FOR OFFICIAL USE ONLY. Report No

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1 Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY Report No Public Disclosure Authorized PROJECT COMPLETION REPORT NEPAL Public Disclosure Authorized INDUSTRIAL DEVELOPMENT PROJECT (CREDIT 1535-NEP) Public Disclosure Authorized JUNE 22, 1995 Country Operations, Industry & Finance Country Department II South Asia Regional Office This document has a restricted distribution and may be used bv recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EOUIVALENT Currency Unit = Nepalese Rupees (Rs) Appraisal Year (FY84): SDR I = US$ US$1.00 = Rs Rs. I = US$0.069 Completion Year (FY94): SDR I = US$ US$1.00 = Rs Rs. I = US$0.02 ABBREVIATIONS AND ACRONYMS ADB/N - Agricultural Development Bank of Nepal BANSBARI - Bansbari Leather and Shoe Factory Ltd. CIDB - Cottage Industries Development Board CSI - Cottage and Small Industries DCSI - Department of Cottage & Small Industries DEG - Deutsche Investitions-und Entwicklungsgesellschaft ESC - Export Services Center FITA - Foreign Investment and Technology Act HLI - Hetauda Leather Industries HMG - His Majesty's Government of Nepal ICICI - Industrial Credit and Investment Corporation of India IDA - International Development Association IDP - Industrial Development Project IEA - Industrial Enterprises Act IEF - Import/Export Facility ISC - Industrial Services Center JVB - Joint Venture Bank KfW - Kreditanstalt fur Wiederauftan LICC - Leather Industries Coordination Cell MOI - Ministry of Industry NBL - Nepal Bank Limited NIDC - Nepal Industrial Development Corporation NRB - Nepal Rastra Bank PCR - Project Completion Report RBB - Rastriya Banijya Bank RHCDC - Raw Hide Collection and Development Company UNDP - United Nations Development Programme USAID - United States Agency for International Development FISCAL YEAR July 16 - July 15

3 THE WORLD BANK Washington, D.C U.S.A. FOR OFFICIAL USE ONLY Office of Director-General Operations Evaluation June 22, 1995 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Nepal Industrial Development Project (Credit 1535-NEP) Attached is the Project Completion Report (PCR) for the Nepal Industrial Development project (Credit 1535-NEP, approved in FY85), prepared by the South Asia Regional Office, with Part II contributed by the Borrower. This SDR 7.5 million credit aimed at promoting industrial exports and strengthening Nepal's Industrial Credit Corporation (NIDC). Project components were a credit line to NIDC, a facility to finance imported inputs (IEF), a development program for leather processing, studies, and technical assistance (TA). The project was prepared by Government agencies, with assistance from IDA Project implementation was beset by problems. Soon after the credit was declared effective, the Government asked IDA to cancel the IEF and the main studies and TA components. Commitments and disbursements were delayed. The credit was closed two years after the original date, and an amount equivalent to 7.5 percent of the total credit was cancelled. The projects financed by the sub-loans were larger and more capital-intensive than had been anticipated in the President's Report. Financial performance of NIDC has been poor, but it has improved in recent years, with collection ratios ranging between 75 and 90 percent. Notwithstanding these weaknesses, the operation achieved its main objective. It helped finance 39 projects with a total investment cost of nearly US$40 million, a majority of which are in operation, some 4,000 jobs have been created, and the country's industrial exports have flourished. The leather sector benefitted from the assistance provided, and two parastatals were privatized. Interest rates were liberalized in This relative success was facilitated by a simple, highly focussed design, without excessively detailed conditionalities, and by the liberalization of interest rates. On the other hand, progress in the institution-building aspects of the project was limited. Some components were dropped, and NIDC remains financially weak. The outcome of the project is rated as marginally satisfactory, its institutional development impact as modest and the sustainability of its benefits as uncertain. The PCR contains abundant information, but it could have been compressed and tightened. It does not explain the reason for the abrupt cancellation of key institutional components. It also fails to show the justification for this kind of subsidized lending to large industrial firms, which seemed to have access to commercial credit sources. No audit is planned. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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5 PROJECT COMPLETION REPORT NEPAL INDUSTRIAL DEVELOPMENT PROTECT (Credit 1535-NEP) FOR OFFICIAL USE ONLY TABLE OF CONTENTS Page No. Preface... i Evaluation Summnary... ii PART I: PROJECT REVIEW FROM IDA'S PERSPECTIVE Project Identity Project Background Project Objectives and Description Project Design and Organization Implementation Project Results Project Sustainability and Impact IDA's Performance Borrower Performance Project Relationships Consultant Services Project Documentation and Data Lessons from the Project PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE PART Im: STATISTICAL SUNMARY ANNEXES: 1. Related IDA Credits Project Timetable Credit Disbursements Project Costs and Financing Project Resuts Status of Covenants Use of IDA Resources An Appraisal of NIDC Subproject Information Subsectoral Distribution of Subloans Subloan Information by Category Cumulative Collection Performance of Subloans Cash Flow Analysis of NIDC Index of Subsidy Dependence for NIDC Rate of Return from Current Portfolio ATTACHMENT: HMG's letter enclosing Part II This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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7 PROJECT COMPLETION REPORT NEPAL INDUSTRIAL DEVELOPMENT PROJECT (Credit 1535-NEP) PREFACE This is the Project Completion Report (PCR) for the Industrial Development Project in Nepal, for which Credit 1535-NEP in the amount of US$7.5 million (SDR 7.5 million) equivalent was approved on December 13, 1984, and made effective on December 20, The project was closed on December 31, 1993, compared with the original closing date of December 31, The final disbursement under the Credit was made on May 13, 1994, at which time the credit account was closed after canceling a balance of SDR 0.56 million (7% of the original credit amount). The PCR was prepared jointly by the Country Operations, Industry and Finance Division of the Country Department 2 of South Asia Regional Office (Preface, Evaluation Summary, Parts I and Ill), and the Borrower (Part li). Preparation of this PCR was based on IDA's project completion mission for the project in February 1994, and information from the Staff Appraisal Report, the Development Credit and Project Agreements, supervision reports, correspondence between IDA and the Borrower, internal IDA correspondence, documentation provided by the implementing agencies, field visits to selected project sites and discussions with project and IDA staff associated with project implementation. The borrower contributed to the preparation of the PCR by providing comments on the draft of Parts I and III and preparing its own evaluation of the project's execution in Part II.

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9 PROJECT COMPLETION REPORT NEPAL INDUSTRIAL DEVELOPMENT PROJECT (Credit 1535-NEP) EVALUATION SUMMARY Project Objectives i. As a follow-on operation to the first Industrial Development Project (Cr. 705-NEP) to the Nepal Industrial Credit Corporation (NIDC), the basic objective of the project was to promote industrial investments and exports in Nepal, primarily in the private sector, and to carry on with the institutional strengthening of NIDC. More specifically the project objectives were to: (a) promote privately owned enterprises, through the financing of Investment Projects for the economic and social development of Nepal, and also promote the leather industry through financial and technical assistance to the subsector and to two public sector companies; (b) strengthen NIDC's operational standards and procedures, through the provision of technical assistance and training; and (c) enhance HMG's capacity to generate foreign exchange reserves, through the establishment of an Import Export Facility. Implementation Experience ii. Soon after effectiveness HMG changed its mind regarding some of the Credit components. Thus, the Import Export Facility (IEF) of US$1.5 million was canceled and the amount earmarked was added to the subloan component. The tourism promotion study and the incentives study were also canceled. The project was, therefore, left with only the lending component (US$6.5 million) and two Technical Assistance components (totalling US$1.0 million); one to strengthen the NIDC and the other to upgrade the leather sector. This pruning of project components actually improved the clarity and realism of the objectives by focussing on the delivery of credit (lending component) and the vehicle for delivery (TA to NIDC) without, in any way, reducing the importance of the main objective of promoting private sector led industrial growth in Nepal. It also reduced the complexity of the project thereby lowering the demands on the implementation capacity of the borrower (para 4.2). iii. After effectiveness, implementation proceeded slowly. Originally, the Credit was expected to be committed in four years and disbursed in seven years. However, both commitment and disbursement under the line of credit were slower than planned. The TA was fully committed by June 1992, one year after the original completion date, while the Credit component was fully committed by December 1992; however subloan disbursement was very slow and by the time the Credit was closed, an amount of SDR 6.09 million was disbursed representing around 93% of the subloan component of SDR 6.55 million. Some subloans, specially those that were approved in the last quarter of 1992, were not fully disbursed by the Credit closing date due to various problems. These subloans are likely to be financed by NIDC by recycling Project funds as well as from other sources. The Credit account was closed on May 13, 1994, at which time the undisbursed balance of SDR 0.56 million, representing 7.5% of the total Credit, was canceled. The estimated cost of the project at appraisal was about US$12.0 million. The final cost is about US$40 million as shown

10 - iii - in Table 4A in Part III; it is higher because the total cost of the subproject component was about $38 million compared to about $9.3 million at appraisal. IDA subloans were expected to finance about 70 % of total subproject cost at appraisal. Actual contribution by IDA subloans was only 21 % with the remaining coming from sponsors and other financiers. The implementation of the technical assistance component proceeded well under the leather development program but was partially delayed in the case of NIDC (para 5.3). Project Results iv. The project's objective of expanding the private sector's role in industrial investment was largely realized. Over 94% of the credit amount was disbursed and majority of the subprojects are in operation and seem to have had a substantial impact on industrial growth, investment, and employment. The other key objective of establishing an efficient and financially viable DFI showed mixed results. The TA to the leather subsector also had a favorable impact on the export sector (para. 6.10). v. At the timne of PCR preparation (mid-1994), 26 out of the 39 subprojects financed were in commercial operation, four were under litigation having been seized and/or closed, and the other nine were under implementation and had not drawn-down their respective subloan (Annex-4). Of the 31 subloans that were fully disbursed, nine (29%) had paid off their entire outstanding balances and another six (19%) were current in their repayments. Twelve subloans (39%) were in arrears and another four (13%) were under litigation. Although a majority of the subloans were in arrears, the amounts involved were not significant (other than those under litigation). This was expected since most of the subprojects were new and faced unanticipated problems which delayed installment payments from time to time. The collection data for the forty subloans aggregated for the three years up to FY93 and adjusted for the fully paid-off subloans, indicated an overall collection ratio of 75% which matched NIDC's current collection ratio for the entire portfolio, but was higher than the HIDC's total collection ratio of 52% (paras 6.3 & 6.4) vi. Employment figures obtained from the 31 subprojects that were in commercial operation indicate that about 3,600 additional jobs were created due to this project compared to the SAR estimate of 2,300 additional jobs. Moreover, at least another 410 jobs are expected to be created once the remaining nine subprojects go into commercial production, giving a total of about 4,000 jobs with a cost per job of about N.Rs. 450,000 compared to the appraisal estimate of N.Rs. 200,000. This was so because the projects were more capital intensive than anticipated at the time of appraisal (Annex 4). As expected, the A-category subprojects (subloans above free-limit of US$150,000) were much more capital intensive with an average cost per job of N.Rs. 526,000 than the B-category subprojects (subloans below free-limit) with average cost per job of N.Rs. 225,000 (para 6.6). Sustainability and Impact vii. Over the past four years, NIDC has increased its profitability and generated healthy cash surpluses. In FY94, NIDC had a: net income of over 3 % of total asset; a Rate of Return on Equity of 9%, a collection rate of 52%; arrears amounting to 23% of portfolio and accumulated provisions equal to 95 % of the arrears. An analysis of the overall cash flow of NIDC for the four years ending in July 1993, shows that the annual cash inflow from operations has been, on average, double the cash outflow from operations (Annex-6). Therefore, only half of NIDC's cash collection

11 - iv - of principal, interest and other income goes towards meeting its debt-service obligations and paying its operating expenses and short-term liabilities, and the other half is recycled for disbursement of new loans. If this trend continues, NIDC should be able to recycle more than N.Rs. 230 million (which is equivalent to the IDA lending component) from its cash collections to finance new subloans during FY95. While NIDC's profitability and cash flow performance is good, particularly in relation to many of the government owned DFIs elsewhere in South Asia, this apparent healthy performance is largely due to its long-term borrowing at below market rates, yielding an interest margin of about 6.6%, and its low dividend payout. The Subsidy Dependence Index (SDI) for NIDC shows that it would have to increase its lending rate by around 37% (from 17% to 23% p.a.) to compensate for full elimination of subsidies received during FY94 (Annex 7). If NIDC could improve its collection rates to over 90% it could be sustainable on a non-subsidized basis, without having to raise its lending rates any further. Looked at another way, the maximum return that NIDC's debt and equity holders could expect from the present stock of loans is about 7.6. % (Annex 8); this is the rate at which the NPV of future cash flow from the current outstanding portfolio -- principal/interest collections, assuming recent collections rates, net of operating costs -- equals the sum of equity and debt outstanding. The expected return (7.6%) from the current portfolio is about 40% lower than market rates on L/T investments (e.g., L/T deposits). viii. To evaluate the impact of the IDA financed lending component on NIDC's financial performance, a model was developed to determine the breakeven interest rate, on both marginal and total cost basis, under different collection scenarios. The marginal break-even interest rate is the nominal lending rate at which the interest income from the subloan equals the marginal cost of borrowing. At the current collection rate of 75%, the marginal breakeven rate is around 10-12% (with and without reinvestment of excess funds) which is substantially lower than the average lending rate of about 17% on IDA subloans. Thus on a marginal basis, the project is generating a positive cash flow for NIDC. On a total cost basis (including operating costs which equal 3 % of subloan outstanding based on past trend) the breakeven rate at the current collection rate of 75% comes to around 17% which is same as the average lending rate; on this basis NIDC is barely breaking even. However if account is taken of the earnings on relending of surplus funds (float as a result of subloans having shorter maturity than borrowed funds) the breakeven rate is around 14% indicating a positive cash flow on account of the project subloans. The above analysis suggests that the Project's objective of making NIDC a sustainable development finance institution for term lending to the private industrial sector is being achieved, albeit modestly. ix. The impact of the technical assistance to the leather subsector appears to be positive as well. Both Bansbari and RHCDC have been successfully privatized and while Bansbari's performance and profitability has improved already, RHCDC under private management also holds promise of better performance. In recognition of its positive contributions, LICC has been absorbed within HMG, after completion of the project, and it should continue to contribute towards the improvement of leather goods. The output and value-added of leather and leather goods have increased from N.Rs million and 62.8 million in FY89 to N.Rs million and million in FY91 respectively. The exports of hides and skins during this period also increased from N.Rs million to N.Rs million. Lessons Learned x. Whereas it is easier to find the reasons for the failure of a project it is relatively more difficult to isolate the reasons for its success. A somewhat similar project in Nepal, under which

12 - v - subloans were made to only small and cottage industries over almost the same period, failed to sustain the lending component through the nationalized commercial banks. While it is true that the reasons for its failure were not all present under this Project, both the projects were implemented under the same overall financial sector framework. The main difference lay in the project conditionalities and the way they were perceived by the implementing agencies and the ultimate beneficiaries. The reasons for the relative success of this Project provide the following lessons: (a) (b) (c) (d) investment lending projects in countries with less developed financial and industrial sectors should be kept simple with a limited number of components. The highly focussed objectives and the simple project design made this Project more acceptable to the Borrower and hence also created a sense of ownership in the Borrower and NIDC (para 9.1). The objectives were understood by all and the demands on the implementation capacity of the agencies concerned were not too great (para 4.2). credit lines though DFIs for encouraging industrial investments should avoid putting in micro-management conditionalities as such conditionalities may violate normal banking instincts and principles. The absence of: subsector or regional lending targets; graduated interest rates and spreads based on subloan size; and such other conditions helped NIDC to make a better credit decision based on the subproject itself (para 4.3). implementing DFIs should be allowed to charge market rates of interest where a competitive lending environment exists. The liberalization of interest rates by NRB in FY90 allowed NIDC to raise its lending interest rates in line with the perceived risks underlying the subprojects. This improved NIDC's margin and also screened out marginal subprojects (para 6.12). foreign equity participation with management assistance for DFIs in developing countries should be encouraged. The presence of an expatriate Director deputed by a foreign shareholder in the management of NIDC appears to have had a favorable impact on the operations of NIDC (para 6.12).

13 NEPAL INDUSTRIAL DEVELOPMENT PROJECT (Credit 1535-NEP) PROJECT COMPLETION REPORT PART I: PROJECT REVIEW FROM IDA'S PERSPECTIVE 1 Project Identity Name Credit No. RVP Unit Country Sector Industrial Development Project Cr NEP South Asia Region Nepal Industry 2 Project Background 2.1 With an average per capita income of only US$170 (1992), Nepal is one of the poorest countries in the world. Reflecting the fact that about 90% of Nepal's people live in rural areas, Nepal's economy is based primarily on traditional rain-fed agriculture, which accounts for about 56 % of GDP and 80% of employment. Agricultural productivity, however, has been stagnant resulting from rapid environmental degradation caused by inappropriate policies and strategies, population pressure combined with excessive grazing and deforestation. Real GDP growth over the past three decades has been virtually offset by an average population growth (2.1 % in 1992) over this period. In a normal rainfall year, Nepal produces barely enough foodgrains to feed its population. While agricultural growth is important to make impact on widespread low income levels, it alone will not be sufficient to improve Nepal's prospects for increasing employment and income and improving the balance of trade. Increases in industrial production and exports are needed to supplement agricultural incomes. 2.2 Nepal's industrial sector is small (16% of GDP in 1992) and under developed, with limited prospects for import substitution or exports of most modern industrial products. Industrial development is constrained by Nepal's limited natural resource base, small domestic demand, lack of skilled labor, landlocked position, and poor transport systems. Because of these constraints, Nepal needs to adopt a selective approach to industrial development by encouraging industrial investment in areas where Nepal has a comparative advantage. 2.3 The Government's approach to development stressed the promotion of private sector expansion. IDP-I (Cr. 705-NEP) for US$4.05 million was approved in 1977 and was relent to 25 subprojects which contributed to increasing incomes and generating employment and foreign exchange through expanded production and exports. The first project also initiated the institutional strengthening of NIDC since it was recognized as the main promoter of private industries in Nepal. 2.4 The second IDA credit line was provided to expand private industrial investment further and to develop the leather and leather goods subsector as a means to diversify exports and enhance value added. Moreover, the institutional strengthening of NIDC that began under the first

14 credit line needed to be carried on in order to turn NIDC into an efficient and viable DFI capable of financing an improved quality of industrial projects in Nepal. 3 Project Objectives and Description 3.1 Project Objectives: The project was designed to promote private industrial investment for the economic and social development of Nepal and to assist in generating more foreign exchange earnings. It also sought to upgrade the quality of leather and encourage efficient domestic processing of leather and its products. Furthermore, the project planned to continue with the strengthening of NIDC's institutional capabilities which was initiated under the first IDA line of credit. The objectives did not include any major reforms for the entire financial sector and were clear and concise, understood by all, and were in line with IDA strategy for the development of Nepal's industrial sector. 3.2 Project Description: To achieve the above objectives the project had the following principal components and costs: (i) (ii) (iii) (iv) a credit line to NIDC for onlending to private industrial enterprises to finance local and foreign costs (including permanent working capital) of sub-projects, and contribution of US$1.0 million to His Majesty's Goverment (HMG) and the National Review Board for setting up an Import Export Facility (IEF) to finance the imported inputs of existing exporters (US$6.5 million); support to HMG for implementing an integrated development program, through RHDC, LIDC and Bansbari, for the leather/leather goods subsector aimed at increasing the collection of raw hides and skins, upgrading footwear designs, quality and production techniques (US$0.55 million); advisory/consultancy services for three studies to promote and improve operations of the light engineering and tourism sub-sectors and to review and recommend a package of industrial and export incentives (US$0.2 million); and assistance to NIDC to build on the institutional improvements made under IDA's first credit line, through provision of consultancies, training, computer hardware and software, equipment and international audit services (US$0.09 million). 3.3 Total project cost, phased over seven years, were estimated at US$12.0 million and an IDA credit of SDR 7.5 million (US$7.5 million equivalent at the time of appraisal) was approved to fund 63 % of costs, while HMG and prospective sub-project sponsors were to contribute 14 % and 23% respectively. NIDC was given the responsibility to relend the credit component of US$6.5 million to private industrial enterprises for the establishment or expansion and modernization of enterprises in manufacturing, agrobased industries, mining and industrial services, as term loans including permanent working capital. NIDC bore the credit risks associated with the sub-loans, while the foreign exchange risk was borne by HMG. 3.4 The technical assistance component, which focused on strengthening NIDC and upgrading the leather subsector, was to be financed through US$ 1.0 million of IDA funding and a US$ 0.2 million equivalent of local currency financing by HMG. Initially, the TA also included

15 - 3 - three studies for the promotion of tourism, light-engineering products and industrial and export incentives to be implemented by the Ministry of Industry through NIDC for its strengthening component and through the Leather Industries Coordination Cell (LICC) for the leather subsector component. 4 Project Design and Organization 4.1 Shortly after the credit was signed HMG requested a change in the project design including the cancellation of: (a) IEF of US$1.5 million, to expand exports. The IDA contribution of US$1.0 million, which was earmarked out of the credit component was, reallocated for financing eligible NIDC subloans. The industrial and export incentives study was financed by ADB. (b) The tourism promotion study. This was eventually financed by NRN and the industrial and export incentives study was financed by ADB. Moreover, the trade policy reforms undertaken under SAL I & II were considered to be adequate at that time. Only the study on light engineering subsector was carried out, but it came out with no significant recommendations for reforms. 4.2 With these changes the project was left with a lending component of US$6.5 million and two technical assistance components totalling US$1.0 million; one to strengthen the NIDC and the other to upgrade the leather sector. This pruning of project components actually improved the clarity and realism of the objectives by focussing on the delivery of credit (lending component) and the vehicle for delivery (TA to NIDC) without, in any way, reducing the importance of the main objective of promoting private sector led industrial growth in Nepal. It also reduced the complexity of the project thereby lowering the demands on the implementation capacity of the borrower. 4.3 In retrospect, it now appears that the absence of micro-management conditionalities in the project design and organization contributed most to the relatively better performance under this project. Thus, this project did not: specify any subsector or regional lending targets; stipulate any graduated refinancing interest rates and spreads based on subloan size; nor put in any other micromanagement targets as were found in many of IDA's investment lending operations designed at that time. 5 Implementation 5.1 Project Start-up. The Credit became effective on December 20, 1985, twelve months after Board approval. The delay was mainly in processing the amended Policy and Strategy Statements of NIDC and getting it approved by its Board, and in signing the subsidiary loan agreement between HMG and NIDC. 5.2 Implementation of the Subloan Component. The highlights of the subloan component implementation are as follows: (i) A total of 46 subloans were approved by IDA during the seven years of the Credit. However, six of the approved subloans were either funded by NIDC from other sources or canceled prior to disbursement and 40 subloans to 39 subprojects (almost

16 - 4 - the exact number estimated in the SAR) were finally financed under the credit component. One subproject repaid the entire subloan ahead of schedule and was later provided with another subloan for balancing and expansion. Total subproject costs were N.Rs. 1.8 billion (US$37.5 million) of which IDA subloans financed N.Rs million (US$4.8 million). IDA subloans represented less than 14% of NIDC's gross loans and advances during (ii) At appraisal, it was expected that 25 % by number and 70 % by amount of subprojects would be reviewed by IDA. In fact, about 49% by number and 89% by amount of subprojects were subjected to prior review by IDA because there were more 'A' category subloans (over the free limit of US$150,000) than anticipated. In terms of subloans, 20 from each category (A-over the free-limit, and B-under the free-limit) were financed under the Project. The average size of the A category subloan was SDR 0.28 million while the average size of the B category subloan was SDR 0.03 million (Annex-2). (iii) A relatively riskier portfolio was financed under the Project since 18 out of the 20 sub-loans in each category were for new sub-projects and only two from each category were for existing subprojects. In regards to location, subprojects were relatively equally distributed, although six B-category subprojects were located in Kathmandu and four A-category subprojects were each in Lalitpur and Bara. (iv) The subsectoral distribution of the subloans was: textile and jute (36.9%); food and mixed products (21.2%); construction (11.2%); hotel and resort (10.2%); paper and printing (8.4%); pharmaceutical and medical products and services (3.6%); and other manufacturing (8.4%). The loans to the textile are jute sectors generating the highest level of new job creation (Annex 3). (v) A substantial number of projects had time overruns. As of February 1994, three A- category and six B-category subprojects were still under implementation because of delays in the import and installation of machineries, delayed power connection, raising promoter's equity, changes in project design and scope, and for other reasons. (vi) The financing of Bansbari and RHCDC for their modernization, upgrading and financial restructuring, as planned under the leather development program, did not fully materialize. Bansbari was privatized in December 1992 and neither the planned equity investment nor any subloan was extended to it. Only the equity investment and the subloan to RHCDC was made, albeit in amounts smaller than planned. RHCDC has also been privatized recently. 5.3 Implementation of the TA Components. After the restructuring of the technical assistance component its implementation proceeded well. Under the leather development program a leather industry advisor was provided to LICC for three years who acted as the Chief Technical Advisor (CTA) responsible for the implementation of this subcomponent. The Cobbler Assistance program was implemented by CIDB with the assistance of an expatriate trainer for shoe uppers and another expatriate trainer for leather garments. LICC also hired an expatriate consultant from 1991 for three years for its leather goods training center which offered courses on manufacturing leather

17 goods. The Effluent Control program was not undertaken. Prior to its privatization, Bansbari was provided 20 man-months of TA for improving leather tanning and finishing, shoe design and shoe engineering. The pilot abattoir that was planned to be set up by RHCDC never got completed due to staffing problems and a shortage of funds expected from HMG, although land was acquired near the river just outside Kathmandu. Finally, the Export Market Promotion program was also implemented successfully by LICC. 5.4 Technical assistance to NIDC was aimed at institutional capacity building to complement NIDC's agreement with ICICI to implement an institutional assistance program. It included a "projects course" program aimed at providing practical tools on project preparation, evaluation, and implementation which was implemented successfully. The international audit to determine the financial condition of NIDC was carried out by Price Waterhouse & Co. The computerization of NIDC's operations was significantly delayed and was not complete at the time of project closing. NIDC barley completed the procurement of the hardware by the closing date and is now soliciting funds for consultants to design a proper software to computerize its operations. 5.5 Risk Assessment. The main risk identified in the SAR for the subloan component was that an adequate number of identified and eligible subprojects may not materialize due to inadequate entrepreneurial interest, the multiple constraints to industrialization and difficulties in incentives and their administration. To minimize this risk, the project provided: (a) a conservative subloan amount; (b) entrepreneurial training courses in preparing and promoting viable industrial projects; (c) assistance in the development and implementation of appropriate incentives for industry and exports through training and technical assistance; and (d) incorporation of subsector development components in key product groups. Whereas all the above were implemented under the Project except (c), it is difficult to determine the extent to which the above actions reduced the elements of risk and how NIDC coped with the other elements not mentioned, such as the macro-economic framework, general credit discipline, legal framework for debt recovery, trade relations with India and others. 5.6 Procurement. There were no particular procurement problems identified in the supervision reports. 5.7 Disbursement and Project Cost. The estimated and actual disbursements of the project are given in Table 3A and 3B in Part III. Originally, the Credit was expected to be committed in four years and disbursed in seven years. However, both commitment and disbursement under the line of credit were slower than planned and by June 1992, one year after the original Project closing date, the full TA component and around 95% of the Credit component was committed. Although the Credit component was fully committed by December 1992, subloan disbursement was very slow and by the time the Credit was closed, an amount of SDR 6.09 million was disbursed representing around 93% of the subloan component of SDR 6.55 million. Some subloans, specially those that were approved in the last quarter of 1992, could not be fully disbursed by the Credit closing date due to various problems as stated in Para 5.2 (v). These subloans are likely to be financed by NIDC by recycling Project funds as well as from other sources. The Credit account was closed on May 13, 1994, at which time the undisbursed balance of SDR 0.56 million, representing 7.5% of the total Credit, was canceled. The estimated cost of the project at appraisal was about US$12.0 million. The final cost is about US$40 million as shown in Table 4A in Part III; it is higher because the total cost of the subproject component was about $38 million compared to about $9.3 million at appraisal. IDA subloans were expected to finance about 70% of total subproject cost at appraisal. Actual contribution by IDA subloans was only 21 % with the remaining coming from sponsors and other

18 - 6 - financiers. The implementation of the technical assistance component proceeded well under the leather development program but was partially delayed in the case of NIDC (para 5.3). 6 Project Results 6.1 The project's objective of expanding the private sector's role in industrial investment was largely realized. Over 94% of the credit amount was disbursed and the majority of the subprojects are in operation with a substantial impact on industrial growth, value added, and employment. The other key objective of establishing an efficient and financially viable DFI showed mixed results. The TA to the leather subsector also had a favorable impact on the export sector (para. 6.10). 6.2 Subloan Component. The subsectoral distribution of the subloans show that a wide variety of subprojects were financed under the Project (Annex-3). These subloans generated incremental productive investments of N.Rs billion compared to the SAR estimate of N.Rs. 160 million (Annex-4). While most of the subprojects cater to the domestic market at least five had either begun exporting or were planning to export their products in the near future. The Project, therefore, had a positive impact on the industrial investment, growth and exports. 6.3 At the time of PCR preparation (mid-1994), 26 out of the 39 subprojects financed were in commercial operation, four were under litigation having been seized and/or closed, and the other nine were under implementation and hence had not even fully drawn-down their respective subloan (Annex-4). Of the 31 subloans that have been fully disbursed, nine (29%) had paid off their entire outstanding and another six (19%) were current in their repayments. Twelve subloans (39%) were in arrears and another four (13%) were under litigation. 6.4 Although over half of the subloans were in arrears, the amounts involved were not significant (other than those under litigation). This was expected since most of the subprojects were new and faced unanticipated problems which delayed installment payments from time to time. The collection data for the forty subloans aggregated for the three years up to FY93 and adjusted for the fully paid-off subloans, indicated an overall collection ratio of around 75% which matched NIDC's current collection ratio for the entire portfolio, but was higher than its total collection ratio of 52%. 6.5 Twelve subprojects, representing around 31% of the total, were visited by the PCR mission during June 1993 and February Ten subprojects were in good running condition and only two appeared to have incurred losses from their operations. The other two subprojects were in the construction stage. 6.6 Employment figures obtained from the 31 subprojects that were in commercial operation suggest that around 3,600 additional jobs were created due to this Project. This is much higher than the SAR estimate of 2,300 additional jobs. Moreover, at least another 410 jobs are expected to be created once the remaining nine subprojects go into commercial production, leading to a total of about 4,000 jobs created under the Project given the cost per job of N.Rs. 450,000 compared to the appraisal estimate of N.Rs. 200,000 showing that most of the subprojects are capital intensive. As expected, the A-category subprojects are much more capital intensive with an average cost per job of N.Rs. 526,000 than the B-category subprojects with average cost per job of N.Rs. 225,000.

19 TA Components. The technical assistance provided to the leather subsector fairly achieved the objectives of improving the quality of leather and leather goods and increasing their exports through an export promotion component. The leather subsector was in its infancy at the beginning of the Project with an inefficient system of collection and processing of hides and skin and outdated tanneries. With the assistance of the international experts provided under the TA the condition has improved considerably. Both the collection and processing of hides and skins by RHCDC has improved due to expansion of its collection centers to 300 in 60 districts, most of them with godown facilities to preserve the collected hides and skins until they are distributed to the tanneries. This has led to an appreciable increase in the availability of the hides and skins. 6.8 The three technical experts provided to Bansbari for improving the quality of tanning and finishing, shoe engineering and footwear design led to the production of higher quality leather which is fetching better prices, as well as better quality shoes. 6.9 Under the Export Market Promotion program, LICC arranged for the participation of a four member delegation to the Hong Kong leather fair in May 1987 which resulted in incremental sales of wet-blue, crust and finished leather. Moreover, a 13-member delegation also visited the Paris leather fair in September 1989, followed by a visit to W. Germany and Pakistan to see the latest technology employed by the leather industries in those countries The provision of a Leather Industry Advisor to LICC assisted in the upgrading of its position from a temporary coordination cell at the beginning of the Project to a regular institution at present under the Department of Cottage and Small Industries of the Ministry of Industry, funded from the regular budget of HMG. It had established a leather goods training center which offers one-year course on skills for manufacturing leather goods. The course started with seven students per year and now has expanded to 12 students with plans to take in 18 students per year from next year. The course was started by an expatriate consultant in 1991 who left at the end of 1993 and is now run by a local trainer. Since the demand for the training course is increasing, LICC is planning to increase the number of trainers and offer two courses every year, one for manufacturing leather garments and goods and the other for shoe uppers The TA to NIDC had mixed results. While the institution building objective was partially realized, more remains to be achieved. The "projects course" training was very successful as was the training of NIDC staff at Manila, Philippines. However, the computerization of NIDC's operations was seriously delayed and was not completed by Project closing. This has delayed the implementation of a much needed MIS to record and inform management about the performance of its portfolio, and the use of advanced evaluation and appraisal techniques. NIDC's financial performance, which has been improving over the Project period as discussed below, will get a further boost once the computerization is operational NIDC's Financial Performance - A detailed assessment of NIDC's performance over the last decade is provided in Annex-l. The assessment indicates that NIDC has achieved remarkable stability in its solvency and capital ratios over the last five years while continuously improving its profitability at the same time. In FY94 NIDC had a net income of over 3% of total assets after providing 1.5% for building up provisions. The ROE is almost 9% up from 6% during

20 - 8 - the last three years. NIDC has a D:E of 2:1, which is well below the 5:1 required under the project; its' debt service coverage ratio has been over 3:1 during the last three years, well above the required ratio of 1. 1:1. NIDC's overall collection ratio is low at about 50%, but in recent years current collections have ranged from 75-90%. NIDC has been following an aggressive provisions policy over the last several years, and accumulated provisions are over 95% of the total arrears. A healthy interest rate margin % in FY resulting from availability of low cost funds on one hand and removal of interest rate controls on the other, has helped NIDC achieve positive cash flow from operations as well as earn profits. In FY90 all interest rate controls were withdrawn. The absence of any lending rate restrictions under this Project allowed NIDC to raise its rates in line with the perceived risks underlying the subprojects, within the new competitive environment. This improved NIDC's margin and also helped in screening out marginal subprojects. The presence of an expatriate Director deputed by the foreign shareholder, in the management of NIDC, appears to have had a favorable impact on the operations of NIDC. 7 Project Sustainability and Impact 7.1 As indicated above, over the last few years NIDC has been increasing its profitability and generating healthy cash surpluses. An analysis of the overall actual cash flow of NIDC for the four years ending in July 1993, shows that the annual cash inflow from operations has been, on average, double the cash outflow from operations (Annex-6). Therefore, only half of NIDC's cash collection of principal, interest and other income goes towards meeting its debt-service obligations and paying its operating expenses and short-term liabilities, and the other half is recycled for disbursement of new loans. If this trend continues, NIDC should be able to recycle more than N. Rs. 230 million (which is equivalent to the IDA lending component) from its cash collections to finance new subloans during FY95. While NIDC's profitability and cash flow performance is good, particularly in relation to many of the government owned DFIs elsewhere in South Asia, this apparent healthy cash flow and profitability performance is largely due to its long-term borrowing being at below market rates, its low dividend payout and a large interest margin of about 6.6 %. The Subsidy Dependence Index (SDI) for NIDC shows that it would have to increase its lending rate by around 37 percent (from 17 % to 23 % p. a.) to compensate for full elimination of subsidies received during FY94 (Annex 7). If NIDC could improve its collection rates to over 90% it could be sustainable on a non-subsidized basis, without having to raise its lending rates any further. Looked at another way, the maximum return that NIDC's debt and equity holders could expect from the present stock of loans is about 7.6% (Annex 8); this is the rate at which the NPV of the future cash flow from the current outstanding portfolio -- principal/interest collections, assuming recent collection rates, net of operating costs of 3% -- equals the equity and debt outstanding. The expected return 7.6%) from the current portfolio is about 40% lower then the market rates on L/T investments (e.g., L/T deposits). 7.2 To evaluate the impact of the IDA financed lending comp,onent on NIDC's financial performance, a model has been developed to determine the breakeven interest rate, on both marginal and total cost basis, under different collection scenarios. The model takes into account the difference in the grace periods, the rates of interest, the repayment schedules of the subloans under the Project and the IDA Credit funds, and income from relending of surplus funds resulting from differences in repayment terms of subloans and IDA funds. IDA funds under the Project were provided by

21 - 9 - HMG to NIDC at the rate of 7% p.a. for a maximum period of 18 years with 5 years grace; NIDC relent these funds to its sub-borrowers for a maximum period of 15 years with 3 years grace. The marginal break-even interest rate is the nominal lending rate, at which the interest income from the subloan equals the marginal cost of borrowing. At the current collection rate of 75 %, the marginal breakeven rate is around 10-12% (with and without reinvestment of excess funds) which is substantially lower than the average lending rate of about 17% on IDA subloans. Thus on a marginal basis the project is generating positive cash flow for NIDC. On a total cost basis (including operating costs which equal 3 % of subloan outstanding based on past trend) the breakeven rate at the current collection rate of 75 % comes to around 17 % which is same as the average lending rate; on this basis NIDC is barely breaking even. However if account is taken of the earnings on relending of surplus funds (float as a result of subloans having shorter maturity than borrowed funds) the breakeven rate is around 14 % which would suggest positive cash flow on account of the project subloans. The above analysis suggests that the Project's objective of contributing towards NIDC being a sustainable development finance institution for term lending to the private industrial sector is being achieved, albeit modestly. 7.3 The impact of the technical assistance to the leather subsector appears to be positive as well. Both Bansbari and RHCDC have been successfully privatized and while Bansbari's performance and profitability has improved already RHCDC under private management also holds promise of better performance. In recognition of its positive contribution, LICC has been absorbed within HMG after completion of the project, and it should continue to contribute towards the improvement of leather goods. The output and value-added of leather and leather goods have increased from N.Rs million and 62.8 million in FY89 to N.Rs million and million in FY91 respectively; the exports of hides and skins during this period also increased from N.Rs million to N.Rs million. 8 IDA's Performance 8.1 IDA proceeded with the preparation of IDP-II after the results of the first Credit line (IDC Cr. 705-NEP) were available. As a result, it included a technical assistance component for NIDC to address the institutional weaknesses identified in the earlier project. 8.2 IDA fielded 13 supervision missions during the seven years between project effectiveness and termination (Table 7B, Part III). While this helped in monitoring the implementation closely, the continuity of progress suffered somewhat due to the frequent change of task managers for this Project. Consequently, the record of technical assistance component implementation was sketchy in the mission reports. 9 Borrower Performance 9.1 The Borrower and specially NIDC placed special emphasis on this Project and its objective. This sense of ownership by the Borrower contributed a lot to the relative success of the Project. Moreover, the Borrower complied with most of the credit covenants and organizational requirements. NIDC cooperated very well with IDA in all stages of the Project.

22 Proiect Relationships 10.1 Relationships under the project were generally cordial, and the absence of cofmanciers avoided any coordination problems. The relationship between HMG and IDA was satisfactory and that between IDA and NIDC was cordial throughout the Project period. The subproject sponsors cooperated fully with the supervision mission during visits to the sites, and had positive comments on NIDC. Relationships with other agencies were also satisfactory. 11 Consulting Services 11.1 In all, around six consultants were provided to the leather subsector through the LICC and at least three consulting firms provided services to NIDC. Most of the consultancy months were effectively utilized and all the agencies were generally pleased with the performance of the consultants, except in the case of NIDC where the computerization component did not progress satisfactorily. The leather subsector consultants recorded their experience in the terminal report for the period June 1989 to February 1990, called "Nepal: Consultancy services to the Leather Industries Coordination Cell (LICC), April 1990." 12 Project Documentation and Data 12.1 The Staff Appraisal Report provided a useful framework for the review of project implementation and the project documents held in IDA files on implementation were also helpful. However, the data on technical assistance performance was incomplete NIDC provided all the data on subprojects as well as on its own financial and management performance. Due to the delay in computerization of NIDC's operations, the subloan data was not complete and up-to-date. Thus, although total collections from each subloan are monitored, the amount is not broken down by principal and interest. The computerization of NIDC's operations would help NIDC to track subloan performance more accurately though the setting up of a proper MIS. 13 Lessons from the Proiect 13.1 Whereas it is easier to find the reasons for the failure of a project it is relatively more difficult to isolate the reasons for its success. A somewhat similar project in Nepal, under which loans were made to small and cottage industries over almost the same period, failed to sustain the lending component through the nationalized commercial banks. While it is true that the reasons for its failure were not all present under this Project, both the projects were implemented under the same overall financial sector framework. The main difference lay in the project conditionalities and the way they were perceived by the implementing agencies and the ultimate beneficiaries. The relative success of this Project provide the following lessons: (a) investment lending projects in countries with less developed financial and industrial sectors should be kept simple and should not have too many components. The highly focussed objectives and the simple project design made this Project more acceptable to the Borrower and hence also created a sense of ownership in the Borrower and

23 NIDC (para 9.1). The objectives were understood by all and the demands on the implementation capacity of the agencies concerned were not too great (para 4.2). (b) (c) (d) credit lines though DFIs for encouraging industrial investments should avoid putting in micro-management conditionalities as such conditionalities may violate normal banking instincts and principles. The absence of: subsector or regional lending targets; graduated interest rates and spreads based on subloan size; and such other conditions helped NIDC to make a better credit decision based on the subproject itself (para 4.3). implementing DFIs should be allowed to charge market rates of interest where a competitive lending environment exists. The liberalization of interest rates by NRB in FY90 allowed NIDC to raise its lending interest rates in line with the perceived risks underlying the subprojects. This improved NIDC's margin and also screened out marginal subprojects (para 6.12). foreign equity participation with management assistance for DFIs in developing countries should be encouraged. The presence of an expatriate Director deputed by a foreign shareholder in the management of NIDC appears to have had a favorable impact on the operations of NIDC (para 6.12).

24 Overview PART II. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE The credit 1535-NEP for SDR 7.5 million was IDA's second line of credit to Nepal Industrial Development Corporation for the Industrial Development Project in Nepal. The project was delayed in both commitment and disbursement under the line of credit. The credit account was closed on May 13, 1994, and the undisbursed balance of SDR 0.56 million was cancelled. The objective originally laid out in this project was changed after the project became effective. The revised project components actually improved the clarity and realism of the objectives. Thus, it helped in achieving the objectives without any difficulty. 2. Proiect Design The credit 1535-NEP project was prepared by NIDC and Ministry of Industry with the assistance from IDA. Later on, HMG/N overviewed the project and decided to cancel some credit components, such as Import Export Facility, Tourism Promotion Study and the Incentive study. The project included the following credit related components: to promote the private sector industry by project financing through NIDC; to strengthen the NIDC activities specially by providing: (i) (ii) (iii) staffs training on project preparation, evaluation and implementation; international auditing to determine the financial position of NIDC; and development of MIS system through computer hardware and software, etc. 3. Achievement to support MHG promote the leather industry through financial and technical assistance. The project's objective of expanding the private sector's role in industrial development was largely realized as stated in the IDA's Report (PCR). Under this project, over 94% of the credit amount was disbursed in 39 sub-projects and majority of the sub-projects are in operation. The significant achievement of this project would naturally have a substantial impact on industrial growth, investment and employment. Besides, it also provided a remarkable help to NIDC in computerization (Hardware) of NIDC's operation, manpower development and international auditing of NIDC to determine its financial position. But the concept of importing computer software developed in highly advanced countries and hiring the foreign consultants to apply such imported software in local conditions could not be materalized because of some technical difficulties like customization of software according to NIDC needs, timely availability of consultant services etc.

25 Lending Operation Altogether 46 sub-loans were approved by IDA. Out of 40 sub-loans, only 39 subprojects were finally financed under the credit component to the tune of SDR 6,086,401 against the total sanctioned amount of SDR 6,555,380. Sub-sectorial distribution of sub-loans reveals that textile and jute-based industry received the highest proportion of loan. However, the full amount of credit could not be utilized as nine sub-projects under this credit line were under final implementation stage at the time when the credit was closed. In terms of sub-loan, 20 from each category (A and B) were financed under this project. The number of employment created by these 39 sub-projects were estimated at 4, Prime Causes of Success Though TA component has a mixed result, the project as a whole enumerated a positive result. some of the factors, responsible for the positive results, include: - the objective of the project was developed and defined clearly as per the borrower's point of view; - credit line has emphasized to avoid unnecessary conditionalities so as to facilitate the borrowers to take decision on sub-projects by themselves; - the liberalization of interest rates by Nepal Rastra Bank in FY 1990 allowed NIDC to raise its lending rate with a satisfactory interest margin; and - the component, specially NIDC's institutional development program, has been well supported by computer hardware for setting up a proper MIS. 6. Borrower's Performance Borrower's performance as a whole is satisfactory in terms of preparing, implementing and monitoring the project. Project Relationship Relationship between IDA and government was satisfactory and that between NIDC and IDA was cordial and friendly throughout the project period. 7. Conclusion The 1535-NEP credit was the IDA's second line of credit to NIDC. The credit was expected to be utilized in five years. However, it was a little delayed and used in seven years. Some sub-loans and TA components could not be fully utilized by the credit closing date due to various problems. However, over 94% of the credit amount was disbursed and a majority of the sub-projects are in operation. So it has helped substantially on the industrial growth, employment

26 and investment. TA component has shown a mixed result. For the last 5 years, NIDC has been increasing its profitability and generating a cash surplus also. In general, the objectives of credit NEP-1535 were met despite of some difficulties and delays other than anticipated.

27 PART III. STATISTICAL SUMMARY 1. Related IDA Credits Loan/Credit Purpose/Comments Year of Status Approval Cr. 659-NEP Carrying out extensive study for exportable 1978 completed Technical CSI's and preparation of the CSI-I project. Assistance Cr. 705-NEP Assistance to NIDC to become a stronger 1978 completed First Industrial development finance institution, and Development provision of foreign exchange for private Project sector investment. Project under review was a follow-on to this project. Cr NEP Employment creation, small-scale industry 1981 completed Cottage and promotion, institutional strengthening Small Industries through technical and financial assistance. Project Project objectives mostly achieved. Cr NEP Support to finance private sector small and 1986 completed Second Cottage cottage industries for the growth of exports, and Small output and employment, and institutional Industries strengthening through technical assistance. Project Project objectives partially achieved. l Follow-on Project None. HMG has requested for a successor project.

28 Project Timetable Identification Item Date Planned Date Revised Date Actual Preparation February 1983 Appraisal Oct./Nov Negotiations Oct./Nov Board Approval December 1984 Credit Signature June 1985 Credit Effectiveness December 1985 Project Completion June 30, 1991 Dec. 31, 1992 Dec. 31, 1992 Credit Closing Dec. 31, 1991, Dec. 31, 1993 Dec. 31, 1993 per DCA. 3.A. Cumulative Credit Disbursements (US$ Millions) FY FY FY FY FY FY FY FY FY FY Appraisal Estimate Actual Actual as 0% 0% 48% 77% 78% 77% 88% 96% 113% %of Estimate SDR US$ Original Amount: 7,500,000 7,500,000' Amount Disbursed: 6,940,695 9,305,910 Amount Canceled: 559, ,000 Date of Final Disbursement: May 13, The revised Credit amount in US Dollars equivalent was substantially higher due to depreciation of the US Dollars against the SDR.

29 B. Disbursements by Category (in '000 SDR equivalents) Amount Actual Disbursed as % Allocated at Disbursements of Original Category Appraisal ' 12/31/93 Allocation I Equipment and Vehicles % 2 TA and Overseas Training % 3-A Subloans through NIDC 6, , % -B Equity Investrnents % TOTAL 7, , % 4. Project Costs and Financing A. Project Costs (US$ mnillion) Item Appraisal Estimate Actual Subloan Component Import/Export Facility Technical Assistance Total B. Proiect Financing (US$ million) Source Appraisal Estimate Actual US$ million % US$ million % IDA % % HMG % % Sponsors % % Total: % % As revised later during implementation.

30 Prolect Results A. Direct Results ARpraisal Actual at Closing 1. Number of subprojects financed Number of subloans financed Permanent Jobs Created 2,300 4, Incremental Productive Investment N.Rs. 160 Million N.Rs Billion 5. Cost/Job (N.Rs.) N.Rs. 200,000 N.Rs. 525, Output and Export Development' - Output of Leather and Leather products N.Rs million N.Rs million (in 1988/89) (in 1990/91) - Output of Footwear N.Rs million N.Rs million (in 1988/89) (in 1990/91) - Exports of hides & skins N.Rs million N.Rs million I/ Incremental increases cannot be attributed to the project. However, project initiatives did play an important role in enhancing the input availability technology had HR skills of the leather industry.

31 Status of Covenants Review of Compliance with Relevant Covenants As of June Relevant Covenants: Development Credit Agreement Status of Compliance DCA HMG/N to furnish report on progress on Facility canceled before establishment, by 3.04 import/export facility. agreement with IDA. DCA HMG/N covenants re operation of No longer applicable (see above) & import/export facility DCA HMGIN to maintain records and procedures LICC monitors leather sector TA. Of SDR 3.07(a) for monitoring of TA components and 42,350 earmarked for equity investments only investments at Bansbari and RHCDC. SDR 27,276 has been drawn down as Bansbari investment was never approved. DCA HMG/N to maintain separate accounts for, Complied with inter alia, the TA for leather subsector and light engineering and tourism studies, and have the accounts audited annually, with a certified copy of the audit furnished to IDA within 9 months of end of fiscal year.

32 PROJECT AGREEMENT Status of Covenants PA NIDC sub-loans to Bansbari and RHCDC subloan authorized in January No 2.05 RHCDC to be exclusively for expansion HMG/N guarantees were issued. No subloan to and modemization of facilities and to be Bansbari was granted as it was privatized. secured by HMG/N guarantee satisfactory to IDA PA NIDC shall: Audits in years prior to AND not carried out in 3.02 (i) have its accounts audited in accordance with sound auditing principles. This accordance with sound auditing covenant has been complied with since FY88. principles consistently applied; (ii) FY92/93 audit report has been received. furnish audited accounts to IDA within 5 months after end of each fiscal year. (amended to 12 months) PA NIDC to maintain debt/equity ratio Complied with - FY93 debt/equity ratio was 2:1 3.03/ below 5:1 (ratio to be consolidated for 3.07 subsidiaries). PA NIDC to maintain debt service coverage Complied with - FY93 DSCR was 3.7: ratio above 1.1 PA NIDC to adopt, maintain and apply Complied with policy and strategy statements satisfactory to IDA. Approved policies cover matters including: minimum financing size, financing limit as % of borrower's assets, maximum grace periods and terms, equity investments and limit on exposure any one borrower as % of NIDC's capital (See SAR) PA Aggregate amount of arrears of principal Complied with - FY93 arrears of N.Rs. 250 million 3.12 and interest of NIDC's debtors not to is much less than unimpaired capital and reserves of exceed NIDC's unimpaired capital and N.Rs. 525 million. surplus.

33 Use of IDA Resources A. Staff Inputs Stage of Project Cycle Staff Weeks Through Appraisal 37.6 Appraisal through Negotiations 40.9 Negotiations through Board Approval 5.9 Supervision 61.6 TOTAL B. Supervision Missions Month/Year No. of Specialization Days Performance Types of Problem Persons in Rating 2 Field October 85 1 FA 8 1 August 86 1 FA 11 1 March 87 2 FA 15 2 M June 87 1 FA? 2 M, T December 87 3 FA M, T February 88 1 FA 3 F, DI September 88 1 FA 3 F, DI November 88 1 FA 16 3 F, DI, M September 89 1 FA 3 M, T April 90 1 FA 3 M,T April 91 1 IE 2 M, April 92 1 IE 10 2 T June 93 2 FA, TA T Jan.27 - Feb. 22, 2 FA, TA Project Completion,l~~ I I I I mission. I FA = Financial Analyst, Credit Line; TA = TA programming; IE = Industrial Economist. 2 1 = Problem free or minor problems; 2 = Moderate problems; 3 = Major problems. F = Financial; M = Management; T = Technical, DI = Development Impact. 4 The mission was for two projects (CSI-II and IDP-II).

34 ANNEX I NEPAL INDUSTRIAL DEVELOPMENT PROJECT PROJECT COMPLETION REPORT An Appraisal of NIDC 1. Originally established in June 1959, the Nepal Industrial Development Corporation (NIDC) completed its thirty-fifth year of operation in June 1994, which was a year of growth and profitability following on a year of consolidation and improvement. Building on the experience gathered over the years, the Board of NIDC restructured the organization in December 1993 to make it more effective. The entire functions of the organization are now grouped under eight divisions (down from nineteen divisions of the past) of which only two divisions, the Tourism and Textile Division and the Agro and Manufacturing Industries Division, are entrusted with the complete responsibility for the appraisal, implementation and monitoring of active projects. The new organization structure is shown in Attachment 1. The structural reorganization has been complemented by a management and personnel reform program which has brought young and dynamic officers to responsible positions eager and capable of handling greater delegation of authority. Moreover, an expatriate Director of the rank of General Manager, deputed by DEG, continued to provide regular advice on, monitoring of and support to NIDC's activities. The immediate effect of these changes are apparent from the provisional (unaudited) financial statements of NIDC as of July 1994, which show significant increases in growth and profitability, and the longterm effects are likely to be further improvements in the financial performance of the organization. 2. Asset Management: As already indicated, FY94 was a year of growth in the operations of NIDC following on a year of consolidation. Total loans outstanding jumped almost 37% over the previous year's level to N.Rs. 1.5 billion, thus surpassing the average growth rate of around 15% p.a. over the last decade. This phenomenal loan growth was funded by additional foreign borrowings from IDA, DEG and KfW as well as by further contributions to its equity. Total assets, therefore, grew more than 25 % over the previous year, once again far exceeding the average growth rate of around 10% p.a. achieved during the last decade (Table 1). 3. Portfolio Quality: NIDC follows the Nepal Rastra Bank Directive in respect of classification and provisioning of its loan portfolio. According to the Directive, NIDC must provide 5 % of all non-performing loans (including rescheduled/restructured loans) that are current to less than 180 days past due. Past due loans over 180 days to 360 days are classified as Substandard/Doubtful for which a provision of 25% of the aggregate loan balance is required. If such loans are secured by collateral then up to 80% of the value of the collateral (at depreciated cost for land, buildings and machineries) may be deducted from the outstanding loan subject to a minimum of 10% of aggregate loan balance. Past due loans over 360 days are classified as Bad and a provision of 100% of the aggregate loan balance (less 80% of the value of securities, subject to a minimum of 25% of aggregate loan balance) is required. To comply with this Directive, NIDC took another big loan loss provision of N. Rs. 36 million in FY94 which increased accumulated provisions to over 16% of total loans outstanding as of July This additional provision, required to comply with NRB's fairly standard classification and provisioning policy, increased the level of accumulated provisions to N.Rs. 239 million in FY94, which covered more than 95% of the beginning arrears for FY94 (N.Rs. 250 million). Accumulated provisions have increased

35 substantially over the Project period from 4% in FY86 to over 16% of the total loans outstanding in FY Although the arrears and collections up to July 1994 are not available yet, the figures as of July 1993 (Table 4) show cash collections (of principal and interest) over 75% of current dues (which had gone up to a high of 90% in FY93) and 52% of total dues (down from over 60% in FY92), which is relatively high in the South Asia region. Current collection of principal (80% in FY93) has been higher than that of interest billed (68% in FY93) during the last three years. NIDC has maintained a current collection ratio of over 70% during the last five years. However, its total collection ratio has been lagging at around 50% because of the deadwood of bad loans carried in its books. If these bad loans, which have been adequately provided for, are written off from its books the total collection ratio would rise to alnost the level of its current collection ratio. Its current collection ratio has assisted NIDC to maintain a debt service coverage ratio of over 3:1 during the last three years which is well above the required minimum of 1.1: 1 agreed during negotiations (Table 4). 5. The higher collection of current principal (96%) and interest (81 %) achieved during FY92 caused total arrears in principal and interest to drop from around 16% of total loans outstanding in FY91 to less than 14% in FY92. However, the fall in current collections during FY93 raised the total arrears to over 17% of total loans outstanding in FY93, which is still within acceptable levels. Moreover, as agreed during negotiations the total arrears never exceeded the amount of unimpaired paid-in capital and reserves of NIDC, and in FY93 the ratio was only around 60%. The Aging of Arrears (Table 5) indicate that NIDC placed special emphasis on the collection of loans that have been defaulting for over two years the proportion of which has come down to 29 % of total arrears in FY93 from over 32% in FY Equity & Resources: NIDC continued to maintained its strong financial position by further infusion of equity funds by its major shareholders. During 1993 and 1994, NRB contributed additional funds of N.Rs. 10 million and 50 million respectively to increase its stake to N.Rs. 79 million (20% of total equity) as of July HMG contributed N.Rs. 10 million in 1993 and another N.Rs. 20 million in 1994 to increase its stake to N.Rs. 266 million (67%). Finally, DEG also contributed another N.Rs. 30 million in 1994 to increase its stake to N.Rs. 50 million (12%). This continuous expansion of the equity base increased the total paid-in capital to almost N.Rs. 400 million as of July 1994, which represented almost 33% of its net loans and advances. 7. FY93 marked the year in which NIDC completely wiped out the losses from its balance sheet, carried over from FY89 when for the first time it took in to its books bad debt provisions of N.Rs. 58 million, by the earnings retained from profits of that year. The total equity base, therefore, increased to N.Rs. 415 million which went up further to N.Rs. 525 million as of July This increased the capital ratio to around 32% of total assets in 1994, which is adequate by most standards. The increased capital was accompanied by an increase in local borrowings of N.Rs. 75 million in 1993 and a further N.Rs. 12 million in 1994 from NRB. Moreover, foreign borrowings also increased by N.Rs. 160 million. The borrowings from its shareholders have been at subsidized rates which helped in bringing down NIDC's average cost of funds to around 5% of average assets. Because of its relatively large equity base, the debt equity ratio remained well within the comfortable limits of 2:1 (much below the required 5:1 ratio) in 1994, a level around which NIDC has been operating over the last decade (Table 1).

36 Profitability: FY94 was another profitable year for NIDC, the fifth since FY89 when it took in the large net loss of N.Rs. 57 million to build up its provisions for bad debt expenses. The provisional (unaudited) FY94 figures show an operating profit of N.Rs. 51 million, which is more than a two-and-a half times jump over the previous year's figure of N.Rs million (Table 2). Gross interest income, which includes only the interest that is collected in cash or is due up to 90 days as per NRB's Directive, increased more than 50% in FY94 from that of FY93 to almost 12% of total assets, well above the average level of 10% maintained over the last decade (Table 3). Interest margin also jumped to 6.6% of total assets from the average level of around 5%. This healthy spread of more than 5% of total assets is the result of NIDC's low cost of funds which allows it to earn a satisfactory spread while still remaining competitive in the market. Together with a tight control over operating expenses (about 2.6% of total assets) the spread translated into a satisfactory net income of over 3% of total assets even after providing 1.5% for building up loan loss provisions. This represents a fully additional percentage point over the 2% return on assets achieved over the last three years. The corresponding return on equity rose to almost 9% from the level of around 6% during the last three years, which is satisfactory even without considering the large equity base of NIDC (Table 2). 9. Performance under IDP-II: During the period from May 1986 to December 1992, NIDC obtained refinancing for forty subloans (for thirty-nine subprojects, as one subproject was given two subloans) under the second IDA Credit. Of these, 31 subloans were fully disbursed while the other nine subloans were partially disbursed since those sub-projects were under implementation. Of the 31 subloans that were fully disbursed, nine (29%) had fully repaid their outstanding and six more (19%) were current in their repayments. Twelve subloans (39%) were in arrears and another four subloans (13%) were under litigation. Although around 52% of the subloans were in arrears the amounts involved were not too big in most cases and represented around 6% of the total disbursement. This was expected in the case of new subprojects which faced unanticipated problems from time to time and hence defaulted on some installments. However, outstanding principal affected by arrears is about N.Rs million which represents 64% of the total outstanding principal (Annex 5). The collection data for the forty subloans aggregated for the last three years, FY91, FY92, and FY93, and adjusted to reflect the fully paid-off status of the nine subloans (Tables 7 & 8), indicate an overall collection ratio of around 75% which matches with NIDC's current collection ratio for the entire loan portfolio, but is higher than Total Collection ratio of 52%. Overall, it appears that the performance of the subloans under the second IDA credit is better than the performance of NIDC's total portfolio, reflecting the outcome of greater supervision and monitoring of IDA-financed subloans. 10. The sustainability of the lending component is closely linked to the sustainability of NIDC itself. An analysis of the overall actual cash flow of NIDC for the four years ending in July 1993, show that the annual cash inflow from operations has been, on average, double the cash outflow from operations (Annex-6). Therefore, only half of NIDC's cash collection of principal, interest and other income goes towards meeting its debt-service obligations and paying its operating expenses and short-term liabilities, and the other half is recycled for disbursement of new loans. If this trend continues, NIDC would be able to recycle more than N.Rs. 230 million (which is equivalent to the IDA lending component) from its cash collections to finance new subloans during FY95. While NIDC's collections and cash flow performance is creditable, particularly in relation to many of the government owned DFIs elsewhere in South Asia, this apparent healthy performance is largely due to its long-term borrowing being at below market rates and its low dividend payout. The Subsidy Dependence Index (SDI) for NIDC shows that it would have to increase its lending rate

37 by around 37 percent (from 17% to 23% p.a.) to compensate for full elimination of subsidies received during FY94 (Annex 7). If NIDC could improve its collection rates to over 90% it could be sustainable on a non-subsidized basis, without having to raise its lending rates any further. 11. Whether or not the IDA financed lending component has contributed positively to NIDC's financial performance depends upon the actual collection performance of the IDA sub-loans. Using the collection ratio (defined as the percentage of principal and interest due from a subloan that is collected during a particular year) as an indicator of financial performance, a model has been developed to determine whether NIDC is making or losing money from the IDA Project, under different collection scenarios. The model assesses the impact of the IDA financed subloans on NIDC on both marginal and total cost basis. It takes into account the difference in the grace periods, the rates of interest, and the repayment schedules of the subloans under the Project and the IDA Credit funds, for a particular rate of collection of the principal and interest due from the subloans. Thus, for term-loans, IDA funds under the Project were provided by HMG to NIDC at the rate of 7 % p.a. for a maximum period of 18 years with 5 years grace. NIDC relent these funds to its sub-borrowers for a maximum period of 15 years with 3 years grace. The model also takes into account returns on reinvestment of project funds. The marginal break-even interest rate is the nominal subloan lending rate, which equals the marginal cost of borrowing. At the current collection rate of 75 %, the marginal breakeven rate is around 10-12% ( with and without reinvestment of excess funds) which is substantially lower than the average lending rate of about 17% on IDA subloans. Thus on a marginal basis NIDC is generating positive cash flow from the project. On a total cost basis ( including operating costs which equal 3 % of subloan outstanding based on past trend) the breakeven rate at the current collection rate of 75 % comes to around 17% which is same as the average lending rate ; on this basis NIDC is barely breaking even. However if account is taken of the earnings on relending of surplus funds ( float as a result of subloans having shorter maturity than borrowed funds) the breakeven rate is around 14% which would suggest positive cash flow on account of the project subloans. The above analysis suggests that the Project's objective of making NIDC a sustainable development finance institution for term lending to the private industrial sector is being achieved, albeit modestly. 12. Overall Status: The overall performance of NIDC is generally satisfactory, better than most government DFIs in South Asia, and the trend is improving. With better performance on the collections front, NIDC could become a fully sustainable development finance institution and contribute, more significantly and effectively towards the industrialization of Nepal. October 19, 1994.

38 NEPAL INDUSTRIAL DEVELOPMENT CORPORATION ORGANIZATION CHART 1".1 1.,.~*. - **S S... SOURCE :NJDC u twy l@ a E_,.<.... R ln.... h SOURCE: NIDC

39 Table 1 NEPAL INDUSTRIAL DEVELOPMENT CORPORATION BALANCE SHEET I ENDING JULY 151 (N.Rs Millpn ) PROV. 85/88 86/87 87/88 88/89 89,90 90/91 91/ ASSETS Current Assets Cash.Bank and Bonds Other Total current asasts A Loans and advances Loan not Vel due Slt ,191.7 Loan due Total loan ourslanding ,467.5 Less proo,sion Nt lon aend danc.s a ,228.7 Eunty & prel. share.nv less provision Netin-netnnts C Net fled assts TOTAL ASSETS (A+B+C f , , t307.0 t LIABILITIES & EQUITY Current lability & prov. A Borrowings Local I NRt & otlhers) Foreign Oebenture & bonds Fised deposlt Others Total gorro.irgs a Equity Authorized capital , Issued capital Paid op capitad H.M Nepal Fastra 8ank DEG (Grman dev. bank) Public S other Total paid up capitsl General reserve Captial and other reserve Reamnet proll llossl ) (46.9) (28.3) 111.7) Tota Equity C TOTAL LIABILITY (A+8+C) , f37.5 Source: NIDC RATrOS Current ratio Dcebt equity ratio Acc. Prov/Total Port 4.2% 4.1% 4.0% 10.0% 12.0% /8.4% 18.7% 19.0% 17.4% Net Port.] Total Assets 82.6% 95.6% 88.0% 77.4% 83.1% 78.8% 79.1% 75.7% 82.7% Growth ot rotal Assets 14.1% 13.6% 14.1% 2.0% 5.9% 12.4% 8.6% 25.3% Capital/ Assets 32.3% 31.7% 29.0% 30.5% 31.0% 33.0% 31.3% 31.7% 32.1% Eqortv/Total Portlolio 39.1% 37.1% 33.0% 39.4% 37.2% 41.9% 39.6% 41.9% 38.8%

40 Table 2 NEPAL INDUSTRIAL DEVELOPMENT CORPORATION PROFIT AND LOSS ACCOUNT IN.ft Manl 851as 86/67 87/8 8eye9 asiso 90sl1 911S k9 INCOiME Interest on an Oividand t Prolt on sal ofl InvJ Asoa Othser inconm e.0 TOTAL NCOMI 67.1 e EXPENDITURE inerest on botrowlo Fes and comnuaion Ovmdaepenses C Otherexpns.s lad debts Deprecaon Provixion for loan Provision lor lntaroxa Provislon fot hnvasint t I4" 0.0 TOTALEXWDOiTUr8x OPERATINIG POFtTILOS8I ) Provision wrtn back. Loa Provision wriran back. lnt Provision wrkltbn back. bnv Not profit boreauag md Soms Provision foi bonus Provisionlor incorne ta Naprottatarma ) ( Stalf welare fund General resxe Oliarreser * Proposad dividand Profttransferred totms I Loss Transfrerrd to N/A O Soures: NI1C latio Operating ProftItm & DO. Inc 17.5% 5.4% 2.2%.77.7% 8.7% 14.3% 25.9% 26.0% 2*.7% N.tprofit aertt axt&div lncom 13.5% 2.4% 40.9% *76.9$% $.1% 18.7% 17.4% 22.7% 2i.11% Ne.roclitattartax/ Euitv RPEo 3.7% 0.5% -0.2%.19.0% 3.6% 6.1% 6.4% 6.2% 9.2% Neoprofitafter uxt Toti(Aaat IRtOAl 1.2% 0.2%.0.1%.5.8% 1.1% 2.0% 2.0% 2.0% 3.0% Int. hicome/ttei Loan OwtIt9ndht 9.8% 9.2% 7.9% 2.7% 14.6% 12.3% 13.2% 10.4% 11.6% Int. Expi Total Loan Outtawndtng 7.1% 6.5% 6.3% 7.0% 6.4% 5.9% 5.5% 6.2% 4.8% Prowv EXD./ 70iLcen 0.9% 0.4% 0.% 7.9% 4.0% 1.2% 1.2% 0.5% 1.5%

41 Table 3 NEPAL INDUSTRIAL DEVELOPMENT CORPORATION INTERMEDIATION MARGIN (N. Rs Million) PROV, 85/86 86/87 87/88 88/89 89/90 90/91 91/92 92/93 93/94 Interest received % 6.6% 7.7% 12.4% 10.8% 12.0% 8.8% 11.5% Interest paid % 5.3% 5.6% 5.3% 5.1% 5.0% 5.3% 4.9% Interest Margin % 1.3% 2.1% 7.1% 5.7% 7.0% 3.5% 6.6% Other income % 1.0% 0.9% 0.7% 0.7% 0.9% 2.5% 0.7% Gross margin % 2.4% 3.0% 7.8% 6.4% 8.0% 6.0% 7.3% Operating costs % 2.1% 2.8% 2.8% 2.7% 3.8% 3.2% 2.6% Provision expenses(net) % 0.4% 6.3% 3.3% 1.1% -1.7% 0.4% 1.5% Profit before taxes % -0.1 % -6.1% 1.8% 2.6% 5.9% 2.4% 3.2% Total Assets , , , , ,637.5 (End of the year Average assets , , , ,472.2 S. MAc

42 EPAL.OugTAtL Tam. 4 O3VILOPUUNT CORPORATIN0 s3nt4 ~ ~ ~ ~ ~.6. PwIe.ins 71mtT mitt 7etie sno oss#s 2S 32/34 6~~~4135 BEING wig? gems sots cwumu dom P.4wigai s Moro e0.e Se.3 TOW * aug mfe VW tipd " WS.3 63.? h>"t TW *72A L n Pt&-Avg S h>"t Tow S * * *-' p MtSeMt S TOW PrvuWd * Men G0.a To" calmum. re I1 eb alm. I Cw.m6 *_ I Pt nei 27.7% 45.5% 15.6% 43.7% 11.8% 5s.4% 71.9% 02.3% 96.3% 80.4% h_ureint # 5.1% 71.6% 2S.2% 60.e% 49.7% 77.5% 74.5% 50.0% 61.0% e7.8% TOW 44.7% 57.7% 24.7S 81.2% 50.3% 73.9% 73.3% 73.7% S0.1% 75.3% Cu6inm res" I (mt" mssm Toald0WA prkkvm. 12.3% 32.0% 14.3% 31.5% 23.7% 25.5% 35.8% 52.9% 57.5% 48.3% hmufte 26S% 25.8% 20.3% 41.0% 36.5% 44.4% 45.4% 45.1% 65.4% 50.6% Told 2z.2% 30A% 17.J% 3.63% 32.4% 34.% 41.J% 50.5% 0OA% 52.1% Tra lee..mutm S.S S TOW_tev * SnimMr*mT6!SqmAy 54.2% U3.3% 75.3% 71.3% 54.0% 58.2% 53.3s 50.4% INS" _w6!ti.lamaon 24.3% 22.1% 27.5% 2S.2% 24.1% 22.5% 1SJS 23.4% 7b: WOC Ms. C 1:1 I.4:1 I.&:1.08:1 1.5:1 1.9S1 2.B,1 3.04:7 4.13:1 3.73:1

43 n3: -: R e. i _ '- R Sj.i fi at! j I I :. I - I z z S S S S l ~~~~~~~~~~~~~~~~~~~ts%! \f j~~~~~~~~~~~~~~~~~ _, ' ^ i ; ^ d s - d :, r! 1

44 Table 6 Nepal Industilal Development Corporation Breakeven Projections SUBLOAN IDA loan Principai Pfincipal operating E.pensas 3% Operatirn E.penses lerresij ritae 16.93% ktlitest fate 7.00% Grace period 3 Grace period 5 Repayment Peniod 1S Repayment 17 CoRection Ratio 75% Collection Ra60 _ 100% Non Discounted Cash flow Subloan IDA loan Not Cash Flow Yrar Pirncipal Principal Balance Inteest Operaling Net Principal Balance hinlerst Total DO. Crrlctod Ort.tanding ColleclId E.pofSles Collection Paid Outltelrding Paid Paid 0 223, O , ,500 28,387 6, ,500 15,645 15,645 6, ,357_ , , ,006 18, ,286 34, ' _ I8, , i9319 5, , , , ,250 14, , , ,656 21,290 5, , , , ,000 11, , ,625 13, , ,191 27,520 18, ,430 29, , ,165 18, , ,969 97, ,625 93, , , ,933 23, ,500 6, , , , ,100 18,625 55, * , ,744 18,625 37,250 3,911 22,536-1, , , NCF- 0 Colection relio interest fate 40% 34.94% 45% 30.71% 50% 27.31% 55% 24.51% 60% 22.17% 55% 20.17% 70% 18.44% 75% 16.93% 80% 15.60% 85% 14.41% 90% 13.34% 95% 12.37% 100% 11.47% * Figrzes we in thouwnds of N. ls. * *Operw Expense re calkuad as 3% of sbteen outristrdang

45 Figure 1 Nepal hiduila D.vebpmmnt Comporatlan Breakavmn Ps*ctkou Cabtion radio 9 raakav n kead im wdih b*eee rate wih irtde ae OgaVtino EsnYxs lokweat~f mid OE 40% 27.44% 34.S4% 30-03% 45% 24.04% 30.71% 26.28% 60% 21.31% 27.31% 23.27% 55% 16.05% 24.51% 20.60% 60% 17.17% 22.1S% 15.73% 65% 15.55% 20.17% % 70% 14.16% 10.44% 15.45% 75% 12.93% 16.59% 14.13% 60% 11.65% 15.60% 12.97% 50% 10.58% 14.41% 11.93% 90% 10.01% 13.34% 11.01% 95% 9.21% 12.37% 10.17% 100% 6.47% 11.47% S.41% Interest Rate Sensitivity 35% J 30% 4 w Gokv nlcewihowk& 25% r 20% 15% 5% 0% I 40% 45% 60% 55% 60% 65% 70% 75% 60% 35% 90% 95% 100% Cdm Rde

46 Table 7 Nepal industrial Development Corporation Collection Ratios I Principal IDA Subloan Amount Due Amowit collected Cotection Ratio NAME OF SUB PROJECT approval N.mber PRINCIPAL PRINCIPAL PRINCIPAL. date TOTAL TOTAL TOTAL Tewelendjt _ % 94.5% % _94.3% Nepalju MyB 6A-0Ot _ % % 303 9% % Arrnapuwa Ill teolrla Mar578 1A-20Z_ r6 1000o % 100.0% 198.3% 100.0% Annaputria texrtile Jun-92 A , _ 6,960 N A NA 77.7% 77.7% Arnica Pfocessing Nov'89 A0400 1, NAN.% 100 Jo 5 eti apinnno go_ Ja9 A i. 14~ -NA -NA 100.m0 % % Preoutin IndustriesDec-92 Teolde A, N A AN Saba Te.tiles Feb % 0.0% % 42.0% Feod an mc d-pout , _ % % Vcrayak Oiscuit ecs A NA A- NA N!A Laxnn VpI qari OGoee - Apr-817 ADe NA NA 27.5% 27.51% Indreni Soyabean ~~~~~Feb-89 A-010 _0 _ a NA NA NA NA Narayani Dairy Dec-8B A NA NA NA NA Nalural Poducls Dec ~ i % NA 100.0% 47.8% Gandebi Noodles IPoti ltd. Sep , % 91.2% 100.0% 91.1% Himalayan Food Copn(lPt)litd Sep NA NA NA NA.Mani jwae and War. IplidSep a NA NA NA NA construction _ _ % 14.0% 76.7% 34.4% T er i Came Sep-86 A-004 4, % 0.0%~ 115.7% 2.0% Wayan tta Sep-87 A NA 0.0% 132.8% 100.0% Prelab Concrele Ind. Dec-8 8 A , i ,237 NA 100.0% 55.1% 73.2% Sidhic We Aug ~ NA NA 0.0% 0.0% SOS Sricks and tile in ulyse _ NA NA NA NA Hotel and resort I _ % 100.0% 100.0% 100.0% HOte Java iternatronal - e-6a-003 3, & ~ 49 3,649 3, % 100.0% 10.% 100.0%.~ Hotel Bue bird u _ 01_6_o a NA NA NA NA Ju 90 B NA NA 100.0% 100.0% Hotel Nirvana (PvtI Ltd. Sep NA NA NA ebani Morantar Resor (PotI Ltd Sgp NA_NA_NA_N Everest Panorama Resort IPlli ltd. - ep NA NA NA NA Hotel Space morrtairrlotllt Sep-92 R NAANAA Paper and prietlna~~~~~~~~~,,,, , % 0.1% 282.0% 79.1% Malla Prets IPot) ltd Nov NA NA 0.0% 0.0% United parcprtesno- 90 B ~ NA NA 100.0% 100.0% Everest Paper MiflslPvtl lid Sep-92-08, _21,560 3, % 0.1% 308.5% 80.0% - 3 ~~~ Pharreaceurlaf ad medic.l products and serniesc , ~ % 4.% Nepal Med (PA)t ltd. Sep-92 A NAANAA NepWl Pharmraceuticals May-86 0~ , % 411.0% 193.4% 100.0% Simca Labo,ra-ors Mar L6O N ha _ NA 460% 46.0% _rrrl4l e 1 gen -- Jun NA 1000% Kathmandu Dontal bottle Jan ,0 o ~ (O ~ 200 N A 100.0% 1D0.0% 100.0% Otlrer mteeatui,, _ % 71.9% 66.3% 70.8% Premier Electrical Jan-86 A ~ NA 100.0% 32.6% 44.2% Triatrabtipoap ~~~~~~Ar- 92A NA NA NA NA Everest Rubber lnd. ApI-92 A NA -NA NA Ilesrala a Auto MAay _ i A 0.0% 110.6% 100.0% RHCDC -NIDC loan Aug-89 A03L 500 Soto0 500, 100.0% NA NA 100.0% TOTAL 40 ~ , 4ll.% 46.8%~ 128.1% 79.0%

47 Table 8 Nepal Indusleial Development Corporation ~~~~~~~~~~~~~~Collection Ratios I Interest IDA SuIL.rar Amount due Amount Collected actioon Ratio Total NAMAE OF SUB Pn1OJECT approval Number INTEREST INTEREST INTEREST C ollection F ~~~~~date TOTAL 91,j 93 TOTAL TOTAL Ratia Tea end juils, , % 0.0% 99.1% % 89.41% Nepal jin May-86 A-001 1, labi , % NA 248.9% 100.0% % Aenapuena le tlk. MIlM~7A ~ % NA %; 100% %~ Amvapurna 16.1de Jun-92 A ~ 0 0 _ NA NA 70.4% 70.4% 7.8 A Prc oc.o-.n 8 Nov.89 A NA N 0.% Joyatispimi Jan-90 A L jj1, _NA. NA.j0.09%l00.0%!100.00% Pragf!i,Tan.te ndustrres Dec-92 A NA NA NA NA NA Saba Teoldes Feb A % 0 0% 100.0% 43.3% 42.76% ~~~~~~~~~~~~~~~~~~~~~~~~~0 TFo-d..;dmmnde- -ot _ ~ 11,582: 5-2.0% 2-0.7% 4-2.6% 4-0.4% - 38% V.ayoak %Lcuit Dec6-8 AOO0S % 0.0% 00% 0.0% 0.00% LaorniVanasppatrGhee Api-87 A , %i 44.5% 100.0%; 73.1%i 72.77% Indleni Soa nfeb.89 A 010 _ 0 A_A_NA._NA_N hafavari DwiayDec-BS A-OIl % NA 5i.9% 12.4% 1240% Natutal Products Dc _ % NA 96.2% 98.3% 57.09% _Gand.ku Noodles!Poll ltd SO.j P % NA 1000% 100.0% 85.93% Ibmalavan Food Conruany!Poil I Sep NA NA NA NA ia Mani Wa. and Wan (Pogilfd Sep NA NA NA NA NA, , _5 _ 1.834_ 4,141~. 58.4%i 24 _% 5.6%L 39.9% 36.20% itinne, - Content - ~ Se- 8-6 A ,781-1,4, % 292% 549% 23.1% 7.23% HI.Vratoor Iitt Sep-87 A _ , NA 0.0% 22.3% 100.0% % Ptetob Camntet Ind. Dec-86 A O , , % NA 100.0% 75.2% 7404% Stdhico tde A.g % 49.3% 0.0% 10.7% 6.60% SOB Bricks and ide iildosrty Sep , NA NA 0.0% 0.0% 0.00% Hotel attd tasoe % NdA 106.9% 100.0% % Hotel Jaya iue-nattonal Se NA 108.2% 100.0% % Hlotel Blueobed Aug-S0A ~ 0 0 NA NA NA NA NA H-1roy. H.ight Rt.ort _ Jun NA NA 100.0% 100.0% % Hotel Nirnana (Put) Ltd. Se NA NA NA NA NA KalI.ani Mountain Report (Nirl Ltd S 5o NA NA NA NA NA_ Everest Panoframa Resort IPull It Sep NA NA NA N Hotel Space rno.ntain(pnt led - Sep NA_ NA NA NA P.o., and erintitn _ a % NA 100.0% 100.0% 83.95% MaSa Ptess lpv`l ltd Nv9B NA NA 100.0% 100.0% 58.23%. United gtaphoc printr Nov-, NA NA 100.0% 100.0% % Everest Paper MdrstPnt l ttl Sep.92 9oI-019 4,19 0 2,013 6,208 ~ % NA, 100.0% 100.0% 84.47% Phsarntacasrlical and udica pvod.cts a.d services , % 728% 168.0% 100.0% 97.78% Nepal Med lpvtt lid. Sep_92_A_ 020 A_NA_N_NA_W N.p.IPh... eatp May-s i2 0 ~ _ % 100.0% NA 79.4% 96.86% Sinia Laboitaltuis Ma 89_8_004 NA NA_NA_NA_ 4 9_1 l-lintalooyeen ~~~~~Jun II % NA 99.2% 96.5% 97.91% Kaih.rand. Dentl alrome - Jan S N4A 0.0% NA, 1000% % Oiliertnan.lac,tutma , % 100.0% 63.0% 83.4% 76.14% Preeer.6 Electtol- Jun-88 A-002-1, , % 100.0% NA 1000% 88.69% isoki apap-9 A0 ~~ NA NA NA NA NA Evetsat fawbberin go..a 5 t9 A NA NA Hanalaya Auto 3a-9a ;O0.0% NA 100.0% 100.0% % RNCOC - NiOC loon 259_259 2_9 NA_NA % TOTAL 40, _8265_ j26s 886s 31,374 69, % 28.2%A 75.8% 88.7% %