Essay on Asian Development Bank (ADB) | Banking

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Essay on Asian Development Bank (ADB)

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The suggestion for the creation of Asian Development Bank (ADB) was initially made by the Economic Commission for Asia and Far East (ECAFE) in 1963 for the purpose of lending funds, promoting investment, rendering technical assistance to the developing countries and fostering economic growth and co-operation in the developing countries of Asia and the Pacific region. This institution formally commenced its operation in December 1966. Its headquarters are located in Manila, Philippines.

Functions of ADB:

The ADB has been instituted to perform the following main functions:

(i) To promote investment of public and private capital for the development of the countries of Asia and Far East;

(ii) To utilise the available capital resources for executing such projects and programmes which are important for the development needs of member countries;

(iii) To provide assistance to member countries for enabling them to co-ordinate their development plans and policies and thereby achieve better utilisation of resources and expansion of inter­regional and intra-regional foreign trade;

(iv) To extend technical assistance for the financing and execution of development projects and programmes;

(v) To co-operate with the United Nations and other international, regional and local organisations for mobilising funds for financing development programmes and plans in the member countries ; and

(vi) To render such other services and to undertake such other activities as, further its objectives.

Membership and Organisation of ADB:

Membership:

The membership of ADB is open to all the members and associate members of ECAFE and the members of the United Nations or any of its specialised agencies. By the year ending 2003, 63 countries were its members. Out of them, 45 were regional and 18 non-regional members.

Organisation:

The apex policy making body of the ADB is the Board of Governors. Each member country nominates one Governor and one Alternate Governor. The responsibility for the general direction of the operations of the Bank is vested in the Board of Directors. The Board of Directors is constituted by 12 Directors. Each of them has an Alternate Director. The Directors hold office for a term of two years subject to their re-election. All matters are decided by majority votes except where expressly provided otherwise by the charter.

The total voting power of each member country consists of the sum of its basic votes and proportional votes. The basic votes consist of 30 percent of the total voting power and these are equally distributed among the members. The remaining 70 percent of the total voting power is in proportion to the share held by the member countries in the capital stock of the Bank. The Chairman of the Board of Directors is the President of the Bank. He is assisted in executing management and operations of the Bank by a Vice-President, other officials and the staff.

Capital Resources of ADB:

The ADB initially had an authorized capital of 2.99 billion U.S. dollars. Out of that 1.09 billion U.S. dollars had been subscribed. 50 percent of the subscribed capital was in the form of paid-up capital and the remaining 50 percent was in the form of callable shares. The latter were to serve as security for the obligations of the Bank. The paid- in part of the subscribed capital was to be paid in five equal yearly installments. The members could pay 50 percent of each installment in their local currencies and 50 percent in convertible currencies.

The authorised capital of the Bank was subsequently raised in 1972 and 1976. At the end of June 2003, the authorised capital of the Bank stood at 51.996 billion U.S. dollars, of which 12 percent was in the form of paid-in capital and 88 percent was callable capital. The subscribed capital of ADB at that time stood at US $ 51.997 billion, out of which share of regional members was 63.2 percent and that of non-regional members was 36.8 percent.

The Bank may supplement its resources by increasing its capital, issuing bonds or accepting contributions to what are called as ‘Special Funds’. The principal non-regional members include the United States, the United Kingdom, Germany and Japan. They have not only made substantial contributions to the share capital of the ADB but have also made contributions to Bank’s Special Funds.

Lending Operations of ADB:

The ADB lending operations are broadly of two types—ordinary and specialised operations. The lending operations financed out of the ordinary capital resources of the Bank are called as ordinary operations. Such loan operations consist of financing of the foreign exchange or local currency component of the cost structure of specified projects.

The Bank can make available to the borrowing countries the required currencies out of its own resources. Apart from providing direct loans for projects in member countries, the Bank also provides indirect loans to the financial institutions in the member countries.

The specialized operations of the Bank are financed from the various Special Funds such as the Technical Assistance Special Fund, Asian Development Fund, Agricultural Special Fund and the Multipurpose Special Fund.

In addition to the provision of project loans to the member countries, the Bank also provides technical assistance to them in the formulation, financing and execution of development plans and projects and the creation of institutions in such fields as agriculture, industry, public administration etc. It also sends technical assistance missions with the approval of potential recipient member countries.

During 1968-73 period, the Bank approved loans amounting to 1.38 billion U.S. dollars to 21 countries for 189 projects. Out of them 26.5 percent loans were given for electrical power projects, 24 percent loans were extended to the projects in the field of transport and communications, 12.5 percent for agricultural development, 11.2 percent for water supply projects and 1 percent for educational projects. During this period, almost 50 percent of the loans went to East Asian countries. India did not ask for assistance from the Bank during this period.

During 1974-92 period, the loans extended by the Bank to the member countries amounted to 41.08 billion U.S. dollars for 931 projects. In the year ending June 1992, the ADB advanced loans amounting to 5.11 billion U.S. dollars for 65 projects. The loans from ordinary capital resources aggregated 3.95 billion U.S. dollars and loans from Asian Development Fund amounted to 1.16 billion dollars.

63 percent of the credits were for specific projects and 21 percent were for specified sectors in the economies of the member countries. In 2003, out of total ADB lending of US $ 105.07 billion, the highest allocation of 21.87 percent was made for transport and communication sector, followed by 20.33 percent, 17.06 percent and 16.28 percent for economy, agriculture and natural resources and social infrastructure respectively.

The ADB and India:

The Asian Development Bank has been making useful contribution in financing development projects and programmes related to private and public sectors in the developing countries of Asia. Prior to 1986, India made no borrowings from the ADB. The loan authorisation to India during 1986-87 was 251.6 million U.S. dollars which rose to $649.8 million in 1991-92.

The gross inflow of assistance in 1991-92 included 150 million U.S. dollars for Special Assistance Project and 125 million U.S. dollars as the first tranche of the hydro-carbon loan sector. In 1997-98, loan authorisation from ADB amounted to 650 million dollars while it stood at 630 million dollars in 1996-97.

The utilisation of assistance from the ADB was, however, woefully small during 1987-90 period. It amounted to only 153.2 million U.S. dollars which was just 10.55 percent of aid authorisation from the ADB in that period. The utilization of ADB assistance in 1997-98 amounted to 601.1 million U.S. dollars which was only 92.3 percent of the authorised assistance.

Despite the sanctions imposed by Group of Seven (G-7) industrialised countries after Atomic Tests in May 1998, ADB has approved three loans amounting to $ 625 million to India. One of these loans is a $ 250 million programme loan of which $ 100 million have already been released by the ADB. During 1996-99 period, ADB loan disbursement to India was over $ 600 million a year. In 1998, it was 32 percent, higher than the disbursement ratio of China.

During 1999-2002 period, total authorisation of assistance by ADB to this country amounted to $ 3.04 billion. The utilisation of ADB assistance was, however, only $ 1.47 billion. The ADB assistance authorised to India during 2003-09 period amounted to US $ 8.48 billion. During the same period the ADB assistance actually utilised by the country was of the order of US $ 5.37 billion which was 63.3 percent of the authorised assistance. The efforts must be directed to improve the extent of utilisation of assistance secured from the ADB.

The ADB authorised loan assistance amounting US $ 565.2 million in 2010-11. ADB’s three year country operations business plan for India for 2012-14 will provide lending assistance of US $ 6.25 billion to support inclusive growth. The lending support will go to key areas like transport, energy, urban development, agriculture, natural resource management, finance and education. In 2014-15, the ADB authorised loan assistance amounting to US $ 799.3 billion. The ADB assistance utilised in that year was US $ 997 million.

The ADB and Government of India agreed to a new country partnership strategy for 2013-2017 period. Under this strategy, ADB will provide a loan of $ 2 billion annually. The ADB aims at increasing its sovereign and non-sovereign lending to India from the present $ 7 billion to $ 9 billion in three years from 2015 to 2017 to $ 10 billion to 12 billion.

The Asian Development Bank has been planning to increase its portfolio in the private sector in India. It will look into the possibility of taking up equity in private banks, ports, bridges and petrochemical projects. The ADB may also finance some unconventional projects in the private sector such as road maintenance projects. The ADB has, however, no plan to assist the steel industry and oil exploration projects. The latter are considered as “too high risk” projects to be financed by the ADB. The ADB would endeavor to finance more projects in the infrastructure sector.

Criticism of ADB:

The functioning of the ADB has been criticised on the following main grounds:

(i) Emphasis on Lending to Private Sector Projects:

Although objectives of ADB specify that the advances by it would be made for furthering the growth of both private and public sectors in the member countries, yet the ADB operations indicate that higher priority has been given to the private sector projects. It has taken very little interest in the development of public sector which has a key role in the development process of LDC’s.

(ii) Tied Loans:

The ADB generally provides tied loans and the borrowing countries are required to utilise funds only for the specified purpose. Such a restriction tends to discourage the developing countries who are in greater need of non-project investible resources.

(iii) High Rate of Interest:

The interest rate charged by the ADB on credits is relatively higher than that charged by some other international financial institutions. The proportion of concessional loans in the total lending of the ADB has remained low. The developing countries of Asia, therefore, have to look to other institutions for assistance.

(iv) Political Bias in Lending:

There is a serious charge against the credit operations of the ADB that there is an element of political bias in its loan policy. The ADB seems to promote the strategies and interests of the United States and her allies. The majority of the Asian countries that have received credit from the ADB included the countries like South Korea, Singapore and Philippines which are fairly developed economies. The countries pursuing independent political and economic policies have not been able to secure assistance from the ADB to the desired extent.

In view of the above objections, it is important that there is a reappraisal of the role and functioning of the ADB so that it can become a more effective and efficient instrument for the accelerated development of the poor countries in the Asian region.

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