The Asian Development Bank (ADB) and Swedish International Development Cooperation Agency (SIDA) have signed a risk-transfer agreement that will help the former to increase its lending capacity by around USD 500 million over the next 10 years.
“The Asian Development Bank and the Swedish International Development Cooperation Agency have signed an agreement on an innovative risk transfer mechanism, under which SIDA will guarantee up to USD 155 million of ADB sovereign loans.
“This guarantee will allow ADB to increase its lending capacity by an estimated USD 500 million over the next 10 years from its Ordinary Capital Resources,” ADB said in a release today.
ADB said its loan portfolio quality and diversity will be improved by replacing the existing loan exposure with AAA- rated exposure to Sweden.
“For the risk transfer arrangement, SIDA selected a portfolio of ongoing ADB loans in India, reflecting the long-standing credibility of India as a borrower,” it said.
Under the risk transfer agreements, specified risks from one party are passed to another in return for a fee.
This can release capacity for additional operations by improving the risk profile of bank balance sheets and reducing the capital held in reserve to cover guaranteed loans.
ADB said it is the first time for a multilateral development bank that a risk transfer arrangement has been effected towards a sovereign loan portfolio.
Demand for innovative development financing has led to this kind of risk transfer arrangement, it added.
ADB said it is committed to exploring risk transfers in its sovereign portfolio under the Action Plan to optimise balance sheets of multilateral development banks endorsed by the G20 in November 2015.
The ADB-SIDA arrangement became effective on October 1 and will run until December 31, 2026.
“This is an innovative arrangement that allows us to release extra financing to support our operations,” said ADB President Takehiko Nakao.
“The guarantee provides a good return,” said Ulrika Modeer, Sweden’s State Secretary to the Minister for International Development Cooperation and ADB Governor.
Nakao and Modeer will meet on 8 October to mark the signing of the risk transfer agreement during the Annual Meetings of the International Monetary Fund and the World Bank Group in Washington.