Bank of developing nations

Post successful completion of euphoric FIFA world cup held in Brazil, in which Germany has lifted the cup by thrashing Argentina in final; Brazil added another feather to its crown by witnessing astonishing BRICS summit held at Brasilia in which heads to five BRICS nation inked the deal for launching their own development bank. BRICS is group of five emerging economies and draws its name from the initials of its member country – Brazil, Russia, India, China and South Africa.

The idea popped up for the first time at BRICS summit in New Delhi in 2012 when the member nations recognised the need, which was motivated by the growing mistrust on International Monetary Fund and World Bank which has dominance by developed countries since establishment and were accused of favouring Euro-Atlantic economic agenda, for a development bank which will cater the rising demand of funds by developing country for their infrastructure project and sustainable development.

The deal was reached after intense negotiations between the founding members over the dispute for setting up headquarter and the presidency of the new bank, which will have initial capital of $50 billion for investment in infra projects. Dialogue crawled over for two years as China asserted to have bigger share in contribution to the bank depending upon the economic strength of the member nations which was opposed by other members and demanded for equal share for every member as higher contribution automatically provide higher control.

To start with member countries infuse $50 billion ($10 billion each) capital which is expected to double $100 billion by 2016 (year in which bank become operational) for infrastructure projects. Bank will maintain contingency reserve swap arrangement (CRA) capital of $100 billion (China contribute $41 billion, South Africa $5 billion, remaining amount will be equally divided between remaining members). CRA capital will not physically put aside but is a pledge to made fund available at the time of crisis. CRA could be drawn at two scenarios: 1) Balance of payment crisis, to save rapidly falling currency 2) Short term liquidity crisis, to meet obligations to foreign parties.

There are certain challenges lies ahead for New Development Bank (NDB). First, as the amount sanctions by the bank would be huge given the size of the projects, imperative need of powerful watchdog mechanism across the countries to check whether the disbursed fund is utilised in proper way or not. Second, establishment of NDB took place because of the conditions levied by institutes like World Bank and IMF, it would be interesting to see can the NDB extend loans without any such conditions, considering the high risk prevailing in the economies. Third, possibility of China pushing the functioning of bank in its own way, considering the fact that all five founding members have equal share in equity but contingency reserve fund has already witness supremacy by China with its stake at 41percent.

Though China has fetched the deal in its favour, the new development bank will headquartered in Shanghai and India has to settle with its presidency for first five years. The presidency will follow rotating policy means China will get presidency after two decades existence of the bank.

Given the widening demand supply gap and financial crunch faced by infrastructure project it is imperative to have this bank become operational soon. The growth will leads to more nations joining in means more funds and more competition would always beneficial for the financial system.

As the new bank is expected to extend loans for development and infrastructure projects and India has the reign for initial years of banks operation would definitely aid Mr. Modi’s government to accomplish the target in infrastructure sector and will fuel the vision of Prime Minister Narendra Modi of creating 100 high tech cities.