World Bank Frequently Asked Questions

Transcription

1 World Bank Frequently Asked Questions Loan Services Group Accounting Department November 2006

2 Introduction This set of Frequently Asked Questions (FAQ) is meant to provide a ready resource to the World Bank s borrowers and staff to understand the Bank s lending products and policies. The set aims to shift the awareness paradigm of the Bank s clients and also provide a single view of information on all operational aspects of the Bank s lending products and policies. The first chapter on Lending Products is a collection of FAQ s which revolve around the structure of IBRD loan products, IDA credits and some of the new financial products that are available to the Bank s borrowers. They aim to comprehensively answer all likely issues that can emanate from the terms and conditions of IBRD and IDA lending products. The subsequent chapter on billing deals with the Bank s debt service billing cycle and procedures. The third chapter on debt service overdues contains a set of FAQ s on the Bank s overdue policy, graduated approach to sanctions and the various Bank overdue notifications. The fourth chapter on waivers is a set of FAQ s that include questions on loan charge waivers that are provided by the Bank, eligibility criteria for waivers and the timeline for waiver loss and restoration, amongst others. The last chapter on loan prepayment aims to increase understanding of the Bank s prepayment policy, procedure and computational methodology. This set of questions has been compiled by the Loan Services Group of the World Bank. Although it is in and of itself comprehensive, it may not necessarily cover all aspects of the Bank s lending products and policy. Detailed information on the terms and conditions of the Bank s financial products can also be obtained from the Debt Servicing Handbook and the World Bank Operational Manual. Any queries related to these FAQ s can be addressed to the Loan Services Group of the World Bank. Loan Services Group Accounting Department The World Bank 1818 H Street, N.W. Washington, D.C Telephone: Facsimile: loanclientservices@worldbank.org 2

3 Contents Chapter 1 Lending Products 1. What are the main loan products currently offered by the International Bank for Reconstruction and Development (IBRD)? 2. What are the currencies in which Variable Spread Loans (VSLs) and Fixed Spread Loans (FSLs) can be offered? 3. Can a borrower change the currency of the VSL or FSL after the loan has been signed? 4. How is the interest rate determined for VSLs? 5. What are the due dates for a VSL? 6. How is the interest rate determined for FSLs? 7. What are the due dates for an FSL? Why does the interest rate on an FSL change? 8. Why is a market risk premium included in determining the spread of an FSL? 9. Why is the Basis Swap Adjustment included in determining the spread of an FSL? 10. At what point is the fixed spread determined for an FSL? 11. How is the interest rate of an FSL calculated for the initial interest period? 12. Where can I locate the current VSL and FSL lending rates? 13. In addition to interest, what other charges are payable on FSLs and VSLs? 14. Why is the commitment charge on FSLs higher than that on VSLs for the first four years of the loan? 15. What hedging avenues are available for FSLs? 16. What hedging avenues are available for VSLs and other loan products (other than FSLs)? 17. Is a separate agreement required to enter into a free-standing hedge? 18. Can you summarize the embedded and free-standing hedge products that are offered by IBRD based on loan type? 19. What is the interest rate for the unwithdrawn portion of an FSL that has undergone a currency conversion? 20. How does the Automatic Rate Fixing (ARF) feature in an FSL work? 21. When can a borrower request ARF and can the ARF arrangement be cancelled? 22. Are there any limits on the amounts for ARF? 23. When should a conversion request be sent to the Bank? 24. What transaction fee is charged for hedging products? 25. Why is there no transaction fee for rate fixing of FSLs? 26. What are the various types of principal repayment patterns that are available for VSLs and FSLs? 27. How are repayment terms determined for VSLs? 28. Can a VSL have repayment terms that are different from standard country terms? 29. What repayment choices are available for FSLs? 30. How are repayment terms determined for Commitment-Linked FSLs? 31. How are repayment terms determined for Disbursement-Linked FSLs? 3

4 32. Is there flexibility to deviate from the governing parameters that determine the repay ment terms of an FSL? 33. What is the effect on the repayment schedule of FSLs and VSLs when the loan is not fully withdrawn by the first principal repayment date and disbursements occur thereafter? 34. What is the effect on the repayment schedule of a VSL if the disbursed and outstanding amount is less than the amount payable on the principal due date? 35. What is the currency of commitment for International Development Association (IDA) credits? 36. How is the Special Drawing Rights (SDR) exchange rate calculated? 37. What charges are payable on IDA credits and how are they determined? 38. How are repayment terms determined for IDA credits? 39. What are hard-term IDA credits? 4

5 Contents Chapter 2 Billing 1. Explain the debt service billing cycle applicable to International Bank for Reconstruction and Development (IBRD) loans and International Development Association (IDA) credits. 2. What are the debt service components of a bill? Briefly explain how each is computed. 3. What happens if a loan due date falls on a weekend or on Bank holidays? 4. Does the Bank charge interest on delayed payments? 5. What is the order of application of debt service payments in IBRD loans and IDA credits? 6. When and how is the front-end fee billed? 7. Will the front-end fee be reduced if there is a cancellation in the loan after loan effectiveness? 8. Will the front-end fee be reduced if there is a cancellation in the loan before loan effectiveness? 9. What are the day count conventions for interest and commitment charges across the vari ous loan types? 10. What is the treatment for undisbursed loan amounts that are cancelled? 11. Can I make a debt service payment in a currency different from that billed? 12. Why are Currency Pool Loans (CPLs) billed in different currencies during the loan life cycle? 13. In addition to debt service bills, does the Bank send any other reminders indicating upcoming debt service payments? 14. How does the Bank treat a debt service receipt that is greater than the amount billed? 15. How can I get a confirmed receipt of the debt service amount paid? 16. Where can I get a copy of my bills? 17. Where can I get estimated debt service payments for future years? 5

6 Contents Chapter 3 Overdue Payments 1. What is the Bank s overdue policy? 2. What overdue reminders are sent to the borrowers by the Loan Services Group (LSG) before the debt service payment crosses the 30-day overdue mark? 3. When will a debt service payment become 30 days overdue? What notifications will the Bank send at this stage? 4. What sanctions will be applied when payments become 30 days overdue and how can these sanctions be lifted? 5. Will the Bank inform the borrower about loss of eligibility for waiver? 6. When will a debt service payment become 45 days overdue? What notifications will the Bank send at this stage? 7. What sanctions will be applied when payments become 45 days overdue and how can these sanctions be lifted? 8. What are the interest waiver loss implications for the country as a whole when only one of the borrowers of the country crosses the 45-day overdue mark? 9. What actions will be initiated when a debt service payment becomes 53 days overdue? 10. When will a debt service payment become 60 days overdue? What notifications will the Bank send at this stage? 11. What sanctions are applied when payments become 60 days overdue and how can these sanctions be lifted? 12. Is the Bank s Board informed about sanctions imposed on the borrower before the nonaccrual stage? 13. Can a suspension of disbursement occur for reasons that are not related to debt service payment? 14. Does the Bank charge interest on overdue payments? 15. When is a country placed in nonaccrual status and what are the implications for the Bank and the member country? 16. When does a country come out of nonaccrual status? 17. What is the role of the LSG in implementing the Bank s overdue policy? 6

7 Contents Chapter 4 Waivers 1. What type of charge waivers do International Bank for Reconstruction and Development (IBRD) loans have? 2. What are the prerequisites for receiving charge waivers from the Bank? 3. What are the current charge waiver rates? Will these rates change over time? 4. How is a commitment charge waiver calculated? 5. How is a partial interest charge waiver calculated? 6. Are waivers recalculated over two consecutive billing cycles? 7. What loan types are not eligible for interest waivers? 8. If a borrower loses an interest waiver, how can it be regained and what is the timeline for completing waiver restoration? 7

8 Contents Chapter 5 Prepayment of IBRD Loans 1. When should a borrower prepay a loan? 2. Why is a premium charged on prepayment of loans? 3. Is the prepayment of Currency Pool Loans (CPLs), Single Currency Pool Loans (SCPLs), and Prepool Loans (PPLs) eligible for waiver of prepayment premium? 4. Is the prepayment of Variable Spread Loans (VSLs), Fixed Spread Loans (FSLs), and Fixed-Rate Single Currency Loans (FSCLs) eligible for waiver of prepayment premium? 5. How is the prepayment amount for a CPL and an SCPL determined? 6. Will the prepayment amount change if the interest rate on a CPL or an SCPL being pre paid changes between the estimate date and the final prepayment date? 7. Why is a margin included in the prepayment estimate of a CPL and non-u.s.-dollar SCPLs? 8. How is the prepayment amount for a VSL determined? 9. What are the reasons that can lead to the final prepayment amount of a VSL being differ ent from the estimated prepayment amount? 10. How is the prepayment amount for an FSL determined? 11. How is the prepayment amount for an FSCL determined? 12. How will a partial prepayment in a loan be applied toward the principal outstanding of the loan? 13. Who should sign the prepayment application form? 14. What is the World Bank s procedure for prepayment? 8

9 Chapter 1 Lending Products 1. What are the main loan products currently offered by the International Bank for Reconstruction and Development (IBRD)? The two current mainstream loan products of IBRD are the Variable Spread Loan (VSL) and the Fixed Spread Loan (FSL). These loan products, which have different characteristics, are available to all IBRD borrowers. The VSL has been offered to borrowers for over a decade; the FSL is a relatively new product that was first offered to borrowers in The FSL is an outcome of the natural evolution of IBRD loan products and aims to enhance the borrower s ability to manage financial risk by offering embedded flexibility. It also provides increased avenues to tailor repayment terms. 2. What are the currencies in which Variable Spread Loans (VSLs) or Fixed Spread Loans (FSLs) can be offered? The VSL or FSL can be denominated in one or more currencies. Although most loans usually are denominated in one of the three main currencies (the U.S. dollar, the euro, or Japanese yen), these loans can be offered in other currencies that the IBRD can efficiently intermediate. As a policy, the IBRD does not offer loans to borrowers in the currency of the concerned member country. 3. Can a borrower change the currency of the VSL or FSL after the loan has been signed? Yes, the currency of the underlying obligation of a loan can be changed after loan signing by undertaking a currency conversion. Such hedging avenues are embedded in the FSL loan agreement, but separate documentation and approvals are required for VSLs undertaking such conversions. Please see questions [15 and 16] on hedging provisions for more details. 4. How is the interest rate determined for VSLs? The interest rate of a VSL is based on a floating base rate and a variable spread. To understand the underlying parameters, let us split the interest rate into the following two components: Base Rate: For most currencies, the base rate for VSLs is the six-month London Interbank Offered Rate (LIBOR) prevailing at the beginning of a semi-annual interest period. Variable Spread: The variable spread on VSLs is the sum of (1) IBRD s borrowing cost margin and (2) the contractual spread. IBRD s borrowing cost for funding allocated to VSLs is currently a sub- LIBOR rate. Consequently, the cost margin is negative and was (-)0.42 percent as of February 15, The cost margin is recalculated every six months (on June 30 and December 31 of each year) depending on IBRD s cost of funding in the preceding six months. 9

10 The contractual spread does not fluctuate frequently and it is the same for all currencies at a point in time. The contractual spread is currently 0.75 perc ent for all loans except Special Development Policy Loans (SDPLs) with an invitation to negotiate on or after July 31, For loans (except SDPLs) having an invitation to negotiate date before that date, the contractual spread is 0.50 percent. The sum of the base rate and the variable spread makes up the interest rate on a VSL. For example, the interest rate components of a U.S. dollar VSL (with an invitation to negotiate date on or after July 31, 1998) for the semi-annual interest period beginning February 15, 2006, will be as follows: Base Rate: 4.93 percent (U.S. dollars six-month LIBOR) Variable Spread: 0.33 percent, which includes Funding Cost Margin: (-)0.42 percent Contractual Spread: 0.75 percent Interest Rate = 4.93 percent (-)0.42 percent percent = 5.26 percent 5. What are the due dates for a VSL? Typically, IBRD loans have due dates that fall on either the 1st or the 15th of a month. In the case of VSLs, the due dates are always on the 15th of a month. The base rate (LIBOR) will usually change for every billing date. However, the loan spread changes only twice in a year (after June 30 and December 31 of each year) because of the change in the cost margin. The contractual spread is relatively stable and does not usually change (this does not preclude a future change in contractual spread). 6. How is the interest rate determined for FSLs? The interest rate of an FSL is based on a floating base rate and a fixed spread. The loan spread is determined at the time of loan signing and remains fixed for the life of the loan. To understand the underlying parameters, let us split the interest rate into the following components: Base Rate: For most currencies, the base rate for FSLs is the six-month LIBOR prevailing at the beginning of a semi-annual interest period. Fixed Spread: The Fixed Spread is the sum of (1) IBRD s borrowing cost margin, (2) the market risk premium, (3) the Basis Swap Adjustment, and (4) contractual spread. IBRD s borrowing cost margin is based on IBRD s projected funding cost margin relative to the U.S. dollar LIBOR. The market risk premium compensates the Bank for refinancing risk and is explained in question [#8]. The Basis Swap Adjustment is only charged for non-u.s.-dollar FSLs and is explained in question [#9]. The contractual spread does not fluctuate frequently and is the same for all currencies at a point in time. The contractual spread is currently 0.75 percent for all loans (except 10

11 SDPLs) with an invitation to negotiate on or after July 31, For loans (except SDPLs) having an invitation to negotiate before that date, the contractual spread is 0.50 percent. For example, the interest rate components of a U.S. dollar FSL for the semi-annual interest period beginning February 15, 2006, will be as follows: Base rate: 4.93 percent (U.S. dollar six-month LIBOR) Fixed Spread: 0.5 percent, which comprises of the following: Projected funding cost margin: (-)0.30 percent Market Risk Premium: 0.05 percent Basis Swap Adjustment: nil Contractual Lending Spread: 0.75 percent Interest Rate = 4.93 percent percent = 5.43 percent 7. What are the due dates for an FSL? Why does the interest rate on an FSL change? FSLs are always due on either the 1st or the 15th of a month. The base rate (LIBOR) will usually change for every semi-annual due date. However, the fixed spread determined at the time of loan signing will remain fixed for the entire maturity of the loan. Thus, the only reason for a change in an FSL s interest rate (not having an interest rate conversion) over time will be the change in the base LIBOR rate. For FSLs in which the interest rate conversion option has been exercised, the interest rate will change when the option is effected. Please refer to questions [15] on FSL interest rate conversion options for more details. 8. Why is a market risk premium included in determining the spread of an FSL? The market risk premium compensates the bank for refinancing risk arising from fixing the spread over the life of the loan, while its funding is for a shorter period. In other words, because the spread is fixed for the life of the FSL, IBRD is exposed to the risk that the new borrowing that will be contracted by IBRD to finance the balance maturity of the FSL (i.e., beyond the maturity of the initial borrowing) may be at a higher cost. To hedge against this risk, IBRD imposes a market risk premium on all FSLs. 9. Why is the Basis Swap Adjustment included in determining the spread of an FSL? The Basis Swap Adjustment is applicable only to non-u.s.-dollar FSLs and can be negative or positive. When the Bank swaps LIBOR-based borrowings from one currency to another, the Basis Swap Adjustment is included in the loan spread because of the difference in the Bank s sub- LIBOR funding cost margin in the currencies involved At what point is the fixed spread determined for an FSL? The fixed spread is determined when the loan agreement is signed. The fixed spread of an FSL is the Bank s fixed spread in respect of the initial loan currency in effect at 12:01 a.m. US eastern standard time, one calendar day before the date of the loan agreement. 11

12 11. How is the interest rate of an FSL calculated for the initial interest period? For the initial interest period, the fixed spread is the spread (in the initial loan currency) in effect at 12:01 a.m. U.S eastern standard time, one calendar day prior to the date of the loan agreement. The LIBOR rate is the London Interbank Offered Rate for six-month deposits in the loan currency that appears on the relevant Telerate page as of 11:00 a.m., Greenwich mean time on the LIBOR reset date of the interest period. For the initial interest period (and all currencies excluding the euro), the LIBOR reset date is the day-two London Banking Business day before the 1st or 15th of the month in which the loan agreement is signed, whichever day immediately precedes the date of the loan agreement. However, if the date of the loan agreement falls on the 1st or 15th of such month, the LIBOR reset date shall be the day-two London Banking Business days prior to the date of the loan agreement. For the euro, the definition of the LIBOR reset date, in the case of the initial period, is based on two target settlement days before the 1st or 15th of the month instead of two London Banking Business days. For example, if a U.S. dollar FSL is signed on February 20, 2006, then the LIBOR reset date for the initial interest period will be two London Banking Business days before February 15, Where can I locate the current VSL and FSL lending rates? The Current VSL and FSL lending rates are available on the treasury Web site of the World Bank ( The interest rates can also be obtained from the Bank s client connection Web site (clientconnection.worldbank.org). The client connection Web site is available only to borrowers and donors after they have registered with the site. A registration request can be initiated by accessing the above Web address. For any queries related to VSL or FSL lending rates, please write to 13. In addition to interest, what other charges are payable on FSLs and VSLs? Apart from regular interest, the following charges are payable on FSLs and VSLs: Commitment Charge: A commitment charge is payable on the undisbursed loan balance of the loan and is calculated using the following equation: Commitment charge = [Commitment charge rate net of waiver * Undisbursed loan balance outstanding * Period in days) / 365 or 366]. The commitment charge begins accruing 60 days after the loan agreement is signed. The commitment charge rate and the commitment charge waiver rate are determined by the Bank s Board on an annual basis. The commitment charge waiver is available to all borrowers irrespective of debt service payment performance after the loan becomes effective. Front-End Fee: For all loan commitments, IBRD charges a one-time front-end fee of 1 percent of the amount of the loan subject to the applicable front-end fee waiver. At the option of the borrower, the front-end fee can be paid out of the loan proceeds upon loan effectiveness. When the borrower does not finance the front-end fee from the loan, the borrower must pay the fee no later than 60 days after the effectiveness date, but 12

13 before the first withdrawal from the loan. The front-end fee waiver is decided annually by the Bank s Board. The Loan Services Group of the Bank sends a separate bill for the front-end fee to be paid (and not refinanced from the loan proceeds) by the borrower. 14. Why is the commitment charge on FSLs higher than that on VSLs for the first four years of the loan? The commitment charge on FSLs is higher than that on VSLs for the first four years because an additional risk premium of 0.10 percent is included in the commitment charge for FSLs. This premium is applied to compensate IBRD for the funding risk inherent in FSLs. This risk arises because IBRD commits to a fixed spread at the inception of the loan when disbursements have not yet occurred. At this point, IBRD usually has not raised funds for on-lending. Funds are raised at the time of actual disbursements in the FSL. This time gap may lead to a situation in which the cost of raising funds increases between the time the fixed spread is committed on the FSL and the time funds are actually raised for the loan. This funding risk is mitigated by charging a risk premium of 0.10 percent on the FSL. As an example, consider that IBRD commits to a fixed spread of 0.50 percent on an FSL. At this point, IBRD expects to raise funds at LIBOR (-)0.30 percent, thereby earning a spread of 0.80 percent. Assume further that by the time the funds are actually raised (when disbursements happen in the FSL) the funding cost rises to LIBOR (-)0.25 percent, thereby reducing the spread available to IBRD to 0.75 percent. The risk premium on the commitment charge for FSLs would compensate IBRD for this risk. 15. What hedging avenues are available for FSLs? FSLs provide considerable flexibility to borrowers to manage the financial risk of their loans. All FSLs have the choice of embedded options available that allow borrowers to transform the risk characteristics of their IBRD obligations, although the negotiated terms of the loan agreements themselves may be fixed. The various conversion options available to borrowers in an FSL after loan effectiveness are summarized below: Currency Conversion: This option allows the borrower to change the currency of commitment of all or any portion of the principal amount of the loan whether undisbursed or disbursed and outstanding. Interest Rate Conversion: This option allows borrowers to fix or unfix the interest rate on all or any portion of the principal amount of the loan that is disbursed and outstanding at any time during the life of the loan. Borrowers can also choose to request IBRD to automatically fix the interest rate through a series of interest rate conversions on all or part of the amounts to be withdrawn (Automatic Rate Fixing). Interest Rate Cap or Collar: This option allows borrowers to reduce the variability of their lending rate and is applicable to the variable rate applicable to all or any portion of the principal amount of the loan disbursed and outstanding. An interest rate cap imposes a ceiling on the interest rate that the borrower has to pay on the FSL. An inter- 13

14 est rate collar, on the other hand, imposes a ceiling as well as a floor on the interest rate of an FSL. Interest rate collars are usually available at a lower price than an interest rate cap. 16. What hedging avenues are available for VSLs and other loan products (other than FSLs)? VSLs do not contain the embedded options that form part of the FSL agreement. For such loan products including Currency Pool Loans (CPLs), Single Currency Pool (SCP) Loans, and Fixed-Rate Single Currency Loans (FSCLs) IBRD offers free-standing hedges. Following are the three main free-standing hedging products that are available: Free-standing currency hedge: By entering into a free-standing currency hedge, a borrower can transform the currency of obligation on an existing IBRD loan. In the case of a currency hedge, IBRD and the borrower agree to exchange cash flows denominated in different currencies at certain dates in the future. The cash flows reflect payments of interest (either fixed or floating) on these currencies and frequently an exchange of principal amounts. In the case of CPLs and SCP Loans, the currency hedge would be partial and not a full currency hedge. The reasons for this are as follows: In the case of CPLs, IBRD will undertake a currency hedge only for the major currencies, namely, U.S. dollars (US$), Japanese yen ( ), and euros (Euro). To the extent that the currency obligation in a CPL is designated in other currencies (usually 5 10 percent), no currency hedge will be available. Currency swaps on CPLs and SCP Loans will be for principal only and must be for the full maturity of the loan. The currency exposure in interest rate payments will not change. Additionally, in CPLs, the borrowers will bear currency exposure to the extent that the currency composition of the CPL pool changes from the targeted ratio of US$1 : Euro1 : 125. Free-standing interest rate hedge: By entering into a free-standing interest rate hedge, the borrower can effectively change the interest rate characteristics of the net obligation to IBRD. The change in obligation can be from a fixed to floating rate or vice versa. In the case of VSLs, only an approximate interest rate hedge is possible. It is possible because the underlying interest rate for a VSL consists of a variable spread over LIBOR, which changes based on IBRD s cost of related funding. This spread cannot be replicated using standard market instruments. Therefore, in the case of VSLs, IBRD executes an approximate hedge by transforming only the LIBOR portion of the interest rate. As a result, when a floating to fixed interest rate hedge is executed for a VSL, then the LIBOR 14

15 portion of the interest rate will be fixed. The variable spread over LIBOR would not be hedged and could still change. Interest rate hedging products are not provided for CPLs and SCP Loans, because the interest rate on these loan types is not a market-based rate and hence cannot be replicated or offset. Free-standing interest rate cap or collar: Among the non-fsl products, caps and collars are available only in VSLs. Because of the reasons highlighted above, the cap or collar in a VSL will be for only the LIBOR portion of the interest rate and will not be provided for the variable spread portion of the interest rate. 17. Is a separate agreement required to enter into a free-standing hedge? To use free-standing hedging products, the borrower must enter into a Master Derivative Agreement (MDA), which sets the contr actual framework between the borrower and IBRD. Before executing an MDA with a bor rower, IBRD will conduct a legal review to ensure the enforceability of the provisions of the MDA with the borrower. Defaults under a MDA are treated similar to defaults under a loan agreement and have cross-remedy provisions with IBRD s loan agreements and vice versa. 18. Can you summarize the embedded and free-standing hedge products that are offered by IBRD based on loan type? The table 1.1 summarizes the embedded and free-standing hedge products offered by IBRD based on loan type. Table 1.1 Summary of Hedge Products Offered by IBRD Loan Type Hedging Product a Currency Conversion Interest Rate Conversion Caps or Collars FSL (Embedded options) Available Available Available VSL Available Available Available CPL Available Not available Not available SCP Available Not available Not available FSCL Available Available Not available Note: FSL = Fixed Spread Loan, VSL = Variable Spread Loan; CPL = Currency Pool Loan SCP = Single Currency Pool Loan; and FSCL = Fixed-Rate Single Currency Loan. a. Hedging for CPL, SCP, and VSL will be approximate and not a full hedge. b. Currency swaps are for principal only. 19. What will be the interest rate for the unwithdrawn portion of an FSL that has undergone a currency conversion? When the undisbursed portion of an FSL undergoes a currency conversion to an approved currency, the variable interest rate on the loan when it is withdrawn will be equal to the LIBOR in respect to the approved currency, plus a fixed spread for the approved currency. The fixed spread is determined by taking the fixed spread applicable prior to the conversion and making a Basis Swap Adjustment (on the execution date) to it. The Basis Swap Adjustment is the difference 15

16 in the Bank s sub-libor funding cost margin when the Bank swaps LIBOR-based borrowings from one currency to another. 20. How does the Automatic Rate Fixing (ARF) feature in an FSL work? When an ARF feature is chosen, IBRD will execute a series of interest rate conversions to change the initial variable rate of the loan amount being disbursed to a fixed rate. Within an ARF, there are two variants. The borrower can choose one of the two variants, which essentially differ on the frequency of the interest rate fixings executed within the ARF. These two variants are as follows: ARF by Period: Interest rate conversions are executed at regular time intervals, such as semi-annually or annually, for future withdrawals of the loan. The intervals necessarily have to coincide with the interest periods under the loan. If the borrower asks for an ARF to be undertaken at the end of each interest period of the loan, then the interest rate on all amounts of the loan withdrawn during an interest period will be converted with effect from the first day of the next interest period. Similarly, if the ARF request spans multiple periods (e.g., 12 or 18 months), then the loan amount disbursed within such multiple periods will be fixed with effect from the first day of the interest period following the end of the multiple interest periods. For the initial interest period, the count begins from the effectiveness date and not from the signing date. ARF by Amount: Interest rate conversions are executed each time withdrawals reach a single specified threshold (subject to a minimum amount). When the specified threshold (or its exact multiple) is reached, the interest rate conversion will take effect from the next interest payment date following the date such threshold was reached. For example, consider a loan of US$100 million (signed amount) having interest payment dates of January 1 and July 1 and an ARF by threshold of US$30 million. Assume further that the disbursed amount reached the threshold of US$30 million on January 20, In such a scenario, the rate fixing (through a forward rate swap) will be executed for the US$30 million, which was disbursed as soon as practicable after the Bank s January 31, 2006, closing date. However, the fixed rate will take effect from July 1, Before this date, the original variable rate will apply. The final interest rate fixing can be calculated for an amount less than the threshold. In the above example, if US$30 million was disbursed in each of three different interest periods ( a ggrega ting to US$90 million), there would be three interest rate conversions of US$ 30 million each. The final interest rate fixing would be for the remaining balance of US$10 million. 21. When can a borrower request an ARF and can the ARF arrangement be cancelled? The borrower may include a request an ARF in the loan agreement or may submit a separate request for an ARF at any time during the life of the loan. The request form can be down- 16

17 l oaded from w w w. worl d b a n k. or g / f p s or a request can be sent to l oa n cl i en t s ervi ce Borrowers can cancel an ARF arrangement at any time. Such a cancellation will only apply to future time periods. 22. Are there any limits on the amounts for ARF? ARFs are subject to a minimum amount equal to US$3 million or 10 percent of the loan amount, whichever is higher, and are subject to a maximum amount of US$500 million. 23. When should a conversion request be sent to the Bank? A conversion request can be sent at any time to the Bank using standardized request forms. However, if the request is received by the Bank within 15 days before an interest payment date and is for a currency conversion of a withdrawn portion of the loan, an interest rate conversion, or an interest rate cap or collar, then the conversion will take effect on the next following interest payment date. For example, assume that an FSL has interest payment dates of January 1 and July 1 of the year. If a currency conversion request for the withdrawn portion of the loan is received on June 20, 2006, then the currency conversion will take effect only from January 1, 2007 (and not from July 1, 2006). For currency conversion of the unwithdrawn portion of the loan, the conversion will take effect from the execution date. 24. What transaction fee is charged for hedging products? Whenever IBRD executes a conversion, cap, or collar, the cost of the corresponding hedge at the time of trade execution is passed through to the borrowers. IBRD charges a one-time transaction fee for all conversions and for early termination of any conversion. The transaction fee schedule for hedging products is given in table 1.2. This fee schedule may change from time to time at the option of the Bank. Transaction fee is determined as a percentage of the principal amount involved in the hedge transaction. Table 1.2 Transaction Fee Schedule for Hedging Products Transaction Type Fee (%) Currency Conversion: - For FSL: on undisbursed amounts For FSL: on disbursed amounts For other loan types 0.25 Interest Rate Conversion: - For FSL: rate fixing for total principal outstanding of Free the FSL for a period up to the final maturity of the loan - For FSL: additional rate fixing/unfixing For other loan types Interest Rate Cap or Collar (for all loan types): Transaction fees will be payable in the applicable loan currency and, in the case of a currency conversion, in the loan currency applicable prior to the currency conversion.. Transaction 17

18 fees charged by the Bank will be payable no later than 60 days after the execution date or the early termination date (of any conversion), as applicable. 25. Why is there no transaction fee for rate fixing of FSLs? There is no transaction fee for rate fixing for the total principal outstanding of the FSL for a period up to the final maturity of the loan. This is in lieu of the withdrawal of the FSCL as a loan choice for borrowers in December FSLs allow longer maturities and more competitive terms compared with the retired FSCL. 26. What are the various types of principal repayment patterns that are available for VSLs and FSLs? Repayment patterns can generally be classified as level, annuity, or customized. Level repayments consist of equal principal repayments during the life of a loan. In annuities the sum of the principal and interest payable remains constant, assuming that interest rates do not change over time. The principal constituent of an annuity typically will increase over time while interest will decline. In customized repayment patterns (e.g., bullet or ballooning), the principal repayment schedule is determined based on the borrower s needs. Not all of these repayment patterns are available for every loan. The eligibility for a repayment pattern depends on the loan type as well as the country category; this is discussed in detail in questions 27 through How are repayment terms determined for VSLs? In the case of VSLs, the borrower has reduced flexibility to select a repayment schedule. For VSLs the repayment schedule is deter mined on the basis of prespecified standard country terms. The standard country terms differentiate among country categories on the basis of three factors, namely, (1) grace period, (2) final maturity, and (3) type of repayment schedule (annuity or level). The standard country terms based on country category are given in table 1.3. Table 1.3 Standard Country Terms Country Category Final Maturity (yrs) Grace Period (yrs) Type I II 20 5 Annuity III 17 4 Annuity 17 5 Level IV V 15 3 Annuity 15 5 Level 28. Can a VSL have repayment terms that are different from standard country terms? In the case of a VSL, there is limited flexibility to have repayment terms that are different from standard country terms. Customized repayment terms and installments, available in FSLs, are not offered in VSLs. The limited flexibility that is allowed in VSL repayment terms includes the following: 18

19 The grace period of a VSL can be extended if the final maturity is reduced (at the rate of one year for every six-month increase of the grace period). For countries in income categories I and II, the grace period and final maturity of a loan may be modified as long as the loan s average life remains within the standard set for borrowers in that category. At the portfolio level, the grace period and final maturity can also be extended if compensating reductions are made in the grace period and for the final maturity of loans that are made to the country in the same fiscal year. The weighted average grace period and final maturity for all loans committed to a country in the same fiscal year mu s t remain within the country limit. For example, consider that a country (borrower) plans to take two VSL loans in a fiscal year- one of US$200 million and another of US$100 million. The country, based on its country category, is eligible for a grace period of five years. Assume further that the country wants a grace period of six years for the second (US$100 million) loan. To do so, the grace period of the first loan will have to be reduced to 4.5 years. [Solve for x (200*(x)+100*6)/300=5) to keep the weighted average grace period at five years.] The above-mentioned deviations in VSL repayment terms require Bank approval. 29. What repayment choices are available for FSLs? There are two alternative repayment choices available for FSLs, which essentially define the two main variants of an FSL. These choices are as follows: Commitment-Linked FSL: FSLs that have repayment maturities that are fixed at the time of loan commitment are called Commitment-Linked FSLs. This variant can have either level, annuity, or customized (such as bullet) repayment patterns at the option of the borrower. Disbursement-Linked FSL: FSLs that have repayment schedules linked to loan disbursements are called Disbursement-Linked FSLs. In this variant, disbursements accumulated in semi-annual interest periods will together form a tranche and each such tranche will have its own repayment schedule. The grace period and final maturity will be the same for all tranche(s) of a Disbursement-Linked FSL. This variant can have only level repayment terms. The governing parameters for determining the repayment terms of the above-mentioned variants are discussed in questions How are repayment terms determined for Commitment-Linked FSLs? A borrower can customize the repayment schedules in the case of FSLs and is not governed by the standard country terms (which act only as a measure of illustration of an available repayment pattern). The customization of repayment schedules is governed by the type of FSL, namely, (1) Commitment-Linked FSLs or (2) Disbursement-Linked FSLs. The governing parameters 19

20 for determining the repayment terms of Commitment-Linked FSLs are as follows: Final Maturity Limit: The final maturity limit is uniform across all country (borrower) categories and is equal to a maximum of 25 years. Average Repayment Maturity: The average repayment maturity for a Commitment- Linked FSL is defined as the weighted average period of time between expected loan approval and scheduled repayments. For example, if a loan of US$100 million has a grace period of three years and a customized repayment schedule consisting of 10 unequal semi-annual installments (as depicted in table 1.4) then the average maturity will be as follows: Table 1.4 Customized Repayment Schedule Installment number Yearsa Repayment Schedule (US$ million) (A)*(B) (A) (B) years Total Average Maturity = 647.5/100 = Note: a. From expected loan approval to the principal repayment date. The stipulated average repayment maturity for each country category is tabulated as follows: Table 1.5 Stipulated Average Repayment Maturity Country Category Maximum Final Maturity (yrs) Average Repayment Maturity (yrs) I II III IV V Table 1.5. Stipulated A 31. How are repayment terms determined for Disbursement-Linked FSLs? A borrower can customize repayment terms in the case of FSLs and is not governed by standard country terms (which act only as a measure of illustration of an available repayment pattern). The customization of repayment terms is governed by the type of FSL, namely, (1) Commitment-Linked FSLs or (2) Disbursement-Linked FSLs. The governing parameters for disbursement linked FSLs are as follows. In Disbursement-Linked FSLs, each disbursed amount will have its own repayment schedule that commences from the beginning of the interest period following disbursements (all disbursements in a semi-annual interest period will be clubbed to determine a single tranche that 20

21 will have its own repayment schedule). All disbursed amounts (tranches) under a loan will have the same grace period and final maturity. The factors that govern the repayment terms of a Disbursement-Linked FSL will be defined in terms of each disbursed amount (tranche) and not the loan as a whole. Disbursement-Linked FSLs can have only level principal repayment patterns as opposed to level, annuity, or customized in the case of Commitment-Linked FSLs. The governing parameters for determining the repayment terms of Disbursement-Linked FSLs are as follows: Final Maturity Limit: The final maturity limit is uniform across all country (borrower) categories and is equal to a maximum of 25 years. Sum of the Disbursement Period and Average Repayment Maturity: Apart from final maturity, the other parameter that governs repayment terms is the sum of the expected disbursement period and average repayment maturity. The constituents of this parameter are detailed below: Expected Average Disbursement Period: This period is defined as the weighted average period of time between loan approval and expected disbursements. It is based on the estimated disbursement profile specified in the loan appraisal document. For example, a loan that is expected to disburse evenly over an eight-year period would have an expected average disbursement period of four years. Average Repayment Maturity: The average repayment maturity is defined as the weighted average period of time between the date of disbursement and scheduled repayments for each disbursed amount. For Disbursement-Linked FSLs, the sum of expected disbursement period and average repayment maturity should not exceed the following country limits of years (categories I II), years (category III), or years (categories IV V). For example, consider a loan of US$70 million that has a grace period of three years and a final maturity of eight years. The loan is expected to be disbursed in two installments of US$20 million and US$50 million (on dates depicted in table 1.6). The calculation of the sum of expected disbursement period and average repayment maturity would be as follows: 21

22 Table 1.6. Calculation of the Sum of the Expected Disbursement Period and Average Repayment Maturity Interest Years Disbursed Repayment Average Repayment MaturityCalculation Expected Period from Loan Amount (US$ Amounts (US$ million) Period since Disbursement Product Average Disb. Approval million) Tranche 1 Tranche 2 Tranche 1 Tranche 2 Tranche 1 Tranche 2 Period (A) (B) (C) (D) (E) (F) (C)*(E) (D)*(F) (A)*(B) Total Expected Average Disb. Period = 130/70 = 1.86 Average Repayment Maturity (Tranche 1) = 115/20 = 5.75 Average Repayment Maturity (Tranche 2) = 287.5/50 = 5.75 Sum of: Expected Average Disbursement Period + Average Repayment Maturity = Is there flexibility to deviate from the governing parameters that determine the repayment terms of an FSL? There is no flexibility to deviate from the first governing parameter, namely, maximum final maturity of 25 years. All FSLs will comply with this provision. In terms of the other governing parameter of average repayment maturity, borrowers can trade off terms across FSLs signed within the previous 12 months, as long as the weighted average repayment maturity of all FSLs to that country (within the previous 12 months) remains within the country limit. 33. What is the effect on the repayment schedule of FSLs and VSLs when the loan is not fully withdrawn by the first principal repayment date and disbursements occur thereafter? If the proceeds of the loan are not fully withdrawn as of the first principal payment date, the principal amount of the loan repayable by the borrower on each principal payment date will be determined as follows: For FSLs: In the case of Commitment-Linked and Disbursement-Linked FSLs, the repayment schedule is a percentage of the total principal amount of the loan withdrawn 22

23 and outstanding. As such, the principal repayment amount due will automatically adjust for the shortfall in disbursement. For example, consider an FSL of US$100 million (signed amount) repayable in four installments of 25 percent each, which is drawn to the extent of only US$80 million by the time the first principal repayment commences. In such a scenario, on the first principal repayment date, the borrower will pay only US$20 million (25 percent * 100 million). If there is a withdrawal of the undisbursed loan amount after the first principal payment date, then it will be repaid on the principal payment dates falling due after the date of such withdrawal in amounts determined by multiplying the amount of each such withdrawal by a fraction. The numerator of this fraction will be the original installment share percent specified in the agreement and the denominator will be the sum of all remaining installment shares for principal dates falling due on or after such date. For example, consider a Commitment-Linked FSL having a first principal repayment date of January 1, 2006, by which time only US$90 million of the US$100 million signed loan amount is disbursed. Assume further that the installment payable on January 1, 2006, as per the loan s repayment terms was 10 percent, while it is 20 percent on July 1, In such a scenario, the repayment on January 1, 2006, will be US$9 million (10 percent * 90 million). Now, if there is a disbursement of the remaining US$10 million on say January 15, 2006, then on the next due date (July 1, 2006) the principal repayment will be US$20.22 million (rounded off), which is the sum of (1) US$18 million (20 percent * 90 million) pertaining to the original disbursed amount and (2) US$2.22 million [10 million * (20 percent/90 percent)] pertaining to the new disbursement of US$10 million. For VSLs: In the case of VSLs, the repayment schedule is based on the loan amount committed as against the loan amount disbursed in the case of FSLs. The principal repayment amounts in the VSL amortization schedule are absolute amounts rather than percentages. As such, the principal repayment amount on the due date will remain fixed, although the loan is not fully disbursed on such date. For example, consider a VSL of US$60 million repayable in 30 equal semi-annual installments of US$2 million each. If disbursements are delayed beyond the first principal due date, even then the repayment amount will remain fixed at US$2 million for such date. 34. What is the effect on the repayment schedule of a VSL if the disbursed and outstanding amount is less than the amount payable on the principal due date? In the event that the disbursed and outstanding amount in a VSL is less than the amount payable on the repayment date, then the amount payable on such principal date will be restricted to the disbursed and outstanding amount. The shortfall (i.e., the difference between the principal amount due as per the repayment terms and the disbursed and outstanding amount) will then be carried forward to the next due date. For example, consider a VSL of US$60 million repayable in 30 equal semi-annual installments of US$2 million each. Assume further that the disbursed and outstanding amount in the loan is only US$1.5 million when the first principal repay- 23

24 ment of US$2 million falls due. In such a scenario, the principal repayment on the first due date will be restricted to US$1.5 million, while the balance of US$0.5 million will be carried forward to the subsequent principal due date. The principal amount payable on the subsequent due date will change to US$2.5 million. 35. What is the currency of commitment for International Development Association (IDA) credits? IDA credits are committed in Special Drawing Rights (SDR). Although the underlying obligation is always in SDR, the repayment of principal and other charges for IDA credits are made in the currency (e.g., U.S. dollars or euros) selected in the IDA credit agreement in an amount equivalent to the SDR required under the agreement. 36. How is the Special Drawing Rights (SDR) exchange rate calculated? The value of the SDR was initially defined as equivalent to grams of fine gold which, at the time, was also equivalent to US$1. After the collapse of the Bretton Woods system in 1973, however, the SDR was redefined as a basket of currencies, today consisting of the euro, Japanese yen, pounds sterling, and U.S. dollar. The U.S. dollar value of the SDR is posted daily on the International Monetary Fund s Web site ( It is calculated as the sum of specific amounts of the four currencies valued in U.S. dollars, on the basis of exchange rates quoted at noon each day in the London market (Greenwich mean time). The basket of currencies used for determining the SDR exchange rate is revised every five years. 37. What charges are payable on IDA credits and how are they determined? No interest is charged on IDA credits. However, the following charges are payable on IDA credits: Service Charge: A service charge of 0.75 percent per year is charged on the disbursed and outstanding amount of the credit. The day basis convention for service charge calculation on IDA credits is 30 days / 360 days. Commitment Charge: The commitment charge is payable on the undisbursed balance of the credit based on the following equation: [(undisbursed balance * commitment charge rate * days outstanding) / 360]. The day basis convention for the commitment charge calculation on IDA credits is 30 days / 360 days. The commitment charge rate for IDA credits is determined at the beginning of every financial year and is the rate approved by the Bank s Board. It can vary from 0 to 0.5 percent. At the beginning of each fiscal year, the Loan Services Group of the World Bank sends a notification to all concerned borrowers about the commitment charge rate approved for that year. 38. How are repayment terms determined for IDA credits? Repayment terms for IDA credits are determined based on country eligibility for IDA borrowings (such as an IDA-only country or a blend country). Based on this categorization, IDA credits currently can have the following terms: 24

25 The grace period for all IDA credits will be 10 years irrespective of final maturity. For IDA-only countries, the final maturity of credits will be 40 years, and principal repayment from the 11th to 20th years will be at the rate of 2 percent (of the credit amount) per year and 4 percent thereafter. For blend countries, the final maturity of credits will be 35 years, and principal repayment from the 11th to 20th years will be at the rate of 2.5 percent (of the credit amount) per year and 5 percent thereafter. In the case of IDA-eligible countries that have a GNI per capita that is above the operational cutoff for IDA eligibility, credits will have a final maturity of 20 years with principal repayment of 10 percent per year from the 11th to 20th years. 39. What are hard-term IDA credits? Eligibility for the hard-term credit window (under the 14th replenishment of IDA resources) is limited to IBRD-IDA blend countries that have (1) per capita income below the IDA operational cutoff, and (2) an active IBRD lending program. Hard-term credits will have an interest rate that is fixed for the life of the credit. There will be one applicable rate for all hard-term credit approvals during a fiscal year, and the rate will be set at the beginning of the year. This interest rate will include the following: The Base Rate: the 40-year interest rate swap quoted by Garban-Intercapital (Reuters). Plus: a spread equivalent to the current spread on IBRD FSLs. Less: 2 percent from the sum of the rates mentioned in A and B. For fiscal year 2006, the interest rate on hard-term IDA credits is 3 percent. Additionally, a service charge of 0.75 percent will be levied on the disbursed and outstanding balance of the credit as also the standard IDA commitment charge on the undisbursed balance of the credit. Hard-term IDA credits will have the same repayment terms as that for blend countries (a grace period of 10 years and a final maturity of 35 years). 25

26 Chapter 2 Billing 1. Explain the debt service billing cycle applicable to International Bank for Reconstruction and Development (IBRD) loans and International Development Association (IDA) credits. IBRD loans and IDA credits are billed twice a year on semi-annual payment due dates specified in the loan or credit agreement. The due dates are always on the 1st or the 15th of a month. If the due date falls on a weekend or a depository Bank holiday, then the Bank will specify the next available business day (based on the holiday list of the Depository Bank specified by IBRD/IDA for the currency being billed) as the bill payable date. The billing statement is produced two months in advance of the debt service due date specified in the loan or credit agreement. Consequently, each semi-annual billing period can be divided into two parts: (1) the first four-month period for which all calculations in the bill are based on actual amounts (referred to as the actual charge period ), and (2) the remaining two-month interim or provisional period for which calculations in the bill are based on estimates (referred to as the estimate period ), because they are calculated using data as of the close of business of the last day of the actual charge period. At the end of the semi-annual billing period (i.e., on the debt service due date), the actual values of the estimate period are determined. This could result in either a shortfall or excess between the amount billed and the final debt service determined on the due date. This shortfall or excess is then adjusted to be reflected in the bill for the next debt service due date. Figure 2.1 depicts the billing cycle used by the Bank. As depicted in figure 2.1, the bill is first generated on Billing Date 1, which occurs four months after the commencement of the semi-annual Billing Period 1. This bill contains calculations (four months of actual amounts and two months of estimated amounts) for the amount payable on Due Date 1. The cycle is then repeated in the next semi-annual billing period (Billing 26

27 Period 2). The bill generated on Billing Date 2 will reflect any adjustments for shortfall or excess amounts (if any) that may have arisen because of the difference in the two-month estimate period of Billing Period 1 relative to the actual amount payable for the same two-month period. 2. What are the debt service components of a bill? Briefly explain how each is computed. IBRD Loans: The various components of debt service on a bill depend on the loan type. However, a typical bill will have the following components: Principal Payable: The principal payable is determined on the basis of the amortization schedule of the loan. In case of Variable Spread Loans (VSLs), the amortization schedule is decided at the time of loan commitment and is based on the committed loan amount. On the other hand, the amortization schedule of a Fixed Spread Loan (FSL) depends on the type of FSL, namely, commitment linked or disbursement linked. The amortization schedule for a commitment-linked FSL is decided based on the committed loan amount, while for disbursement-linked FSLs, each disbursed amount will have its own repayment schedule that commences from the beginning of the interest period following disbursements (all disbursements in a six-month period will be clubbed to determine a single tranche that will have its own repayment schedule). Each disbursed amount (tranche) will have the same grace period and final maturity. The amortization schedule for pool loans Currency Pool Loans (CPLs) and Single Currency Pool (SCP) Loans is determined by extrapolating the principal repayment as per the loan s historic amortization schedule (available in the loan agreement) to the current value of the loan. The current value of the loan is determined by multiplying the current pool unit value with the loan pool units that are outstanding. For example, consider a pool loan with a principal outstanding of US$100 million that has a US$10 million installment repayable on the due date per its historic amortization schedule (i.e., 10 percent of the loan amount). Furthermore, say the pool units that are outstanding in the loan and the pool unit value are 7,000 units and US$14,000, respectively; then the principal payable on the due date will be calculated as follows: [7,000 * 14,000 * (10 percent) = US$9,800,000]. Interest: The interest payable is calculated on the disbursed and outstanding amount of the loan. The interest rate and day count convention used for the purpose of this calculation depends on the loan type. For more details on interest calculations, please see questions 4 & 6 in the chapter on lending products. All interest periods begin at the start of the semi-annual billing period (e.g., January 1, 2006) and end on the last day of the billing period (in this case, June 30, 2006). Partial Interest Waiver: IBRD waives a part of the interest charge payable on IBRD loans in the coming year for all eligible borrowers. To be eligible for interest waivers, the borrower must have serviced all of its IBRD loans and have paid all amounts under IBRD 27

28 guarantees and hedging products during the preceding six-month period within 30 calendar days of their due dates. The interest waiver rate depends on the loan type as well as on the invitation to negotiate date. The waiver rates are decided annually by the Bank s Board in conjunction with the annual review of IBRD s net income. For more details on interest waiver calculations, please see the chapter in waivers. Commitment Charge: The commitment charge is calculated on the undisbursed amount of the loan. The commitment charge rate (net of unconditional commitment charge waiver) is determined by IBRD on a yearly basis. Other Components: A bill can also have other debt service components that are payable. Two such common components are as follows: Interest on Overdue Principal: IBRD does not charge any interest on overdue interest or commitment charges. However, the Bank charges interest on overdue principal until it is actually paid. Please refer to question 4 for more details on this topic. Adjustment from Previous Due Date: These adjustments arise when the borrower has fully paid the billed amount on the due date, but there is either an excess or shortfall because of differences between the estimated amount that was billed and the actual amount payable on the due date. There can be various reasons for these differences, including changes in pool unit values, exchange rates (between the time of the estimate and the loan due date), and disbursements and refunds that occur in the two-month interim period. Adjustments for shortfalls (called deferred amounts ) or excesses ( carried forward credits ) will be reflected in the bill generated for the next consecutive debt service due date of the loan. IDA Credits: The billing statements for IDA credits have essentially the same components as the billing statements for IBRD loans, but that they do not contain any interest charge. However, IDA credits contain a service charge of 0.75 percent of the disbursed and outstanding balance. The commitment charge rates for IDA credits and the applicable day count convention differ from that used for IBRD loans. If Highly Indebted Poor Country (HIPC) relief is applicable to the IDA credit in question, then the debt service payment is calculated net of such relief. The calculation methodology of each component of a VSL bill is depicted in figure 2.2. The calculations are based on sample loan billing information stated in table 2.1: 28

29 Table 2.1 Calculation Methodology for Each Component of a Variable Spread Loan Bill Billing Information (all figures in US$) A Billing period Jan. 1 July 1, 2006 B Billing date May 1, 2006 C Due date July 1, 2006 D Loan signed amount 1,000,000 E Undisbursed amount 150,000 F Disbursed and outstanding amount (after repayment of Jan. 1, 2006) 800,000 G Loan Type VSL H Interest rate starting Jan. 1, 2006 and ending June 30, % I Interest waiver rate for the period Jan. 1 June 30, % J Commitment charge rate starting Jan. 1, 2006 (net of charge waiver) 0.25% K Amortization schedule 20 equal installments commencing Jan. 1, 2006 L Actual days in the billing period Day count convention for VSL: M - For interest Actual no. of days / 360 days N - For interest waiver Actual no. of days / 365 days O - For commitment charge Actual no. of days / 365 days Payment history of previous due date (Jan. 1,20 06): P - No of days of delay in making payment 11 Q - Principal payable on previous due date (Jan 1, 06) 50, R - Shortfall from previous due date due to difference between estimated and actual amounts

30 Based on the loan information in table 2.1, the various bill components are calculated as follows: 3. What happens if a loan due date falls on a weekend or on Bank holidays? The billing statements for IBRD loans and IDA credits specify a payable date, which is not a depository Bank holiday for the currency in which the bill is payable. If the loan (or credit) due date is a holiday, then the Bank will specify the next available business day as the bill payable date. For this reason, the bill payable date may sometimes exceed the loan (or credit) due date. If payments are received by the bill payable date, the funds will be applied with a value date equal to the due date of the loan. Because this is a flexibility given by the Bank to borrowers, the Bank does not charge any overdue interest on payments that are received by the bill payable date even though the bill payable date falls after the loan due date. However, if debt service payments are delayed beyond the bill payable date, then interest on the overdue principal (if any) is charged from the actual loan due date. The Bank holidays are in accordance with the holiday schedules of the depository Banks for the various billed currencies. For example, a loan payable in U.S. dollars with a due date of April 15, 2006, will have a bill payable date of April 17, 2006, because April 15 and 16 are depository Bank holidays. This means that if funds are received by April 17, 2006, they will be applied to the loan with a value date of 30

31 April 15, However, if funds are received after April 17, 2006, then the Bank will charge interest on the overdue principal (if any) from April 15, 2006 (and not April 17, 2006). 4. Does the Bank charge interest on delayed payments? The Bank does not charge interest on overdue interest and other charge payments (e.g., front-end fee payments) that are paid after their specified payable date. However, on principal amounts that become overdue, the Bank charges interest until the outstanding principal amount is actually paid. Overdue principal is defined as the billed principal installment that is paid after the bill payable date. To illustrate, assume a loan that has a debt service payment of US$150,000 on January 1, 2006, including a principal payment of US$90,000 and interest payment of US$60,000. Assume further that the loan has an interest rate of 4 percent per year until December 31, 2005, and 5 percent per year thereafter. If the debt service payment is made on January 10, 2006, instead of January 1, 2006, then the Bank will charge the following interest on the overdue principal amount of US$90,000 from January 1, 2006, to January 9, 2006: [90,0000 * 5 percent * 9 / 365 = US$110.95]. This interest on overdue principal will be payable on the next loan due date, which for this example will be July 1, What is the order of application of debt service payments in IBRD loans and IDA credits? IBRD debt service payments are applied in the following order: (1) interest on overdue principal, (2) commitment charge, (3) interest, (4) transaction fees, and (5) principal. IDA debt service payments are applied in the following order: (1) principal, (2) commitment charge, (3) service charge on overdue principal, and (4) service charge. 6. When and how is the front-end fee billed? For all loan commitments, IBRD charges a front-end fee of 0 1 percent of the signed loan amount. Currently, IDA credits do not contain any front-end fees. The front-end fee on IBRD loans can be paid out of the proceeds of the loan (financed by the loan) or the borrower can pay for the front-end fee separately. If the front-end fee is paid out of the proceeds of the loan, then the Bank will, on the loan effectiveness date, automatically withdraw the front-end fee amount (from the loan account) on behalf of the borrower and pay this amount to itself. The Bank does not charge a front-end fee for loans that do not become effective. If the front-end fee is not financed by the loan, then the borrower must pay the fee no later than 60 days after the effectiveness date, but before the first withdrawal from the loan. The Loan Services Group of the Bank sends the front-end fee bill to borrowers shortly after the loan has been signed and approximately 60 days before the estimated loan effectiveness date. 7. Will the front-end fee be reduced if there is a cancellation in the loan after loan effectiveness? If the loan is partially or fully cancelled on or after effectiveness, no adjustment to the front-end fee is made. This applies equally to loans disbursed in tranches: if a tranche is cancelled after loan effectiveness, no portion of the front-end fee is refunded to the borrower. 31

32 8. Will the front-end fee be reduced if there is a cancellation in the loan before loan effectiveness? If there is a partial cancellation in the loan before loan effectiveness, then the front-end fee amount is reduced on a pro rata basis. For example, consider a loan of US$100 million (signed amount) with a front-end fee of 1 percent. The loan was signed on January 1, 2006, and is expected to become effective on March 4, Assume further that there is a partial cancellation of the loan amount to the extent of US$10 million on February 7, In such a scenario, the frontend fee payable by the borrower is reduced from US$1 million (1 percent of US$100 million) to US$0.9 million (1 percent of US$90 million). 9. What are the day count conventions for interest and commitment charges across the various loan types? The day count conventions for interest and commitment charges across the various loan types appear in table 2.2. Table 2.2 Day Count Conventions for Interest and Commitment Charges Day Count Convention Loan Type For Interest (IBRD)/Service Charge (IDA) For Commitment Charge Currency Pool Loans Actual no. of days / Actual no. of days Actual no. of days / Actual no. of days Single Currency Pool Loans Actual no. of days / Actual no. of days Actual no. of days / Actual no. of days Variable Spread Loan Actual no. of days / 360 days Actual no. of days / Actual no. of days Fixed Spread Loans: Fixed Spread Loans Variable Ratea Actual no. of days / 360 days Actual no. of days / Actual no. of days Fixed Spread Loans Fixed Rate 30 days / 360 days Actual no. of days / Actual no. of days Fixed-Rate Single Currency Loans 30 days / 360 days Actual no. of days / Actual no. of days IDA Credits 30 days / 360 days 30 days / 360 days SDPLs Actual no. of days / 360 days Actual no. of days / Actual no. of days Project Preparation Facility 30 days / 360 days Actual no. of days / Actual no. of days Note: SDPL = Special Development Policy Loans (earlier called Special Structural Adjustment Loans). a. For bills in pounds sterling the convention is actual / 365 days. 10. What is the treatment for undisbursed loan amounts that are cancelled? Loan amounts that have not yet been withdrawn can be cancelled at the option of either the borrower or the Bank. The borrower has a right to cancel unilaterally any amount of the loan not yet withdrawn, except amounts for which the Bank has entered into special commitments. The Bank, too, can undertake cancellation of an unwithdrawn loan balance for various reasons, including cancellation of the part of the loan that was subject to disbursement suspension for at least 30 days. For VSLs, CPLs, and SCP Loans, cancelled amounts are applied pro rata to the maturities of the principal amount of the loan that fall due after the date of cancellation. 32

33 11. Can I make a debt service payment in a currency different from that billed? No, debt service payments are to be made only in the currency specified on the payment instruction sheet of the bill. IBRD does not undertake currency conversion for debt service payments received in a currency that is different from the billed currency. Such amounts are returned to the borrower and a fresh payment is requested in the billed currency. 12. Why are Currency Pool Loans (CPLs) billed in different currencies during the loan life cycle? The payment currency chosen by the IBRD for CPL bills can be any one of the major currencies that constitute the pool. This is in accordance with the structure of the CPL and is reaffirmed in the General Conditions applicable to CPLs. While each borrower s obligation is a multicurrency obligation, for administrative ease, repayments on individual loans are billed and transacted in one currency for each billing period. The billed currency usually is U.S. dollars, Japanese yen, or the euro. Consequently, unless the borrower has entered into a currency purchase agreement, the same loan can be billed in different currencies during the life of the loan (i.e., over various billing periods). Because loans can be billed in different currencies, it is also possible that the debt service payment of a loan on a particular due date is made in amounts that are payable in different currencies. This usually happens when the billed currency of a CPL changes and a deferred amount is due from the previous due date. For example, assume that a CPL was billed in euros for the January 1, 2006, due date and is being billed in U.S. dollars on the next due date (July 1, 2006). The loan has a deferred amount in euros from the January 1, 2006, due date. In such a scenario, the bill for the due date of July 1, 2006, will contain the current receivables payable in U.S. dollars as well as the deferred amount payable in euros. To avoid separately billing small deferred amounts in a different currency than that of the current receivables, the deferred amounts are translated to the currency of the current receivables if the deferred amounts are less than a specified threshold,. A borrower then receives the bill in one currency. The current threshold is US$25,000 (or equivalent). 13. In addition to debt service bills, does the Bank send any other reminders indicating upcoming debt service payments? The Loan Services Group of the Bank sends a Billing Advice Notification to all borrowers who have upcoming debt service payments and to those who request this notification. This notification is sent approximately 45 days before the loan due date and includes all upcoming debt service payments (excluding overdue payments) for the country in question. The Billing Advice Notification is sent at a country level either by facsimile or . To be included in the mailing list of the Billing Advice Notification, please send a request to loanclientservices@worldbank.org. 14. How does the Bank treat a debt service receipt that is greater than the amount billed? It is possible for a bor rower to inadvertently make a payment that is higher than the amount mentioned in the bill. In such a scenario, the Bank can, at the request of the borrower, 33

34 either (1) refund the excess amount to the borrower or (2) apply the amount to the future debt service payment of a loan (including the loan in which there was an excess) having the same borrower of record. In either case, the Bank will not give any benefit of interest on the excess amount that has been received, and the Bank will not be liable for the foreign exchange risk (if any) on such excess amount(s). Moreover, the Bank will require a written authorization from the borrower to act on either option. If the borrower chooses the first option (request a refund), then they are required to send Depository Bank details to enable the Bank to initiate the refund. For the second option (apply the excess amount), the borrower is required to specify the loan number and due date against which the excess payment is to be applied. If the excess amount paid is small or negligible, then it is carried forward as an excess to the next due date of the same loan or credit number. 15. How can I get a confirmed receipt of the debt service amount paid? The Loan Services Group of the Bank sends a confirmation of receipt of funds to the borrower. To receive such a confirmation, please send a request to loanclientservices@worldbank.org after the debt service payment has been made. Please note that debt service confirmation cannot be provided through SWIFT or to multiple senders and can be sent only by facsimile or Where can I get a copy of my bills? Debt service billing statements for IBRD loans and IDA credits for the upcoming payment due date can be obtained from the following sources: Loan Services Group (LSG): Please send a request to loanclientservices@worldbank.org for a copy of the bill. LSG will send a copy to the address specified. Client Connection: A copy of the bill can be directly downloaded from the Bank s client connection Web site (clientconnection.worldbank.org). The client connection Web site is available to borrowers and donors only after they have been registered with the site. A registration request can be initiated by accessing the Web address specified above. 17. Where can I get estimated debt service payments for future years? Estimated future debt service payments can be obtained by requesting an Estimated Debt Service Report (EDSR) from the following sources: Loan Services Group (LSG): Please send a request to loanclientservices@worldbank.org for the EDSR of a specified country or borrower or IBRD loan(s)/ida credit(s). The period (maximum 52 years) for which the estimated debt service data is required must be mentioned in the request. LSG will send a copy of the report to the address specified. Client Connection: The EDSR can be downloaded directly from the Bank s client connection Web site (clientconnection.worldbank.org). The client connection Web site is available to borrowers and donors only after they have registered with the site. A registration request can be initiated by accessing the Web address specified above. 34

35 Chapter 3 Overdue Payments 1. What is the Bank s policy on overdues? The World Bank s sanction policy on debt service payment defaults is based on a graduated approach of imposing progressive sanctions. The Bank sends reminders to defaulting borrowers at various stages as well as notifications to borrowers informing them of sanctions that are planned or imposed. Figure 3.1 summarizes the Bank s progressive sanction policy. As depicted in the figure, overdue aging is based on the number of days elapsed since the debt service due date and, accordingly, the due date is depicted as day zero. Figure 3.1 Timeline for Payment-Related Sanctions and Notifications 35

36 There are three major sanction stages in the timeline for payment-related sanctions apart from the nonaccrual status event at the end. These stages are as follows: Stage 1: When debt service payment is overdue by more than 30 days. Sanctions include withholding Board presentation of new loans and guarantees and loss of interest waiver eligibility for IBRD loans. Please see question 4 for a more comprehensive description of 30-day sanctions. Stage 2: When debt service payment is overdue by more than 45 days. Sanctions mentioned in stage 1 become applicable to all loans or credits of the borrower and a warning of impending suspension of disbursement is issued. Please see question 7 for a more comprehensive description of 45-day sanctions. Stage 3: When debt service payment is overdue by more than 60 days. The Bank suspends disbursements on all loans to or guaranteed by the country. Please see question 10 for a more comprehensive description of 60-day sanctions. 2. What overdue reminders are sent to the borrowers by the Loan Services Group (LSG) before the debt service payment crosses the 30-day overdue mark? The LSG of the Bank sends out two reminders before the debt service payment crosses the 30-day overdue mark. The first reminder is called the five-day overdue reminder and, as the name suggests, it is sent five business days after the debt service payment becomes overdue. The second reminder is the 15-day overdue reminder, which is sent on the next business day after payment becomes 15 days overdue. These reminders detail the loan or credit numbers that are overdue as well as the respective overdue amounts. The reminders are sent to the borrower as well as to concerned country staff and others who have requested a copy of the notice. To receive an automated copy of these notifications (for a specific loan or credit or for all loans and credits of the country), a request can be sent to loanclientservices@worldbank.org. 3. When will a debt service payment become 30-days overdue? What notifications will the Bank send at this stage? A debt service payment will become 30 days overdue if it is not paid within 30 calendar days of the debt service due date. To illustrate, consider a loan that has a debt service due date of January 1, This debt service payment will become 30 days overdue if the payment is not made by the close of business on January 31, Close of business is defined in terms of US eastern standard time. If the 30th calendar day after the due date falls on a holiday, then the overdue debt service payment must be received by the preceding business day for the borrower to avoid loss of partial interest waiver eligibility on IBRD loans. If a loan or credit becomes 30 days overdue, then the Bank sends a notice of overdue payment (also called the 30-day overdue notice) to the borrower, the guarantor country, and all other borrowers in the country informing them about sanctions that have been imposed. The notice also states the sanctions that will be imposed if the payment crosses the 45-day, 53-day, and 60- day overdue mark. The 30-day overdue notice is sent by the concerned country director on the next business 36

37 day after the payment becomes 30-days overdue. In this example, the 30-day overdue notice will be sent on February 1, 2006, if the overdue payment has not been received by then. If the overdue payment is received by the time the notice is scheduled to be sent, the notice will be held back. 4. What sanctions are applied when payments become 30 days overdue and how can these sanctions be lifted? If the debt service payment crosses the 30-day overdue mark, then the following sanctions are applied: No New Loans or Credits: No new loans or credits to the borrower will be presented to the Bank s Board of Directors for approval, and no agreements related to approved loans or credits will be signed. If the borrower in default is the country itself, then this sanction also applies to all loans or credits that are guaranteed by the country in default. Loss of Applicable Interest Waiver: All IBRD loans of the borrower (or country if the borrower in default is the country itself) that cross the 30-day overdue mark will lose eligibility for any applicable waiver of interest charges. Because IDA credits (except those with hardened terms) do not have any interest charge (they have a service charge of 0.75 percent), the waiver loss eligibility does not apply to IDA credits. The first sanction (no approval or signing of new loans or credits) will be lifted as soon as the payments overdue by 30 days or more are received. Payments are considered received when the amounts due are deposited into the Bank s account in the designated depository bank in the currency billed (or, in the case of loans with a currency purchase agreement, in the agreed currency). Eligibility for interest waiver on IBRD loans will not be restored immediately on receipt of all overdue payments. The borrower has to establish a six-month track record of acceptable debt service payment (defined as payment within 30 calendar days of the due dates) before the applicable interest waiver can be restored. 5. Will the Bank inform the borrower about loss of eligibility for waiver? Yes, the LSG of the Bank will send a waiver loss notification to the relevant borrower for all IBRD loans that cross the 30-day overdue mark. This notification will be sent approximately 35 days after the debt service payment falls due, if the overdue payment has crossed the 30-day mark. 6. When will a debt service payment become 45 days overdue? What notifications will the Bank send at this stage? A debt service payment will become 45 days overdue if it is not paid within 45 calendar days of the debt service due date. To illustrate, consider a loan that has a debt service due date of January 1, This debt service payment will become 45 days overdue if the payment is not made by the close of business on February 15, Close of business is defined in terms of US eastern standard time. If the 45th calendar day after the due date falls on a holiday, then the overdue debt service payment must be received by the preceding business day to avoid 45-day sanctions. 37

38 If a loan or credit becomes 45 days overdue, then the Bank sends a notice of impending suspension of disbursements (also called the 45-day overdue notice) to the borrower, the guarantor country, and all other borrowers in the country informing them about sanctions that have been imposed because of the debt service payment crossing the 45-day overdue mark. The notice also states the sanctions that will be imposed if the payment crosses the 53-day and 60-day overdue mark. The 45-day overdue notice is signed by the concerned regional vice president of the Bank and sent to the borrower on the next business day after the payment becomes 45 days overdue. This notice is copied to the senior management of the World Bank, including the executive director of the country concerned, the managing director of the World Bank, vice president and secretary, the Resource Mobilization and Cofinancing Department, and the Operations Policy Department. In this example, the 45-day overdue notice will be sent on February 16, 2006, if the overdue payment has not cleared by the close of business of February 15, What sanctions are applied when payments become 45 days overdue and how can these sanctions be lifted? If a debt service payment crosses the 45-day overdue mark, the following sanctions apply: No New Loans: No new loans to the country, or to be guaranteed by the country, will be presented to the Board for approval and no agreements related to approved loans to the country, or to be guaranteed by the country, will be signed. No Deposits into Special Accounts: Initial deposits will not be made into special accounts under loans to or guaranteed by the country, nor will replenishments be made. Loss of Interest Waiver: Interest waiver ineligibility will apply to all borrowers (for IBRD loans) of the country, even if only one of the borrowers in the country has crossed the 45-day threshold. The sanctions cited above will be lifted after the country and all borrowers in the country are current on all payments. Being current on all payments means that the country, as borrower or guarantor, and all borrowers in the country must pay not only all payments overdue by 30 days or more, but also all payments due as of the date the Bank receives payment, regardless of the number of days since they fell due. This provision is different from that applicable for lifting the 30-day overdue sanctions in that only the debt service payments overdue by 30 days or more are required to be paid to lift the 30-day sanctions. Lifting the 45-day sanctions encompasses a wider range of payments and, therefore, may involve a larger payment to be cleared, because all payments, including those less than 30 days overdue, are required to be paid. 8. What are the interest waiver loss implications for the country as a whole when only one of the borrowers of the country crosses the 45-day overdue mark? At the 45-day stage, sanctions become applicable to the country as a whole. Consequently, even if only one borrower crosses the 45-day overdue mark, all borrowers of the country (including those that are not currently overdue) will lose eligibility for any applicable interest waiver on IBRD loans. 38

39 9. What actions will be initiated when a debt service payment becomes 53 days overdue? When a debt service payment crosses the 53-day threshold, the World Bank informs any cofinanciers, as well as the relevant regional development bank, of the impending suspension. 10. When will a debt service payment become 60 days overdue? What notifications will the Bank send at this stage? A debt service payment will become 60 days overdue if it is not paid within 60 calendar days of the debt service due date. To illustrate, consider a loan that has a debt service due date of January 1, This debt service payment will become 60 days overdue if the payment is not made by close of business on March 2, Close of business is defined in terms of US eastern standard time. If a loan or credit becomes 60 days overdue, then the Bank sends a notice of suspension of disbursements (also called the 60-day overdue notice) to the guarantor country and all borrowers in the country informing them about the sanctions that have been imposed because of the debt service payment crossing the 60-day overdue mark. The notice of suspension of disbursements is sent on the 60th day after payment becomes due. If this day is a weekend or Bank holiday, the suspension notice is sent on the last working day before the 60th day advising that suspension is effective on the 60th day. This practice is different from that followed for the 30- and 45-day overdue notices in that these notices were sent on the next business day following the 30th and 45th day overdue, respectively. The notice of suspension of disbursements is signed by the concerned regional vice president of the Bank and sent to the guarantor country and all borrowers in the country. This notice is copied to the senior management of the World Bank, including the executive director of the country concerned, the managing director of the World Bank, the vice president and secretary, the Resource Mobilization and Cofinancing Department, Controllers Vice Presidency, Legal Vice Presidency, and the Operations Policy Department. 11. What sanctions are applied when payments become 60 days overdue and how can these sanctions be lifted? When a loan payment becomes 60 days overdue, the Bank suspends disbursements on all loans to or guaranteed by the country. In addition, the sanctions cited in the notice of impending suspension (45-day notice) apply until the suspension is lifted. The sanctions cited in the notice of suspension of disbursements will be lifted when the Bank has received all the overdue payments specified in the suspension notice and those falling due since the suspension date. To illustrate, consider a loan with a due date of January 1, 2006, that has not been paid beyond the 60-day overdue mark (March 2, 2006). Consequently, disbursements to the country have been suspended. If the country is considering making a payment on April 17, 2006 (to come out of disbursement suspension), then it will not only have to pay all overdue payments listed in the notice of disbursement suspension sent on March 2, 2006, but also all payments that became due from that date to April 17, This will include payments falling due on the due dates of March 15, April 1, and April 15, When a suspension of disburse- 39

40 ment is lifted, a notice of lifting of suspension, signed by the regional vice president, is sent to the borrower and copied to the guarantor, all other borrowers in the country, cofinanciers, the relevant regional development bank, the managing director of the World Bank, the concerned executive director, and various concerned departments of the World Bank. 12. Is the Bank s Board informed about sanctions imposed on the borrower before the nonaccrual stage? The Bank s Board is informed about sanctions and other related implications at the following stages: When disbursements to a country are suspended: The concerned country director prepares a notice, approved by the regional vice president, informing the Board of the suspension. The vice president and secretary issue the notice. When there are cancellations following suspension: The vice president and secretary issue a notice informing the Board of the cancellation. When disbursement suspension is lifted: The concerned country director prepares a notice to the Board, cleared by the regional vice president and legal and issued by the vice president and secretary. 13. Can a suspension of disbursement occur for reasons that are not related to debt service payment? There are reasons for suspension of disbursements that are not payment related. Typically this happens when a borrower or other contracting party fails to carry out covenants under a loan, project, or other relevant agreement. When such an event occurs, the Bank, at its discretion, determines whether disbursements on a loan are to be suspended. The Bank may decide to suspend disbursements as of a specified date or to warn the borrower that suspension will occur unless the borrower takes certain remedying actions by a specified date. 14. Does the Bank charge interest on overdue payments? IBRD and IDA do not charge interest on interest and other charge payments that are paid after the due date. On principal amounts that become overdue, the Bank charges interest until the outstanding principal amount is paid. To illustrate, assume a loan that has a debt service payment of US$150,000 million due on January 1, 2006, comprising a principal payment of US$90,000 and an interest payment of US$60,000. Assume further that the loan has an interest rate of 4 percent per year until December 31, 2005, and 5 percent per year thereafter. If the debt service payment is made on January 10, 2006, instead of January 1, 2006, then the Bank will calculate the following interest on overdue principal: Interest on the outstanding principal amount of US$90,000 from January 1, 2006, to January 9, 2006 = [90,0000 * 5 percent * 9 / 365 = US$110.95]. 15. When is a country placed in nonaccrual status and what are the implications for the Bank and the member country? According to the Bank s policy, all loans or credits made or guaranteed by a member country will be placed in nonaccrual if principal, interest, or other charges with respect to any loan or 40

41 credit are overdue by more than six months. Specifically, a country is placed in nonaccrual status if the second consecutive debt service payment on a loan or credit is missed. The implications of a nonaccrual event for the Bank are as follows (the Bank s nonaccrual policy is under review and, therefore, the implications listed below may change): All amounts of interest and charges that have been accrued on loans outstanding to the member that remain unpaid are deducted from the Bank s income of the current period. As long as the loans to the member country remain in nonaccrual status, all interest and charges due after the date of nonaccrual are recorded as income only when payments are actually received by the Bank. Loan loss provisioning for a member country with arrears to IBRD begins concurrently with the placement of the country in nonaccrual status. Although no new sanctions are applied when a country is placed in nonaccrual status, there are reputational implications for the country. These implications result from the following steps taken by the World Bank: Nonaccrual Notice: When a country passes into nonaccrual, a nonaccrual notice is sent to the member government by the World Bank. Board Notification: When a country passes into nonaccrual, the Bank s Board is informed about the nonaccrual event. Public Notice: When a country passes into nonaccrual, the Bank distributes a news release announcing the nonaccrual status and summarizing relevant data. Placing a country in nonaccrual status does not affect the original interest (and other charges) payment obligations of the country. Principal, interest, and other charges continue to be billed on the original terms of the loan or credit. 16. When does a country come out of nonaccrual status? A country comes out of nonaccrual status when all amounts due and outstanding under all loans have been paid to both IBRD and IDA. Partial payment of overdue amounts, or even complete clearance of arrears, to either IBRD or IDA does not constitute grounds for restoring accrual status as long as amounts remain due and outstanding to either entity. 17. What is the role of the LSG in implementing the Bank s overdue policy? The LSG of the Bank is the repository for all overdue debt service data and is responsible for resolving most overdue policy issues. The LSG also coordinates with other Bank divisions to assist in the implementation of the Bank s overdue policy. Specifically, the LSG undertakes the following debt service related overdue activities: 41

42 Table 3.1 LSG Debt Service Related Overdue Activities Activity Description 1 Advisory services LSG provides information and clarifications to staff on the Bank s debt service related overdue policy. The range of advisory activities also includes providing the historic payment track record of borrowers and countries to eligible internal staff. LSG also advises borrowers on the Bank s overdue policy and 15-day overdue LSG is responsible for generating these notices. notices 3 30-, 45-, and 60-day overdue notices LSG coordinates the initiation of the 30-, 45-, and 60-day overdue notice and clears the draft notices sent by the country office (these notices are sent by the region under the 4 Loss of eligibility of waiver notice LSG generates and sends the waiver loss eligibility notice to the concerned borrower(s). 5 Update disbursement LSG updates the Bank s accounting system to reflect a country moving in or out of disbursement suspension status suspension. 6 Nonaccrual notice and Board data LSG provides loan data for the nonaccrual notice to be sent to the borrower and for the Board notification of a nonaccrual event. 7 Reporting LSG sends a fortnightly overdue status report (called the Management Overdue Report) to senior management of the World Bank. LSG can be contacted at loanclientservices@worldbank.org. 42

43 Chapter 4 Waivers 1. What type of charge waivers do International Bank for Reconstruction and Development (IBRD) loans have? The World Bank provides three types of waivers for IBRD loans: (1) waiver of a part of the interest charge payable in the coming financial year for all eligible borrowers, (2) waiver of a part of the commitment charge payable in the coming year for all borrowers, and (3) waiver of a part of the front-end fee payable in the coming year for all borrowers. Currently, IDA credits (excluding IDA credits with hardened terms) do not contain any interest rate or front-end fee and, as such, waivers for these charges are not applicable to IDA credits. Although a commitment charge is applicable to IDA credits, an IDA commitment charge is not subject to any waiver. 2. What are the prerequisites for receiving charge waivers from the Bank? Partial interest waiver is granted only to eligible borrowers; for commitment charge and front-end fee waivers, there are no eligibility criteria. To be eligible for partial interest waiver, the borrower must have serviced all of its IBRD loans and have paid all amounts under IBRD guarantees and hedging products during the preceding six-month period within 30 calendar days of their due dates. 3. What are the current charge waiver rates? Will these rates change over time? The current charge waiver rates applicable to IBRD loans are depicted in table 4.1. The waiver rates are decided annually by the Bank s Board in conjunction with the annual review of IBRD s net income. As such, the waiver rates may change on an annual basis. Fiscal Year and Waiver Type Table 4.1 Current Charge Waiver Rates IBRD Loans with an Invitation to Negotiate Before July 31, 1998 On or after July 31, 1998 FY 2006 interest waiver 0.05% 0.25% FY 2006 commitment charge waiver 0.50% 0.50% Table 4.1. Current For fiscal year (FY) 2006, beginning July 1, 2005, the front-end fee waiver on new IBRD loans is 0.75 percent. 4. How is a commitment charge waiver calculated? Commitment charge waivers are calculated as a percentage of the undisbursed loan amount outstanding. To illustrate, consider a signed and effective IBRD loan with a signed amount of US$10 million. The loan s debt servicing due dates are January 1 and July 1. The commitment charge waiver amount for the January 1, 2006, due date (billing date is November 1, 2005) is to be determined. Assume further, that the undisbursed amount has remained at US$2 43

44 million from July 1, 2005 (last debt servicing due date) to November 1, The method of calculating the commitment charge waiver for the January 1, 2006, due date will be as follows: Commitment Charge Waiver Amount = (Commitment charge waiver rate * Undisbursed loan balance outstanding * Period in days) / 365 or 366. The undisbursed loan balance outstanding in the equation stated above is taken for the semi-annual billing period commencing on July 1, 2005, and ending on December 31, For the first four months (i.e., from July 1, 2005, to October 31, 2005) the undisbursed loan balance will be based on actual amounts, while for the remaining two months, the balance will be estimated in line with our billing methodology. In this example, the undisbursed loan balance will be taken as US$2 million based on actual amounts for the first four months. The estimated undisbursed balance for the remaining two months will also be US$2 million, because the actual amount outstanding on the last day of the first four months (October 31, 2005) was US$2 million. The period in days refers to the number of days that the relevant undisbursed amount was outstanding. It begins from the commencement of the semi-annual billing period (July 1, 2005) and ends on the last day of the billing period (December 31, 2005). In this example, the total period in days will amount to 184, including 123 days for the actual period (from July 1, 2005, to October 31, 2005) and 61 days for the estimated period (from November 1, 2005, to December 31, 2005). Assuming a commitment charge waiver rate of 0.50 percent, the commitment charge waiver amount will be as follows: = (0.50 percent * 2,000,000 * 184) / 365. = US$5, The number of days in the year has been taken at 365 in the above example. For a leap year this will change to 366 days. The commitment charge waiver amount calculated above will be subtracted from the commitment charge amount to determine the charge net of waiver. Assuming the commitment charge rate (before w a ivers) to be 0.75 percen t, the com m i tm ent ch a r ge amount (before waiver) on the undisbursed loan balance will be US$7, On subtraction of the commitment charge waiver, the net commitment charge amount will be US$2, The debt service bill will depict this calculation by first subtracting the waiver rate from the commitment charge rate and then calculating the net commitment charge waiver amount. The result will be the same. To illustrate, the bill will depict the net commit- 44

45 ment charge amount = [(0.75 percent p ercent) * 2,000,000 * 184 / 365 = US$2,520.54]. The commitment charge starts accruing from the 60th day after the loan signing date. Although commitment charges start accruing 60 days after signing, the Bank does not charge a commitment charge for loans that do not become effective. 5. How is partial interest charge waiver calculated? Partial interest waivers are calculated as a percentage of the disbursed and outstanding loan balance. To illustrate, consider a signed and effective IBRD loan with a signed amount of US$10 million. The loan s debt servicing due dates are January 1 and July 1. The interest rate waiver amount for the January 1, 2006, due date (billing date is November 1, 2005) is to be determined. Assume further that the disbursed and outstanding loan amount has remained at US$8 million from July 1, 2005 (last debt servicing due date) to November 1, The method of calculating the partial interest waiver for the January 1, 2006, due date will be as follows: Interest Waiver Amount = (Interest waiver rate * Disbursed and outstanding loan balance * Period in days) / 365 or 366 days The disbursed and outstanding loan balance in the equation stated above is taken for the semi-annual billing period commencing on July 1, 2005, and ending on December 31, For the first four months (i.e., from July 1, 2005, to October 31, 2005) the disbursed and outstanding loan balance will be based on actual amounts, while for the remaining two months the balance will be estimated in line with our billing methodology. In this example, the disbursed and outstanding loan balance will be taken as US$8 million based on actual amounts for the first four months. The estimated disbursed and outstanding balance for the remaining two months will also be US$8 million, because the actual amount outstanding on the last day of the first four months (October 31, 2005) was US$8 million. The period in days refers to the number of days for calculating interest waiver on the relevant disbursed and outstanding loan amount. It begins from the commencement of the semi-annual billing period (July 1, 2005) and ends on the last day of the billing period (December 31, 2005). In this example, the total period in days will amount to 184, including 123 days for the actual period (from July 1, 2005, to October 31, 2005) and 61 days for the estimate period (from November 1, 2005, to December 31, 2005). Assuming an interest charge waiver rate of 0.25 percent, the total interest waiver amount will be: = (0.25 percent * 8,000,000 * 184) / 365 = US$10,

46 The number of days in the year has been taken at 365 in the above example. For a leap year this will change to 366 days. The interest waiver amount calculated above will be subtracted from the interest amount to determine the interest payable net of waiver (assuming that the borrower is eligible for interest waiver). Assuming an interest rate of 5 percent and an interest rate day basis convention of actual number of days in a 365 day year, the interest charge amount (before waiver) on the disbursed and outstanding loan balance will be US$201, On subtraction of the interest waiver, the net interest amount payable will be US$191, As mentioned above, the interest waiver for the two-month period from the billing date (November 1, 2005) to the corresponding due date (January 1, 2006) is estimated. Unlike in commitment charge waivers, by convention, interest charge waivers are not recalculated in the next bill even if the disbursed and outstanding loan balance changes during the two-month estimate period. 6. Are waivers recalculated over two consecutive billing cycles? The commitment charge and interest waiver billing methodology employs calculations that are based on (1) known (actual) balances for the first four months, and (2) estimates for the subsequent two months of the semi-annual billing cycle. This is further explained below: Actual Period (first four months of the billing cycle) Commitment charge waiver calculations based on actual undisbursed loan balances. Interest waiver calculations based on actual disbursed & outstanding loan balances. Estimate Period (last two months of the billing cycle) Commitment charge waiver calculations based on estimated undisbursed loan balances. Interest waiver calculations based on estimated disbursed & outstanding loan balance. At the end of the six-month billing cycle the final values of the all loan balances (disbursed and undisbursed) will be known. This leads to a recalculation of the commitment charge waiver for the above-mentioned two-month estimate period. If the actual undisbursed loan balance is less than that estimated (because of disbursements in the loan), then the final commitment charge waiver is less than estimated. The excess waiver given is then reflected as an amount payable by the borrower in the next billing cycle. Similarly, if the actual undisbursed and outstanding loan balance is higher than that estimated (say due to a refund), then the final waiver is more than that originally estimated. This will result in a credit being given to the borrower in the next billing cycle for the difference between estimated and final waiver amounts. Although commitment charge waivers are revised after the final loan balances are known, the same methodology is not employed for interest waivers. Partial interest waivers are not revised and remain constant once they are incorporated in the bill. Because of this practice, if additional disbursements occur during the two-month period between the billing date and the corresponding due date, then the borrower loses the potential interest waiver that they would have received 46

47 on these additional disbursements. Conversely, if partial prepayments occur in the loan account, then the borrower notionally gains an additional waiver although the principal has been repaid earlier. 7. What loan types are not eligible for interest waivers? Special Development Policy Loans (formerly Special Structural Adjustment Loans) are ineligible for waiver of interest, commitment charge, or front-end fee because of the special nature and high risks of lending for crisis support above and beyond anticipated risk levels. Project Preparation Facility, variable lending rate 82 pool loans, IDA credits, and B loans are ineligible for interest waivers. In the case of IDA credits with hardened terms, the partial interest waiver is built into the interest rate. 8. If a borrower loses an interest waiver, how can it be regained and what is the timeline for completing waiver restoration? If interest waiver is lost by the borrower, then the following condition must be met for the borrower to regain waiver: The borrower must have serviced all IBRD loans and have paid all amounts under IBRD guarantees and hedging products during the preceding six-month period within 30 calendar days of their due dates. The timeline for waiver loss and subsequent restoration is illustrated in figure 4.1. Figure 4.1 Timeline for Waiver Loss and Subsequent Restoration 47