BRICS BANK15 July 201408:22

Reasons for setting up new Bank:1. Fed up with the heavily dominated US & Western Influence over global financial

system and have been oppressive against developing countries, 5 emerging markets come together to create "alternatives to existing world order"; failure of richest countries led by US to create governance reforms may have been major trigger for this move by countries accounting for 20% global output to push for a lender who is more sympathetic to the causes of developing countries

2. BRICS bank as an alternative to WB & IMF which is BRICS countries have a "shared desire for want of bigger voice in global economic policy"; each of them has had painful experiences with US dominated global financial system in the past: Contending with economic sanctions with Western powers, forced to make strict budget cuts or accept other obligations for emergency IMF loans; It basically is a safety net if they fall out with the west.

Facts:1. BRICS bank (to be named as New Development Bank (NDB)) - All 5 countries to invest

equally now (initial funding) for this bank while other developing countries can join later.

2. $100 billion fund to fight financial crises and create BRICS version of mini-IMF 3. China will have largest share of new reserve fund-called Contingency Reserve

Arrangement with $41 billion by China, $18 Billion By India, Brazil & Russia & $5 billion by South Africa

Issues agreed upon so far:1. Bank will be fully capitalized with $100 billion in long term; other developing countries

to be roped as shareholders2. Terms of $100 billion Contingency Reserve Arrangement(CRA) have been decided 3. BRICS will hold a minimum stake of 55% at the lending stage4. HQ to be in Shanghai, China (which is a huge business hub) with a regional center in

each of the founding member countries; First President to be from India and to be shared by rotation thereafter every year.

Positives:1. Provides extra measure of comfort with for emerging markets (including India) who

have experienced volatility in currency markets after capital outflows in recent times.2. An alternative to WB which provides loans for infrastructure projects across

developing world.3. It will work like swap arrangement between 5 countries; limits on how much funds can

be accessed based on several parameters.4. Additional buffer ( analogous to India's arrangement with Japan) will perhaps obviate

the need to approach global institutions/markets in case of liquidity squeeze situations => quick recourse to short term liquidity management which can stave off pressure of local currency and provide comfort to markets.

5. In short term window: can help do away with regressive moves like clamp down on imports & exports during bouts of liquidity squeeze and volatility.

6. In Medium Term: potentially help global acceptance of these currencies as trade & output grows.

7. $50 billion capital, sizeable fund to finance infra projects in developing countries.8. Funding could be channeled towards even social sector programs and needs of

developing countries unlike that of WB.9. This move to promote new bank may nudge the Washington based lenders towards

reforms especially on voting & shareholding rights which is crucial for India, considering it had been a founding member of these institutions six decades back.

Negatives:1. Should not turn out to be a replica of WB & IMF in its efforts to be an alternative to

them.2. Rate of borrowings from this new bank in comparison with WB & IMF over longer

tenure still unknown; curious to see if they will offer competitive rates compared to WB & IMF.

3. China has world's largest pile of forex reserves; Ideally china must not borrow from this bank. If starts borrowing, then there will be less funds remaining for capital starved nations.

4. Terms of lending to be key issue; Bretton Woods Institutions have AAA credit rating. Hence, can tap into markets for to raise funds at very low rates. This may not be possible with BRICS bank. This bank may not obtain such a rating and hence borrowings would turn out to be costlier.

5. Terms of loan agreement will be a tricky issue. WB & IMF borrowings are related to certain strict conditions. Negotiating such conditions would be challenging for BRICS bank.

6. Threat of Chinese domination & influence due to its economic might over this bank analogous to Washington's influence over WB & IMF. These leads competitive vying for posts and influence between member countries themselves.

7. Striking differences in economies & politics of the member countries.8. China could bring other smaller countries (from its sphere of influence) for loans to

project its soft power and increase their influence over these countries.