Ideas on some new products in Nepal

In a situation where huge investments in roads, electricity and other infrastructure are needed, where huge agricultural and industrial as well as transport projects can not be financed locally and where foreign investment or donor agency support is not coming as earlier, one starts to think if it is not possible that Nepal itself can not create the needed financing packages
Money in Nepal is not an insurmountable problem, but capital is. While money represents cash or short term investment, capital represents the investment capacity into the future of this country. So if we want to be more self reliant it gets more and more important to transfer money into capital by at the same time keeping the short term available character of money intact.
What capital is needed?
Needed is share capital in any form and long term available debt.
SHARE CAPITAL
It is no secret that up to now share capital could be raised in Nepal for banks mainly. Some money could be raised for other financial institutions like Finance Companies and Insurance companies or hotels like Hyatt or Radisson. But very very little for other activities.
This is not the sense of a share market, whose task is to provide equity to a widespread sector of industry, agriculture and trade besides of infrastructure and other branches of the economy.
The experience in Nepal with a functioning stock exchange is up to now very limited.

Why?

Shares besides of Banks have no liquidity, which makes trading of volumes difficult
Besides in banks due to the rules of NRB there is still no corporate governance to help transparency and shareholder values.
Deeply disappointing IPO’s like the one in Himal Distillery or Indrawati Hydropower are signs that the market is not ripe.

So what to do?
Needed is a professional handling of settlement procedures, obviously in the preparation right now. Unfortunately the history in Nepal teaches that you talk years without really moving. It’s different in neighboring countries in the north and south.
The other need is the introduction of real institutional investors.
It is another open secret that in the developed world only a small stake of trading is individually done, while the vast majority of trading and placements is done with institutional investors.

Who are the potential institutional investors?

Well there are plenty. But in the context of Nepal institutional players can only be the Banks, Financial institutions and provident funds. A Mutual Fund some years ago laid out by NIDC Capital Market became a flop after hideous underground attacks on the management of the same.
Again even today Nepal does everything to destroy the share part of the Capital Market by introducing rules which exclude potential players like Banks and Finance Institutions from significantly trading with shares by excluding Banks and Finance Companies from the portfolio of these institutions. This is self-destructive and excludes players, which could stabilize the markets as individuals have up to now little ideas on the fundamental values of shares. This is the case, even though a share assessment Internet side was introduced some months ago.

What should be done?
Reversal of the rules that institutional players are excluded more or less from the share trading.
Introduction of Mutual Funds based on rules, which don’t have to be developed anew, but can be taken over from India more or less. It is not necessary to develop the wheel again and again if it is developed and proven already. Mutual Funds are a need everywhere not only in Nepal, but their use has to be supported and it is utterly non-understandable that applications from different potential participants have not been followed through.

Debt securities for new projects
Financing via loans from banks for long term projects like roads, hydropower, airplanes or other long-term projects are nearly impossible from the domestic market. Not so much because Banks and Finance Institutions are unwilling to take the risks in the necessary volume, but because they are hindered via their own financing resources. No healthy bank can finance periods of more than around 7 years and this also only with repayment installments if the deposit side is not covering these periods. One should be clear that this is not a fault of the banks but a fault in the framework.
It is a good step to introduce treasury trading at the Nepal Stock Exchange. But it is far from being enough.
In the case of long term finance for e.g. water or road projects there is no finance available not because we don’t have the money in this country but because of periodicity. That is why the introduction of tradable debt securities is proposed, which allows the long term financing to become highly short term available.
It is unrealistic to assume that any investor would buy these papers in the start off period of a project like a road or a hydropower project or any other project of public interest.
Therefore the introduction of a government guarantee for the period of building these kind of projects until it can start its production and operating cash flow. Then the guarantee can be withdrawn. In this way a multitude of projects can be financed locally and with debt securities tradable at the stock exchange. Even the banks themselves can finance such projects to some extend once debt securities are introduced, as they can sell their loans represented by such securities at any time.
Earlier big industrial or trading houses of Nepal could get loans from banks where they were involved with a financial stake without much of a problem. With the directives of the Central Bank that stakeholders of banks can not receive or keep loans in the books from these banks, all big houses will face problems. Which most of them don’t know yet how to solve. This is if not new debt securities can be introduced in the market.

What are this kind of debt securities?

They are securitized loans, means loans bundled by the banks and sold to the general public. With securitization these loans disappear more or less from the balance sheets of the banks. If the loans are bundled the average interest rate minus a commission for handling can be paid to the individual ore institutional investors, who are acquiring these kind of securities. The banks are collecting the interest from the borrower and see to it that interest and repayment proceeds are disbursed to the investors. What is even better. This kind of securities can run for a long period and repaid loans can be substituted.
The securitized loans are covered by the collateral, which the original borrowers have forwarded to the banks.
It’s an easy and elegant way how American, British or European banks are getting rid of a big chunk of their portfolios and are getting able to disburse more loans by at the same time giving the investor a significantly bigger return than on normal deposits,

Conclusion

While remittances are in the medium term a very important support for the receiving country one should never forget that migration has high costs for the same. if it means a country is losing its most able people. Thus government and banks to create an investment friendly climate and to use these funds to build up economic activities within the country should utilize remittances.
The introduction of Mutual Funds as institutional players adjusted to the legal basis of Indian Mutual Funds is easy and would not only allow a stabilization of share markets in their volatility processes but would also allow bigger companies to float a large chunk of equity at the markets. At the same time the liquidity of shares and thus its tradability would increase significantly.
The introduction of project oriented debt securities with a period wise limited government guarantee would allow the local loan financing part to increase tremendously.
The introduction of securitized debts would allow the cleaning of bankbooks from undesired loans of their stakeholders.
Condition would be that these debt securities would be allowed to trade without limitations at the Stock Exchange.