Page 1 CONFORMED COPY LOAN NUMBER 3229 HU (Integrated Agricultural Export Project) between INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT and NATIONAL BANK OF HUNGARY Dated June 29, 1990 LOAN NUMBER 3229 HU LOAN AGREEMENT AGREEMENT, dated June 29, 1990, between INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (the Bank) and NATIONAL BANK OF HUNGARY (the Borrower). WHEREAS (A) Republic of Hungary (the Guarantor) and the Borrower, having been satisfied as to the feasibility and priority of the Project described in Schedule 2 to this Agreement, have requested the Bank to assist in the financing of the Project; (B) the Guarantor intends to obtain grant funds from donors who are members of the Organization for Economic Cooperation and Development in an amount of fourteen million dollars ($14,000,000) equivalent to assist in financing Part B of the Project on the terms and conditions to be set forth in grant agreements to be entered into between each donor and the Guarantor; (C) by an agreement (the Guarantee Agreement) of even date Page 2 herewith between the Guarantor and the Bank, the Guarantor has agreed to guarantee the obligations of the Borrower in respect of the Loan and to undertake such other obligations as set forth in the Guarantee Agreement; and WHEREAS the Bank has agreed, on the basis, inter alia, of the foregoing, to extend the Loan to the Borrower upon the terms and conditions set forth in this Agreement; NOW THEREFORE the parties hereto hereby agree as follows: ARTICLE I General Conditions; Definitions Section 1.01. The "General Conditions Applicable to Loan and Guarantee Agreements" of the Bank, dated January 1, 1985, with the last sentence of Section 3.02 deleted (the General Conditions) constitute an integral part of this Agreement. Section 1.02. Unless the context otherwise requires, the several terms defined in the General Conditions and in the Preamble to this Agreement have the respective meanings therein set forth and the following additional terms have the following meanings: (a) "Special Account" means the account referred to in Section 2.02 (b) of this Agreement; (b) "Subsidiary Loan Agreement" means any agreement to be entered into between the Borrower and a Participating Bank pursuant to Section 3.01 (b) of this Agreement, as the same may be amended from time to time; (c) "Subsidiary Loan" means the loan provided by the Borrower to a Participating Bank (defined below) under a Subsidiary Loan Agreement; (d) "Participating Bank" means any banking institution which satisfies the conditions set forth in Part B of Schedule 6 to this Agreement and which shall have entered into a Subsidiary Loan Agreement with the Borrower; (e) "Sub-loan" means a loan made or proposed to be made by a Participating Bank, out of the equivalent of the proceeds of the Loan, to a Beneficiary (defined below) for a Sub-project; (f) "Beneficiary" means any large scale farm (defined below) or marketing company or agroprocessing enterprise (whose gross sales were less than two million ($2,000,000) equivalent during its previous fiscal year) or small scale farmer (defined below) or contractor of farm services or rural entrepreneur; (g) "large scale farm" means any cooperative or state farm or association of cooperatives or state farms or economic associations whose primary activity is agricultural production; (h) "small scale farmer" means any individual farmer (including any part-time farmer) or farmer who is a member of an agricultural cooperative or farm employees of state farms or farmers organized into a group; (i) "Sub-project" means a specific project to be carried out by a Beneficiary utilizing the proceeds of a Sub-loan; (j) "Basic Law" means Law Decree No. 36 of 1967, of the Presidential Council of the Guarantor, as amended to the date of this Agreement; and (k) "Credit Policy Guidelines" means the Monetary and Credit Policy Guidelines regulating the provision of credit by the Borrower, established by Resolution No. 1166/1989 dated December 28, 1989, of the Council of Ministers of the Guarantor. Page 3 ARTICLE II The Loan Section 2.01. The Bank agrees to lend to the Borrower, on the terms and conditions set forth or referred to in the Loan Agreement, various currencies that shall have an aggregate value equivalent to the amount of one hundred million dollars ($100,000,000), being the sum of withdrawals of the proceeds of the Loan, with each withdrawal valued by the Bank as of the date of such withdrawal. Section 2.02. (a) The amount of the Loan may be withdrawn from the Loan Account in accordance with the provisions of Schedule 1 to this Agreement for expenditures made (or, if the Bank shall so agree, to be made) in respect of the reasonable cost of goods and services required for the Project described in Schedule 2 to this Agreement and to be financed out of the proceeds of the Loan. (b) The Borrower shall, for the purposes of the Project, open and maintain in dollars a special account on terms and conditions satisfactory to the Bank. Deposits into, and payments out of, the Special Account shall be made in accordance with the provisions of Schedule 5 to this Agreement. Section 2.03. The Closing Date shall be December 31, 1995 or such later date as the Bank shall establish. The Bank shall promptly notify the Borrower and the Guarantor of such later date. Section 2.04. The Borrower shall pay to the Bank a commitment charge at the rate of three-fourths of one percent (3/4 of 1%) per annum on the principal amount of the Loan not withdrawn from time to time. Section 2.05. (a) The Borrower shall pay interest on the principal amount of the Loan withdrawn and outstanding from time to time, at a rate for each Interest Period equal to the Cost of Qualified Borrowings determined in respect of the preceding Semester, plus one-half of one percent (1/2 of 1%). On each of the dates specified in Section 2.06 of this Agreement, the Borrower shall pay interest accrued on the principal amount outstanding during the preceding Interest Period, calculated at the rate applicable during such Interest Period. (b) As soon as practicable after the end of each Semester, the Bank shall notify the Borrower and the Guarantor of the Cost of Qualified Borrowings determined in respect of such Semester. (c) For the purposes of this Section: (i) "Interest Period" means a six-month period ending on the date immediately preceding each date specified in Section 2.06 of this Agreement, beginning with the Interest Period in which this Agreement is signed. (ii) "Cost of Qualified Borrowings" means the cost, as reasonably determined by the Bank and expressed as a percentage per annum, of the outstanding borrowings of the Bank drawn down after June 30, 1982, excluding such borrowings or portions thereof as the Bank has allocated to fund: (A) the Bank's investments; and (B) loans which may be made by the Bank after July 1, 1989 bearing interest rates determined otherwise than as provided in paragraph (a) of this Section. (iii) "Semester" means the first six months or the second six months of a calendar year. (d) On such date as the Bank may specify by no less than six months' notice to the Borrower, paragraphs (a), (b) and (c) (iii) of Page 4 this Section shall be amended to read as follows: "(a) The Borrower shall pay interest on the principal amount of the Loan withdrawn and outstanding from time to time, at a rate for each Quarter equal to the Cost of Qualified Borrowings determined in respect of the preceding Quarter, plus one-half of one percent (1/2 of 1%). On each of the dates specified in Section 2.06 of this Agreement, the Borrower shall pay interest accrued on the principal amount outstanding during the preceding Interest Period, calculated at the rates applicable during such Interest Period." "(b) As soon as practicable after the end of each Quarter, the Bank shall notify the Borrower and the Guarantor of the Cost of Qualified Borrowings determined in respect of such Quarter." "(c) (iii) `Quarter' means a three-month period commencing on January 1, April 1, July 1 or October 1 in a calendar year." Section 2.06. Interest and other charges shall be payable semiannually on June 15 and December 15 in each year. Section 2.07. The Borrower shall repay the principal amount of the Loan in accordance with the amortization schedule set forth in Schedule 3 to this Agreement. ARTICLE III Execution of the Project Section 3.01. (a) The Borrower declares its commitment to the objectives of the Project as set forth in Schedule 2 to this Agreement, and, to this end, shall carry out the Project with due diligence and efficiency and in conformity with appropriate technical, administrative, financial and economic practices in accordance with the Basic Law and the Credit Policy Guidelines, and shall provide, promptly as needed, the funds, facilities, services and other resources required for the Project. (b) For the purpose of carrying out Part A of the Project, the Borrower shall make available to the Participating Banks the equivalent of the proceeds of the Loan referred to in Part A.1 of Schedule 6 to this Agreement under subsidiary loan agreements to be entered into between the Borrower and each of the Participating Banks, under terms and conditions which shall have been approved by the Bank, and which shall include, without limitation, those set forth in Schedule 6 to this Agreement; (c) The Borrower shall: (i) exercise its rights under the Subsidiary Loan Agreements in such manner as to protect the interest of the Borrower and the Bank and to accomplish the purposes of the Loan, and, except as the Bank shall otherwise agree, the Borrower shall not assign, amend, abrogate or waive any of the Subsidiary Loan Agreements, or any provision thereof; and (ii) coordinate and monitor the overall execution of the Project and supervise the carrying out by the Participating Banks of their respective Subsidiary Loan Agreements in accordance with policies and proce- dures satisfactory to the Bank. Section 3.02. Except as the Bank shall otherwise agree, procurement of the goods and services required for Part A of the Project and to be financed out of the proceeds of the Loan shall be governed by the provisions of Schedule 4 to this Agreement. ARTICLE IV Financial Covenants Section 4.01. (a) The Borrower shall maintain records and accounts adequate to reflect in accordance with sound accounting Page 5 practices its operations, resources and expenditures in respect of Part A of the Project. (b) The Borrower shall: (i) have the records and accounts referred to in paragraph (a) of this Section and the records and accounts for the Special Account for each fiscal year audited, in accordance with appropriate auditing principles consistently applied, by independent auditors acceptable to the Bank; (ii) furnish to the Bank as soon as available, but in any case not later than five months after the end of each such year: (A) certified copies of said accounts for such year as so audited; and (B) the report of such audit by said auditors, of such scope and in such detail as the Bank shall have reasonably requested; and (iii) furnish to the Bank such other information concerning said records and accounts as well as the audit thereof as the Bank shall from time to time reasonably request. (c) For all expenditures with respect to which withdrawals from the Loan Account were made on the basis of statements of expenditure, the Borrower shall: (i) maintain, in accordance with paragraph (a) of this Section, records and accounts reflecting such expenditures; (ii) retain, until at least one year after the Bank has received the audit report for the fiscal year in which the last withdrawal from the Loan Account or payment out of the Special Account was made, all records (contracts, orders, invoices, bills, receipts and other documents) evidencing such expenditures; (iii) enable the Bank's representatives to examine such records; and (iv) ensure that such records and accounts are included in the annual audit referred to in paragraph (b) of this Section and that the report of such audit contains a separate opinion by said auditors as to whether the statements of expenditure submitted during such fiscal year, together with the procedures and internal controls involved in their preparation, can be relied upon to support the related withdrawals. ARTICLE V Remedies of the Bank Section 5.01. Pursuant to Section 6.02 (k) of the General Conditions, the following additional event is specified, namely, that the Basic Law or the Credit Policy Guidelines shall have been amended, suspended, abrogated, repealed or waived so as to affect materially and adversely the ability of the Borrower to perform any of its obligations under this Agreement. Section 5.02. Pursuant to Section 7.01 (h) of the General Conditions, the following additional event is specified, namely, that the event specified in Section 5.01 of this Agreement shall occur. ARTICLE VI Page 6 Effective Date; Termination Section 6.01. The following event is specified as an additional condition to the effectiveness of the Loan Agreement within the meaning of Section 12.01 (c) of the General Conditions, namely that Subsidiary Loan Agreements have been executed on behalf of the Borrower and two Participating Banks. Section 6.02. The following is specified as an additional matter, within the meaning of Section 12.02 (c) of the General Conditions, to be included in the opinion or opinions to be furnished to the Bank, namely that each of the Subsidiary Loan Agreements referred to in Section 6.01 of this Agreement has been duly authorized or ratified by the Borrower and a Participating Bank and is legally binding upon the Borrower and such Participating Bank in accordance with its terms. Section 6.03. The date ninety (90) days after the date of this Agreement is hereby specified for the purposes of Section 12.04 of the General Conditions. ARTICLE VII Representative of the Borrower; Addresses Section 7.01. The President of the Borrower is designated as representative of the Borrower for the purposes of Section 11.03 of the General Conditions. Section 7.02. The following addresses are specified for the purposes of Section 11.01 of the General Conditions: For the Bank: International Bank for Reconstruction and Development 1818 H Street, N.W. Washington, D.C. 20433 United States of America Cable address: Telex: INTBAFRAD 197688 (TRT), Washington, D.C. 248423 (RCA), 64145 (WUI) or 82987 (FTCC) For the Borrower: National Bank of Hungary Department for International Development Institutions H-1850 Budapest Szabadsag ter 8-9 Republic of Hungary Cable address: Telex: BANKO 227267 SMAFU-H, Budapest 225755 BANKO-H or 227028 BANKO-H IN WITNESS WHEREOF, the parties hereto, acting through their duly authorized representatives, have caused this Agreement to be signed in their respective names in the District of Columbia, United States of America, as of the day and year first above written. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Page 7 By /s/ Eugenio F. Lari Acting Regional Vice President Europe, Middle East and North Africa NATIONAL BANK OF HUNGARY By /s/ Istvan Ipper Authorized Representative SCHEDULE 1 Withdrawal of the Proceeds of the Loan 1. The table below sets forth the Categories of items to be financed out of the proceeds of the Loan, the allocation of the amounts of the Loan to each Category and the percentage of expen- ditures for items so to be financed in each Category: Amount of the Loan Allocated % of (Expressed in Expenditures Category Dollar Equivalent) to be Financed (1) Goods and 100,000,000 100% of foreign consultants' expenditures and services 100% of local ex- under Part A penditures (ex- of the Project factory cost) for goods and 75% of local expenditures of other items of goods and related services procured locally and 80% of local expenditures for services of con- sultants domiciled within the terri- tory of the Guar- antor and 100% of foreign expen- ditures for ser- vices of other consultants and 100% of foreign expenditures for technical licenses and marketing activities ___________ TOTAL 100,000,000 =========== 2. For the purposes of this Schedule: (a) the term "foreign expenditures" means expenditures in the currency of any country other than that of the Guarantor for goods or services supplied from the territory of any country other than that of the Guarantor; and (b) the term "local expenditures" means expenditures in the Page 8 currency of the Guarantor or for goods or services supplied from the territory of the Guarantor. 3. Notwithstanding the provisions of paragraph 1 above, no withdrawals shall be made in respect of: (a) payments made for expenditures prior to the date of this Agreement, except that withdrawals, in an aggregate amount not exceeding the equivalent of $10,000,000, may be made in respect of payments made for expenditures by a small farmer under a Sub-loan made by a Participating Bank before that date but after January 1, 1990; and (b) Sub-loans except for expenditures by a Beneficiary under a Sub-loan made by a Participating Bank after the Bank shall have communicated to the Borrower its acceptance of evidence that a Subsidiary Loan Agreement has been executed on behalf of, and is legally binding upon, the Borrower and such Participating Bank. SCHEDULE 2 Description of the Project The objectives of the Project are to: (a) provide quality food products for export either as raw material or as inputs into agroprocessed goods; and (b) improve the efficiency of agricultural producers by providing additional financial resources to small scale, private farmers and by modernizing agrobusiness methods and practices of managers of large scale farms. The Project consists of the following parts, subject to such modifications thereof as the Borrower and the Bank may agree upon from time to time to achieve such objectives: Part A: The financing, through the provision of loans, including Sub-loans, by the Participating Banks of Sub-projects by Beneficiaries for: (1) planting material, breeding stock, fattening stock, machinery and equipment for the improvement of crop and livestock production, including construction materials and equip- ment for buildings for crop and livestock production; (2) non- agricultural activities of agricultural enterprises, such as services and manufacturing; (3) storage and commodity handling facilities of both large scale farms and small scale farmers; (4) small scale agroprocessing activities; (5) marketing and sales promotion; and (6) activities of contractors of farm services and rural entrepreneurs supporting agricultural or agroprocessing activities or engaged in village tourism. Part B: The carrying out of a program of technical assistance and training for the development of: (1) marketing schemes for the domestic and export markets; (2) management and farming techniques of small scale farmers; (3) local consultant services, primarily for business planning; (4) livestock advisory services; and (5) an agricultural insurance program. * * * The Project is expected to be completed by June 30, 1995. SCHEDULE 3 Amortization Schedule Page 9 Payment of Principal Date Payment Due (expressed in dollars)* On each June 15 and December 15 beginning December 15, 1995 through June 15, 2005 5,000,000 _____________________________ * The figure in this column represents dollar equivalents determined as of the respective dates of withdrawal. See General Conditions, Sections 3.04 and 4.03. Premiums on Prepayment Pursuant to Section 3.04 (b) of the General Conditions, the premium payable on the principal amount of any maturity of the Loan to be prepaid shall be the percentage specified for the applicable time of prepayment below: Time of Prepayment Premium The interest rate (expressed as a per- centage per annum) applicable to the Loan on the day of prepayment multi- plied by: Not more than three years 0.20 before maturity More than three years but 0.40 not more than six years before maturity More than six years but 0.73 not more than 11 years before maturity More than 11 years but not 0.87 more than 13 years before maturity More than 13 years before 1.00 maturity SCHEDULE 4 Procurement and Consultants' Services Section I. Procurement of Goods and Works Part A: International Competitive Bidding 1. Except as provided in Part C hereof, goods shall be procured under contracts awarded in accordance with procedures consistent with those set forth in Sections I and II of the "Guidelines for Procurement under IBRD Loans and IDA Credits" published by the Bank in May 1985 (the Guidelines). Part B: Preference for Domestic Manufacturers In the procurement of goods in accordance with the procedures described in Part A hereof, goods manufactured in the territory of the Guarantor may be granted a margin of preference in accordance with, and subject to, the provisions of paragraphs 2.55 and 2.56 of the Guidelines and paragraphs 1 through 4 of Appendix 2 thereto. Part C: Other Procurement Procedures Page 10 1. Goods and technical licenses which the Bank agrees: (a) are of proprietary nature; (b) the timely supply thereof is critical for efficient Project execution; or (c) need to be compatible with other installed equipment may be procured through direct negotiations with the proprietors thereof, on terms and conditions acceptable to the Bank. 2. Goods estimated to cost less than the equivalent of $300,000 per contract may be procured under contracts awarded on the basis of comparison of price quotations obtained from at least three suppliers in accordance with standard commercial practices. Part D: Review by the Bank of Procurement Decisions 1. Review of invitations to bid and of proposed awards and final contracts: (a) With respect to each contract estimated to cost the equivalent of $1,000,000 or more, the procedures set forth in paragraphs 2 and 4 of Appendix 1 to the Guidelines shall apply. Where payments for such contract are to be made out of the Special Account, such procedures shall be modified to ensure that the two conformed copies of the contract required to be furnished to the Bank pursuant to said paragraph 2 (d) shall be furnished to the Bank prior to the making of the first payment out of the Special Account in respect of such contract. (b) With respect to each contract not governed by the preceding paragraph, the procedures set forth in paragraphs 3 and 4 of Appendix 1 to the Guidelines shall apply. Where payments for such contract are to be made out of the Special Account, said procedures shall be modified to ensure that the two conformed copies of the contract together with the other information required to be furnished to the Bank pursuant to said paragraph 3 shall be furnished to the Bank as part of the evidence to be furnished pursuant to paragraph 4 of Schedule 5 to this Agreement. 2. The figure of 15% is hereby specified for purposes of paragraph 4 of Appendix 1 to the Guidelines. Section II. Employment of Consultants Consultants' services shall be procured under contracts awarded to consultants: (a) whose qualifications, experience and terms and conditions of employment shall be satisfactory to the Bank; and (b) who shall be selected in accordance with principles and procedures satisfactory to the Bank on the basis of the "Guidelines for the Use of Consultants by World Bank Borrowers and by The World Bank as Executing Agency" published by the Bank in August 1981. SCHEDULE 5 Special Account 1. For the purposes of this Schedule: (a) the term "eligible Category" means Category (1) set forth in the table in paragraph 1 of Schedule 1 to this Agreement; (b) the term "eligible expenditures" means expenditures in respect of the reasonable cost of goods and services required for the Project and to be financed out of the proceeds of the Loan allocated from time to time to the eligible Category in accordance with the provisions of Schedule 1 to this Agreement; and (c) the term "Authorized Allocation" means an amount equivalent to $8,000,000 to be withdrawn from the Loan Account and deposited in the Special Account pursuant to paragraph 3 (a) of this Schedule. Page 11 2. Payments out of the Special Account shall be made exclusively for eligible expenditures in accordance with the provisions of this Schedule. 3. After the Bank has received evidence satisfactory to it that the Special Account has been duly opened, withdrawals of the Authorized Allocation and subsequent withdrawals to replenish the Special Account shall be made as follows: (a) For withdrawals of the Authorized Allocation, the Borrower shall furnish to the Bank a request or requests for a deposit or deposits which do not exceed the aggregate amount of the Authorized Allocation. On the basis of such request or requests, the Bank shall, on behalf of the Borrower, withdraw from the Loan Account and deposit in the Special Account such amount or amounts as the Borrower shall have requested. (b) (i) For replenishment of the Special Account, the Borrower shall furnish to the Bank requests for deposits into the Special Account at such intervals as the Bank shall specify. (ii) Prior to or at the time of each such request, the Borrower shall furnish to the Bank the documents and other evidence required pursuant to paragraph 4 of this Schedule for the payment or payments in respect of which replenishment is requested. On the basis of each such request, the Bank shall, on behalf of the Borrower, withdraw from the Loan Account and deposit into the Special Account such amount as the Borrower shall have requested and as shall have been shown by said documents and other evidence to have been paid out of the Special Account for eligible expenditures. All such deposits shall be withdrawn by the Bank from the Loan Account under the eligible Category, and in the equivalent amounts, as shall have been justified by said documents and other evidence. 4. For each payment made by the Borrower out of the Special Account, the Borrower shall, at such time as the Bank shall reasonably request, furnish to the Bank such documents and other evidence showing that such payment was made exclusively for eligible expenditures. 5. Notwithstanding the provisions of paragraph 3 of this Schedule, the Bank shall not be required to make further deposits into the Special Account: (a) if, at any time, the Bank shall have determined that all further withdrawals should be made by the Borrower directly from the Loan Account in accordance with the provisions of Article V of the General Conditions and paragraph (a) of Section 2.02 of this Agreement; or (b) once the total unwithdrawn amount of the Loan allocated to the eligible Category, less the amount of any outstanding special commitment entered into by the Bank pursuant to Section 5.02 of the General Conditions with respect to the Project, shall equal the equivalent of twice the amount of the Authorized Allocation. Thereafter, withdrawal from the Loan Account of the remaining unwithdrawn amount of the Loan allocated to the eligible Category shall follow such procedures as the Bank shall specify by notice to the Borrower. Such further withdrawals shall be made only after and to the extent that the Bank shall have been satisfied that all such amounts remaining on deposit in the Special Account as of the date of such notice will be utilized in making payments for eligible expenditures. 6. (a) If the Bank shall have determined at any time that any payment out of the Special Account: (i) was made for an expenditure Page 12 or in an amount not eligible pursuant to paragraph 2 of this Schedule; or (ii) was not justified by the evidence furnished to the Bank, the Borrower shall, promptly upon notice from the Bank: (A) provide such additional evidence as the Bank may request; or (B) deposit into the Special Account (or, if the Bank shall so request, refund to the Bank) an amount equal to the amount of such payment or the portion thereof not so eligible or justified. Unless the Bank shall otherwise agree, no further deposit by the Bank into the Special Account shall be made until the Borrower has provided such evidence or made such deposit or refund, as the case may be. (b) If the Bank shall have determined at any time that any amount outstanding in the Special Account will not be required to cover further payments for eligible expenditures, the Borrower shall, promptly upon notice from the Bank, refund to the Bank such outstanding amount. (c) The Borrower may, upon notice to the Bank, refund to the Bank all or any portion of the funds on deposit in the Special Account. (d) Refunds to the Bank made pursuant to paragraphs 6 (a), (b) and (c) of this Schedule shall be credited to the Loan Account for subsequent withdrawal or for cancellation in accordance with the relevant provisions of this Agreement, including the General Conditions. SCHEDULE 6 Principal Terms and Conditions of the Subsidiary Loan Agreement Except as the Bank and the Borrower shall otherwise agree, the principal terms and conditions set forth in this Schedule shall apply for the purposes of Section 3.01 (b) of this Agreement. A. Terms 1. The aggregate amount to be made available by the Borrower to a Participating Bank under its respective Subsidiary Loan Agreement shall be the equivalent in the currency of the Guarantor (determined as of the respective date or dates of withdrawal from the Loan Account or payment out of the Special Account) of the value of the currency or currencies so withdrawn or paid out on account of the cost of goods and services for the Sub-projects to be carried out under Sub-loans made by such Participating Bank and to be financed out of the proceeds of the Loan allocated from time to time to Category (1). 2. The Subsidiary Loan shall be charged on the principal amount thereof withdrawn and outstanding from time to time interest at a rate of not less than the refinancing rate charged from time to time by the Borrower pursuant to the Credit Policy Guidelines. 3. The Subsidiary Loan shall be charged on the principal amount thereof not withdrawn and outstanding from time to time a commitment fee at a rate equal to the commitment fee on the principal amount of the Loan not withdrawn and outstanding from time to time as set forth in Section 2.04 of this Agreement. 4. The Subsidiary Loan shall be for a period not exceeding fifteen years, including a grace period not exceeding five years. 5. The right of a Participating Bank to the use of the proceeds of its respective Subsidiary Loan shall be: (a) suspended upon failure by such Participating Bank to perform any of its obligations under its respective Subsidiary Loan Agreement; and (b) terminated if such right shall have been suspended pursuant to paragraph (a) hereof for a continuous period of sixty days. B. Conditions Page 13 A Subsidiary Loan Agreement may be entered into with a banking institution, duly established and operating under the laws of the Guarantor, which the Borrower shall have determined, and the Bank shall have agreed, that such institution: 1. is operating pursuant to an official lending and investment policy statement, which the Bank and the Borrower shall have judged acceptable, and has undertaken to maintain said policy statement; 2. has a sound financial structure and the organization, management, staff and other resources required for the efficient carrying out of its operations and affairs and has undertaken: (a) to carry out the same in accordance with its lending and investment policy statement, referred to in paragraph 1 hereof, and with sound financial standards and practices; and (b) to provide, promptly as needed, the funds, facilities, services and other resources required for the carrying out of its activities under Part A of the Project; 3. has undertaken to: (a) incorporate into its training program, training for the further strengthening of its staff capabilities in servicing small scale farmers; (b) assign or employ one full-time qualified agricultural credit officer for each branch which has reached a level of 200 loans made to small scale farmers per year or which has reached a level of 1,000 loans in its loan portfolio; and (c) employ, as may be determined necessary by the Borrower, consultants with qualifications, experience and terms of reference satisfactory to the Borrower, to assist it in the carrying out its activities under Part A of the Project. 4. has adopted and undertaken to maintain suitable procedures to enable it effectively to: (a) (i) make Sub-loans to Beneficiaries for Sub-projects under Part A of the Project on the basis of the criteria, procedures and terms and conditions set forth in the Annex to this Schedule, (ii) exercise its rights in relation to each such Sub-project in such a manner as to protect its interests and the interests of the Bank and the Borrower, comply with its obligations under its respective Subsidiary Loan Agreement and achieve the purposes of Part A of the Project, and (iii) not assign, amend, abrogate or waive any of its agreements providing for Sub-loans, or any provisions thereof, without the prior approval of the Borrower; (b) carry out its activities under Part A of the Project, appraise Sub-projects, and supervise, monitor and report on the carrying out by Beneficiaries of Sub-projects, including the procurement of the goods and services therefor, in accordance with policies and procedures satisfactory to the Bank and the Borrower; (c) exchange views with, and furnish all such information to, the Bank or the Borrower, as may be reasonably requested by the Bank or the Borrower, with regard to the progress of its activities under Part A of the Project, the performance of its obligations under its respective Subsidiary Loan Agreement, and other matters relating to the purposes of Part A of the Project; and (d) promptly inform the Bank and the Borrower of any condition which interferes or threatens to interfere with the progress of its activities under Part A of the Project, the accomplishment of the purposes thereof, or the performance of its obligations under its respective Subsidiary Loan Agreement. 5. has undertaken to: (a) maintain records and accounts adequate to reflect in Page 14 accordance with sound accounting practices its operations and financial conditions; (b) have its financial statements (balance sheets, statements of income and expenses and related statements) for each fiscal year audited, in accordance with appropriate auditing principles consistently applied, by independent auditors acceptable to the Bank and the Borrower; (c) furnish to the Bank, through the Borrower, as soon as available, but in any case not later than five months after the end of each such year: (i) certified copies of its financial statements for such year as so audited; and (ii) the report of such audit by said auditors in such scope and detail as the Bank or the Borrower shall have reasonably requested; and (d) furnish to the Bank, through the Borrower, such other information concerning said records, accounts and financial statements, as well as the audit thereof, as the Bank or the Borrower shall from time to time reasonably request. ANNEX TO SCHEDULE 6 Principal Terms and Conditions of the Sub-loans The principal terms and conditions set forth or referred to in this Annex shall apply for the purposes of paragraph 4 (a) (i) of Part B of Schedule 6 to this Agreement. 1. The principal amount of each Sub-loan shall be the equivalent in the currency of the Guarantor (determined as of the date or respective dates of withdrawals from the Loan Account or payment out of the Special Account) of the value of the currency or currencies so withdrawn or paid out on account of the cost of the goods and services for the Sub-project to be carried out under such Sub-loan and to be financed out of the proceeds of the Loan allocated from time to time to Category (1). 2. Sub-loans shall each be made by a Participating Bank for a period not exceeding ten years, including a grace period not exceeding three years, and on other terms, including those relating to interest and other charges, which are in accordance with the lending and investment policy statement of such Participating Bank. 3. Sub-loans in the principal amount in excess of $300,000 equivalent shall be made only to those Beneficiaries who each shall have: (a) established, to the satisfaction of the Participating Bank making the Sub-loan, on the basis of guidelines satisfactory to the Bank, that: (i) it is creditworthy; (ii) its projected cash generation or equity increases shall be sufficient to enable it to meet the estimated expenditures required for the Sub-project; (iii) it is in a position to continue to maintain a debt to equity ratio of not more than 65:35, a debt service coverage ratio of not less than 1.5:1, and a ratio of current assets to current liabilities of not less than 1.3:1; (b) established that the Sub-project shall have a financial rate of return and an economic rate of return in real terms of at least 12%, as shall be calculated to the satisfaction of the Borrower and the Participating Bank on the basis of an appraisal carried out in accordance with guidelines satisfactory to the Bank; and (c) developed and undertaken to carry out a business plan, satisfactory to the Participating Bank, on the basis of criteria and methodology satisfactory to the Bank, describing their markets, operations and financing arrangements. Page 15 4. Sub-loans in the principal amount of $300,000 equivalent or less shall be made only to those Beneficiaries who qualify on the basis of the present criteria of Participating Banks for determining creditworthiness and Sub-project viability. 5. Sub-loans shall be made only to those small scale farmers whoeach shall have established to the satisfaction of the Participating Bank making the Sub-loan that it has: (a) (i) previous farming experience; (ii) adequate assets; (iii) satisfactory capacity to repay the Sub-loan based on farm income (including income from the proposed investment) and income from non-farm sources; and (iv) adequate collateral for the Sub- loan; and (b) developed and undertaken to carry out a farm plan satisfactory to the Participating Bank. 6. Sub-loans shall be made only for Sub-projects which are each determined to be technically feasible and designed in accordance with appropriate safety, health and environmental standards satisfactory to the Bank. 7. Each Sub-loan for a Sub-project for non-agricultural activities shall not exceed $500,000 equivalent. 8. No expenditures for goods or services required for a Sub- project shall be eligible for financing out of the proceeds of the Loan unless the Bank shall have authorized withdrawals from the Loan Account in respect of the Sub-loan for such Sub-project and such expenditures shall have been made not earlier than ninety (90) days prior to the date on which the Bank shall have received the request and information required under paragraph 9 of this Annex in respect of such Sub-loan. 9. Each request by the Borrower for authorization to make withdrawals from the Loan Account in respect of a Sub-loan shall contain: (i) a summary description of the Beneficiary and the Sub- project, including a description of the expenditures proposed to be financed out of the proceeds of the Loan; and (ii) the terms and conditions of the Sub-loan, including the schedule of amortization therefor. 10. The Participating Bank shall: (a) open, by the date on which it shall receive the first payment of interest or other charges on, or repayment of principal under, a Sub-loan and thereafter maintain a separate account on its books in accordance with its normal financial practices and on conditions satisfactory to the Bank and the Borrower; and (b) upon receipt of each such payment or repayments under each Sub-loan, credit the same to the said separate account. All amounts to be so credited to the said separate account shall be utilized by the Participating Bank, to the extent they are not yet required to meet the Participating Bank's payment obligations to the Borrower under its Subsidiary Loan Agreement, exclusively to finance projects similar to Sub-projects in accordance with the Credit Policy Guidelines. 11. Sub-loans shall be made on terms whereby the Participating Bank making such Sub-loan shall obtain, by written contract or other appropriate legal means, rights adequate to protect such Partici- pating Bank's interests and those of the Bank and the Borrower: (a) require that each Beneficiary shall undertake to: (i) carry out and operate the Sub-project with due diligence and efficiency and in accordance with safety, health and environmental standards, satisfactory to the Bank, and with sound technical, financial and managerial standards Page 16 and practices and provide, promptly as needed, the funds, facilities and other resources required for the purpose; (ii) procure the goods and services to be financed out of the proceeds of the Loan in accordance with the provisions of Schedule 4 to this Agreement, and use such goods and services exclusively in the carrying out of the Sub- project; (iii) enable the Participating Bank, the Bank and the Borrower to inspect such goods and the sites and works included in the Sub-project, the operation thereof, and any relevant records and documents; (iv) take out and maintain such insurance, against such risks and in such amounts, as shall be consistent with sound business practice including, without limitation, such insurance to cover hazards incident to the acquisition, transportation and delivery of goods financed out of the proceeds of the Loan to the place of use or installation, any indemnity thereunder to be made payable in a currency freely usable by the Beneficiary to replace or repair such goods; (v) if the Beneficiary is a large scale farm or agroprocessing enterprise or marketing company, maintain the debt to equity and debt service coverage ratios and the ratio of current assets to current liabilities as specified in paragraph 3 (a) (iii) of this Annex; (vi) if the Beneficiary is a large scale farm or agroprocessing enterprise or marketing company, and the proposed sub-loan exceeds $300,000 equivalent, carry out the business plan referred to in paragraph 3 (c) of this Annex or, if the Beneficiary is a small scale farmer, carry out the farm plan referred to in paragraph 5 (b) of this Annex in such manner so as to achieve the objectives thereof; (vii) prepare and furnish to the Participating Bank, for forwarding to the Borrower as may be requested by the Bank or the Borrower, all such information as the Bank or the Borrower shall reasonably request relating to the foregoing, to its administration, operations and financial condition and to the benefits to be derived from the Sub-project; and (viii) (A) maintain records and accounts adequate to reflect in accordance with consistently maintained sound accounting practices its operations and financial conditions; (B) have its financial statements (balance sheets, income statements and cash flow statements) for each fiscal year audited, in accordance with appropriate auditing principles consistently applied, by independent auditors acceptable to the Bank and the Borrower; (C) furnish to the Participating Bank, for forwarding to the Borrower as may be requested by the Bank or the Borrower, as soon as available, but in any case not later than five months after the end of each such year certified copies of its Page 17 financial statements for such year as so audited, and the report of such audit by said auditors, of such scope and in such detail as the Bank or the Borrower shall have reasonably requested; and (D) furnish to the Participating Bank, for forwarding to the Borrower as may be requested by the Bank or the Borrower, such other information concerning said accounts, financial statements and records, as well as the audit thereof, as the Bank or the Borrower shall from time to time reasonably request; and (b) suspend or terminate the right of the Beneficiary to the use of the proceeds of the Sub-loan upon failure by such Beneficiary to perform its obligations under its contract with the Participating Bank.