India stands to save $35 million per annum as ADB links loans to Libor

Sanjay Thapa

New Delhi, Aug 8: Potential savings of $35 million per annum as debt servicing costs comes for India following the Asian Development Bank’s (ADB) linking of its loan portfolio to the London Interbank Offered Rate (Libor).

“An offer of the loan conversion option has already been made to the Union finance ministry which now has to make a final agreement on this account,” said ADB India representative Frank Polman told in an exclusive interview to The Financial Express on Tuesday.

The offer comes close on the heels of Bank’s recent move to suspend its pool based multi-currency loans under its ordinary capital resources and link it to a more market-friendly floating rate product based on the Libor. The decision comes into effect from July 1, 2001 for loans that have already been withdrawn or to their remaining portions.

For India, which is one of the major financial borrower from the ADB, the move is likely to bring in rein in the debt servicing costs of its loans.

Currently, there are eight ADB loans in India’s portfolio under the Bank’s pool-based single currency (US dollar) loan approved up to December 31, 2000 which qualify for such a conversion.

The total amount of the undisbursed balance in US dollar of these loans by December 31, 2001 is likely to be in the tune of $1.36 billion, according to ADB sources.

“As India is likely to withdraw the loans in a spread of four years, the savings in the initial year is likely to be in the order of $5.5 million, this will rise to $11 million in the second year, to $17 million in the third and peak to $27 million in the fourth year,” said ADB officials.

In addition to this, if India converts the $500 million Gujarat earthquake rehabilitation and reconstruction loan from pool-based single currency (US dollar) loans the Libor linked loan arrangement an further savings of an annual $8 million would accrue once the loan is fully withdrawn.

Hence, ADB says that a total savings of $35 million would come about for India if it fully converts all its existing pool-based single currency (US dollar) loans to the Bank’s new Libor-linked loan product.

On an average, ADB sources say that the linking of the interest on the ADB loans to the Libor is expected to yield a benefit of about two percentage points going by the current Libor rates.

Under the new guidelines, the Bank’s board has announced that under its ordinary capital resources, ADB borrowers will have the choice of three loan currencies — Euro, Yen or the US dollar. The Bank will also suspend all its pool-based multi-currency loans as well as withdraw pool-based US dollar loans.

With this, the Bank would also offer borrowers the option to convert the undisbursed portions of their pool-based US dollar loans to the new Libor linked loans.

It would also offer borrowers more flexibility in terms of repayment terms and free-standing hedging products.

ADB says that the new product will not expose the Bank to additional risks as it will maintain its policy of avoiding foreign exchange and interest rate risks.