Manila: A US proposal for multilateral institutions to extend more aid in the form of grants rather than loans to poor nations may not be feasible in Asia, the head of the Asian Development Bank warned on April 18.

ADB president Tadao Chino added the system of providing loans rather than grants reduced the "moral hazard" of aid programs and required more financial discipline from the borrowing country.

US Treasury Secretary Paul O'Neill proposed recently that half of the assistance provided by the World Bank's concessional lending arm, the International Development Association (IDA), be provided in the form of grants rather than loans.

Washington believed it was wrong to provide aid as loans when the World Bank was helping countries to improve health, combat HIV/AIDS, or cope with the aftermath of war or internal strife.

Providing loans risked adding to unsustainable debt loads on the poorest nations, it argued.

European powers have opposed the US idea because it would slash the World Bank's income and could ultimately threaten the existence of the institution.

Chino, asked whether the US plan could work for the ADB, said increasing the weight of grants in development assistance "may lead to moral hazards".

"When a country receives loans, they have to be paid and this will strengthen the discipline on the part of the borrowing country which has to make the most effective use of the loans so that they can be repaid," Chino told AFP.

He said increasing the proportion of grants could weaken financial discipline among recipients.

The ADB, the only Asian-based multilateral bank, at present provides lending assistance to poor countries with extremely cheap interest rates, Chino said. It also provides other loans at commercial rates.