Cut costs or else, finance ministry warns ADB

New Delhi, Aug 3 | Updated: Aug 4 2005, 05:50am hrs
Navratna PSUs will gradually desert the Asian Development Bank (ADB) and take recourse to comparatively cheaper domestic and international (private) finance unless the ADB regains its lending competitiveness.

A high-level ADB team visiting New Delhi this weekend to finalise the country programme for 2006 and 2007 is likely to be cautioned by the finance ministry that various additional costs of the ADB money have made it unattractive to Indian PSUs.

The ministry will bring to the notice of the multilateral lender, which has an yearly exposure of $1.2-2 billion to India for several years, that given the current cost of its money (about 7.8%), PSUs would rather like to take loans from the countrys public sector banks and financial institutions. Only a few states, which face problems in raising money from markets, could end up as the sole recipients of the ADB funds.

Finance ministry sources said the government would attack the methodology of charging the commitment fee on unreleased funds and the not-so-obvious costs of various conditionalities.

At present, the ADB loans, as a general rule, carry an interest rate of Libor and a fixed spread of 60 basis points. In practice, a lot of waivers are being given on the spread bringing down the rate to 8 basis points, and the interest stands at about 3.98%. It might look more attractive, compared to, say, the rate of 6.5% at which the Life Insurance Corporation had lent money to the NTPC recently. And the ADB loans are actually more expensive.

The bank charges a commitment fee of 0.75%-1% for unreleased funds too, even if the borrower abides by the disbursement schedule, which, on a ten-year loan, adds 0.4% to the cost.

Front-end fee of 1% is also chargeable and will have to be paid in full even before the start of the disbursal.

Various conditionalities add another 0.5%. In all, a direct borrower will incur a cost of 6.6% on an ADB loan.

On the other hand, domestic rupee loans are available at 6.5-7%, sans forex risk.

Focus on roads, power

The government is set to pitch for more ADB focus on infrastructure (rural roads in particular) and power transmission projects during the deliberations with the banks director-general (South Asia) John Samy and his team this week. Loans of $560 million will be sought for two projects of the Power Grid Corporation in Tamil Nadu and Delhi-Bihar-Jharkhand regions.

The Power Finance Corporation will seek a $150-million loan for projects in Maharashtra and West Bengal, which it will on-lend to the states. Four hydro-electric projects in Uttaranchal would also seek ADB funds, finance ministry sources said.