The Asian Development Bank and the Swedish International Development Cooperation Agency have agreed on a new risk transfer mechanism under which SIDA will guarantee up to $155 million of ADB sovereign loans for an unspecified fee.
SIDA’s guarantee will allow the ADB to increase its lending capacity by an estimated $500 million over the next 10 years from its ordinary capital resources. The latter are used to fund developing countries with a higher level of economic development and constitute the majority of the ADB’s investments.
For the debut of the risk transfer arrangement, SIDA has settled on a portfolio of ongoing ADB loans in India. ADB said this reflected the long-standing credibility of India as a borrower. Moreover, ADB’s portfolio quality and diversity will be improved by replacing existing loan exposure with AAA-rated exposure to Sweden.
The deal marks the first time a multilateral bank is using a risk transfer mechanism for one of its sovereign loan portfolios.
“The initiative is a significant breakthrough and will serve as a precedent for development banks looking to help member countries to meet new sustainable development goals and the COP21 climate change agreement,” ADB president Takehiko Nakao said in a statement.
“The guarantee provides a good return,” added Ulrika Modeer, Sweden’s State Secretary to the Minister for International Development Cooperation and ADB governor, adding that the expanded lending capacity can be invested in innovative ideas which address poverty reduction and environmental issues.
The risk transfer arrangement comes amid rising demand for innovative development financing, the bank said. The ADB 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 last November.