ASIAN DEVELOPMENT BANK Reducing Poverty

Team members

Anil Khadka

Sarthak Kaushik

Ayush Srivastava

SouradeepMukherjee

Presented by

Financial institution licensed as receiver of depositsWHAT IS A BANK?

Commercial Bank

Retail Bank

Issuance of new securities to the public

1 2

Investment Bank

Deposit

Commercial Bank Demand Deposit Accounts

Savings Accounts

Money Market Accounts

Timed Accounts

INTEREST

Loan the deposited money

Pays Interest as long as Loan is Outstanding

Short Term Loans

Car Loans

Mortgages

Large Loans

Limitations of Debt Financing with Local Currency Loans i.e. Through Financial Institutions The high interest rates (interest rates between 12 and15 percent) in India

has led to an increase in the cost of debt for power projects. Long tenure debt of over 10 to 15 years is usually unavailable for rupee

term loans, thus stressing the cash flows from the projects in the initial years and impacting their financial attractiveness.

Fixed interest rate debt for rupee term loans is quite rare, with most FIs providing floating interest rates. This reduces the predictability of cash flows and exposes the projects to interest rate fluctuations.

Debt funding for a projects by FI’s in India needs to be guaranteed partially or fully by the parent entity; only a few private FI’s provide debt to projects without a guarantee from the parent entity.

Banks internally define sector limits and RE is covered under the power sector limits. As most banks are approaching their power sector limits, they are often not able to provide financing to RE projects.

Some banks do not lend to RE projects due to unfamiliarity with RETs, markets and related government policies.

State level policies, along with the poor financial condition of state utilities, restrict lending to only a few states

Limitations of Equity Finance with Local Currency Loans in India

Equity is also restricted to states with good policy regimes and attractive business environments.

The hurdle rates of equity investors for RE projects in India are high (16 to 20 percent), compared to the hurdle rates of 10 to 15 percent for similar projects in the U.S. and Europe. This means Indian developers face higher cost of equity and lower valuations.

A substantial portion of private equity investments in the Indian RE space is approaching five years, the normal time for making exits. Investors have not been able to find exits due to the limited opportunities in the capital markets. Raising new funds is proving difficult for these organizations, as they have not been able to provide exits

Fighting Poverty in Asia and the Pacific

INTRODUCTION TO ADB The Asian Development Bank (ADB) is a regional development bank established on 22 august1966 ADB is an international development finance institution owned by 67 members, 48 of which are from Asia and the Pacific region

Primary Aim: The Asian Development Bank aims for an Asia and Pacific free from poverty

The social and economic development of the Asian and Pacific countries To boost cooperative and simultaneous regional growth among member countries

Membership in ADB is open to: Members and associate members of the United Nations Economic and Social Commission for Asia and the Pacific and other regional

countries and non-regional developed countries that are members of the United Nations or of any of its specialized agencies.

• ADB focused much of its assistance on food production and rural development

• Its operations included ADB's first technical assistance, loans, and bond issue in Germany

1960s• Education ,health, infrastructure and industries• ADB first bond issue in Asia - worth $16.7 million and

issued in Japan1970s• Made its first direct equity investment and began to use its

track record to mobilize additional resources for development from the private sector

• Increased its support to social infrastructure, including gender, microfinance, environmental, education, urban planning, and health issues

1980s• In mid-1997, a severe financial crisis hit the region, setting

back Asia's spectacular economic gains• ADB approved its largest single loan-a $4 billion

emergency loan to the Republic of Korea1990s

HISTORY

INTO THE 21st CENTURY

2003- began providing support at national and regional levels to help countries more effectively respond to HIV/AIDS and the growing threat of SARS & avian influenza

Respond to other unprecedented natural disasters, committing more than $850 million for recovery in areas of India, Indonesia, Maldives, and Sri Lanka hit by the December 2004 Asian tsunami

Looking forward to Strategy 2020 that will determine the organization's future direction and vision for the next dozen years

Under Strategy 2020, ADB will follow three complementary strategic agendas:  Inclusive growth,  Environmentally sustainable growth, and  Regional integration

AREAS OF WORKThe Bank's operations cover a wide spectrum of activities

and have been classified according to the following sectors:

Agriculture Education Energy Finance Health

Industry and Trade Information and Communication Technology Public Sector Management Social Protection Transport Water

CORE OPERATIONAL AREAS

INFRASTRUCTURE

ENVIRONMENT

FINANCE SECTOR

DEVELOPMENT

EDUCTAION

REGIONAL COOPERATIO

N AND INTEGERATI

ON

Share of ADB Support by SectorInfrastructure 58%

Energy 24%

Transport 21%

Water 11%

Other infrastructure 2%

Finance 4%

Education 8%

Agriculture 11%

Health 1%

Others (includes public sector management, and industry and trade)

18%

PHILIPPINES 7%

VIETNAM6%

PAK-ISTAN

8%

INDONESIA11%

INDIA24%

OTHERS17%

PEOPLES REPUB-LIC OF CHINA

26%

BY BORROWER

FINANCE7%

MULTISECTOR4%

EDUCATION3%

OTHERS1%

TRANSPORT39%

ENERGY22%

PUBLIC SECTOR MANAGEMENT10%

WATER AND OTHER URBAN IN-

FARSTRUCTURE AN SERVICES

9%

AGRICULTURE RURAL RESOURCES AND RURAL DEVELOPMENT

6%

BY SECTOR

Outstanding Effective Loans As of 31 December 2014

ADB AND INDIA

India became a member of the Asian Development Bank (ADB) as a founding member in 1966

India is now its fourth-largest shareholder ADB commenced its operations in India in 1986, and has approved 189 sovereign

loans amounting to $31.3 billion during 1986–2014 The portfolio included 86 ongoing sovereign loans amounting to $11.5 billion till

31 December 2014 Cumulative disbursements to India for lending and grants financed by ordinary

capital resources and other special funds amounted to $21.28 billion Asian Development Bank (ADB) approved a $500 million multitranche financing

facility (MFF) for the Indian Renewable Energy Development Agency (IREDA) IN 2014

ADB LOAN TO INDIA SECTOR WISE

ICT- information and communication technology , PSM-public sector management , WUS = water and other urban infrastructure and services

IMPACT OF ASSISTANCE1. Support for the Rural Roads Program since 2003 is helping to improve connectivity

in rural areas of five states-Assam, Chhattisgarh, Madhya Pradesh, Orissa, and West Bengal

2. The Gujarat Power Sector Development Project (December 2000–March 2007) helped the government of Gujarat by establishing an appropriate legal and regulatory framework for the electricity sector

3. The Gujarat Earthquake Rehabilitation and Reconstruction Project(May 2001–November 2007) has helped in reconstructing and restoring damaged infrastructure in the earthquake-affected areas of Gujarat

4. The Tsunami Emergency Assistance (Sector) Project has helped to rebuild houses, roads, bridges, ports facilities, and other public infrastructure incorporating better safety standards

ADB will continue to support the Twelfth Five-Year Plan priorities, through the three strategic pillars of the CPS, namely, inclusive growth; environmentally sustainable growth; and regional cooperation and integration.

The proposed 3-year lending program, reflected in the country operations business plan, 2015–2017, will average about $2.6 billion annually.

About 90% of the lending program will contribute to inclusive economic growth, and 72% will support environmental sustainability.

Projects under the East Coast Economic Corridor and SASEC, constituting 10% of the program, will support regional cooperation and integration

FUTURE DIRECTIONS

Types of lending ADB has four primary types of lending

LAONS

Project loans Sector loans

Private Sector Loans, Equity,

and GuaranteesProgram loans

SECTOR LOANS- Sector lending is a form of ADB assistance to a Developing Member Countries (DMC) for project-related investments based on considerations relating to a sector or sub-sector as a whole in the DMC. A sector loan is expected to improve sector policies and strengthen

institutional capabilities. Financing large number of sub-projects in the sector Finance for technical assistance may be given for project preparation,

sectorial studies, and/ or institution building Loans for Recurring costs (e.g., fuel and essential supplies) and local

currency expenditures

PROGRAM LOAN- Program loans are given by ADB to assist a DMC in developing a sector (or subsector) as a whole and improving a sector’s performance through appropriate policy and. institutional improvements over the medium to long term

Advisory technical assistance may be attached to a program loan to further study unresolved policy issues or to strengthen the capacity of key sector institutions.

PROJECT LOANS- Project lending is aimed at developing energy, agriculture, transport and communications, and other basic infrastructure as well as health, education, and finance.

Private Sector Loans, Equity, and Guarantees – ADB assistance to the private sector in DMCs is designed to help in resource mobilization and more efficient use of investment funds for economic development

ADB support for the private sector in DMCs aims to: Create a favorable environment for the private sector in DMCs Strengthen financial institutions and capital markets Assist in privatizing public sector enterprises Develop build-own-operate (BOO) / build-own-transfer (BOT) modals Invest in selected, productive private enterprise in accordance with sound

banking principles Assist most of the economically attractive and financially sound private sector

projects that require ADB financial support to complete the financing plan

ADB ASSISTANCE FORMS ADB assistance may be provided in one or more of the following forms:

Loans to financial institutions to finance small and medium scale private enterprises

Direct loans to medium and large scale private enterprises Equity investments in private enterprises including private financial

institutions Underwriting of issues of equity or debt instruments on national or

international securities markets Equity investments in government sector projects Guarantees of the debt-service obligations of private enterprises with or

without counter-guarantee by the DMC government.

STEPS TO FINANCEThe steps in a typical ADB-financed project include:

i. Project identification

ii. Fact-finding to establish project feasibility

iii. Appraisal to assess project soundness and viability technical, financial, economic, social, environmental, production, marketing, and management aspects, and loan conditions are closely examined

iv. Consideration and approval by ADB’s Board of Directors; and

v. Finally, project implementation, within the guiding framework of ADB’s loan administration procedures.

Project Processing StepsStep 1: Identification and Early Preparation

Projects are selected carefully with the needs of its borrowing members. ADB staff review a country’s economy, particularly its national and sectorial development programs, and determine the prospects for its success. ADB tries to select those projects which will most effectively contribute to the economic and social development of the country concerned. Once it is confirmed that the project investment is justified, ADB evaluates the project.

Step 2: Loan Preparation

Loan preparation involves justifying the technical feasibility, economic viability and financial soundness of a project. This preparation phase can be undertaken by the government or any other agency, but ADB can also assist by providing technical assistance grants to the government.

Step 3: Project Examination

Project feasibility report is presented and examined by ADB, first through a fact-finding mission and then through an appraisal mission. The mission teams, in consultation with the government, examine the project’s technical, financial, economic, environmental and management aspects and potential social impact. Loan terms and conditions are discussed. Following the examination in the field, the appraisal mission team prepares a report and draws up a draft loan agreement for negotiation.

Step 4: Loan Negotiations

After negotiations with the government, the loan proposal is submitted to ADB’s Board of Directors for approval. The loan agreement is then signed by the ADB President and representatives of the government and the executing agency. The loan takes effect once certain conditions are met.

Step 5: Project ImplementationThe project has to be implemented according to the agreed schedule and procedures.

Project consultants are recruited, the detailed engineering design and bidding documents are prepared, machinery and equipment are procured, and civil works are constructed and installed.

Step 6: Project CompletionAfter the project facilities are completed and commissioned, ADB prepares a Project Completion Report (PCR) to document the implementation experience.It also prepares project performance audit reports that assess project formulation and implementation, economic, financial, social benefits and environmental impacts.

Guidelines describes ADB’s approach to preparing financial cost-benefit analyses

Preparing project cost estimates Forecasting project net cash flows Determining the appropriate discount rate i.e., Weighted Average Cost of

Capital (WACC) serving as a proxy for the financial opportunity cost of capital

Calculating the financial net present value(NPV) Calculating the financial internal rate of return (FIRR) Undertaking risk and sensitivity analysis. The sensitivity analysis examines

the likely effect of changes in forecasting assumptions on the project’s financial viability

Fundamental Principles

Lending limitation- Under ADB’s lending policy, the total amount of disbursed loans, approved equity investments, and the maximum amount that could be demanded from ADB under its guarantee portfolio may not exceed the total amount of ADB’s unimpaired subscribed capital, reserves, and surplus (excluding special reserve).

Borrowing limitation- Under ADB’s borrowing policy, ADB’s gross outstanding borrowings may not exceed the sum of callable capital of non-borrowing members, paid-in capital, and reserves (including surplus).

Conservative financial management Working Capital Portfolio- manage ADB’s short term cash flow and hold

borrowing transactions pending disbursement Discretionary portfolio- funded by debt and is intended to provide flexibility

in executing ADB’s funding program by borrowing ahead of cash flow needs, avoid refinancing risk from a concentration of large borrowings, and smoothen the capital market presence.

Equity Funded Core liquidity portfolio- ensures that ADB can meet its minimum net cash requirement by sustaining an uninterrupted supply of funds

Core liquidity portfolio- ensure liquidity buffer is met

Risk M

anag

emen

t

Credit and equity

risk – Non sovereign

Credit risk -

Sovereign

Credit Risk

Treasury Portfolio

Interest Rate

Market Risk

Liquidity Market

Risk

Foreign Exchange

market Risk

Risk Attacks

Credit risk :- SovereignSovereign credit risk is the risk that a sovereign borrower or guarantor will default on its loan or guarantee obligations.

Mitigation ADB manages its sovereign credit risk through loan loss reserves and by

maintaining conservative equity levels. ADB also appropriates loan loss reserves in the equity section of its

balance sheet for the average loss that ADB could incur in the course of lending

Credit and equity risk :- Non-sovereign

Risk that a borrower will default on its loan or guarantee obligations for which ADB does not have recourse to a sovereign entity. These are considered more significant because of the uncertain economic environment in some of ADB’s markets

Mitigation manages its non-sovereign credit risk by assessing all new transactions ;

annual review of all exposures

Credit Risk Treasury PortfolioIssuer default and counterparty default are credit risks that affect the treasury portfolio

Issuer default is the risk that a bond issuer will default on its interest or principal payments

Counterparty default is the risk that a counterparty will not meet its contractual obligations to ADB.

Mitigation ADB only transacts with institutions with ratings from at least two reputable external

rating agencies. the treasury portfolio is generally invested in conservative assets, such as money

market instruments and government securities ADB has established exposure limits for its corporate investments; depository

relationships, and other investments mitigate counterparty credit risk arising through derivative transactions; undertaking

swap transactions

Interest Rate Market RiskInterest rate risk in the operations portfolio is hedged as the borrowers interest payments are matched to ADB's borrowing expenses

Mitigation borrower must hedge the risk of fluctuating interest rates, whereas ADB’s

margins remain largely constant.

Foreign Exchange market Risk

It is the exposure to exchange rate risk in its operations.

Mitigation ADB is required to match the currency of its assets with the currencies of

liabilities and equity Risk of Borrowed funds or funds to be invested are fully hedged through cross-

currency swaps or forward exchange agreements

Liquidity Market Risk

Arises if ADB is unable to raise funds to meet its financial and operational commitments.

Mitigation ADB maintains core liquidity to safeguard against a liquidity shortfall

in case its access to the capital market is temporarily denied. Liquidity policy framework redefined the prudential minimum

liquidity as 45% of the 3-year net cash requirements.

COMPANY A COMPANY B

COUNTRY A COUNTRY B

LOAN AMOUNT OF COMPANY

”A”LOAN AMOUNT OF COMPANY

“B”

INTEREST BY BANK OF COMPANY B

INTEREST BY BANK OF COMPANY A

Currency swapping

BUSINESS

ADB

WORLD BANKFive institutions, One group

Provides financial resources, technical services & strategic advice to governments of middle-income and creditworthy low-

income countries

Provides interest free loans called credits and grants to governments of the poorest countries.

largest global development institution focused exclusively on the private sector. Helps developing countries achieve sustainable growth by financing investment, mobilizing capital in international financial

markets, and providing advisory services to businesses and governments

Created in 1988 to promote FDI into developing countries.offers political risk insurance (guarantees) to investors and lenders.

Created in 1966provides international facilities for conciliation, arbitration or fact

finding of investment disputes

Together, IBRD and IDA make

up the World Bank. Owned by

Govt. of member countries

represented by 25 member

board (5 appointed & 20

elected exec directors)

Offers much more than loss recovery i.e. increasing tenors, providing environmental & social expertise…..

Each case is considered by an independent Conciliation Commission or Arbitral Tribunal. A dedicated ICSID case team is assigned to each case and provides expert assistance throughout the process

188 countries

173 countries

184 countries

181 countries

151 countries

lend about US$ 15-20 billion annually to 100+ countries

Borrower + Bank analysisPCN & PID are made

Country driven mainly

Financial instruments coveredi. Equity ii. Shareholder loaniii. Loan guaranteesiv. Non-equity direct investment (ex-turnkey contracts)v. Capital market transaction Investments characteristicsi. Cross-border from one member country (developed/developing) into another

developing member country Clients or guarantee holderi. Investorsii. Banksiii. Other gov agencies

ADBInitial focus-food and rural development projects Later included-education, health, and infrastructure development. 1970s oil crisis- began financing energy projects to increase energy security in the region

ADB financed its first equity investment in the 1980s and was a major player, together with the International Monetary Fund (IMF) and the World Bank, in responding to the Asian financial crisis in the late 1990s by supporting financial sector development and strengthening social safety nets. It was during this period that ADB made poverty reduction its key objective.

Share same objective i.e. “POVERTY REDUCTION”

* Both the World Bank and ADB are actively involved in every low- and middle-income country in Asia and the Pacific, except North Korea

WORLD BANK

WHY NOT NORTH KOREA?

issue of North Korea’s nuclear weapons programme disclose sufficient information relating to industry, public finances, and

its tax base. (Fear of enemy countries using this data)

Joining the bank would probably be North Korea’s best chance to sort out its infrastructure problems – from transportation to electricity.

SUGGESTION

ADB and the World Bank: Selected Financial Indicators

ADB ($ bn) WORLD BANK (excluding IFC) ($bn)

Lending in 2010 8.2 44.2Disbursements in 2010 5.3 28.9Outstanding loans 43.6 129.5Authorized capital 163.8 278.3Outstanding Debt 51.8 135.2Total Assets 100.2 312.8Net Income 0.6 0.9

Commitments ($ mn) Disbursements ($ mn)

These show that ADB’s commitments and disbursements declined in 2010 while those of the World Bank increased. But the World Bank’s lending levels are not sustainable and are expected to decline in coming years, while ADB’s commitment levels are likely to remain at about $10 billion a year. This will make ADB the dominant multilateral development bank lender in Asia, barring any further capital increase for the World Bank in the near future

WHERE DOES WORLD BANK GETS ITS FUNDING?

WHERE DOES WORLD BANK GETS ITS FUNDING?

Selling AAA-rated bonds in world’s financial market These bonds are purchased by a wide range of private and institutional

investors in North America, Europe, and Asia. While IBRD earns a small margin on this lending, the greater proportion of income comes from lending out their own capital.

This capital consists of reserves built up over the years and money paid in from the bank's 188 member country shareholders. IBRD income also pays for World Bank operating expenses and has contributed to IDA and debt relief. They maintain strict financial discipline to maintain the AAA status of their bonds and continue to extend financing to developing countries

WHERE DOES ADB GETS ITS FUNDING? ADB raises funds through bond issues on the world's capital markets

Also rely on there members' contributions, retained earnings from the lending operations, and the repayment of loans

ADB provide loans and grants from a number of Special Funds. The largest is the Asian Development Fund which offers grants and loans at very low interest rates