The Asian Development Bank has signed an agreement with the Swedish International Development Cooperation Agency (SIDA) on a risk-transfer scheme under which SIDA will guarantee $155 million out of ADB's $455 million basket of five loans to India, a first for a sovereign loan portfolio for any multilateral development bank, the ADB announced Monday.

The ADB dedicated to reducing poverty in Asia said the pilot guarantee arrangement with SIDA will increase the bank's lending capacity by an estimated $500 million over a 10-year period and is being eyed by other multilateral development banks as a way to increase capital amid expanding financing needs for development goals.

Risk-transfer agreements pass specified risks from one party to another in return for a fee. The guarantee by SIDA, which has a triple-A credit rating, for ADB's clean energy loans to India, whose credit rating is triple B-, will improve the portfolio's risk profile and reduce capital held in reserve to cover guaranteed loans.

The arrangement became effective on October 1 and runs until the end of 2026. ADB Vice President Diwakar Gupta said because the bank's capital has recently increased, there is no urgency to create headroom. "it's a good starting point for us to gain experience on how we can do more of this kind of transfers." he said. 

Gupta said the risk-sharing arrangement will help the ADB provide sovereign loans to countries that do not have an investment grade credit rating, such as India. Starting in January the ADB will also merge its fund that provides concessional loans and grants to poorer countries and its ordinary capital resources that gives loans to middle-income countries at market-based rates. 

The move enhances ADB's risk-bearing capacity because it boosts the amount considered as equity, in effect increasing available funds for assistance by at least 50%. The ADB last year provided $27.2 billion in loans and grants, including co-financing of loans worth $10.7 billion.

Source : QNA