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p. 7 of 8 BACK | NEXT I. Introduction II. Borrower's Demand for New Loan Products III. Proposed New Libor-Based Loan Products IV. Withdrawal and Conversion of Pool-Based Loans V. Funding Risk Management Strategy VI. Implementation and Resource Requirements VII. Conclusion and Recommendations Appendixes

Review of Asian Development Bank's Financial Loan Products

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VII. Conclusion and Recommendations

152. ADB was established to provide its DMCs with long-term capital for development; capital of a kind that they may not otherwise have access to. Accordingly, ADB has been the main official regional multilateral channel through which capital resources have been intermediated between the developed countries and DMCs. The survey conducted by ADB among the DMCs in late 1999 and early 2000, indicated that their needs and expectations of ADB as a financial intermediary are evolving. The DMCs expect ADB to

1. provide appropriate loan products suitable for development, taking into consideration project-specific factors and debt management considerations;
2. enhance their institutions and capabilities for effective debt management and choice of appropriate financial instruments; and
3. improve their understanding of financial needs and provide them access to the best-known practices and financial instruments that can be made available through ADB.

153. These three expectations are inextricably linked and mutually supporting. All three are directly or indirectly needed for ADB’s effective and efficient financial intermediation.

154. The DMCs revealed preference is for ADB to move away from providing pool-based homogenous loan products to catering for a much more heterogeneous range of loan products. These should be market-based with (i) built-in derivatives to cap or contain risk, (ii) flexibility to switch currencies, and (iii) different prices and terms, all tailored to meet the needs of specific borrowers for specific projects. The DMCs want transparency and automaticity in the cost base of loan pricing.

155. In this paper, while ADB’s response has been tailored to address the needs and expectations of the DMCs, the sequence and phasing of the new initiatives have factored in institutional capabilities that will need to be created for the introduction of the LBL products. The approach adopted has been to focus on how well ADB’s financial instruments meet DMC requirements and help achieve institutional goals. In the design of its new loan products, ADB has been guided by three factors. First, it is being responsive by setting goals that are appropriate to DMCs’ loan product needs and institutional priorities. Second, increased relevance is being achieved through devising the loan products and deploying them in a proper sequence to achieve the goals. Finally, a high quality of financial services will be assured to meet the standards of the best-known practices in relating financial instruments to debt management considerations.

156. With the introduction of the LBL product, ADB is leveraging its financial strength, knowledge of risk management, and knowledge of international capital markets and financial products, to provide DMCs with a range of risk management financial products that are widely available in the markets but not accessible to many DMCs. This evolution in ADB’s financial intermediation role constitutes a watershed.

157. In this connection, two aspects are important. First, the cooperative nature of ADB will be maintained and reflected in the pooling of certain risks and costs, as reflected in the system of rebates and surcharges that is being proposed with the pricing of the LBL product. Second, costs associated with addressing the needs of individual DMCs in terms of currency and interest rate swaps and prepayments will be charged to individual DMCs without any pooling. In effect, while the benefits of ADB’s financial strength will be equally available to all DMCs through a homogenous cost base, lending spread and access to financial expertise, costs that are transaction specific will be charged to the DMC concerned. The transparency and automaticity of pricing and access to financial instruments will be ensured, as will equity, as one DMC will not have to pay for the cost of financial services requested by another DMC.

158. The introduction of a core LBL product begins the next step in ADB’s evolution as a financial intermediary. Additional initiatives will be needed to progressively align ADB’s loan products with those available in the market. At each step for strengthening ADB’s financial intermediation role, the guidance of the Board of Directors will be requested.

159. It is recommended that the Board approve:

1. the creation of a new LIBOR-based lending facility, substantially on the basis of the terms described in this paper (and particularly in Appendix 2 thereto), with respect to loans to be made from ADB’s ordinary capital resources for which the invitation to negotiate will be issued on or after 1 July 2001;
2. the draft Loan Regulations Applicable to LIBOR-based Loans from ADB’s Ordinary Capital Resources presented to the Board;
3. the undertaking by ADB, from time to time, of direct borrowings of funds for periods not exceeding one year in connection with bridge-financing transactions contemplated by the new LIBOR-based lending facility described in this paper, provided that (a) such direct borrowings shall be reported to the Board every quarter, and (b) the sum of the total principal amount of such direct borrowings and total principal amount of euro-commercial paper issues at any one time shall not exceed $5,000,000,000;
4. the undertaking by ADB, from time to time, of any currency liability swap transactions, interest rate swap transactions and related transactions in connection with the lending operations and risk management transactions contemplated by the new LIBOR-based lending facility described in this paper;
5. the termination of the market-based lending facility with respect to loans for which the invitation to negotiate will be issued on or after 1 July 2001;
6. the termination of the pool-based multicurrency lending facility with respect to loans for which the invitation to negotiate will be issued on or after 1 July 2001;
7. the conversion of outstanding pool-based multicurrency loans into pool-based single currency loans in Japanese yen, and the offer to amend the related loan agreements to effect their removal from ADB’s exchange rate pool system by 31 December 2003;
8. the termination of the pool-based single currency lending facility in United States dollars with respect to loans for which the invitation to negotiate will be issued on or after 1 July 2002;
9. the offer to convert on or after 1 July 2001 undisbursed amounts of effective pool-based single currency loans in United States dollars and market-based loans (constituting at least 40 percent of the original loan amount), that were approved by the Board in 2001 and for which the invitation to negotiate was issued before 1 July 2001, to the new LIBOR-based lending facility, substantially on the basis of the terms described in this paper (and particularly in Appendix 3 thereto);
10. the offer to convert on or after 31 July 2002 undisbursed amounts of effective pool-based single currency loans in United States dollars (constituting at least 40 percent of the original loan amount), that were approved by the Board in 2001 and for which the invitation to negotiate was issued on or after 1 July 2001, to the new LIBOR-based lending facility, substantially on the basis of the terms described in this paper (and particularly in Appendix 3 thereto);
11. the offer to convert on or after 31 July 2002 undisbursed amounts of effective pool-based single currency loans in United States dollars (constituting at least 40 percent of the original loan amount), that were approved by the Board prior to 1 January 2001, to the new LIBOR-based lending facility, substantially on the basis of the terms described in this paper (and particularly in Appendix 3 thereto); and
12. the reduction of the minimum liquidity coverage of undisbursed amounts of outstanding market-based loans from the present requirement of 100 percent to 40 percent.

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