World Bank Ups Loan Charges

A cash-strapped World Bank has hiked charges on all loans extended by the International Bank for Reconstruction and Development after July 31. However, the new terms do not apply to funds availed from the soft-lending arm of the bank, the International Development Association.

Representatives of borrowing countries fear that this might be the first step by the Bank to introduce differential lending based on respective risk assessments of countries. World Bank officials were not available for comment.

The decision to increase borrowing charges, approved by the board of executive directors, entails a higher spread over the bank's funding costs being charged from borrowers. The spread has been hiked by 25-75 basis points above the borrowing cost of the bank.

In addition, all borrowers will have to pay an upfront fee of 100 basis points, or 1 per cent, of the loan amount. This is to be paid as soon as the loan is made effective. For a $1 billion loan, the borrowing country will have to incur an additional charge of $10 million, which will have to be paid upfront.

The bank has also decided to retain the current commitment charge structure of 75 basis points. Normally, about 50 basis points is waived.

Further, the bank has also reduced the concession accorded to borrowers meeting their debt obligations in time. Normally, the bank would waive as much as 25 basis points of the interest rate spread to countries that are current in servicing existing loans. The board has now laid down that for fiscal year 1999, this interest waiver will be reduced to 5 basis points for existing loans, but it will be maintained at 25 basis points for any loans subject to the new loan charge policy.

The measures have been undertaken to strengthen the bank's finances that have been under strain, particularly in the past year. An extended financial review of the bank's balance sheet has shown a declining trend in IBRD net income over the medium and long term.

On the cost side, both the strategic compact and the cost effectiveness review have highlighted that any additional cuts will undermine the bank's ability to deliver quality services to its clients and will be insufficient to reverse the trend.