Key Takeaways
- The domestic lending ceiling has been hit: Nepal’s commercial banks have effectively reached their structural capacity to finance new, large-scale hydropower projects. The 15% mandatory lending directive for the energy sector is no longer a target to be met, but a breached limit constraining future growth.
- A sovereign credit rating is not a national report card: It is a financial passport. Without a rating from an agency like Fitch or Moody’s, Nepal is invisible to the multi-trillion-dollar global bond market, making international capital inaccessible for even the most viable projects.
- The next 5,000 MW will be financed in dollars, not rupees: The scale of ambition—to develop transformative projects like the Upper Arun (1,061 MW)—is mathematically impossible to fund through domestic bank debt alone. The only viable path is through US dollar-denominated Green Bonds and access to global Climate Funds.
Introduction
Nepal’s rivers hold more than water; they hold the kinetic energy of our national economic aspirations. For decades, the narrative has been simple and powerful: harness this immense hydropower potential to achieve energy self-sufficiency, power industrial growth, and export the surplus to our energy-hungry neighbors. The engine of this vision has been the domestic banking sector, with commercial banks acting as the primary financiers, channelling rupee deposits into concrete dams and turbines. A seemingly successful model, this has propelled us to over 2,800 MW of installed capacity.
But that engine has seized. The steady hum of project financing has been replaced by the alarming sounds of a system under strain. This article argues a difficult but necessary truth: the era of financing major hydropower projects primarily through domestic bank debt is over. We are standing at a fiscal precipice, where the liquidity constraints of our Class A commercial banks have created a hard ceiling on our ambitions. The domestic lending cap for energy has not just been reached; it has been effectively breached, with a shadow queue of worthy projects unable to secure financing.
The path to financing the next 5,000 MW—the scale required to transform Nepal from a net importer to a significant energy exporter—does not lie in further squeezing our domestic banking system. It lies beyond our borders, in the deep, liquid pools of global capital. This analysis will demonstrate why securing a sovereign credit rating is no longer a “nice-to-have” academic exercise but an urgent, non-negotiable prerequisite to unlock international Green Bonds and Climate Funds. Without this strategic shift, our hydropower dreams risk being stranded not by a lack of water, but by a lack of capital.
The Great Wall of NPR 5.5 Trillion
To understand why the old model is broken, one must appreciate the structural limits of Nepal’s financial architecture. The country’s 20 commercial banks collectively hold approximately NPR 5.5 trillion in deposits as of mid-2023. Governed by Nepal Rastra Bank (NRB) regulations, their ability to lend is not infinite; it is tethered directly to this deposit base. The most critical constraint is the Credit-to-Deposit (CD) ratio, which mandates that banks maintain a certain buffer and cannot lend out every rupee they receive. With the CD ratio hovering persistently close to the regulatory ceiling (currently around 85-90% for most banks), the system as a whole has very little “dry powder” left.
The problem is compounded by a well-intentioned-but-now-problematic directive: the mandate for banks to allocate a specific portion of their loan portfolio to productive sectors. Banks are required to lend at least 15% of their total loan book to the energy and agriculture sectors combined. For years, this directive acted as a floor, pushing reluctant capital towards hydropower. Today, it has become a hard ceiling. The aggregate lending to the energy sector, predominantly hydropower, by commercial banks has already surpassed NPR 350 billion. This figure represents a significant concentration of risk on the balance sheets of these institutions, pushing them right up against, and in some cases strategically maneuvering around, both the sectoral limit and their internal risk thresholds.
Furthermore, two other critical regulatory constraints are at play: the Single Obligor Limit and the inherent asset-liability mismatch. The Single Obligor Limit prevents a bank from lending more than a specified percentage of its core capital to a single borrower or project. This is a prudent measure to prevent a single project failure from taking down a bank. However, its effect is to render our banks incapable of financing a mega-project like the proposed 1,061 MW Upper Arun, which has a projected cost exceeding USD 1.3 billion (over NPR 170 billion). No single bank, or even a consortium of all Nepali banks, can write a cheque that large without violating this fundamental prudential norm. This forces developers to slice projects into smaller, less efficient sizes purely to fit the constraints of domestic finance, not the logic of engineering.
Finally, there is the chronic asset-liability mismatch. Banks fund themselves with short-term deposits (which can be withdrawn on demand) but are lending to hydropower projects with a 20- to 30-year life cycle. This creates a permanent liquidity risk that the central bank and the banks themselves must manage vigilantly. The system has reached a saturation point where adding more long-term, illiquid hydro loans onto balance sheets funded by short-term, flighty deposits is becoming an act of systemic imprudence. The wall is not imaginary; it is a very real, multi-layered regulatory and structural barrier built on deposit size, CD ratios, and single-borrower limits. We have run out of domestic road.
Green Bonds: The USD Denominated Alternative
If domestic rupee debt is a tapped-out well, international Green Bonds represent a vast, untapped ocean. A Green Bond is functionally similar to a standard bond—an IOU issued by an entity to raise capital—but with one critical distinction: the proceeds are earmarked exclusively for projects with clear environmental benefits. Hydropower, especially run-of-the-river projects with diligent environmental and social impact assessments, is a prime candidate for such financing.
The key difference between bank debt and a bond lies in the source and nature of the capital. Nepali bank debt is a bilateral negotiation between a developer and a small consortium of local banks. A Green Bond, by contrast, is a standardized security sold to a global market of thousands of institutional investors. These are not banks, but pension funds (like the California Public Employees’ Retirement System, CalPERS, with nearly half a trillion dollars in assets), insurance companies, sovereign wealth funds, and ESG (Environmental, Social, and Governance) focused asset managers. For these global players, a USD 50 million loan is a rounding error; they need to deploy capital in chunks of USD 300 million, USD 500 million, or more. This is a scale that aligns perfectly with Nepal’s need to finance large, efficient, and transformative hydropower projects.
Issuing a Green Bond would fundamentally change the financing equation. Instead of borrowing short-term rupees at high domestic interest rates (often exceeding 12-14%), Nepal could tap into long-term US dollar financing at potentially much lower rates. A 15- or 20-year bond would perfectly match the revenue profile of a hydropower project with a long-term Power Purchase Agreement (PPA). This eliminates the perilous asset-liability mismatch plaguing our domestic banks. The project earns revenues in a currency (or pegged to a currency) that matches its debt obligations, creating a natural hedge and a far more stable financial structure.
This is not a theoretical concept. The global Green Bond market saw issuances of over USD 870 billion in 2021 alone. Our neighbor, India, is a prolific issuer, with companies like Adani Green Energy and ReNew Power raising billions of dollars for renewable projects. They do this because it is more efficient, cheaper, and provides a scale of capital that their domestic market cannot. For Nepal, this is the only model that allows us to think in terms of gigawatts, not megawatts. It is the bridge from building 25 MW projects to building 500 MW projects, and doing so with capital that is patient, affordable, and aligned with the project’s long-term nature.
The Sovereign Rating: A Passport, Not a Report Card
Why can’t Nepal simply issue a Green Bond tomorrow? The answer lies in a crucial missing piece of financial infrastructure: a sovereign credit rating. To an institutional investor in London, Tokyo, or New York, Nepal is an unknown quantity. They have no way to systematically assess the risk of lending to a Nepali entity. Is the political environment stable? Is the central bank independent? Is the legal framework for enforcing contracts robust? A sovereign credit rating, issued by one of the “big three” agencies (Fitch, Moody’s, or S&P), answers these questions in a standardized, globally understood language.
It is critical to demystify what a rating is. It is not an academic grade on the nation’s honor, nor is it a judgment on our culture or people. It is a forward-looking opinion on the government’s ability and willingness to meet its financial obligations in full and on time. It is a risk assessment, translated into a simple alphanumeric code (e.g., AAA, BB+, B-). This code allows investors to price risk. Without a rating, the perceived risk is infinite, and the cost of capital is therefore also infinite—meaning, no one will lend to you at any price.
The process involves the rating agencies conducting a deep, intrusive analysis of the country’s economic and political fundamentals. They scrutinize fiscal deficits, public debt levels, inflation trends, foreign exchange reserves, governance quality, and political stability. The fear among policymakers in Kathmandu has often been, “What if we get a low rating?” This question misses the point entirely. A speculative-grade rating—say, a ‘B+’—is infinitely better than no rating at all. Bangladesh, for instance, holds a ‘BB-‘ rating from S&P. This rating, while not investment grade, has been the passport allowing it to access billions from international financial institutions and issue its own global bonds. It establishes a benchmark price for Bangladeshi risk, a starting point for every financial conversation.
A sovereign rating for Nepal would act as a “country ceiling.” Once Nepal as a sovereign is rated, a strong state-owned entity like the Nepal Electricity Authority (NEA) could then seek its own rating and issue a Green Bond. Its rating would likely be capped at the sovereign level, but it would have a clear basis for negotiation with investors. Subsequently, strong private sector developers with robust PPAs could also tap the market, referencing the established sovereign benchmark. The rating is the master key that unlocks every subsequent door to the global capital market. Delaying its acquisition is akin to choosing to remain locked outside the global financial system by choice.
The Strategic Outlook
Nepal stands at a clear fork in the road, and the choice we make in the next 24 months will define our economic trajectory for the next two decades. The path we choose will determine whether the “5,000 MW target” is a realistic policy goal or a recurring, hollow slogan.
Scenario A: The Path of Inaction and Stagnation. If we continue to defer the process of obtaining a sovereign credit rating, citing political unpreparedness or fear of a “low score,” the future is predictable. We will remain prisoners of our domestic liquidity cycle. Hydropower development will stagnate, limited to smaller projects (under 100 MW) that can be cobbled together through expensive, short-term domestic loans. Larger, more efficient projects like the Upper Arun or the Budhi Gandaki will remain perpetually on the drawing board, victims of a financing gap that can never be bridged by local banks. Our ambition to become a regional energy hub will evaporate, and we will likely remain in a state of fragile energy security, perpetually vulnerable to fluctuations in domestic credit and Indian energy prices.
Scenario B: The Path of Global Integration. If the government, led by the Ministry of Finance, immediately and decisively pursues a sovereign credit rating, a different future becomes possible. The process itself—of opening our books to international scrutiny—will impose a welcome fiscal discipline. Upon securing a rating (likely in the ‘B’ to ‘BB’ range), the government can enable the NEA or a special purpose vehicle (SPV) to issue Nepal’s inaugural sovereign-guaranteed Green Bond on an international exchange like Singapore or London. A successful benchmark issuance of, say, USD 500 million would be a transformational event. It would establish a price for Nepali sovereign risk, creating a yield curve. This would not only finance a significant portion of a mega-project but would also provide a pricing template for the entire private sector, unlocking access to climate finance, development banks, and institutional investors at an unprecedented scale.
The Hard Truth: The primary barrier to securing a sovereign credit rating is not technical; it is political. It requires a level of transparency, policy predictability, and long-term commitment that transcends party lines and election cycles. It means subjecting our fiscal and monetary policies to a global standard of accountability. The fear isn’t about the rating itself, but about the discipline the process entails. However, the choice is stark: we can either embrace this discipline to unlock a trillion-dollar global market, or we can remain comfortable within our self-imposed constraints, and in doing so, cap our own national potential. The finance for our future exists, but it will not come to us. We must build the bridge to go get it.
