BRICS Bank should be credible: Rangarajan

The former RBI governor says the new bank should disburse loans based on commercial viability of the projects

Credibility should be built around the proposed BRICS (Brazil, Russia, India and China and South Africa) New Development Bank (NDB), for it to become successful and act as a supplement to the existing multilateral development banks (MDBs), said C Rangarajan, chairman, Madras School of Economics, and former governor of Reserve Bank of India.

Releasing a study by trade association Assocham, he said the new bank  should disburse loans based on commercial viability of the projects.

The study noted that by its sheer financial muscle of $3.8 trillion of foreign currency reserves, China wields influence over critical components of the major financial channels. “How should India thus situate itself in the emerging world economic and political order? Obviously, India has to seek a balance outside China-led or likely dominated structures, while remaining a relevant voice within them.”

The strength of China in global lending, the study said, surpassed the loan levels of the World Bank ($14 billion) and IDB ($12 billion), to reach $37 billion in 2010.

“At the international level, Russia, Brazil and India desire the emergence of a multi-polar international system in which they are the major actors. In contrast, China aims at a bipolar world in which it serves as a counterbalance to American power,” the study said.

Speaking about the BRICS Bank, Rangarajan said, “Almost every country including India follows certain principles while investing their foreign exchange reserves, because they are a buffer. If some part of the reserves are to be invested in the bonds floated by the New Development Bank, these bonds will have to be marketable; must have liquidity and must be having the highest grade given to them by the rating agencies. For all these purposes, it is important that the credibility of the institution is well established,” he said.

He added it should be a bank of projects rather than a bank of policies. Its purpose should be to give long-term loans, particularly infrastructure finance. And it is only when the market is convinced that the institution is following prudential principles, it will be able to raise loans in the market, he said.

Estimates show that in another 25 years, in the global economy, the share of the present developing economies will be equal to the share of the developed economies. It’s because the developed economies at best would grow at two per cent, whereas the developing economies will grow by five per cent at the minimum.

Rangarajan said the existing MDBs such as the World Bank and others had been working under the policies set several decades ago, though there has been a tremendous change in governance.

According to him, the disbursement of some of the established MDBs to the developing countries have not been  proportionate to their size.

With an initial capital of $50 billion, the annual lending capacity of the new bank is estimated in the range of $2.4 billion to $18 billion depending on the assumptions used.