THE GOVERNMENT has announced the recapitalisation of public sector banks in the interim budget to infuse more capital into banks so that they can increase their lending and improve their liquidity. As per the Reserve Bank of India (RBI) norms, banks are expected to maintain a capital adequacy ratio (CAR) of 9% or higher. All Indian banks have higher CAR than the prescribed limit. However, it seems that the government intends all PSU banks to have a CAR of at least 12% (see table showing the list of PSU banks with CAR of 12% or less). This is what makes recapitalisation different in India from what is happening globally, especially in the US and Europe, where governments have to step in to save the possible bankruptcy due to erosion of capital. Indeed, the move will make PSU banks much stronger than earlier to face any eventuality.
However, what is good for banks may not be that good for their shareholders. This is because, when the government infuses more capital into banks, its percentage ownership increases at the cost of other shareholders. But, the story does not end here. It can very well be the case that post capital infusion, the profits grow to such an extent that despite of lesser percentage ownership, the shareholders are left with more money in their hands.
lets find out the impact of earlier recapitalisation on the performance of the banks. Logically, after the recapitalisation, banks should clean up their books and scale up the growth trajectory. We analysed the trend in profit growth during the financial years, after the increase in the paid-up equity capital. Apart from profit growth, we also tried to analyse the trend in interest income to find whether the bank could scale up lending with more capital in hand. In certain cases, banks did not do well after capital infusion. For example, for Bank of Maharashtra (BoM), the paid-up capital was up by Rs 100 crore in FY04. However, the interest earned grew by 7.7% and 4.5% in FY05 and FY06, respectively. The bank’s growth in interest-earned was not helped by the capital infusion. It shows that BoM could not lend more, as normally expected, with more capital. BoM’s profit declined post recapitalisation by 41.8% and 71.3% in FY05 and FY06, respectively. In the case of many other banks, though the interest income grew at higher rates post recapitalisation, the profit growth fell apart. UCO Bank’s interest income grew at a compounded annual growth rate (CAGR) of 22.4% during the period between FY05 and FY08 post the capital infusion in FY04. However, UCO Bank’s profits fell at a CAGR of 2.4% in FY05-08. This shows that high growth in lending may not necessarily translate into high bottom line growth. Similar was the case with IndusInd Bank and Andhra Bank.
Notwithstanding the dismal performance of a few banks post capital infusion, there were many big PSU banks, which did well after the recapitalisation. For instance, Bank of Baroda’s (BoB) paid up equity capital was increased by Rs 71 crore in FY06, and after that its interest earned grew by 27.7% and 31.2% in FY07 and FY08, respectively. Before FY06, the bank’s interest income was expanding at lower rates. BoB’s profit grew by 23.1% and 40.9% in FY07 and FY08, respectively. In this case, the recapitalisation was indeed helpful in revitalising the bank. Quite similar was the case with Allahabad Bank, Union Bank of India and Syndicate Bank among others.
In a nutshell, more banks have raised the growth trajectory after the recapitlisation. The key for shareholders is that the more stable the bank is, the more likely that it will actually grow at higher rates post infusion of capital. Hence, for investment purposes, recapitalisation will be more rewarding in the case of stable banks such as State Bank of India (SBI), Punjab National Bank (PNB), Bank of India (BoI), Union Bank of India, Bank of Baroda (BoB), Corporation Bank and Syndicate Bank.
However, what is good for banks may not be that good for their shareholders. This is because, when the government infuses more capital into banks, its percentage ownership increases at the cost of other shareholders. But, the story does not end here. It can very well be the case that post capital infusion, the profits grow to such an extent that despite of lesser percentage ownership, the shareholders are left with more money in their hands.
lets find out the impact of earlier recapitalisation on the performance of the banks. Logically, after the recapitalisation, banks should clean up their books and scale up the growth trajectory. We analysed the trend in profit growth during the financial years, after the increase in the paid-up equity capital. Apart from profit growth, we also tried to analyse the trend in interest income to find whether the bank could scale up lending with more capital in hand. In certain cases, banks did not do well after capital infusion. For example, for Bank of Maharashtra (BoM), the paid-up capital was up by Rs 100 crore in FY04. However, the interest earned grew by 7.7% and 4.5% in FY05 and FY06, respectively. The bank’s growth in interest-earned was not helped by the capital infusion. It shows that BoM could not lend more, as normally expected, with more capital. BoM’s profit declined post recapitalisation by 41.8% and 71.3% in FY05 and FY06, respectively. In the case of many other banks, though the interest income grew at higher rates post recapitalisation, the profit growth fell apart. UCO Bank’s interest income grew at a compounded annual growth rate (CAGR) of 22.4% during the period between FY05 and FY08 post the capital infusion in FY04. However, UCO Bank’s profits fell at a CAGR of 2.4% in FY05-08. This shows that high growth in lending may not necessarily translate into high bottom line growth. Similar was the case with IndusInd Bank and Andhra Bank.
Notwithstanding the dismal performance of a few banks post capital infusion, there were many big PSU banks, which did well after the recapitalisation. For instance, Bank of Baroda’s (BoB) paid up equity capital was increased by Rs 71 crore in FY06, and after that its interest earned grew by 27.7% and 31.2% in FY07 and FY08, respectively. Before FY06, the bank’s interest income was expanding at lower rates. BoB’s profit grew by 23.1% and 40.9% in FY07 and FY08, respectively. In this case, the recapitalisation was indeed helpful in revitalising the bank. Quite similar was the case with Allahabad Bank, Union Bank of India and Syndicate Bank among others.
In a nutshell, more banks have raised the growth trajectory after the recapitlisation. The key for shareholders is that the more stable the bank is, the more likely that it will actually grow at higher rates post infusion of capital. Hence, for investment purposes, recapitalisation will be more rewarding in the case of stable banks such as State Bank of India (SBI), Punjab National Bank (PNB), Bank of India (BoI), Union Bank of India, Bank of Baroda (BoB), Corporation Bank and Syndicate Bank.
