The EBRD is considering providing local currency loans to borrowers in ETCs at more competitive rates. The Bank will establish an ETC Local Currency Risk Sharing Fund. This Fund would be set up with donor support and would provide a first loss guarantee for credit losses up to the Fund’s capital of € 30 million. Any further losses would be for the Bank’s ordinary capital resources.
The local currency loans would be extended to private sector borrowers in the financial sector and real economy. Based on current forecasts, it is expected that the Bank would be able to create a portfolio of €200 million of local currency loans in the first two years and such portfolio would require EUR 30 million of risk sharing grants to achieve the targeted reduction in credit margins.
The risk sharing fund would allow the Bank to reduce credit margins for local currency loans. The lower margins on top of relatively expensive cost of funds in local currency would allow the Bank to offer local currency loans at lower interest rates thereby influencing borrowers to switch to borrowing in local currency. This shift from USD loans would reduce the borrowers’ FX risk and, more importantly, help mitigate the increasingly higher levels of dollarisation in ETC financial systems.
The ETC LCY Fund would be established for a temporary period to catalyse local currency loans. The proposed risk-sharing mechanism would be available in those ETCs where the Government cooperates with the Bank in the initial Country Assessment, and then enters into a Memorandum of Understanding with EBRD where it commits to implement changes in macroeconomic policies, legislation and/or practices required to improve local capital markets and local currency loan markets. The Bank would review a country’s actual progress annually with the expectation that continued commitment to developing local currency local capital markets will be in evidence.
In countries where capital market development leads to improved sources of local currency funding, or the Bank’s all-in cost of funds is otherwise reduced, the support elements of the Fund will be calibrated to reflect the improved market conditions. It is expected that once local capital markets have improved sufficiently, there will no longer be a need to levy lower margins and the Bank can return to charging conventional credit margins with no risk sharing support from donors.
Principal elements of transition impact are:
Institution building: Development of local currency local capital markets as a result of the plan agreed in letters of intent with ETC Governments, which should ultimately result in a sustainable increase in the availability of local currency funding to businesses. In addition, the project can be seen as supporting post-crisis recovery.
- Demonstration of new forms of financing: Encouragement of de-dollarisation and the establishment of longer term local currency lending, and the development of local currency money and capital market instruments.
At the sub-project level, borrowers that lack natural hedges will benefit from reduced currency exposure. Partner banks and clients will need to develop the skills required to manage floating rate instruments, and to the extent that they engage on this there will be some knowledge transfer and skill development.
OCE would transition-rate each project benefiting from the Programme as that transaction would otherwise be handled, i.e. independently or under the relevant framework facility as appropriate.
Private corporate clients and all financial institutions, including commercial banks, micro-finance institutions, leasing and pension funds.
Revolving Limit of €200 million
The Eligible Assets under the ETC LCY Special Fund will be processed and approved pursuant to existing frameworks listed below:
- Local currency loans to financial institutions;
- Local currency senior loans under the Direct Lending Facility (a regional framework to provide smaller loans primarily to medium-sized local private companies in the ETCs); and
- Local currency participations with local financial institutions in sub-loans under the Medium-Sized Co-Financing Facility (“MCFF”).
This fund will be providing first loss risk guarantee to the Bank to cover credit losses associated with local currency loans made under a number of existing EBRD frameworks/instruments. Environmental and social due diligence will therefore be carried out under the procedures agreed for those frameworks/instruments and hence no additional environmental or social requirements will be placed upon this programme.
To be decided at a later stage.
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