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BRICS Bank: A New Funding Source for Developing Countries

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Published : Monday, 18 May, 2015 11:10 AM

MBA aspirants must be updated with General Awareness on current topics. General awareness topics with analytically drawn conclusions will benefit you in XATIIFTCMATMAT, Essay writing, General Awareness sections besides in WATGD & PI.

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BRICS Bank: A New Funding Source for Developing Countries

In July 2014, a coalition of emerging economics Brazil, Russia, India, China and South Africa (BRICS) announced the formation of new international bank which would be known as New Development Bank (NDB). The NDB is established with the initial paid-up capital of USD50 billion where each nation has contributed USD10 billion. Initially, the funds of NDB would be used for the infrastructure development and other projects of sustainable development in the five signatory nations. However, later, other low and middle income countries would also be able to get funds from NDB for their socio-economic development. 

Thus, the NDB is raised as a parallel system to the World Bank, the only difference is that here BRICS countries will have equal role in the decision making unlike World Bank and International Monetary Fund. 

Need For New Development Bank 

The formation of New Development Bank (NDB) by the BRICS nation is because of the two main reasons. First, these countries need billions of dollars for development of social and economic infrastructure and any new source of funding is always welcome. As per the estimates of World Bank, a $1 trillion infrastructure investment “gap” exists in developing countries. Second reason is the relatively lesser role played by the developing countries in the decision making in the major global financial institutions which are International Monetary Fund (IMF) and World Bank (WB). These institutions are dominated by the west in general and the United States in particular where developing countries have been demanding more democratization of IMF and WB since long.  
The word ‘new’ in the New Development Bank is the testimony of the fact that BRICS nations have decided to challenge the world financial order established by WB and IMF. While the NDB would be an answer to WB which finances infrastructure and social development projects in developing countries, BRICS also decided to establish a $100 billion Contingent Reserve Arrangement (CRA), which would be helping nations during balance of payment crisis which would be parallel to the role of IMF. 

Role of Individual Members in NDB

NDB is expected to become functional somewhere during the year 2016. During the first six years of the operations, NDB will have an Indian President. KV Kamath, the non-executive chairman of ICICI Bank, will hold the presidency of the bank for six years. For Russia, it would have the first Chairman at Board of Governors, while a Brazilian would be the Chairman of Board of Directors. The Headquarter of the NDB will located at Shanghai in China. The regional base of NDB will be located in South Africa.      

Impact on India

As already stated, there is an enormous fund deficit of USD 1 trillion dollars for developing nations. India too needs funds for its development and NDB would help in bridging this deficit up to some extent. In case of a slowdown as witnessed during 2007-08, CRA could prove to be a lifeline for BRICS nations.  Also, it would bring BRICS nations mutually closure resulting in the increased cooperation between them. As NDB would fund the other less developed countries as well, it will help in elevating the position of BRICS nations at the global stage. Its existence would clearly strengthen the voice of developing and emerging economies like India in the development finance architecture, as well as provide much needed additional finance. 

Seeing the development needs of the third world, the NDB would and should be a complement, not a substitute, for existing financial institutions both in the public as well as the private sector. Institutions like NDB and CRA can provide a valuable platform for the BRICS advancing reforms in the international financial and development architecture that favour developing and emerging countries in general. 

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