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HANDELSBLATT INTERVIEW - Banking on Speed
07 June 2016

The head of the BRICS-founded New Development Bank, Indian executive Kundapur Vaman Kamath, explained how his bank works differently toWestern institutions, why even Asia fears a possible Brexit, and where the next global growth engines are


WHY IT MATTERS

With the West only slowly recovering from economic crisis, much of the world’s growth is driven by developing countries whose banking needs are changing.

FACTS

The New Development Bank was founded in July 2014 by Brazil, Russia, India, China and South Africa, otherwise known as the BRICS countries. The U.S.-dominated World Bank and International Monetary Fund have been around since the 1950s. China started its own, rival development bank, called Asian Infrastructure Investment Bank, in 2015.

The field of lenders to foster development worldwide is getting more crowded and the new institutions work differently – namely faster. That’s the message from K.V. Kamath, who heads the New Development Bank, founded by the BRICS grouping of emerging nations: Brazil, Russia, India, China and South Africa. Mr. Kamath was formerly head of software giant Infosys and previously non-executive chairman of Indian bank ICICI. In an interview with Handelsblatt, Mr. Kamath explained how his bankis different from western lending institutions like the Washington-based World Bank, and where the West has gone wrong in its approach to development. He also outlined how his bank will distinguish itself from the Chinese-led Asian Infrastructure Investment Bank, and why even Asia is looking anxiously to the British vote on whether or not stay in the European Union. Mr. Kamath said he was confident that NDB’s new approach to development will serve rising economies better, and laid out where growth will come from in the next 25 years.

Handelsblatt: Mr. Kamath, what’s new about the New Development Bank?
K.V. Kamath: We are an institution of the new century. This is what the five founding countries wanted to stress. It is the first time that developing countries came together to set up a global financial institution. That applies to us as well as to the Asian Infrastructure Investment Bank. We want to build a case not only for best practice in development assistance but for next practice.

What do you mean by next practice?
In the past 70 years multilateral banks have established patterns. But things have changed. The size of challenges has increased dramatically. A number frequently mentioned is a gap of a trillion dollar investment in infrastructure every year. All multilateral development banks combined can only provide on tenth of that. Our role has to change. We cannot be the prime source to solve the problems. I call this time a time of impatience. Countries and people do not want to wait years for development. They want it faster. Without compromising quality, we try to meet the needs in less time.

Are the International Monetary Fund IMF and the World Bank too slow?
I am not the right person to comment on that. Their approach is to take more time to look at proposals. Our approach is different. I think we are able to come to decisions in a much faster time frame.

Besides speed, what makes the NDB special?
We have a different mindset. Historically, developed countries have told other countries what they thought to be right and wrong. But the rise of some developing countries has shown that we ourselves also understand how things work. As an institution we listen to our partners, rather than telling others how to do things. Traditionally the term donor was being used a lot in the multilateral development world. In our institution we will not use this word. We see partners with needs and provide them with loans. We see opportunities that are economically worthwhile for which we can take an interest over time.

Don’t the IMF and the World Bank listen enough to countries’ needs?
Historically policies have been set and then directions have been taken. We have decided not to be in the policy space but to have a dialogue with our partners.

Are you following a Chinese development path rather than a U.S. or European one?
I do not think that there is only one single model. The European approach has become more market based. We are learning from that. At the same time we are learning from countries which have gone through a development phase like China. Russia and Brazil also have their models. We take everything into account.

What are your goals? What volume of loans will you offer each year?
We start modestly. In the first year we will issue $1.5 billion. In three years we plan $6 billion to $8 billion. We will slowly start scaling it up. We have to build up skills within the bank.

Why is there a need for two new development banks, the NDB and the AIIB?
I have no answer to that. When I came into this bank, AIIB was already set up. All I can say is that the space is large with a high worldwide unmet demand.

What is the difference between the approaches of the NDB in contrast to AIIB?
There will be differences. At this point I cannot say what they will be. At the moment the membership is one difference. Whereas we concentrate on the BRICS countries, the AIIB has a large membership. We want to develop an open relationship with the AIIB. Our approach is to learn from all the development banks in the world to find the best approaches.

When will you expand membership of the bank beyond the five BRICS founding countries?
We are open to all UN member states. The caveat is that each new member has to be approached by our board of governors. We have already consulted the board on that topic. I think it will take another six months for them to take a view on that. After that we can reach out to potential members.

What about European countries like Greece?
I cannot comment on that at this stage.

What is your assessment of the current situation in Europe?
The economy at least in Germany seems to be coming back. But the next six months are going to be important in determining whether the no- or negative-interest-rate monetary policy has given the momentum that the whole economy in Europe needs. Germany is the engine of the European economy. If the engine fires, it can generate a new growth momentum in the other countries. The political scenario is, like in other parts of the world, very dynamic though.

The biggest decision coming up in Europe is the Brexit referendum. Will it affect you?
See, a few years back I would have said that it has no impact on us at all. But I am wiser since 2009. In today’s world everything is connected. If one country were to leave the E.U. it will impact everybody including us. It would be like a tsunami. Every bank will have to carefully look at it.

Are you worried about Europe?
I will put it very simply as a banker: If the economies come back, I am not worried. Economic growth forgives a lot of things. But evolution on the political front can put the economy under strain. I wish for and pray for a solution where the economic part of the equation is strong.

What about U.S. monetary policy? The economic situation in your focus countries will depend heavily on what the Fed will do. Does the success of your bank depend on the Fed?
It does impact us. What will happen later this month in terms of an interest rate hike which several Fed members have clearly indicated will certainly have an impact on local markets in all our member countries – stock markets, bond markets, currency markets. Nobody can fully factor it in. And we do not know how many interest rate increases we will see during the next six months.

Is it the right time to increase interest rates?
Ultimately you have to get back to a normal monetary policy. The so called new normal clearly is not normal. At least in the U.S. the course in action is clearly to get back to the normal. The rest of us have to bear the consequences.

Some commentators speak of a perfect storm scenario with tightening of monetary policy in the U.S. and slow growth or even recession in some of the BRICS countries.
I think there are several things not factored in in these remarks. Sometimes we comment on the base of what happened in the past. There are of course lessons from the past, but today’s context, where technology is creating so many new opportunities, is significantly different from the past.

How?
Look at the impact of the new services economy on the lives of a billion plus people in India and a billion plus people in China, the rapidity in which it can impact economic policy and development. For example, five years ago I said that the biggest challenge for India and other parts of the world was how to bank the unbanked. In the last twelve months, more than 200 million bank accounts were opened in India. Almost everyone has a bank account now. That makes a dramatic change in the economic wheel. And that is only one example. Today there are others drivers of change. And if countries push all these drivers effectively they can counterbalance to some extent some of the volatility that will happen.

Nevertheless the BRICS countries are far from the economic success story they used to be…
One point is clear: If you look at growth stories of the last 60 to 70 years, sustained developmental change happens for 25 to 30 years. Then growth slows down. Wages catch up, exchange rates get stronger. Like you age as a human being, there is an aging cycle for a developing country. So to some extent there will be a slowdown in growth in some of our member countries. The question will be how you manage it.

Your bank is founded on the idea of the BRICS. But what do these five countries still have in common?
Development process is not a straight line. So many factors drive it and create wild swings. In the last two years the wildest swings have been in commodity prices. But I do not think that that is going to be the new normal here. I think the next growth engines for commodity prices will be the growth of India and Africa. That should be enough for momentum for the next 25 to 30 years.

At the upcoming G20 summit, the members will talk about new drivers of growth. The answer of some countries is protectionism. Does that worry you?
That is all part of the landscape in which we have to operate because ultimately each country will have to look what is in its own interest. The good news for us is: There is enough to be done in the context of internal growth engines for the developing world. They can keep being engaged for the next two decades or more.

So let the developed world do what they want and concentrate on your own growth?
Yes, we have to focus. There is so much to be done and let us work on that. New opportunities will happen in mutual beneficial terms. Between 2004 and 2008 for example Indian companies became big buyers of auto manufacturing across Europe because the companies were in distress and in India, a large home market was developing. A complementary fit. Going forward the developed world and the developing world will find other complementary fits. But countries will look at their own needs first.

You are 68 years old – and have just started a new challenge in a new country. Why?
It was a simple call from the government.

And you could not say “no” to Indian President Narendra Modi?
And I could not say no (laughs). But having said that, this challenge to build up a new bank and the new opportunities in the developing world looked very interesting – so I said yes.

Handelsblatt’s Nicole Bastian is the coordinating editor of foreign affairs in Düsseldorf. Stephan Scheuer is Handelsblatt’s China correspondent, based in Beijing.
To contact the authors:
bastian@handelsblatt.com
scheuer@handelsblatt.com