This Operational Policy statement was revised in March 2012 to take into account the provisions of OP/BP 9.00, issued in February 2012; and previously revised to reflect title change to "finance officer" (formerly disbursement officer) that took effect on July 1, 2002.
Note: OP 3.10 and BP 3.10 replace OP and BP 3.10, Financial Terms and Conditions of IBRD Loans, IBRD Hedging Products, and IDA Credits dated March 2002. For guidance, additional information is available at http://www.worldbank.org/fps. Information contained on such websites is for illustration purposes only and does not constitute World Bank policy. Questions on IBRD financial products may be referred to the Manager, Banking and Debt Management Group (BCFBD). Questions on IDA credits may be referred to the Director, Resource Mobilization Department (FRM).
Revised March 2012
1. Bank staff include discussions on the optimal use of IBRD's financial products as an integral part of IBRD's dialogue with the borrower to help it strengthen its sovereign asset-liability management capacity or devise a coherent risk management strategy if it does not have one. The Country Portfolio Performance Review (CPPR) exercise and Country Assistance Strategy (CAS) preparation provide an opportunity to review debt management issues and strategies and to discuss the choice of financial instrument(s) for upcoming operations.
New Loan Commitments
2. IBRD's financing options allow the borrower a choice of financial terms both before Board approval and during the life of the loan. The borrower is solely responsible for choosing the financial terms of the IBRD loan. IBRD staff are responsible for ensuring that the borrower is aware of available financing options at the appropriate time. IBRD staff provide information but do not recommend specific loan terms or advise the borrower in their selection.
3. As early as possible during loan preparation, IBRD staff ensure that the borrower is aware of the following sequence of decisions: (a) choice of loan product; (b) choice of the currency or currencies of loan denomination; (c) whether to pay the front-end fee up front or finance it out of the loan proceeds; (d) repayment schedule choices; and (e) if fixed-spread loan (FSL) terms are selected, choice of the conversion options to be included in the Loan Agreement and, if the interest rate conversion option is chosen, whether to instruct the Bank to periodically fix the rate on disbursed loan amounts through inclusion of an Automatic Rate Fixing (ARF) clause in the Loan Agreement.
4. Appraisal. Before project/program appraisal, the task team leader (TL) provides to the representative of the borrower/guarantor in charge of making financial term choices the Banking and Debt Management Group's (BCFBD's) information package, including a loan choice worksheet outlining the options mentioned above.1 Once the borrower indicates its selection by completing the loan choice worksheet and sending it back to the BCFBD, BCFBD forwards the worksheet to Loan Department and Legal Department for their use in preparing the applicable draft legal documentation.
5. The task team describes the selected loan terms on the front page of the Project/Program Appraisal Document (PAD) and includes them in the financial analysis for the project. For a revenue-generating project/program, the appropriate section of the PAD discusses the selected terms and their effect on the project's/program's risks and benefits. When the borrower chooses disbursement-linked repayment of an FSL, the task team defines the expected disbursements in semester increments on the basis of IBRD's fiscal year, reliable expenditure forecasts, and sound cost analysis.
6. Negotiations. The borrower confirms its choice of financial terms during negotiations, and a final version of the loan choice worksheet reflecting the borrower's final choices is attached to the Minutes of Negotiation. The borrower's rationale for its choice of currency, interest rate basis, and repayment schedule are reflected in the Minutes of Negotiation.
7. On the basis of the agreed repayment terms, the finance officer prepares the amortization schedule for inclusion in the draft Loan Agreement annexed to the Minutes of Negotiations. For variable-spread loans (VSLs), the country director clears any deviation from standard country terms with the Regional vice president (RVP); Director, Corporate Finance Department (SFRCF); Director, Loan Department (LOA); and the chief counsel of the relevant Regional Practice Group, Legal Vice Presidency (LEG).2
8. Implementation, Monitoring, and Evaluation. During project/program implementation and through the life of the loan, Bank staff ensure that the borrower has sufficient information on the options available to convert to a different currency or interest rate basis or use an IBRD hedging product. CPPR mission reports include updated assessments of the extent to which selected loan terms are actually assisting the borrower in reducing its financial risks by more closely matching the currency and interest rate characteristics of its assets and liabilities. For a direct loan or a subloan to a revenue-earning entity, the Implementation Completion Report assesses the impact of the selected loan on the entity's financial risk management.
Conversion and Hedging Requests3
9. When the Loan Client and Financial Services Division of the Accounting Department (ACTCF) receives the borrower's signed request for FSL conversion or hedging products, it sends the request, through the Loan Tracking System (LTS),4to the country director, LEG, and the Banking and Debt Management Group (BCFBD) for clearance. The country director (or a designated representative) reviews the borrower's rationale for the conversion or hedge request and discusses any concerns with BCFBD, seeking further clarification from the borrower as necessary. Ultimately, if IBRD is not satisfied with the rationale for the transaction, it retains the right (under the legal documentation) to decline the request. Following internal clearance, ACTCF sends the request to the Asset-Liability Management Group (ALM) in the Bank's Treasury for trade execution within 15 business days. ALM then returns the request to ACTCF for the necessary financial recording and borrower notification.
Changes to Approved Repayment Terms of IBRD Loans
10. Under exceptional circumstances, IBRD may, upon receiving a request by the borrower, change existing repayment terms for a loan using the following procedures:
(a) If the principal disbursed and outstanding under a loan is less than the scheduled maturity payment, ACTCF advises the TL of the adjustments required, and the TL informs the borrower of the adjustment. ACTCF bills the borrower an amount equal to the full disbursed and outstanding balance and adds the balance of the scheduled maturity payment to the next scheduled maturity payment. This process continues until the disbursed and outstanding balance exceeds the scheduled maturity payment plus any additions due to such deferrals.5
(b) If there are extraordinary country or project/program circumstances, requests to change existing repayment terms are endorsed by the country director and cleared by the RVP; Director, SFRCF; Director, ACTCF; and LEG.
11. When the borrower submits a signed prepayment request to ACTCF, ACTCF requests ALM to compute the prepayment premium.6 ACTCF then communicates the amount of any premium to the borrower. ACTCF monitors the level of prepayment requests during the year and notifies SFRCF if the Bank receives a large volume of such requests. Moreover, if any prepayment gives rise to a financial policy issue, ACTCF consults SFRCF.
12. Prepayment. In consultation with the Region and the borrower as required, ACTCF administers the actual prepayment (e.g., currency of payment, date of payment). If sold or converted portions of the loan are included in the prepayment, ACTCF also informs ALM of the transaction details on those portions, before the agreed date of prepayment.
13. Each Region has appointed a Regional Product Delivery Team (RDT), led by an RDT Coordinator, to assist other operational staff in the Region in carrying out their responsibilities with respect to the IBRD financial products.7
14. The RDT may request support from a Central Resource Team (CRT) led by BCFBD in close collaboration with LEG and LOA. The CRT provides expert support on the application of the financial products and develops operational procedures for delivering new products to borrowers, in collaboration with the Regions. BCFBD supports informed borrower decision-making and IBRD staff delivery capacity by offering training and information programs for Bank clients and Bank staff on IBRD loan and hedging products; modeling alternative loan repayment term cash flows and helping clients customize loan terms that meet their financing needs and project/program objectives; and issuing informational materials describing the loan and hedging products and tools to analyze IBRD financial product choices.8
15. Country unit staff are responsible for ensuring adequate communication with task teams that are preparing new lending operations and for keeping IBRD missions abreast of the latest discussions with the ministry of finance, the central bank, and other central authorities relating to loan terms and ALM issues. Country economists, country officers, and other operational staff are expected to be familiar with, but not to become experts in, the loan products, hedging products, and risk management principles. They are expected to engage central support as needed.
Detailed information on and procedures for FSL conversions and use of hedging products are set out in the Guidelines for Conversion of Loan Terms for Fixed-Spread Loans (the Conversion Guidelines) and Guidelines for Using IBRD Hedging Products (the Hedging Guidelines), respectively. Both are available at http://www.worldbank.org/fps Each contains an annex providing the request forms.
Internal clearance within the Bank is handled through the LTS, a web-based tracking system that also helps monitor the various processes involved in implementing a request. ACTCF maintains the database of Regional representatives designated to review and authorize through the LTS, FSL conversions and hedge requests from borrowers.
This case is not applicable to FSLs as repayment installments for FSLs are calculated as a portion of the disbursed and outstanding loan amount.
For calculation of the prepayment premium see Annex B of OP 3.10.
RDT members and designated staff in country units are expected to become thoroughly familiar with the financial product menu by participating in BCFBD's training and certification program.
Such materials include: (a) product brochures describing the products and their use; (b) a Principal Amortization Generator (PAG) spreadsheet, which allows the user to create different principal repayment schedules specifying the country category and the desired loan repayment terms; (c) an "IBRD Financial Product Workbook" (FPW) model supporting evaluation of product alternatives under various assumptions; and (d) a distance education program with accompanying material. These and other materials are available in hard copy or on the BCFBD website at http://www.worldbank.org/fps. Product brochures are available in English and other selected languages.