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Review of Asian Development Bank's Financial Loan Products
VI. Implementation and Resource Requirements120. Ensuring effective implementation of the new product proposal will be an institutional priority for ADB. The main implementation goals are
A. Outreach Program with Borrowers121. ADB borrowers already possess a high level of understanding of the proposed LBL products, given their familiarity with similar loan products offered by IBRD. All of ADB’s major active borrowers and one small active borrower have participated in IBRD’s product information workshops as well as in global sovereign debt management workshops. Some ADB borrowers have received several loans under IBRD’s new menu of loan products. 122. Nevertheless, ADB will have an outreach program to: (i) promote the borrowers’ awareness and knowledge about the products, and (ii) enhance the borrowers’ capacity to make informed decisions. A product brochure and information materials will be disseminated in hard copy and on ADB’s website. This will be followed by orientation sessions with ADB’s borrowers in their countries on product information and when necessary additional workshops for more advanced topics such as sovereign debt management issues. 123. Ultimately, the training sessions will be replaced by a distance learning and information system using CD-ROMs that will include sophisticated working tools that borrowers could use to support their analysis of the financial alternatives available under the LBL product. Work on this project has been started. B. Enhancing Product Delivery Capacity within ADB124. The key objectives of ADB’s program for enhancing product delivery capacity are to (i) promote awareness and knowledge of the new loan products, (ii) promote awareness of borrowers’ debt management concerns, and (iii) ensure that staff will not act as advisers to borrowers (operational staff will not be trained as risk management experts). 125. To promote awareness and knowledge of the proposed LBL product, ADB will conduct general training sessions among relevant operational staff. The first round, consisting of four training sessions, has already been completed. More training sessions will be delivered focusing on specialized staff consisting of mission leaders, financial analysts, and operations lawyers. Ultimately, classroom-based training sessions will be replaced by the distance learning and information system that is currently being developed. 126. A resource team has been created in the Treasurer’s Department. The team will be responsible for preparing product information materials, developing and delivering staff training, and providing operational support. The team’s role in providing support during loan negotiations and appraisal missions is a temporary arrangement until operations staff (particularly the specialized staff) are qualified to respond to borrowers’ questions. C. New Loan Documentation and Systems Modification
127. Two documents usually define the financial terms and conditions of a public sector loan: (i) the individual loan agreement, and (ii) loan regulations. Following the innovation initiated by IBRD, a third document, the conversion guidelines, will be used. This document will set out the procedures for requesting, accepting, and effecting conversion transactions. It will also contain information on restrictions or limits on transactions and transaction fees and charges on conversions. As many of the guidelines are market-based and operational in nature, they could be changed over the life of a loan. Thus, the advantage of having a third and unilateral document is to provide flexibility in executing transactions to fund conversion requests. 128. The conversion guidelines will be completed before 1 July 2001. The Board will be considering the new loan regulations along with this paper.
129. The new LBL product will require a radical change in ADB’s loan accounting and loan billing systems. The new system must be able to handle conversion transactions and associated hedges and to monitor the status of a loan after several conversions have taken place over time. Loan accounting should also provide pro-rata allocation of total loan repayments to each portion of the loan being converted. Further, the necessary introduction of the rebate and surcharge system will in effect involve recalculation of interest payments for a specific interest period. Moreover, the new accounting system should reflect all possible future improvements in the LBL product menu, such as the customized repayment structure and free-standing hedging products. 130. In short, because the new LBL product will require a total revamp of the existing system, the current system should not be modified to meet the LBL requirements. Instead, the existing system will be replaced over time by a commercial lending software package or a customdeveloped new loan accounting system. 131. Based on MDBs’ experience, any system development, whether purchased from a vendor or developed in-house, will necessarily take a long time to implement because many MDB operations are unique. Any off-the-shelf software package will have to be significantly modified to suit MDB requirements. Thus, the development of a new system for the LBL product will have to be phased, and it would not be prudent to unduly hasten the process, which will probably take 2-3 years. 132. In light of the complexity of the changes required in the loan accounting and billing systems, it is proposed to adopt a two-track approach, and the tracks will converge at some point in the future. 133. The first track will consist of rapidly installing a simple and flexible system that will not necessarily be limited to the use of Excel spreadsheets. The system should be easily modifiable by staff because the change process warrants an iterative approach to accommodate development of system requirements over time. Given the magnitude of the requirements of loan accounting and loan administration for the LBL product, even under track one the major commitment will need to be made in terms of resources allocated. The second track will involve developing new loan accounting and loan administration systems for the LBL product. The twotrack approach will enable ADB staff to develop clearly and precisely a statement of the overall specifications of the new loan accounting system. This will improve the specification, design, and implementation of a new loan accounting system under the second track. 134. For the second track, the two major options are (i) custom development of the new loan accounting and loan administration systems, or (ii) installation of a commercial lending software package. Among the MDBs surveyed for this purpose, IBRD has opted for a custom development of its LBL accounting system. IBRD has not yet completed its new system development. If ADB were to adopt this option, it would expand the loan accounting functions covered by INTEGRA. The LBL product handling features are not included under present scope. Inclusion of these new features will require a contract variation. 135. Under the second option, ADB must be ready to accept much of the process rules imposed by a commercially available software package to minimize customization. Other MDBs such as the European Bank for Reconstruction and Development (EBRD) are implementing commercial lending packages for their LBL products. If ADB adopts this option, the commercial lending software package will be integrated with the software ADB is currently using, providing interfaces with the current systems and INTEGRA. This approach should cover LBLs and all existing loan products, excluding those that will be replaced by LBLs. 136. A comparative analysis of the options will be carried out to evaluate them from a technical and financial standpoint. This analysis will provide the basis for deciding the information technology (IT) solution that will be implemented. 137. The adoption of a two-track approach raises the question of whether the interim system under the first track could handle the expected volume of transactions. On the basis of IBRD’s experience, demand for interest rate transformations will be stronger than that for currency transformations. As the interest rate flexibility relates to disbursed amounts (not undisbursed balances) and the build-up of disbursements on most new loans will take time, the number of requests to change the interest rate basis on new loans may be limited over the next 2-3 years. Demand will likely increase if interest rates rise or become highly volatile. ADB, however, should expect some borrowers to opt for specified rate fixing (SRF) whereby borrowers at the outset will provide ADB a schedule of rate fixing for their loans. About 20 percent of IBRD’s new borrowers opted for automatic rate fixing.
138. The in-house developed risk management software for MBL is an Excel-based application designed to accommodate the volumes and matched-funding policies governing the MBL product. The LBL product will adopt a similar matched-funded approach as the MBL. In addition, initial volumes under the LBL product are expected to be modest. Therefore, the existing risk management software for MBL can initially be used for LBL. This notwithstanding, Treasurer’s Department is exploring the extension of applications under the Treasury Risk Management System (TRMS) to determine whether robust asset and liability management (ALM) can be handled on a more permanent basis through the new system. This will include determining the capacity of the TRMS to accommodate higher volumes of LBL transactions, simulation analysis under a variety of exchange rate and interest rate scenarios, traditional gap analysis, duration analysis, and other such standard features available in most ALM software packages. D. Due Diligence with Borrowers139. Management does not propose to establish eligibility criteria to ensure that the selected terms or requests for conversion by the borrowers are appropriate. Instead, a coordinated effort will be undertaken by the Operations, Controller’s, and Treasurer’s Departments to ensure that ADB performs due diligence on any conversion proposal. 140. Borrowers will be responsible for the choices they make using ADB’s loan and conversion options. However, ADB has a responsibility to ensure the borrowers have an opportunity to understand the terms of the alternatives. ADB will support borrowers by providing extensive outreach and information programs (paras. 121-123). Staff from the Treasurer’s Department will also be available to assist operational staff in discussing financial terms with borrowers. Such assistance will help ensure that borrowers understand the financial terms and/or risks of the products being offered and are in position to make well-informed choices. Nevertheless, the relationship between ADB and its borrowers must be well defined and explained, so that borrowers understand that they are making their own independent judgements on how best to use the new loan instruments. 141. While ADB may not be able to avoid all misunderstandings over its role, at least three levels of protection will be designed to minimize this risk:
E. Budgetary Implication142. Three key implementation activities will have budgetary implications: training, new accounting and risk management systems, and additional staff. 143. Borrower and Staff Training. The major component of this activity is the preparation of multimedia distance learning materials including CD-ROMs. The first stage in this development will focus on promoting awareness of and familiarity with the features of the LBL product. This will be covered by the 2001 budget for staff consultancy. The second stage will focus on more advanced topics, such as sovereign debt management issues, and more sophisticated working tools to support practical analysis of the financial alternatives available under the LBL product. Budgetary implications of the second stage cannot yet be ascertained. 144. The first round of ADB’s outreach program with borrowers will entail travel expenses for conducting product information sessions and training of ADB’s active borrowers. The second round of training will be needed when ADB introduces additional products in the future or when borrowers request for workshops in their countries on sovereign debt management issues. All travel expenses will be absorbed by regular budgetary allocation for staff travel. 145. New Accounting and Risk Management Systems. The new LBL product will require a radical change in the loan accounting system and loan administration (paras. 129 to 131). Because of the complexity of the required changes, a two-track solution is recommended. For the first track, staff are now preparing the system design using the Excel spreadsheet. For the second track, staff are rigorously assessing whether to develop a custom-built system within INTEGRA, or acquire commercially available software. Commercially available software packages used by major banks and other MDBs are being evaluated against ADB’s LBL product requirements. Based on a preliminary survey of costs of various software packages and the development costs needed to modify them to suit ADB’s requirements, ADB might incur a capital cost of about $10 million to $20 million to implement a new loan accounting system. 146. Available risk management software for MBLs can initially be used for LBLs. This notwithstanding, ADB is exploring the possibility of extending the applications of the new TRMS to ALM for the LBL product on a permanent basis. However, this will also involve expenditure for implementation services, additional licenses, hardware, and the building of interfaces, which is estimated to cost less than $1.0 million. 147. Additional Staff. The interim loan accounting and billing arrangements will be laborintensive. ADB will, however, employ fixed-term support staff until the medium-term solution is in place. 148. The volume and number of disbursements for the LBL product will be the same as those of the existing product. However, the use of the conversion options will increase the number of transactions to be handled by the staff. Additional professional staff will be required in the Office of the General Counsel, Controller’s and Treasurer’s Department to process and administer loan conversion requests, execute swap transactions, and monitor the ALM. 149. Conversion requests will arise from both the new loan products and the PSCLs in US dollars. As disbursements will build up slowly for most new loans, requests for conversions may be limited over the next 2-3 years. Thus, in 2002, additional staff will be required mainly to handle conversion requests from existing loans. Subsequently, additional staff will be required to handle conversion requests from new loans. 150. The Office of the Information Systems and Technology will also require additional staff to develop, implement, and support the IT solution. These staff will be primarily responsible for implementing the solution and for building interfaces to integrate it with the current software, bridging it with the old systems and INTEGRA. Additional legal resources will also be needed for negotiation and documentation of a more complex and sophisticated loan product and for documentation of swaps. 151. The number, timing, and sequencing of additional staff requirements associated with the introduction of the LBL in the concerned departments and offices, will have to be determined and incorporated in ADB’s annual budget over the next 2-3 years.
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