The World Bank is in discussions with rating agencies over the multilateral development bank’s (MDB) ‘callable capital’ instrument that would help increase its lending capacity, managing director and chief financial officer Anshula Kant has said.

“We are talking to rating agencies so that they also understand what we are trying to do and they give more weightage to callable capital as they rate the MDBs,” Kant said on August 11 in Mumbai at a seminar co-hosted by the finance ministry’s Department of Economic Affairs and the Reserve Bank of India (RBI) on the challenges, opportunities, and the way forward for the global economy.

“Hopefully, once this process is through – it will take us time – we may be able to leverage this better than we are doing today,” Kant added.

The so-called callable capital is a commitment from the World Bank’s shareholders to step in with new funds to help it only under extreme circumstances. However, rating agencies may not favourably view callable capital to increase lending, which could hurt the Bank’s credit rating.

“Callable capital is a unique instrument from which most multilateral development banks benefit. However, the concept of callable capital is an untested one, in that none of the MDBs has ever called it. There is growing focus on how much MDBs, as well as the credit rating agencies, should give credit to callable capital,” Fitch Ratings said in November 2022.

Also Read: World Bank’s top economist calls on India to be champion of debt relief initiative

Kant, who was previously a managing director of State Bank of India, admitted that the callable capital mechanism was far from straightforward and clarity was needed on the procedures involved.

“Who will call, what are the context of the call, when can we trigger the call, what are the enablers that the country’s shareholders will need to actually pay out on that callable capital, will they need Parliament and Congress approval, how long will it take…. All these intricacies, we are currently working with our largest shareholders to see if we can bring more clarity to this process,” she added.

The World Bank is undertaking a series of reforms to more efficiently leverage its resources. However, new President Ajay Banga has said that while he would “push it as hard as you can,” the Bank’s AAA rating had to be protected to ensure it can raise funds at low cost.

Speaking in Mumbai on August 11, Kant also underlined how crucial it was that the World Bank’s top rating was maintained.

“We borrow about $50 billion in the bond markets every year. We are one of the largest non-sovereign issuers in the world. And borrowing $50 billion with an AAA rating is a whole different ballgame versus if we were borrowing say at AA or BBB – the scale matters, the size matters,” Kant said.

Taking the example of International Development Association (IDA) – a part of the World Bank that helps the world’s poorest countries by providing grants and zero to low-interest loans – Kant said its AAA rating rides on the AAA rating of International Bank for Reconstruction and Development (IBRD). Any rating downgrade would not mean just a 10-15 basis point increase in borrowing cost, she said.

With reference to hybrid capital from the private sector, the World Bank CFO said informal meetings with country representatives had revealed that many countries, including India, were very concerned about the cost of funding going up if the Bank accessed the private sector for hybrid capital.

“So I don’t think many IBRD countries have an appetite to borrow at higher costs from us. Maybe some do, but not all,” Kant warned.

Earlier in the seminar, Finance Minister Nirmala Sitharaman delivered the keynote address and said multilateralism today is facing one of its biggest challenges.

“After decades of integration, the global economy is starting to witness increasing fragmentation and unravelling multilateralism,” Sitharaman said.

“So far, we have ensured that geopolitical differences do not supersede the core G20 mandate of the international cooperation… The Indian Presidency has ensured that common ground is reached on all economic issues while maintaining a forward-looking agenda for the G20 in 2023,” she added.

India, under its G20 Presidency, has pushed for the reform of multilateral development banks such as the World Bank. In the meeting of finance ministers and central bank governors in Gandhinagar last month, one of the key issues under discussion was these reforms, with the expert group led by Larry Summers and NK Singh submitting the first volume of its report this week. The second volume is expected to be submitted in October.