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IDB to help financial institutions boost lending to small projects with high social impact

The Inter-American Development Bank's Board of Executive Directors approved a loan and guarantees facility of up to US$150 million to strengthen the solvency of financial institutions in Latin America and the Caribbean and boost long-term financing to small projects with a high social impact.

The assistance under the Latin America and Caribbean Subordinated Debt Facility will also mobilize additional resources from commercial banks and other institutions in order to increase funding to small and mid-sized enterprises (SMEs), microfinancing, and housing finance.

"This support to the private sector will contribute to spur economic recovery in regional nations that suffered the backlash of the global financial crisis unleashed in 2008," IDB's Financial Markets Division Chief Daniela Carrera said. "This is the IDB's response to the financial institutions need to strengthen their capital structure to support growth, particularly in high social impact areas that are crucial for the region's economic development."

Due to liquidity constraints and worsening of portfolio performance during the crisis, private financial institutions throughout the region reduced their lending, including in the SMEs and loans areas. Now that there are signs that the emergency is subsiding, the new facility will help them recover their pre-crisis lending levels.

"With these structures, the IDB is maximizing its added value by supporting local financial markets that faced portfolio growth constraints," the operation's team leader Mónica Mesanza said.

In order to achieve this goal, the facility will include the structuring of subordinated debt instruments that may consist of subordinated loans, guarantees to regional banks and investors willing to fund such loans, or partial credit guarantees to support the issuance of subordinated bonds.

Depending on market conditions, these instruments may be complemented by co-loans, co-guarantees, or syndicated loans extended by commercial banks or other financial institutions.

This facility promotes the access of new customers to the financial system (accessBanking) and the evaluation and improvement of the financial institutions' corporate governance programs (clearBanking), which are key components of the IDB's beyondBanking strategy.

The subordinated debt instruments will be financed chiefly by the IDB, whereas capital instruments that may be required by these institutions will be financed mostly by the International Finance Corporation, the World Bank branch that supports the private sector.