ADB's Financial Sector Operational Plan supports the market-based pricing approach and stipulates that projects involving credit lines need to be designed to strengthen the capacity of financial institutions intermediating the credits and such a project should comply with the Operations Manual (D6) to avoid undermining the commercial incentive for the participating financial institutions to competitively mobilize finances and distorting the credit and interbank market. As such, it is the norm to adopt the average weighted deposit rate (AWDR) as a local anchor for determining subloan interest rates for ADB financial intermediary loans. Adopting the AWDR is considered generally consistent with best practices. However, adopting a local interest rate anchor is not widely practiced by other development partners, which in many cases adopt fixed interest rates, often lower than prevailing market rates. There may be a need to promote a standard local anchor for interest rates, as it will bring assistance from development partners into conformity with the local environment and avoid market distortions. Project formulation missions need to be mindful of consistency with other projects with financial intermediary loans. If a significant discrepancy in the interest rate exists with projects funded by other development partners, there will likely be implications for disbursement.
Small and Medium Enterprise Regional Development Project