World Bank clears $4.3 bn loan package

World Bank clears $4.3 bn loan package

New Delhi: The World Bank’s board has cleared $4.3 billion (around Rs20,640 crore) of loans for India to support the government’s plans to reinforce the capital of state-owned banks, build infrastructure and boost economic growth.

Approved on Tuesday, this is the World Bank’s largest annual loan package for the country, eclipsing the $3.7 billion cleared in 2006-07. In August, the Washington, DC-based agency had separately approved a loan of $330 million for India.

The loans were approved in the context of a decision taken by members of the Group of Twenty (G-20) last year to use multilateral institutions to help the global economy to cope with fallout from the financial crisis in some developed markets, according to Roberto Zagha, World Bank’s country director for India.

“The steps taken by the G-20 to augment the resources of multilateral development banks have led to substantial stepping up of World Bank lending to India," Prime Minister Manmohan Singh said on Wednesday on the eve of his departure for Pittsburgh, US, to attend a G-20 summit.

The residual amount would be split between a loan of $1.2 billion to the government’s India Infrastructure Finance Co. Ltd (IIFCL), $1 billion to public sector Power Grid Corp. of India Ltd (PGCIL) and $150 million for the Andhra Pradesh Rural Water Supply and Sanitation Project.

The loans, except for the one on social infrastructure, are of 28-30-year duration. The interest rate on these loans is linked to the six-month London interbank offered rate, or Libor. Libor is the rate that the most creditworthy international banks dealing in euro-dollars charge each other for large loans.

The variable spread, adjusted every six months, for the banking sector loan is Libor plus 0.17%, and for the Powergrid and IIFCL loans is 0.03% lower than Libor. In addition, the World Bank charges a front-end fee of 0.25% on IBRD loans.

According to data on the World Bank’s website, the government had identified 19 banks which together would need a capital infusion of Rs22,489 crore ($4.8 billion) by 2011 to support their growth and simultaneously make sure that state ownership did not fall below 51%.

In addition to the $2 billion loan, which is likely to be drawn by the government in January, the World Bank board also gave the government an option to draw another $1 billion by June 2010.

Banks need to back every rupee lent with a portion of shareholders’ capital. The World Bank’s website said the government eventually plans to ask banks to back lending of every Rs100, adjusted for risks, with shareholders’ capital of at least Rs12. Currently, the mandated minimum capital needed is Rs9 for every Rs100 lent.

A World Bank press release said public sector banks did not have to fulfil conditions to qualify for the loan because it is a Development Policy Loan (DPL) to the Indian government. A DPL provides budgetary support and is meant for quick disbursement.

The DPL is “predicated upon maintenance of an appropriate macroeconomic framework, and an effective medium-term strategy for economic growth and poverty reduction", the release said. “Moreover, as this operation is designed to support the government budget, it is also predicated upon the maintenance of satisfactory public financial management practices."

Conditions that accompany a World Bank loan have earlier generated controversy in India. In July, two officials in the finance ministry, who did not want to be identified, told Mint that the government’s negotiations with World Bank to raise capital for public sector banks did involve tough negotiations on loan conditions. The World Bank had backed down on its initial demand that the loan meant for public sector banks be accompanied by financial sector reforms, the official said.

Thomas Rose, the World Bank’s adviser, East Asia-Pacific region, who along with Zagha and a few other officials spoke to the media from Washington, said: “DPL does not contain conditionality going forward."

Further, prior actions taken by the government on macroeconomic conditions were sufficient, Rose said. During negotiations with the World Bank, the government had not identified banks that would receive an injection of fresh capital, he added.

Besides banks, the financial sector in India will see more capital inflow through a $1.2 billion loan to IIFCL, the government’s wholly owned subsidiary, to finance infrastructure.

According to Zagha, the infusion of every $1 billion into IIFCL would lead to a multiplier of $4 billion through private sector spending. IIFCL would use the loan to support infrastructure spending largely on roads, power generation and transmission projects and ports.

Unlike DPL, the loan to IIFCL comes with conditions attached. Projects funded by IIFCL using the World Bank’s loans would have to meet environmental and social safeguard policies, and follow a process laid down for equipment procurement.

According to the World Bank’s media statement, environmental and social safeguard policies seek to mitigate the impact of large infrastructure projects on people and their habitat. The $1 billion loan to PGCIL is largely meant to help the company strengthen India’s grid system to allow it to handle a greater load.

The $150 million loan for social infrastructure aims to provide piped water to 2.1 million people and extend sanitation services to one million people. This loan is for a duration of 35 years and carries only a 0.75% service fee.