The International Development Association (IDA) was established in 1960 as an affiliate to the World Bank. As matter of policy, the World Bank’s finance is conditional and inadequately meets the credit requirements of the underdeveloped countries.
Its loans are for specific development purposes; bear relatively high rate of interest (5 to 7%); and are for relatively short period (5 to 20 years).
There are many projects (such as irrigation, railway construction, education, public health, housing, etc.) in the underdeveloped countries which are vital to general economic development, which have longer gestation period and which do not yield sufficient returns to meet the amortisation charges.
As per rules of the World Bank, loans cannot be given for such general development projects. The IDA was started to supplement the World Bank’s development assistance and to make available loans to the developing countries on softer terms and for longer periods. Thus, the IDA has been aptly regarded as the ‘Soft Loans Window‘ of the World Bank.
The main objectives of the IDA are as follows:
(i) To provide development finance to the less developed countries on easy and flexible terms.
(ii) To promote economic development, increase productivity, and thus, raise the standard of living in the less developed countries.
(iii) To supplement the objectives and activities of the World Bank.
The membership of the IDA is open to all the members of the World Bank. The members of the IDA are divided into two parts. Part I countries are developed countries which are required to pay their subscription in gold or freely convertible currencies.
Part II countries are less developed countries which are required to pay only 10% of their subscription in gold or freely convertible currencies and the remaining 90% is payable in their domestic currencies.
India falls in Part II. The initial capital of the IDA was $1000 million which has been raised from time to time. Although, legally and financially, IDA is a distinct entity from the World Bank, but administratively it is managed by the same staff.
The IDA loans are different from the convention loans. The following are the distinctive features of the financing policy of the IDA:
(i) The IDA grants loans for projects whether they are directly productive or not.
(ii) The IDA loans are interest free; only a nominal annual rate of 3.4% on the amounts withdrawn and outstanding is charged to meet the administrative expenses.
(iii) The IDA loans are for long periods, i.e., for 50 years.
(iv) There is a 10 years of grace and no amount is repayable during this period of grace. After this only 1% of the principal is to be repaid annually for 10 years and 3% annually for the remaining 30 years.
(v) IDA loans are generally repayable in foreign exchange.
(vi) IDA loans are granted to the government of the country concerned.