Financing Hydropower: Lenders, Security Packages and Foreign Loans

In July 2026 Nepali commercial banks held NPR 1.56 trillion of lendable funds, against deposits of NPR 8.26 trillion and loans of NPR 5.94 trillion. The credit-to-deposit ratio stood at 71.29 per cent and loan growth was running below the previous year. Nepal is not short of capital for power projects. It is short of projects a lender can underwrite, and the reason is the buyer rather than the balance sheet.

How projects are capitalised

Two domestic sources dominate.

Bank debt. Nepali commercial banks are the primary project lenders, usually in consortium for anything of scale. Energy is also a directed-lending category. Banks must place at least 20 per cent of their portfolio across tourism, micro, small and medium enterprises, energy, information technology and export businesses using domestic raw materials, inside a total specified-sector requirement of 35 per cent. That obligation pushes credit toward the sector regardless of relative pricing: a support in good conditions, a concentration in bad ones.

Retail equity. Hydropower is one of the largest groups on the Nepal Stock Exchange, and public issues form a standard part of the capital structure rather than an exit. That is why the Electricity Regulatory Commission holds a prior approval power over public share issues by electricity companies, and why sector shocks reach household savings directly.

The strain shows in credit quality. System non-performing loans rose from 3.02 per cent in mid-July 2023 to 5.6 per cent in the third quarter of FY 2025/26. Construction, a category that includes hydropower, accounted for 10.5 per cent of the total.

Foreign debt rules

Offshore borrowing runs through the Nepal Rastra Bank’s Foreign Investment and Foreign Loan Management Bylaw.

Prior approval is required under bylaw 7(1), and the Bank has 15 working days to decide. Schedule 10 lists the eligible sectors, and energy is among them; real estate, land development and lending against shares are excluded. The Bank specifies the documents: loan agreement, lender and borrower identification, financial statements, business licence and repayment plan. The loan must be recorded within six months of drawdown, after which repayment can proceed through the banking system without a fresh approval.

Pricing is capped by lender type:

Lender	Ceiling
Foreign banks and development finance institutions	One-year benchmark rate plus 6% p.a.
Parent or group company	Interest-free, or one-year benchmark rate plus 3.5% p.a.
Indian rupee loans	Up to the average one-year MCLR

Tenor runs from six months to a maximum of 15 years, subject to renewal as the Bank approves.

Then condition 13 of Schedule 10: no movable or immovable property, including mortgage, lien, security, surety or bank guarantee, may be provided for a foreign loan.

The security package

Limited-recourse project finance works by giving lenders the project. A mortgage over the land and works. A fixed and floating charge over the plant, an assignment of the offtake receivables, a pledge of the project company’s shares, accounts control, and step-in rights that let a lender replace a failing sponsor and keep the concession alive.

An offshore lender in Nepal has none of that available over Nepali property. The consequences run in one direction.

Security migrates offshore. The pledgeable asset becomes the shares in a holding company outside Nepal, the accounts into which export or dividend flows are paid, and guarantees given by entities that are not Nepali. Recourse migrates to the sponsor. Completion support, cost overrun undertakings and parent guarantees carry the credit that project assets would otherwise carry. The sponsor’s balance sheet, rather than the project’s cover ratios, becomes the real subject of the negotiation.

Domestic and offshore lender groups also cannot easily share a security position. A Nepali bank can take mortgage security under Nepali law. An offshore lender to the same borrower cannot. Intercreditor arrangements that assume a common security trustee do not translate here.

Even for the domestic lender, the collateral is narrower than it looks. Much of a hydropower project stands on state land leased for the term of the licence under section 33 of the Electricity Act, which confers no ownership interest. Where foreign investment exceeds fifty per cent, the structures may pass to the Government at licence expiry. Security over a wasting, reverting interest is worth less than a mortgage over freehold, and has to be sized accordingly.

Three mismatches to size

Tenor. A foreign loan is capped at fifteen years. A generation licence typically runs thirty to thirty-five. A hydropower asset lasts longer than either. A capital structure built on fifteen-year offshore money against a thirty-year licence has a refinancing event in the middle of the concession, in a market with no long-dated domestic bond curve to refinance into.

Currency. Revenue is a nominal Nepali rupee tariff: NPR 8.40 per kWh dry and NPR 4.80 wet for run-of-river, unchanged since 27 April 2017 and escalating at 3 per cent simple for eight years. Offshore debt is not in rupees. There is no deep domestic hedging market, and the Bank’s security prohibition removes the collateral that might otherwise support a hedge line. The mismatch sits on the project.

Revenue certainty. Whether the agreement is take-or-pay or take-and-pay changes the asset class. Take-and-pay on a run-of-river plant in a system already spilling roughly a thousand megawatts in the wet season is a merchant exposure dressed as a contract. Policy moved to take-and-pay in one budget and back to take-or-pay in the FY 2026/27 budget, without legislation either time. A lender pricing a twelve-year loan against a policy that has reversed twice in two years will discount it.

Constraints on domestic banks

A Nepali bank can take security an offshore lender cannot, which makes it the natural senior lender. Other constraints bind it instead.

Exposure to any one borrower or group is capped by the Nepal Rastra Bank Unified Directives as a proportion of core capital. We do not state the percentage, because the numerical limit could not be extracted from the Bank’s published consolidated text. The effect is well established. A single bank cannot fund a large hydropower project alone, so financing of scale is syndicated across a consortium. That multiplies the credit committees a sponsor must satisfy, and slows amendment and waiver decisions during construction, which is exactly when speed matters.

Directed lending compounds the concentration. Energy counts toward the 20 per cent specified-sector requirement, so banks move into the same sector at the same time. A sector-wide shock, whether a hydrological event, a tariff decision or a prolonged offtake freeze, then lands on the system rather than on one lender. System non-performing loans at 5.6 per cent, with construction at 10.5 per cent of the total, are the early evidence.

Two routes under FITTA

Section 11 of the Foreign Investment and Technology Transfer Act 2075 lets a public limited company incorporated in Nepal borrow abroad, or raise foreign currency by issuing bonds, debentures or other securities in a foreign capital market. That needs the approval of Nepal Rastra Bank and the Securities Board of Nepal, and the proceeds must be invested in Nepal. A separate provision lets an industry with foreign investment take a project loan from a foreign financial institution, or enter a project financing agreement with one, on the recommendation of the Ministry and with the Bank’s approval.

Both are statutory routes to offshore capital sitting alongside the central bank bylaw rather than inside it. Neither displaces the security prohibition, and both add an approval step. They matter mainly for a listed hydropower company of scale contemplating an offshore issue, a structure for which Nepal has more of the preconditions than is generally assumed.

Why development banks lend

Put the constraints together. No security over Nepali assets, a fifteen-year tenor cap, a rupee tariff, an offtaker that is also the network owner and system operator, and a physical asset base that lost 405 MW of hydropower and 25 MW of solar to a single flood in the Bhotekoshi basin on 26 August 2026. The lender that fits is one with a high tolerance for unsecured country exposure and a long horizon. That describes a development finance institution rather than a commercial offshore bank, and it matches what the sector’s foreign lending has looked like.

Equity approvals

Foreign equity is approved under section 17 of FITTA 2075 by the Department of Industry up to NPR 6 billion and by the Investment Board above it, with a seven-day decision period. Funds must arrive in convertible foreign currency through the banking system, with an Indian rupee route available for Indian investors, and repatriation approval must be given within fifteen days.

Those timetables are short on paper. They leave untouched the sequence problem that decides whether the financing happens at all. Approvals are quick, capital is available, sites are licensed, and the agreement that turns a plant into a cash flow is the one thing nobody can apply for.

Sources

1. Foreign Investment and Foreign Loan Management Bylaw

   Nepal Rastra Bank · Consolidated English text published by the Bank; amendments to the fifth posted December 2025 · Tier 1 — Primary legal instrument

   Supports: Bylaw 7(1) prior approval to borrow abroad; bylaw 7(3) 15 working day decision; bylaw 9(1) repayment without fresh approval; Schedule 10 eligible sectors including energy, pricing ceilings by lender type, tenor of six months to 15 years, and condition 13 prohibiting security over property for a foreign loan; Schedules 11 to 16 on documents, recording within six months and repayment.

   Accessed 26 August 2026

2. Banks sit on Rs1.56 trillion in excess liquidity as weak credit demand persists

   The Kathmandu Post · 16 July 2026 · Tier 6 — Professional or news source

   Supports: NPR 1.56 trillion of lendable funds, deposits of NPR 8.26 trillion, loans of NPR 5.94 trillion, a credit-to-deposit ratio of 71.29%, and loan growth of NPR 354 billion against NPR 422 billion a year earlier.

   Accessed 26 August 2026

3. Priority lending is dragging down Nepali banks into huge bad debt

   The Kathmandu Post · 3 July 2026 · Tier 6 — Professional or news source

   Supports: The 10% agriculture, 20% combined tourism/MSME/energy/IT/export and 5% deprived-sector lending requirements totalling 35%; system NPLs of 5.6% in Q3 FY 2025/26 against 3.02% in mid-July 2023; construction including hydropower at 10.5% of total NPLs.

   Accessed 26 August 2026

4. Floods take 430 MW of electricity offline, damage 11 hydropower projects

   Republica · 26 August 2026 · Tier 6 — Professional or news source

   Supports: 405 MW of hydropower and 25 MW of solar taken offline across eleven projects in the Bhotekoshi basin on 26 August 2026.

   Accessed 26 August 2026

5. Foreign Investment and Technology Transfer Act, 2075 (2019)

   Government of Nepal, published by the Department of Industry · 2019 — in force, as amended · Tier 1 — Primary legal instrument

   Supports: Section 15 seven-day decision on a foreign investment application; section 16 requiring investment in convertible foreign currency through the banking system with an Indian rupee alternative; section 17 approval by the Department of Industry up to NPR 6 billion and by the Investment Board above it; section 20 repatriation approval within 15 days.

   Accessed 26 August 2026

6. Electricity Act, 2049 (1992) — English text

   Government of Nepal, published by the Department of Electricity Development · 1992 — in force · Tier 1 — Primary legal instrument

   Supports: Section 5 licence terms; section 10 transfer of structures to the Government on expiry where foreign investment exceeds 50%; section 33 lease of state land for the licence term.

   Accessed 26 August 2026

7. PPA Tariff Rates

   Nepal Electricity Authority · Effective 2074/01/14 (27 April 2017) · Tier 2 — Official publication

   Supports: That the contracted revenue stream is a nominal Nepali rupee tariff with 3% simple escalation for eight years.

   Accessed 26 August 2026