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BANGALORE, May 22

THE World Bank has indicated that it would impose foreclosure charges on prepayments of loans availed by India.

The bank's Chief Economist and Senior Vice-President, Dr Nicholas Stern, said, "These are standard covenants for bank loans advanced to India and other countries." But Dr Stern said the details of such charges are usually worked out by the policy making body of the bank. But Dr Stern added that such prepayments would not affect future loan disbursals to India.

So far, India has prepaid $2.8 billion of loans availed from multilateral institutions. But India is not the only country to have made such large loan prepayments. Russia has also made prepayments during this year of some of the high interest loans availed during the mid 90s.

Such prepayments were made during the year in view of the large foreign currency reserve build up. Foreign currency reserves are expected to touch a record $80 billion before September. Prepayments have had the effect of minimising the liquidity overhang in the banking system and mitigating the risks of any sharp exchange rate appreciation. Asked whether prepayments were acceptable to the bank as an instrument of exchange rate management, Dr Stern said, ``This is an internal decision of India and will bring down the interest dues.''

The loans that have been prepaid are those that were availed during the high interest rate regime in the mid 90s. These loans have residual maturities in excess of 10 years. World bank loans normally have a maturity profile of about 25 years. This year, current indications are that one more round of prepayments are expected to be made to reduce the interest rate burden and bring down the external debt.

However, only the high cost loans where multilateral institutions have made on commercial terms and through co financing are in the process of being prepaid. Low interest rates loans drawn from International Development Association would be redeemed only at the time of maturity.

These prepayments were being funded by the strong current account flows into the country. These inflows have resulted in the exchange rate appreciating by at least 5 per cent during the last one year to Rs 46.90, as against the depreciation that was experienced during the last two decades. The inflows have also resulted in the forward premiums sinking to all time lows. Forward premiums for April 2004 is currently only about 10 paise whereas six month forward premiums are about 7 paise.

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