Active Stocks
Thu Mar 28 2024 14:29:24
  1. Tata Steel share price
  2. 156.40 2.32%
  1. ITC share price
  2. 432.80 1.12%
  1. HDFC Bank share price
  2. 1,456.05 1.07%
  1. Power Grid Corporation Of India share price
  2. 278.85 2.88%
  1. State Bank Of India share price
  2. 758.30 3.30%
Business News/ Opinion / A bank made of different Brics
BackBack

A bank made of different Brics

The bank's risks will outweigh benefits if certain issues are not addressed

Illustration: Jayachandran/MintPremium
Illustration: Jayachandran/Mint

After years of negotiations, the Brics (Brazil, Russia, India, China, South Africa) bank is a reality. The leaders of these countries formalized the structure of the $50 billion banking venture in Brazil on Tuesday. The establishment of the bank is a positive step that will help India in enlarging India’s basket of sources for financial help.

The bank has a structure similar to other international development finance institutions such as the World Bank and the Asian Development Bank (ADB). It also doubles up as an institution that will help its members in case of financial emergencies—say a balance of payments crisis. In this, it resembles the International Monetary Fund (IMF). With subscribed capital of $50 billion, it is, of course, much more modest than World Bank for which the sum is $223 billion. Similarly, the currency reserve kitty, for meeting any financial trouble, stands at $100 billion. This is, again, much smaller than what IMF can muster in case of emergencies ($1 trillion).

These numbers, however, tell a different story. Unlike IMF and the World Bank, the Brics bank will be limited to servicing its members and hence far more useful to these countries individually in contrast to other forms of multilateral lending. At another level, the bank is also an alternative to these institutions whose limitations were apparent during the Asian financial crisis of 1996-97 when they did not help Asian economies cope with the worst financial emergency they faced in their history. Since then, Asian countries have been trying hard to develop an Asian version of IMF, to no avail. The Brics bank should be seen as the fruition of that alternative.

The bank can help India considerably as it is a capital-starved country. For example, to fund infrastructure creation alone in the years ahead, India needs close to $500 billion. That sum cannot be obtained from a single source or even a couple of sources. The greater the number of lenders, the closer India can come to getting its hands on that kind of money. The bank can free up scarce domestic capital for projects that can’t be funded from other sources.

This is the good part. However, the bank’s risks will far outweigh its benefits if certain issues are not addressed upfront. The risks are substantial given the rather novel political-cum-financial arrangements involved.

One, the location of the bank and the large role that China is likely to play in its running pose some obvious risks. China should not end up being in a position like the US is to IMF. China’s opposition to key Indian projects (for example, hydroelectric power plants in Arunachal Pradesh) is well-known. It has blocked loans to India in ADB. It is not clear if China’s political influence will play a role in influencing the projects for which the bank lends money. On the surface, there are adequate safeguards. For example, the presidency of the bank and the leadership of its board of governors etc. is rotatable. But these are not sufficient safeguards: the choice of personnel for the bank, especially the ones who carry the project appraisal work and other tasks, matters a lot. How will these personnel be selected? This should be made clear before the bank begins its operations.

Two, with lower costs of borrowing comes another danger: chasing of “vanity" projects. These projects could range from highways running to nowhere, expensive urban transport projects where traffic needs are out of line with the money spent on creating them to any number of other possibilities. The net outcome often is the frittering away of capital—a risk that ends up being borne by all members of the bank—and projects that don’t serve any purpose. Internationally, this is well-known. For example, a slew of poorly lent loans in the 1980s left the European Bank for Reconstruction and Development (EBRD) clearing the mess in the 1990s. The Brics bank should not end up doing something similar.

The regulatory infrastructure of the bank—basically guidelines on lending, risk management etc.—have not been put in place yet. Given the risks mentioned above, there is a good case to have a sound framework soon. As compared with IMF/World Bank/ADB that have a far more diversified contributing and lending base, the very small number of members of the bank also means the risks borne by Brics countries will be on the higher side. In addition, because of the very diverse nature of the Brics economies (for example, Russia and Brazil: predominantly natural resources exporters, China: manufacturing) risk perceptions are likely to vary. This is all the more reason that one member’s evaluation of risks should not colour the outlook of the bank itself. China, with its current lax financial lending practices, will house the bank. It is only fitting that other members hold important decision-making positions to ensure that these poor lending practices do not creep into the Brics bank.

What will determine the success (or failure) of the Brics bank? Tell us at views@livemint.com

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 16 Jul 2014, 06:47 PM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App