ADB may finalise dollar-swap pact with India

The bank may consider giving loans to Punjab next year to help it tide over the debt crisis

Manila-based Asian Development Bank (ADB) is likely to finalise an agreement with Indian authorities soon to go for dollar-swap to finance projects in India in the Indian currency.

After approving a $400-million dollar loan for West Bengal to help the state tide over a debt cycle, ADB is also considering giving loans to another debt-stressed state, Punjab, next year, sources said. Sources added that the ADB officials are in touch with the finance ministry officials to go for a dollar-swap agreement. Under the agreement, the multilateral agency will bring dollars to India and swap it with banks or financial institutions to get rupee. ADB will, then, give rupee loan to projects in India and when the loan matures, it will return the rupee to the bank or financial institution and get back the dollar.

The agreement would help finance projects in India without augmenting currency inflows into the system. The swap would not increase dollar inflows as the greenback would be held in the central bank’s reserves.

Right now, India needs dollars, but in future, dollar flow could be much more than requirement, necessitating the need to finance projects in rupee, officials explained.

In that case, ADB would give a basket of dollars to India and India will give it a basket of rupees.

Earlier this year, ADB board of directors had approved inclusion of the Indian rupee in the Trade Finance Program (TFP), which bridges market gaps for trade finance by providing guarantees and loans to banks to support trade.

Until now, TFP used to cover only transactions denominated in dollars, yen and euros. Recently, ADB approved a $400-million (around Rs 2,159 crore) loan for West Bengal to help it overcome a debt cycle and development spending cuts.

Besides, the Manila-based multi-lateral agency will provide a grant of $ 0.7 million (around Rs 3.78 crore) to help the state pursue reforms to effectively spend money, boost revenues and manage its fast-growing public debt. ADB’s move came even as the fate of a proposal of West Bengal to seek a moratorium on repayment of interest (Rs 20,000 crore) on its loans from the Centre for a period of three years hangs in balance.

ADB is in talks with Punjab as well to provide it loans to help the state surmount the debt crisis. Officials indicated that the loan could be considered for the next year.

Punjab is in a severe debt trap as its gross borrowings for FY13 are likely to be Rs 13,225 crore and its servicing would involve payment of Rs 10, 268 crore. The payment includes Rs 3,606 crore as principal and Rs 6,662 crore as interest, leaving only Rs 2,957 crore in the hands of the state government.

In the past, similar arrangement by other multi-lateral agencies could not be proceeded, with the deal struck over power reforms. ADB officials said these issues would be resolved before the loan is approved.