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p. 18 of 53 BACK | NEXT Classification of Developing Member Countries in Bank Operations Bank Operations in Pacific Island Developing Member Countries Lending and Relending Policies (Ordinary Capital Resources) Lending and Relending Policies (Asian Development Fund) Sector Lending Program Lending Assistance to Private Enterprises Financial Intermediation Loans/Credit Lines Financing of Interest and Other Charges During Construction Financing of Indirect Foreign Exchange Cost of Projects Lending Foreign Exchange for Local Expenditures on Projects Retroactive Financing Supplementary Financing of Cost Overruns of Bank-Financed Projects Use of Surplus Loan Funds Foreign Exchange Risk in Bank Operations Sector Development Programs Technical Assistance Guarantee and Security Arrangment for Bank Loans Environmental Considerations in Bank Operations Gender and Development in Bank Operations Project Performance Management System The Bank's Cooperation with NGOs Emergency Rehabilitation Assistance Loan for Small DMCs Rehabilitation Assistance After Disasters Cooperation Arrangements with International Organizations and Bilateral Sources Coordination with Aid Agencies Regional Cooperation Cofinancing Japan Special Fund Guarantee Operations Bank's Operational Missions Communication with Members of the Board of Directors Processing of Loan Proposals Project Financial Management Systems, Financial Analysis and Financial Performance Indicators Economic Analysis of Projects Procurement of Goods and Works Use of Consulting Services Formulation and Implementation of Loan Convenants Effectiveness of the Loan Agreement Loan Disbursement and Loan Closing Project Accounting, Financial Reporting, and Auditing Post Evaluation Country Planning and Programming Incorporation of Social Dimensions in Bank Operations Poverty Reduction ADB Accountability Mechanism Involuntary Resettlement Internal Audit Confidentiality and Disclosure of Information Indigenous Peoples Governance Anticorruption Enhancing the Asian Development Bank's Role in Combating Money Laundering and the Financing of Terrorism

Operations Manual

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OM Section 19: Issued on 12 December 1995
Guarantee and Security Arrangment for Bank Loans¹

Bank Policies (BP)

Introduction

1. Article 11 of the Bank's Articles of Agreement (the Charter) states that the Bank may provide or facilitate financing to any member; agency, instrumentality, or political subdivision of a member; entity or enterprise operating in the territory of a member; or international or regional agency concerned with the economic development of the region. Article 15.2 of the Charter provides that, if the recipient of loans or guarantees of loans is not itself a member, the Bank may, when it deems advisable, require that the member in whose territory the project concerned is to be carried out, or a public agency or any instrumentality of that member acceptable to the Bank, guarantee the repayment of the principal and the payment of interest and other charges on the loan in accordance with the terms thereof.

The Need for Guarantees

2. In making a loan to a developing member country (DMC), the Bank pays particular regard to the financial viability of the project and the creditworthiness of the proposed borrower. However, the Bank, like any financial institution, must consider whether to take additional measures to protect itself in the event of default by the borrower.

3. When the Bank makes a loan to a DMC, the full faith and credit of the member stands behind the obligations of repayment. No special safeguards to protect the Bank in the event of default are considered necessary.

4. When the Bank makes a loan to an agency, instrumentality, or political subdivision of a member, it must examine in detail the borrower's standing in terms of the full faith and credit of the DMC government. To the extent that such standing falls short of the full faith and credit of the DMC government, the fullest protection against default may be possible only through securing for the loan a guarantee from the DMC government.

5. When the borrower is any other entity or enterprise in the territory of a DMC, the Bank will need to consider whether to obtain a guarantee from a third party, e.g., the DMC government, or obtain from the borrower some appropriate form of security in order to protect itself in the event of default by the borrower. In general, a guarantee by the relevant member government is the most effective means of protecting the Bank's interests. Therefore, the Bank will normally protect itself against default by obtaining a government guarantee from the DMC concerned. If the DMC lacks the necessary guarantee power, consideration is given to making the loan to the DMC for onlending to the nonmember, or through a public agency that can, in effect, pledge the full faith and credit of the DMC. Alternatively, the loan might be made through a public agency the loans of which the DMC is empowered to guarantee.

6. In making loans from Special Funds resources, it is the policy of the Bank to make loans only to DMCs. The question of guarantees or other security thus does not arise.

7. When the borrower is a regional or international agency, appropriate safeguards against default depend on the character and composition of the agency. If it is an agency in which member governments participate, the Bank will have to determine the extent to which they have subscribed to the financial liabilities of the agency to determine the appropriate safeguards. If such an agency is formed on a basis other than the participation of member governments, its status as a borrower may legally be the same or virtually the same as a private entity borrowing from the Bank, and may involve nearly the same factors in the consideration of safeguards against default.

The Nature of Government Guarantee

8. The Bank's standard form of government guarantee agreement gives the Bank the legal right of prompt collection from the guarantor as soon as default occurs. This empowers the Bank to demand repayment of the loan without the necessity of prior demand on the borrower. The guarantee agreement provides that the obligations of the guarantor will not be impaired by any extension of time or other concession granted to the borrower, or by failure of the Bank to press available remedies. It also reinforces the provision of the Bank's loan regulations that the validity and effect of a guarantee agreement is not affected by municipal or any other applicable law.

Operational Procedures (OP)

This OM Section does not contain Operational Procedures.

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