%.

2.03 In FY76, Nepal's recorded trade with India accounted for approxi-mately 75% of its total exports and 66% of its total imports. The tradingrelationship between the two countries is governed by a Trade and TransitTreaty. This treaty has expired and negotiations between the two countriesare stalemated. In the meantime, trade is still being conducted on the basisof the old treaty though this has created some uncertainty in the investmentclimate.

III. THE INDUSTRIAL AND FINANCIAL SECTOR

Origin of Industrialization

3.01 Small-scale handicrafts have long been produced, but significantmedium industrialization did not begin until 1936 when a jute mill was estab-lished in Biratnagar with Indian assistance. Other industries such as themanufacture of matches, soap, rice and oil milling developed during the SecondWorld War. Most of these industries fared badly after the war and it was notuntil the 1950's that an attempt was made to create a proper climate for in-dustrialization. Government policy became more specific regarding industrial-ization with the adoption of five year plans in the 1950's, with the publica-tion of a general statement of Industrial Policy in 1957 and the creation ofthe Nepal Industrial Development Corporation in 1959 to finance privateindustry.

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The Structure of Industry

3.02 According to the 1972/73 census of manufacturing establishments, 1/

there are approximately 2,400 manufacturing establishments in Nepal employ-

ing 50,000 workers giving an average employment per establishment of about

20 workers. However, the majority of the firms are considerably smaller than

this, with 80% of them employing less than 10 workers. It is estimated

that only 65 of these establishments employ 100 or more workers.

3.03 Industrial productivity is extremely low with the overall value -

added per worker at US$560. This is partly explained by the high labour

intensity of most of the processes, since the value of fixed assets per

worker is only US$430. Equally important factors are the high incidence of

temporary closures caused by shortages of raw materials and spare parts and

the low level of technical and managerial skills.

3.04 It is estimated that 48% of Nepal's industrial sector production is

exported. However, 95% of these exports are from the grain and oil milling

industries whose export sales are virtually confined to India. The remaining

exports are almost entirely made up of jute and jute products, while exports

from other manufacturing industries are negligible. This surprisingly high

export percentage could change as Nepal's population continues to increase

faster than its agricultural output, forcing a decline in exports based on

grain production. Nepal should continue to stress economically viable import

substitution industries and industries whose output is directed at the local

market.

Types of Industry

3.05 Most of the modern industry in Nepal, aside from tourism, is an ex-

tension of the agricultural sector. Rice and oil mills account for 76% of the

total number of establishments, 50% of the value added and provide employment

for 10,000 workers. Jute mills are the second most important industrial ac-

tivity and provide employment for 5,000 workers. Other industrial activities

consist of cigarette and shoe factories, saw milling, brick and tile manufac-

ture, mechanical workshops and a brewery. Recently, a modern cement plant

has started operation. Mining activities are limited and have so far been

confined to simple quarrying and stone crushing operations. However, HMG is

considering setting up a magnesite industry based on the Kharidhunga magnesitedeposit. Annex 1 provides data on the output of industry in Nepal and capa-

city utilization'for certain types of industries. Capacity utilization for

Nepal's major industrial sub-sectors, jute, sugar and cement (cement plant

started in 1975) has been running at a reasorably high capacity (between 66%

and 91%) during FY72-FY76. The capacity utilization of small units in the

matches, bricks and strawboard sub-sectors was lower (about 51%). By con-

trast, the capacity utilization of the beer and liquor industry has beenconstantly rising and far exceeds the rated capacity. No data are available

for other sub-sectors. However, it appears that most major sub-sectors were

1/ Defined as establishments with fixed assets exceeding Rs 200,000.

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not severely hampered by shortages of agricultural raw materials. The lowoutput of the modern brick industry was caused by stiff competition fromtraditional brick plants (small brick-ovens) which produce low-qualitybricks at a very competitive price.

3.06 Cottage and Village Industry (Annex 2) is the second largest sourceof employment after agriculture and its contribution to GDP is almost doublethat of the modern industrial sector. This sector produces a number of goodssuch as handloom cloth, blankets, rugs, footwear, carpets, handmade paper,household utensils, simple metal tools and bamboo and reed products.

3.07 Tourism. The tourism sector (Annex 3) has grown very rapidly inrecent years and has become the most important foreign exchange earner.Gross earnings of foreign exchange are estimated to have generated $13.6million in FY76, roughly equal to earnings from all merchandise exports andrepresenting an increase of 41% over FY75. 75,000 visitors arrived in Nepalin 1975, and it is expected that this will reach over 130,000 by 1980, whichis not unlikely as the hotel shortage in the Kathmandu Valley will soon beeliminated. This sector is also providing employment to a growing number ofpeople (currently 7,500). HMG's strategy has been based on a 1972 master planprepared with German technical assistance. Its present objectives are to ex-pand tourist areas outside the Kathmandu Valley which should lengthen the stayof tourists visiting Nepal, through the selective construction of hotels andtrekking lodges, and the provision of appropriate training to guides, hotelstaff, and employees of tourist information centers. Recently, a new Ministryof Tourism was created to improve planning and execution of tourism activities.

Location of Industry

3.08 Most of the larger industrial units in Nepal are located in theKathmandu Valley or the Terai, particularly between Birganj and Biratnagar,near the Indian border (see Map). Small units such as rice and oil mills arescattered throughout the country. HMG is encouraging industry to locate out-side the Kathmandu Valley by providing financial incentives such as lowerinterest rates and through the establishment of industrial districts. Duringthe 1960's three industrial districts were established (two in Kathmandu Valleyand one in Hetaura near the Indian border ) to provide the infrastructuralbase for industrial investment. The utilization of the districts developedslowly, though the districts in the Kathmandu Valley had considerably moresuccess (though all remained unprofitable.) More recently, HMG began theconstruction of four additional districts outside the Kathmandu Valley(Nepalgunj, Dharan, Pokhara, and Butwal). However, given the difficultiesexperienced in the past, the Industrial Services Center (para 3.15) is con-ducting a major review of the problems and prospects of industrial districtswhich is expected to be completed in mid-1977.

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Constraints on Industrialization

3.09 A number of basic factors have hampered Nepal's industrializationprocess which were confirmed by industrial visits and by the results of asample study of eleven modern industrial enterprises 1/:

(a) The small size of the urban market, since two thirdsof the population live in the hills where monetary trans-actions are peripheral and where their needs are metby their own production. Only 5% of the populationlives in towns and the more accessible parts of theTerai. As a consequence, many industries can only beset up on a small scale. Because of this, certain in-dustries face stiff competition from Indian imports,which often have established brand names and channelsof distribution.

(b) The shortage of industrialists. Entrepreneurs have givenpreference to quick-yielding investments such as trade andreal estate. Further, there is a shortage of skilled andsemi-skilled workers.

(c) The high cost of production in Nepal, caused by itsland-locked position, its mountainous terrain and itsuncertain supply of inputs.

(d) Shortage of known exploitable natural resources.

Industrial Planning

3.10 The first four five year plans concentrated mainly on the creationof road infrastructure, air transport, a telecommunication network and elec-tricity generation. With respect to industry, no development strategy hadbeen carefully enunciated since the plans mainly consisted of a tentativelist of industrial units to be established over each five year period, with-out regard to priorities and how the units might be financed.

3.11 In the fifth five year plan (1976/1980), HMG has shifted its prior-ities from infrastructural investments in favor of directly productive activ-ities and has allocated approximately 18% of its total planned development

1/ The data for this study was gathered by the staff of the IndustrialServices Centre and although the number of the companies in the sampleis small, they represent a wide range of industrial activity. One ofthese companies exported all its products, two companies produced importsubstitution goods while the remaining companies produced goods forlocal consumption. One company imported all its raw material whilethe remaining companies used mainly local material. M4ost of theseindustries had been established in the last 10 years.

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expenditure to the industrial sector (including power). This is a substan-tial share in view of Nepal's small industrial GDP. HMG has now definedits objectives with regard to the industrial sector as follows:

(i) The encouragement of import substitution industries forcertain essential goods such as sugar, textiles, paper,cement, etc.

(ii) The development of export industries based on local rawmaterials, such as jute and tea.

(iii) The encouragement of economically viable industries inless developed areas of Nepal, particularly Small-scale andVillage and Cottage industries (Annex 4).

(iv) The expansion of the job opportunities for the growinglabor force.

Industrial Policy

3.12 HMG's 1974 Statement of Industrial Policy defines and classifiesindustry by type of activity, size of capital investment and whether they arereserved for the public sector, could be jointly owned by the public and pri-vate sector, or could be completely privately owned. It also specifies thetax holidays, custom rates and excise duty exemptions that are open to thedifferent industries. These incentives vary according to the size and type ofindustry, the number of workers employed in the industry and its geographicallocation. Annex 4 contains a summary of the important points of this statement.HMG's incenatives favor capital-intensive industries, although there are someemp'loyment incentives. However, increases in interest rates has removed partof the bias towards capital-intensive industries. There are also biases suchas interestl rate differentials and tax holidays towards the less developedareas of Nepal (Annex 4, paras 5 and 6). Although the intentions behind thesepolicies have merit, the measures are probably ineffective: Infrastructureand availability of raw materials and markets are more important factors forindustrialization in these areas.

3.13 The present industrial statement is an improvement on its prede-cessor although the categorization of industry by type is still vague andnot mutually exclusive. HMG, in difficult cases, reserves the right to placean industry in what it believes is the most appropriate category and althoughthe incentives for particular industries are stated, in practice many entre-preneurs still find that these incentives are not always available.

3.14 In the past, HMG has had to invest in industrial projects thatwere reserved for the private sector, due to the lack of private investors.It is estimtated that HMG has at least a majority share in enterprises whichrepresent over 35% of the total authorized capital of the major industries.There is now sufficient private interest in industry and it is expected thatHMG will not have to take over projects in the future which are reserved forthe private sector. In June 1976, HMG also opened new areas of investment

to the private sector 1/ that were previously reserved for 51% governmentowned corporations. The 1976-80 plan anticipates that over 60% of industrialinvestment will come from the private sector. There are at present 74 govern-ment controlled corporations in Nepal. The majority of these corporationshave not been operated profitably and have been receiving subsidies from HMG.Consequently, a "Corporation Coordination Council" was established in January,-1975 with the objective of establishing a mechanism to analyse the performanceof government controlled companies and to recommend improvements. The chair-man of this council reports directly to the Prime Minister and is administra-tively attached to the Cabinet Secretariat.

Industrial Coordination

3.15 One of the difficulties that had hindered industrial developmentin Nepal in the past had been the lack of coordination between the differentministries and the overlapping of responsibilities between the differentinstitutions concerned with industrial development. In 1974, HMG createdthe Industrial Services Centre (ISC) with the objective of consolidating inone place all aspects of industrial development in Nepal (Annex 5 describesits organizational structure and its present activities). NIDC remains themain source of finance for the development of the private industrial sector.Coordination between these different institutions is mainly achieved bycross-representation on their respective Boards of Directors. The relevantMinistries and the Rastra Bank are represented on each Board of Directors.NIDC's General Manager is a member of the ISC Board and is an invitee to theLicensing Board, while the Executive Chairman of ISC is a special invitee toNIDC's Board of Directors.

Licensing Procedures

3.16 Industries with a capital investment greater than Rs 1,000,000require a license from the Licensing Board. The Board's composition is shownin Annex 6 and contains a special invitee from NIDC. Industries having acapital investment between Rs 200,000 and Rs 1,000,000 have to apply for alicense from the Department of Industry. Village and Cottage industries needonly complete a simple registration form.

3.17 The Industrial Policy Statement specifies a time limit for licens-ing decisions which varies with the size of the capital investment 2/. During1972-76, approximately 50% of the applications received were approved, withthe size of the investment varying widely from year to year (Annex 7). Mostof these licenses (32%) were for agro-based industries, 20% for general manu-facturing industries and 17% for tourist-based industries. Not all the li-censes issued were used by the entrepreneurs, partly due to changes in the

1/ Primary consumption goods (cotton, textiles, dairy production, vegetableghee, writing and printing paper) can now be produced by private sectormajority owned corporations.

2/ For small-scale industry, a maximum processing time of 30 days, formedium-scale industry, 60 days, and for large-scale industry, 90 days.

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investment climate. HMG has now started to cancel licenses when it expects

that a project will not materialize in the near future.

Industrial Finance

3.18 Sources of Funds. Funds for industrial development are provided

by HMG, foreign aid, commercial banks 1/, the Agricultural Development

Bank (AGDB) 2/, NIDC and by private investors from their own resources.

Long-term finance for the public sector is provided by HMG and by foreign

aid. HMG had invested about Rs 104 million up to the end of FY74 in the

equity of public corporations engaged in the industrial sector. Foreign

aid, usually in the form of grants, had amounted to approximately Rs 252

million by the end of FY75, most of this in the public sector. Working

capital financing for public sector companies has also been provided by

HMG through budget allocations.

3.19 Information on fixed investment in the private sector is unavail-

able, except for investments provided by NIDC and its clients. Annex 8 shows

that in FY75, NIDC invested Rs 51.2 million in fixed assets while in the same

period NIDC's clients invested Rs 45 million.

3.20 The commercial banks have been the main source of working capital

financing for industry. It is estimated that outstanding loans to private

and public sector industry amounted to Rs 51.5 million or 2% of their total

assets as of July 1975. With the amendment of the Commercial Bank Act (1975),

it is now envisaged that they will play a larger role than previously in pro-

viding funds to industry, since the Act allows the commercial banks to extend

term loans up to 10 years for the first time. As the banks do not currently

have project appraisal skills, they are considering joint project financing

with NIDC. NIDC will undertake the project appraisal and supervision for

a fixed fee. The amended Act also allows the banks to acquire second mort-

gages, thereby easing the burden of an entrepreneur in raising additional fi-

nancing once his assets had been mortgaged to one financial intermediary. It

is not expected that commercial banks will provide long-term funds, to any

significant extent, to industry given their weakness in project appraisal.

However, the commercial banks are expected to become an important source of

long and short-term financing for village and cottage industries as the Rastra

Bank has required them to provide 7% of their end FY76 deposits to this sector.

3.21 Capital Market. Except for a Government Bond market, no organized

capital market exists in Nepal. Since 1964, HMG has had twelve tax free bond

issues amounting to Rs 408 million, carrying rates of interest ranging from

6% and 10% (latest), and maturities ranging from 5-10 years. Major buyers

1/ There are two commercial banks in Nepal, the Nepal Bank Ltd. (109

branches) which is 50% owned by HMG and the Rastriya Banijya Bank

(71 branches) which is 100% owned by HMG.

2/ The AGDB is engaged in short and long-term finance to the agricultural

sector.

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are commercial banks (40%), insurance companies (6%), NIDC and the Agricul-tural Development Bank (5.5%), with the Rastra Bank holding most of the bal-ance. The absence of a share market can be partly explained by the fact that,historically, entrepreneurs have tended to establish sole proprietorship,partnership, or private limited companies. Since the promulgation of thefirst Company Act in 1936, however, 87 manufacturing public limited companieshave been formed with an authorized capital of over Rs 870 million covering awide range of industries. However, given the uneven performance in terms ofprofitability of such companies and the attractive investment alternatives 1/(para 3.09), the appeal of such share subscriptions by investors has not beenvery great.

3.22 Nevertheless, with a view to assisting public limited companies tosell new issues of shares and debentures to investors as well as to create amarket place for securities, a "Security Marketing Centre Ltd." was formed inApril 1976 as a subsidiary of NIDC. The authorized share capital is Rs 1 mil-lion, and is 51% owned by NIDC and 49% by the Rastra Bank. It is unlikely,in the near term, that there will be much demand for underwriting or buyingand selling of shares, particularly in the absence of any incentives for com-panies to go public, though NIDC could create a small market through salesfrom its own portfolio. The most promising immediate activity for the Centerwould be in the creation of a secondary Government bond market.

Interest Rates

3.23 In the past one and a half years, Nepal's interest rate structurehas been changed three times. In April 1975, the Nepal Rastra Bank increaseddeposit rates by between 1-1/2% and 11-1/2% (Annex 9) and lending ratesby 2% to 6% (Annex 10). The sharp increase in interest rates resulted inincreased fixed deposits of commercial banks, though this did not result inincreased lending as borrowers were discouraged by the high interest rate.Instead, it was used to repay the banks' loans from the Rastra Bank (Annex 11).In July 1976, the Rastra Bank decided to reduce interest rate levels. Thisreduction of interest rates was done independently of price developments, andwas aimed at stimulating the flow of funds to agriculture and industry, al-though the increase in the Kathmandu price index declined in FY76 to 4% from16% in FY74 and 75. To retain high deposits, the Rastra Bank reduced depositrates only slightly but decreased lending rates substantially, in particularfor fixed loans for cottage industries and basic industries (by 5 and 4%,respectively). However, the working capital lending rates were only slightlyreduced (by 1%). Currently, interest on short-term loans is higher than onlong-term loans, probably to increase the demand for long-term loans which hasnot been following the longer deposit maturity structure, but this relationshipmay change in the future 2/. In February 1977 interest rates on deposits werereduced by 1 to 2% (Annex 9) and on commercial bank loans to cottage industriesfor working capital from 14 to 10% (Annex 10).

1/ Commercial bank long-term fixed deposits (over two years) also givea high return, 14-15%.

2/ Between April 15, 1975 and July 1976, all lending rates were a flat 15%.

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3.24 As part of the April 1975 interest rate changes, the Rastra Bankdirected all financial intermediaries to provide a clause in their loanagreements to the effect that loans made subsequent to that date would carryrates of interest which were to be adjusted retroactively in the event ofoverall interest rate changes. This policy was later felt to be inappropriatefor long-term loans as the retroactive clause introduced a great deal ofuncertainty in financial contracts between financial institutions and theirclients and had a negative impact on demand for long-term loans. In addition,it was administratively complex to deal with loans which had this feature.The Rastra Bank has now exempted NIDC and commercial bank long-term loansfrom its retroactive interest policy.

IV. INSTITUTIONAL ASPECTS

Share Capital and Ownership

4.01 NIDC was originally established in 1959 with an authorized capitalof Rs 10 million, and was fully government owned. Its authorized capitalhas been gradually increased to Rs 250 million in 1976. The paid in capitalis Rs 139.3 million of which Rs 130.3 million is provided by HMG and theremaining Rs 9 million by the Rastra Bank.

The Institution

4.02 Board of Directors. NIDC's Act specifies that the Board shall con-sist of six members, two of whom should be "non official" and should comefrom industry or trade. The remaining directors shall be nominated by HMG.The General Manager of NIDC acts as Secretary to the Board (Annex 12). Fourof the Board members, including the Chairman, are HMG officials; the remainingtwo members are from private industry. In the past, the two members repre-senting private industry have been from the same industrial company. Thishas now changed as one of them has been replaced by the President of theNepalese Chamber of Commerce and Industry. The Board meets, on the average,twice a month and the attendance at these meetings has been good. The Boardhas also started meeting outside Kathmandu and has organized visits to NIDC'sproblem clients. The communication from the staff of NIDC to the Board isgood. It receives quarterly operating results, a list of arrears and copiesof other administrative matters.

4.03 To get a broader composition of the Board, HMG and NIDC managementfeel that it would be desirable to increase the number of Directors from theindustrial sector. This would involve a change in NIDC's Act, which HMG andNIDC are willing to consider (para 4.04). If changes to the Act are to be made,the Act could also be amended to remove the clause which provides that onlybusinessmen who have no financial obligations to NIDC can be members of itsBoard. Since the number of private industrialists is limited and most haveborrowed from NIDC, changing this clause is desirable. In the choice of newmembers, due consideration would be given to potential conflict of interest.The communication of information from the Board to NIDC's staff is poor. TheGeneral Manager of NIDC recognizes this and has agreed to improve it.

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4.04 Other Changes in NIDC's Act of 1959. In the event that the Act is

amended to change the Board structure, NIDC's management is consideting other

amendments to be made at the same time. Firstly, the Act contains a "lender

of last resort" clause. This clause has meanwhile become inappropriate, as

NIDC is no longer the only provider of term loans to industry. 1/ Thus, the

"lender of last resort" restriction can be removed. Further, the Act spe-

-cifies that the Corporation may only guarantee loans raised by industrial

concerns through commercial banking facilities in Nepal. Similarly, the Act

could be amended to allow NIDC also to provide guarantees to foreign indus-

trial companies as well as foreign financial institutions.

4.05 Management. Mr. Prasai was appointed General Manager in July 1976,

succeeding Mr. Sharma. Mr. Prasai is a civil servant and will probably serve

NIDC for three years or more since HMG and NIDC recognize the importance of

continuity. He is a capable administrator and was previously the Director of

Tourism and the General Manager of the Royal Nepal Airlines Corporation. Con-

sidering the many weaknesses of NIDC's policies and procedures and the General

Manager's limited experience in development banking, an experienced development

banker will be attached to NIDC as a Policy Advisor for about two years. He

will advise the General Manager on all policy and operational matters, and see

that agreed procedures and strategies are properly implemented. The appoint-

ment of the policy advisor is a condition of effectiveness of the proposed IDAcredit.

4.06 Staff. As of July 15, 1976, NIDC's total staff numbered 125, of

whom 75 are professionals. Annex 13 shows the breakdown of staff between

the different professions. NIDC does not have qualified accountants and has

therefore agreed to hire a well qualified accountant by September 30, 1977.

Moreover, as NIDC's accounting and management information system is very weak

and its resource and business planning expertise is limited, an accounting and

management information systems advisor will be attached to NIDC for a period

of two years. The appointment of the accounting and information systems

advisor is a condition of effectiveness of the proposed IDA credit.

4.07 The staff turnover in the year ending July 15, 1976 was high in

comparison with previous years though this was due to the transfer of cer-

tain functions to ISC (Annex 5). Some new staff have been recruited to re-

place those transferred to ISC. Training has been conducted internally, mainly

on the job. The staff is reasonably well qualified, with a mix of experienced

staff and new recruits from the universities.

4.08 Recruitment of capable staff is sometimes difficult as salaries in

the private sector tend to be 30-50% higher. While NIDC need not follow the

rules set by the Public Service Commission, the NIDC Board likes to keep its

pay scales in line with the public corporations. A new set of rules has re-

cently been issued which gives more flexibility to NIDC's management in the

hiring of junior staff. At present, the Corporation Coordination Council is

reviewing the pay scales of government controlled corporations in Nepal. The

Association will keep an eye on this so that recruitment and retainment of good

staff does not become more of a problem in future.

1/ According to the Commercial Banking Act of 1975, commercial banks may

make term loans up to 10 years against adequate security (para 3.20).

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OrganizatiorL

4.09 NlDC's organization chart is shown in Annex 14. Several changeshave taken place in the organizational structure in the past year, partlyas a result of IDA's recommendations:

(a) The transfer of the responsibility for the Balaju and HetaudaIndustrial Districts to the Industrial Services Center (ISC)in February 1976.

(b) ThLe Industrial Planning and Feasibility Division was trans-ferred to ISC in July 1976 (Annex 5).

(c) The Small Scale Development Corporation (SIDC), which wastaLken over by NIDC in May 1972, has stopped making any newloans and its responsibilities were transferred to theDepartment for Cottage Industries in July 1976.

(d) In February 1977, NIDC's organization was divided into twoparts, each headed by a Deputy General Manager. The firstis responsible for the operational aspects of the Corporation,while the second is responsible for administration.

(e) The financial and accounting activities were concentratedin one division.

(f) Finally, a new project implementation and follow-up divisionwas created in February 1977.

The last three changes have given NIDC a sound organization structure necessaryfor a develcpment bank.

4.10 Prior to the transfer of NIDC's Industrial Planning and FeasibilityDivision to ISC, it had produced 15-20 feasibility studies a year of reason-able quality, of which 40% were done at NIDC's initiative, 40% at HMG's re-quest, and 20% at the request of clients. The division had organized indus-trial conferences, and had published a few handbooks related to industrialinvestment in Nepal. Almost all of NIDC's staff from that division weretransferred to the ISC. Since the transfer, NIDC itself has undertaken fewfeasibility studies, relying mainly on ISC. This is an unsatisfactory situa-tion, as ISC, which is supposed to undertake feasibility studies for thepublic as well as private sector, lacks the staff and expertise to cover thewhole industrial sector. Moreover, it is overburdened with studies and otherfunctions. It is, therefore, essential that NIDC begin rebuilding its indus-trial planning and feasibility activities. 1/ HMG is aware that a betterdivision of labor between NIDC and ISC could be worked out, with NIDC spe-cializing in studying a few industries but financing a broader range.

1/ NIDC should assign more of its staff to work on industrial promotionand undertake feasibility studies for projects which could be suitablefor financing. It should also be able to make feasibility studies atthe request of clients.

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V. POLICIES AND PROCEDURES

Operating Policies

5.01 NIDC's formal Statement of Investment and Operational Policies is

shown in Annex 15. The Policy Statement substantially conforms to that used

by most development banks, except that it allows NIDC to acquire majority

ownership in its sub-projects, but only in exceptional circumstances. This

qualification allows NIDC to act as a catalyst in mobilizing private invest-

ment but to dispose of its majority shareholdings when other sponsors can be

found. This is appropriate in a country the size of Nepal. The private

sector emphasis is again found in NIDC's Strategy Paper for 1977-79 (Annex 32).

This Strategy Paper relates NIDC's policies to those of HMG such as priority

regions for development and priority sectors for investment.

5.02 Other clauses of the Investment and Operational Policy Statement

prevent NIDC from making loans to enterprises with fixed assets of less than

Rs 200,000 and provide for a minimum financing operation (loan and/or equity)

of Rs 50,000 to any client. A maximum of 70% of project costs can be financed.

5.03 NIDC's Act of 1959 clearly states that it should only finance the

private sector. This had resulted in a somewhat restricted financing role

for NIDC in the sixties and early seventies, as the general lack of entre-

preneurship in Nepal has sometimes forced HMG to take up projects which were

originally reserved for the private sector. However, there is now sufficient

private business for NIDC to play a major financing role in this sector. If

NIDC were to finance public sector projects, it might come under pressure from

HMG to become involved with the large public sector units, many of which are

performing poorly.

5.04 Appraisal Procedures. Applications for financial assistance 1/ are

first reviewed by a Loan Appraisal Committee 2/ to determine if the project

falls within NIDC's investment priorities and if so, it is passed on to the

Project Appraisal Division. A detailed report containing the division's re-

commendations is then submitted to NIDC's General Manager (who has the author-

ity to approve projects that require an investment of Rs 200,000 or less).

If the project requires a larger loan, the report is submitted to the Loan and

Investment Committee 3/. This committee can approve projects that require an

investment of Rs 1,000,000 or less while larger loan requests are submitted

to the Board for approval. Following IDA's recommendation, the NIDC Board

1/ Investors must have already obtained a license from the Licensing

Board before applying for financial asistance.

2/ Tnis committee consists of the General Manager and all concerned

division chiefs.

3/ This committee consists of the Chairman, the General Manager and the

Rastra Bank representative on the NIDC Board.

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will consider increasing the authority limits of the General Manager and theLoan and Investment Committee to Rs 1.0 million and Rs 2.5 million respectively.

5.05 The average time required for a loan decision to be made is sixmonths. This long processing time is caused by the difficulty in obtaininginformation from the sponsor and his difficulty in obtaining the necessaryclearance from H1MG. The number of loan requests in FY75 and FY76 was only26 (Annex 16). This drop in requests from 91 in FY74 and 258 in FY73 wasexplained by NIDC's management largely by the sharp increase in interestrates in FY75.

5.06 Appraisal Standards. NIDC's appraisal standards could be improved.Some of the project cost overruns and delays can be attributed to poor esti-mates at the project appraisal stage. Coverage of marketing aspects andappraisal of management tend to be weak. Further, of the 14 projects completedin FY76, 50% incurred delays of more than one year, and 40% experienced costoverruns in excess of 25% (Annex 17). In addition, internal financial andeconomic rates of return have seldom been calculated. In future, NIDC willcalculate internal financial rates of return for all projects costing morethan Rs 1 million and economic rates of return for projects above Rs 2.5million. Special attention will be given to capacity utilization within anexisting industry before financing new undertakings. Also, in order that NIDCprepare and present to IDA a broad range of projects, and not merely a fewlarge projects, the proposed IDA credit will limit withdrawals of the proceedsof the credit to $1 million for any one sub-project.

5.07 HMG's Industrial Policy Statement of 1974 contains a number ofclauses that affect NIDC:

(a) The Statement specifies the maximum loan percentage offixed assets that NIDC may make which depends on thetypes of industry and on its geographical location.Publishing this data leads the entrepreneur to expectthe maximum loan size. The loan size should be aninternal NIDC matter.

(b) The Statement sets time limits on NIDC's processingof loan applications and on disbursement. Again, itraises unrealistic expectations on the part of entre-preneurs and restricts NIDC's autonomy.

The above will be corrected in the event that HMG decides to modify thestatement.

5.08 NIDC's standard loan agreement with its clients has been modifiedto include a number of essential clauses previously missing. As such, itconforms to that used by most long-term lending agencies.

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5.09 Procurement Procedures. NIDC, in conjunction with the project'ssponsor, invites bids from at least three sources 1/. The selection of asource of supply is based on price, delivery time, availability of service andspare parts, the quality and the reputation of the supplier. Annex 18 showsthe amount of procurement of foreign plant and machinery by country. Indiaremains the largest supplier of machinery. This is largely due to the levelof technology that is used in Nepal, price and transport cost advantages andthe relative ease in obtaining spare parts. NIDC's procurement practices aregenerally satisfactory and its technical staff are competent in advising onsimple projects (rice mills, oil mills, etc.). However, when faced withtechnologically more complex projects, NIDC might have to use outside con-sultants for advice.

5.10 Disbursements Procedures. It is usual for the average delay betweenproject approval and the signing of the loan commitment to be six months, whichis normally caused by the sponsor's delay or difficulty in becoming incorpo-rated and obtaining the necessary land titles. Disbursement usually takesplace on a reimbursement basis in the case of local currency and on the basisof the conditions of letters of credit in the case of foreign currency. Itis usual for 20-30 withdrawals to take place over the 2-3 year constructionperiod. NIDC insists that the sponsor disburses his funds in a fixed rela-tionship to NIDC's funds. NIDC's disbursement procedures are generally satis-factory. With the consolidation of all procurement, disbursement and follow-up activities into one division, the disbursement procedures should improve.

5.11 Follow-up Procedures. NIDC's follow-up activities are inadequateIt has only three people managing a portfolio of 190 projects scattered through-out the country, though some staff is provided by the Regional Offices. Con-sequently, follow-up visits are inadequate. Annex 19 shows that NIDC staffmade only 68 visits in FY76 which is a decline from FY75 (80). NIDC distin-guishes three types of follow-up visits: (i) a courtesy visit of 1-3 hours'duration; (ii) an evaluation visit by a team composed of three staff memberswhen a project has defaulted on two installments. A report is prepared-whichshould cover all aspects of the project and contain action recommendations;and (iii) a special study follow-up visit. In FY76, only three evaluationreports were made and no special studies were carried out. NIDC seldom re-ceives quarterly reports from its clients, although this is stipulated in itsloan documents. In future, NIDC will link-up its reporting requirements withthose of the Ministry of Commerce and Industry, which has had more success inreceiving data from industrialists.

5.12 Follow-up should improve with NIDC's recent organizational changes(para 4.09). Although it is difficult to predict total follow-up staff re-quirements, it is estimated that NIDC should allocate at least 10 people full

1/ Competitive bidding is not required for purchases less than Rs 50,000.However, even with larger projects there is a lack of potential sup-pliers. It is estimated that competitive bidding is used in about halfthe projects.

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time to supervise the loan portfolio. In improving its follow-up procedures,NIDC has undertaken:

(a) to hire or reallocate sufficient staff to enable eachproject to be visited annually, and projects in arrearsover six months at least twice a year;

(b) as a result of such visits, to prepare action reportsfocussing on specific problems and recommending actionto management;

(c) to review systematically the timing and content of thereports due from its clients and to actively pursuedelinquencies; and

(d) to use Regional Offices as much as possible for follow-up in the areas of their geographic responsibility.

5.13 Prior to the NIDC reorganization, a Small Industries Analysis andCoordination Division was in charge of follow-up work of loans to small scale-industry. NIDC has stopped making new loans to this sector (para 6.15). NIDChas worked out an arrangement with the commercial banks whereby they shouldconsult NIDC before making any additional loans to those NIDC small-scaleclients in arrears.

Relationship with Government and Business Community

5.14 Given the fact that NIDC is (a) wholly goverment-owned, with itsBoard of Directors and General Manager appointed by the Government and (b)that it is virtually dependent on HMG for most of its resources, it is notsurprising to find that the Government wields considerable influence overits operations. Despite this close relationship, NIDC is recognized inGovernment circles as being a valuable source of information on industrialand financial questions, particularly in the area of licensing decisionsand industrial policy formulation.

5.15 NIDC's relationship with other financial institutions is good,and it is expected that its relationship with the commercial banks will be-come closer, especially with the possibility of joint financing of projects(para 3.20). NIDC's relationship with its clients is generally good althoughit is sometimes criticized for the time taken in processing loan applica-tions and the lack of thoroughness in its evaluation of certain aspects ofprojects (e.g. market aspects). Also, because of the virtual absence ofreporting from NIDC's clients, NIDC often loses contact with them once aloan is fully disbursed, particularly for those clients which are repayingregularly.

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VI. OPERATIONS

Summary of Operations 1/

6.01 Annex 20 shows NIDC's approvals, commitments, and disbursements fromFY71 through FY76. NIDC's business has fluctuated widely from year to yearboth in numerical and monetary terms. Net approvals in FY74 amounted to Rs41 million, in FY75 to Rs 145 million and in FY76 to Rs 16 million. From theinception of NIDC until the end of FY75, there has also been a large gapbetween gross approvals and disbursements. Two reasons exist for this: (a)the high level of cancellations reflecting a change in investors' interest;and (b) the slow implementation of projects. In FY76, approvals dropped to avery low level, mainly due to a sharp increase in interest rates from 7.5%, onthe average, to 14%. From FY70 to FY74, disbursements fluctuated between onlyRs 8 million and Rs 23 million per annum (about $2 million) but they havesince increased significantly to about Rs 54 million in FY75 and Rs 37 millionin FY76. As of July 1974, loans outstanding amounted to only Rs 74 million,but had increased to Rs 143 million as of July 1976.

Characteristics of Loans

6.02 Industrial Distribution. Annex 21 shows the industrial distribu-tion of loans outstanding. As of July 1976, hotels accounted for 37%, foodmanufacturing 28%, cement 14%. NDIC's financing of trucks and buses, whichhas been very unsuccessful (para 8.04), has declined significantly from 12.6%in FY71 to only 1.8% in FY76. Also, NIDC financing of power units has de-creased from 8.6% to 1.9% over the same period. Financing of manufacturingprojects has increased significantly in recent years from 41.6% in FY72 to57.6% in FY76. It is expected that this trend will continue in the future,when NIDC hotel financing will decline (para 9.09).

6.03 Size of Loans. NIDC's loans are generally small; the average sizeover the past two years was about Rs 2 million or $160,000 2/. During theperiod FY70-FY74, the average size of the loans was only about Rs 400,000 whichshows that NIDC has been financing larger projects in recent years. Loansunder Rs 500,000 during FY75-FY76 account for over 40% of total net approvalsby number, but less than 5% by amount (Annex 22). NIDC has not systematicallykept account of employment creation as a result of its financing, but a sampleof projects indicates that total investment cost per job has been around$3,000 in recent years.

6.04 Geographical Spread. The bulk of NIDC's loan approvals during thepast six years have been directed to the metropolitan areas (Annex 22), gen-erally following the national pattern of industrial distribution. 72% of

1/ Excludes SIDC portfolio.

2/ Exchange rate applied: US$1 = Rs 12.5

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NIDC's loans are in the Metropolitan Region (Bagmati and Narayani Zones),7% in the Central Region (Lumbini and Gandaki Zones), 14% in the EasternRegion (Kosi, Mechi, and Sagarmatha Zones), and 7% in the Western Region.NIDC has recently opened three branches (in the Central, Eastern, and West-ern Regions) in order to serve the backward areas better, which suffer fromlack of infrastructure, which should improve the geographic distribution ofits portfolio in future.

6.05 Maturity of Loans. The maturity of loans ranges from 5 to 15years with the longer maturities given to the larger loans (Annex 22).Grace periods range from six months to three years depending on the gestationperiod for the projects. Repayment of principal is not always determinedby factors such as debt service capability of the clients and nature of theproject. NIDC usually requires the client to repay interest accrued duringthe construction and start-up period of the project in the first four yearsafter completion of the project in addition to the regular interest andprincipal repayment requirements. This system places an undue financialstrain on the client in the early stage of operation. NIDC will considerspreading interest accrued during construction over the whole life of theloan.

6.06 New Versus Expansion. During the past six years more than 3/4 ofNIDC's loans by amount and number have been made for new projects (Annex 22).This fact reflects the limited number of existing industrial enterprises inthe country and their slow rate of growth and also suggests that NIDC hasbeen active in promotional work.

Guarantee Operations

6.07 NIDC does not usually make working capital loans directly (exclud-ing SIDC operations), but it has given repayment guarantees for working cap-ital loans obtained from commercial banks by its clients. NIDC's guarantees(Annex 20) have reduced substantially in recent years as commercial banks may,since the revision of the Commercial Banking Act in 1975, take a secondmortgage on assets (para 3.20). Outstanding guarantees as of July 1976amounted to about Rs 2 million. NIDC charges a fee of 1-1/2% to 2-1/2% perannum on its guarantees.

Equity Investments

6.08 As of July 15, 1976, NIDC's equity portfolio stood at Rs 28.4 mil-lion (20% of NIDC's net worth) in 14 companies (Annex 23). All of thesecompanies had also received loans from NIDC. Four of 14 companies are knownto be operating profitability while only three companies are paying dividends.Four companies are under construction or in the initial stage of operationsand six companies were operating at a loss as of July 15, 1976.

6.09 Sales of shares from NIDC's portfolio have been small i.e. sinceFY74, NIDC sold shares of Rs 2.7 million in eight companies. Sales proceedsfor these companies equalized approximately the cost prices, which probablyreflect two things: NIDC's lack of policy regarding timing of sales and cri-teria for determining the sales price, and the very thin market for shares,

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which makes it difficult for NIDC to dispose of its shares profitability.

Recently, NIDC has established a fully owned subsidiary for marketing secu-

rities (para 3.22). NIDC has currently a controlling interest in four com-

panies (para 5.01). One of these companies accounts for 38.7% of its total

equity portfolio.

NIDC Terms of Assistance

6.10 Annex 24 shows NIDC's present interest and other charges. In line

with Rastra Bank's general interest rate adjustment, NIDC's lending rates

were reduced in July 1976 from 14% to 11% on the average. The rates vary per

geographic district. The minimum rates specified are 12% in the Kathmandu

Valley, Biratnagar, and Birganj; 11% in Bhadrapur, Rajbiraj, Janakpur, Bhai-

rawa, Hetauda, and Dharan; and 10% in the least developed areas. The lending

rates for local and foreign currency loans are the same. NIDC's lending rates

are in line with those of commercial banks (11% for basic industries). With

inflation running at an annual rate of 6% with only limited prospect for in-

crease in the future, NIDC's lending rate is positive in real terms. The

Rastra Bank feels that higher lending rates will discourage private investment;

the April 1975 interest rate change from 7.5% to 14% largely caused NIDC's

large fall in net approvals in FY76 (Rs 16 million from Rs 145 million in

1975). On the basis of the current lending rate of 11% on the average, NIDC

will have a spread of 3%, on local currency borrowings from the Rastra Bank.The IDA funds will be on-lent to NIDC at the rate of 8.2%, giving NIDC an

overall spread of about 3%, the same as on its local currency borrowings.

In view of NIDC's low administrative costs, this spread is adequate. I/ NIDC

will lend the IDA funds to borrowers a minimum rate of 11% except for the

undeveloped areas where a minimum interest rate of 10% will prevail. Loans for

projects in the more developed regions (Kathmandu Valley, Biratnagar and

Birgunj) will be charged a minimum rate of 12% (in accordance with Rastra Bank

policy). NIDC charges a penalty rate of 2% on loans overdue over 6 months and

offers an interest rebate of 0.25% for timely payments. Until recently, NIDC

charged a commitment fee of only 0.20%, which has now been raised to 0.75%, as

NIDC will be required to pay this to HMG on the IDA funds.

6.11 Foreign Exchange Risk. NIDC's loans are all denominated in Nepal-

ese rupees and thus it assumes the foreign exchange risk on its loans from

foreign sources. In turn, NIDC recovers its foreign exchange losses from

the Rastra Bank. In view of the early stage of industrialization and the

aversion of Nepal's entrepreneurs to risktaking, the Rastra Bank will continue

to carry the exchange risk. 2/

1/ In the past, NIDC's large base of free equity contributed greatly to its

low financial costs. As further contributions are made in the form of

loans, however, the impact of this base will diminish and financial costs

are expected to rise from 1.0% of total assets in FY76 to 5.3% in FY81.

Administrative costs, however, are expected to decline from 1.6% of

total assets in FY76 to 1.0% in FY81 (Annexes 27 and 35).

2/ Rastra Bank has informed NIDC by letter (February 21, 1977) that it will

compensate NIDC for losses due to changes in the exchange rate. Payment

will be made to NIDC after the Rastra Bank receives the relevant papers.

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Industrial Districts

6.12 NIDC has developed and managed two industrial districts, one eachin Balaju and Hetauda, to provide basic facilities such as land, buildingsand utilities to industrial enterprises. The former was established in 1961and the latter in 1963. NIDC's investment to date in these operations hastotalled Rs 9.6 million. As of July 15, 1976, the two Industrial Districtswere transferred to the Industrial Services Center (ISC). Financial arrange-ments have not been finalized but NIDC expects to recover its total invest-ments of Rs 9.6 million, to be paid by BMG to NIDC without issuing new sharesto HMG. NIDC has not consolidated the accounts of the Industrial Districtsin the past, and the losses suffered have been kept in1 the accounts of theindustrial districts.

Small-scale Industry

6.13 Origins. SIDC was established in 1971 as a government corporationto finance small-scale industry 1/. In May 1972, NIDC took over the assetsand liabilities of SIDC, and managed them as part of its own operations.As a result, the loss incurred by this take-over was written off in NIDC'saccounts (Rs 280,000) of FY72. At the time of the take-over, SIDC had made22 loans which became part of NIDC's overall portfolio. As of July 15, 1976,the responsibility for development and financing of small enterprises wastransferred to the Department of Cottage Industries (para 4.09). However,the SIDC loan portfolio has not been transferred and will continue to behandled by NIDC in future. The SIDC portfolio has been kept separate,although NIDC's financial statements reflect consolidated operations. Thishas been done largely because NIDC management has always felt that it willbe required to transfer SIDC back to HMG.

6.14 Operations. As of July 15, 1976, the SIDC had approved 325 projectsamounting to Rs 9.5 million and Rs 4.1 million have been disbursed. The averagesize of loan was Rs 30,000 or $2,500. Most loans have been made for hand andpowerloom units, and small rice, flour and oil mills. About 75% of SIDC'sloans have been made in the Kathmandu area (Bagmati, Janakpur and Narayani).The small-scale industries loans were mostly made at low interest rates beforeApril 1975, when interest rates were increased. Prior to April 1975, lendingterms were 7-1/2% for working capital loans (up to 18 months), and 4-1/2% forlong-term loans (up to 7 years). Between April 1975 and July 1976, the cottageindustries lending rate was 15%.

6.15 SIDC Portfolio. Though the portfolio is still young, already 145projects are in arrears amounting to about Rs 750,000 in principal, which is18% of the SIDC portfolio. On an "infected" basis, arrears amount to about

1/ This means cottage industries; SIDC have mainly financed projectswith fixed assets below Rs 200,000 which are defined as cottageindustries in the Industrial Policy Statement of 1974.

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45% of the portfolio. Because of the difficulty of reaching many of thesmall-scale clients and the fact that NIDC has stopped new lending to cottageindustries, it is expected that NIDC will not be able to recover a substantialpart of its small-scale portfolio. However, with the increased provision fordoubtful debts (para 8.06), this should be adequately covered.

VII. RESOURCES

NIDC Funding

7.01 According to the NIDC Act, NIDC can raise its financial resourcesfrom the following sources: (a) share capital and reserves; (b) issues ofpreferred shares and bonds etc.; (c) direct borrowing; and (d) grants. NIDChas relied so far on HMG for almost all its local resources while most of itsforeign resources came from bilateral donors, arranged by HMG. Thus, NIDC'srole as a direct mobilizer of resources has been insignificant.

7.02 Annex 25 shows NIDC's resource position as of July 15, 1976, whichis summarized below:

(Rs Millions)

Domestic currency:Share capital 139.3Reserves and retained earnings 3.9Rastra Bank loan 6.0

Inconvertible foreign currency (Indian rupee)borrowings /a: 29.5

Convertible foreign currency(other than Indian rupee) /a 55.4

Total 234.1

/a Net of cancellations and repayments.

7.03 Domestic Currency Resources. HMG's subscription to NIDC's sharecapital (paid-up capital of Rs 134.3 million and Rs 5 million advances forshare capital increase) constitute over 90% of NIDC's local resources. Theremaining local resources consist of Rs 3.9 million of reserves and retainedearnings and a 10-year loan of Rs 6 million from the Rastra Bank. As ofJuly 15, 1976, local resources amounted to about two-thirds of NIDC's totalresources. However, about half of the Nepalese rupees have been convertedinto Indian rupees I/ for the import of machinery and equipment from India.

1/ Although the Indian rupee is-not legal tender in Nepal, it has been per-missible so far to convert Nepalese currency into Indian currency.

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7.04 Inconvertible Foreign Currency (Indian rupees) Resources. NIDChas obtained four lines of credit in Indian rupees (Annex 26). A US ExportImport Bank credit equivalent to US$1 million in Indian rupees was obtainedin 1960 through HMG. The credit was fully utilized and tied to procurementof goods in India. Two lines of credit from USAID amounting to Nepalese rupees26 million equivalent were granted through HMG in 1963 and 1966 and were fullydisbursed. In 1964 the Government of India also made an inconvertible rupeeloan available, and most of the funds have meanwhile been utilized. If Nepaleseand Indian currency are taken together (Annex 25) NIDC had, as of July 15, 1976,inconvertible resources of Rs 17.8 million available for disbursements. How-ever, NIDC had already committed Rs 62.1 million at that time in the expecta-tion of loans to be obtained from the Rastra Bank where it has access to bor-rowings of up to Rs 90 million, which is convertible into Indian currency.

7.05 Convertible Foreign Currency Borrowings. NIDC has received eightloans and credits in convertible currencies from five different sources.Two USAID credits totalling US$1.4 million were obtained in 1961 and 1963through HMG, but only $400,000 has been utilized, with the remainder can-celled. From KfW, NIDC received three loans (untied), two of DM 2 millionand one of DM 3 million in 1964, 1966 and 1974. The first two KfW loanswere fully disbursed and the third loan has an undisbursed balance of DM1.7 million, but the loan is already fully committed. In 1965, NIDC obtaineda sterling loan of 1 150,000 from the UK government which was fully utilizedto help expand an existing power plant. In 1970, NIDC received a Japan EximBank loan of Yen 360 million or about Rs 16 million, of which Yen 17 millionwas cancelled. Meanwhile, the loan has been fully utilized. In June 1973,NIDC was granted an interest-free loan from the Danish Government. Theloan amounted initially to Dkr 16.1 million (tied) or Rs 30.5 million, butas NIDC could not use the whole amount, Rs 14.4 million was transferred tothe government-owned Dairy Corporation. The loan is meant to be used forslaughter houses, and meat and dairy processing projects. As shown above,in a few cases part of the loans and credits were cancelled. The reason forthis was that NIDC could not use the funds since procurement of equipmentand machinery was tied to the country supplying the funds. Furthermore,NIDC's lending program (para 5.02) was restricted, particularly in thesixties by the lack of private entrepreneurs. As of July 15, 1976, NIDChad only Rs 25.3 million available for disbursements. However, NIDC hadundisbursed commitments Rs 34.4 million, thereby creating a shortfall ofRs 9.1 million. Although NIDC's sub-loan documents contain a clause thatdisbursements will be made to clients subject to availability of funds, itis imprudent for NIDC to commit funds before it has secured adequate funding.This illustrates NIDC's poor resource planning. It should be noted, however,that NIDC has access to HMG's foreign exchange reserves if and when needed.HMG has allocated about Rs 10 million foreign exchange to NIDC for FY77.This seems sufficient for FY77 and could be viewed as compensation for theRs 14.4 million NIDC has returned to HMG in FY76 out of the Danish loan ofRs 30.5 million. In 1972, NIDC was selected to act as channel for a fee fora US$4 million IDA credit for tourism to HMG. Originally, the funds were tobe used for the construction of two hotels, but due to delays and cost over-runs, IDA funds are now being utilized for one hotel only, the Yak and Yeti.

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The IDA credit has been reduced to $3 million and the terms of credit havebeen changed. The first credit tranche $1.68 million will be passed on byHMG at 7-1/2% and the second tranche ($1.32 million) at 11%. This was decidedin view of the rise in interest rates since the credit was originally granted.

VIII. FINANCIAL POSITION AND PERFORMANCE

Profitability 1/

8.01 Annex 27 shows NIDC's income statements from FY71 through FY76.Net profits after tax increased from Rs 144,000 in FY71 to Rs 1,469,000 inFY76 2/. During the same period, assets increased from Rs 86.6 million toRs 226.4 million. As profits rose more rapidly than assets, the profitsafter tax as % of average total assets increased from 0.1 to 0.7. Note-worthy in Annex 28 is the wide gap between the gross income on the loanportfolio and the gross income on average total assets. This is mainlydue to three factors: (1) The low return on NIDC's liquid resources, par-ticularly in the period FY72-FY74. These funds were largely invested inlow yield short-term deposits; (2) the investment of a substantial amountof NIDC's funds in shares, which have a very low dividend pay out; and(3) NIDC's investment of Rs 9.6 million in non-income producing industrialdistricts. Administrative expenses as % of total assets during FY71-FY76increased slightly from 1.3 to 1.6, but financial cost declined from 1.8to 1.0. Although return on equity has increased in recent years (from 0.2%in FY72 to 1.1% in FY76), it should still be considered low. This iscaused by the absence of financial leverage (debt to equity ratio 0.5 to1 as of July 1976) (para 8.02).

Financial Position

8.02 NIDC's balance sheets are shown in Annex 29 for the years FY71-FY76.In FY72, total assets increased strongly due to the large increase in paid-up capital (Rs 43 million), which placed NIDC in a very liquid position.NIDC did not use these resources until FY75, when disbursements increasedconsiderably (Rs 54 million). Meanwhile, HMG made further contributionsto NIDC's share capital which caused NIDC to remain an unleveraged financialinstitution (Rs 139 million share capital versus only Rs 64 million debt asof July 15, 1976). This practice of funding NIDC with excessive amounts offree equity, which rarely carried dividends (para 8.03), has signified asubsidy to NIDC without explicit justification. Therefore, HMG plans to

1/ In discussing NIDC's financial position and performance, it shouldbe noted that the industrial districts have not been consolidated inNIDC's financial statements, and figures between years are not fullycomparable due to rapid change-over of NIDC's auditors, who have notalways applied the same accounting principles and methods.

2/ Unaudited figures.

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provide funds in the foreseeable future largely in the form of loans. Thecurrent plan projects Rs 120 million from the Rastra Bank and Rs 50 millionfrom HMG although additional loans will be provided if needed. After FY81,further equity might be required.

8.03 So far, NIDC has not followed a formal policy with regard to divi-dend payout. From FY71-FY76, a dividend was declared only once in FY74 (Rs100,000). NIDC is considering a dividend of Rs 200,000 for FY76, which willresult in a payout ratio of only 1.5% because of NIDC's large equity base.HMG is expected to allow NIDC as a government-owned institution to retain mostof its earnings in future in order to build up its reserves, though they wouldlike the payout ratio to increase in future.

Quality of Portfolio

8.04 Arnnex 30 shows the development of overdues from FY73 to FY76. Asof July 15, 1976, 56% of the companies were in arrears as compared with 58%in FY73. However, principal and interest in arrears over 6 months as % ofloans oustanding amounted to only 11.5 in FY76 compared to 30.3 in FY73,which indicates a strong improvement in NIDC's collection performance duringrecent years. The reason why the number of companies in arrears has not de-clined much is that NIDC has not been able to collect overdues on its manysmall loans made to the transport, sawmailling and cold storage and ice sub-sectors. For example, 35 small projects in these subsectors remain outstand-ing, representing only 5% of the loan portfolio by amount. Most of theseloans were made before FY73. An analysis shows that many of these loans weremade without proper market analysis (para 6.02). By contrast, arrears in thefood sub-sector were only 8.5% while this sector accounted for 28% of NIDC'sloan portfolio (Annex 31).

8.05 In recent years, NIDC has taken a number of actions to improve itscollections. However, action often came too late for its small loans, andconsequently, seizing of property and issuing legal notices is no longer eco-nomical in view of the high recovery cost and the low recovery rate. NIDC,therefore, hopes to recover most of these loans through a stronger follow-up,but it will have to write off ultimately many of its small loans. NIDC hasonly rescheduled seven loans, all during FY76. As of July 1976, it has seizedfour properties, issued eight legal notices and had put financial controllersin four companies.

8.06 Despite recently made improvements in NIDC's collection performance,and its expected strengthening of follow-up work, provisions for doubtful loanshave been inadequate and were thus increased in FY76 to Rs 3.3 million from theprevious Rs 2.1 million. 1/ This represents 2% of its loan portfolio. NIDC'smanagement intends to set aside larger amounts for reserves in future.

1/ NIDC's badly performing small-scale industries portfolio (para 6.15)increased the need for higher provisions.

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8.07 Audit. The auditor-general appoints auditors for public sectorcorporations. Due to the rapid change-over of auditors, which is governmentpractice in Nepal, and the early state of development of Nepal's accountingprofession, audits are not comprehensive. In addition, the shortage of char-tered accountants often leads to audits being late. NIDC's current auditor,Sunder and Co., who was appointed this year, is reasonably well qualified andtheir term should be extended. However, the tenure of NIDC's auditors is amatter for the Auditor-General to decide and he is being asked to consider thematter. Meanwhile, the auditors will prepare the long-form audit beginningJuly 15, 1977.

IX. PROSPECTS

General Outlook

9.01 HMG has stated in its five year plan 1976-1980 the objective ofreducing the import of simple consumer goods and construction materials.To that end, a number of medium and large-scale projects have been plannedin the public sector, such as a textile mill, a cement plant, plywood plantsand possibly one or two mining operations (magnesia, lead and zinc). Inthe private sector, 127 small, medium and large-scale projects are planned,mainly based on availability of domestic raw materials. The total amount offunds involved is estimated at around half a billion rupees ($40 million) 1/.HMG's attitude towards the private sector continues to be very positive andrecently it even increased the number of industries open to the private sector(para 3.14).

9.02 NIDC Strategy. NIDC will continue to be guided by HMG's industrialpolicies. These include: (a) the reduction of imports by the establishmentand expansion of a number of basic industries such as soap, textiles andbuilding materials; (b) the establishment, modernization and expansion ofindustries which make use of domestic raw materials and forest products;(c) the expansion of hotel capacity in places of interest outside the Kath-mandu Valley; (d) the development of the local construction industry; and(e) the reduction of regional imbalances in industrialization. NIDC is chargedwith the main responsibility to finance industrial projects, including tourismprojects 2/ reserved for the private sector. To cope with an increased lend-ing program in the future, NIDC plans to strengthen its operations (para5.11), and to undertake a number of other steps as outlined in its strategypaper (Annex 32). As a condition of Board presentation of the IDA credit,the strategy statement like the policy statement should have been approvedby NIDC's Board of Directors.

1/ Inflationary developments since 1974, when the preparation of theplan took place, have made this estimate inadequate.

2/ NIDC will also follow government guidelines with regard to tourismdevelopment.

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Resource Requirements

9.03 Annex 33 shows the forecast of NIDCGs approvals, commitments anddisbursements for FY77-FY81. Its foreign commitments from July 15, 1976 toJuly 1979 will amount to about $14 million, of which almost $4 million arenon-Indian foreign currency requirements. The $10 million equivalent of Indiancurrency will be available through local currency loans from HMG and RastraBank (para 7.04) and NIDC's internal cash generation and loan collections.The proposed IDA credit will therefore cover all other foreign exchange needs.The IDA funds can also be used for the import of machinery and equipment fromIndia. It is not expected that foreign exchange will be forthcoming in theforeseeable future from other sources except through purchases from the RastraBank. KfW, which has given NIDC three loans in the past, seems to have ear-marked its development assistance for Nepal to other sectors involving largeprojects. Assuming that HMG will continue to allow convertibility of Nepalesecurrency into Indian, NIDC will be able to meet all foreign currency needs, butthis in turn assumes that NIDC can borrow sufficient local funds (para 9.04).

9.04 Domestic. NIDC's future need for domestic currency will be verylarge, because loan collections will be small and portfolio growth has beenaccelerating since FY74. The Rastra Bank is prepared to provide the bulkof the funds needed by NIDC in future. During the period FY77-FY79, it isexpected that the Rastra Bank will make Rs 147 million or $12 million avail-able to NIDC, assuming that HMG will discontinue providing equity capitalto NIDC for the foreseeable future (para 8.02). It has been Rastra Bank'spractice to provide 10-year loans, at a variable interest rate (currently 8%)to be repaid in a lump sum at the end of the loan period.

NIDC Pipeline

9.05 NIDC is expected to commit from July 1976 until July 1979 about$21 million in total investments (loans and equity) of which about $14 mil-lion will be foreign exchange, including Indian Rupees. Disbursements forall projects, both already committed (para 9.06) and new projects not yetapproved or committed (para 9.07) during the same period, will amount to$24 million in total investments, which is $3 million higher than totalcommitments. This is due to the fact that NIDC has many projects in itspipeline which are already committed, but for which disbursements haveeither partially taken place or have not yet started (as of July 1976).

9.06 NIDC has about 55 projects in its pipeline which are alreadyapproved and committed, but not yet disbursed or only partly disbursed.The foreign currency requirements including Indian rupees for these proj-ects amount to about $5 million. It is not expected that many of theseprojects will be financed from the proposed IDA credit, as most disburse-ments will be made before IDA funds come on stream (mid-1977). Included inthis list are a few large hotel projects (Soaltee, Annapurna, Yak and Yeti),but most projects are based on agricultural raw materials and local skillsand cater to the domestic market.

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9.07 The proceeds from the proposed IDA credit will mainly be usedfor projects which are currently under investigation, but not yet approved.

NIDC's new project pipeline (Annex 34) include mainly projects based on

agricultural raw materials and forest products such as flour mills (2), rice

mills (5), starch and glucose, wood processing (for export), wood seasoning,

furniture, and sal seed oil. Also included in its pipeline are a number of

projects which are of an import substitution nature such as insecticides,

paper, soft drinks (cola), soap and beer. Furthermore, a number of work-

shops, repair shops, small hotels and projects based on availability of

other local materials/skills are included 1/. The pipeline represents a sub-

stantial reduction from the original NIDC proposed project list, as a large

number of economically unattractive or premature projects have been excluded.

Many projects are replacement for existing old and obsolete mills (flour and

rice mills). It is not expected that output of proposed projects will be

constrained in future by lack of raw materials.

9.08 All projects in NIDC's project pipeline are consistent with HEG's

industrial development plans. To avoid duplication of projects and to make

NIDC's pipeline as realistic as possible, only projects reserved for the

private sector are included. Recently HMG prepared, with the assistance of

the World Bank, an external assistance document for Nepal's Aid Group. One

such project, starch and glucose, is already included in NIDC's pipeline.

Other projects such as a sugar mill, a paper mill, a textile mill, and a

number of chemical projects are not in the NIDC pipeline, but are in the Aid

Group document. If the projects can be run as commercial ventures, they could

enter the NIDC pipeline e.g. under the Technical Assistance Credit (No. 659),

IDA is assisting HMG in preparing a feasibility study for a proposed Paper

mill project. For most projects, qualified private sponsors have been iden-

tified. Only about 30 projects, with an average size $500,000, have been

included in the project list and it is expected that disbursements on them

will take place during the period FY1977-1979. NIDC is currently not con-sidering financing other projects. It is estimated that NIDC's portfolio

(190 projects) will not increase in number since many small projects will berepaid or will have to be written off soon. Therefore, it is expected that

NIDC will not have any difficulty absorbing the increased portfolio in mone-

tary terms. As it is not expected that the commercial banks 2/ will be

forthcoming with long-term funds in the future, to any significant extent,

NIDC will remain the main financier of private industry.

1/ NIDC will also finance the construction industry in future. It is

expected that once this is known to builders, some loan applications

will come forward. No construction projects, however, have been

included in NIDC's project pipeline.

2/ It is conceivable that NIDC and commercial banks may jointly finance a

few projects, as the commercial banks do not have industrial appraisal

capabilities.

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9.09 Total disbursements (foreign and local) for all projects will amountto approximately $6 million in FY77, $8 million in FY78 and $10 million in FY79(Annex 33), whereas disbursements averaged over $4 million during FY75 andFY76. Assuming inflation rates of 6-8% per annum over the next few years andNIDC's increased project implementation experience, it should be able to dis-burse the indicated amount of funds. It is estimated that about 60% of NIDC'sdisbursements will be for projects based on agricultural raw materials andforest products. Hotel disbursements will decline drastically to less than20% by end-FY79 and to 10% in later years when large hotels under construction(para 9.06) are completed.

Financial Projections

9.10 Annex 35 shows projected income statements for FY77-FY81. Due toincreased financing of NIDC's investments with debt, the net return on NIDC'sequity is projected to rise substantially from 1.3% in FY77 to 2.8% in FY81(Annex 36). However, because interest costs on borrowings will significantlyraise the financial cost as a % of NIDC's total funding, the before tax profit-ability on total assets, despite reduced administrative expense, will dropslightly from 2.7% in FY77 to 2.2% in FY81. Nevertheless, NIDC's profita-bility should be regarded as sufficient, particularly since HMG will likelyallow NIDC to increase its reserves annually. In addition, profitability willbe sufficient to continue to set aside 2% of its increased loan portfolio fordoubtful loans.

9.11 Annex 37 shows projected cash flow statements through FY81. Theneed for external borrowings, foreign and local, will be large, becauseNIDC's existing loan portfolio is relatively young and its new loans willnot generate internal funds, to any significant extent, for some years tocome. It is not expected that NIDC will face liquidity problems in theimmediate future as it is likely to continue to obtain long-term funds fromthe Rastra Bank and also intends to raise local funds by issuing debentures.

9.12 Annex 38 shows projected balance sheets through FY81. Total assetsare expected to grow from Rs 291 million in FY77 to Rs 784 million or by 27%per annum. The rapid growth is due to the relatively high disbursements vis-a-vis repayments falling due 1/. Reserves for doubtful loans as a % of totalloan portfolio will gradually rise from 2.5% in FY77 to 2.8% in FY81. Thedebt to equity ratio will increase strongly, assuming that no equity contri-butions will be made by HMG during the period studied, from 0.8:1 in FY77 to3.9 in FY81. By that time, it is likely that HMG will resume its equitycontributions. For the purposes of this proposed credit, NIDC's debt toequity ratio has been set at a maximum of 5 to 1.

1/ NIDC's loan collections will be minimal in the next few years. Thefunds for most projects have recently been disbursed or are still not yetfully disbursed so that, taking the grace period into account, loanrepayments on these projects, which form a large part of its portfolio(para 6.01), will be small.

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X. OBJECTIVES AND FEATURES OF THE PROPOSED CREDIT

Objectives of Credit

10.01 The proposed credit has two primary objectives:

(a) to help finance economically viable industrial projectscontrolled by the private sector;

(b) to build a stronger financial institution through changesin NIDC's organization, reallocation and expansion of staff,improvements in appraisal standards, increased follow-upactivities, and revised policies and strategies.

Lending Scheme

10.02 The proposed credit of $4 million would be made to HMG to be on-lent to NIDC to meet 100% of the foreign expenditures for directly importedcapital goods and services of sub-projects sponsored by private productiveenterprises to be broadly defined so as to include not only manufacturing,but also agro-industries, mining, construction and hotel projects. As partof the project, but to be financed by UNDP and the United Kingdom 1/, techni-cal assistance for 2 advisors, involving 48 man-months at a cost of about$216,000, is included (paras 4.05-4.06).

Main Terms

10.03 Interest. HMG would on-lend the IDA credit to NIDC at 8.2% andNIDC will finance sub-projects at minimum rates of 10 or 11% (depending onthe region), thus generating for NIDC an overall spread of about 3% (para6.10).

10.04 Foreign Exchange Risk. The Rastra Bank has carried the exchangerisk under previous bilateral foreign currency loans to NIDC. In view of theearly stage of industrialization and the aversion of Nepal's generally smallentrepreneurs to risktaking, the Rastra Bank will continue to carry the ex-change risk (para 6.11).

10.05 Free Limit. Considering that this is the first credit to NIDC, alow free limit of $80,000 has been set for foreign exchange borrowings. Thiswould allow IDA prior approval on about 40% of the subprojects by number and75% by amount. In addition, no withdrawal from the proceeds of the credit foran individual sub-loan can exceed $1 million (para 5.06).

10.06 Amortization Schedule. NIDC will provide loans with a maturity of amaximum of 15 years. Therefore, allowing for the commitment period, aneighteen-year flexible amortization schedule is recommended including threeyears of grace. A disbursement schedule is provided in Annex 39.

1/ To date, the United Kingdom has only tentatively agreed to providinga grant to cover the costs of the Accounting and Information SystemsAdvisor. The UNDP will cover the costs of the Policy Advisor.

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XI. RECOMMENDATIONS

11.01 On the basis of the agreements reached with HMG and NIDC, a $4 mil-

lion IDA credit to HMG is recommended, to be on-lent to NIDC at 8.2%. The

only condition of effectiveness of the proposed credit would be that NIDC has

appointed the two advisors referred to in paras. 4.05-4.06.

NEPAL INDUSTRIAL DEVELOPMENT CCFIORATION

INDUSTRIAL PERFORMANCE FY73-76

1/INDUSIRIAL PRODUCTION IN NEPAL INSTALLED CAPACITY CAPACITY UTILIZATION

Product 1972/73 1973/74 1974/75 1975/76 1972/7j 1973/74 1974/75 1975/76 1972/73 1973/74 1974/75 1975/76(9 months)

Jute Goods-t (1000 13.7 12.9 12.3 11.3 18.0 18.0 18.0 18.0 76 72 68 83tons)

Sugar23/(1000 tons) 10.6 14.2 11.9 10.6 15.5 15.5 15.5 15.5 68 91 77 684/Cigarettes- (billion 2.3 2.5 3.0 1.7 - - - - - - -sticks)

Matches (1000 gross) 587 662 649 330 1020 1020 1020 1020 57 65 64 43Liquor distillation 171 206 224 334 250 250 250 250 69 83 90 180-/

(1000 litres)

Soap-(1000 maund) 36 26 24 15 - - - - - - - -

Shoes-i/(1000 pairs) 79 82 70 46 - - - - _ - * _

Processed leather 206 197 55 174 - - - - - - - -(1000 tons)

Agricultural tools - 381 300 - - - - - - - - - -(1000 tons)

Tea-/ (tons) 35 54 47 37 - - - - - - - -

Stainless steel 245 *209 156 94 - - - - - - - -Utensils

Straw Board (tons) 705 937 1022 693 1800 1800 1800 1800 39 52 57 518/Bricks and Tiles- 26 23 26 14 40 40 50 50 65 58 52 37

(million pieces)

Beer (1000 litres) 402 542 688 589 600 600 600 600 67 90 115 131Fertilizer (1000 tons) 0.7 0.6 0.4 - - - - - - - - -Textiles (1000 meters) - - - 2938 - - - - - - - -

Cement (1000 tons) - - - 23.6 - - - 48 _ _ _ 66

1/ Supplied by the Department of Industry.

2/ Represents the output of the two largest units and reflects approximately 90% of Nepal's production.

3/ Represents approximately 100% of Nepal's production and is produced by one public and two private corporations.

4/ Represents 90% of Nepal's output as produced by one public sector corporation, there is also one small private sector corporationwhose output is not shown.

5/ Represents 20-25% of the total output.

6/ Represents only approximately 25% of total output.

7/ Represents the output of public sector corporations and only 50% of total output.

8/ Represents the output of a public sector corporation and only 20% of total output.

9/ Probably new capacity added which is not registered and/or industry works 24 hours per day.

December 17,1976

ANNEX 2Page 1

NEPAL

APPRAISAL OF THENEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Cottage and Village Industries

1. General. Approximately 80% of Nepal's land area is mountainousand hilly, and although substantial investments have been made in building aroad infrastructure, large parts of the country can still only be reached byfoot trails; in such areas, transport volume and thus the size of the marketis limited to what people can carry on their backs. It is estimated thattwo thirds of Nepal's population live in these remote inaccessible partswhere village and cottage industry has been the traditional economic systemfor producing consumer goods. These goods are produced from local raw mate-rials, using simple tools in the homes of the local people.

2. HMG's 1974 Industrial Policy Statement defines village and cottageindustries as those industries with investments in fixed assets of Rs 200,000or less. After agriculture, this sector provides the main source of employ-ment and it is estimated that it accounted for 7% of GDP in FY75, which isalmost double the contribution of the modern industrial sector.

3. Sector Characteristics. 1/ HMG estimates (1972/73) that there areabout 375,000 cottage industries in Nepal, providing full or part time employ-ment to over a million workers. These industries can be classified as follows:

(a) Geographic distribution

Region No. of Industries ('000)

Eastern Development Region 56 15%Central Development Region 12 3%Western Development Region 211 56%Far Western Development Region 96 26%

375 100%

1/ Detailed information on this sector is contained in the HMG report -

"Sample of the Cottage and Small Scale Industries - 1972/73".

ANNEX 2Page 2

(b) Distribution by size of capital investment.

Investment No. of Industries ('000)

Up to Rs 100 239 63.5%Rs 101 - Rs 200 59 16%Rs 201 - Rs 500 41 11%Rs 501 - Rs 1,000 19 5%Rs 1,001 - Rs 10,000 16 4%Rs 10,001 - Rs 200,000 1 0.5%

375 100%

The average capital investment is Rs 380 per unit.

(c) Distribution by number of workers employed.

No. of Workers No. of Industries ('000)

1 95 25%2 117 31%3-5 134 36%6-9 29 8%

375 100%

4. The total output of this sector was estimated at about Rs 300 mil-lion in 1972, which is Rs 300 per worker or Rs 800 per establishment. It isestimated that 20% of it is used for home consumption. Further, only 20%of the output is sold for cash while the remainder is bartered.

5. The major type of goods produced by this sector are handloomcloth, woollen goods such as blankets and rugs, footwear, woollen carpets,curio goods, handmade paper, pottery, household utensils, simple metal toolsand bamboo and reed products. Some of these products such as carpets andcurio goods are mainly produced for export. The Village and Cottage Indus-tries Department estimates that the exports of curio goods in FY75 amountedto Rs 13.5 million and carpets Rs 3.5 million.

6. Constraints on Development. There is substantial scope for raisingthe productivity of this sector. The low productivity is due to severalfactors: (a) most of these industries, especially those in the remote partsof the hills have no access to a market outside the surrounding villages;(b) although local raw materias are used, they may not be available in theimmediate vicinity and the nearest source could be several days away; and(c) the small and uncertain market. New designs and improved manufacturingtechniques combined with steady access to raw materials and markets couldconsiderably improve the output and productivity of this sector.

7. HMG's Policy. HMG has defined the following objectives for thevillage and cottage industries in its fifth five year plan: (a) to providemore jobs to a greater number of people; (b) to utilize local raw materials

ANNEX 2Page 3

as far as possible; (c) to help tourism by promoting additional skills andcrafts and by producing artifacts; (d) to create a source of regular incomefor the maximum number of people; and (e) to minimize regional imbalancesand disparities.

8. To achieve the above objectives, HMG has decided on the followingpolicies:

(a) Certain items will be reserved for production by village andcottage industries.

(b) Loan facilities, raw material facilities will be made avail-able on easy terms.

(c) The cottage industry will be modernized to increase itsproductivity.

(d) The Cottage and Village Handicraft Emporium will providenecessary imported raw material as well as marketingfacilities for finished products produced by cottageindustries.

The Cottage Industry Department

9. The Cottage and Village Industries Department (CID) was created in1956 and placed under the Ministry of Industry and Commerce. It is the onlybody with the responsibility for development of cottage industry in Nepal.It has four basic functions: (a) it provides training programs for potentialentrepreneurs; (b) it provides them with financial help; (c) it carries outresearch into improved design and manufacturing techniques; and (d) it operatesthe Handicraft Emporium Center. CID has 25 regional branches outside Kathmandu,each is staffed by three professionals. It also has 25 professional staffin Kathmandu. The Handicraft Emporium provides sales outlets for the outputof the cottage and village industries as well as raw materials. It has cur-rently only six branches outside Kathmandu.

Sources of Finance

10. Money lenders have traditionally been the major source of financefor this sector though little is known about their operations. The CottageIndustry Department has also provided term loans to this sector. In FY1975/76, it disbursed Rs 3.7 million. It also spent Rs 1.3 million on buyingraw materials and machinery in bulk which was later sold on an installmentbasis. Of the Rs 5 million made available by HMG to CID in FY76, almostRs 1.3 million was used to purchase foreign raw material and equipment.CID's loans ranged in size from Rs 200 to Rs 25,000 with an average sizeof Rs 2,000. However, CID's collection performance has been poor since outof Rs 5 million due in FY75, only 20% was collected, though the arrears wereconfined primarily to a few large borrowers.

ANNEX 2Page 4

11. SIDC, which was part of NIDC until July 15, 1976, when it was trans-

ferred to the CID, was another source of finance. As of July 15, 1976 it had

approved 325 projects amounting to Rs 9.5 million of which it has disbursed

Rs 4.1 million. The average size of SIDC loans is Rs 30,000.

12. In 1975, HMG decided to streamline the financing arrangements for

this sector by transferring all financing responsibility for cottage indus-

tries to the commercial banks. HMG believes that the banks with their large

number of branches (180 in 1976) are more accessible to cottage and village

industries than the CID or SIDC. As of FY76, the commercial banks have been

required by the Rastra Bank to provide 5% of their total deposits to village

and cottage industrialists as well as small scale agriculturalists. This

target was increased to 7% for FY77. 1/ The Rastra Bank has also introduced

a penalty if this target is not met - it will require the commercial banks to

deposit with the Rastra Bank at no interest the balance of the target figure

that has not been lent out. This 7% target seems unreasonably high as the

absorptive capacity of small-scale sector is small. The Rastra Bank has also

agreed to refinance the commercial bank loans to this sector. 2/ A Credit

Guarantee Corporation was also set up in 1975 to guarantee small-scale commer-

cial bank loans. This corporation will guarantee only 50-70% of the principle

amount of the loans. The amount of principle guaranteed depends on the type

of industry financed. The paid up capital of the corporation is Rs 3 million

and it is owned jointly by the two commercial banks and the Rastra Banr.-k.

13. Conclusions. HMG seems to be following a two pronged approach.

The first approach is to encourage self reliance in the remote parts of the

country by encouraging the establishment of new village and cottage indus-

tries and by encouraging the existing ones to increase their output. The

second approach is to encourage some cottage industries to expand their

market beyond the surrounding village and even to export part of their out-

put. In both approaches HMG wants to concentrate on extension services

through CID while the commercial banks provide the financing. HKG realizes

that additional services such as a bulk raw material purchasing scheme and

finished product marketing scheme are required. HMG is receiving assistance

from IDA (Technical Assistance Credit NEP-659) in the preparation of an

integrated cottage industries project in the Kathmandu Valley. This could

develop into a potential project for IDA financing.

1/ The CID and SIDC have stopped making new loans as of July 15, 1976.

2/ From July 16, 1976 the Rastra Bank will refinance working capital loans

at 12% and term loans at 6%. The commercial banks charge village and

cottage industries 14% and 10%, respectively. The intention behind the

better spread for term loans is probably to induce commercial banks to

make more long-term industrial loans.

ANNEX 3Page 1

NEPAL

APPRAISAL OF THENEPAL INDUSTRIAL DEVELOPMENT CORPORATION

The Tourism Sector

1. General. Nepal's magnificent landscape and rich cultural heritagehave been discovered by a growing number of visitors over the years makingtourism a major source of foreign exchange earnings. The number of touristsarriving in Nepal reached 75,000, excluding Indians, in 1975 (Attachment 1).Almost 55% of tourist arrivals in 1975 came from Europe, while North Americaaccounted for 21% (Attachment 2). The growth rate averaged 10% over the last5 years and it is projected that over 130,000 tourists will arrive in Nepalby 1980. This sector provides employment to 7,500 people and it is estimatedthat the gross foreign exchange earnings in FY76 will reach $13.6 million, anincrease of 41% over FY75 (Attachment 3).

2. HMG's Objectives and Policies. HMG has defined the followingobjectives with regard to the development of tourism:

(a) to preserve the country's historical, cultural andgeographical characteristics;

(b) to expand touristic areas outside the Kathmandu area;

(c) to lengthen the stay of tourists visiting Nepal; and

(d) to provide appropriate training to guides, hotel staffand employees of tourist information centres.

3. A tourism master plan was prepared in 1972 with German technicalassistance. The master plan had recognized the following main constraints onthe development of tourism in Nepal:

(a) the shortage of accommodation in Kathmandu and in the restof Nepal;

(b) the shortage of transportation both to Nepal and within thecountry;

(c) the insufficient attention to the development of places ofinterest outside the Kathmandu Valley; and

(d) the organizational structure of the Department of Tourismand its shortage of staff.

ANNEX 3

Page 2

4. The Present Situation. HMG has set out to remove the first con-

straint and has encouraged the expansion of hotel accommodation. A large

number of licenses were issued and financing was available from NIDC which

eventually financed 31 hotels throughout Nepal. At present, there are 1,934

hotel beds in the Kathmandu Valley and it is expected that their number will

increase to 4,316 beds by 1978 (Attachment 4). In the past, HMG did not seem

to have given sufficient thought to capacity utilization by type of hotel when

issuing hotel licenses. For instance, Attachment 4 shows that the bed capa-

city rate in the 2-star hotels will increase from 707 at present to 1,357

beds by 1978. Although the break-even point for these hotels is low, it is

not expected, even if the predicted increase in number of visitors material-

izes, that the 2-star hotels will be profitable for sometime. A similar

situation exists for 3-star hotels. Attachment 5 shows that the average bed

occupancy rate for 2-star hotels in Kathmandu was 33% in 1975 compared to

35% in 1974, while 3-star hotels experienced an increase from 41% to 50% over

the same period. By contrast, 1-star hotel occupancy was 79% in 1975, while

5-star was 62%. Room occupancy rates are usually 20% above bed occupancy

rates. The average guest per hotel in Kathmandu in 1975 stayed 4.1 nights.

The poor performance of 2 and 3-star hotels is reflected in NIDC's portfolio

as these two categories account for most of its hotel arrears. The Bank Group

has also financed, through IFC, the expansion of the 5-star Soaltee Hotel and,

through IDA, the 5-star Yak and Yeti Hotel, both in Kathmandu. HMG has now

stopped issuing licenses for new hotels in the Kathmandu Valley.

5. Attachment 6 shows that the hotel capacity outside Kathmandu will

increase from 697 beds at present to 911 beds. It is not known whether this

increase is sufficient as no occupancy figures are available.

6. To improve the quality of the services provided by hotels, a Hotel

Management and Tourism Training Centre was established in 1972, with UNDP/

ILO assistance. Over 500 persons have been trained in this centre so far.

HMG is now seeking external financial assistance to improve the quality of

the training and to introduce higher level courses.

7. In order to improve air transportation, since air transport accounts

for over 85% of tourist arrivals, the runway of Tribhuvan International Air-

port is currently being improved, and it is expected that, with the projected

expansion of the terminal complex, airline services can also be extended.

8. In its efforts to open up other parts of the country for tourism,

HMG recently commissioned a study by the Pacific Asia Tourism Development

Authority (PATA) on the development of Pokhara as a tourism centre. IDA

has also been providing assistance with a similar study in the Khumbu region.

HMG is also seeking assistance for the preparation of feasibility studies for

the development of the Kali Gandaki Valley. Also, in view of the increasing

demand for tourist trekking accommodation 1/ (Attachment 7), HMG intends to

1/ Trekking arrivals increased from 590 in 1970/71 (1.2% of total) to 12,600

in 1974/75 (13.6 of total).

ANNEX 3Page 3

construct a number of trekking lodges and campsites. It is expected thatNIDC will finance some of these trekking lodges and a few small hotels out-side Kathmandu.

9. The tourism master plan had recommended the upgrading of the Depart-ment of Tourism and the creation of a separate Ministry of Tourism, responsiblefor the formulation and implementation of tourism policies. The Department ofTourism was criticized in the report for its organizational weaknesses and itslack of authority in matters relating to tourism. It was also criticized forits lack of staff. HMG has now created the new Ministry of Tourism, althoughit is too soon to measure any effects.

ANNEX 3Attachment 1

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

I/Number of Visitors Arriving in Nepal-/

Year Total Number % Growth

1971 49,914 8.6

1972 52,930 6.0

1973 68,047 28.6

1974 72,601 (17,237) 6.7 (32.0)

1975 74,559 (17,881) 2.7 (2.9)

1/ The data for 1971 to 1973 include Indian visitors, while tivee for 1974-75exclude Indian visitors - The number of Indian visitors arriving by airare shown separately for 1974-75.

ANNEX 3Attachment 2

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Tourist Arrivals by Major Nationalities 1971-1975 Numbers

1971 1972 1973 1974 1975

TOTAL ARRIVALS e 49914 52930 68047 72601 74559

USA 15114 16127 16704 15114 13551

Canada 1474 1733 1923 2047 1998

Mexico 229 197 242 331 302

North America 16817 18057 18869 17492 15851

Denmark 1313 1190 1200 1663 1158

France 5159 5349 8118 7927 8662

Germany 5133 5889 8519 9704 9431

Italy 1670 1695 3073 2995 3638

Netherlands 1253 1034 992 1611 1706

UK 5575 5877 6565 7685 8346

Other E C 659 766 1284 1226 1519

E C 20762 21800 29751 32811 34460

Austria 618 548 1096 1674 1551

Spain 259 265 590 854 1027

Switzerland 1606 1781 2644 2941 2754

Sweden 862 1116 1040 1525 1239

Sub-Total 3345 3710 5370 6994 6571

Japan 2903 3589 5719 5362 5921

Australia 2643 2495 3432 4377 5296

New Zealand 601 549 703 1012 1268

Sub-Total 6147 6633 9854 10751 12485

Others 2843 2730 4203 4553 5192

x All figures exclude arrivals from IndiaSource: Department of Tourism

ANNEX 3Attachment 3

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Gross Foreign Exchange Earnings from Tourism in Nepal

Fiscal Year US$ % Growth

1971/72 2,180,000 + 32%

1972/73 5,153,000 +136%

1973/74 9,079,000 + 76%

1974/75 9,692,000 + 7%

1975/76 13,650,000 + 41%

Present and Future Capacity of Hotels

in the Kathmandu Valley

Present Capacity Under Construction Capacity in 1978Star Category No. of Hotels Rooms Beds Rooms Beds Rooms Beds

5 1 111 216 183 366 294 588

4 4 172 334 319 550 461 898

3 6 190 372 293 586 558 1108

2 16 380 707 325 650 705 1357

1 7 163 305 30 60 193 365

TOTAL 1016 1934 1150 2212 2211 4316

>._D t

n X

rt

Monthly Bed Occupancy Rates

for Hotels in the Kathmandu Valley

StarCategory Year Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Average

5 1974 - - - - - 38 52 69 60 83 85 69 651975 73 61 82 71 61 36 43 62 48 82 59 70 62

4 1974 - - - - - 25 39 54 37 72 77 66 531975 72 59 73 60 51 31 38 55 37 69 81 63 57

3 1974 - - - - - 22 21 29 25 63 70 57 41

1975 58 42 71 47 33 31 51 48 44 68 58 51 50

2 1974 - - - - - 10 29 28 13 52 68 46 351975 18 42 51 25 12 14 6 21 21 54 61 46 31

1 1974 - - - - - 61 60 55 59 79 73 74 66

1975 57 66 86 88 90 68 74 83 10 112 108 111 79

I, r s.

ANNEX 3Attac'hment A

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Present and Future Hotel Capacity Outside the Kathmandu Valley

Present Capacity Under ConstructionLocation No. of Hotels- Rooms Beds Rooms Beds

Pokhara, GandakiZone 7 128 258 15 30

Chitawan DistrictNarayani Zone 1 22 44 - -

Parsa DistrictNarayani Zone 3 32 135 - -

Makawanpur districtNarayani Zone 1 15 30 - -

Snangboche, SagarmathaZone 1 12 24 - -

Surkhat District, BheriZone 1 12 24 - -

Janakpur, JanakpurZone 2 19 42 22 40

Jamsour, BhaulagiriZone 1 - - 8 20

Helambu, Bagmati Zone 1 6 16 - -

Biratnagar, Koshi Zone 3 34 92 34 92

Bhairawa, Lumbini Zone 1 16 32 16 32

Total 22 296 697 95 214

1/ Hotels outside the Kathmandu Valley are not star rated.

ANNEX 3Attachment 7

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION1/

NEPAL - Arrivals by purpose of visits 1971-1975

1971 1972 1973 1974 1975

Pleasure 45687 49176 62555 67748 70124

Trekking and mountaineering 590 613 1565 11710 12587

Business 1245 1099 1258 3896 4911

Official 1704 1699 2244 3707 4227

Other 688 343 425 2777 591

Total 49914 52930 68047 89838 92440

Pleasure 91.5 92.9 91.9 75.4 75.9

Trekking and mountaineering 1.2 1.2 2.3 13.0 13.6

Business 2.5 2.1 1.9 4.4 5.3

Official 3.4 3.2 3.3 4.1 4.6

Other 1.4 0.6 0.6 3.1 0.6

Total 100.0 100.0 100.0 100.0 100.0

1/ 1974 and 1975 figures include arrivals from India.

Source: Department of Tourism.

ANNEX 4Page 1

NEPAL

APPRAISAL OF THENEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Summary of Industrial Policy Statement of 1974

1. The industrial policy statement of 1974 contains policies, proce-dures, regulations and incentives and defines the role of the private sector.Industry is defined broadly and embraces manufacturing, mining, power, as-sembling and all types of service industries (tourism, recreation, transport,construction, etc.) HMG distinguishes the following categories of industryaccording to size of fixed assets 1/:

- Village and Cottage industry not more than Rs 200,000.

- Small industry between Rs 200,000 and Rs 1 million.

- Medium industry between Rs 1 million and Rs 5 million.

- Large industry more than Rs 5 million.

2. The policy statement specifies that power and defence industriesare reserved for 100% ownership by the public sector. The iron and steel,chemicals, petroleum and cement industries are also reserved for' the publicsector but the private sector may participate up to 49% in the share capital.The policy statement also lists a number of other industries in which HMGrequires a majority shareholding including cotton, textile, medicine, dairyproducts, vegetable ghee, and writing and printing paper. This requirementwas abandoned in June 1976. In all other sectors, private participationmay reach 100%.

3. HMG provides generous investment incentives. The table belowcontains a summary of income tax holidays.

1/ Fixed assets cover (a) investments in land, building, machinery andequipment; and (b) pre-investment expenditure and pre-production ex-penditure.

ANNEX 4Page 2

AdditionalCapital Investment in Minimum Exemption based MaximumManufacturing and Tourism /a Exemption on Employment /b Exemption

(years) (years)

Rs 200,000 to Rs 1 million 5 1-3 8Rs 1 million to Rs 2.5 million 6 1-3 9Rs 2.5 million to Rs 10 million 7 1-3 10Rs 10 million to Rs 40 million 8 1-3 11More than Rs 40 million 9 1-3 12

/a Recently incentives for new hotels in the Kathmandu Valley were eli-minated.

/b Depending on how many workers are used, extra tax holidays are granted.

4. Tax holidays for basic industries with a capital investment ofmore than Rs 50 million are 15 years, whereas they can go up to 20 yearsfor mineral-based industries with a capital investment of more than Rs 250million. Tax holidays for industries whose products are largely consumedin the country, though they depend mostly on imported raw materials, as wellas for cold storages and national film production are lower (1 year) for theindicated categories in the above table.

5. The tax holidays mentioned above are adjusted for certain geo-graphic districts, to reduce regional imbalances in Nepal. A correctionof 2 years is made on investment in the most developed regions of Nepal(Kathmandu Valley, Biratnagar, and Birganj), whereas extra tax holidays ofbetween one and two years are granted for the least developed areas of Nepal.

6. HMG also grants other privileges to the least developed areas ofNepal. These include lower interest rates (1-2%) and higher loan facilitiesfrom NIDC (5-12%) 1/. These concessions may encroach on NIDC's autonomy(main report, para 5.07). The above-mentioned tax and other concessions areprobably necessary at the current early stage of industrialization in Nepal,but they should be reviewed in due time so as not to establish industrieswhich have no long-run economic viability when incentives are eliminated.

7. Tax incentives also exist for industries which undertake moderni-zation and expansion of at least 25% of the rated capacity. The customsduties for most industries are only 1% for imported machines, equipment,spare parts and electric goods. Custom duties for imported raw materialsare also low (0-15%). HMG also has concessionary rates for excise duties forcertain types of industries.

1/ Entrepreneurs can obtain the following financing from NIDC as % offixed assets; between 70% and 80% depending on type of undertakingfor region A (Kathmandu Valley, Biratnagar and Birganj); and between75% and 95% for the other, least developed, regions of Nepal.

ANNEX 4Page 3

8. The Industrial Policy Statement also specifies time limits forgranting licenses from the date of application at the Department of Indus-tries. They are almost 30 days for small industry, 60 days for medium in-dustry and 90 days for large industry. Furthermore, time limits are givenin this Policy Statement for the disbursement of funds to the applicantsonce the project has been approved by NIDC. They vary from 1 to 6 monthsdepending on the size of the project. These policies also encroach onNIDC's autonomy and may be against its interest (para 5.07).

ANNEX 5Page 1

NEPAL

APPRAISAL OF THENEPAL INDUSTRIAL DEVELOPMENT CORPORATION

The Industrial Services Center

General

1. The UNIDO report of the Industrial Advisory Mission to Nepal in

1971 recommended the establishment of an Industrial Services Center with the

objective of consolidating in one place all aspects of industrial develop-

ment (except financing). This recommendation was not immediately acceptable

to HMG because of disagreement regarding the logical set-up for such an insti-

tution. However, in 1974 an Industrial Services Center was formed with the

required financing provided from UNDP and HMG. The board of ISC (Attachment

1) is composed of representatives of the Ministry of Finance, the Ministry

of Commerce and Industry, Department of Cottage Industries, Tribhuvan Uni-

versity and NIDC. ISC's original nucleus of staff came from NIDC with the

transfer of its Industrial Planning and Feasibility Division.

Organization

2. ISC is managed by the executive chairman Mr. Ajit Thapa who is

assisted by a UNDP advisor, Mr. Pearson. It is divided into four divisions

(Attachment 2).

The Industrial Promotion, Planning and Feasibility Studies Division

3. This division has three branches - the promotion branch, which so

far has mainly been concerned with arranging seminars on industry in Nepal.

The feasibility study branch has carried out approximately 25 studies. This

branch has only four permanent staff members so it has had to make use of

staff from other departments and outside consultants. The planning branch

also has four staff members; its main function is to provide advice to

HMG on industrial strategy. It has carried out about 5 industrial identi-

fication studies and is currently working on an import substitution study.

It is too early (ISC started only in 1974) to judge about the quality of

the studies, but preliminary indications are that ISC has difficulties in

collecting sound data.

The Industrial Extension Services Division

4. This division is composed of three branches. The project engineer-

ring branch (4 staff members) has had so far little demand for its service. The

management consultancy branch (4 staff members) has carried out several assign-

ments, mainly for government controlled corporations. The training branch

ANNEX 5Page 2

(2 staff members) has arranged several training programs. Attendance atthese training sessions has mainly been from the public sector companies.

The Industrial Districts Coordination Division

5. This division supervises six industrial districts of which onlythe Balaju industrial district is operating at breakeven, the remainder ata loss.

The Administration and Finance Division

6. This division's main responsibility is to provide administrativesupport services to the other divisions and management of the center's fi-nancial affairs.

Conclusions

7. There are currently several weaknesses in ISC. The main weak-nesses is the shortage of experienced and well qualified staff, thoughother institutions face the same problem in Nepal. When this weakness iscoupled with the large number of diverse responsibilities that ISC has beengiven, it leads to the neglect of important areas. The main problem is,consequently, that ISC has not been able to do enough industrial promotionwork particularly through the preparation of feasibility studies for theprivate sector as ISC tends to give preference to public sector projects.This could affect the number of projects that eventually are submittedto NIDC.

ANNEX 5

Attachment 1

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Industrial Services Center

Board of Directors

Name Principal Position

Mr. Ajit N.S. Thapa Executive Chairman of ISC

Mr. B. Gopal Undersecretary, Ministry of Finance

Mr. G.L. Rajbhandari Acting Joint Secretary, Ministry ofIndustry and Commerce

Mr. D.P. Gautam Director-General, Department of CottageIndustry.

Dr. U.B. Pradhanang Dean, Institute of Business Administration,Tribhuvan University

Mr. Tej B. Prasai General Manager, NIDC

NEPAL INDUSTRIAL DEVELOPMENT CORPORATIONORGANIZATION OF INDUSTRIAL SERVICES CENTRE

BOARD OF DIRECTORS

INDUSTRIAL PROMOTION, INDUSTRIAL EXTENSION INDUSTRIAL DISTRICTS ADMINISTRATION ANDPLANNING AND FEASIBILITY SERVICES DIVISION COORDINATION DIVISION FINANCE DIVISIONSTUDY DIVISION

1 | PROJECT ENGINEERING BALAJU7 PROMOTION BRANCH j -|___B RANCH INDUSTRIAL ESTATE

MANAGEMENT BUTWALPLANNING BRANCH CONSULTANCY INDUSTRIAL ESTATE

FEASIBILITY STUDY 1 MANAGEMENT TRAINING DHARANBRANCH J BRANCH INDUSTRIAL ESTATE

HETANDA

INDUSTRIAL ESTATE

NEPALGANJ

INDUSTRIAL ESTATE

POKHARA

INDUSTRIAL ESTATE |n

rtWorld Bank--16764

ANNEX C

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Composition of Licensing Board

State Minister of Industry and Commerce - Chairman

Secretary, Ministry of Industry and Commerce - Member

Secretary, Ministry of Finance - Member

Secretary, National Planning Commission - Member

Governor, Nepal Rastra Bank - Member

Director General, Industry Department - Member and Secretary

General Manager, NIDC - Special Invitee

December 17, 1976

ANNEX 7

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Applications and Licences Issued and Breakdown by Type of Industry

1972/73 1973/74 1974/75 1975/76

Applications received 180 267 186 206

Licences Issued 75 135 87 112

Agro based industry 3,(40%) 56(41%) 27(31%) 36(32%)

Forest based industry 3(42) 3(2%) 2(2%) 4(4%)

Mining based industry _ 6(5%) 2(2%)

General manufacturing 20(27%) 21(18%) 24(28%) 23(20%)

Tourist based industry 16(21%) 42(31%) 23(26%) 17(15%)

Miscellaneous 4(3%) 11(13%) 30(27%)

Capital investment forlicenced projects(Rs Millions) 68.35 296.84 44.67 702.87

December 17, 1976

ANNEX 8

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Sources of Mediuta and Lorg-term Funds for Industry

A) In the Public Sector (Rs Million)

1972/73 1973/74 1974/75

HMG 4.9 73.3 84 (est)

Foreign aid (grants and loans) 36.4 43.4 26.5

Total 41.3 116.7 110.5

B) In the Private Sector

N.I.D.C. 16.0 28.5 51.2

N.I.D.C.'s Clients 14.8 24.0 45.0

Total 30.8 52.5 96.2

1/ This list is based on a disbursement basis, it is not complete because

of the lack of data in Nepal. The commercial banks are not included because

most of their loans are for working capital and they have only been

making long-term loans recently.

December 17, 1976

ANNEX 9

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Commercial Banks

Deposit Rates

Effective JulyEffective up to,/ Effective up to 1976 - February Effective fromApril 28, 1975 - July 16, 1976 1977 February 1977

Current deposits 0 0 0 0

Savings deposits 6-1/2 8 8 8

Fixed deposits3 months 4 4 4 46 months 4 10 10 91 year 3-1/2 15 14 122 years and above 9-3/4 16 15 13

1/ The rates effective up to April 28, 1975 used different time period, for instancea different fixed deposit interest rate was used for each year up to 5 years.

March 31, 1977

ANNEX 10

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Commercial Banks

Loan Rates

Effective up to Effective from1. Industrial Loans July 16, 1976 July 16, 1976

A. For Fixed Capital1/

Cottage and Village industries- 15 10

Basic Industries, ExportSubstituting Industries,Export Promoting industriesand Forest Based industries 15 11

Luxury Goods industries 15 16

B. For Working Capital 15 142/

2. Agricultural Loan

A. For Fixed Capital

Cardamon plantations,Horticulture and tea and cottoncultivation 15 8

Livestock, Poultry, Fishery, andBee farming 15 11

Other agricultural loans 15 14

B. For Working Capital 15 14

3. Service Sector 15 14

4. Export Bill 15 12

5. Loans against HMG bonds. 15 14

6. Loans against fixed deposits 15 20% above

deposit rates3/

7. Others 18 18

8. Overdue loans - 20% above

specified rate.

1/ Having fixed assets less than Rs 200,000.WI Reduced to 10% in February 1977 for loans to cottage industries.

3/ Commercial banks can charge a higher rate than that specified. The minimum rate

was reduced to 16% in February 1977.

March 31, 1977

ANNEX

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Commercial Banks Balance Sheets (FY74-FY76)

(Rs Millions)

Mid July Mid July Mid June1974 1975 1976

Liabilities

- Total depositi 859.2 1,029.6 1,403.7

(a) Demand 290.2 340.4 439.2(b) Fixed 411.9 516.8 777.5(c) Savings 157.1 172.4 187.0

- BorrQwings from Rastra Bank 151.0 368.9 20.4

- Foreign Liabilities 22.9 107.6 150.0

- Other Sources 247.6 317.9 422.6

Total 1,280.7 1,824.0 1,996.7

Assets

Cash, 92.7 151.5 168.3Foreign Assets 209.2 238.8 322.2Loans and advances 865.2 1,294X7 1,283.6

(a) To Government 98.3 100.4 100.2(b) To Government enterprises 84.5 405.3 439.7(c) To private sector 682.4 789.0 743.7

Other Uses 113.6 139.0 222.6

Total 1,280.7 1,824.0 1,996.7

December 17, 1976

ANNEX 12

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION1/

Board of Directors

Name Principal Position

Mr. I.L. Shrestha - Acting Secretary, Ministry of Industry andCommerce (Chairman) 2/

Mr. U.S. Thapa - Deputy Governor, Nepal Rastra Bank and exGeneral Manager of NIDC

Dr. Pandey - Joint Secretary, Ministry of Finance, HMG

Mr. J.L. Maskay - Joint Secretary, Economic Planning Commission

Mr. J.B. Lama _ Chairman, Biratnagar, Jute Mills Ltd.

Mr. H.P. Giri - President, Federation of Nepalese Chamber ofCommerce and Industry

Mr. Tej B. Prasai - General Manager, NIDC

1/ The HMG directors' tenure of office is not specified whereas the privatesector representatives hold office for 2 years. There are also twoinvitees to the board - Mr. Satyal, Director General, Department ofIndustry and Commerce, and Mr. Ajit Thapa, Chairman, Industrial ServicesCentre.

2/ Ex-Officio Chairman.

December 17, 1976

ANNEX 13

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Composition of Staff

No. of Staff Members as of July 15 1973 1974 1975 1976

Professional

uommerce uraduates 27 27 24 28Engineers 22 22 18 16Financial Analysts 16 16 15 20Others (Masters and Graduate ofLaw and General Arts) 6 6 6 8

71 71 63 72Non Professionals 95 87 87 53

Total 166 158 150 125

Changes in No. of Professional Staff

1973 1974 1975 1976

No. at beginning of fiscal year 73 71 71 63New recruits during the year - - - 25Departure during the year 2 - 8 16No. at the end of fiscal year 71 71 63 72

December 17, 1976

NIDC'S ORGANIZATIONAL STRUCTURE /

BOARD OF DIRECTORS

IV~~~~~~~~~~~~~

| GEN ERAL _| MANAGER

GN ERAL MANAGER UAN ER

D VISION ON5OADMINISOERAION

| CHIEF l l CHIEF l | ~~~~~~~~~~~~~~~~~~~~~~~~CHIEF CHE

~~~~~~~~~~~~~~~~~~~~~~~~FAADIN. INVETMERNAL REEROJCH

PROMOTIONI EASTERN W 'ESTERN W YESTERN AC OU T AUDI &X PLANNING

DIVISIRO REGN RI DIOJ

BRANCH ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~BAC BRANCH

MARKET AGRO

l 1ANALIS _ MINERALBFRANCH _ EFJECT

FINVETMNCILFOET

ANALYSOION MINERtAL

BRANCH _ PF OJECTS

1

BRANCH

J/ InpeetdF.blu.,, 1977 Wlorid B.nk-1B7B2

ANNEX 15Page l

NEPAL

APPRAISAL OF THENEPAL INDUSTRIAL DEVELOPMENT CORPORATION

1/Statement of Investment and Operational Policies

The Nepal Industrial Development Corporation, whose objective isto promote private enterprise in Nepal, will be guided by the followingpolicies:

I. Scope and Nature of Operations:

(1) NIDC will invest in manufacturing and processing industriesand tourism.

(2) NIDC will finance private companies only.

(3) NIDC will finance new enterprises and also the expansionand modernization of existing companies.

(4) In its operations, NIDC will be guided by the Government'sNational Economic Plan. Industries in the plan will bepromoted on a priority basis.

(5) NIDC will assist private enterprise by providing:

(a) Medium and long-term loans;

(b) Equity participation;

(c) Guarantees;

(d) Technical and Managerial advice.

II. Operational Policy

(1) NIDC will only finance projects which appear upon carefulinvestigation to be financially and economically sound andtechnically well conceived.

(2) NIDC will not finance enterprises whose fixed capital in-vestment is less than Rs 200,000 (with the exception oftrekking lodges).

l/ The Statement was officially approved by the NIDC Board of Directors onApril 7, 1977.

ANNEX 15Page 2

(3) The minimum financing (debt plus equity) that NIDC willprovide is Rs 50,000.

(4) The use of NIDC's loan financing is to be limited to in-vestments in fixed assets and permanent working capital.

(5) NIDC, within the guidelines established by the Rastra Bank,will set its interest rates to maintain a reasonable spreadand reflect the cost of capital.

(6) NIDC will set the maturity of its loans on the basis of thedebt service capacity of its clients, but will not exceed15 years.

(7) NIDC will normally limit itself to finance a maximum of70% of the total project cost.

(8) NIDC will encourage joint financing with foreign partnersin industries that require advanced technology.

(9) To broaden the industrial ownership in the country, NIDCwill seek to sell its equity investments to the extentpossible.

III. Financial Prudence

(1) NIDC will require its borrowers to provide adequate col-lateral and to keep records in accordance with soundaccounting procedures. NIDC will have the right toinspect the enterprises it finances.

(2) NIDC will not bear the exchange risk on loans repayablein a foreign currency.

(3) NIDC's debt will not exceed five times its share capitaland reserves.

(4) NIDC would acquire or retain more than 50% ownershipin any manufacturing enterprise, only in exceptionalcircumstances.

(5) The total equity investments of NIDC should not at anytime exceed its paid-up share capital and reserves.

(6) The total commitment of NIDC to any single enterprise,in all forms including Equity, Loans and Guarantees shallnot normally exceed 25% of its share capital and reserves.

(7) NIDC will diversify its portfolio to maintain a reasonablelevel of risk.

ANNEX 15Page 3

IV. Accounting and Auditing

NIDC will maintain accounting records which adequately reflect itsbusiness operations and results in accordance with generally accepted account-ing principles.

V. Profits and Their Distribution

NIDC will seek to develop earnings sufficient to cover expensesand taxes, to provide reserves adequate to the size and risk of its portfolio.A minimum of 25% of net profits after tax will be added to the reserves.

ANNEX 16

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Number and Value of Loan Requests and Approvals(Rs '000)

1972/73 1973/74 1974/75 1975/76-

Requests

No. of loan applications 258 91 26 26Amount 101,512 87,644 392,925 41,149

Approved

No. of Loans Approved 84 51 54 18Amount 40,877 57,286 147,207 15,965

December 17, 1976

ANNEX 17

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Time and Cost Overruns for 14 ?roiects Completed DurngFiscAl YeAr 1975/76

Time Overruns-I Cost Overruns-/

3 - 6 Months 5 0- 25% 8

6 - 12 Months 2 25% - 50% 4

1 - 2 years 6 50% and Over 2

2 + Years 1 -

14 14

1/ This is the extra time taken to complete the project when compared tothe estimates prepared at the project appraisal stage.

2/ This is the percentage increase in the project's total cost as comparedto its original estimated cost. This increase could be due to timedelays, inflation or poor estimation of project cost at the appraisalstage.

December 17, 1976

ANNEX 18

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Procurement of Imported Plant yd

Machinery by Source and Amount-(Rs '000)

Year of Project No. ofApproval Projects India Germany Japan Denmark ,.-U.K. Others Total

1973/74 25 7,785 7,464 - - - 1,349 16,598

1974/75 40 20,977 24,016 472 2,216 293 18 47,992

1975/76 7 4,036 - 165 - - - 4,201

32,798 31,480 637 2,216 293 1,367 68,791

1/ These figures do not represent the procurement that has actually taken

place; it shows the proposed procurement source and amounts that were

proposed at the project approval stage.

December 17, 1976

ANNEX 19

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

The Evaluation and Progress Division'sFollow-Up Activities

1974/75 1975/76

No. of follow up visits 70 65

No. of evaluation reportscarried out 10 3

No. of study reports carriedout 1 -

No. of evaluation-/questionnaires answered - 26

1/ A simple evaluation questionnaire was introduced in 1976.

December 17, 1976

NEPAL INDUSTRIAL DEVELOPNENT CORPORATION

1/Summary of Operations

Rs '000

Loans

Local-/ Foreign Equity

Year ending July 15 currency currency Total No Investment No Guarantees Total No

Gross approvals

1971 17,342 14,929 32,271 46 9,076 3 - 41,347 49

1972 14,863 7,773 22,636 78 - - 22,636 78

1973 17,274 23,603 40,877 84 3,544 4 - 44,421 88

1974 34,845 22,441 57,286 51 2,270 2 - 59,556 53

1975 107,841 39,366 147,207 54 9,365 6 - 156,572 60

1976 10,940 5,026 15,966 24 700 3 - 16,666 27

Net approvals

1971 4,003 3,309 7,312 26 7,076 2 - 14,388 28

1972 12,904 3,180 16,084 47 - - 16,084 46

1973 8,873 19,102 27,975 47 3,544 4 - 31,519 51

1974 22,650 18,118 40,768 27 2,270 2 - 43,038 29

1975 105,641 39,366 145,007 51 9,365 6 - 154,372 57

1976 10,891 5,026 15,917 24 700 3 - 16,617 27

Disbursements

1971 7,734 4,300 12,034 725 12,759

1972 7,248 432 7,680 6,284 13,964

1973 12,814 651 13,465 2,563 16,028

1974 17,483 5,626 23,109 5,436 28,545

1975 39,287 14,490 53,777 3,900 57,677

1976 25,466 11,077 36,543 6,805 43,348

Outstanding

1971 42,660 9,318 5199783/ 5,341 4,107 61,426

1972 42,150 8,992 51,142-/ 11,625 4,364 67,131

1973 47,581 9,318 56,899-/ 13,808 4,877 75,584

1974 56,692 17,640 74 3321/ 19,244 4,077 97,653

1975 97,416 24,861 122,277- 21,245 1,110 144,632

1976 ~~~~~~~~~~~~~~~~~3/1976 113,244 30,100 143,344 /. 28,050 1,950 173,344

N

1/ Not including SIDC's operations.

2/ Includes Nepalese currency converted into Indian rupees.

3/ These figures differ from those shown in Balance Sheets since latter include accrued interest and SIDC's portfolio.

December 17, 1976.

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Industry-wide distribution of loans outstanding 1971-1976

Rs '000

Year ending July 15

Type of Industry 1971 1972 1973 1974 1975 1976

Hotels and Tourism 29.7 36.2 32.0 31.9 33.7 37.1

Transportation 12.6 14.2 12.8 8.3 4.1 1.8

Power 8.6 7.4 5.5 3.7 2.3 1.9

Manufacturing 48.5 41.6 49.1 54.3 58.4 57.6Cement 7.9 8.0 17.6 2T T 19.1Food 20.7 19.1 20.0 18.0 23.6 28.3of which sugar (13.3) (12.1) (10.7) ( 8.3) ( 4.9) ( 0.2)Brewery 4.1 4.2 3.5 1.9 0.9 0.7Textiles (including jute) 5.7 1.9 0.4 0.3 3.9 4.7Saw milling & wood products 2.4 2.7 2.6 2.3 1.7 1.5Straw Board 1.1 0.7 0.3 0.2 0.1 _Printing & publishing 1.7 1.0 0.5 0.2 0.3 0.2Chemicals 2.2 1.4 0.3 3.6 4.4 2.3Stone products 0.6 0.5 0.6 0.2 0.3 0.6Light machinery 1.3 1.1 1.9 2.9 1.9 3.6Icemaking & cold storage 0.8 1.0 1.4 3.3 2.2 1.7

Miscellaneous 0.6 0.6 0.6 1.8 1.5 1.6

Total 100.0 100.0 100.0 100.0 100.0 100.0

December 17, 1976

NEPAL INDUSTRIAL DEVELOPMNT CORPORATION

Analysis of Loan Approval by Size, Maturity, Nature of Projects and Geographical Spread(p.. '000)

Year ending T,u 1970 1971 1972 1973 1974 1975 1976Size of Loan No. Amount % No. Amount % No. Amount * No. Amount % No. Amount % No. Amount % No. Amount %

Under Rs. 200000 37 3405 17.3 18 1695 23.2 33 2900 18.0 26 2890 10.3 6 717 1.7 10 1400 0.9 7 654 411Ra. 200000 to 500000 10 3520 17.9 5 1973 26.9 7 1948 12.2 14 4866 17.3 11 3648 8.9 6 2226 1.5 8 2771 17.4

Above s. 500000 5 12789 64.3 3 3644 49.9 7 11236 69.8 7 20219 72.4 10 36403 89.1l 35 141381 97.6 9 U492 78.5

52 19714 100 0 26 7312 100.0 47 16084 100.0 47 27975 100.0 27 40768 100.0 51 145007 100. 0 24 15917 100.0

Maturity of Loans

5 to 7 years 41 4122 20.9 20 3313 45.3 36 3812 23.7 29 4180 14.9 8 2189 5.3 2 292 0.2 12 3579 22.4

7 to 10 years 4 2282 11.5 5 975 13.3 5 1516 9.5 7 2618 9.3 7 1486 3.7 24 15631 10.7 9 3703 23.310 to 15 years 7 13310 67.6 1 3024 41.4 6 10756 66.8 11 21177 75.8 12 37093 91.0 25 129084 89.1 3 8635 54.3

52 19714 100.0 26 7312 100.0 47 16084 100.0 47 27975 100.0 27 40768 100.0 51 145007 100.0 24 15917 100.0Nature of Project

New 48 13635 69.2 17 3433 46.9 32 13714 85.2 36 26109 93.3 26 37724 92.5 49 100162 69.0 15 13392 84.2Expansion 4 6079 30.8 9 3879 53.1 15 2370 14.8 11 1886 6.7 1 3044 7.5 2 44845 31.0 9 2525 15.8

52 19714 100.0 26 7312 100.0 47 16084 100.0 47 27975 100.0 27 4076 100O.0 51 145007 100.0 24 15917 100.0aeographical Spread

1. Bagnati 28 L5888 80.5 10 4306 58.8 18 10259 63.8 14 7515 26.8 8 27125 66.5 25 93157 64.2 10 7678 48.22. Narayani 14 1949 9.8 3 151 2.1 13 2726 16.9 8 14719 52.8 2 6078 14.9 4 7896 5.4 1 275 1.83. Janakpur - - - - 2 448 1.0 3 6934 4.8 1 626 3.9

4. Sagarmatha 1 500 2.6 - - - 1 135 0.9 3 880 3.2 1 766 1.9 - - - - - -

5. Noshi 5 811 4.3 3 198 2.7 5 1234 7.7 11 2277 8.0 7 4409 10.8 7 19008 13.2 2 111 0.76. Gandaki 3 338 1.7 4 1273 17.4 8 884 5.5 4 963 3.6 - - - 2 1403 1.0 - - -

7. Lumbini 1 228 1.1 5 1134 15.5 1 717 4.4 2 305 1.0 2 453 1.2 4 11888 8.2 2 277 1.88. Bheri - - - 1 250 3.5 - - - - - - - - - 2 2041 1.5 2 3186 20.0

9. Mahakali - - - - 1 129 0.8 2 230 0.8 - - - - - - 1 350 2.2

10. Mecbi - - - - - - - 3 1086 3.1 5 1119 2:7 2 1604 1.1 4 3125 19.611. Seti - - - - - - - - - - 1 370 1.0 - - - - - -

12. Dhaulagiri - - - - - - - - - - - - - 1 350 0.1 - - -

13. Rapti _ _ _ _ - 1 726 0.5 1 289 1.8

52 19714 100.0 2o 7312 100.0 47 16084 100.o 47 27975 100.0 27 40768 100.0 51 145007 100.0 24 15917 100.0

DeCember 17, 1976

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Equity portfolio as of July 15, 1976

Rx '000

Z of NIDC'sYear of RIDC'8 NIDC's % of Total

Type of NIDC;s first Par Shareholding NIDC's EquityCompany Activity investment Value Cost Shareholding Portfolio

A. Ordinary Shares

(a) Companies operating Mechanical Workshop 1963 1199 899 66.98 3.16

profitably. Sawmill 1963 600 600 8.71 2.11

Pharmaceuticals 1973 700 700 11.04 2.46

Hotel 1976 4100 4100 25.18 14.42

(b) Companies under Livestock 1973 4300 4300 86.03 15.13

construction or in Cheuri Ghee 1975 150 150 50.00 0.53

initial operatingSteel Billet 1976 501 501 50.60 1.76

stage.

Agriculture Lime 1976 200 200 22.22 0.70

(c) Companies operating Wool 1963 119 119 39.66 0.42

at a loss. Workshop 1963 200 200 25.67 0.70

Power Generation 1967 81 81 1.91 0.28

Cotton Textile 1971 1000 1000 33.33 3.52Cement 1966 11000 11000 70.58 38.70

Plywood 1973 2000 2000 33.33 7.04

B. Preference Shares Cement 1966 2576 2576 100.00 9.06

Total equity portfolio 28726 28426 lOO.OO

De2eraber 17, 1976

ANNEX 24

NEPAL INDUSTRIAL DEVELOPMENT CORPORATIONMain terms and conditions

After April 1975but before July After July

Lending rates 1976 1976

I. 1. Cottage industries 10% Lending discontinued

2. Basic Industries 14% WI/

3. Luxury goods industries 16% 14%

4. Tourismn industries 12% llZ

II. Guaranlee fee 1.5% - 2-1/2%

III. Peualty fees for overdues over 2%

six months

IV. Interest rebate for timely payments 0.25%

V. Comnitiaent fee 0.2%

VI. Foreign exchange rate is carried by the Rastra Bank; all loans are made in localcurrency.

1/ On a regional basis, the following adjustments are made to the interest rate: - 1% inthe least developed areas of Nepal; + 1% in the Kathmandu Valley, Biratnagar,andBirganj. The 1L1% interest rate for basic industries applies to Bhadrapur, Rajbiraj,Janakpur, Bhairawa, Butwal, Hetauda, and Dharan.

December 17, 1976

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION ANNEX 25

Statement of Resource Position as of July 15, 1976

A. Domeatic and Inconvertible Currencies NRS Million

a) Nepalese currency

EquityShare capital .139.3Reserves and Retained Earnings 3.9

.Rastra Bank Loan 6.0149.2

b) Borrowings in Indian currency (less cancellationsand repayments

Two USAID loans 19.4One US EXIM Bank Loan 1.9One Government of India Loan 8.2

29.5Total domestic and inconvertible currenciesresources 178.7

Less: Loans outstanding 118.7Equity investments 28.0Other long-term investments and fixed assets 14.2

Sub-total 160.9Resources available for disbursement 17.8Less: Undisbursed commitments 62.1Resources available for commitments - 44.3 1/

B. Foreign Currency

Borrowings and lines of credit (less cancellations andrepayments)

Three KFW lines of credit 25.4Two USAID lines of credit 1.1One UK line of credit 0.9One Danish Government line of credit 16.1 2/One Japan EXIM Bank line of credit 11.9

Total foreign currency resources 55.4Less: Foreign currency loans outstanding 30.1Resources available for disbursement 25.3Less: Undisbursed commitments 34.4Resources available for commitments - 9.1 3/

1/ NIDC has access to Rastra Bank borrowings to an amount of Rs 90 million

2/ The size of the original Danish Government line of credit was Rs 30.5million, but as NIDC could not use the whole credit, Rs 14.4 million wastransferred to the Government-owned Dairy Corporation.

3/ HMG has made foreign exchange available to NIDC if and when needed.HKG has allocated about RSlO.0 million foreign exchange to NIDC for 1977.

December 17, 1976

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Details on foreign borrowings up to July 15. 1976

InterestDate of Amount Repayment Period rate paid Free Restriction

Source Agreement approved(net) Total Grace by NIaC lidit on procure_mt Remarks(Years) (Years) (1)

Inconvertible Currency (Indian Rupees) 1) All inconvertible currency loans are repaid in Nepalese Rup.ee.

USAID3rd loan (367-D-004) Dec. 1963 $ 1,000,000 15 2 1/2 5 $ 100,000 Tied to India 2) 4 1/2 of 5% interest repaid to NIDC for non-revenue producing

activities. This applies to both loans.

4th loan (367-D-006) Apr. 1966 S 2,000,000 15 2 1/2 5 $ 100,000 India and Nepal

Export-Import Bank (USA) July 1960 $ 1,000,000 15 3 4 $ 50,000 India and 15epal

Governmnt of India Sept. 1964 IC 7,000,000 15 - 5 Prior appro- India nd dNOval required

Convertible Currency

USAIDlst loan (DLF 152) June 1961 $ 269,000 15 2 1/2 5 $ 50,000 Tied 3) Original amunt loan $ 400,000; $131,000 cancelled.

2nd loan (367-H-003) Dec. 1963 $ 150,000 15 2 1/2 5 $ 100,000 Tied 4) original amot loan $ 1,000,000; $ 850,000 ccelled.

lot loan Feb. 1964 DM 2,000,000 15 2 1/2 5 Prior Untiedapproval

2nd loan June 1966 DM 2,000,000 25 7 1/2 5 - ditto - Untied 5) 2% and 3 3/4Z interest refunded to NDC e the s.com andthird loan for non-bankn services.

3rd loan Aug. 1974 DM 3,000,000 25 7 1/2 4 1/2 - ditto - Untied

UK Government Amended 1965 h 143,000 25 - 5 Not applica- Tied 6) Original amount loan h 150,000; h 7000 cancelled.ble

Export-Import Bank (Japan) Dec. 1970 Yen343,000,000 12 2 5 Prior Tied 7) Original amount loan Yen 360 million; Yen 17 million canalled.approval

Danish Government June 1973 DKr 5,900,000 35 10 0 - ditto - Tied 8) Original amount DKr 11.1 million; DKr 5.2 illion vm transferredto the Government-owned Dairy Corporation.

December 17, 1976

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Income Statements 1971-1976 (Year ending July 15)

Rs '000

Audited Unaudited

1971 1972 1973 1974 1975 1976Income

Interest on loans 3082 3538 3644 4162 7249) 9504)Guarantee fee 89 75 75 75 ) )Dividends 45 40 - 181 75 428Interest on deposits 25 88 1003 1334 820 74Other income 42 37 29 156 528 1309

3283 3778 4751 5908 8672 11315

Expenses

Administrative expenses 1554 1678 2379 3466 3186 3310Financial expenses 1821 1959 1913 1959 1945 2121

perating income -92 141 459 483 3541 5884S on operating income 500 526 633 594 400 370Non operating expenses 120 460 243 - 1795 1300

Net Profits before Tax 288 207 849 1077 2146 4954Tax provision 144 99 367 761 1273 3385

Net Profits 144 108 482 316 873 1569

Ratios

1. Net Profits/average equity 0.2% 0.5% 0.3% 0.7% 1.1%2. Profit before Tax/average total assets 0.2% 0.6 0.7% 1.1% 2.3%3. Profit after Tax/average total assets 0.1% 0.3% 0.2% 0.7% 0.7%4. Gross Income/average total assets 3.5% 3.4% 3.6% 4.6% 5.3%5. Administrative Expenses/average total assets 1.3% 1.7% 2.1% 1.7% 1.6%6. Financial Cost/average total assets 1.8% 1.4% 1.2% 1.0% 1.0%7. Gross Income on loans/average loan portfolio 6.4% 6.2% 6.1% 7.3% 7.5Z

P

December 17, 1976

IIEPtl INtUSTRIAL DEVELOPMENT CORPORATION

Comparative Operational Ratios

Unaudited

FY 1972 FY 1973 FY 1974 FY 1975 FY 1976

A. Ratios of Profitability

1. Profit before Tax as % of average 0.2 0.6 0.7 1.1 2.3

total assets2. Profit after Tax as % of average 0.1 0.3 0.2 0.7 0.7

total assets3. Profits after Tax as % of average 0.2 0.5 0.3 0.7 1.1

equity

B. Ratios of Capital Structure4. Current ratio 9.6 23.0 10.7 3.4 2.0

5. Debt to equity ratio 0.5 0.4 0.4 0.4 0.5

C. Average Rate of Growth6. Average annual rate of growth of 50.8 13.7 18.1 12.5 11.4

total assets (%)M

D. Financial Margins7. Income from term loans as % of 6.4 6.2 6.1 7.3 7.5

average loan portfolio8. Cost of term debt as % of average 5.0 4.9 4.8 4.1 3.6

term debt9. Dividends as % of average equity 0.5 - 1.1 0.4 1.7

portfolio

E. Expenses10. Financial costs as % of average 1.8 1.4 1.2 1.0 1.0

total assets11. Administrative costs as % of average 1.3 1.7 2.1 1.7 1.6

total assets

F. Reserves12. Reserves for bad debt as % of loan and 1.9 2.7 2.4 1.4 2.0

equity portfolio

G. Dividends13. Dividend payout as % net earnings - 31.7 - 13.6

December 17, 1976

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Balance Sheets 1971-1976 (Year ending July 15)

Rs '000

Audited Unaudited

1971 1972 1973 1974 1975 1976ASSETS

Current assets:Cash & bank 6,477 42,047 49,273 48,732 18,964 9,028Keceivables & advances 3,389 5,333 7,183 11,560 13,415 18,375

Total current assets 9,866 47,380 56,456 60,292 32,379 27,403Loans and investments: Loans 56,179 55,605 62,057 79,364 130,896 154,689

equity 5,341 11,625 13,808 19,244 21,245 28,050industrial districts 8,813 9,611 9,611 9,611 9,611 9,611long-term securities 5C0 500 500 500 500 2,762

Fixed assets (net) 1,708 1,774 1,789 1,912 1,950 1,920Other assets (guarantees) 4,347 4,365 4,621 4,877 1,110 1,950

86,754 130,860 148,842 175,800 197,691 226,385

LIABILITIES 200)3,385)

Current liabilities 3,030 4,928 2,460 5,639 9,572 10,287)Term debt 39,956 39,048 39,183 42,052 53,222 63,952Other liabilities (guarantees) 4,347 4,364 4,621 4,877 1,110 1,950

47,333 48,340 46,264 52,568 63,904 79,774

Equity: Paid-up capital 34,422 42,429 42,429 99,267 119,267 134,267Advances for shares 3,007 37,500 56,838 20,000 10,000 5,000

Reserves 1,992 2,591 3,311 3,965 4,520 7,344

Total equity 39,421 82,520 102,578 123,232 133,787 146,611Total Liabilities of Equity 86,754 130,860 148,842 175,800 197,691 226,385

Ratios

1. Current ratio 9.6 23.0 10.7 3.4 2.02. Long-term debt/equity 0.5 0.4 0.4 0.4 0.53. Total assets growth 50.8% 13.7% 18.1% 12.5% 11.4%4. Loan portfolio growth - 1.0% 11.6% 27.9% 64.9% 18.2%

December 17, 19'6

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Trends in arrears, 1973-1976

(Rs. Millions)

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)Total Principal Interest Principalprincipals' in arrears in arrears & interest

Principal Interest interest in over six over six over sixNo. of Total % of in arrears in arrears arrears All prin- All inte- months as months as months as

Total loans companies number of companies over six over six over six cipal in rest in % of loans % of loans % of loansAs of July li outstanding in arrears companies (2) - (3) months 1/ months jI months arrears arrears outstanding outstanding outstanding

1973 56.9 96 165 58.2 14.0 3.25 17.25 16.0 3.8 24.6 5.7 30.3

1974 74.3 114 177 64.4 16.6 2.35 18.95 19.1 2.8 22.3 2.3 24.6

1975 122.2 116 181 64.1 14.2 2.90 17.10 16.7 3.4 11.6 2.4 14.0

1976 143.3 108 192 56.2 11.9 4.6 16.5 14.4 5.6 8.3 3.2 11.5

Notes A) Total amount of loans outstandingaffected by projects in arrears forover one year as of July 1976 Rs 22.4 millionThis is 16% of loans outstanding.

B) In the first half of 1976,7 cases havebeen rescheduled, but they areincluded in the arrearsanalysis.

1/ Estimated.

December 17, 1976

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Arrears Analysis by region and industryAs of July 15, 1976

All arrears (principal only)

Industrywise industrywise1/ 1/ 1/! 1/ 1/ arrears loan portfolio

Region Region Region Region Region di.stribution Aisq--ibutionIndustry A B C D All % %

1. Hotels 2531348 137509 696095 x 3364952 23.0 37.12. Cement 1313081 x x x 1313081 9.1 14.03. Transport 1391674 219262 151238 x 1762174 12.2 1.8S 'aw Milling & Wood Products 789746 478555 21825 78125 1366251 8.2 1.55. Printing & Publishing x x x x x x 0.26. Chemicals x x x x x x 2.37. Sugar x x x 268543 268543 1.9 0.28. Brewery 140625 x x x 140625 1.0 0.69. Food other than sugar 130621 x 922489 177394 1230504 3.5 28.0IC. Cold Storage & Ice Plants 1448612 26476 112939 x 1588027 11.0 1.711. Textile 25524 x x x 25524 0.7 0.212. Miscellaneous 1632765 526634 500124 718750 3378273 23.4 12.4

9403996 1388436 2404710 1242812 14439954 100% 100%

1/ Region A - Kathmandu Valley, Biratwagar , Birganj

Region B - Bhadrapur, Rajbiraj, Janakpur, Bhairawa, Butwal

Region C - The remaining area of the Tarai Region

IKeCion D - The remaining area of the Hilly Region

December 17, 1976

ANNEX 32Page 1

NEPAL

APPRAISAL OF THENEPAL INDUSTRIAL DEVELOPMENT CORPORATION

1/NIDC's Proposed Strategy for 1977-1979

I. Business Policy

(a) As the only major source for long-term industrial finance in Nepal,

NIDC would continue to confine itself to the financing of only those industries

in the private sector.

(b) NIDC's overall lending activities would continue to be guided by the

priorities as outlined in HMG's Industrial Policy of 1974 which includes the

objectives:

(i) to improve the balance of payments by resorting to

financing export oriented and economically efficientimport substitution industries;

(ii) to create more industrial labor opportunities;

(iii) to assist in the modernization, balancing and expan-sion of viable industries particularly those based onlocal raw materials;

(iv) to minimize regional economic imbalance through financingof economically viable industrial projects;

(v) to develop the local construction industry.

(c) In the field of tourism, NIDC would restrict its hotel financing to

the area outside Kathmandu, and in particular would promote trekking lodges in

relatively remote areas.

II. Organization

NIDC will seek to implement the consolidation of its organization to

enable it to discharge its duties and responsibilities more efficiently parti-

cularly with respect to the quality and timeliness of its appraisal and follow-

up work.

III. Management and Staff

NIDC will seek to strengthen its management structure through:

1/ This Strategy Paper was officially approved by the NIDC Board of Directors

on April 7, 1977.

ANNEX 32Page 2

(a) permitting greater continuity in the tenure of GeneralManager;

(b) through the appointment of an additional Deputy GeneralManager; and

(c) through provision of adequate training.

NIDC will also seek to strengthen its staff through the hiring of additionalqualified accountants, economists and technical personnel.

IV. Appraisal Standards

A. NIDC will take steps to increase the quality of its appraisalreports particulary in the areas of market and economic analysis.

B. It will pay special attention to capacity utilization within analready existing industry before financing new undertakings.

V. Implementation and Follow-up

(a) NIDC will put greater emphasis on management of its portfolio. Toachieve this goal, it will group project implementation, supervision andfollow-up activities in one department. The department will be staffed witha sufficient number of qualified staff so that problems during project con-struction as well as implementation can be quickly detected and rectified.NIDC will ensure that staff will visit its clients at least once a year andprojects in arrears over 6 months at least 2 times a year, and will makegreater efforts to implement its present client reporting system.

(b) NIDC will review with special care badly performing industries andmake suggestions to the Board and Management to take appropriate action whenclients have repayment difficulties.

VI. Financial Planning and Control

(a) NIDC will, with the assistance of an accounting and information sys-tem advisor, by technical assistance, substantially improve its financial re-cording, planning and control functions so as to have timely detailed dataavailable for decision making. NIDC will take steps to ensure a better coor-dination between the finance and accounts divisions.

(b) NIDC will expand its resource and business planning period beyondthe 1-year limit to include full five-year forecasts. NIDC will ensure thatsufficient funds are available before client commitments are made for localas well as foreign resources. NIDC will endeavor to diversify its sourcesof funds for both local and foreign currencies. Since NIDC has a large equitybase, substantial scope exists for attracting loan funds.

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Forecast of Approvals, Commitments and Disbursements 1977-1981 (Year ending July 15)

(Rs in Millions)

1975 1976 1977 1978 1979 1980 1981--- -------------------- projected -------------------------

APPROVALS

Local currency loans 50.01 5.01/ 12.9 29.4 35.0 40.0 46.0Indian currency loans 55.6- 5-.9_ 58.4 34.2 40.0 46.0 53.0Other foreign currency loans 39.4 5.0 5.0 27.3 30.0 34.0 39.0

Sub Total 145.0 15.9 76.3 90.9 105.0 120.0 138.0

Equity investments 9.4 0.7 - 20.0 15.0 15.0 15.0

Total 154.4 16.6 76.3 110.9 120.0 135.0 153.0

COMMITMENTS

Local currency loans 41.0 16.2 10.8 25.7 33.6 38.8 44.5Indian currency loans 4 3 .01/ 18.31/ 45.2 39.8 38.6 44.5 51.3Other foreign currency loans 33.8 13.5 2.6 21.8 29.3 33.0 37.8

Sub Total 117.8 48.0 58.6 87.3 101.5 116.3 133.6

Equity investments 7.1 0.7 - 5.0 15.0 15.0 15.0

Total 124.9 1 48.71/ 58.6 92.3 116.5 131.3 148.6

DISBURSEMENTS

Local currency loans 19.3 12.0 21.0 18.45 34.4 39.0 45.0Indian currency loans 20.0- 13.51/ 17.4 49.55 45.7 53.0 61.0Other foreign currency loans 14.5 11.1 26.1 21.3 27.5 32.0 37.0

Sub Total 53.8 36.6 64.5 89.3 107.6 124.0 143.0

Equity investments 3.9 6.8 8.6 15.0 15.0 15.0 15.0

Total 57.7 43.4 73.1 104.3 122.6 139.0 158.0

1/ Estimated

December 17, 1976,

ANNEX 34

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Tentative new project pipeline- for 1977-1979

(Rs Million)

Loans % Distribution

Agro-based projects Local Indian Foreign

2 Flour Mills 1.50 1.50 5.005 Rice Mills 2.75 2.75 -1 Vegetable Ghee plant - 20.00 -1 Starch Glucose plant 4.00 20.00 -

8.25 44.25 5.00 35.3

Forest based projects1 Mini paper plant 3.00 25.00 -1 Wood preparation plant 1.00 2.00 -1 Wood seasoning plant - 1.20 -1 Furniture plant 1.00 -1 Sal seedoil plant - 4.50 -

4.00 33.70 - 23.2

General consumer goods1 Soft drinks plant - - 4.001 Soap plant 2.50 - 2.501 Beer plant 5.00 - 8.50

7.50 - 15.00 13.8

Miscellaneous1 Insecticides project 2.50 - 2.50

10 Small projects (workshops,repair shops etc.) 6.00 6.00 8.00

8.50 6.00 10.50 15.4

Hotels3 Small hotels outside Kathmandu 10.00 - 10.00 12.3

Total requirements 38.25 83.95 40.50 100.00

Total Requirements 1977 - 1979

Loans:Local currency Rs 38.25Indian currency Rs 83.95Foreign currency Rs 40.50

Rs 162.70

Equity:Local currency Rs 30.00

2/Total Rs 192.70-

1/ This list is meant to give only an indication of the type of projects NIDC will likelyfinance in tne future. Note that this list includes only projects not yet approved(as of July 15, 1976)

ZL Tne average size of the projects financed by NIDC (including equity) will be aboutRs 6 mfllion or I S,nnnnn as against "s ? million in the past two years.

December 17, 1976

NEPAL INDUSTRIAL DEVELCOPENT CORPORATION

Pro,jected Income Statement 19/7-1981 (Year ending July 15)

(Rs in Millions)

1977 1978 1979 1980 1981--------------------- projected --------------------- -----

Income

Interest 13.3 19.7 29.5 41.2 55.6Dividends 0.7 1.0 1.3 1.6 1.9Miscellaneous 0.7 1.0 1.3 1.6 2.0

Cost of Finance 3.7 8.9 17.1 26.6 37.3

Administration Cost 3.9 4.5 5.2 6.0 6.9

Net Profits before Tax and provisions 7.1 8.3 9.8 11.8 15.3Provision doubtful loans 1.8 2.4 2.9 3.3 3.7Tax 3.5 4.0 4.6 5.6 7.5

Net Profits after tax 1.8 1.9 2.3 2.9 4.1

Dividend payout 0.2 0.2 0.2 0.2 0.2Retained Earnings 1.6 1.7 2.1 2.7 3.9

Ratios

1. Net Profits after tax/average equity 1.3% 1.3% 1.5% 1.9% 2.8%2. Profits before tax/average total assets 2.7% 2.4% 2.2% 2.1% 2.2%3. Profits after tax/average total assets 0.7% 0.6% 0.5% 0.5% 0.6%4. Gross income/average total assets 5.7% 6.4% 7.2% 7.8% 8.4%5. Administrative expenses/average total assets 1.5% 1.3% 1.2% 1.1% 1.0%6. Financial cost/average total assets 1.4% 2.6% 3.8% 4.7% 5.3%7. Gross income on loans/average loan portfolio 7.8% 8.3% 9.2% 9.8% 10.4%8. Financial cost/average loan portfolio 2.1% 3.6% 5.1% 6.1% 6.7%

December 17, 1976

NEPAL INDUSTRIAL DEVELOPMENT CORPORATIONComparative Operational RaLiOS

~~~~~~~~~~~~- --- cFjictnd - -

FY 1977 FY 1978 FY 1979 FY 1980 FY 1981

A. Ratios of Profitability1. Profit before Tax as % of average 2.7 2.4 2.2 2.1 2.2

total assets2. Profit after Tax as % of average 0.7 0.6 0.5 0.5 0.6

total assets3. Pr6fits after Tax as % of average 1.3 1.3 1.5 1.9 2.8

equity

B. Ratios of Capital Structure4. Current ratio 2.9 4.4 3.4 3.5 3.95. Debt to equity ratio 0.8 1.4 2.1 3.0 3.9

C. Average Rate of Growth6. Average annual rate of growth of 28.6 34.3 29.5 25.7 23.2

total assets (%)

D. Financial Margins7. Income from term loans as % of 7.8 8.3 9.2 9.8 10.4

average loan portfolio8. Cost of term debt as % of average 4.1 5.5 6.5 7.0 7.3

term debt9. Dividends as % of average equity 2.1 2.2 2.2 2.2 2.2

portfolio

E. Expenses10. Financial costs as % of average 1.4 2.6 3.8 4.7 5.3

tptal assets11. Administrative costs as % of average 1.5 1.3 1.2 1.1 1.0

total assets

F. Reserves12. Reserves for bad debt as % of loan and 2.1 2.2 2.3 2.4 2.4

equity portfolio

G. Dividends13. Dividend payout as % of net earnings 11.1 10.5 8.7 6.9 4.9

December 17, 1976

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Projected Cashflows Statement (Year ending July 15)

(Rs in Millions)

1977 1978 1979 1980 1981------------------------- projected ------------------ …

Sources of Funds

Profits before Tax and Provisions 7.1 8.3 9.8 1.1.8 15.3Depreciation 0.2 0.2 0.2 042 0.2Loan collections 6.6 9.0 12.0 15.0 19.0Borrowings Rastra Bank 32.3 66.3 80.6 64.0 79.0Receipts sale of industrial districts and workshops 9.6 - - - -Drawings from foreign borrowers 20.0 20.0 20.0 50.0 50.0HMG equity 10.0 - - - -HMG loans - 10.0 10.0 10.0 10.0Sale of equity - 5.0

85.8 113.8 132.6 151.0 178.5===l,=, .~~~~~~~~~~~ ===== === ===========se=== = … =…=

Uses of funds

Disbursements 64.5 89.3 107.6 124.0 143.0Equity participation 8.6 15.0 15.0 15.0 15.0Increase accounts receivables 5.3 6.9 8.9 10.3 11.1Tax payment (last year) 3.4 3.5 4.0 4.6 5.6Dividend (last year) 0.2 0.2 0.2 0.2 0.2Foreign loan repaymen_. 1.0 1.0 1.0 1.0 1.0

83. 0 115.9 136.7 155.1 175.9=====S==e= ====,==== ==mS~=-ass e S = . __ =

Cash balance beginning year 8.6 11.4 9-3 5-2 1 1end year 11.4 9.3 5-2 1.1 3.7

December 17, 1976

NEPAL INDUSTRIAL DEVELOPMENT CORPORATI.01'

PrX ected Balance Sheet 1977-1981 (Year ending July 15)

(Rs in Million)

1976 1977 1978 1979 1980 1981Unaudited --- projected --------------------------------

ASSETS

Cash and Bank 8.6 11.4 9.3 5.2 1.1 3.7Peceivables and Advances 24.3 29.6 36.5 45.4 55.7 66-8Equity investments 28.4 37.0 52.0 67.0 82.0 92.0Outstanding loans 148.8 206.7 287.0 382.6 491.6 615;6Industrial districts 9.6 Guarantee deposits and securities 2.8 ?.28 2.8 2.8 2.8 2.8Net fixed assets 1.9 1.7 1.5 1.3 1.1 0.9Other assets (guarantees) 2.0 2.0 2.0 2.0 2.0 2.0

Total 226.4 291.2 391.1 506.3 636.3 783.8

LIABILITIES OF EQUITY

Current Liabilities 10.3 10.3 10.3 10.3 10.3 10.3Term debt 63.9 115.2 210.5 320.1 443.1 581.1Tax provision 3.4 3.5 4.0 4,6 5.6 7.5Dividendi provision 0.2 0.2 0.2 0.2 0.2 0.2Other liabilities 2.0 2.0 2.0 2.0 2.0 2.0Equity

Paid-up capital 139.3 149.3 149.3 149.3 149.3 149.3Reserve doubtful loans 3.4 5.2 7.6 10.5 13.8 17.3Other reserves 3.9 5.5 7.2 9.3 12.0 15.9

Total 226.4 291.2 391.1 506.3 636.3 783.6

RATIOS

1. Long-term debt/equity 0.8 1.4 2.1 3.0 3.92. Total assets growth (%) 28.6% 34.3% 29.5% 25.7Z 23.2%3. Loan portfolio growth (%) 38.9% 38.9% 33.3% 28.5% 25.2%4. Reserve for doubtful loans as Z of 2.5% 2.6% 2.7% 2.8% 2.8%

loan portfolio

December 17, 1976

co

ANNEX 39

NEPAL INDUSTRIAL DEVELOPMENT CORPORATION

Estimated Disbursement Schedule(Millions)

Amount US $ X

1977 October - December 0.2 5

1978 January - March 0.4 10April - June 0.6 15July - September 0.6 15October - December 0.6 15

1979 January - March 0.3 7.5April - June 0.3 7.5July - September 0.2 5.0October - December 0.2 5.0

1980 January - March 0.1 2.5April - June 0.1 2.5July - September 0.1 2.5October - December 0.1 2.5

1981 January - March 0.1 2.5April - June 0.1 2.5

Total $4.0 100.0

December 17, 1976

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