Goa, India
At a time when the BRICS grouping confronts vastly disparate economic outlooks and increasingly thorny intra-state geopolitics, questions are being raised over the bloc’s efficacy in ushering in a new global economic order. But the one tangible accomplishment of this multilateral group of emerging countries till now has been the setting up of the Shanghai-based New Development Bank (NDB) in 2014.
The NDB was set up with the objective of funding infrastructure projects and enabling sustainable development in the developing countries. At the time of its launch, the bank was seen as an alternative to the World Bank and the International Monetary Fund.
On the sidelines of the 8th BRICS Summit in Goa, NDB president KV Kamath spoke to Quartz India. One of India’s most respected bankers, Kamath is known for his stellar role in turning ICICI Bank into the country’s biggest private sector lender.
With reference to NDB, he delved into the challenges in driving synergies at a time of increasing dissimilarities. Kamath said the bank will see a 10-fold jump in its lending book over the next five years, and will also issue a “Masala Bond,” in the first quarter of calender year 2017. Masala bonds are financial instruments through which Indian entities can raise money from overseas markets in rupees and not any foreign currency.
Edited excerpts:
There is a creeping diplomatic and economic divergence among BRICS countries. Is it hard for a young organization like NDB to function and find multilateral synergies at a time like this?
No. We have in the first year successfully done a few loans aggregating to around $900 million in each of the member countries. We’ve also raised “green bonds” to finance these loans in the renminbi market. So in fact, very interesting synergies being driven, in terms of use of local currencies for developmental efforts.
I think countries are recognizing that, along with the volatility seen in the last couple of years in the various markets, currencies have also gone through difficult times, and, for that reason, the BRICS countries are very happy to borrow locally. Going forward, we would be stressing upon local currency funding and accessing bond markets in various member countries.
So even though you have countries that are located geographically, at a distance from one another, and might not interact regularly, we come in as an agent and catalyst that sees what is happening at closer quarters and share our insights to build a higher degree of trust and collaboration. And I see that happening.
You’ve said you’ll grow your lending book to $1 billion by 2016 and $2.5 billion by 2017. Can you share a more medium- to long-term view on the expected trajectory?
See, the way I look at the New Development Bank is that it is a creation of the South. It is a South-South cooperation initiative with a clear aspiration to stand on our own feet. But in terms of growing the book, every bank has to be prudent and nothing can happen overnight. So yes, the first year will be a little over a billion dollars, the second year will be $2.5 billion and then we will grow the book probably at the same pace over the next couple of years and see how far we can go.
So $10 billion in the next five years?
Yes, in five years we should be able to do that with a fair amount of ease. But the point is that you cannot grow too fast because you have to make sure all the risk and compliance practices are fully in place.
One of the criticisms leveled at NDB is that while it was initially projected as an emerging markets alternative of sorts to the established Western multilaterals, you’ve signed agreements with the World Bank and Asian Development Bank. Are there potential threats of replication in using this approach?
I must say that I do not believe the NDB was set up as an alternative to any institution. This was set up to meet the aspirations of the South and make the point that we are ready to stand on our feet, while also collaborating at the same time with others. The simple reason for this is that the developmental needs, if you just look at infrastructure alone, run at between $1 trillion to 1.5 trillion annually, over the next 15-20 years. And the entire multilateral system does incrementally about 15% of this, so there is a vast space open as far as the funding needs are concerned, and enormous opportunities for everyone to co-operate and collaborate.
Your focus thus far has been sustainable financing. The first tranche of about $811 million divided into four loans went largely to renewables projects. How are you ensuring that these large-scale infrastructure projects actually meet the sustainability criteria, and what are some of the sectors you’ll be lending to besides renewables?
I think there is a deep consciousness that the future road to growth, if it can be in a manner that you don’t harm the environment and cause negative impacts, helps avoid problems for the future. All our member countries, to the extent possible, are looking at putting this into the base case. As it happens, we have a large pipeline of renewables projects, but we will also be looking at projects in areas like water, transportation, and other needs.
To me, if an economy has to sustain then all of these become key drivers. But while doing this, we must ensure that the projects are implemented in such a way that they do not cause any harm. That’s the path we are looking at.
You’ve announced plans to raise between $250 million and 500 million in masala bonds. What are the timelines we are looking at?
We would plan our bond issues starting the first quarter of the coming calendar. And based on the progress, the first one will be an Indian bond issue. Thereafter, we will look at other markets.
I wanted to talk about NDB’s capital structure and the issue around equal contributions by member states. Is this likely to change?
The articles are very clear. The contributions between the founding members will always be equal.
But some of the countries have put in their second year’s contributions in the first year itself. Do the articles need to change to reflect the differences in contributing capacities of each country?
Three member countries have put in their second year’s contributions ahead of due dates. But the articles were well thought of by the founding fathers and they will remain as such.
So the South is opening up, at a time when there is growing protectionist rhetoric in the West from the likes of Donald Trump, and that’s a good thing?
Every nation tries to work on policies that only suit itself. So a cooperative approach among the BRICS nations is an extremely good thing. Recognizing that the developed world is going to write and enact policies which are appropriate to itself, we have to carefully watch and work out our own strategies going forward.