Reported by: banking|Updated: May 18, 2021
At a time when banking capital is scarce and finance capitalism is driving the world, it is but natural to expect foreign money to find its way, to pump ailing weak banks. It is a common knowledge that in the past one decade or so, beleaguered banks due to decelerating economy, raising NPA levels and many other structural impediments were finding it difficult to garner capital. The weaker banks faced the brunt of it. The old generation banks, with myriad governance issues and regulatory compulsions of the nature of Basel III guidelines and the like, were finding it very difficult to raise capital, repeatedly. More specifically, some banks were classified into weak banks and put under Prompt-Corrective Action (PCA) Framework of the Reserve Bank of India. In short, PCA is a framework under which banks with weak metrics on capital ratios, asset quality and profitability concerns are put under watch by the RBI. Such classification deems bank as risky and starts corrective actions which majorly include capital infusion and probing governance issues. Accordingly, some private banks like Yes Bank, Lakshmi Vilas Bank, Dhanlaxmi Bank, CSB Bank etc. apart from the nationalized banks in like UCO Bank and Indian Overseas Bank have been placed under the PCA framework in the last two-three years. Some have successfully come out of it.
Looking for fresh capital by weak banks
For banks, when trying to pull out from the quagmire of such distress, raising fresh Capital from investors is always a conundrum that plays out. ‘Suitors’ are looked around for the ‘bride’, but generally it ends up as a long process and ‘suitors-with-deep-pockets’ are always a preferred lot in the game.
They might come from far and wide after hearing the news. In the globalized world of finance capital, Sovereign Wealth Funds (SWF) are emerging as one such major ‘suitors’ in supplying banking capital, or that is what the recent merger of Lakshmi Vilas Bank with DBS Bank India points out, going by the fact that Temasek Holdings one of the SWFs of Singapore Government has the majority stake in DBS Bank. Now, herein we need to understand SWFs with more clarity.
What is SWF?
SWFs are investment funds owned by sovereign governments and is funded by foreign exchange and reserve assets. They are generally funded by reserves held by countries running current account and budgetary surpluses. It is categorized by their longer-term investment horizons as well as their different objectives. Since an SWF’s balance sheet does not carry much of liabilities, it helps them with long-term goals/ outlook when making an allocation. In fact, SWFs can be the “stickiest” of all institutional investors, as they seek returns over long periods and do not divest in times of crisis.
But when we come to specifics (including investments in financial sector or in venture funds) probably some are not aware of the role played by the government owned investment funds or SWF. SWFs are supposed to be wielding financial muscle in excess of $ 8.4 trillion now. (Source: IE Sovereign Wealth Fund Research, 2019) In terms of asset size, SWFs have already outgrown hedge funds, private equity funds etc, though its quantum is small, when compared to assets held by pension funds, mutual funds or insurers. From this information, discussions and references, it shall be clear why a better understanding of SWF is required, especially when the composition of FDI is undergoing changes from private actors to public actors. It is necessary therefore to have insights into what this sovereign investment vehicle has brought about into governance, regulatory and strategic aspects of international business. More specifically, its investment in banking capital and what it signifies.
Merger of LVB with DBS and the Sovereign Connection
As we all know, the beleaguered capital starved Lakshmi Vilas Bank was merged with DBS Bank in India in a sudden move. It opened an initial shock and awe followed by many legal disputes to this day. The poor due-diligence that has gone into finding the suiter in a jiffy was heavily criticised. The following reasons are being pointed out and are still getting debated:
But the biggest question that should harbour the attention should have been on the control the SWF of Singapore government ie., Temasek Holding, has on DBS Bank. The following aspects could have merited attention.
Scholars and Researchers who have studied SWFs have conflicting views about these entities’ increasing role in the world economy. Some argue that SWFs are a result of balance of payment surpluses and are used for economic smoothening purposes (Mattoo & Subramanian, 2008). There is an alternative view published in the same year stating that this theory is unfounded (Madden, 2008). An extreme view set forth in the thesis by Norris (in 2010) is that SWFs deliberately try to pursue and generate their strategic goals by manipulating the activities of commercial actors and are engaging in economic statecraft. Another view is that SWFs can be seen as a state-adaptive strategy under contemporary conditions of globalization (Monk, 2011). It is an evolving theme and little attention is focused on SWFs’ use by states as a tool in promoting national development.
Emergence and Growth of SWF
It is an established fact by research that cross-border financial flows as investments in value creating activities in diverse economies, look for productivity of financial capital in a globalized world which has seen a shift towards a more integrated and inter-dependent world economy. The shift in financial power from private to public actors, has led to examination of SWFs’ operations and the implications for the world economy.
Sign of the growing clout that state-backed investment vehicles are wielding in the financial sector has been evident for some time now. The flow of cash from state-backed agencies, especially those based in Asia or the Middle East, is creating concern among politicians in Europe and the US, who worry it may give foreign governments influence over the financial sector.
Problem Areas / Issues in SWFs
The following could be termed as major issues with regard to the growth and emergence of SWFs in the world:
Scene to the future
SWFs are increasingly metamorphosing from passive investors in government securities to active investors in riskier investments and equity markets. The component of SWF in inward FDI is going up in the world which clearly underscores the risks emanating from sovereign actors in the conduct of international business. Arguably, this brings with it a bouquet of issues with regard to banking capital, governance, management and regulatory aspects in world of investing and banking business.
– Prof. (Dr) N. Krishna Kumar is Dean, State Bank Institute of Leadership (SBIL), Kolkata
Views expressed are personal.