The latest initiative by five nations -- Brazil, Russia, India, China and South Africa (BRICS) -- to float the New Development Bank on the lines of the International Monetary Fund (IMF) has been a victory of sorts for these countries that account for a fifth of the global economic output, though critics have questioned its relevance and impact.
Given the insignificant contribution to the world economy, BRICS never had a commanding position in the first place while negotiating loans with IMF. In fact, even today funding from IMF comes with several riders that include fiscal governance, growth and environmental issues, to name a few.
This has primarily led to the five-nation bank, besides protecting exchange rate fluctuations caused by flight of capital, as was witnessed last year when talks of the US Fed lowering its infusion of liquidity through bond buying or quantitative easing started doing the rounds.
This led to the rupee hitting an all-time low of Rs 68 to the dollar on August 28, 2013, a day after the Sensex tanked 590 points to 17968. Fed eventually began tapering in January this year by lowering bond buying by $10 billion, from $85 billion in bond purchases it did in December. The move hit emerging economies like India the worst.
"There were arrogant statements from various US top honchos stating they were not in to protect the currency of other nations, as much as taking care of its own economy," said a senior banker.
The BRICS-promoted bank, with a subscribed capital of $50 billion, divided equally between the five nations and another $100 billion as currency reserves pool, addresses two major aspects of any growing economy: one, the need for funds for getting on to the map of the developed economy from a developing one, and, second, protecting each others' currency caused by outflows of foreign exchange.
Therefore, the need to build a bank of this nature is quite different from the Bretton Woods Conference of July 1944 where 44 countries met during World War II to re-build their economies shattered by war.
The New Development Bank, therefore, is progressive towards funding growth, especially infrastructure and targeting government-backed projects to start with.
According to initial plans, the $50-billion corpus means the bank can leverage 10 times the amount from world markets just like IMF through issue of bonds. This would reduce dependence on banks promoted by developed nations that do not understand the inherent stumbling blocks of growing economies in terms of political developments and needs, the people and the laws that are in the process of reformations.
"The IMF has a single formula for all issues," Arundhati Bhattacharya, chairperson of the country's largest government bank, the State Bank of India, told dna. "The new bank will support the need of BRICS and also curb currency volatilities," she added.
Many see the development expanding to neighbouring countries in Asia as well. But then it could take a good three to five years for the bank to grow in size and stature as envisaged by the founding members and can also invite more participants as shareholders if they decide to divest.
"The BRICS nations can admit new members. However, their shareholding can never go below 55% at any given time," said Piyush Vora, partner at accounting firm, BDO India LLP.
To sum it up, as said by a senior banker, "The idea is good if efficiency is at par with IMF. Since India will head the bank, caution should be exercised to see the coveted position does not go to undeserving bureaucrats."
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