Additional Financing of Small and Medium-Sized Enterprises Line of Credit Project (RRP SRI 49273-002)

Project Administration Manual

Project Number: 49273-002

Loan and/or Grant Number(s): L3370; LXXXX; TA9080
November 2017

Sri Lanka: Small and Medium-Sized Enterprises Line

of Credit Project Additional Financing
 ABBREVIATIONS

ADB – Asian Development Bank

BPO – business process outsourcing
CBSL – Central Bank of Sri Lanka
EMS – environmental management system
ICT – information and communication technology
PFI – participating financial institution
PMU – project monitoring unit
PPMS – project performance management system
SC – steering committee
SMEs – small and medium-sized enterprises
SOE – statement of expenditures
SPS – Safeguard Policy Statement
TA – technical assistance
 CONTENTS
I. PROJECT DESCRIPTION 1
II. IMPLEMENTATION PLANS 2
A. Project Readiness Activities 2
B. Overall Project and Implementation Plan 3
III. PROJECT MANAGEMENT ARRANGEMENTS 4
A. Project Implementation Organizations: Roles and Responsibilities 4
B. Key Persons Involved in Implementation 6
C. Project Organization Structure 7
IV. COSTS AND FINANCING 8
A. Allocation of Loan Proceeds 8
B. Disbursement S-Curve 8
C. Fund Flow Diagram 9
V. FINANCIAL MANAGEMENT 9
A. Financial Management Assessment 9
B. Disbursement 10
C. Accounting and Auditing Arrangements 11
VI. PROCUREMENT AND CONSULTING SERVICES 12
A. Advance Contracting and Retroactive Financing 12
B. Procurement of Goods, Works, and Consulting Services 12
C. Procurement Plan 13
VII. SAFEGUARDS 13
VIII. GENDER AND SOCIAL DIMENSIONS 14
IX. PERFORMANCE MONITORING, EVALUATION, REPORTING AND
COMMUNICATION 16
A. Project Design and Monitoring Framework 16
B. Monitoring 17
C. Evaluation 17
D. Reporting 18
E. Stakeholder Communication Strategy 19
X. ANTICORRUPTION POLICY 19
XI. ACCOUNTABILITY MECHANISM 20
XII. RECORD OF PAM CHANGES 20

Appendix 1: Allocation Request Form 21

Appendix 2: Participating Financial Institution Criteria 22
Appendix 3: Subloan and Subborrower Criteria 23
Appendix 4: Advance Reconcilation Worksheet 25
 Project Administration Manual Purpose and Process

1. The project administration manual (PAM) describes the essential administrative and management
requirements to implement the project on time, within budget, and in accordance with the policies and
procedures of the government and Asian Development Bank (ADB). The PAM should include references
to all available templates and instructions either through linkages to relevant URLs or directly
incorporated in the PAM.

2. The Ministry of Finance and Mass Media (MOF) and participating financial institutions are wholly
responsible for the implementation of ADB-financed projects, as agreed jointly between the borrower
and ADB, and in accordance with the policies and procedures of the government and ADB. ADB staff is
responsible for supporting implementation including compliance by MOF and participating financial
institutions of their obligations and responsibilities for project implementation in accordance with ADB’s
policies and procedures.

3. At loan negotiations, the borrower and ADB shall agree to the PAM and ensure consistency with the loan
agreement and project agreement. Such agreement shall be reflected in the minutes of the loan
negotiations. In the event of any discrepancy or contradiction between the PAM and the loan agreement
and the project agreement, the provisions of the loan agreement shall prevail.

4. After ADB Board approval of the project's report and recommendations of the President (RRP) changes
in implementation arrangements are subject to agreement and approval pursuant to relevant
government and ADB administrative procedures (including the Project Administration Instructions) and
upon such approval, they will be subsequently incorporated in the PAM.
 I. PROJECT DESCRIPTION

1. The Small and Medium-Sized Enterprises Line of Credit Project and attached technical
assistance (TA) to be provided by the Japan Fund for Poverty Reduction for Cluster
Development and SME Finance Innovation are aimed at improving SME’s access to banks
loans in the Democratic Socialist Republic of Sri Lanka.

2. Small and medium-sized enterprises (SMEs) are a source of economic growth and
employment. Yet, they often struggle to access bank loans because banks typically consider
SME loans as riskier and more expensive to administer. The project and TA will address this
issue from two angles. First, the credit line will use financial incentives to encourage banks to
lend to SMEs, particularly those that typically struggle to access financing. Second, the TA will
strengthen the supply of creditworthy SMEs through support to three of Sri Lanka’s most
dynamic industry clusters.

3. The project’s impact will be increased employment opportunities for SMEs aligned
government policy.1 The outcome will be strengthened SME’s access to finance. The project’s
outputs will be (i) increased financing to SMEs through formal intermediaries, (ii) enhanced
capacity of SMEs in targeted clusters to access financial services, and (iii) strengthened
international competitiveness of the information and communication technology and business
process outsourcing (ICT-BPO) cluster.2

4. Fund allocation process. The project was originally approved in February 2016. The
$100 million equivalent credit line is expected to be fully disbursed by January 2018. The first
and second fund allocations of $12.5 million were auctioned in April 2016 and September 2016.
The third and fourth fund allocations of $37.5 million were distributed pro rata among eligible
participating financial institutions (PFIs) in March 2017 and September 2017. The additional $75
million will continue with the current pro rata allocation process.

5. Eligible PFIs will request the amount that they would like to borrow from the Asian
Development Bank (ADB) credit line. The request (Appendix 1) should be submitted no later
than (i) 30 March 2018 for the fifth funding round, (ii) 28 September 2018 for the sixth funding
round, and (iii) 29 March 2019 for the seventh. PFI eligibility criteria are specified in Appendix 2.
Each PFI may request between $1 million up to the prorated maximum available at each of the
allocations. If insufficient funds remain to meet all the PFIs’ requests, the funds will be allocated
pro rata. PFIs will not be allowed to participate in a subsequent allocation until 80% of the
previous allocation has been disbursed to eligible subborrowers. Compliance with the
disbursement requirements will be assessed 1 month prior to the next allocation. Moreover,
20% of the number of subloans must be lent to subborrowers that have not previously borrowed
from a licensed commercial or specialized bank, 20% of the number of subloans must be lent to
subborrowers that are led by women, and 70% of the total subloan amount must cumulatively
be lent to targeted SMEs, including SMEs which are either (i) located outside of Colombo
District, (ii) borrowing for working capital against which fixed or financial assets are not pledged,
(iii) led by women, or (iv) not previously borrowed from a licensed commercial or specialized

1 Government of Sri Lanka. 2015. Manifesto, New Democratic Front, A Stable Country, Maithri, Compassionate.
Colombo (President Maithripala Sirisena’s election manifesto); and Government of Sri Lanka, Ministry of Finance
and Mass Media. 2015. Statement by the Minister of Finance on Hundred Day Revolution. Colombo (revised
budget speech).
2 ADB. 2015. Report and Recommendation of the President to the Board of Directors: Small and Medium-Sized
Enterprises Line of Credit Project. Manila.
2

bank. Detailed eligibility criteria (updated) for subborrowers are in Appendix 3.

II. IMPLEMENTATION PLANS

A. Project Readiness Activities

2017 2018 Responsible

Indicative Activities 08 09 10 11 12 01 02 03 04 05 06 Unit
Financial and integrity due▲ ▲
diligence on participating
ADB
commercial banks
conducted
Stakeholder analysis and ▲ ▲
consultation have been
undertaken and are ADB
reflected in the project
documents
Major risks (including ▲ ▲
governance) have been
ADB
identified, and mitigating
measures are indicated
Establish project ▲ ▲ ▲ ▲ ▲ ▲ ▲
implementation ADB
arrangements
Loan negotiations ▲ ADB, MOF
ADB Board approval ▲ ADB
Loan and project ▲ ADB, MOF,
agreements signing PFIs
Government legal opinion ▲
MOF, MOJ
provided
Signing of the subsidiary ▲
loan agreements between MOF, PFIs
MOF and PFIs
Loan effectiveness ▲ MOF, ADB
First allocation ▲ MOF, PFIs
First disbursement ▲ ADB, MOF
ADB = Asian Development Bank, MOF = Ministry of Finance and Mass Media, MOJ = Ministry of Justice, PFIs =
participating financial institutions.
Source: Asian Development Bank.
 3

B. Overall Project and Implementation Plan

6. The scheduled implementation period, including the original loan and additional financing, is 4 years (March 2016–March
2020).
2015 2016 2017 2018 2019 2020
Activity 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6
A. ADB Internal Processing Schedule
1 SRM
2 Loan Negotiations
3 Expected Loan Approval
4 Loan and Project Agreements Signing
5 Loan Effectiveness
B. Project Preparation
1 Establish project implementation
arrangements
2 Acceptable project management unit in
each PFI formed
3 Signing of the subsidiary loan agreements
between MOF and PFIs
4 Recruitment of TA consultants
5 Preparation of formants and benchmarks
for performance management system
C. Project Review w/ Administration
1 Allocation
2 Monthly Progress Report
3 Independent Third Party Quarterly
Report
4 Semiannual Report
5 Disbursement
6 Preparation of annual PMU report
7 Annual and Midterm review by ADB
8 Project Completion Report
D. DMF Please refer to Appendix 1 Design and Monitoring Framework in the RRP.
ADB = Asian Development Bank, MOF = Ministry of Finance and Mass Media, PFIs = participating financial institutions, PMU = project management unit, SRM = staff
review meeting, TA = technical assistance.
Source: Asian Development Bank.

3
4

III. PROJECT MANAGEMENT ARRANGEMENTS

A. Project Implementation Organizations: Roles and Responsibilities

1. Steering Committee

7. A steering committee (SC) will oversee project implementation. The members of the SC
are:
(i) secretary or deputy secretary to the Treasury (chair);
(ii) director general, Department of Development Finance;
(iii) a representative from the External Resources Department;
(iv) a representative from the Department of Project Management and Monitoring;
(v) a representative from the Asian Development Bank;
(vi) a representative from the Export Development Board;
(vii) a representative from the Federation of Commerce and Industry;
(viii) a representative from the Central Bank of Sri Lanka; and
(ix) others who may be considered appropriate by the Government of Sri Lanka.

8. The SC’s secretariat will be performed by the project management unit (PMU) of Ministry
of Finance and Mass Media (MOF). Although PFIs will not be members of the SC, the SC will
periodically seek their feedback.

9. The principal function of the SC is to discuss and advise the executing agency on policy
issues relevant to the implementation and management of the project, inter alia:
(i) review and approval of major policy changes of operating guidelines,
(ii) supervision of the project, and
(iii) any other issues related to the smooth operation of the project.

10. The SC will convene semiannually during the first 12 months of implementation and
thereafter as needed.

11. The SC may also decide to reallocate any undisbursed funds prior to and increase the
maximum allocation available at the last allocation so as to ensure that the loan’s closing is not
delayed due to undisbursed funds.

2. Project Management Unit

12. The PMU has already been established, and there are currently nine staff.

13. The position of project director (PD) will be assigned to the PMU head. The PD will be
primarily responsible for project implementation and PMU management. Preferably, the PMU
will be staffed with officials who have prior experience with ADB projects.

14. The various functions of the PMU, which include implementation, administration, and
operation of the project on behalf of the implementing agency are shown below:

(i) general administration and treasury section

(a) maintenance of MOF advance and local currency accounts and the PFIs’
ledgers and
 5

(b) preparation of statements of the MOF advance account, MOF local

currency account, and PFIs’ ledgers.
(ii) Recovery and monitoring
(a) invoicing of PFIs for interest and repayment and
(b) preparation of annual reports and project completion report.
(iii) Administration and appraisal
(a) annual accreditation of PFIs;
(b) review of withdrawal applications from PFIs to include verifying
compliance with the onlending requirements for targeted SMEs and,
where appropriate, preparation of initial environmental examination;
(c) approval and disbursement of the funds to PFIs; and
(d) submission of statement of expenditure.

Project Implementation
Organizations Management Roles and Responsibilities
Ministry of Finance and Mass  Acts as executing agency for the loan and technical assistance (TA)
Media (MOF)  Responsible for executing the subsidiary loan agreements with the
participating financial institutions (PFIs)
Department of Development  Acts as the implementing agency for the loan and for component 1 of the
Finance TA
 Leads the project management unit
 Approves PFI’s withdrawal requests to include verifying compliance with the
onlending requirements for targeted SMEs and, where appropriate,
preparation of IEE
 Prepares a project completion report
Central Bank of Sri Lanka  Upon loan disbursements being deposited into MOF’s advance account at
(CBSL) CBSL, convert disbursements into local currency and deposit into a
separate MOF local currency account that will hold the funds on behalf of
the PFI
 Upon MOF’s instructions, transfer funds from MOF’s local currency account
to PFI accounts
 Participate in the steering committee and inform in confidence ADB and
other steering committee members through appropriate channels of any
PFI covenant breaches particularly where relating to corporate governance,
reputation/integrity, and anti-money laundering
PFIs  Assess creditworthiness of subborrowers and financial viability of
subprojects
 Implement and ensure compliance with the selection criteria for
subborrowers, subprojects, and subloans and with covenants in project
agreement
 Ensure that the qualified subborrowers comply with ADB's Safeguard Policy
Statement (SPS) and applicable environmental, health and safety, and
social laws and regulations of the borrower
 Submit to MOF a withdrawal request for approval
 Submit annual audited entity-level financial statements with the auditors’
report and management letter
 Submit audited statements of fund utilization
 Submit through the PMU semiannual reports as of 28 February and 31
August within 15 days of the reporting period end
 Submit to ADB annual safeguards monitoring report
 Respond to other information requests as required
ADB  Prepare a project completion report within 12 to 24 months from project
closing date
 Provide overall project coordination
 Monitor PFIs’ compliance with project agreement covenants
 Monitor achievements of the project’s targets established in the design and
monitoring framework
 Conduct periodic field reviews of implementation
 Implement attached TA
6

ADB = Asian Development Bank, IEE = initial environmental examination, PMU = project management unit, SME =
small and medium-sized enterprises, TA = technical assistance.
Source: Asian Development Bank

B. Key Persons Involved in Implementation

Executing Agency Mr. A.M.P.M.B. Atapattu

Ministry of Finance and Mass Media Director General
Department of Development Finance, Ministry of Finance and
Mass Media
+94 11 248 4542
[email protected]
Asian Development Bank Mr. Bruno Carrasco
Public Management, Financial Sector, and Director
Trade Division (SAPF) Fax No.: (63-2) 636-2337
South Asia Department (SARD) E-mail: [email protected]

Mr. Don Lambert

Senior Finance Specialist
Tel. No.: (63-2) 632-5921
E-mail: [email protected]
 7

C. Project Organization Structure

Steering Committee

Advise
Subsidiary loan
Loan agreement
agreement
MOF
ADB
PMU

Finance JFPR TA

Government of
Japan
MOF’s advance/local currency accounts

CBSL
Ledger for Ledger for Ledger for
accounts
PFI-A PFI-B PFI-C

PFI-A PFI-B PFI-C

Project agreement

ADB = Asian Development Bank, CBSL = Central Bank of Sri Lanka, JFPR = Japan Fund for Poverty Reduction,
MOF = Ministry of Finance and Mass Media, PFI = participating financial institution, PMU = project management unit,
TA = technical assistance.
Source: Asian Development Bank.
8

IV. COSTS AND FINANCING

15. Please see Table 1 of the RRP for investment and financing plan.

A. Allocation of Loan Proceeds

16. ADB loan (ADB to government). Sri Lanka will be the borrower. The ADB loan will
have a 10-year term bullet repayment based on disbursement-linked repayment schedule, an
annual interest rate determined in accordance with ADB’s London interbank offered rate
(LIBOR)-based lending facility,3 a commitment charge of 0.15% per year and such other terms
and conditions set forth in the loan agreement.

17. Relending (government to PFIs). MOF will relend the ADB loan to the PFIs in local
currency fixed at the Central Bank of Sri Lanka’s most recently published average weighted
deposit rate, with a 10-year term, and with principal due at maturity pursuant to a subsidiary
loan agreement with each PFI.4 The Government of Sri Lanka will bear the foreign exchange
risks.

18. Onlending (PFIs to SMEs). Onlending from the PFIs will be at interest rates that reflect
their cost of funds plus a spread to cover transaction costs and risks reflecting full commercial
and competitive terms at the PFIs’ discretion. The ADB loan will finance 100% of the PFIs’
subloans up to the individual transaction ceiling of Rs50 million.

B. Disbursement S-Curve

Disbursement Curve
200
180
160
140
120
$ millions

100
80
60
40
20
0

Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar-
16 16 16 17 17 17 17 18 18 18 18 19 19 19 19 20
Disbursements 0 12.5 12.5 25 62.5 62.5 62.5 100 125 125 125 150 175 175 175 175

Source: Asian Development Bank.

3 The interest will not include any maturity premium. This is based on the above loan terms and the government’s
choice of repayment options and dates.
4 Alternately, government may elect to return to rates determined through auction.
 9

C. Fund Flow Diagram

2. ADB loan in MOF’s USD

USD at LIBOR + 50 advance 3. Conversion
bps at T+3 months account at from USD to LKR
CBSL
ADB
MOF’s MOF’s local
10. Repay in USD at treasury currency (LKR)
10 years of T+3 account account account
months
1. Report
Allocation 9. Repay in SLRs at 6. CBSL releases
Results at T 10 years of T+3 funds to PFIs
5. Approve the months
request and instruct
CBSL to release
funds

MOF-PMU PFIs

4. Request fund
8. Repay at 7. Onlend at market rate
release
approval subloan
maturity

SMEs

ADB = Asian Development Bank, CBSL = Central Bank of Sri Lanka, LKR = Sri Lankan rupees, MOF = Ministry of
Finance and Mass Media, PFIs = participating financial institutions, PMU = project management unit, SLRs = Sri
Lankan rupees, SMEs = small and medium-sized enterprises, USD = United States dollar
Note: Solid arrows represent fund flows and broken arrows information flows that trigger fund flows.
Source: Asian Development Bank

V. FINANCIAL MANAGEMENT

A. Financial Management Assessment

19. A financial management assessment (FMA) has been conducted on MOF and 10 PFIs
in accordance with ADB’s Guidelines for the Financial Management and Analysis of Projects
(2005) and Financial Management Assessment Technical Guidance Note (2015). The overall
financial management risk for the project is assessed as moderate. The PFIs are regulated,
have mature financial management systems in place, and have experience in handling credit
line facilities from ADB. An integrity due diligence has been undertaken on the 10 PFIs in
coordination with the Office of Anticorruption and Integrity. No major concern for disclosure has
been identified. Key risks identified include (i) the macroeconomic situation and in particular the
external liquidity position, and (ii) the ability of PFIs to handle fund flow and monitor eligibility
criteria of end-borrowers. Mitigating measures have been proposed including (i) frequent review
10

missions; (ii) the PFIs have been briefed on ADB audit requirements and asked to include the
assignment in the work program of their external auditors; and (iii) participation of PFIs in the
allocation procedure is regularly reviewed by ADB. Accordingly, and with the above measures in
place, the overall financial management arrangements are considered adequate. MOF is the
most appropriate organization to administer the project because of its prior experience in
administering similar donor funded programs. MOF has the necessary financial management
capacity—including procedures for making payments, accounting for transactions, financial
reporting, auditing of financial statements, and internal control procedures—to avoid misuse or
misappropriation of funds and assets.

B. Disbursement

20. General. For each allocation, no withdrawal shall be made from the MOF’s local
currency account for a PFI until:
(i) a project agreement, in form and substance satisfactory to ADB, has been duly
executed and delivered on behalf of ADB and the PFI; and
(ii) the PFI has provided ADB a legal opinion specifying that the project agreement
has been duly authorized, executed, and delivered on behalf of the PFI, and is
legally binding on the PFI in accordance with its terms.

21. The ADB loan will be disbursed per the 6-months estimated expenditures of the
allocation mechanism, and in accordance with ADB’s Loan Disbursement Handbook (2017).

22. ADB’s advance fund and statement of expenditures (SOE) procedures will be used for
disbursements under the loan.5

23. Advance. The total outstanding advance to the advance account should not exceed the
cumulative total of each PFI’s estimate of expenditures for the forthcoming 6 months.6 PFIs that
have not disbursed at least 80% of their allocated funds within 2 months of the previous
disbursement may not request additional funds. The PMU will request for initial and additional
advances to the advance account based on an estimate of expenditures sheet. Supporting
documents should be submitted to ADB or retained by PMU in accordance with ADB’s Loan
Disbursement Handbook (2017, as amended from time to time) when liquidating or replenishing
the advance account.

24. Advance account. MOF will establish and administer a separate advance account in
US dollars at CBSL for exclusive use of the project to facilitate disbursements and provide
accountability. MOF, who will establish the advance account in its name, is accountable and
responsible for the proper use of advances to the advance account. In addition, MOF will
establish a separate local currency (LKR) account. After the announcement of allocation results,
ADB will transfer loan proceeds to the MOF’s US dollar advance account within approximately
10 working days upon receipt of a satisfactory and fully documented request. The US dollar loan
proceeds will be converted into Sri Lankan Rupees and deposited in the LKR local currency
account as soon as practical. The MOF will maintain a ledger to track how much funding is
being held in the local currency account on behalf of each PFI.

5 Details of SOE procedures are available in the Loan Disbursement Handbook (2017).
6 The advance request should equal the amount requested through the semiannual allocation plus any funds not yet
liquidated to ADB at the time of preparing the withdrawal application. ADB’s Controller’s Department will disburse
the requested amount net of the unliquidated amount.
 11

25. Subloan approval by PMU. To release funds from the separate local currency account,
PFIs will submit withdrawal requests to the PMU.7

26. Liquidation. The PMU will consolidate eligible expenditures and submit to ADB for
liquidation. Liquidation will follow SOE procedures. The corresponding bank statement and the
advance account reconciliation statement are also required to be submitted.

27. SOE procedures. SOE procedures will be used for liquidation because the SME
subloans are expected to be numerous and small. SOE records should be maintained with the
PMU and made available for review upon ADB’s request for submission of supporting
documents on a sampling basis and for independent audit.

28. Minimum value per withdrawal application. The minimum value per withdrawal
application is $200,000 equivalent. Individual payments below this amount should be paid by
the MOF and subsequently claimed from the ADB advance account, unless otherwise agreed to
with ADB.

29. Recycling of reflows from SMEs to PFIs. As subloans are repaid to the PFIs prior to
their repayment to the government, PFIs may relend to SMEs. The relending rate is equal to or
less than CBSL’s most recently published monthly average weighted deposit rate plus the
average weighted credit margin that the PFI charged on the initial subloans. The PFIs must also
continue to comply with fiduciary and safeguard covenants in the subsidiary loan agreements
with the government. PFIs shall maintain separate ledgers to manage revolving funds.

C. Accounting and Auditing Arrangements

30. MOF will keep a record of the utilization of funds and will ensure that the record-keeping
and accounting undertaken is in accordance with national accounting laws and regulations
which are consistent with international accounting principles and practices.

31. The PFIs will also maintain separate books and accounts relating to all subloans. Project
financial statements, i.e. statement of utilization of funds will be prepared using the same
accounting principles and guidelines as the PFIs statutory financial statements. Each PFI will
cause the statement of utilization of funds to be audited in accordance with international
standards on auditing and with the government's audit regulations by an independent auditor
acceptable to ADB.8 The PFIs will prepare and submit the audited statement of utilization of
funds for subloans, in the English language within 6 months after the end of the fiscal year.

32. Each auditor report will include audit opinions which cover (i) whether the statement of
utilization of funds presents a true and fair view or are presented fairly, in all material respects,
in accordance with the applicable financial reporting framework; and (ii) whether or not loan
proceeds were used only for the purposes of the project. A management letter will also be
provided, unless already provided with the entity-level financial statements. PFIs will enable
ADB, upon ADB's request, to discuss the financial statements for the project with the auditors
and will authorize and require such auditors to participate in any such discussions.

7 A PFI only needs to submit one withdrawal request for a subloan that is disbursed in tranches. If the later tranches
are subsequently cancelled, the PFI may apply to the PMU to use the remaining funds for a different subloan.
8 In the case of the state-owned banks, auditors appointed by the auditor general constitute an independent auditor.
12

33. The PFIs will cause their entity-level financial statements to be audited in accordance
with international standards on auditing and with the government's audit regulations by an
independent auditor acceptable to ADB. If the audited entity-level financial statements do not
address each of the project’s financial covenants, then the PFI’s auditor must prepare a
separate letter that reports on each covenant. The audited entity-level financial statements,
together with the auditors’ report, will be submitted in the English language to ADB within 1
month after their approval by the competent authority.

34. Compliance with financial reporting and auditing requirements will be monitored by
review missions and during normal project supervision and followed up as needed with all
concerned, including the external auditor.

35. MOF has been made aware of ADB’s approach on delayed submission, and the
requirements for satisfactory and acceptable quality of the audited financial statements.9 ADB
reserves the right to require a change in the auditor or for additional support to be provided to
the auditor, if the audits required are not conducted in a manner satisfactory to ADB, or if the
audits are substantially delayed. ADB reserves the right to verify the project's financial accounts
to confirm that the share of ADB’s financing is used in accordance with ADB’s policies and
procedures.

36. Public disclosure of the audit opinion and related statements of fund utilization will be
guided by ADB’s Public Communications Policy (2011).10 After review, ADB will disclose these
within 14 days the date of their receipt by posting them on ADB’s website. The audit
management letter and the entity-level audited financial statements will not be disclosed.

VI. PROCUREMENT AND CONSULTING SERVICES

A. Advance Contracting and Retroactive Financing

37. There is no advance contracting or retroactive financing under the project.

B. Procurement of Goods, Works, and Consulting Services

38. Procurement under ADB-financed subloans will be in accordance with ADB’s

Procurement Guidelines (2015, as amended from time to time) as they relate to financial
intermediary loans. Subborrowers will be required to undertake procurement in accordance with
established private sector or commercial practices that are acceptable to ADB (paragraph 3.12
of the ADB Procurement Guidelines).

9 ADB approach on delayed submission of the audited statement of utilization of funds and entity-level financial
statements: (i) when either the statement of utilization of funds or entity-level financial statements have not been
received by due date, ADB will write to the executing and implementing agencies advising that (a) the audit
documents are overdue and (b) if they are not received within the next 6 months, requests for new commitments
and disbursement such as new replenishment of advance accounts and processing of new reimbursement will not
be processed; (ii) when either the statement of utilization of funds or entity-level financial statements have not been
received within 6 months after the due date, ADB will withhold processing of requests for new commitments and
disbursement such as new replenishment of advance accounts and processing of new reimbursement, ADB will (a)
inform the executing and implementing agencies of ADB’s actions and (b) advise that the loan may be suspended
if the audit documents are not received within the next 6 months; and (iii) when either the audited statement of
utilization of funds or entity-level financial statements have not been received within 12 months after the due date,
ADB has the option to suspend the loan.
10 Available from http://www.adb.org/documents/pcp-2011?ref=site/disclosure/publications
 13

39. All consultants and nongovernment organizations under the TA will be recruited
according to ADB‘s Guidelines on the Use of Consultants (2013, as amended from time to time).

C. Procurement Plan

40. A procurement plan is not applicable for financial intermediary loans.

VII. SAFEGUARDS

41. PFIs will be classified as follows:

(i) Class C. PFIs that finance only category C subprojects. These are subprojects
where the impacts are minimal to null. No environmental assessment is required
although environmental implications need to be reviewed and incorporated into
the due diligence report; or
(ii) Class B/C. PFIs that finance category B and C subprojects. Category B
subprojects are those whose impacts are site-specific, some irreversible, and, in
most cases, mitigation measures can be designed more readily. An initial
environmental examination is required. Class B/C PFIs are also required to have
an existing environmental management system (EMS) that has been approved
by ADB. The EMS aims to: (a) avoid, and when avoidance is not possible,
minimize and mitigate adverse impacts of subprojects on the environment and
affected people and (b) maximize opportunities for environmental benefits.

42. If a PFI does not have an EMS that ADB has approved, it may only lend to category C
subprojects that are included in the Environmental Management System Framework (as may be
updated by ADB from time to time during implementation) or that have been reviewed and
confirmed as category C by the PMU’s safeguards officer. This will be covenanted in the project
agreement. PFIs still can establish an EMS to qualify it to participate as a class B/C PFI, subject
to ADB’s concurrence.

43. In the selection of subprojects, PFIs will ensure that:

(i) all subprojects using ADB funds are screened against the Prohibited Investment
Activities List (PIAL) of the ADB Safeguard Policy Statement (2009);
(ii) all subprojects using ADB funds with potential environmental and/or social
impacts are reviewed and evaluated against safeguard requirements 1–3 of the
ADB Safeguard Policy Statement (2009);
(iii) all subprojects are reviewed and evaluated against the national laws, regulations,
and standards on environment, health, and safety, involuntary resettlement and
land acquisition, indigenous peoples, and physical cultural resources; and
(iv) all subprojects will undergo screening and categorization using a checklist as
approved by ADB.

44. At subproject identification stage, the safeguard personnel (or other designated officer)
of the PFI will work with the subproject company to make a rapid assessment of the potential
impacts of the project on the environment and community. A template checklist, approved by
ADB, will guide the team in determining the significance of potential impacts associated with the
subproject. Once the checklists and the verification work are completed by the PFI, the
subproject will be classified as category B or category C.

45. The following categories will be outright rejected in the list of eligible subprojects for
14

financing: (i) category A subprojects for environment, involuntary resettlement, or indigenous

peoples (i.e., subprojects where the impacts are irreversible, diverse, or unprecedented over an
area larger than the sites or facilities subject to physical works) and (ii) category A or B for
involuntary resettlement and indigenous peoples.

46. PFIs that finance subprojects with minimal or no adverse impacts on the environment
(category B and/or C) and have zero impacts on resettlement and indigenous peoples (category
C for both resettlement and indigenous peoples) are preferred. A project has minimal or no
impacts on the environment if it does not generate harmful atmospheric emissions and waste
byproducts on water and on land. A project has zero impacts on resettlement and indigenous
peoples if there is no land acquisition and the customs and traditions of indigenous peoples are
kept intact.

VIII. GENDER AND SOCIAL DIMENSIONS

47. Potential gender and social impacts were reviewed. A gender assessment is reflected in
the project documents and is an integral part of the project design which is categorized
thematically as effective gender mainstreaming (EGM). Overall, the project targets at least 15%
of the subborrowers to be women-led SMEs. Furthermore, the associated TA subproject will
build women entrepreneurs’ capacity to access finance resources and services.

48. Initial assessment of the gender situation of SMEs in Sri Lanka was gathered such as
follows:
(i) In Sri Lanka, the low female labor participation rate of 39% suggests a large pool
of untapped human resource for national economic development. A potential
measure to address this is to support women’s greater involvement in the SME
sector.
(ii) Data from the Ministry of Rural Economic Affairs shows that in Sri Lanka, of the
766,766 entrepreneurs, 24.8% (or 252,915) are women. Of them, 1,190 are
involved in the information technology sector. No data is available on women
entrepreneurs involved in the fruits and vegetables. As this report did not mention
the sizes of the enterprises, it is assumed that the cited number of entrepreneurs
pertains to all sizes of enterprises. It is further assumed that the overall percent
of women-led SMEs is lower than 24.8%. The ADB Asia SME Finance Monitor
2014 reported a total of active 1,017,480 enterprises in 2013, of which 86.5%
(880,066) were microenterprises and 13% (132,483) were SMEs. No sex-
disaggregated data on these enterprises were however provided. These figures
suggest the lack of reliable data on women-led SMEs, more so on those involved
in the ICT-BPO and fruits and vegetables. The gender responsive value chain
analysis of these SME clusters thus aims at, among others, gathering these data
in project areas.
(iii) According to the Women’s Chamber of Industry and Commerce, women
entrepreneurs face four key challenges: (a) lack of skills and cultural barriers to
start and run a business and dependence on their husbands for financial support,
(b) lack of access to markets and information on market needs and difficulties in
finding new markets for products, (c) lack of access to finance due to low
financial literacy and lack of collateral for bank loans, and (d) weak government
institutional support. The government’s recognition, in the upcoming National
Policy Framework for SME Development, of the need for stronger support to
women-led SMEs and new women entrepreneurs points to greater action of the
government on these issues. This project will seek to assist the government to
 15

respond to these issues.

49. Consistent with the design criteria of an EGM-categorized project, a gender action plan
(GAP) was developed, which will continue to be implemented during the additional financing.
The implementation is generally on track. Assessment of gender-related issues in the original
three target clusters (fruits and vegetable, rubber, and ICT-BPO) and an additional cluster
(processed food and beverage) has been completed and frameworks for the implementation of
gender-related initiatives were prepared. The implementation of some activities, such as
trainings for women entrepreneurs and career events for female students, is delayed mainly
because the processed food and beverage cluster was added to the targeted clusters and the
consensus building among key stakeholders on the approaches to enhancing women’s
participation in ICT-BPO sector has taken more time than originally scheduled. However, all
activities will be completed and targets will be achieved during project period. Timelines for
lagging activities and targets are revised. The implementing agency of the associated TA
project, the Export Development Board, is responsible for ensuring the effective implementation
of the GAP and monitoring its progress and completion.

Gender Action Plan

Responsible
Activitiesa Targets and Indicator Unit Timeframe
Outcome: SME’s access to finance strengthened
At least 20% of subborrowers of Participating Q4 2018
credit facility (of associated loan financial
project) are women-led SMEs institutions
(project baseline as of February
2017: 17.5%)c Project
management
unit
Output 3. b Capacity of SMEs in targeted clusters for accessing financial services enhanced.
3b. By 2018, 500 actual and potential women entrepreneurs from SMEs in the three clusters (ICT-BPO, fruits and
vegetables, and rubber) trained in business development and management (including financial literacy) (2015
baseline: 0)
3b.1. Conduct a gender responsive value  Gender responsive value chain  Export Completed
chain analysis of the three targeted clusters analysis of ICT-BPO, fruits and Development in Q2 2017
and develop a strategy for expanding and vegetables, and rubber clusters Board
strengthening women entrepreneurship and conducted  Consultant
financing, and helping them move up the  Strategy for expanding and organization
value chain in the three clusters by Q2 2017 strengthening women
entrepreneurship in the three
clusters developed and
approved by Export
Development Board
3b.2. Provide business development  Business development services Q4 2017
services to women entrepreneurs as per the (including accessing credit
recommendations of the analysis by Q4 facility) provided to at least 500
2017 women-owned/led SMEs in
three clusters (distribution of
500 in the three clusters to be
based on the results of gender
responsive value chain analysis)
3b.3. Assess the capability development  Training modules designed Completed
needs of women entrepreneurs and design based on identified capability in Q2 2017
training modules on business development development needs of women
and management (including financial entrepreneurs
literacy) in three clusters based on identified
capability development needs by Q2 2017
16

Responsible
Activitiesa Targets and Indicator Unit Timeframe
3b.4. Launch initiatives to strengthen  At least three forums on women Q4 2017
networks of women entrepreneurs by Q4 entrepreneurs conducted
2017  Success stories of at least six
women entrepreneurs in three
clusters (two stories per cluster)
documented and disseminated
widely
3b.5. Train 500 actual and potential women  At least 500 actual and potential Q4 2018
entrepreneurs in business development and women entrepreneurs trained
management (including financial literacy) in  Business management plans of
the three SME clusters by Q4 2018 at least 60% of trained women
entrepreneurs passed the
standards/evaluation of trainers
Output 4. International competitiveness of ICT-BPO cluster strengthened
4b. By 2017, at least 500 females participated in career events for working in ICT-BPO cluster (2015 baseline: 0)
4b.1. Identify economic, social and  Barriers to women’s  Export Completed
regulatory barriers that prohibit women from participation in the ICT-BPO Development in Q1 2017
entering and staying in the ICT-BPO cluster, cluster identified to include a Board
to include an assessment of the cost and report that assesses the costs of  Consultant
benefits of statutory prohibitions on female statutory prohibitions against organization
working hours, and develop a cluster women working at night
strategy to attract women workers by Q1  Strategy to attract women
2017 workers to enter and stay in the
ICT-BPO cluster developed
4b.2. Provide support for school career  MOU forged with identified Q4 2017
counselors to construct strong network with educational institutions
ICT-BPO professionals by Q4 2017  Career counselors in at least
five schools are updated at least
quarterly on developments and
work opportunities in the ICT-
BPO cluster
4b.3. Launch a career forum for females with  At least three participating Q4 2017
interest in the ICT-BPO cluster by Q4 2017 schools developed networks
with ICT-BPO professionals
4b.4. Facilitate participation of at least 500  At least 500 female students Q4 2017
women in career events in the ICT-BPO by and alumni attended career
Q4 2017 forums on ICT-BPO conducted
under the project
BPO = business process outsourcing, ICT = information and communication technology, MOU = memorandum of
understanding, Q = quarter, SMEs = small and medium-sized enterprises.
a Activity numbering corresponds to the design monitoring framework.
b Based on the original project, this project is optimistic that this target will be exceeded because the participating

banks have tended to overshoot the requirement to avoid the penalties for failing to meet it.
c Output numbers correspond to those in the design and monitoring framework.

Source: Asian Development Bank.

IX. PERFORMANCE MONITORING, EVALUATION, REPORTING AND

COMMUNICATION

A. Project Design and Monitoring Framework

50. Please refer to Appendix 1 of the RRP for project design and monitoring framework.
 17

B. Monitoring

1. Project Performance Monitoring

51. To ensure that the project is managed efficiently and its benefits are maximized, MOF
will implement a project performance management system (PPMS) that is satisfactory to ADB.
The key performance indicators and assumptions in the design and monitoring framework will
be the basis for the system. MOF will have such information made available to review missions
and to the government for future impact assessment surveys. MOF will submit monthly progress
reports and a PMU semiannual report to ADB for the duration of the project. The PPMS will
monitor and evaluate the project information and data to ensure that planned interventions
achieve the desired results, including key outcome indicators.

2. Compliance Monitoring

52. PFIs’ compliance with the covenants will be monitored by MOF based on the PFI
semiannual report, annual audited entity-level financial statements, and audited statement of
utilization of funds.

3. Safeguards Monitoring

53. PFIs will evaluate subprojects that are category B for environment on an annual basis
against the applicable environmental requirements. The safeguards staff of the PFIs will prepare
an annual environmental performance report11 and submit this to the management of the PFI
and to ADB via the PMU for review and approval.

54. The designated PFI safeguards officer (or other designated officer) communicates with
the subprojects companies and conducts an annual performance check to ensure that (i) the
subproject company is undertaking the obligations of compliance with all applicable
environmental and social safeguard requirements and (ii) the PFI will promptly report to ADB
any actual or potential breach of the compliance requirements through a compilation of incident
reports.12 The PFI will supervise and coordinate with the subborrower so that the subborrower
can take corrective action, if any.

4. Poverty and Social Actions Plans

55. While Sri Lanka has a good record in gender equality and related issues, the
unemployment rate of women is higher than men. Because of more limited employment
opportunities, many women become entrepreneurs engaged in small trade activities, with
limited opportunity for expansion because of poor access to economic resources. The project is
categorized as effective gender mainstreaming because it is expected to promote better
monitoring, outreach, and access to finance for women entrepreneurs seeking to expand or
modernize their businesses.

C. Evaluation

56. To ensure responsive and timely implementation, ADB will undertake periodic review

11 Sample reporting format provided in the Environmental and Safeguard Monitoring Framework.
12 Sample reporting format provided in the Environmental and Safeguard Monitoring Framework.
18

missions. There will be regular interaction between the executing agency, PFIs, and ADB.
Semiannual performance reviews will be conducted by the MOF, and the Department of Project
Management and Monitoring and ADB will review the project annually as part of the ADB
Project Portfolio Review.

57. Within 9 months of the final allocation, the executing agency, implementing agency, and
Department of Project Management and Monitoring will submit a project completion report to
ADB in a form acceptable to ADB.13 Subsequently, ADB will field a mission to finalize the project
completion report.

D. Reporting

58. The PPMS is ADB’s system for setting program objectives, designing projects, and
monitoring and evaluating project performance based on the design and monitoring framework
to ensure that goals are consistently being met in an effective and efficient manner. 14 The
PPMS will include the following components:

Name of
Document Submitter Receiver Timing/Frequency Purpose
Advance request PMU ADB Following each Advance to the advance account
allocation
Withdrawal PFI PMU At discretion of PFI Approval for fund release to PFI’s
request
Statement of PMU ADB As required Liquidation
expenditure
Monthly progress PMU ADB A week after the end of Summary of PFIs’ disbursements
report every month and compliance with onlending
requirements
PFI semiannual PFI PMU Within 15 days of and Screen PFIs’ eligibility for the next
reporta as of 28 February and allocation and monitor progress of
31 August the project
PMU semiannual PMU Steering By 31 March (as of 28 Consolidates the PFIs’ quarterly
report committee February) and 30 performance reports; provide
and posted September (as of 31 quarterly update of project’s status
to project August)
website
Audited statement PFI PMU, ADB Within 6 months of the Basis for audited annual project-level
of utilization of end of fiscal year financial statements prepared by
funds PMU
Audited annual PFI PMU, ADB Within 1 month of their Mandatory under ADB policy (OMJ7)
entity-level approval by the
financial relevant authority
statements
Annual Class B/C PFI PMU, ADB Within 2 months of the Mandatory under ADB policy
environmental end of fiscal year (OMF1)
performance
report
Project completion MOF ADB Within 9 months of the Provides initial assessment of the
report final allocation project vis-à-vis the design
monitoring framework

13 Project completion report format is available at http://www.adb.org/sites/default/files/institutional-

document/33431/pai-6-07a.pdf
14 Japan International Cooperation Agency, under its ongoing “Financial Sector Project for the Development of Small
and Medium-Sized Enterprises” intervention has developed a detailed and comprehensive project performance
monitoring system (PPMS) which will be used as the basis for the development of ADB’s PPMS.
 19

Name of
Document Submitter Receiver Timing/Frequency Purpose
GAP Consultant PMU, ADB Quarterly; also Provides an assessment of the
implementation through EDB included in the project progress and accomplishment of
report completion report gender-related target outputs
ADB = Asian Development Bank, EDB = Export Development Board, GAP = gender action plan, OMF1 = Operations
Manual on Financing of Interest and Other Charges During Construction, OMJ7 = Operations Manual on Project
Financial Reporting and Auditing, PFI = participating financial institution, PMU = project management unit,
a The report will include among other items: (i) original principal amount of each SME loan; (ii) terms including interest

rate, tenor, and collateral; (iii) sector of activity; (iv) outstanding principal balance; (v) size of SME in terms of
number of SME employees and annual turnover; (vi) whether the SME is classified as “women-led”; (vii) location of
the SME subprojects (to include inside or outside of Colombo District); (viii) if the SME has not previously borrowed
from a licensed commercial or specialized bank; and (ix) purpose of the loan (land, working capital, plant, purchase,
or equipment, etc.).
Source: Asian Development Bank.

E. Stakeholder Communication Strategy

59. ADB will communicate the information about this project and the outcome of this project
through its publications, presentations, and on its website. ADB will also communicate with the
project‘s internal stakeholders through written documents.

60. The key communication objectives of the project are:

(i) to inform potential and existing targeted SMEs (located outside of Colombo
District, borrowing for non-collateral working capital, led by women and not
previously not previously borrowed from a licensed commercial or specialized
bank) of the opportunities that the project offers including capacity building
activities and increased access to credit resources;
(ii) to empower potential targeted SMEs and encourage them to enter into business
ventures;
(iii) to strengthen SMEs’ networks and create a learning environment through sharing
of experiences;
(iv) to provide public accountability; and
(v) to create public support for the project.

X. ANTICORRUPTION POLICY

61. ADB reserves the right to investigate, directly or through its agents, any violations of the
Anticorruption Policy relating to the program. 15 All contracts financed by ADB shall include
provisions specifying the right of ADB to audit and examine the records and accounts of the
executing agency and all program contractors, suppliers, consultants, and other service
providers. Individuals and/or entities on ADB‘s anticorruption debarment list are ineligible to
participate in ADB-financed activity and may not be awarded any contracts under the project.

62. To support these efforts, relevant provisions will be included in the legal agreements.
During project processing, financial management assessment and integrity due diligence were
conducted on the applicant PFIs. ADB's handbooks on Anticorruption Policy and Anticorruption
and Integrity were given to the government and MOF during loan negotiations.

63. ADB’s Office of Anticorruption and Integrity16 is the point of contact to report allegations

15 Available at https://www.adb.org/documents/integrity-principles-and-guidelines.
16 ADB's Integrity Office website is available at http://www.adb.org/site/integrity/main.
20

of fraud and corruption among ADB-financed projects or its staff. Anyone coming across
evidence of corruption associated with the project may contact below by telephone, facsimile, e-
mail, or by mail:

Office of Anticorruption and Integrity

Asian Development Bank
6 ADB Avenue, Mandaluyong City
1550 Metro Manila, Philippines
Telephone: +63 2 632 5004
Fax: +63 2 636 2152
E-mail: [email protected] or [email protected]

XI. ACCOUNTABILITY MECHANISM

64. People who are, or may in the future be, adversely affected by the program may submit
complaints to ADB‘s Accountability Mechanism. The Accountability Mechanism provides an
independent forum and process whereby people adversely affected by ADB-assisted projects
can voice and seek a resolution of their problems, as well as report alleged violations of ADB‘s
operational policies and procedures. Before submitting a complaint to the Accountability
Mechanism, affected people should make a good faith effort to solve their problems by working
with the concerned ADB operations department. Only after doing that, and if they are still
dissatisfied, should they approach the Accountability Mechanism.17

XII. RECORD OF PAM CHANGES

65. All revisions/updates during course of implementation should be retained in this section
to provide a chronological history of changes to implemented arrangements recorded in the
PAM.

17 For further information, see https://www.adb.org/site/accountability-mechanism/main.

 Appendix 1 21

ALLOCATION REQUEST FORM

The local currency equivalent of $25 million is available to be allocated among [] banks.
Requests must be at least $1 million and in increments of $100,000. Instead of specifying a
specific amount, banks may request the maximum available based on pro rata distribution. If
undersubscribed, the funds will be distributed as mutually agreed by ADB and the PMU.

The allocation will be lent at a rate of []%, which is the [6 or 1]-month average weighted deposit
rate published on the Central Bank of Sri Lanka’s website as of [February/August] 20[18 / 19].

Your institution will be notified within 3 working days of your allocation. The allocation will be
available to disburse for qualified withdrawals on or around [30 June 2018 / 4 January 2019 / 30
June 2019]. From this date, your institution will begin to incur interest charges.

This form must be returned to ADB [email protected] with copy to

[email protected] by midnight (Sri Lanka time) of [30 March 2018 / 28 September 2018 / 29
March 2019]. Forms may be sent earlier than that date, but form sent after that time will not be
accepted. If a form is incorrectly completed, ADB will attempt to return it; the institution can
resubmit it if time permits.

By signing this form, your institution confirms that the signatory is authorized to conduct
business on its behalf for this project (including execution of this fund allocation request), that
the request for these funds is binding and final, that ADB reserves the right not to accept an
allocation request without giving cause, and that your institution agrees to adhere to the
requirements of the Project Agreement and the Project Administration Manual.

Either enter an amount _____________________ (minimum $1 million expressed in increments

of $100,000) or leave the amount blank and check this box  if requesting the maximum
available based on a pro rata distribution.

Signature: ___________________________________

Name: ___________________________________

Position: ___________________________________
22 Appendix 2

PARTICIPATING FINANCIAL INSTITUTION CRITERIA

1. Domestic banks in good standing with the Central Bank of Sri Lanka (CBSL), whether
publicly or privately owned, are eligible. Eligibility criteria includes:

(i) CBSL must have confirmed at project inception that the participating financial
institution (PFI) is in good regulatory standing, including its corporate
governance, reputation/integrity, and compliance with anti-money laundering
requirements;
(ii) Due diligence of Asian Development Bank (ADB) of the PFI is satisfactory;
(iii) The PFI complies with CBSL’s regulatory capital minimum as of its last audited
financial statements or as confirmed by its auditor;
(iv) The PFI has a net nonperforming loan ratio less than or equal to 5.0% as of its
last audited financial statements or as confirmed by its auditor;
(v) The PFI was profitable as of its last audited annual financial statements;
(vi) The PFI must have tangible equity of at least Rs1 billion as of its last audited
financial statements as confirmed by its auditor;
(vii) If the PFI has undisbursed funds from any other ADB project, including those
with ADB’s Private Sector Operations Department, the PFI must covenant that it
will not prepay the other ADB loan;
(viii) The PFI must maintain a management information system that can provide
quarterly reports on subloan disbursements, repayment performance, lending
spreads, targeted SMEs, and other subproject and subborrower information;
(ix) The PFI must consent that ADB can publicly disclose detailed data on the PFIs’
performance and the subloans; and
(x) The PFI can maintain separate records of subloans under the project.

2. PFIs will ensure that the subloans finance subprojects with no involuntary resettlement
or indigenous peoples impacts under ADB’s Safeguard Policy Statement. Furthermore,
subprojects may have environmental impacts that are not significant (categorized as B under
ADB’s Safeguard Policy Statement) only if the PFI maintains an environmental management
system acceptable to ADB and that environmental management system has certified that the
sub loan is compliant with national laws and ADB’s Safeguard Policy Statement. In the absence
of such system, the subprojects will have no environmental impact.

3. In addition to these criteria, PFI must adhere to other requirements as specified in the
project agreement.

4. Failure to adhere to these criteria could result in a PFI’s exclusion from allocations or a
demand to repay to the government any outstanding loans under the project.
 Appendix 3 23

SUBLOAN AND SUBBOROWER CRITERIA

1. Participating financial institutions (PFIs) will comply with the following requirements in
selecting eligible subborrowers:
(i) subborrowers must be economically and financially viable;
(ii) subborrowers may not be related parties of the PFI’s board or senior
management;
(iii) subborrowers (the parent company and any subsidiaries) must have annual
turnover under Rs750 million or less than 300 employees if in manufacturing or
200 employees if in services; and
(iv) subborrowers must contribute equity, if required by the PFIs, to subprojects as
per commercial norms.

2. PFIs will comply with the following requirements in originating the initial subloans:
(i) 20% of the number of subloans must be lent to subborrowers that have not
previously borrowed from a licensed commercial or specialized bank;
(ii) 20% of the number of subloans must be lent to subborrowers that are led by
women;1
(iii) 70% of the total subloan amounts must cumulatively be lent to “targeted small
and medium-sized enterprises (SMEs),” which include SMEs that are:
(a) located outside of Colombo District (the SME may have a representative
office in Colombo District so long as the funds are used for subprojects
outside of Colombo District);
(b) borrowing for working capital against which fixed or financial assets are
not pledged;
(c) led by women, or at least 51% of enterprise ownership is controlled by
women, or at least 60% of senior managers are women, or at least 50%
of board members are women); or
(d) not previously borrowed from a licensed commercial or specialized bank.

3. If subloans are repaid to the PFIs prior to their repayment to the government, PFIs may
onlend the funds so long as the criteria in paragraph 1 are still met. The relending rate must be
equal to or less than the Central Bank of Sri Lanka’s (CBSL) most recently published average
weighted deposit rate plus the average weighted credit margin that the PFI charged on its initial
sub loans. The PFIs must also continue to comply with fiduciary and safeguard covenants in the
subsidiary loan agreements with the government.

4. Maximum subloan size is Rs50 million except for cluster loans. No more than 50% of
funding may fund subloans for working capital. Subloans for vehicles are ineligible unless the
SMEs primary business is transport or tourism or the project management unit has approved
the subloan. Subloans may not be used to repay another loan.

5. PFIs will ensure that the subloans are for financing subprojects with no involuntary
resettlement or indigenous peoples impacts under ADB’s Safeguard Policy Statement (2009).
Furthermore, subprojects may have environmental impacts that are not significant (categorized
as B under ADB’s Safeguard Policy Statement) only if the PFI maintains an environmental
management system acceptable to ADB and that environmental management system has

1 Defined as at least 51% of enterprise ownership is controlled by women, at least 60% of senior managers are
women, or at least 50% of board members are women.
24 Appendix 3

certified that the subloan is compliant with national laws and ADB’s Safeguard Policy Statement.
In the absence of such system, the subprojects will have no environmental impact.

6. PFIs whose environmental management system has not been approved by the ADB
may lend to subprojects that are potentially category C, although not included in the Attachment
1 of the Environmental Management System Framework, provided that the project management
unit’s safeguard officer has confirmed eligibility. The safeguard specialist’s review would include
a site visit, the costs of which the PFI will shoulder.

7. In addition to these criteria, PFIs must adhere to other requirements as specified in the
project agreement.

8. Failure to adhere to these criteria could result in a PFI’s exclusion from allocations or a
demand to repay to the government any outstanding loans under the project.
 Appendix 4 25

ADVANCE RECONCILIATION WORKSHEET

PMU Request Balance from Banks’ PMU

from Liquidated Last Requests Request
Previous by MOF Allocation for this for this ADB
Allocation (USD (USD Allocation Allocation Disbursement
(USD) Equivalent) Equivalent) (USD) (USD) (USD)
A B C D E F
E from
previous Result of
Advance A–B Allocation C+D E–C
Reconciliation Request
Worksheet Form
Example 3,500,000 3,000,000 500,00 4,000,000 4,500,000 4,000,000

Bank of Ceylon

Commercial Bank

DFCC Bank

Hatton National Bank

Nation’s Trust Bank

NDB Bank

People’s Bank
Regional Development
Bank
Sampath Bank

Seylan Bank

Total