Financial Products: Public Sector Financing | Asian Development Bank

Financial Products: Public Sector Financing

ADB offers the public sector different types of financial products, which includes loans, grants, technical assistance, guarantees, and debt management products. These products are financed from ordinary capital resources (OCR) as well as special and trust funds, of which the Asian Development Fund (ADF) is the largest. Most of ADB's lending comes from OCR, a pool of funds offered at near-market terms to lower- to middle-income countries, and beginning in 2017, at very low interest rates to lower income countries. ADF offers grants that help reduce poverty in ADB’s poorest borrowing countries.

LIBOR-based Loans (LBL)

ADB offers its sovereign and sovereign-guaranteed borrowers London Interbank Offered Rate (LIBOR)-based Loans (LBL) with a floating rate based on 6-month LIBOR plus an effective contractual spread and a maturity premium (where applicable) that are fixed over the life of the loan.

The LBL is a market-based loan product that allows ADB’s efficient intermediation on the finest possible terms, provides transparent and market-based pricing, and meets borrowers’ needs to tailor currencies and interest rate basis to suit project needs and external risk management strategies.

Read: Overview of LIBOR-based Loans: Sovereign and Sovereign-Guaranteed Borrowers

Lending rates

 

Local Currency Loan (LCL) product 

 

To continue meeting borrowers’ evolving financial needs, ADB introduced the local currency loan (LCL) product in August 2005. Private sector enterprises and certain public sector entities including local governments and public sector enterprises may avail themselves of LCLs.

LCLs aim to reduce currency mismatches in the developing member countries (DMCs). Under the LCL window, borrowers have the option of changing the interest rate basis of an LCL during the life of the loan by requesting an interest rate conversion to fix or unfix their interest rate, subject to regulatory approvals and relevant swap market opportunities available to ADB in the local market.

Concessional OCR loans (COL)

ADB offers loans at very low interest rates to help reduce poverty in ADB's poorest member countries, and bridge the development gap in the Asia-Pacific region. Concessional assistance to developing member countries (DMC) is meant to help them overcome development challenges, support inclusive and sustainable development, and make progress on the Sustainable Development Goals. Large unmet development challenges, limited financing options, and the need to provide incentives to increase investment in regional public goods underlie the need for ADB’s continued concessional assistance to eligible DMCs.

Debt management products

 

ADB offers debt management products to members and entities fully guaranteed by members in relation to their third-party liabilities. In offering debt management products for third-party liabilities, ADB is able to contribute to the economic development of its DMCs by allowing members or guaranteed entities to improve debt management, thereby potentially reducing economic volatility, reducing borrowing costs, improving access to capital markets, and freeing up scarce financial resources for economic development.

Debt management products offered by ADB include currency swaps, including local currency swaps, and interest rate swaps. While currency swaps include the possibility of members or guaranteed entities transforming a foreign currency liability into a local currency liability, the reverse transformation of a local currency liability into a foreign currency liability is not offered.

New financing products and modalities

ADB approved a set of new products and modalities to support implementation of Strategy 2030, by expanding ADB’s product offering to meet the diverse and evolving needs of our developing member countries:

Project Readiness Financing

Project readiness financing (PRF) provides support to ensure that ensuing ADB projects have a high level of project imple-mentation readiness. This increases the likelihood of timely and cost-effective achievement of project outcomes. PRF replaces technical assistance loans and the pilot Project Design Facility.

Small Expenditure Financing Facility

Small expenditure financing facility (SEFF) supports small expenditures (up to $15 million per activity) in a quick and re-sponsive manner. Each activity under SEFF should be associated or support a larger ADB-financed project.

SEFF works like a sector loan. Individual activities under SEFF will be identified, appraised, and implemented during project implementation.

Policy-Based Guarantee

A policy-based guarantee (PBG) is like a policy-based loan (PBL). It supports government’s general budget financing needs based on the achievement of policy conditions. The difference is that PBL provides a loan to the government, while PBG provides a credit guarantee over government borrowing from commercial banks or issuance of bonds.

Guarantees in Group A Countries

Under the old policy, guarantees in group A countries could be used only if the projects generated sufficient foreign currency revenues (e.g. a hydropower project that exports power to a neighboring country). This operation is funded with ordinary capital resources.

Under the new policy, this guarantee can be used if the developing member country (DMC) is not classified as being in high risk of debt distress (e.g. Asian Development Fund grant-only DMCs) and the proposed project is not expected to change the country’s debt distress classification. ADB provides an allocation on top of the regular country allocation.

    Terms and conditions of ADB's concessional loans

      Maturity Grace Period Interest Other Features
    Group A (CA-only): Project Loans 32 yrs 8 yrs 1% during the grace period
    1.5% during the amortization period
    Equal amortization; No commitment fee
    Group A (CA-only): Program Loans 24 yrs 8 yrs 1% during the grace period
    1.5% during the amortization period
    Equal amortization; No commitment fee
    Group B (OCR blend) 25 yrs 5 yrs 2% interest per year Equal amortization; No commitment fee
    Emergency Assistance Loans 40 yrs 10 yrs 1% interest per year Principal repayment at 2% per year for the first 10 years after the grace period and 4% per year thereafter; No commitment fee