Annex 2. Table of Selected Development Banks, and their counter-cyclical response

Source: For commitments and disbursements, authors’ calculations, based on data in Annual Reports of the development banks and their websites. For GDP data, source was World Bank.

1. The Asian Infrastructure Investment Bank (AIIB)

Drawn from interview with Dr Joachim von Amsberg (11 January 2022)

The AIIB increased lending by 120% in 2020, compared to 2019 (Disbursement increased 320%)

The AIIB decided from the first management discussions in Feb 2020 that Covid was not just a passing incidence. The Bank knew it faced a stark choice; it could say “we are an infrastructure bank, with a focused mandate and stick to it…” but it realized if it did this, it would suffer a decline in business, and would miss the opportunity to help our members. “We realized we needed to adjust our strategy and do things (kinds of lending) we had not foreseen.”

Scaling up for counter-cyclical lending. For the historical multilateral banks such as the World Bank, to scale up and lend counter-cyclically for such a crisis is part of their business model; however for most PDBs and for the AIIB in particular, this was a more difficult decision. It required the Bank to “move out of our usual safety zone”.

The process for doing this was quick. The Board gave approval in April 2020 for the adjustment to the business model. This was relatively straightforward as the AIIB’s clients were clear about what they needed, and the bank shifted its focus from its usual long-term infrastructure perspective to one about shorter-term needs - specifically health, budgetary support and liquidity.

The importance of having spare capacity. The AIIB was “the only one in the MDB system with spare capital, and we could do it (use it) quickly”. The Bank is well capitalized, and because its business plan prior to Covid had been for a gradual ramp up of lending over several years, it could ramp up quickly because there was spare capital already waiting. Not only could the Bank scale up quickly it could also expand the impact of that lending by helping other banks, including the WB, ADB and EBRD, as the AIIB provided the co-financing on joint projects. “We just put a line into the deal saying 500 m from the AIIB. It was simple but for the client it meant a lot.”

The initial plan for Covid recovery finance had been modest in April 2020 – at $5b. Then in response to client needs, they increased the window to $10 b and then $13b. Thus, far $11b has been committed, which is a lot given the unexpected two year timeframe.

The AIIB has spare capacity still and intends to continue to lend more next year. “We are inclined to continue, even as the crisis evolves. This was the point in history - we were set up, we were well capitalized, and had not committed our balance sheet”.

Speed of lending. The dispersal of funds was also quick. Although this was not the usual kind of lending for the AIIB, the fact that it was with partners such as the WB and ADB meant processes could be fast. One reason was that these banks had similar criteria for evaluating proposals, and so could be quick and unbureaucratic, while still meeting quality and fiduciary requirements.

Partnership with the MDBs, especially WB and ADB. In addition to the speed of disbursement mentioned above, partnership also involved more than only finance. The AIIB also learned new operational skills and worked with some new countries it had not worked with before, especially outside Asia, where they previously had little capacity. The new countries included Cook Islands (with ADB);

Ecuador (with WB); Kazakhstan, Rwanda with WB. The point was that all three sides to a collaborative deal like this can benefit. This shows not only the advantages of having spare capacity in the system, but also the benefits that can be achieved with MDBs work as a system rather than individual banks only. (The Eminent Persons report in 2018 also raised this.) In the Covid case, while the AIIB had the capital, the WB had the experience. “We all work best when we work as a system, when capabilities and intellectual capacity lie across banks. Whether this will be a permanent shift is not clear.

Covid lending in perspective. In total, the AIIB has committed already $30 b in its short lifetime, and has substantial capacity to keep growing the balance sheet. The strategy is to build up to 2030 – the scaling up in this Covid crisis was just an anticipation of that. AIIB could still carry more, until it reaches its capital limits by the end of the decade.

The lending was in part designed with this in mind - many of the Covid-related loans should be repaid by the end of the decade, some loans had only limited maturity for the purpose of not losing this future spare balance sheet capacity. As much as the AIIB aimed to be counter-cyclical in the current crisis, it did not want to take away our capacity to do our regular business.

Any trade-offs? Not so much in terms of capital, but in institutional capacity to do infrastructure lending? Initially the Bank feared there could be trade-offs but in fact there were not. If there had been demand for infrastructure the bank would have kept with its original strategy, however governments were distracted, they were not focused on infrastructure, so there was no trade off rather a natural pullback in client demand in those areas. When countries have acute pressures, there is a pause, then they will want economic recovery (and more infrastructure? but not yet?).

Impact on relationships with clients The Bank has demonstrated its relevance to clients; built relationships, and shown that it was agile and responsive. At present, it does not have a forum for regular feedback from our clients, but the sovereign clients are already present as representatives on the Board and so participate in discussions. In this way they knew the AIIB had a new strategy or programme on Covid finance. There are also bilateral discussions with Ministries where the Bank learned informally that government priorities were in the short-term; they did not cancel infrastructure but put it on a back burner.

Most lending went to the public sector. It included credit line operations with the EIB, and with national development Banks (Turkey, Ecuador, Egypt, Sri Lanka and others). Importantly, the AIIB still requires government guarantees when it does private sector liquidity loans.

The business model is clearly one of an MDB but the bank seeks to innovate also. It comes with less of a policy agenda. This has pros and cons, but it was deliberate. It has a sector focus and does not have the country policies or country agenda as do other MDBs; no partnership docs. It was felt that while this approach may suit other banks, for the AIIB it brings too strong a view on what a country should do. “We do not have a country agenda; rather we support projects if they meet our requirements. We are more flexible”. It was felt that the EIB was a bit similar; the EIB is seen as a relevant parallel and was a model that informed the AIIB when it set up. It also like AIIB has lighter staffing.

Links with national banks. In Ecuador, Turkey, Egypt, Sri Lanka and others the AIIB financed credit lines through national DBs. This is considered a natural way to meet smaller clients, and useful for the bank in the long-term, good to have national counterparts. In some cases these were pre-existing relationships, e g in Sri Lanka; others were new, such as with Jordan. Other benefits of broadening the reach included that it was a way “to show other countries we are on the map”.

Longer-term and post-Covid Green investment is a huge priority for the Bank, which has been signalling that it intends to pivot to that. In Turkey, where it had credit lines for energy efficiency already existing before Covid, it was easy to scale up once Covid hit because of existing relationships from before the crisis, with partner banks and lines already so it was easy.

Risk and counter-cyclical lending. How to deal with risk. The AIIB does not take the credit risk for the final borrowers, only the risk for the banks or for the sovereign. The banks they lend to, use the finance to expand the scope and scale of their lending to their existing borrowers, they have relationships with those borrowers, and they (and we) are helping those corporates from going under, it is also about protecting existing assets. We rely on the national bank risk assessment. “They are protecting the financial viability of the clients of their bank. We are protecting our relationship with the bank client”. Hence there are multiple, iterative layers of counter-cyclical lending…

The AIIB’s thinking is that it wants to continue to respond to the Covid recovery and note that the crisis is not yet over, the whole uneven recovery could also cause further crisis. At the same time, it does not overstate its capacity. It is small compared to what could still come… the taper tantrum this time around could be much worse than what we saw in the past… “We want to be ready, but our scaling up is still modest amount compared to the macroeconomic needs of our members, we can’t cover everything.”

2. Uganda Development Bank

Drawn from interview with Patricia Ojangole, CEO of UDB and material provided by her.

Uganda Development Bank (UDB), Uganda’s national development bank, had one of the strongest counter-cyclical responses to the Covid crisis world-wide, as its commitments increased by 73 % from US $ 69 million in 2019 to US $120 million in 2020. Disbursements also rose significantly, though less, by 32% in the same period, going up from US $50 million to $65 million. During 2021, there were further increases especially in disbursements, but also in commitments.

Political support One of the main reasons why UBD was able to respond so quickly and on a significant scale was that the Ugandan Government, including in particular the President, clearly earmarked UDB as a key instrument to respond to the COVID crisis, and took very concrete action by strongly capitalizing UDB, in fact by doubling its capital. A significant part of this increased capital (more than half) was provided as additional funding.

The Government funded this increase of capital as equity drawing on its own resources and its borrowing, including from international sources. UDB itself has been accessing international lines of credit, from regional and bilateral development banks.

The strong increase in capital of UDB was rather unique internationally, as other DBs did not receive such an increase, and in many cases, found this an important restriction to their capacity to increase their lending significantly and speedily

National development strategy. Also helpful was that the Government had recently before COVID hit, defined a new national strategy and development plan, which identified key development sectors to be supported: Primary Agriculture, Agro-Industry and Manufacturing, which were also the ones most strongly supported during the COVID period. Additional effort was made also to support sectors particularly badly hit by COVID, such as tourism, private education, and the night economy (much of which was closed during the pandemic).

The purpose of these loans was to provide initially working capital, so companies could survive and maintain their staff. In a second phase, loans were provided to support faster recovery. More generally, given problems with international supply chains, an emphasis was placed to produce as much locally (e g essential goods for citizens, including health related products, like masks). In some cases, the Bank helped guide finance provided from elsewhere, for example the EU provided a special grant to UDB, for it to make loans to the tourism sector.

Consistent with its mandate, UDB tried to support projects within the private sector that demonstrate potential to deliver high social economic value, in terms of job creation, improved production output, tax contribution and foreign exchange generation among other outcomes. According to its own evaluation, the impact of its loans during the August 2020 - December 2021 period on jobs generated was most important in primary agriculture, agro-processing, tourism and manufacturing (in that order); in terms of increased output, the main effects were achieved linked to loans to agroprocessing, primary agriculture and manufacturing, whereas both for tax and foreign exchange generation, the two key sectors were primary agriculture and agro-processing.

As with some other national banks, the crisis conditions prompted internal re-organisation and innovations. To facilitate a speedy and significantly scaled up response UDB, re-organized itself, including by hiring new staff, modified the process review for loans (aiming to combine speed and cautious evaluation) and incorporating more digitalization. The bank also proactively reached out to potential clients – it made calls to companies around the country for this purpose, to which there were very many applications in response. As a result, all the additional capital of UDB was committed.

Finally, as with many other banks interviewed, the UDB works closely with the Ministry of Finance, including to help design policies and by providing expertise.

3. Development Bank of Rwanda (BRD)

Drawn from interview with I, with Blaise Pascal Gasabira, Head of Strategy; 9 December 2021.

The BRD increased lending commitments from 2019 to 2020 by 42%; however, disbursements decreased by 17%.

The BRD was established in 1967, and since 2011 has become a Public Company, with the vision “to be innovative and sustainable provider of development finance for socio-economic impact”.

Crisis response. The bank followed different patterns of lending at different phases of the crisis. At first, it focused on working capital and allowed banks to restructure debt, while the Central Bank covered the liquidity. At the time of the Covid crisis, the bank’s borrowers “just dried up”. Rwanda had a lot of lockdowns, and projects that were just starting were all stopped. Borrowers were managing their costs, no one wanted to do it alone, and investment demand was slow. The Bank spoke to its lenders, asking for debt moratoriums and payment holidays, because it needed to restructure its outgoing loans as the borrowers could not pay. “We did a lot of restructuring. Most of our borrowers were struggling”. As noted in the Annual Report, the Bank did an “unprecedented” restructuring of loans, deferring interest payments and penalties on a case-by-case basis. The lending in 2022 was therefore mostly restructured loans rather than additional ones.

At the same time, for the Bank to be able to increase its lending capacities to clients in need, it needed to borrow more. Hence, before offering this Covid support the Bank had to check first to get new facilities from its lenders. Most responded positively, extending loans for 12 to 18 months. Some lenders restructured the entire loan to cushion as much as they could. When the BRD saw the signs of business resuming after the worst of the Covid period, it negotiated again with its partners to see if it could get additional finances for liquidity to the economy. Some responded more quickly than others; the World Bank’s response was disbursed only in November 2021.

At the time of the interview (late 2021), when the worst of the Covid period seemed to have passed, the bank is targeting loans to manufacturing, as the sector has potential growth, lots of links to value chains and it creates rapidly jobs. It is also aligned with Government objectives; the Government has designed priorities and manufacturing is one of them (Others include manufacturing exports, energy, agriculture, housing, and the digital economy)

Sources of finance. The Bank tried leveraging funds from existing networks and stakeholders, including designing with the Ministry of Finance. This is how they arranged a $160 million loan with the World Bank, for example. The example also shows the importance of government relationships – the WB lent to the Ministry of the Government and not directly to the BRD.

The Bank also gained finance from negotiations with EIB, which they on-lent to clients and to provide commercial bank liquidity, at lower rates so they can on-lend (at lower rates also). Other support fame from the government of Rwanda, which put up two facilities including liquidity through the Central Bank, which was paid directly to the other banks in the national system; and secondly by providing working capital.

In terms of regular financing, the Bank is not a deposit taker and most of its funding comes from the shareholders, borrowing through bonds, and borrowing from the larger DFIs. The Bank’s balance sheet comprises about 70% borrowings, of which foreign borrowing accounts for 60% and local Rwandan sources about 40% (including from the domestic pension fund, the National Bank of Rwanda and the government’s Economic Recovery Fund. It received several capital injections by Government of Rwanda in recent years including 13 billion RFr, meaning the capitalization was increased by around one third.

Its high reliance on international sources of finance means it is highly exposed to foreign exchange risk, which the Government can hedge to some extent through swap operations, but the exposure is still significant. Its reliance on external sources of finance also mean that the Bank puts a high priority on trust, responsibility and proper reporting to its partners. It has tried to improve visibility on the projects it finances, to help give the necessary assurances and “more comfort” to its lenders.

Support from partners including the EIB, AfD, TDB, Shelter Africa, and KfW was considered very important. “They are good partners who understand our environment, the region”.

Institutional contexts. The Covid experience provided a reminder of the importance of history, and the existence of previous relationships for speed of Covid delivery… Pre Covid, the Bank had already several projects with the Ministry of Finance, and in the urgent conditions of the crisis, the Bank asked if we could replicate those processes, seeing it as a way to be quick in responding. Setting up new relationships can take one year with big institutions, but this one took five months because the communication channels already existed, and so could help support the need for increased lending.

Other contexts are more challenging. The World Bank, for example, deals mostly with governments not banks, but (also) what is still a challenge, other lenders who would be willing to help, are still limited in what they can offer without a sovereign guarantee. “They say ‘we’ve put capital in already, we can’t keep increasing it as debt.” The regional MDB, the AfDB, also wanted government guarantees. In this context, the Bank had to think more widely than seeking capital increases; the strategy had to be also, how can we interest other investors, DFIs, like minded institutions, IFD and KfW who have higher ratings, and do not need the government guarantee

New sources of capital Bank has recently been upgraded by Fitch to B+ (Annual Report), but this is still not high enough to borrow on international markets at a sufficiently low rate. The Bank felt that having the Government of Rwanda as its main shareholder limits its credit rating, as the highest can only be the sovereign; which is rated B. This affects the Bank’s capacity to raise funds and to borrow, and to on-lend.

Looking forward for ways to address this, one option the Bank is considering is taking on new shareholders, as a way to increase its credit ratings and help to reduce the cost of capital. “We were thinking of it before Covid but Covid pushed us to do it rapidly, now it’s urgent. At the same time, it is not clear whether new shareholders would bring fresh bring capital, or, less ideally, whether they would just buy a portion of the capital they already have.

Similarly from the day the Bank heard of using SDRs as a possibility, it started “knocking on the door of AfDB” as it was taking the lead in the debate. However, from the BRD’s perspective things are rather vague. The Bank also approached the AfD as leaders of the Finance in Common. “We want this on the table, but there is no clear visibility”.

Concerns about NPLs? Previous debts were not sold, we still have them, not securitized, we are very traditional. In the future, the Bank may write them off if they reach a level where this needed; which would impact negatively on profits. They have sought to cover this potential problem in two ways: a) Asking lenders to give the Bank a moratorium period, otherwise the NPLs would hit their liquidity. In this context, they have already asked EIB, TDB and Shelter Africa. Some restructured the facilities the Bank had with them. And also b) The Bank borrowed more to allow other businesses to invest in the economy. To support this objective, the Government put up two facilities. Firstly, liquidity for banks to get cash from the Central Bank, that went directly from central banks to those banks (i e not through the BDR); and secondly, to provide liquidity for restructuring and working capital. This was important, because the Central Bank portion accounted for up to 35% of some sectors’ restructuring, so it helped them reduce the cash flow and helped the economy. Mostly this support was given only for SMEs.

Counter-cyclicality. In some regards, the Bank could not be very counter-cyclical. For example, the most significantly hit sectors in the economy were tourism and transport. The Bank saw significant reductions in lending to those sectors. As there was no movement, there was no demand. Today, the firms in this sector are still struggling. All the Bank could do was to restructure loans, there was not room for them to demand (new loans). “We lend to the resilient, we continued to lend to agriculture, export crops, energy, these businesses continued at the same level during Covid.” At the same time, while the Bank could not do more for those hard-hit sectors, it did attempt to show the importance of this counter-cyclical role in its mandate. “We told the Ministry, if we don’t do it, others will not do it. Our projects are perceived as being riskier than others. Our mandate is to de-risk and catalyse priority sectors that are not currently attractive.”

Covid Response. The first response following the start of Covid was to provide liquidity to the market. The EIB approved the projects it already had begun, as quickly as possible. Then many new instruments were added. It was a very dynamic response.

In particular, an instrument used was to provide guarantee products for firms. There was a big role for the EGF; firstly, to support corporates; also, to share risk with financial intermediaries. This procedure took more time at the start but was then very successful. Risk-sharing in particular had become the most problematic issue, because of the very strong uncertainty facing the European economy. Financial support was also combined with technical capacity support; and there was a particular focus on providing to SMEs, and to the health sector. The Bank focused its attention on sectors most vulnerable to crisis, and clients in most need.

Today, by the end of 2021, the funding situation is quite good and liquidity is no longer an issue. The EIB continues to focus on long-term issues, such as innovation, Paris alignment, and digitalization acceleration.

Mechanisms and instruments used. One way the EIB rolled out its support was to relax some lending constraints, including: 1) Eligibility, not just CAPEX constrained, but also enabling access to working capital. 2) The Bank was now able to lend more than 50% of total transaction (which was the normal constraint).

The EIB also developed some new products, that enabled it to take lending risks in a short period of time. This included by sharing risk with financial intermediaries, which provides them with capital relief. The Bank took the first loss piece; with guarantee pari-passu. It also used existing instruments, like venture debt. These approaches helped the IEB overcome what is usually the biggest constraint for Banks to do SME lending, which is capital constraint. This was alleviated by the various means described above for risk-sharing, and also venture debt for a few companies, the more innovative ones, that had prospects of high growth, and big initial cash consumption.

History matters. This time during the Covid crisis, the EIB was able to benefit from a lot from lessons learned from previous crises: One includes knowledge about what type of instruments that work. These included the advantages of Topping up existing loans. If the borrower has a problem to pay, the answer may be to reschedule. This is easily done without Board approval, and can be speedy. Hence, the lesson learned is that key for speed is using instruments already available, because new instruments take time. There is the need for agreement of MSs, also conducting processes of due diligence, etc. The EGF could be especially successfully used, once approved

A second lesson is that speed is of the essence. The EIB was quicker to move forward this time, than in previous crisis. One reason for this concerns the background, which was very different compared to the 2007-2008 crisis. This time around there was support for a EU build back better approach, based on common borrowing. This enabled countries like Greece and Italy to ask for support from this Fund.

International support. The EIB was also very active in Africa. The Covid-related shock in trade sharply impacted Africa, and implied African companies, including SMEs would suffer. To address this, the EIB instituted top-ups and an accelerating of disbursements, which much done through national DBs like TDB, BOAD, Ecobank, others. Broadly, a lesson was that it is beneficial to work through FIs you know and believe in; this included for example the EIB’s close working with European banks CDP Italy, KfW, Caisse

Regional public goods and innovation. An important role played by the EIB was to support the COVAX partnership for health sector, including the development of the coronavirus vaccines. This stemmed from a previous history whereby the EIB had been playing an important role lending to Biontech, and the initial start of research into cancer treatments, using a then unknown technology, MRNA. The research team was led by Professor of Medicine who was convinced by this project: over time the EIB lent around Euro 90 million to the research. At the time of the Covid crisis, the Biontech team said its learning could be applied to working on a Covid vaccine. The research team thought it could work and hence EIB directed another Euro 100 m to the project. It proved to be extremely successful, but the point perhaps to be made is that such research is usually very difficult to finance privately because of the inherent risks and uncertainty, and hence it was considered an important role for a bank such as the EIB.

Other projects include scientific or medical testing and diagnostics. The EIB both before Covid and after is a key institution in supporting financially health innovative projects.

Support to low-income countries The EIB is concerned about the situation in countries such as Africa, whose needs were highlighted in an African Union Summit February 2021, especially in terms of the continent’s lack of Covid vaccines. A number of countries including Senegal, Rwanda and others are very interested in manufacturing capacity of vaccines.

Counter-cyclical role. The mandate of the EIB and its contribution to playing a counter-cyclical role in times of crisis was a big debate in the Board 10 years ago. The EIB was not seen as a typical countercyclical institution. In 2020 and the Covid period however, the Bank never had this debate. There is a much more mainstream idea of counter-cyclical roles that can be played by such banks. At the same time, while the Covid experience has head to some sectorial lending being highlighted for the future, such as digitalization, and lending to municipalities; there was no overarching change in the long-term priorities of the bank. Providing support to SMES continued to be its key role; also the need to lend for greening projects.

5. Colombian Development Banks

Drawn from background paper by JA Ocampo and JD Torres

Covid-response. The Covid experience stands out for Colombian development banks, especially when compared to previous periods in history. Generally, during the last decades, Colombian development banks have not exercised the counter-cyclical function in a clear way: it was nil or very limited to mitigate the lower growth in 2009 associated with the effects of the North Atlantic crisis, and the period 2015-2016, generated by the fall in oil prices. This is observed in Graph A.1, which presents the annual variation of the loan portfolio of development banks and other credit institutions. In contrast to this previous behavior, during 2020, in the context of the COVID-19 pandemic, the credit portfolio of development banks expanded substantially, by 17%, well above that of second-tier private banks, whose portfolio grew below 5%.

Graph A.1. Annual variation in loan portfolio (%) (1993-2020)

Source: Superintendencia Financiera de Colombia.

Development banks act counter-cyclically, especially compared to private banks

The counter-cyclical behavior of the credit stock of development banks during 2020 is explained by an expansion in their disbursements. Graph A.2 shows the evolution of loan disbursements from each development bank since 2010. It is observed that although disbursements had been growing, during 2020 they accelerated. For example, Bancóldex reached disbursements of $ 6.8 billion pesos, with a growth of 25% compared to 2019. This same growth was experienced by the loans granted by Finagro, which reached $ 24.2 billion. However, in this case, most of the increase is explained by portfolio normalizations, which reached $ 6.7 trillion in 2020, with a growth of 116% compared to 2019. As for Findeter and the FDN, their disbursements grew at more moderate rates: 11.4% and 4.8%, respectively. Unlike development banks, loan disbursements by other credit institutions grew very little in 2020, and less than in the previous year, which reflects their pro-cyclical stance during the crisis.

Instruments used. To accomplish this task, Colombian development banks worked on different fronts to compensate for the credit drop and protect the business fabric and employment. During the first half of 2020 they created special lines of credit (LEC in spanish). Bancóldex reacted quickly with the LEC “Colombia Responde” and “Colombia Responde para Todos”, which sought to provide liquidity for the payment of payroll, supplies and debt restructuring to the sectors directly affected by the measures to contain the virus. About 80% of these resources had to be transferred to Micro, Small and Medium Enterprises (MSMEs.). The delivery of resources to financial intermediaries was conditional on interest rate cuts of between 200 and 500 basis points. Similarly, nineteen regional LECs were developed, and others for early start-ups and reactivation. In 2020, $ 1.44 trillion were disbursed in 51,378 operations (see table A.1).

Note:

Amounts in millions of pesos.

* The amounts correspond to credit subsidies.

Superintendencia Financiera.

For its part, Findeter created eight LECs for territorial entities and their companies, which have longer terms, grace periods and lower interest rates. These LECs played a fundamental role in supporting the health sector (which had a specific LEC), construction, aqueducts and energy development, all strategic sectors for the fight against the virus and economic reactivation. In addition, 80% focused projects were favored in the most vulnerable municipalities in the country. Finagro substantially expanded the resources available to the agricultural sector. The creation of the LEC “Colombia Agro Produce” stands out, which sought to maintain the country's production and supply through a subsidy at the interest rate and longer payment terms. For its part, the LEC “Campo no para” financed support services, marketing, and machinery.

Development banks in Colombia took advantage of the situation of the pandemic to experiment with direct credit. Although this tool was abandoned since the market reforms of the 1990s, bank managers had expressed their desire to reactivate it for various reasons. In this context, the Financial Superintendency authorized Findeter and Bancóldex to act as first-tier banks until December 2020. Findeter ventured into direct credit with subsidized interest rates to support sectors widely affected by the pandemic. Later, a line was created for territorial entities. For its part, Bancóldex, by merging with its financing company, Arco, offered a portfolio of services such as the Acceso Directo line and other leasing and factoring services.

A final mechanism through which the pandemic was addressed was through credit guarantees. In this case, the national government relied on the two guarantee funds in force: the National Guarantee Fund (FNG) and the Agricultural Guarantee Fund (FAG). These funds have been complemented by Bancóldex and Finagro, respectively, to promote financial inclusion by providing guarantees directly through financial intermediaries.

In March 2020, the national government promised to assume up to 90% of the credit guarantees through the FNG to support the businessmen's credit applications through different lines. Due to the emergency of the pandemic, the coverage of these guarantees expanded beyond MSMEs. In general, loan guarantees were aimed at the most vulnerable companies, both due to their size and their impact in the face of the pandemic. During 2020, guarantees were granted for $ 11.5 billion, corresponding to 466,933 loans. For its part, the FAG issued 280,686 guarantees for $ 2.4 trillion, 25% more than in 2019. These guarantees benefited, 96%, small producers, with a greater focus on livestock and coffee production.

6. BNDES

BNDES role in responding to the 2008-2009 North Atlantic crisis

During the 2008-2011 North Atlantic financial crisis, BNDES played a very important counter cyclical role for the Brazilian government in response to the crisis. BNDES disbursements as a percentage of GDP went up by 48 % during this period from 2.9% in the year 2008 to 4.3 % in the year 2010. Reflecting this role, its share of the total credit in the Brazilian economy during the 2008-2009 North Atlantic crisis period was at a 13 years historical high ,with its share of total credit hovering around 21 % consistently for the five peak years of the crisis period i.e., from 20092015.

BNDES role in the ongoing COVID 19 Crisis

However, the scenario has significantly changed in recent years, reflecting changing views on the Bank’s role (see for example TDR2019:144), starting from around 2017 and leading to a significant and consistent drop in BNDES assets and disbursements both in terms of the share of GDP and in terms of US dollars. The aggressive counter cyclical role played by BNDES during the 2008-09 North Atlantic Crisis is not reflecting in the current COVID 19 induced economic crisis, as its assets and disbursements has already dropped by 24 % and 37 % percent in the year 2018 when the crisis has not hit. This trend continued during the present COVID 19 crisis, as BNDES Assets and Disbursement further dropped by 22 % and 11 % in 2020 compared to 2019, in terms of USD amounts. .

Hence, there has been a significant change in strategy to respond the ongoing COVID 19 crisis, and BNDES does not appear to be in the forefront to offer a counter cyclical role as government support was rather offered to all banks and not just the government-owned ones (see Reyes 2020). Based on the data available in the figure 1 and 2, BNDES disbursement as a percentage of GDP was 4.3 % in the year 2010 and its share of the total credit stood at 20.85 % during this period. However, contrary to the expectations, in the period of COVID 19 crisis BNDES disbursement as a percentage of GDP has seen a downward trend as it has significantly reduced to 0.8 % and its total share of credit in the Brazilian economy has also reduce to 12.58 % only (BNDES 2021).

Sectorial support during Covid. Compared to previous years, during the Covid time it seems that BNDES increased its support to industry and to trade and services – the sectors hardest hit by the pandemic and lockdown in most countries. Its lending to infrastructure and agriculture was little changed (Table 1). Notable also in Table 1 is the extent to which the role of BNDES has chanced since 2016, with decreased lending to all sectors of the economy except for agriculture. The Covid period therefore signifies somewhat of a change of direction in sectorial terms, even if only temporary.

Disbursements BNDES

Disbursements BNDES (% GDP)

Conclusion

The above data reflect that the BNDES which had proven to be potent during the Brazilian government response to the 2008-2009 North Atlantic crisis and the spike in credit and disbursements resulted in a recovery of 7.5 % GDP growth in the year 2010 from -13 % in the year 2009. However, during the current crisis Brazil’s economy has not shown positive signs of recovery as yet, with its GDP growth falling from 1.41 % in 2019 % to -4 % in 2020.

In the current scenario, the Brazilian government has sought alternative strategies for financing the crisis response, compared to the tried and tested approaches of previous crises. Instead of aggressively infusing capital through BNDES into the Brazilian economy, it is exploring the route of private finance and have prioritised to mobilise the private capital in the public development space. Learning from history and the important role BNDES has played in the Brazilian economy, by virtue its strong governance policy, deep understanding of the Brazilian economy and its borrowers. There is a strong case to further utilise BNDES in response to the ongoing Covid-19 crisis. During the current crisis BNDES has been sparingly used to provide providing urgent finance to individual and companies, small and large enterprises, public and healthcare sector which has greatly assisted the government in responding and mitigating the high level of economic and social damages. There is need to infuse higher level of capital in BNDES and utilise its financing instruments on higher volumes on a larger scale.

7. Cassa Depositi e Prestiti

Interview with Enrico Petrocelli, Giorgia Prelaz, Stephan Mari

Sources of finance. The ability of CDP to respond to the Covid emergency shows the important role of political will at the highest level. The emergency reply by CDP was enabled significantly by the new EU legal framework, which compared to the past, allowed it to use our lending instruments more flexibly. This was very important, as the next generation EU plan and its multiannual framework got essential EU resources for member states, in the form of grants and loans. CDP role as advisor to the Italian government, Minister of Finance, then received the funds to implement the recovery.

Other sources of finance included the CDP quickly issuing a Social Bond, as early as April 2020. The Covid-19 Social Response Bond, to support Italian enterprises and local authorities (See Vandone et al. 2020). It raised $1 billion euros and was subscribed to by international investors as well as local ones, and offered either three-year or seven-year lending at low rates (ibid: 307). At the same time as this bond’s success, the Bank continued to seek other ways to scale up their immediate reach – including through co-financing loans with the private banking system that were counter-guaranteed by the State for some months; and implementing funds arranged by the Italian government, directed to SMEs.

Longer-term directions. After the immediate Covid crisis period, the Bank has been looking towards medium to long term recovery, and the next generation of industrial strategic plans for the next three years. This implies more targeted lending, that is more strategic and selective lending; and also an increased use of equities. The need to be able to consider the recovery needs of the next few years ahead has been one of the important learnings from Covid, revealed the second time around in 2021.

Reflecting this approach, the Bank has introduced some new innovations for lending including introduction specific criteria for loan selection; including the use of preliminary assessments in terms of the sustainability, green profile or relevance to the digital economy. By 2021, the Bank had also introduced criteria for lending such as geographical origin of companies to support the south, which needs criteria to be selective to support less developed regions. Furthermore, the Bank is required to assess the impact of its loan – in particular the economic impact as opposed to just financial. “CDP needs to be useful to change the business model of companies we finance – the impact of lending. “

Lending to SMES and trade sector. The economic structure of Italy depends on export sector, even more relevant at the start of the pandemic as GVCs so affected. Challenge in keeping alive! Keep smooth functions of the export economy, we relied on it. Had to ensure to keep alive this part of the economy. 90% of economy are SMES. Italy exported 500 billion euros exports this year, huge. Last year it was stuck.

Lending to the regions Pandemic affected some regions more than others, as reflected in the new criteria to promote lending to the South and other less developed areas.

Challenges, the fast move to digital was a massive challenge. Disbursement of lending at the early stage during lock-down and social distancing proved challenging, as the public administration was generally not well set up for digital operations. The Bank had to work hard and quickly to set up online digital systems to collect request for funds (from borrowers). During the first Covid period, within 12 hours the CDP received enough requests to mobilise the entire fund of 1.2 billion euros. Unsurprisingly with such unprecedented demand, the platform at first crashed. It was also difficult to disburse a huge amount of funds in a short time, whilst maintaining the need to insure quality, accountability, and stability.

This year there was a similar reply to the offer of loan finance, especially the need for liquidity; however the impact of the selection criteria means we needed more quality, which reduced the number of requests.

Nature of lending during crisis months. Most DBs are long-term and for some banks, the Covid response meant they switched to providing working as opposed to long-term capital. In the case of CDP, they did not do this; out of respect for the bank’s mandate, and to ensure responsible management of the Fund. It was also not possible to switch the approach because of the sources of much of the bank’s own resources – which, unlike many other banks relies heavily on the postal savings of private citizens, as well as from the market – hence it must also comply with strict rules, long-term lending, risk, etc. It was felt that while this constrained the bank in one direction, it had benefits reputationally – “The CDP’s credibility is linked to the fact it can remain firm.” The Bank does however offer concessional loans within its mandate and also some grants to SME, although this possibly only when finance was coming from the EU Public Fund, not the CDP’s own money. Impact on returns. An important question for many banks concerns the impact of their crisis lending to long-term financial metrics. In the case of CDP, it was anticipated that the bank will still need to make a positive rate of return (which was 10% in the pre-Covid year); and even that similar levels could still be made again, because some companies the Bank lent to survived quite well. Reflects the fact the bank has been cautious in long-term investments.

Countercyclical role The bank was clear of its need to provide crisis support. This is “precisely how we see ourselves, to be at the disposal of the public sector to support the long-term goals 10-20 years. Not used to look at one year. Look rather for how we can contribute to the next generational 6-10 years of the EU” The Bank saw itself as a socially and publicly oriented bank, with different role to play and different demands put upon it compared to an Italian commercial bank.

Tools and instruments. Some banks were able to do rescheduling very quickly, funded projects already approved, rescheduled loans, reallocated liquidity only when needed, which is not the case now. However, the CDP did not do much rescheduling. Nor did it increase leverage, that is a big challenge for it. Rather, the bank relies on public guarantee to mitigate our risk and provide lending support. It is linked to the credit rating of the national public debt of Italy, so its lending is more expensive on the market than others. It tries to reduce the cost of lending to make it more affordable for clients; for example, the bank tries to blend finances with MDBs, public institutions, and the EU. It needs to rely on government guarantees ”Sometimes we can get it but not always. Our lending counts as fiscal deficit on the national budget of Italy, that’s why it’s not always possible to get it”.

Relationship with government. The bank worked closely with national and supranational authorities It participated in preparatory activities for the National Recovery Resilience Framework, where the EC and European Council had asked members to submit plans for reforms and sectoral priorities. The Bank provided advice and support, contributing to the creation of a well-received plan, with clear priorities. Now the plan is all in place, all member states need time line. In addition to such broad strategic participation, the so CDP gives support to the government on a daily basis, to the PM’s office, the Ministry of Finance etc. The Bank sees the benefit from having a long-lasting relationship, which helps to smooth the way during crisis because there was already a stable mechanism of cooperation in place. Even then, the new framework still had to be set up; now the machine is in motion, the CDP advisor is part of the EU process.

Lessons for Italy and other countries. It’s clear we are not going back to the previous models, of public administration nor work; it’s a new era, a new phase. The pandemic was a dramatic and negative experience, but it triggered effects such as speeding up digitalisation. We are managing to come out of crisis with a positive effect, a huge public fund and clear priorities (green, digital).

The new challenge is to make sure it materializes; and that the impact assessments work correctly, they are key.

8. Korea Development bank

Drawn from interview with Eugina Kim.

From the year 2019 to 2020, our data shows KDB loan commitments increased 25%. There is no data on disbursements.

Covid context. It is important to stress that there was no lockdown in Korea, so Covid damage to economy far smaller than in many other countries. Indeed, GDP fell by less than 1% in 2020 in South Korea. (At the same time, Korea was impacted by the wider shock to trade and economic activity worldwide; as were other countries that also did not do lockdowns or did them slowly).

Links between immediate Covid recovery, and longer-term green lending. KDB has a target to achieve a significant increase in green lending by 2030. The change now is government led. President Moon announced a new green policy. The Ministry of Environment and public entities have a Green Taxonomy which is the basis for all stakeholders to define whether activities are green or not. KDB is also making their own criteria aligned to the Taxonomy. The mission of KDB is to become a Climate Bank in the next years.

Link with government. KDB mission is always aligned with that of the government. This time, the new mission, is to be a Climate Bank.

With Covid, there was not a single institutions that could resolve that, even if they were very large.

KDB is “government policy implementation arm”. It supported SMES and some large conglomerates and venture start-ups.

Government budget is critical, for expanding lending quickly; there must be someone who can implement the funds. Private banks cannot finance large conglomerates because of the Basle ratio. “KDB is the only bank that can support these large conglomerates”.

KDB also established a fund for vulnerable SMES, the original source of funds was the government budget.

Latest target, venture and start-ups, as part of “policy finance”. The Fund for Stabilisation of SMES in Time of Crisis offered loans, also delayed payments, rescheduled debt.

The Fund was large scale, KDB was just an implementor. Also a lot of sub-implementers, KDB gave loans to them with favourable conditions.

Government provided funding to KDB to lend to SMES, from the government budget. Covid and green new deal are integrated together in KDB. The vehicle to support SMEs is temporary, the “New Deal Fund” is much larger, and more permanent. KDB also responding to Covid at the same time. In the post-Covid crisis, KDB also established the New Deal Fund, it is the primary one, responding to a lot of issues. Funds came from Ministry of Finance, some from the KDB itself, also from private banks.

KDB takes the main risk. Thus KDB has the first loss equity. Main instruments are loans, reimburseable grants and equity injections – depending on the company needs. Startups are important, in fields like AI, green and tech. “As a bank KDB expects repayment but know that only 1/10 of start-ups can survive, so call it policy finance.”

Looking ahead. During Covid crisis, KDB still supported startups. Startups promote their business on a KDB platform, broadcast nationwide on zoom and you tube. Even large investors come from Singapore to watch the presentation platform.

In the crisis, the larger financiers and banks could not provide sufficient funds, so KDB stepped in as crisis provider. KDB made these loans on a commercial basis, but favoured production with greater Korean content.

Corporate restructuring was a major task, for KDB in times of crisis such as Covid; it lent for example to airlines.

Definitely, procedure for lending was different with the fund for SMEs. The team was exclusively operating under the Ministry of Finance, implementation and operations were done by the KDB but reporting to the Ministry of Finance.

KDB is the only accredited Korean entity to the GCF, the Korean based Green Capital Fund. Korean firms must go through KDB, to have access to these funds. KDB is in discussions with Cambodia to help them join the GCF. Cambodia is the first that KDB is supporting. The GCF wants to replicate this, if it is successful. Thus KDB would play a major role in the Green Capital Fund domestically and internationally

KDB plays an important counter-cyclical role. It is only the public DFI that can take the risk, so private banks can lend. KDB negotiated with the President’s office and the Ministry of Finance.

Drawn from interview with Jan Klasen, 31 January 2022.

From 2019 to 2020, the KfW increased loans committed by +75%; there is not disbursement data.

Speed of response. KfW response to Covid was very speedy. This speed was possible because they used existing programs for loans. Loans took place in three weeks from an idea being implemented. By 28 March 2020, KfW had accepted applications for loans.

The KfW motto was “be quick, be decisive, use big numbers”

Building confidence. Companies take up financial support when offered, but the knowledge there is further support, if needed, was also important – it buys trust, especially for people and in circumstances of uncertainty about their future. Used this previously in the 2008 crisis, which was actually smaller than the Covid crisis. In the Covid crisis, KfW loaned only a small portion of what KfW offered. Although the numbers committed are big, this is far less than what KfW could have done. If we look at the overall commitments, in 2019 all of the operations - domestic, exports, development, etc - came to 77 billion euros. In 2020, it was 125 billion euros, of which more than 50 billion euros was related to problems generated by Corona.

Indeed, even usual business loans, at 84 billion euros was higher than normal, in addition to 50 billion euros of corona-related business. The usual business did not go down, climate reduction was a big source of demand.

Links with Government. Corona Special Programs were linked to a special guarantee from the German Federal government. Government covers 100% of the risks, which KfW committed. This guarantee was used only for domestic support, for German companies.

For the rest of the world, the development sector got $1 billion from government for special transactions. Existing facilities were used.

Further capacities KfW could have done more loans. It put the offer on the table, German companies could apply for cheap loans, sometimes government took 100% of risk.

KfW did on-lending to banks, who on lent to final customer, SMEs had 90% government guarantee, bigger companies 80%; Corona quick programme, implied 100% government guarantee, but this was limited to a total loan of 1 million euro, companies could apply for without any proof of documents, limited in volume, not used much; it was available for companies with less than 10 employees. Dominant part was for SME support, which had 90% government guarantee.

KfW had 154,000 applications; in fact, KfW could have had 200,000 or 300,000 applicants and could have met that. The demand was not there. It is interesting that KfW did not turn away a single client, everyone who wanted a loan got one. Because KfW offered security of available future loans, nobody rushed. As KfW said come when you need, companies were confident there was enough. This was in contrast with the beginning of the Covid crisis, when there was panic. Once companies knew there was support, they analysed what they needed and borrowed only that.

GDP fell but not as badly as expected. We set clear principles, if companies met them. They got the money.

Conditions for eligibility. Borrowers had to be in good shape prior to the end of 2019. Not in distress.

We turned away the ones who “wanted a free lunch, said now my problem is corona”. Eg show you had a drop in orders, show where you’d use the funds. Choice between long term or working capital, 5-10 years maturity, you had the choice. Long term offers to give relief.

10. African Development Bank

Drawn from interview with Prajesh Bhakat, Carina Sugden, Laurent Achi

The African Development Bank data shows approvals in 2020 were down 43%; however, disbursements up 44% driven by CRF (Covid Rapid Recovery Fund) disbursements.

Speed of response. As soon as Covid struck, the CRF set out possible response to help members. Completely reoriented the programme. All lending to the private sector was de facto stopped in March 2020 and did not take place, as AfDB needed all the resources to help governments deal with the pandemic. Governments badly and urgently needed support, which was granted mainly via budget support, that tends to be disbursed in one big tranche.

Prudential rates went down as countries were downgraded – prudent lending to governments (only, not private sector?)

Change in orientation. Disbursed more in 2020 because the budget support operations, once signed were disbursed in one big tranche. This is why the disbursement in 2020 is so much higher. $3.5 b was “crisis response budget support” to 39 member countries, 90% was disbursed by the middle of the year.

Similar to policy operations, as for example done by the World Bank

Could not use it in all countries. For high risk countries, we approved normal operations, $306 million.

Also, allowed restructuring of some projects. If excess resources could be diverted to Covid related activities.

CRF document envisaged support to private sector, workforce, business, etc but all the crisis response focus went in fact instead to governments – activities such as health, support to vulnerable groups, cash transfer programmes, economic recovery of SMEs. Thus, governments helped the private sector through giving tax credit assistance, deferrals, incentives for small SMES. Government helped many private sector enterprises to survive

Reporting and feedback. Currently launching a whole in-depth evaluation of how member states responded, and used the resources.

As regards speed of lending, AfDB had to build in mechanisms to ensure governments did report, also in African countries the financial systems needed more time to create appropriate mechanisms than in developed economies. Still, AfDB did transactions in almost half the time, than in normal times. With upfront dialogue, (or) discussions don’t get tracked… it takes time.

First Covid cases appeared in March, severity was known by mid-March. The Bank responsed from early April – reprioritization, very fast, envisaged and planned. Rapid Response facility. Bank staff “did not sleep, as worked so hard”, in April and May 2020!

Key instrument – programme based lending. World Bank calls it policy lending – basically it is budget support.

2012 policy for crisis response was approved by the AfDB, it was unique as for example budget support criteria are different compared to what needed to fulfil a normal budget support Criteria are : does country have a strategy to respond to crisis, was it developed with the stakeholders? Existence of this previous policy decision facilitated and accelerated ability to respond to Covid crisis.

Designed to provide liquidity, here and now, to address the fiscal gap. Governments don’t have buffers, NO resources available for expanding health services, vaccination, etc , essential to respond to COVID. AfDB contributed to provide resources

AfDB already had the details for how to do rapid crisis response, which helped streamline and fast track. AfDB still needed to decide what to fast track… “Did not sleep between April and May”. Processes were developed to be able to approve and disburse fast, without compromise on quality, due diligence, fiduciary responsibilities or good governance, as attempted not to cut those

Another unique AfDB strategic response, focused on what we do. However, health support had not been one of the sectors supported by the Bank – but could not ignore health! Lot of discussion at the Board, which concluded: “We won’t meet those other strategies if we don’t do this one” COVID spillovers would affect all other sectors, therefore priority given to support health sector

Counter-cyclical properties of budget support, can come in quickly, governments can then help their private sectors. Each country programme was tailored to their needs.

AfDB did not use development banks for channeling funds, but lent directly to government, via budget support, which was fungible. AfDB look at government policies, and at what AfDB and they saw as the highest priorities. AfDB need assurances they had a plan and a programme. AfDB will hold them accountable.

Challenges. In COVID times, there were no country missions; work was all virtual, there were lockdowns.

Another major challenge was for donors to allow commitments to be front loaded in the AfDB Fund. The cycle is usually three years; all funds were asked for in year 1. The Fund did a lot of front loading. In 2021, there was nothing left in the Fund, therefore no approvals.

The Fund is replenished every three years, then annual resource allocation can front load 50%, also only allowed to give 25% to budget support. This Fund is for low-income countries. In 2020, AfDB frontloaded every country, and there were high disbursements.

Capital constraints. The demand for budget support is much larger than what the Bank can supply. AfDB and AfDF are constrained by limits on their capital. If it was possible to increase their capital, their level of activity could increase significantly.

Another problem for the AfDB is that it obtained a capital increase, but it was slow. Belgium has agreed to pay in one shot. Dialogue with other members, who argue they are in a difficult situation too.

Also, SDRs would help the Bank get more headroom, for increasing their operations in African countries. AfDB is pushing hard on this issue, so SDRs are partly channeled through MDBs, such as the AfDB, by increasing their capital. The president of AfDB is strongly supportive, the EIB also is.